Market Analysis

The Real Credit Story

Long-term rates have been moving lower lately, a remarkable story almost entirely ignored by the media.

Story Outline

  • The media is too focused on rehashing popular investor concerns to notice a more fundamental story—long-term interest rates are dropping near year-to-date lows.
  • Benign interest rates are a powerful driver behind this bull market.
  • That most don't recognize the positive impact of benign interest rates is an additional bullish factor.

Scene: A newsroom floor at The USA Times, a major national daily. Morning.

Smith: OK, gang. I'm going on vacation. I deserve a break after editing 4,786 articles on the credit crisis just this last week alone. By end of day today, I need you to submit all your headlines for the next month. Jones?

Jones: Yeah boss?

Smith: Jones, you have the daily subprime implosion story. Lots of drama. Put a face to the tragedy by writing sad anecdotes about troubled individuals. Make sure you imply subprime is causing a credit crisis too. Remember, only report the data that looks bad. Got that?!

Jones: Ay ay, cap'n

Smith: Rogers?

Rogers: Yes sir!

Smith: You have the daily weak dollar story. I'm thinking America in peril. I'm thinking foreigners seizing our assets. I'm thinking weak dollar equals recession, inflation, unemployment, deflation, stagflation . . . anything with a "flation." Got that?

Rogers: Yes sir. Um . . . sir? Shall I mention a weak dollar could shrink the trade deficit, for people who care about such things?

Smith: No, Rogers! What do you fail to understand about your job? You're on probation. No more donuts for you. Jones, take away Rogers' donuts.

Jones: {through mouthful of donut} Yes sir!

Smith: OK, Williams. So we don't look like we're recycling news every day, you have to come up with some fresh news to report each day.

Williams: {Gulps, looks panicked, begins sweating profusely}

Smith: Calm down Williams! You have the easiest job of all! This is what you do, "The President vetoed XYZ bill today, causing global warming and leading to mass strangulations of homeless seeing-eye puppies." Jeez! Do I have to do your job for you?

End scene

It's not hard to imagine that scene actually unfolding in news rooms across the nation. Long-term interest rates are in a mini-slide, the 10-year US Treasury stands at 4.4%, and this is the tenor of today's headlines:

Dow Keeps Dropping
By the Staff,

Investors Eye Chance of Another Black Monday
By Nick Godt, MarketWatch

Economic, Credit Worries Rattle Investors
By Jeremy Gaunt, International Business Times

Foreigners Tired of US Dollar, Says Greenspan
By Kevin Carmichael and Simon Kennedy Washington, The Sydney Morning Herald

Same old doom and gloom—weak dollar, credit crisis, housing implosion. You'd think at least one industrious news source would have pounced on the opportunity to file a different story. Not so. Maybe sliding interest rates are ignored because they don't support the prevailing "credit crisis" media theme. Or perhaps the media can't see what benign interest rates tell us:

  1. For average and above-average companies, it's as cheap or cheaper to borrow today than at any point in 2007. How in the name of all that's profitable is that a "credit crunch?" Junk rates remain somewhat elevated, but are still lower than in July when the credit kerfuffle kicked-off.
  2. The market continues to expect contained inflation. Were it not true, we'd see long-term interest rates moving higher, not remaining historically low.
  3. The gap between the market's earnings yield and bond yields globally remains very wide—which will lead to continued stock supply shrinkage—a very bullish factor. (For our most recent commentary on the yield gap, read "Leave it to the Mavericks," 10/12/2007.)
  4. Stocks are valued exceedingly attractively relative to bonds.

At MarketMinder, we frequently point out negatives that are widely known lack power to move the market much (and usually don't have the market impact folks fear anyway). As important, it's the unappreciated positives that help push stocks higher. Interest rates are near (or below) year-to-date lows globally, and you're not reading that in any newspaper. What's more, you're certainly not reading the positives inherent in today's benign long-term interest rates.

We tend to give the financial press a good-natured ribbing, but they're actually very useful. Note: What they aren't focusing on is very instructive. We've been saying all year benign interest rates are an important driver to this bull market, and the near media-blackout on this topic tends to confirm that viewpoint.

The more they focus on sad stories about the weak dollar, the unending subprime crisis, higher oil prices, the yen carry trade, bird flu, income inequality, etc.—the less they're noticing the actual, positive fundamentals driving the market higher. And for that, we should thank them. Maybe send them a box of donuts. Up to you.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.