Market Insider

Credit Crunch: Real Or Just A Crumple?


Is the credit crunch becoming more of a crumple? There certainly are encouraging signs of life in the credit markets where just a few weeks ago there was a scary paralysis. But it's too soon to call an end to the crisis even though the stock market is clearly taking the improvements to heart.

"Things have improved across almost every type of security, but it is a long way from normal and it's still fragile," said CNBC's senior economic correspondent Steve Liesman.

News that KKR'sdeal to buyFirst Data is getting a better reception in debt markets than it had just a week ago is encouraging traders, who say it is a positive sign for some of the deal debt awaiting its turn at market.

There are also signs of stability in the commercial paper market, where companies turn for short-term financing. This week, the Fed reported the amount of commercial paper outstanding fell $13.6 billion for the week ended yesterday. That's a much smaller decline than we've seen in the last four weeks, which each averaged about $75 billion. Riskier asset-backed commercial paper declined $17.3 billion in the latest week, also a smaller decline than some recent weeks.

Miller Tabak's Tony Crescenzi writes in a note following the Fed's report that stability of the asset-backed commercial paper market is more important than its continued decline because the decline could be related the economy's weakening. "It is estimated that the amount of commercial paper that had exposure to the mortgage markets was about $300 billion before the credit markets froze, an amount that has been largely purged by now--mind you, with nary a default," he says.

"...By weeding out weaker issuers, or issuers perceived as risky, what remains are issuers that investors are comfortable investing in," Crescenzi writes. "This process helps foster stability in the commercial paper market and prevents contagion. Such is a process that has continued of late, with major issuers experiencing virtually no difficulties raising money in the commercial paper market."

Edward Marrinan, J.P. Morgan's chief credit strategist, says there are clear signs of recovery in the credit markets but also cautions conditions are still far from normal. "It's improving. Anything is better than what we were living through, or barely living through, in July and August. There are multiple signs that things are getting better, slowly admittedly, but better," he said.

Marrinan says in addition to improvement in the commercial paper markets, there are other signs, including less volatility in equities (witness performance of the VIX), narrowing swap spreads and a near record volume of about $85 billion in high-grade corporate debt coming to market in September.

"In subprime land, the month of September is the month during which the largest volume of subprime adjustable rate mortgage loans will reset. Rates are going to go up on those people. That's certainly a signal there will be more foreclosures, more defaults, more pain for subprime holders," Marrinan said. "On a quantitative sense, it may be a low point. It's a bottom we have to touch in order to start working our way out of the subprime problem. It's a catharsis cleansing to work our way out of the problem." Each month, thereafter, there will be fewer and fewer resets.

As we approach the end of what was one of the roughest market quarters in recent memory, we see a relatively stable stock market but a dollar tumbling down the dark basement steps with no cellar floor in sight. "I think that every day that passes after the Fed's psychological easing makes for improvement in the general state of the market, and the mark to the markets. The credit crisis is a lot like a radioactive material. It has a half life," said CNBC's Rick Santelli.

Despite the good news there were a few negatives today. First theEuropean Central Bank lent more money on a short-term basis to some one financial institution this morning than it has in the past three years.

Later in the morning, the Fed revealed that it added $38 billion of repurchase agreements ranging from overnight to 14-day repos. That is the largest amount in one day since August, when it initially took action to keep banks liquid and steady the Fed funds rate.

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