Why today feels like late 2007, but isn’t!

Last week was not an orderly deterioration of quality but a sudden onslaught of what MIT professor Andrew Lo calls high serial correlation, which is his new measure for liquidity events. We got four outsized quality spread inversions in the span of one week! Today we are getting better than expected manufacturing numbers, but Nasdaq, which has the highest beta-to-growth among the broad indices is selling off the worst. These events imply that there are underlying issues which could be precursors to even larger displacements in the market.

Though it may feel like late 2007 today, we doubt we are headed for a repeat of a looming 2008. For one, the amount of leverage in the market is far less and two, far more companies are in much better shape today, with stronger balance sheets than they had back then. One concern may be a lack of liquidity. However, with a large amount of cash, in the form of treasuries, sitting on the sidelines throughout this rally I would hope that value buyers will flood into the market—limiting this to a 10% to 15% correction. A raising VIX and continued concerns about Greece will also likely inspire the quality rally that we have been looking for.