The Smart Money?

The bulls says the worst is over and that it is time to be invested in financial shares. Let's see if that jibes with reality. Here are just a few brief news items from this past week:

• Warren Buffet says "there's going to be more pain" and that the Bear Stearns bailout "doesn't mean the losses are over by a long shot."
• After taking $45 billion in write-downs and losses over the past nine months, Citigroup announces plans to sell $400 billion in assets in an attempt to keep itself afloat.
• American International Group announced another round of record quarterly losses, detailed plans to raise $12.5 billion in capital, and said that there can be "no assurance" that the losses are over.
• The Financial Times reported that "Bankruptcies and Defaults Gather Pace":

The number of companies defaulting on their junk-rated debt and filing for bankruptcy in North America is running at its fastest pace in five years amid the slowing economy and contraction in credit markets.

So far this year, 28 “entities” have defaulted, according to Standard & Poor’s. The defaulted debt of the one Canadian and 27 US companies totals $18.4bn and exceeds the 17 defaults in the US for all of last year.

S&P said the pace of US defaults in the first five months of the year is the fastest since 2003.

The US is leading the global default rate for companies, said Ken Emery, senior vice-president at Moody's.

The global default rate for speculative-grade companies rose to 1.7 per cent in April, up from 1.5 per cent in March and a multi-decade low of less than 1 per cent last year, said Moody's.

Meanwhile, in the US the default rate rose from 1.8 per cent in March to 2.1 per cent in April. Moody's expects the global default rate to reach 4.98 per cent by the end of the year, with defaults in the US reaching 5.7 per cent. In Europe the default rate is currently 0.7 per cent.

This week the latest Federal Reserve Senior Loan Officer survey highlighted tougher lending conditions from banks to lower-rated corporate borrowers. In spite of the recent rally in credit markets, the number of junk-rated companies trading at highly elevated levels remains well above normal.

"This increases the risks to the weakest links, entities rated B minus or lower," said S&P. Weak links, which are three times more likely to default than the rest of the speculative grade market, rose to 101 entities in April. This was compared with 78 at the end of 2007 and a 10-year low of 64 in July.

"If the recession is deeper and longer than expected and lending constraints worsen more markedly, the default rate could be significantly more pronounced and severe, possibly reaching 8.5 per cent," said S&P. Such a rate would reflect 136 defaults.

Yep, I guess those smart money guys are right. No sign of trouble here.

Comments

[Truesincerity]

Please...these same people who got this ALL wrong in the first place?? and now ALL of a sudden has it right with the "worst is over" message. The "smart money guys" if that is what you want to call them, should get out more, and take a little trip, spend some time with middle America, seeing is believing, and they will see that a 3rd Qtr recovery is not in the works, especially with OIL were it is. I'm waiting to hear the parade of 3rd Qtr recovery back-tracking....who will be first? Bernanke maybe?