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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...

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