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Bear Markets, sucker rallies, looming credit defaults

Posted by Adrian on July 25, 2008

The depressed US housing market is continuing to erode confidence in the banking sector, stocks, profits etc. With the banks in the US reporting losses, the Dow and S & P 500 now all in bear market territory staged ‘sucker rallies’ on the premise that bank losses were ‘not as bad’ as first estimated. These recent rallies have been wiped away with the Dow losing 283.10 points (July 24th 2008 ) bringing the index down to 11,349.28 points

The main concern is the collapsed credit markets, as banks still hold deprecating assets, usually any sort of secularization that is tied into (US) mortgage backed securities. Also the costs of protecting credit defaults swaps is increasing as the likely hood of high risk company defaults could increase towards the end of 2008.

The Markit iTraxx measure is showing Asia, Australia moving up; as the pricing for CDO’s for bigger companies becomes more expensive. The price orientated default risks are a good indicator of how the market sees company debt.

The Markit iTraxx Asia index (excluding Japan) rose 523 +

Australia’s Markit iTraxx index rose 133+

(from Bloomberg data)

The Australian rise in the CDO’S iTraxx market could be on the back of The National Australia Bank increase of cash provisions of $830 million, this was tentatively explained in response to decaying US credit markets (namely housing and MBS and CDO markets). But I would say Australian banks are more concerned about domestic company/housing credit defaults, if not more, than the US credit markets which are so decayed now – it is essentially a dead market. But never the less the portfolio of bank assets in Australia could be very problematic. Not only do they (Australia banks) appeared to have held a lot of toxic waste assets from the CDO markets (US mortgage backed securities), but they will be major worries of the over leveraged and local housing bubble – that was fueled by banks feeding outsourced credit into the local housing market.

Australian banks are undoubtedly in a bad situation with major funding issues from asset depreciation both internationally and local. No wonder their is a major sell on their stocks.

Bear Markets now seem synchronized on global stock indexes, Brazil which has a completely out of control inflation problem has now enter a bear market with their stocks with the IBOVESPA now sitting at 57,434 points a decline from May 20th 2008 peak of 73,517 points – a huge fall of 16,083 points or a 22% drop.

please refer to graph, Brazilian BVSP compared with the US dow

(please note the 3yr graph above is running real time daily statistics)

As mentioned in Gold and oil drop, stocks maintain rallies, in regards to the recent week of stock market rallies. The global credit crunch will now enter the bankruptcy stage, with not only banks finding hard to raise capital; but companies that have over leveraged and will find it hard, if not completely unable to refinance debt. Another aspect to watch, will be at some point the banks will cut credit lines to consumers.

I suspect a sharp increase in unemployment figures globally in the next 6mths.


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