“Sell In May and Go Away”

06/01/2021 03:00 AM

“Sell In May and Go Away”
Kamakura Troubled Company Index Decreases by 1.25% to 6.32%
Credit Quality Improves to the 94th Percentile

 NEW YORK, June 1, 2021: An old adage advises investors to “Sell in May and go away.”  We saw the Troubled Company Index improve to the 94th percentile this May.  Have company fundamentals really improved substantially, or is this a reflection of the Federal Reserve’s low interest and easy money policy, combined with massive bouts of fiscal stimulus?  Is this as good as it gets, or can credit conditions improve further?  Inflection points are hard to call in advance, but conditions certainly look pretty good from a credit default perspective.

The Kamakura Troubled Company Index® indicated that credit quality improved in May, with a decline in default probabilities of 1.25% to 6.32%, compared to 7.57% on April 30.  Volatility decreased, with default probabilities ranging from 10.00% on May 12 to 6.32% on May 28.  The index reflects the percentage of 40,500 public firms that have a default probability of over 1%. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.

At the close of May, the percentage of companies with a default probability between 1% and 5% was 5.56%, a decrease of 1.09% over the previous month.  The percentage with a default probability between 5% and 10% was 0.57%, a decrease of 0.09%. Those with a default probability between 10% and 20% amounted to 0.15% of the total, representing a decrease of 0.05%; and those with a default probability of over 20% amounted to 0.04%, a decrease of 0.02%. 

Troubled Company Index – May 28, 2021

Among the 10 riskiest-rated firms listed in May, five were in the U.S., two in Mexico and one each in China, India and Spain.  The riskiest-rated firm was Vantage Drilling International (OTCMKTS:VTDRF), a contract offshore drilling firm whose one-month KDP was 20.49%.

Riskiest Rated Companies based on 1-month KDP

The Kamakura expected cumulative default curve for all rated companies worldwide narrowed, with the one-year expected default rate decreasing by 0.06% to 0.33%, while the 10-year rate decreased by 0.62% to 11.58%.

Expected Cumulative Default Rate – May 28, 2021

By Martin Zorn, President and Chief Operating Officer, Kamakura Corporation

Signs of global recovery accelerated as corporate earnings showed very good improvement.  Markets were lifted by signs of economic recovery in Europe, and the Pacific Rim markets rose as well.  Pent-up consumer demand coming out of the pandemic, along with positive expectations for a continued expansion, lifted equities worldwide.  The Federal Reserve continues to see inflation as transitory, requiring no changes to its monetary position.  Most of its public comments appeared to try to calm inflation fears as the week came to a close.  On the other hand, there were worries that the Fed could be misreading the inflation numbers.

For now, we know that industrial production is up, retail sales are up and people everywhere are ready to spend.  This, indeed may be the best of times, and as we enter the summer months in the Northern Hemisphere “Sell in May and go away” may be the best strategy.  We expect extremely low default rates, especially over the next year.  Near-zero interest rates, plentiful liquidity, easy money, and an expanding economy certainly set a low bar for debt service coverage.

Calling inflection points before they occur is always a difficult task.  But as an old portfolio and risk manager, I believe this is a great time to sell marginal assets as the world is buying.  As Warren Buffet has said, “Be fearful when others are greedy’.

About the Troubled Company Index
The Kamakura Troubled Company Index® measures the percentage of 40,500 public firms in 76 countries that have an annualized one- month default risk of over one percent. The average index value since January 1990 is 14.55%.  Since November 2015, the Kamakura index has used the annualized one-month default probability produced by the KRIS version 6.0 Jarrow-Chava reduced form default probability model, a formula that bases default predictions on a sophisticated combination of financial ratios, stock price history, and macro-economic factors.

The KRIS version 6.0 models were developed using a data base of more than 2.2 million observations and more than 2,600 corporate failures.  A complete technical guide, including full model test results and parameters, is provided to subscribers. The KRIS service also includes a wide array of other default probability models that can be seamlessly loaded into Kamakura’s state-of-the-art enterprise risk management software engine, the Kamakura Risk Manager. Available models include the non-public-firm default model, the commercial real estate model, the U.S. bank model, and the sovereign model.  Related data includes credit default swap trading volume by reference name, market implied credit spreads, and prices on all traded corporate bonds traded in the U.S. market.  Macro factor parameter subscriptions include Heath, Jarrow, and Morton term structure models for government securities in the U.S., Germany, the UK, Canada, Spain, Sweden, Australia, Japan, Thailand, and Singapore.  All parameters are derived in a no-arbitrage manner consistent with seminal papers by Heath, Jarrow, and Morton, as well as Amin and Jarrow.  A KRIS Macro Factor Scenario Service subscription includes both risk neutral and “real world” empirical scenarios for interest rates and macro factors.

The version 6.0 model was estimated over the period from 1990 to May 2014 and includes the insights of the entirety of the recent credit crisis. The 76 countries currently covered by the index are:  Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Belize, Botswana, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Ghana, Greece, Hungary, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kenya, Kuwait, Luxembourg, Malaysia, Malta, Mauritius, Mexico, Nigeria, the Netherlands, New Zealand, Norway, Oman, Pakistan, Peru, the Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Tanzania, Taiwan, Thailand, Turkey, the United Arab Emirates, Uganda, the UK, the U.S., Vietnam and Zimbabwe.  

About Kamakura Corporation
Founded in 1990, Honolulu-based Kamakura Corporation is a leading provider of risk management information, processing, and software. Kamakura was recognized as a category leader in the Chartis Report, Technology Solutions for Credit Risk 2.0 2018.  Kamakura was named to the World Finance 100 by the editor and readers of World Finance magazine in 2017, 2016 and 2012. In 2010, Kamakura was the only vendor to win two Credit Magazine innovation awards., Kamakura Risk Manager, first sold commercially in 1993 and now in version 10.1, is the first enterprise risk management system for users focused on credit risk, asset and liability management, market risk, stress testing, liquidity risk, counterparty credit risk, and capital allocation from a single software solution. The KRIS public firm default service was launched in 2002. The KRIS sovereign default service, the world’s first, was launched in 2008, and the KRIS non-public firm default service was offered beginning in 2011. Kamakura added its U.S. Bank default probability service in 2014.

Kamakura has served more than 330 clients with assets ranging in size from $1.5 billion to $7.0 trillion.  Current clients have a combined “total assets” or “assets under management” in excess of $28 trillion.  Its risk management products are currently used in 47 countries, including the United States, Canada, Germany, the Netherlands, France, Austria, Switzerland, the United Kingdom, Russia, Ukraine, South Africa, Australia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam, and many other countries in Asia, Europe and the Middle East.

To follow risk commentary by Kamakura on a daily basis, please follow:
Kamakura CEO, Dr. Donald van Deventer (
Kamakura President, Martin Zorn (
Kamakura’s official twitter account (

For more information, please contact:
Kamakura Corporation

2222 Kalakaua Avenue, Suite 1400, Honolulu, Hawaii 96815
Telephone: 1-808-791-9888
Facsimile: 1-808-791-9898
Web site: