×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

Subprime crisis led to share price slump

Subprime crisis led to share price slump
Comment E-mail Print Share
First Published: Wed, Nov 21 2007. 11 09 PM IST
Updated: Wed, Nov 21 2007. 11 09 PM IST
It was only a little more than a month ago that the S&P 500 stock market index hit an all time record. It looked like shares were exempt from credit problems. But that isolation has ended. The US index subsequently has fallen by about 10%. When liquidity almost disappeared from the money markets in August, stocks suffered. But they then recovered, along with credit markets.
The iTraxx index of European investment grade credit spreads, which had risen from 20 to 57 basis points (bps) in August, fell all the way back to 29 bps. With the help of central banks, overnight funds became cheap and easy to find.
But, the underlying problem for credit markets—losses on US mortgages—has steadily got worse. Tuesday’s news that the Federal Home Loan Mortgage Corp., better known as Freddie Mac—the government-supported mortgage group—is looking for additional equity capital, is only the latest blow. The triple-B-minus rated ABX index of subprime mortgages is now only half the level where it was even at the start of the credit crunch in August.
Stock market investors hoped that the housing credit problems wouldn’t cause much collateral damage. But interbank spreads are now close to near-crisis level and lenders are increasingly cautious. That has widened spreads. The iTraxx investment index is only 2 bps below its August high, and the crossover (near-junk) index, is a mere 40 bps below its 430 bps high. Banks are yet again having difficulty syndicating leveraged buyout debt. Witness the delay pumping out the big Chrysler Llc. loan.
Stock market investors can’t take too much comfort from the yield on the US 10 year treasury bond, which has dropped since August from 4.7% to 4.1%. A fall of that sort is usually associated with weak economic activity. Then there is the dollar, which has dropped by 10% against a basket of trading partners. That’s good for foreign earnings in the US, but likely to discourage foreign purchases of US assets.
Have stocks caught up with the bad credit news? The world market is trading on an expected 14.5 times 2008 earnings, according to lender and liquidity provider Dresdner Kleinwort. If earnings were to grow at the 12% that analysts still pretend to believe, shares might seem reasonably valued. But with debt market indicators all pointing to economic trouble ahead, that seems scarcely credible.
Comment E-mail Print Share
First Published: Wed, Nov 21 2007. 11 09 PM IST