Skip to main content

Credit market worries spread

We spoke yesterday about worsening conditions in the credit markets, as fears from the subprime mortgage bond market had spread to the corporate and high yield debt markets.

Today we see more evidence of a contagion of fear, as credit fears join with worries over higher oil prices and the state of the U.S. housing market. The result: a reversal to yesterday's gains in the leading U.S. stock indexes, as U.S. stocks declined sharply in morning trading.

The fallout in stocks was not limited to U.S. markets. European and Asian shares also suffered from fears of a slowdown in the takeover market due to higher borrowing costs. More on that from Reuters:
U.S. stocks tumbled on Thursday on signs of further deterioration in the U.S. housing market, a jump in oil prices and a worsening climate for financing corporate takeovers.

The broad Standard & Poor's 500 stock index fell 2 percent at one point, and the steep decline led the New York Stock Exchange to impose trading curbs which restrict large-block sales when a stock was falling.


The slump was worldwide, with overnight equity losses in Asia and the worst drop in European shares in more than four months. U.S. Treasuries rallied, meanwhile, on a flight to safety.


And here's Bloomberg's take:
Stocks tumbled around the world and U.S. Treasuries rallied on concern higher borrowing costs will slow takeovers, spur debt defaults and curb earnings, prompting investors to flee riskier assets.
The Standard & Poor's 500 Index fell to its lowest in almost three months, while Europe's Dow Jones Stoxx 600 Index dropped 2.7 percent, its biggest retreat since March. Benchmark stock indexes in Brazil, Mexico, Argentina, Korea, Poland, Russia and Turkey slid more than 2 percent.
``We're seeing a global repricing of risk as the cost of capital ratchets up,'' said Joseph Quinlan, chief market strategist at Bank of America's investment strategy group in New York. Bank of America's investment-management unit oversees about $566 billion. ``We're working our way through a period of angst and anxiety.''
The interesting thing to note here is that junk bonds and emerging market debt are finally beginning to be priced in a manner that would more accurately reflect their historical risk levels.
Here are two paragraphs from the above linked Bloomberg article that illustrate the recent flight from risky assets:
The cost of the credit-default swaps, used to bet on the ability of companies to repay debt, is the highest in more than two years. The U.S. benchmark CDX Investment Grade Index jumped $6,000 to $62,750, Deutsche Bank AG said.
and...
Emerging-market bonds tumbled, pushing yields over U.S. Treasuries to the widest since September, as investors reduced their holdings of riskier securities. The spread, or extra yield, on emerging-market bonds over U.S. Treasuries widened 15 basis point to 2.1 percentage points at 11:37 a.m. in New York, according to JPMorgan Chase & Co.'s EMBI Plus index. A basis point is 0.01 percentage point. The risk premium is the widest since Sept. 26.
So, we can see that recent worries over the state of the credit markets and the U.S. economy are sending a ripple of fear through the financial markets worldwide.
Short-term worries or lasting effects? Only time will tell, but until then, we'll be here to help you appraise the situation.
With that in mind, here's some more market coverage you might find useful and interesting.
"Rising credit fears rock equity markets" - FT's John Authers comments on the day's market turmoil and cites Jeremy Grantham's opinion of the stock market's slow reaction to credit market problems in this US Daily View video.
"Global Stocks Drop; Investors Shun Risk on Debt Woes" - Bloomberg.
"Goldman Sachs, Bear Stearns Bond Risk Soars, Credit Swaps Show" - Bloomberg.

Popular posts from this blog

Seth Klarman: Margin of Safety (pdf)

Welcome, readers! Signup for free email updates at the Finance Trends Newsletter . Update: PDF links removed due to DMCA notice. Please see our extensive Klarman book notes below. New visitors, please check the Finance Trends home page for all new posts. Here's something for anyone who has been trying to get a look at Seth Klarman's now famous, and out of print, 1991 investment book, Margin of Safety .  My knowledge of value investing is pretty much limited to what I've read in Ben Graham's The Intelligent Investor (the book which originally popularized the investment concept of a "Margin of Safety"), so check out the wisdom from Seth Klarman and other investing greats in our related posts below. You can also go straight to Ronald Redfield's Margin of Safety book notes .    Related posts: 1. Seth Klarman interviews and Margin of Safety notes     2. Seth Klarman: Lessons from 2008 3. Investing Lessons from Sir John Templeton 4.

Slate profiles Victor Niederhoffer

Slate's recent profile of writer/speculator, Vic Niederhoffer has been getting some attention from traders and finance types in recent days. I thought we'd take a look at it here too, to offer up some possible educational value from Vic's experiences with trading and loss. Here's an excerpt from Slate's profile of Victor Niederhoffer : " I've enjoyed getting your e-mails. It sounds like you've thought a lot about being wrong. Well, the reason you contacted me, to call a spade a spade, is that I'm sort of infamous for having made a big, notorious, terrible error not once but twice in my market career. Let's talk about those errors. The first was your investment in the Thai baht, which pretty much wiped you out when the Thai stock market crashed in 1997. I made so many errors there it's pathetic. I made one of my favorite errors: "The mouse with one hole is quickly cornered." That is key. There are certain decisions you make in li

Clean Money - John Rubino: Book review

Clean Money by John Rubino 274 pages. Hoboken, New Jersey John Wiley & Sons. 2009. 1st Edition. The bouyant stock market environment of the past several years is gone, and the financial wreckage of 2008 is still sharp in our minds as a new year starts to unfold. Given the recent across-the-board-declines in global stock markets (and most asset classes) that have left many investors shell-shocked, you might wonder if there is any good reason to consider the merits of a hot new investment theme, such as clean energy. However, we shouldn't be too hasty to write off all future stock investments. After all, the market declines of 2008 may continue into 2009, but they may also leave interesting investment opportunities in their wake. Which brings us to the subject of this review. John Rubino, author and editor of GreenStockInvesting.com , recently released a new book on renewable energy and clean-tech investing entitled, Clean Money: Picking Winners in the Green Tech Boom . In Clean