Selloffs Suggest a Looming Credit Crunch
The credit boom is still on schedule to collapse in early 2006, taking the economy and the stock market down with it. What's more, the stock market is starting to see that scenario as increasingly likely.
Many expected 2005 to be the year when the economy turned in a robust performance, finally putting the destabilizing factors of the past five years -- overpriced assets, erratic demand, whipsawing consumer confidence and a gaping trade deficit -- in the rearview mirror.
But for the economy to escape those things, it has to ditch its addiction to easy money in the very near future. And there is no sign of that happening as we approach the middle of this pivotal year. In fact, just the opposite has occurred. As hard as it may be to believe, nearly every key indicator shows that the dependence on credit has gotten markedly worse.
And the stock market is obtaining an increasing distaste for the credit bubble, even though it has helped shore it up since 2001. The lackluster performance of market indices -- the S&P 500 is down 4% so far -- needs to be explained.
Cold TurkeyTo do that, it's worth looking at valuation. The S&P 500 is trading at 15 times forecast 2005 earnings, which is cheap compared with the price-to-earnings ratios of the past eight years. With interest rates at low levels historically, this cheap-looking P/E ratio would normally provide the basis for a ferocious and sustained move upward in stocks. The fact that the indices have sagged suggests that the market sniffs real trouble around the corner. It might be that investors feel that analysts have overestimated the earnings being used in the P/E ratio calculation. But analysts always overestimate marketwide earnings, so something else must be spooking the market. That something is almost certainly the fear that the intoxicating fuel that has driven stocks higher in the past -- cheap credit -- will soon have to be switched off, either by the Fed or by banks that finally see the need to be more circumspect with their balance sheets.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV