It is very difficult for me to imagine a sustained downturn in the market when junk bonds trade at record low yields. Corporations have nearly unlimited access to the debt markets. This allows for cash takeovers, LBOs and share repurchases. Its possible that the terrible economy eventually leads to wider spreads in bond markets but we are not there yet.
There are some early signs that the credit cycle might be turning. Three municipalities in California declared bankruptcy in a single week. We are seeing rapid earnings decline in the more cyclical sectors and its a matter of time before we see some bankruptcies. But the fact is that junk markets are at record low yields and there is little stress seen in yields.
As readers can see I have been torn lately between the bull and the bear case. The more I analyze the situation the less clear it becomes to me. It seems that I am not the only one that is confused as we have been seeing wild swings in both directions recently.