They’d Rather Be in the Casket

Jerry Seinfeld used to do a bit in his stand-up routine about a survey showing that fear of public speaking actually outranked fear of death in the average person. That is, if you were attending a funeral you'd rather be in the casket than giving the eulogy.

Much to our delight, and perhaps even more uproarious, a just-released survey ranked credit crunch worries above fears of terrorism! While we would agree an actual massive credit crunch would likely have a bigger impact on the economy than terrorism (historically terrorist acts, while vile and tragic, don't have much lasting impact on stocks), people tend to have much greater emotional sensitivity to terrorism than almost anything else. So to have credit leapfrog to the number one spot says this topic is beyond adequately reflected in current prices. It has rung the freak-out factor bell.

Bad Credit Tops Terror as Risk to Economy
Associated Press, MSNBC

But given the strength of the global economy and orderly functioning of credit markets recently, if this isn't damning evidence credit hysteria has far surpassed reason and reality, we're not sure what is. (See our past commentary, "Jump the Shark" 8/22, for more).

Meanwhile, we recently uncovered an interesting tidbit of information that folks are either ignoring or failing to recognize pointing to a very nice run for stocks by the end of this year.

As the credit crunch hysteria hit fever pitch, Treasury Bills rates dropped well below the Fed Funds target rate. (Generally, Fed Funds and Treasury Bills trade closely to each other.) The target rate is set by the Fed, currently at 5.25%, but T-bills hit a low of 2.51% on 8/20. That's a pretty big digression. In fact, you can only go back a few times in history where the spread has widened so far. So what gives?

In order to drive the T-bill yield down so low, it takes one heck of a lot of money buying T-bills to drive up the price (by definition, a higher bond price means a lower yield). In our view, this is strong evidence that liquidity is not an issue today—perhaps just the opposite. Such a gigantic surge in capital flowing to T-bills is evidence folks have plenty of liquidity to spare—it's just a matter of where they're deploying it. Over the last few weeks, people have opted for the "flight to quality" tack and bought T-bills. It's highly likely that, as credit fears lessen and folks come back to reality, capital will flow out of T-bills and back into higher yielding assets.

To wit, T-bill rates have risen back up to 4.50% as of this morning, almost 2% higher than the intra-day low of 2.51% reached on 8/20. As this spread comes back to normal levels, look for stocks to climb.

The media has spilled a lot of ink comparing today's subprime credit woes to 1998's market correction involving the Russian Ruble crisis and the collapse of hedge fund Long Term Capital Management (LTCM).

But then again, it wouldn't be such a bad thing if today really was like 1998. For one thing, stocks were up big to the tune of +20% by the end of the year. But even more interesting, 1998's mid-year correction saw T-bill rates drop far from the Fed Funds rate in largely the same fashion and magnitude as today.

Once the 1998 hysteria wore off, T-bill rates recovered to near the Fed Funds rate almost as quickly as they sank, and stocks rebounded along with it. Of course, today's correction might run longer and T-bill rates could even drop a bit lower. But on the whole this is a very bullish signal, particularly because few are recognizing or talking about it.

Times like these are great for savvy stock investors. Anytime folks fear the podium over the casket, fret credit woes more than terrorism, or fail to see stark signs of bullishness right in front of them, is a great time for investing in stocks.