Tuesday, October 14, 2008

Finally On The Right Track But...

...not out of the woods.

The way out of the credit crisis has been paved. Coordinated actions taken by European countries following the lead of the UK now points toward a recapitalization of the banks (injecting money into the banks in return for an equity stake) as the first right step, according to most economists and informed market strategists. Additionally, a shift in the US toward a similar plan is underway.

With a plan of action that appears to address most of the problem head on, investor attention can and should begin to turn to the aftermath of the crisis. In that regard, there appears to be two dimensions to our brave new world:

1. What will be the global financial model?
2. What will be the global economic model?

While this will become the primary area of analysis going forward, there is one conclusion that can be reached immediately – the US consumer is on the long deleveraging path toward more savings and less spending. The consequences to the global economy and where growth oriented investors should place their bets will be part of the investment equation of the future. But that is then and this is now.

For the moment, with the TED spread still at elevated levels and the technicals only supporting an oversold rally, all market advances should be viewed as just that – oversold rallies. For while the equity markets may be at an internal low, a sustainable advance is most certainly months away.

Investment Strategy Implications

While it is debatable whether yesterday's record stock market advance is a product of the belief that the light at the end of the credit crisis tunnel is not a train headed our way but the daylight out of the darkness, the path toward a resolution of the financial crisis appears to have its best hope yet. To get there, however, it must be forgotten that equities are not the thermometer of the credit freeze - the TED spread is.

So when bond traders return today and bankers have another day to digest the European and American government actions, we will all get a better read on where things stand.

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