Bonds bring the rally to stocks
The market initially took a hit after fears that MBIA would lose its AAA bond credit rating, which backs thousands of bond issuers and keeps corporate interest rates low. Losing its AAA rating would mean huge losses in the bond market as corporations default, leaving MBIA holding the bag.
Today news broke that MBIA will indeed keep is triple A rating. Warren Buffett also made serious investments in municipal bond insurance, adding new hope to the industry.
Usually rough times on the bond market bring new capital to equities. As bond yields fall, stocks benefit from new credit entering the investment cycle. However, the news of MBIA losing its ratings did affect the overall markets for a very simple reason. Had MBIA lost its creditworthiness, we would have seen a fallout in the bond market, higher interest payments on bonds and corporations swimming in debt.
The biggest winner in times of good and easy credit are always the homebuilders and financials. This was certainly true today as Washington Mutual squirms its way back to $19 per share and homebuilders such as NVR tack on 5% today.
There is no room to call a bottom on financial stocks however, I do think that we are ready to see some gains in the sector. I’d look for a quick option bet on Citi or Washington Mutual but long term, we won’t know how the credit crunch hurt these companies until its over. I’d go soft on financials and put heavy investment overseas.
