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Time to 'Fess Up: Just How Much Covenant Lite Do You Own?

Friday, 10 Aug 2007 | 7:51 AM ET
BNP Paribas
AP
BNP Paribas

Isn't this just like that country-fair game where you use a hammer to beat down characters that pop out of a hole? (Know in the U.S. as Whack-a-Mole.) The harder you beat each one down, the faster they pop up in another location. I doubt this is an original analogy, but it is still a useful one for understanding this credit crisis.

The U.S. has a housing market slowdown. We see a rise in the inability to pay subprime mortgages, buyers of bundled mortgages get twitchy and some mortgage providers fold, and before you know it, a German bank is getting bailed out and a leading French bank can't work out the value of some of its funds anymore.

On Wall Street and in the City there will be a lot of people working through this weekend trying to get their story straight for the market next week. They get a reprieve from the daily grind of market selling that is bringing its own problems. But it is a temporary respite. If BNP Paribas can't work out the value of some funds, then nor will a lot of asset management operations. Be prepared Monday for more confessions.

Our tech analyst this morning is calling Monday as a big day for a trend turn in lots of markets. Sentiment is clearly going bad and the downside could pitch much lower, until there is an obvious end to the subprime fall out.

Many of our guests have continued to point out the strength of corporate earnings and corporate balance sheets. Another big theme has been the lack of leverage in emerging Asia. This may all be right -- and the shrewd long-term investor should always be mindful of picking up quality on the cheap -- however, when the market is looking to exact revenge, prices can get cheaper still.

Feedback welcome - here.