Thoughts on Tech, Deals, and Markets

Good News for Economy and Deal Flow

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Actually, this qualifies as very good news.

Hat tip to Calculated Risk:

TED Spread
  • The TED spread is at 0.99, sharply lower. (improved)The TED spread was stuck above 2.0 for some time. The peak was 4.63 on Oct 10th. The TED spread has finally moved below 1.0, although a normal spread is around 0.5.
  • The TED spread measures the difference between the interest rates on interbank lending (as measured by LIBOR) and  the three-month US Treasury.

    And:

    The three month LIBOR has decreased to 1.109%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (improved) Imagine all those adjusted rate mortgage loans tied to treasuries or even the 3 month LIBOR? The rates are looking pretty good!

    The sudden, huge spikes in the LIBOR and the TED spread were at the center of the financial panic last September and October.  Every participant in the market was scared stiff that every market entity not backed by a developed government was on the brink of worthlessness.  The great irony of that moment was that, due to the panic, everything was, indeed, teetering on the edge.

    The frenzied, ‘animal spirits’ of last fall are finally calming.  The credit markets are beginning to thaw.  Gradually, market participants are rebuilding their tolerance for risk.  If this continues, it will shorten the path to economic stabilization and, eventually, recovery.

    It’s easy to focus on backwards-facing economic news such as unemployment or earnings reports, particularly when they are as heinous as they have been of late.  But these are lagging indicators, not forward-looking.  On the other hand, real-time measures of risk tolerance in the credit market are causal, and therefore highly predictive.  While we aren’t there yet, when it returns a healthy credit market will spur lending that will drive  future economic activity.

    In the M&A and private equity world, improved credit markets will reduce the fear that has gripped many buyers and investors since the last September, catalyzing deal flow.  Frozen credit markets translated into a sky-high cost of capital.  Little leverage was available to goose investor returns.  Combine that with the lack of visibility into ’09 earnings and it’s understandable that the deal sidelines have been crowded of late.  However, as credit conditions improve, there will be opportunities for value for buyers and investors who are willing to move before the crowd.

    Written by sandykory

    January 14, 2009 at 11:12 am

    Posted in Uncategorized

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