FYI | May 21 2010
By Greg Peel
BTIG's chief market strategist in the US, Mike O'Rourke, notes that what is happening right now in the markets is described as an “echo panic”. Investors are seeing familiar signposts in 2010 as those which impacted on markets in 2008.
These include over-leveraged entities (this time governments instead of banks), widening risk spreads, government bail-outs, short-selling bans and anti-market political rhetoric. Deflation fears have reemerged and commodities have collapsed, and there is massive de-risking and a flight to quality.
“The list goes on, says O'Rourke, however “despite the similarities this is nor Credit Crunch 2.0”.
O'Rourke suggests there are several critical elements missing and the most important is a lack of systemic failure. There has not yet been a Lehman. Greece was a contender but given the EU paid Greece's immediate debt obligations this week there is no longer an imminent catalyst for ongoing problems. This is not a new GFC, it is simply an ongoing fall-out from the old one. But, “the bottom line is governments have far more influence over their own destiny than individual financial institutions do,” notes O'Rourke, “and survival is the politician's preeminent skill-set”.
While the London Interbank Overnight Rate (Libor), which is the benchmark for bank credit spreads, has widened recently from 7 basis points to 25, this represents only half of the move of mid-2007 when the credit crisis began. At that point the S&P 500 rallied another 12% before the bear market set in, while this time the S&P has fallen 12% on half the apparent risk.
“It is rare that investors are offered such violent and quick corrections in an environment that is fundamentally improving,” says O'Rourke, “It looks and feels like 2008, but it is 2010”.
His advice to US clients is they should be looking to buy into any further down move tonight, “even if only for a trade”. Thereafter, BTIG still has 1200 as the S&P 500's target (it closed last night at 1071).
