Whither Wall Street? Pick Your Indicator

Everyone on Wall Street watches the Dow. Guy LeBas watches the Cow.

To be precise, he watches Bessie — the nickname of an obscure market barometer devised by Janney Montgomery Scott, an old-line brokerage firm in Philadelphia, to measure the anxiety inside the world’s credit markets. Officially, Bessie is the Credit Availability Oscillator, or CAO — pronounced “cow,” hence the playful moniker.

Wall Street sign
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Wall Street sign

Like his counterparts from New York to London, Mr. LeBas, Janney’s chief fixed-income strategist, is digging ever deeper for clues about the markets and economy. The financial world has turned so volatile lately, and its story moves so fast, that bankers, money managers and analysts are latching onto a variety of market indicators in an effort to see what’s ahead.

Indicators are being continually parsed and picked over, like the prices of lumber and palladium, as well as an alphabet soup of indexes, interest rates, spreads and swaps. The big question on everyone’s mind is whether the financial troubles in Europe will worsen — and what that would mean for the United States. The stock market’s recent dive only added to fears that this crisis will reach across the Atlantic.

“What you are really looking for is a canary in a coal mine,” said Douglas S. Roberts, chief investment strategist for the Channel Capital Research Institute.

The canaries that the pros are listening to are rarely heard outside financial circles. But then, it wasn’t long ago that the same could be said for collateralized debt obligations, or C.D.O.’s. As events unfold, new terms — Libor, VIX, the Ifo index, the Baltic Dry Index — may well join the lexicon of the Great Recession.

Perhaps no other banking statistic is being watched as closely as Libor — the London interbank offered rate. It is a measure, calculated by the British Bankers’ Association, of the rates at which banks borrow money from other banks in the London wholesale money market.

In the dark days after Lehman Brothers collapsed, the three-month Libor spiked to more than 5 percent. Today, it is about 0.5 percent. But for months now, the Libor has been creeping upward. It is already double what it was at the start of the year — a sign, economists say, that banks are reluctant to lend money to one another.

The Libor-Overnight Indexed Swaps spread, another bellwether, measures the difference between the Libor and the rate that banks pay to borrow money in the swaps market. It, too, has been rising.

Skeptics say the Libor provides a skewed look at the borrowing costs of banks because the rate is set largely by European banks. Some analysts instead track the vast market for corporate i.o.u.’s, or commercial paper.

The chief financial officer of one American bank, who did not want to be named, has a computer “dashboard” tracking Libor, Libor-O.I.S. and a host of other market variables, including the Baltic Dry Index, which tracks worldwide shipping rates and, the thinking goes, is therefore a good gauge of economic activity.

Which of these indicators is most important?

“The answer changes over time as the underlying conditions change,” said Mohamed El-Erian, chief executive of the bond giant Pimco. “Right now, we are paying a lot of attention to indicators of the health of the interbank market in Europe.”

In the credit markets, the focus is on distinguishing between Europe’s weak and strong. The premium to German government bonds — Europe’s equivalent of ultra-safe United States Treasury securities — that bond investors demand on Greek, Portuguese and Spanish debt has been watched closely for months now. Indeed, even ordinary Greeks are known to ask, “where’s the spread?” when the markets turn turbulent.

Last week, the premium, or spread, on Spanish debt rose to the highest level since the mid-1990s.

When that happens, investors start to get nervous that the borrowing costs of governments will jump, creating a vicious circle ending in some countries being unable to pay their debts.

“The thing we want is a sense that government yields are not rising in some kind of nefarious way,” said Jeffrey Palma, head of global equity strategy at UBS Investment Bank.

Traders are also keenly watching the credit-default swap market for European debt, a mechanism for investors to buy insurance against the risk of default on bonds. One of the most-watched measures is the Markit iTraxx SovX index, which tracks C.D.S. spreads on sovereign debt. It rose sharply this year, fell back once European governments promised a $1 trillion aid package, but then recently returned to its peak of earlier this year.

“It is clearly flashing now,” said Zach Pandl, an economist at Nomura Securities in New York.

With the renewed volatility in the markets — including the May 6 flash crash — has come fresh interest in the Chicago Board Options Exchange Volatility Index. The VIX, as it is known, measures the implied volatility of options on the Standard & Poor’s 500-stock index. On Friday, it ticked up again, close to its highest level since early last year.

And then there is Bessie. Janney Montgomery Scott compiles the oscillator from all sorts of things — mortgage rates, auto loan rates, loan survey data from the Federal Reserve and buy and sell messages that its traders receive via their Bloomberg terminals. It uses Bessie internally and makes it available to its clients.

The idea of Bessie is to determine how difficult it is for consumers to get credit. Lending conditions are a central driver of consumer spending, and thus economic growth.

Bessie dipped into deep negative territory in 2008 and early 2009, but then it bounced back later in 2009. Worryingly, though, Bessie has started to move down again lately, Mr. LeBas said. After plunging to a reading of minus 90 in the fourth quarter of 2008, it stood at around 13 earlier this year, but is currently at around 3.

“The last time there was a negative move of this magnitude was in the fourth quarter of 2008,” Mr. LeBas said. That was just before the initial optimism over the federal rescue of the nation’s banking system faded — and the Dow began to slide.

Christine Hauser contributed reporting.