Friday, September 26, 2008

Markets are braced for bad news

Spreads on BB and B corporate bonds are about as high as they have ever been, nearly matching the highs we saw in the wake of the disastrous corporate governance scandals in 2002. It was in early October '02 that spreads peaked and the stock market reached its bear market low. It was a time when the consensus view was that we were mired in a jobless recovery, the Fed was powerless to do anything about it ("pushing on a string"), and company bankruptcies were going to be widespread.

That we are once again seeing similar signs of distress in the market (the VIX index closed today at almost 35) means the market is assigning a relatively high probability to a very ugly economic scenario in which many companies end up failing, the economy likely slides into a long and painful recession, and the Fed and Congress can do little to stop it. That doesn't mean the market is right, rather that if you want to be bearish these days you have to believe in a real doomsday scenario. Anything less and spreads will narrow, corporate bonds will be very attractive investments, stocks will rally, and subprime loans bought by Treasury could end up being quite profitable.

So if the bailout fails to materialize this weekend or looks so ugly that it will be ineffective, markets could be disappointed, but the disappointment can't be much worse than what is already priced into the market. That, and the many signs that the economy on balance is still in reasonably good shape, suggest that the odds favor remaining bullish.


CDLIC said...

And who is to part of the reason for this mess?

Watch the video at this link:

and then read this article:

Scott Grannis said...

Democrats deserve most of the blame for this mess. Unfortunately they seem to have shifted the blame to the Republicans, because they attempted to deregulated the financial industry. I don't think the mess has anything to do with deregulation.

CDLIC said...


Here is an excellent video presentation regarding the cause of the present credit market meltdown, i.e., lots of charts, graphs, articles, etc., reminded of you Scott....backing up everything you state with facts.

The last minute or so the author pitched for one political candidate over another, nevertheless, disregarding the pitch, it is an excellent presentation.


Scott Grannis said...

That would be a superb video if it weren't for the political pitch at the end.