by Houghton and Atkeson 09/29/08
WHOSE FAULT ARE THE DEFAULTS?
The condition of the credit market was worse on Friday (Sept. 26) than it was the previous Thursday (Sept. 18 -- pre-bailout). And that was before we saw the Dow Industrials (DJI) lose 6% with their 777-point drop after the bailout package failed to pass Congress.
If the S&P 500 were to trade in-line with the credit markets, it would be trading between 900 and 990 today. This is based on the current yield on corporate debt versus the current earnings yield on stocks (the inverse of the price-to-earnings ratio).
More Trader Alerts
In any event, fear of default is running high in the credit markets. About two weeks ago, the U.S. government made a bet. It decided to let Lehman Brothers go out of business without government interference.
The lenders to Lehman, including money-market funds, got hammered on their Lehman debt holdings. Since then, about a half-trillion dollars have been pulled out of money-market funds and put into short-term Treasuries.
With money market accounts losing funds at such a rapid rate, U.S. corporations are finding it increasingly difficult to fund their short-term capital needs.
When a financial bailout package, we will very closely monitor the credit market to see if there is a credit pricing recovery. If not, this could be a powerful leading indicator for equities and very worrisome for equities.
Dawn Pennington
Read This Before You Buy Another Stock
A savvy stock position can start with a single options trade.
This technique can help you breathe a sigh of relief as it aims to relieve a 'choking' portfolio.
If you are familiar with buying calls and puts, we'll show you how to buy them even cheaper.
Anatomy of a Stock Option Ticker
Option tickers may look like a bowl of alphabet soup to you, but each letter means something.
You don't have to short stock to put a bearish bet on the table -- but the path to profits comes with different levels of risk.
