Stop Complaining the Fed...Buy Quality Credit

The better than expected results from the existing home sales February and the 5-fold increase in Bear Sterns selling price has provided some market cheers lately. Some of the analysts are turning cautiously optimistic with their calls lately. Below is one example of such report:-


Morgan Stanley(MS) strategist Teun Draaisma and his team are “turning strategically positive on higher-quality credit”: "There is now deep value in the sector for investors with a medium-term investment horizon. Tactically, risks remain, given the poor outlook for the economic cycle and lingering financial system instability. However, recent Fed action suggests that the funding crisis for higher-quality assets has turned the corner. We now see a good tactical entry point for what is a medium-term deep-value trade".


With valuations now fully priced for the current recession - added to the fact that prices have been driven this wide by deleveraging, not just “fundamentals” - it is, Draaisma says, time to stop fighting the Fed.

After a slow start last year, the Fed’s most recent actions are an aggressive and effective response to the current crisis, in our view. In particular, the Primary Dealer Credit Facility (PDCF) provides a big boost for investment grade assets, which have dramatically underperformed thus far in this bear market.

But to be clear here, the MS team are not sounding the all-clear for credit markets in general, while for equity investors the fact that corporate earnings will be seriously disappointing means the bear market in stocks continues - notwithstanding a likely “bear market rally” encouraged by the stabilisation of credit.