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The Credit Window is Now Closed

Posted By Barry Ritholtz On July 26, 2007 @ 3:25 pm In Credit,Derivatives,Markets,Psychology,Trading | Comments Disabled

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? [1]) — 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 [2] 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.


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2007/07/the-credit-window-is-now-closed/

URLs in this post:

[1] WTF is going on in the ABX Markets?: http://bigpicture.typepad.com/comments/2007/07/wtf-is-going-on.html

[2] fairly valued: http://news.morningstar.com/articlenet/article.aspx?id=198570&pgid=wwhome1a&lpos=Commentary

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