Felix Salmon looks at the criticism of CDS by Robert Waldmann.
In general, I think it's reasonable to say that market participants do over time change their views about such things as future earnings and default probabilities, often using often inchoate macroeconomic information, including simple anecdotal observation, rather than anything granular or specific. The change in those views is reflected in a change in market prices for stocks and bonds, and indeed the market is pretty much the only place where a large number of individual anecdotal observations can coalesce into something as quantifiable as a default probability
How useful is this? Does the benefit of real-time, quantitative measure of sentiment outweigh the negative effects of liquidity?