Market Sentiment: Extreme Complacency Across Every Asset Class

Yet another irrational and exuberant report from Bloomberg. In one word: extreme complacency across every asset class. And Bloomberg titles the report All Clear Sounded as Markets Shrug Off Multiple Black Swans
March 22 (Bloomberg) -- Global markets are signaling that sustained economic growth will more than make up for Japan’s worst disaster since World War II, rising commodity prices and uprisings throughout the Middle East and North Africa.

Interest-rate derivatives, bond sales by the riskiest borrowers and rebounding benchmark stock indexes all show increasing confidence in the economy. New York-based JPMorgan Chase &Co. is putting up $20 billion of its own money in a short-term loan to finance AT&T Inc.’s $39 billion bid for Deutsche Telecom AG’s T-Mobile business.
People are trying to balance the global growth with these exogenous economic shocks,” said Charles Burge, the Louisville, Kentucky-based head of investment-grade money management at Invesco Ltd., which oversees $641 billion. “People are thinking growth is the one that’s ultimately going to win and we can move past these one-off incidents.”

Markets have consistently rallied amid those shocks, called black swan events by Nassim Nicholas Taleb [...] 
This year markets have contended with the ouster of Egyptian President Hosni Mubarak, battles between forces loyal to Libyan leader Muammar Qaddafi and rebels, protests in Saudi Arabia, Bahrain and Yemen, oil above $100 a barrel, record-high food costs and a magnitude 9.0 earthquake in Japan that killed more than 8,000 people and crippled a nuclear power plant.
The difference between the two-year U.S. swap rate and the comparable-maturity Treasury note yield, used to gauge investor perceptions of credit risk, fell to 20.3 basis points yesterday from this year’s high of 26.13 on Jan. 7. That contrasts with last year, when swap spreads surged to 64.21 on May 25 from 9.6 two months earlier as concern mounted that budget turmoil in Greece would infect Europe’s banking system.

Some of the riskiest borrowers are tapping the bond markets for cash with relative ease.

The Philippines, rated Ba3 by Moody’s Investors Service, sold $1.5 billion of dollar-denominated bonds yesterday, completing its target for global financing and helping to cover this year’s budget deficit. Intelsat SA, the commercial satellite operator taken private in 2005, announced plans yesterday to sell $2.65 billion of debentures in the second- biggest offering of speculative-grade debt this year.

New high-yield, high-risk bonds are reviving after issuance of all types fell more than 50 percent last week amid the threat of a nuclear disaster in Japan and growing tensions in the Middle East. 
[...] “The market has stabilized,” said Marc Gross, a money manager in New York at RS Investments, which oversees $3 billion in fixed-income funds. “I am not sure if risk is all the way back on to where it was, but the market seems much happier and healthier after a short-term panic attack last week.”
The U.S. economy looks like it’s on solid footing and earnings will continue to grow,” said Joseph Keating, the Birmingham, Alabama-based chief investment officer at CenterState Wealth Management, who oversees $1 billion. “This is a buying opportunity. Time to get in the market.”
The U.S. Treasury Department displayed more confidence yesterday, saying it plans to wind down its $142 billion portfolio of agency-guaranteed mortgage-backed securities by selling as much as $10 billion per month. It began buying the securities after seizing Fannie Mae and Freddie Mac at the height of the financial crisis in September 2008.
“There’s more confidence that at least the U.S. central bank will not be shy about avoiding any close encounter with a double dip,” Lonski said, referring to the odds that America’s economy will slip back into recession.

AT&T’s agreement to buy T-Mobile USA from Deutsche Telekom AG for $39 billion in cash and stock to create America’s largest mobile-phone company is another sign of confidence in economic stability, said Matt Toms, the Atlanta-based head of U.S. public fixed income investments at ING Investment Management, which oversees more than $500 billion.

“That’s a big deal and means there’s some confidence in corporate managements that there’s enough stability to get it done.” Toms said in a telephone interview. “You’re seeing corporate investments such as that and that’s good news.
“We have a growth economy that seems like it is moving faster than it was six months ago,” said Jason Pride, director of investment strategy at Philadelphia-based Glenmede, which oversees $19 billion in assets. “Everything’s pointing in the direction of an economic expansion. There’s still a lot of work to be done, but it’s moving the right way.”

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