“Investors debated overnight whether the global credit crisis had peaked, but with Deutsche Bank and Merrill Lynch financial results looming large Wall Street remained jittery,” explains Reuters this morning. Stocks everywhere have rallied since late August. The ASX 200 closed at a record high of 6,659 while stocks in Asia, Europe, and America all rose on anticipation that more rate cuts from the Fed are on the way.
Yesterday the Dow paused and lost 40 points, as if rethinking the logic of the rise. It would be unusual for a rampaging bull market to begin on the foundations of an epic collapse in the credit markets. How can a phoenix rise from the ashes before it’s been consumed in fire? But that’s really the question today isn’t it? Not about the phoenix, but about the bear. Can you have a bear market in credit and still have a bull market in stocks?
The bullish scenario is that the worst is over in subprime. Although it was bad, it wasn’t end of the world. “We can’t tell if new sources of asset panic will arise given the surprises so far. Nearly driving over a cliff and veering away provides a completely different outcome than going over it,” said Steven Wieting of Citigroup. So it was near miss, according to some.
A simpler explanation is that the money no longer going into short-term bonds is going into stocks. In other words, the bear market in credit is fully consistent with the bull market in stocks, at least in terms of money flow. Investors have given up on high-risk, high yield debt and moved on to high-risk, no yield stocks. The weight of money into the market has created a self-fulfilling bull market.
So stocks have become a great lifeboat. But they’ve been taking on investors awfully fast. How much upside is left? You’d expect valuations to become an issue at some point. But that point is probably after 7,000 on the ASX 200. With not much to choose from in other assets, stocks are the only game in the global village right now…unless you are sifting through the rubble of the CDO market.
Markets and Money