Warmer Hands (Equities) but Cold Heart (Credit)
As noted before, stocks, having partially recovered from their deep oversold condition, are not the epicenter of the real economy impact of the credit crisis. The credit markets are. And in this regard, as lovely as the big oversold bounce in equities may have been and as astute as any investor might have been in identifying the baby thrown out with the bathwater (oil services and global infrastructure, for example), investor focus needs remain firmly on the credit markets.
As of this morning, the TED spread (LIBOR minus 3 month US Treasury rate) has narrowed some -- not that LIBOR has declined meaningfully, but because the 3 month US Treasury rate dropped. This is not what investors (and central banks) want to see – little inter-bank lending, greater fear.
Investment Strategy Implications
Equities appear to be in that twilight world of leadership transition where the winners and losers of the next sustainable rally phase (and the inevitable bull market) will emerge. However, as confident as equity investors might and should be re the central banks and governments' actions, it does seem advisable to restrain any large amounts of enthusiasm until more visible signs of the freeze is thawing. In this regards, the credit crisis remains a "thawny" issue.
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