Of Course Bond Turmoil Isn't Affecting Stocks

I get emails and postings almost every day from fixed-income specialists, saying that the credit markets' myriad problems simply aren't being reflected in the equity markets, and that's just plain wrong. They warn us equity players that we are dreamers and that it is just a matter of time before the terrible problems in collateralized debt, huge leverage, and now auction rate preferred notes spill over into equities and that any rally in stocks is just a fool's paradise.

There's a problem with this inevitability story though, one that eludes these critics and might continue to elude them -- it hasn't happened yet, despite a year's worth of turmoil. That's a long time for a big problem like this to be cordoned, so it is worth looking at whether the naysayers are wrong and something else is at work.

When I look around at the vast choices of assets out there for the thousands of fund managers and institutions that have to put their money somewhere -- provided it is not dedicated to a particular asset from the get-go -- I see one world in chaos and another world in order. The bond market, the credit market, is in total disarray, with every aspect of its existence save Treasuries under fire. We know now that a simple reset market for municipals is failing because, of course, the charade of the bond insurers and their chimerical protection. The CDO market stinks. This is a multibillion dollar market where no one can figure out the prices of anything and the spreads between the bid and the ask are so wide that no one can afford to own or trade them. You don't know where they are marked. You don't know what's in them. You don't know what they are really rated. They are basically worth nothing right now to anyone. Commercial paper? Hardly worth the pick-up in interest. "Cash reserves"? We have seen the "buck" supported over and over again. There has to be a moment where the buck is broken.

I've even heard lots of reservations about agency paper issued by the government-sponsored agencies, although these I question because if they don't work, then it is the end of the credit world.

And then there's stocks. With the exception of companies in finance and autos, the balance sheets of corporate America are unbelievably strong. They are banks, where the banks are trying to figure out the best the best way to return capital: buybacks, accelerated buybacks or dividends. I have seen pieces of research during this period where the issue is "too much cash," like the piece this week from Goldman Sachs about CF Industries (CF - commentary - Cramer's Take), the ag play. When you look at an Altria (MO - commentary - Cramer's Take) or a 3M (MMM - commentary - Cramer's Take) or a General Electric (GE - commentary - Cramer's Take), you see so much cash you have to figure that their dividends are much safer than so much of what is offered in the credit markets, and after taxes, they simply can't be beat.

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