Skip to main content

Update - Lessons from Credit Spreads

History...once again triumphed...The gloomy story painted by the behavior of Credit Spreads played out in the equity markets (again). The S&P 500 finally fell by over 7% from its high in response to the developments in the credit markets. Expectations of ever higher premiums in takeovers finally receded into the background.

The markets seem to be rational again...Or, is this just the proverbial tip of the iceberg? Another hedge fund, Sowood Capital, succumbed to the sub-prime disease. It seems there will be more casualties along the way. Evidently, private equity buy-out firms - for whom credit is equivalent to blood - are finding the going tough. But few seem to be openly accepting it.

In more ways than one, the tightening of credit is good for the markets, in terms of adjusting investor perception towards risk. This article from this week's Economist makes for good reading.

I am going to be watching the happenings in the credit markets with rapt attention in the coming days...

Comments

Popular posts from this blog

'CORN'y Connection

A common theme in investing is that, in the long-term, asset prices adhere to fundamentals. The road to adherence is often an irregular one, prices overshoot and undershoot along the way...but ultimately, they behave like obedient children. Sometimes though, the relationships between asset prices are hidden from the eye. Peer through the layers and one might just be able to come up with a relationship that could form the basis of a trading strategy. 'Corn'y Connection , is one such linkage... The Craze for Maize Lot of factors have driven corn (maize) prices of late. The rush of demand for et hanol has ensured that corn finally got its due. Apart from the fundamental factors of demand and supply, speculative demand for the commodity has served to increase the volatility in corn prices. Not surprisingly, corn prices have surged quite a bit (refer adjoining figure) . Along with the rise in corn prices, the 200-day historic volatility has increased significantly. Cor...

One Small Voice

Continuing in the spirit of Haphazard Linkages, I look at the consequences that a false sense of ‘progress’ has on an economy. Things may look ‘good’, but is it a true and justified reflection of the resources at a country’s disposal? Can things be made better? An economist aims for efficiency. A state where one individual cannot be made better off, without making another worse off in some way. On the 60 th anniversary of India ’s independence, patriotism and a sense of well-being abounds everywhere. People are mostly unanimous in their verdict that India had arrived and bask in glory…The Times of India headline, “60 and getting Sexier” couldn’t have captured it better. Every news channel and celebrity waxed eloquent about how much progress India had made during this time. Waxed eloquent about India ’s stupendous GDP growth…about India Shining. Did this appraisal reflect reality? Or was it just another day where patriotism oozed out of wherever anybody cared to look?...

A Scary Scry?

I feel much like the protagonist in Microsoft's Age of Empir es game; at the beginning the only rays of light shine on me and my target at the other corner of the map. I need to get to the target but there's a problem. Everything is dark out there. I don't know the way. The darkness camouflages danger but also opportunities. I don't lose if I don't move, but I don't win either. As I start moving around feeling my way, the blanket of darkness lifts gradually, revealing reality. Sometimes I hit a dead end, forced to backtrack and em bark on a new path, but at other times I get lucky and hit jackpot soon. There is a huge premium attached to action and adaptability to a dynamically evolving environment. Investing is similar in many respects. The ghost of unc ertainty lurks in the darkness at every turn in Investorville. But decisions have to be made. Often based on an incomplete, uncertain and biased perception of reality. As in the game, ones experiences are...