The Credit Window is Now Closed

The Dow is off 395 points as I type this. There will be some short covering shortly, and a rally attempt. But what I want to address is the change that has taken place:

What has changed? What is different today than yesterday? Are the prospects of the economy and/or corporate profits so different today than they were merely a week ago?

What has changed is Credit: Risk appetite for anything less than AAA — and that includes the ABX stretched definition of AAA (see WTF is going on in the ABX Markets?) — has waned considerably.


My favorite market metaphor is the multi-engined plane. Each propeller-driven engine represents a different source of power, and each works to propel the markets higher and higher. Over the past few years, this plane has climbed on a variety of sources of "elevation."

What have been the engines?

Share Buybacks
Reasonable Valuations
Private Equity/LBOs
High Corporate Profits
Consumer Spending

How are these factors working at present?

-Valuation: We have been more or less fairly valued for some time now.
-M&A activity will likely soften, due to both psychology and unavailability of leverage for cash.
-Corporate profits are still expanding, albeit at a much slower rate
-Consumer spending has been pinched, and retail sales are slowing

Two of the biggest drivers — Share Buybacks and LBOs — are now kaput. What is occurring today is a full blown repricing of the liquidity spigot slowly turning off.

Back to work.

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. rs commented on Jul 26

    First… people glued to their ticker..

  2. rs commented on Jul 26

    S&P below 1490… major technical damage just happened.

  3. michael schumacher commented on Jul 26

    I lightened yesterday as most all of last week were dist. days even though we hit a “record”, breadth simply was not prevalent, it was very selective. Today OTOH…well it’s pretty broad…..

    Be wary though…….it will most likely get rescued by someone from the Fed, Treasurey or Commerce dept. they seem to have a knack for making comments about things they should just STFU about.

    Will add to shorts on the relief rally tomorrow. You know it’s coming..


  4. Mike M commented on Jul 26

    Stocks are fairly valued? I think not. Stocks are overpriced based on every measure (except the absurd Fed model). When the market finally comes to grips with normalizing profit margins, watch out.

  5. Richard commented on Jul 26

    i see a buying opportunity. i see several debt issues with no subprime exposure have NAV’s in the 8-15% discount range. pure knee jerk reactions so profit from it boys.

  6. winjr commented on Jul 26

    Money quote from yesterday:

    “Here’s a great quote from “Since the bull market began in March 2003, the (sentiment) score has reached this kind of extreme 26 times, and the S&P 500 reacted positively the next day 70% of the time. The 8 times that it showed a negative return the next day, then the day following that was positive all 8 times by an even larger average return. Meaning that if the signal “fails” today and the S&P declines again, then it’s an even higher-odds buy signal for tomorrow.”

    GREAT quote!! Lessee … what might the trading strategy be when the S&P gets pummeled on Day 1, recovers only fractionally on Day 2, then gets routed on Day 3?

    Looks like a buy to me! LOL!

  7. ECONOMISTA NON GRATA commented on Jul 26


    Just a short note… I’ve been hearing all day about how the default rate has been so historically low, one commentator on CNBC weent so far as to say that if they even quadrupled that they would still be historically low…. I wonder if they have ever heard of toggle financing… I was discussing this with my partner this morning and he advised me that this type of financing has all but disappeared with the exception of the unsold bridge financing….

    I’m quite sure that we’ll be hearing more about this soon…. I am anticipating defaults galore to come out of the pipeline as the next phase in the housing containment…. ;-)

    Back to work also….


  8. michael schumacher commented on Jul 26

    Don’t forget that COT report….you know that trumps everything else out there.

    They were sure committed………….


  9. super-anon commented on Jul 26

    People at work today are worried. Everybody’s checking their 401k balances, etc.

    The sense I get is that individual investors are much more skittish if they experienced the tech bust.

    The crash in junk bonds and other credit markets is the real story here, IMO.

    I don’t see how this can’t bring stocks down further, but I’ve been surprised before.

  10. super-anon commented on Jul 26

    Just a short note… I’ve been hearing all day about how the default rate has been so historically low, one commentator on CNBC weent so far as to say that if they even quadrupled that they would still be historically low…

    You could have said that about the California housing market not too long ago.

    In a ponzi finance scheme, as soon as the easy credit dries up defaults explode.

  11. TIckersense commented on Jul 26

    414 stock buyback announcements totaling $228.9 billion in the second quarter

  12. michael schumacher commented on Jul 26

    I sort of feel that it should have been ALOT worse than we actually saw. Then I went over to see what was up at Hank’s Place and he’s been a very busy boy yesterday and today… the tune of about $19billion. $16.5b(first link) yesterday and ONLY $2.5b today.

    Straight to the trading desks of the broker dealers……..

    Think they thought it was contained as of yesterday???


  13. scorpio commented on Jul 26

    the super-low default rate is ITSELF the warning signal. it’s low BECAUSE there has been such dramatic new issuance and all in the last year or so, meaning THE ISSUES HAVE HAD NO TIME TO SEASON. it takes 2-3 years for the bad credits (based on over-inflated projections) to surface. so a low default rate means literally nothing, except watch out below!

  14. Stuart commented on Jul 26

    Knew it. right on cue, Paulson et al were out and now on CNBC tomorrow am in full force. What a farce. How nervous must they be?

  15. MJ commented on Jul 26

    As an analyst from one of big investment banks, the credit spigot is drying up. As he put it righty tighty, lefty loosey gossey. Yep that is what he said.

    I think a major credit contraction has begun.

  16. ac commented on Jul 26

    Hopefully the economy can pick up speed and mute the crunch, but it will be rough. The silly short squeeze rally just corrected itself.

    How bad the crunch hits the US economy in the first half of 2008 will also determine if a recession hits the nation. If it does, the global boom is over and will effect the Eurozone and yes, even Asia by the end of 2008.

  17. Great Boom commented on Jul 26

    I disagree with the comments on these boards. This is a very mild credit contraction and is basically regulated to the housing and auto.

    I suspect with the rerise of tech and alternative fuels development, the US economy is near economic boom.

    I wish this board had more savvy thoughts rather than masturbationary fantasies of doom(ie recessions). It must really get the pleasure hormones running for those types.

  18. dgoverde commented on Jul 26

    That would be “masturbatory,” which is my personal preference, or “masturbational,” but not “masturbationary,” Monsieur Great Boom.

  19. Groty commented on Jul 26

    The yen is ripping higher, suggesting an unorderly unwind of the carry trade. And as Rick Santoli pointed out, sovereign credits around the globe are rallying hard also.

    With the huge markdowns in CDOs after Bear Stearns hedge funds blew up, and the amazing speed that corporate credit spreads have blown out, the price action smells like some VERY LARGE leveraged player(s) found themselves on the wrong side of those trades and are now in forced liquidation.

    How long before we know who was thrown threw the windshield?

  20. Frankie commented on Jul 26

    I love foaming at the mouth bears!

    I implore you to go all in (short) Friday AM…it’s a lay up!

  21. UrbanDigs commented on Jul 26

    Groty – I hear its BSC that has a few more funds that are in process of going under. Not sure if its true or not, but certainly wouldnt be a surprise.

    Also, we had this Yen Carry scare in February and markets seemed to absorb it fairly well as the yen is just as weak as the us dollar and has no fundamental reason to start a large rally against our currency.

    However, how far this credit squeeze goes is anyones guess. Psychology def plays a role in tradable markets.

  22. tjofpa commented on Jul 26

    Great Boom is right!

    As long as China and Japan decide to plow their worthless US IOUs into even more worthless CDOs, MBSs and CPDOs, this will be a very mild “credit” contraction.

    Who does git credit for this, anyway?

  23. Sven commented on Jul 27

    Great Boom,

    Once KKR and Cerberus can’t get their deals done, you can no longer say it is “regulated” (you mean relegated?) to housing and autos.

    Alternative fuels…in this country? Ha…don’t make me laugh.

  24. Alex Grey commented on Jul 27

    I think that the market has bencome heavily dependent on share buybacks and LBOs. Large increases in margin debt (rising at $20 billion/month in the last two months (to June) suggests people are speculating on what company is going to announce a share buyback of be the subject of a LBO. The problems in corporate debt are therefore likely to have a substantial effect on this stock market. Morover, the US economy is highly dependendent on the performance of its stock market – a bad situation to be in. The personal savings rate should be going up from its negative level recently as a result of weakening house prices (people can no longer rely on their house to do their savings for them – note Martin Feldstein has been expecting this). This has been forestalled by the strong increase in equity prices. Look for sustained falls in the stock market, if not in the next month then shortly therafter as the economy shows increased signs of slowing as savings rates rise.

  25. Bud Hovell commented on Jul 29

    The biggest losses for retail buyers in 29-33 were in over-valued debt instruments, not stocks. If the first “down” didn’t get ’em, the second one a few years later (after the market “recovery”) did. Makes you wonder how many two-time losers we’ll see this time around.

    Bernanke said to Friedman about the Depression having been caused by ill-crafted policies of the FED: “You’re right. We caused it. But we won’t do it again.”

    Yeah, right, Ben. Way too much cheap money pumped for way too long back then created a huge bubble, but that’s not what’s happened this time. No, no — what we have now is just “normal growth”. And the big bust afterward, back then, simply can’t repeat again because economists today are such enormously more clever people.

    This time is different.

Posted Under