Be Careful: Corporate Bonds and Treasuries Say Lower Stock Prices Beckon

Here's the intro to the latest bi-weekly RevolutioNewsletter that we published today.

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The stock market’s been hanging in there. Even as GDP has fully turned negative, even as retail sales plummet, even as oil’s drop from its highs just a couple months ago hits 70% plus, even as China’s exports drop double digits, even as housing prices drop the most since the Great Depression – the stock market’s been hanging in there.

Of course, the market’s already down 40% from its highs early in 2008. And more the point, stocks don’t necessarily trade according to current economic results. Stocks of course are supposed to be forward-looking, discounting mechanisms.

Forward-looking, so too are the bonds that represent those who lend the companies that those stocks represent ownership. The stress in the corporate bond market can be measured by the difference between how much the interest on those bonds are vs. what the US government pays on Treasuries. This is also known as “spreads”. And while spreads have come down a little bit recently, they still remain at record levels. Levels, that, yes, we’ve not seen since the Great Depression.

It was partly the spiking spreads back in late 2007 and early 2008 that had me repeatedly telling the bulls on Fox Business Network that they were whistling past the graveyard since corporate bonds were signaling distress even as stocks were hitting all-time highs.

Spreads are much, much higher now than they were back then. And that’s even after they’ve come down a bunch in the last month. Corporate bonds are clearly signaling more cash flow distress ahead. And that means more earnings distress ahead. And that likely means more stock price distress ahead.

Meanwhile, short-term Treasuries are trading with near zero interest yields. They’ve even gone negative yields in recent weeks, which means that billions of investment dollars are being lent to the government by investors and traders who are so scared about being paid back by corporate cash flows that they’re willing to get back 99 cents for every dollar they lend.

The stock market keeps hanging in there though. And while that might mean that stocks have already discounted much of what the bond and Treasury markets are signaling, it might also mean that stock investors are once again whistling past the graveyard. I tend to think that’s the most likely scenario, and that’s why I continue to think we’ll see the stock market trade in a range of 7000-9500 for most of the next year or two. And right now, I tend to think we’re headed toward the 7500 range or lower as stock investors and traders come to terms with the fact that many companies are going to go bankrupt in 2009 and 2010, taking their stocks to zero no matter how many bailouts the government hands the shareholders on the way down.

Opportunities to slowly scale in are ahead in this stock market. Let’s be patient. In this newsletter, we look at some of the horror stories that come to investors in companies who disregard the importance of building clean balance sheets and maintaining high, virtuous profit margins.

Here are some stocks from which we can learn what to avoid in these Revolutionary economic times…

CLOCK IS TICKING ON THIS LIMITED TIME OFFER: Subscriptions to RevolutioNewsletter (including full access to RevolutionPicks.com) are $20/month or $200/year. But you can sign up BEFORE THE END OF THE YEAR and get your first year of the RevolutioNewsletter and access to RevolutionPicks.com for half price — $10/month or $100/year. Click here to sign up now.