Is the Credit Meltdown Finally Here?

The trickle of disturbing data about the credit market has reached a veritable flood in the last few weeks. We are seeing the subprime meltdown continue as well as problems in the high yield debt market. Here are a few of the highlights from the last week:

1. According to Bloomberg there have been over 20 postponed or restructured financing deals in recent weeks and more on the horizon.
   
2. High yield spreads have widened 27% since June 1st, yet still remain at historic lows. I am inclined to think that once a major LBO collapses we could see spreads widen substantially in the weeks and months ahead.(Hat Tip:Bespoke Investment Group)
3. Cerberus announced today that the tighter credit markets forced them to sweeten their Chrysler financing from 3.25% above LIBOR to 3.75% above LIBOR. I expect similar changes on almost every other major deal (yes First Data, I mean you) still out there . . . of which there are about $200 billion.
4. I'm scared everyday when I go online and check the Markit indices because everyday I am shocked and awed by the declines. Today was no different. The LCDX Index that tracks bank loans is approaching 96 with a spread of 229:

   Time / Date	Price	Spread
   4pm Close (17Jul07)	96.14	229.1
   Midday (17Jul07)	96.60	214.7
   4pm Close (16Jul07)	97.06	200.9
   Midday (16Jul07)	97.42	190.4

5. In the subprime world, investors in the troubled Bear Stearns hedge funds were told today that: "preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for investors in the High-GradeFund as of June 30th." That is scary news.
6. The Markit ABX Index continues a plunge that the WSJ market blog calls a "bloodbath". The BBB index is down to 45 from 97 in January, the A index is at 68 from 100, the AA index is at 88 from 100 and the AAA is at 95 from 100. Clearly every credit quality is getting hurt, not just subprime. But I have to admit this BBB chart is by far the ugliest:

So what is an investor to do?

• If you have a bond portfolio I would recommend two actions: 1) focus on high credit quality, 2) shorten your duration.
  
• If you are very ambitious you can look into buying an ETF or mutual fund that tracks the inverse of the junk bond market. Check out this article from the Wall Street Journal from a fund that was launched 2 years ago.
• You may want to stay away from Blackstone and Fortress for a while in case investors flee quickly out of fear that PE management companies aren't where you want to be if the market dries up.
• Don't ditch your long term asset allocation, but you may want to focus on large cap equities and blue chip stocks for the time being as their borrowing costs will stay lower during a swoon in the credit market.