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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.

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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.

Source: The Credit Window Is Now Closed