This post was written by Minyanville contributor Fil Zucchi.

It's well known by now that the corporate bond market, from high yield to investment grade, has had a mind numbing move up, and this rally is beginning to be used as an explanation/reason why the equity markets will have no choice but to follow suit. To keep things in perspective, here are some comments from last week conference call by the Morgan Stanley (NYSE:MS) corporate credit team:

• Despite the deleveraging process many companies have undertaken, on an EBITDA/Debt ratio junk rated companies are as leveraged as they have ever been thanks to the "complete trashing" of cash flows. MS expects leverage ratios to rise even further and, therefore, from a "leverage-risk to yield" basis, junk spreads are way too tight to reward buyers for the underlying default risk.
• In the residential Option ARMs market, delinquency rates as a percentage of original balances are running higher than they were in subprime. On the other side of the ledger – and confirming what is intuitively logical – recoveries as a percentage of balances are significantly lower and falling, which will continue to put heavy pressure on home values. In the Alt-A market things are not going that well either.
• In the Commercial Mortgage Backed Securities (CMBS) world, Standard & Poor recently implemented new tests to determine the downgrade of various CMBS vintages. The test for the 2004 issues was relaxed, which is likely to spare from downgrade 65% of AAA rated CMBS which had been put on negative watch. Under the prior, stricter test, 80% of the watch list issues were in danger of downgrades. Are we really to believe that the relaxation of the testing standards for issues that are coming up for refi between now and the next two years are just a coincidence?
• What caritas the S & P showed toward the 2004 CMBS it apparently took it out on the mezzanine CMBS of 2006 and later. Most AAA mezz tranches are or will be downgraded to A/BBB- grades, while all junior AAAs tranches have gone straight to junk.

Never mind the bears and bulls or even the pigs and chickens, I think between Wall Street and Washington D.C. the goofs and ghosts are leading the charge.

What I mean by this is that the rationale for certain market activity and advisement makes no sense to me. Maybe we are not recovering from the recession but we are moving into something like a shadow economy, where people look at what is going on in the market and rationalize it after the fact, when all the real energy is in the darkness.

Today American Eagle (NYSE: AEO) was upgraded to Overweight from Equal Weight at Barclays, and Lazard Capital Markets upgraded AEO from hold to buy. Why now, after the stock has run up 65% this year, do they finally wake up and think there might be something here?

"Tread lightly," cautions leading fund expert Bill Donoghue. In his Marketwatch Proactive Fund Investor, which develops various actively-managed mutual funds portfolios, "Further market erosion is more likely than a rally. There's little reason for optimism."

"When trends become highly probable and highly correlated with portfolio holdings, our advice may become very profitable. This is one of those times.

"The Dow Jones Industrial Average is about to take out its 2002 low and safe-harbor investors are shifting to precious metals. Technically the next support is 25% down at 6,000.

"Considering the chronic financial damage done to the global economy, the bottom could even be lower. Even if you are a perennial optimist, you have to entertain and prepare for the possibility that the safest investment is to expect a continuing market downturn.

Humana (NYSE: HUM) reported earnings below analysts' expectations for the fourth quarter of 2008, spurring a quick sell-off of more than 3%.

The stock quickly recovered, due in part to the better-than-expected ISM report, and closed up almost 6% at $40.13.

Humana is one of the nations' largest providers of employer-based health care plans. Humana offers group health and dental plans for individuals and serves the health care needs of military families and seniors through a series of specialized plans.

The fourth-quarter earnings report disappointed analysts initially, as the report revealed a larger-than-expected decline in earnings of 28% from the previous year's fourth quarter.

Financial institutions, who traditionally pay less to borrow funds, must pay more than average industrial companies in the corporate bond market as investors wait for the final shoe to drop in the mortgage mess. That hasn't been true for at least ten years. Bonds of banks, brokerages and insurance companies yield 1.49 percentage points more than U.S. Treasuries, while industrial company bonds yield a premium of 1.34, according to a report at Bloomberg today.

The costs are even higher for the financial institutions that have already written down some assets. Ciitgroup (NYSE: C) paid a premium of 1.90 to sell 10-year-notes on Nov. 14 and Merrill Lynch's 6.4% notes due in 2017 have a spread that almost doubled from a 1.21 percentage point spread last month to a spread of 2.4 percentage points Bloomberg reports. Wachovia also had to pay a high premium - 1.95 percentage points - on 10 year notes sold yesterday.

Bloomberg compares these spreads to some for industrial companies including Nstar, which paid a 1.40 premium on notes due in 2017, and Abbott Laboratories paid a 1.27 premium on Nov. 6 for 10-year notes.

John Atkins, a corporate bond analyst for IDEAglobal, told Bloomberg, "Until credibility can be restored, the banks are going to have to pay prices to investors that they thought were unthinkable until six months ago. But they have little choice as they need to keep the capital taps open."

I wonder if these additional borrowing costs were calculated when Citigroup and Merrill Lynch (NYSE: MER) warned about fourth quarter earnings?

Lita Epstein has written more than 20 books including "Reading Financial Reports for Dummies."

Expedia Inc. (NASDAQ: EXPE), the online travel company, announced that it would buyback 116.7 million shares. That was in June. The company's shares quickly jumped from under $24 to $29.

Today, the company announced that the share purchase program would be reduced to 25 million shares. The stock will be bought in a price range of $27.50 to $30.00. On the announcement, Expedia's price promptly dropped to $26.50, about 9% down.

Bloomberg quotes Expedia Chairman Barry Diller as saying, "The terms available to us in the current debt market environment were simply unacceptable." The company would have added $3.5 billion in debt to cover buying back the stock.

What happened? Well, credit is getting tighter, but it is never too tight for really attractive deals. The company is not exactly minting money. In the last reported quarter, net income was $38 million on revenue of $551 million. Interest payments for the quarter were about $11 million. With the additional $3.5 billion of debt on the books, interest payments could have gone up as much as 7 times. And there would not be a good enough ratio of operating income to the sum of the old debt plus the new borrowing Expedia would have made to buy the 116.7 million shares.

The simple reason that there may not have been debt available at good interest rates is that earnings would not support it.

Douglas A. McIntyre is a partner at 24/7 Wall St.

It's a basic concept in finance: investors should get a higher return for increased risk.

It's a no-brainer. However, it's been somewhat elusive in the corporate credit markets. This is according to a piece in the Wall Street Journal [subscription only].

True, inflation appears to be in-check. With a fairly strong economy, the default rates have been minor. It also helps that there are huge pools of capital – such as from other countries and hedge funds – that are moving into debt investments.

As a result, it's possible for troubled companies to borrow money at cheap rates, such was the case with Ford (NYSE: F). And, of course, private equity firms are taking advantage of the situation by doing many buyouts -- at high multiples. Just look at Blackstone's bid for Equity Office Properties (NYSE: EOP).

But if history is any indication, credit markets can move quickly. So, if a couple private equity deals implode, there's a good chance the credit nirvana could turn into a nightmare.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

While reaffirming their focus on keeping inflation in check, the Federal Reserve Board has been passive about interest rate increases lately. The Board has been very clear they will remain inflation hawks and will take action to prevent any significant upward inflationary trend.

In the meantime, Wall Streeters are taking on ever increasing debt with more leveraged buy-outs, issuance of more corporate bonds and preferred stock and the first-ever unsecured bond offering by a hedge fund. According to the December 11, 2006 issue of Barron's, Citadel Investment Group of Chicago sold $500 million of five year notes yielding 6.343%.

It is not just Wall Street, either. In the real estate world the same thing is happening. While mortgage rates have moved up over the last 30 months, they are still historically low. For example, in 1998 we refinanced a property using a conduit loan and were thrilled to lock-in a rate of 6.7% (25 year / due in 10). The best traditional loan at the time was 8.1%. After rates moved down our fantastic loan seems only average but we saved some money and had predictability.

Now we find conduit loans can be had as low as 5.7% and traditional mortgages at 6.2%. These rates are typically offered at a maximum of 75% loan-to-value (LTV), with high occupancy, and credit tenants and may vary during the course of the day, based on many factors. At these rates we are interested in borrowing more money. Our business model is very conservative so we do not pursue maximum leverage. We might only seek up to 65% LTV. However other real estate investors are maxing out their leverage, apparently believing the market rates will move higher in the foreseeable future.