Credit Crunch?

First, this should be taken as a personal explanation for the financial problems that have engulfed our credit markets since last February. It began with the risky lenders going bankrupt in February (although the underlying bonds representing their loans were never priced appropriately). This was caused when Bankers\Hedge Fund Managers and Portfolio Managers stretched for return and had no bearing of risk over the last few years when volatility was low. Over the last three months, most short term leverage (i.e. commercial paper and medium term notes) have been called by Banks/Wall Street Brokers and investors (or never rolled). This caused massive selling on the parts of leveraged Hedge Funds/CDO and CLV's. One positive note is that most of the assets that had been liquidated are high in quality due to the lack of bid for esoteric derivatives and mark to model non-rated debt held by these entities. This means that the Hedge Funds had to sell their stock positions and Treasuries to raise capital for margin calls and redemption's. In due time, the credit markets will begin to measure risk in in a prudent manner and the young managers will loose their jobs just like previous credit crunches. Times seem to repeat themselves. This time the global economy is in full swing and corporate profits look healthy. During this fallout, an overweight in high quality equities (especially International) as well as some corporate/AAA Mortgage Debt that has dropped in price during the credit crunch should be tactical. In the coming weeks, more news might hit like Countrywide or some small regional banks like Vineyard Bank might have further short term cash needs. This will cause more panic but these are just short term movements. Just remember that in 2002 many un-failable companies declared bankruptcy. This is not the end of the world. Just unraveling of a bubble. The market still looks poised to rebound this small correction and continue higher by year end. Again, 14,000 has been already crossed over. Remember, stay away from leverage a major correction in Residential Real Estate seems to be setting in.