Ireland and the Credit Markets
Jun 9, 2009
Posted by Jody Eisenman | Filed under Uncategorized
After much speculation, Standard and Poors downgraded Ireland’s debt to AA. This was the second downgrade in three months. As a result, the Euro slipped against the US dollar, and Irish stocks dropped in value. This was not an unexpected move, as Ireland’s debt situation is clearly out of control compared to its’ Gross Domestic Product (GDP). Despite this, the overall credit markets here continue to improve. In fact, there is now a rather large gap between the bond market and the stock market performance over the past month or so. Although things could change as there are three treasury auctions (3, 10 and 30 year noted and bonds) this week, I believe the credit markets have “turned the corner”, which should bode well for the stock market going forward. For the banks, the same leverage that caused them all the problems in 2008 are not working in a positive way in 2009. However, should this leverage not be reduced, the banks could be facing the same problems again in another credit crunch. As always, any unforseen event could change things, but investor sentiment has changed dramatically in the last 90 days.
As I have written, I expect a battle over the S and P 500 level of 930-950. Today’s action was typical, as the index traded down over 13.5 points early in the day, only to mount a furious rally in the last hour to close at 939.14, down less than a point. The DJIA actually closed up over a point despite being down over 100 points earlier. The S and P broke the 930 range on the upside on June 1. Since then, we have traded in the relatively narrow range of 923-959. I expect this to continue for awhile, until we ultimately break through the 950 range. If and when that happens, I think we could be in for a potentially explosive move on the upside.
