Haphazard Linkages

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 com...

An army of market watchers around the world spend a lot of time predicting market direction. Some follow the fundamental approach and base their views on things like earnings growth of corporates, P/E multiples etc; while some follow the technical approach. The latter express a view on market dirrection by reading charts. They talk support, resistances, head & shoulders, negative and positive divergences etc. While neither of the methods are per se ‘wrong’, it would be rather intuitive to learn about movements in one asset class by looking closely at what happens in another asset class. Credit Spreads is one such ‘indicator’. Investors in ‘Junk’ bonds - bonds issued by companies that are teetering on the brink of disaster are classified as ‘junk’ - need to be compensated adequately for assuming higher risk by investing in the junk bond as compared to investing in a government backed Treasury Bond. So they demand a higher yield for investing in these bonds. The difference b...