FT: Short View: What ‘decoupling’ means to the credit and equity markets (It ain't good)

[El Pinko]

http://ftalphaville.ft.com/blog/2008/02/20/11046/short-view-what-decoupling-means-to-the-credit-and-equity-markets/

Short View: What ‘decoupling’ means to the credit and equity markets
The equity market seems to think that it can safely ignore the credit markets - but the decoupling syndrome between the two invites closer scrutiny, says John Authers in Wednesday’s Short View column. If you believe the credit market, things have worsened sharply in the past few weeks. With spreads widening significantly, recession is a certainty in the US and Europe.

If you believe the equity market, there are grounds for optimism. Stocks are still above the low they hit in January, before the Federal Reserve made its emergency rate cut - betting that this huge monetary stimulus would ensure that any recession is shallow.

The decoupling of credit and equity is also visible at the level of individual stocks. Ian Scott, equity strategist at Lehman Brothers in London, points out (not least in the FT’s View of the Day on Tuesday) that the stock prices of companies with relatively poor credit quality have fallen faster than the market as a whole over the past six months - in line with the deterioration of the credit market as a whole.

....

The credit market may be at levels that cannot be justified by the fundamental outlook for defaults: its investors have difficulty raising liquidity; many need to clean their balance sheets; there are unprecedented worries over various structured credit products, many of which did not exist during the last downturn in the credit cycle; and the problems of the monoline bond insurers create further uncertainty. Alternatively, the stocks rally may have been driven by “short covering” as traders stopped betting that stocks would go down. Or the equity market is in denial about the acute problems in the credit market.
Whatever the explanation, the disconnection is unlikely to persist for long.

[yellowcanine]

1. What does coitus interruptus have to do with equity markets?

[El Pinko]

2. In this case, "decoupling" is when the REAL reaming just begins...

nt