Back Down With a Thud
Dec 2, 2008
Posted by Jody Eisenman | Filed under Uncategorized
After closing out November with a nice 5 day rally, the stock market fell almost 700 points today. Selling was widespread across virtually every industry group. The plus minus ratio was over 35/1, meaning that losers outnumbered winners by an incredible margin. The financials gave up much of last weeks’ gains, falling on average 17%. Not one single Dow 30 stock closed higher for the day. Investors continued to pour money into US treasuries, as yields dropped to a 43 year low on the 10 year note.
The governor of California claimed that his state is going broke, as investors simply refuse to buy anything that isn’t guaranteed by the United States. This is a result of the credit crisis. As way of illustration, I have enclosed a link to the following article from seekingalpha: link
If you look at the chart there, you will see that long term credit spreads (basically high yield bonds minus 10 year treasuries) are approaching 2000 basis points or 20%. In the last 20 years, they hit 1000 basis points twice, with the average being 450 basis points. Basically, the spread is in the stratosphere, indicating that investors won’t touch anything they perceive to be risky, which today is almost anything that’s not a treasury. The article goes on to state that unless the credit markets open up, there will be massive corporate bankruptcies. As I have stated previously, our entire capitalist system revolves around credit. If businesses can’t borrow at any reasonable rates, they cannot expand. However, what is much more troublesome are companies that exist by rolling over credit lines. If this is no longer possible, many will fail. Although the Fed has attempted to address this issue with sweeping measures such as TARP, the overall effect has shown little improvement. Simply put, most of the major banks’ balance sheets are in lousy shape. In addition, as the recession hit, their ability to earn money has dropped off dramatically. Therefore, the banks simply took the TARP money and either looked to buy cheap assets (like other banks) or simply shored up their balance sheets. Unfortunately, TARP did not force anyone to lend. As banks refused to lend, everyone else followed suit. This has led to almost a complete inability for corporations to get the funds they need at any reasonable rate. I am profoundly concerned about the financial health of our nation if this situation does not improve very soon.
