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Eric Fry, “You need to recession proof your retirement now” 

Eric Fry is sounding the alarm on the stock market. Several headwinds are all
converging, and he warns a massive sell-off could be just around the corner.
He’s holding an emergency update with a special guest to reveal a unique way you
can recession-proof your retirement.

Tue, September 24 at 8:00PM ET
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 * Home
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 * Market Analysis
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 * Stock Investors Can’t Ignore This “Alert” From the Bond Markets

Meet Eric Fry


STOCK INVESTORS CAN’T IGNORE THIS “ALERT” FROM THE BOND MARKETS

This pivotal shift means big things could be coming…

By Eric Fry, Editor, Fry's Investment Report Sep 12, 2024, 3:54 pm EDT September
19, 2024


Source: shutterstock.com/Anastasiia Skorobogatova

Hello, Reader.

Tom Yeung here with today’s Smart Money.

When most people start cooking, it’s easy to assume fancy cookbooks will be a
guiding light in making tasty, picture-perfect dishes.

But as any seasoned chef – whether at home or an upscale restaurant – will tell
you, the real magic happens when you watch a family member whip up a cherished
recipe from memory.

Well, this similar principle applies to the simple yet specialized job of
analyzing companies.



When I started working on Wall Street as a buy-side equity analyst, I was
usually given two sets of reports for each company we covered…

Equity sell-side reports. From investment banks like UBS and Goldman Sachs,
focusing on the value of the company’s stock. These reports addressed areas like
stock price targets, earnings forecasts, and company outlook. (Here’s a sample
of one.)

Credit reports. These reports focused on the debt of a company and were produced
by firms like Moody’s and Fitch Ratings. They were more interested in the
solvency of a company and rated a firm’s bonds on a AAA to C/D scale.

Now, you might think that equity reports would be more useful.

That’s because years of study demonstrate that equity is the top layer of a
company’s value. If a $100 million company is split 50-50 between equity and
debt, every additional $1 million in value goes directly to the stock.

For instance, if the company’s value increases by $1 million, the equity would
rise to $51 million while debt remains at $50 million. Conversely,if the
company’s value goes down by $1 million, then it’s the equity value that
suffers, dropping to $49 million while the debt maintains its $50 million value.



Our theoretical firm would have to lose $50 million in enterprise value before
debt is affected! So, we might imagine that equity analysts would be more
sensitive to changes in a company’s value and give a fellow young equity analyst
the necessary information.

However, I quickly learned that the opposite is true…


DEBT MARKETS SAY “BUY”

In my experience, sell-side companies like UBS and Goldman were always too
bullish. They would paint the rosiest picture, claiming unlimited upside and
zero risk, and saying “buy, buy, buy!” With many of these investment banks as
bookrunners for the companies they covered, it was their unspoken jobs to be
bullish to sell more stock.

“Chinese Walls” between equity research and investment banking were rarely
enforced.

Meanwhile, debt ratings agencies like Moody’s and Fitch would consistently
publish accurate reports about the status of a company.

This accuracy stems from credit rating agencies’ greater financial liability for
egregious errors that deceive investors, and so they have less incentive to
promote troubled firms. The business is more interested in return of investment,
not return on investment.



Detachments from stocks allow debt analysts to have a clearer view about
markets. Troubles at Enron in the early 2000s, for instance, were flagged by S&P
and Fitch long before equity analysts soured on the high-priced firm.

This predictive ability extends to debt markets as well. Since 1960, every
recession has been predicted by a particular occurrence in debt markets, and
this unusual event has only yielded one false positive in that period. 2022 to
2024 would mark the second false positive.

Meanwhile, stock markets are far too skittish to predict much at all. Over the
same period, the S&P 500 saw 18 years where a bear market occurred (prices drop
>20%) and another 20 years where a correction happened (prices drop 10%-20%).

That’s why a special event in debt markets last week is so notable.

Last Friday, the 10-Year Treasury yield rose above the 2-Year yield for the
first time in over two years. This “dis-inversion” (or reversion) of the spread
is an extremely bullish sign because it undoes the yield inversion we’ve seen
since June 2022 – a typical warning of an upcoming recession. Friday’s
“dis-inversion” means the recession alarm has now been lifted.

This also happens to be the same “particular occurrence” I wrote about earlier.
As recessions approach, the yield of 2-year bonds tend to rise above those of
10-year ones; debt investors anticipate near-term interest rate cuts and make
their bets accordingly. As the risk disappears, the same traders then unwind
these bets, pushing yields of long-dated bonds back to where they started.

That’s excellent news for stocks, especially ones exposed to the business cycle.
Robust economies signal strong employment, mild inflation, and rising stock
markets. Last week’s dis-inversion is an echo of the late 1990s, which saw a
stock market boom (and a bubble in tech stocks) through 2001.

And so, we remain highly bullish on our commodity-based bets in Fry’s Investment
Report, and even more so on mean-reverting ones in tech and healthcare. These
low price-to-earnings companies benefit as P/E ratios rise and earnings catch up
– a pair of lucky breaks. They also avoid the sort of bubble-like stocks that
turned the dot-com boom into a bust.

It’s also why we’re consciously downplaying the recent downward moves by equity
markets.



This does not change our macro outlook. We believe that shares of AI firms were
simply too highly priced to start, which is why Eric recommended his paid
members take profits in some notable tech firms over the past several months in
the Investment Report (go here to find out how to join them).

Lower equity values now provide a more attractive entry point into companies
whose outlooks have frankly not changed by the magnitude their share prices
suggest. Sometimes the most valuable insights come from unassuming sources, much
like the outperforming nature of your grandmother’s reliable chicken noodle
soup.

Regards,

Thomas Yeung

Markets Analyst, InvestorPlace



Submit



Eric Fry Editor, Smart Money


MEET ERIC FRY

By looking for big-picture trends that drive huge, multiyear moves in entire
sectors of the market, Eric Fry exploits moneymaking opportunities regular Wall
Streeters miss.

Learn more about Eric

--------------------------------------------------------------------------------

Article printed from InvestorPlace Media,
https://investorplace.com/smartmoney/2024/09/stock-investors-cant-ignore-alert-from-bond-markets/.

©2024 InvestorPlace Media, LLC


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