There was today a divergence between equity and credit markets with on the one side the stock market which rallied strongly after the US ISM Manufacturing index topping the economists estimates and the increase of the sales of existing homes overshadowed the concerns in the morning (GMT) about the more and more in-the-money US autos state-assisted bankruptcy, to close well North (the Dow closed at 7762, +150 for the day) and on the other side the credit markets which were weak all day, notably with the corporate credit wider and the ABX, the CDO of subprime ABS credit index hitting historical lows after the Case-Schiller home price index fell of a record of around 19% YoY yesterday. Geithner's rally has been really fun, thanks Tim!
The news had their usual flow of bad news with the Euro-zone unemployment which rose more than expected from 8.2% to 8.5% (est. 8.3%) and its daily bankruptcy story with Thornburg mortgage Inc., the “jumbo” home lender planning to file for Chapter 11 Bankruptcy Protection , after Idearc Inc, the publisher of phone directories incl. Verizon Yellow Pages) bit the dust yesterday (this thread was not running up yet yesterday...).
The event that kept all of us distracted all day was definetely the G20 protesters riots in London. I had two interesting thoughts as I was watching on Sky news (CNBC has no idea where London is) the G20 protesters break the windows of a RBS branch in the City of London in a Middle-Age way (actually I think the police riding horses really helped for the Middle-Age feeling) :
- If the digital cameras existed in the Middle-Age, would the attackers of a castle spend their time taking pictures of the situation with their mobile phone as they fight ?
- Maybe I should bet that the bankers from RBS will defend their fortress tomorrow throwing boiling oil on the invaders from their office and go long Brent speculating on a shortage of oil in the UK? The sad truth is I'm really not expert at oil trading...
Back to the divergence between equity and credit, my opinion is that one will need to give very shortly. The question is who is right ? Me, old contrarian, the only thing giving me some doubts in my current bearish position is that the whole world seems to be bearish, my grand-ma is bear, the taxi driver is bear, everybody is bear : that's definitely the sign that the shorts have become far too expensive. I will wait to hear here and around that the crisis is over, that the bull market is back, that the world is safe, that the G20 members will all together record a cover of "We're the World" to put more on my position. One valid argument I heard about the equity-credit divergence is that Inflation prospects would favour a long equity-short credit position, I will need to think about it.
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