The Epic American Credit and Bond Bubble Laboratory Message Board

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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: YanivBA who wrote (71301)	10/7/2006 10:33:39 AM
From: YanivBA	Read Replies (2) of 110194

Notes on the CDX chart: The S&P speculative grade spreads are from here: www2.standardandpoors.com The CDX index is an index of 125 Credit Default Swaps on the investment grade bonds of North America top corporations: markit.com The bottom chart is an inverted chart of the S&P 500 stock index. "$one" is just a dummy index – it constantly equals one so when I divide it by the S&P I get an inverted S&P 500. The comparison of the CDX to the S&P 500 could also be seen here: Which is really the same as looking at this chart where the CDX is inverted and the S&P 500 is normal: Theoretically the spread measured on the bonds, the price of CDS protection and the price of the stock should be very closely correlated as the main risk to all is the risk of bankruptcy. However since there are different crowds trading them and each has its own technical twist they don't have to trade together. For example the CDS involves a third party that might not make good on its promise to cover the damages of a default. As this counter party risk rises the CDS falls in value but the bond and stock should be unaffected. Another example is the possibility of a leveraged buyout which should widen the bond spread but because of possible restructuring of debt could send the CDS down in value. Another example could be the now court approved technical default which should serve to depress stocks, cheer bonds and send CDS values higher (I guess). Hope that clarifies things. YanivBA.

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