The Credit Window Is Now Closed

The Dow was off 395 points as I typed 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 was different Thursday than Wednesday? 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
M&A
Liquidity
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 occurred Thursday is a full blown repricing of the liquidity spigot slowly turning off.

Comments

[Paul Meisel:]

I heard on CNBC this morning that share buybacks are ramping up today.... perhaps you should check your predictions against facts?

2007 Jul 27 11:51 AM

[brynaw:]

@Paul Meisel,

Granted, 2 or 3-days of poor performance does not a secular trend make. However, I'd caution against taking anything the talking heads over at Bubblevision say at face value. Last I checked, the Dow was down another ~100 pts and still dropping.

2007 Jul 27 02:28 PM

[Johnny Bitc...:]

Share buybacks are a function of earnings and cash flow. No reason to state they are kaput, but Barry has always been a bit of Drama Queen when it comes to these things.

The problem with Drama Queens is they get all emotional and it's tough to interpret their words. What the hell is this supposed to mean:

"What occurred Thursday is a full blown repricing of the liquidity spigot slowly turning off."

Barry, if you are trying to say stocks went down, or perhaps risk premiums went up, just say it......but this gramatically impaired nonsense, though entertaining is kind of stupid.

Lastly, since your website says that you don't try to make forecasts, why are you making short term forecasts related to short covering induced rallies ? Is this just so you can sound smart whether the market goes up OR down ?

I thought so.

John.

2007 Jul 27 05:44 PM

[wixeywaxy:]

I don't understand this supposed credit crunch. There is a problem in sub prime mortagages which was no secret even as they were being deliberately expanded. There is a slow down in home building which is no surprise since the population isn't growing at anything like the rate of home contruction growth in recent years. Business is reasonably healthy and there is no reason to suppose most loans, even most real estate loans are going to default. This is a tempest in a teapot. They will hype this issue until they knoch a few more hundred points off the DJI and then after a few months the stock market will have a very nice rise for the balance of the year. Wall St needs to produce these episodes in order to pick the public's pocket. Vic

2007 Jul 27 10:07 PM

[ctbaez:]

genious with other people's money is a dangerous combination, and that is Wall Street !! Soon or later the fan is going to hit the you know what .....in my 35 years plus in markets I have never seen the confluence of so many negatives and the market continues up...............

I am scared fanless.........

2007 Jul 27 10:48 PM

[Johnny Bitc...:]

I think it's a bit more problematic than you say because there are some signs of systemic failure:

1. Fools buying houses without regard to reasonable economic value. See rent vs. buy.

2. Corrupt ratings agencies willing to back phony ratings despite neither understanding the securities and having no historical data to back up the phony ratings.

3. Fat, lazy, unmotivated, and improperly incented money managers who make money regardless of their stupid decisions. In particular Pension funds bought alot of the crap with phony ratings.

4. Property tax code related dysfunction......I won't get into detail here, but suffice to say that govt. bureaucracies throughout the land collect taxes based on phony assessments which are based partly on the systemic failures.

Anyway, there is plenty of reason to be concerned when these things happen, and I generally think Wall Street is much more likely to be selling a load of crap at high prices than trying to drive prices lower.

john.

2007 Jul 27 10:32 PM

[gordon:]

Going into this week, take out the large banks and big oil (which traditionally trade 10-15 p/e) and the S&P had a p/e of 22 I think. Not cheap at all. China 45, Hong Kong near 25 , speculation using yen carry- trade. The recent rise from March was not retail thru mutual funds( there were outflows), but leveraged hedgefunds making up 60+% of trades, read David Fry's posts. So they make $$ short now I guess...maybe 1450 $SPX holds.

2007 Jul 28 03:51 AM