The headline is fairly self-explanatory, but it’s true: UBS strategist David Bianco has a 2009 target on the S&P 500 of 1,300 – more than 50% above where it sits now. Talk about a V-shaped recovery.

As far-fetched as that might seem, I find these kinds of calls to be thought-provoking because it forces some comparative judgments between where the “market gurus” are, and where I’m at. The last time I did this was in mid-September in the days of S&P 1,250, and it made me realize just how bad the macro environment was becoming, and how little was being priced in to equities. Looking at past history, it seems to me like the S&P target must only be compatible with four-digit numbers, but how about Bianco’s argument?

He believes there are a number of large-cap stocks with excellent global growth prospects that will power the index higher, and while I agree with the large-cap leaning to some level, this particular angle is puzzling. What global growth? Decoupling, for those of you who remember, was dragged out to the woodshed and shot – that was one of my better fall outlook predictions.

There is a danger to being persistently negative, though, especially when you have the world’s central bankers lining up everything they have against you. So is it time to reverse course on my dour thesis that a global slowdown accompanied by scarce and expensive credit will weigh on sentiment? The data coming in continues to point in one direction, and that’s from someone who wants to be an optimist.

The other day, I noted that China was cutting interest rates in an attempt to spur sagging economic activity, as China’s manufacturing-dependent economy was apparently caught completely off-guard by the rapid drop in demand during the fall. Still, there is only so much interest rate manipulation can do when your trade partners feel very poor. American Express (AXP) CEO Ken Chenault said today that changing spending patterns have hit across all income classes, including the affluent his company is known for having. Following up on something first mentioned in May, Oppenheimer analyst Meredith Whitney continues to assert that credit card companies will pull back on more than $2 trillion in credit lines available to consumers, reducing overall liquidity by 45%.
The consensus is also growing that the Eurozone is going to be hit by a hard recession, although if even the notoriously slow Jean-Claude Trichet is aware of this, the contrarian in me perks up. The takeaways:

1. The American consumers is down for the time being
2. Europe is catching up to America in terms of economic problems
3. China’s factories, and hence economy, are being idled by problems in the West

Put more acutely, we’re in a global slowdown, and there is still plenty of surprisingly bad data emerging.

As for credit being both scarce and expensive, that has come true to a greater degree than I would have guessed ten weeks ago.

As the Fed and Treasury prop up various otherwise-insolvent institutions like Citigroup (C) and make it clear they will not allow another Lehman-esque failure, financial commercial paper issues have recovered somewhat, but are still 20% off their previous levels. The real plunge can be seen in asset-backed CP issues, which I’ll touch on in a moment.

As for expensive credit, consider the spread on A2/P2 CP relative to high-grade non-financial commercial paper. Having already jumped to absurd levels, it’s continuing to push higher.

Likewise, A2/P2 CP relative to the 2-year Treasury is stumbling through uncharted depths:

Hat Tip, David Merkel

A little over a week back, I had some scary quotes about the state of the credit markets from Fortress Investment Groups (FIG). While they tried to be optimistic and say there were opportunities amid the fallout, their investors don’t seem so confident: they are withdrawing enough money, and at an accelerated pace, that Fortress has had to put a freeze on the fund’s assets. On their conference call last week, KKR Financial (KFN) CEO Nino Fanlo said that leveraged loan prices have fallen into the mid-70s, even though they have never typically breached the 90 mark in prior recessions.

A look at the various asset-backed and structured finance credit protection indices suggests that the top-level tranches are generally just off their lows (LCDX, CMBX, CDX on IG)…

… while the lower-tranche securities and the ABX continue to be destroyed.

And rounding it off, spreads on speculative-grade corporate debt hit a new high today.

The Standard & Poor’s investment-grade and speculative-grade composite spreads once again widened past five-year records yesterday, leaving them at 556 basis points (bps) and 1,616 bps, respectively. Widening continued across the rating spectrum as well, with the exception of the ‘CCC’ spread (now at 3,027 bps). The ‘BBB’, ‘BB’, and ‘B’ spreads reached new five-year highs of 663 bps, 1,143 bps, and 1,710 bps, respectively. The ‘AA’ spread widened 4 bps to 433 bps and ‘A’ widened 2 bps to 500 bps, 4 bps short of its five-year high.

Since the stock market is simply a symptom of credit market stress, color me skeptical until there is some indication that ridiculously high spreads and distressed debt prices are stabilizing - not getting worse.

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