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Subprime Makes LTCM Crisis Look Tame at Trader’s Narrative

Want to see something that will knock your socks off?

US Financial Stress Index
BCA research US financial stress index.jpgThe BCA US Financial Stress Index (left) is a proprietary and nutritious blend of these econometric and statistical ingredients:

  • performance of bank stocks relative to the general stock market
  • the yield curve
  • credit spreads
  • real stock prices
  • consumer confidence
  • market leverage
  • private debt
  • new bond issuance
  • new equity issuance

BCA Research is the world re-known financial markets analysis firm out of Montreal. According to this indicator, the only previous crisis in recent history to outdo our present subprime debacle is the Savings and Loan boondoggle that was the epitome of the 80’s excess.

Which would explain why BCA Research is not giving up on their bullish bias:

The long running bull market in equities is not dead yet. The Fed is not the only game in town. The U.S.economy is not falling apart, the dollar has cheapened substantially and bond yields have melted. Most important, equities offer good value and the areas most exposed to the subprime crisis are already attractively priced.

If you’re still wondering how the Sub-Prime mess came about, there is no simpler explanation than this.

Here’s a more serious one (don’t forget to check the “How it went wrong” checkmark).

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5 Responses to “Subprime Makes LTCM Crisis Look Tame”  

  1. 1 Doug

    To begin with, I enjoy reading your blog, and have learned a great deal, particularly with respect to the various indicators.

    This morning’s blog leaves me puzzled. The BCA US Financial Stress Index seems incredibly hight, and yet BCA “remains bullish”?? How can this be? What is the rationale? From looking at the chart, I’m considering running for the hills.

    Would greatly appreciate a brief summary of why they would remain bullish given the “stress index” level.


    Douglas Craig

  2. 2 Babak

    Douglas, the reason they would long the market is that in the past when the stress index has spiked like this, it has been a buying opportunity. When everyone is soiling their pants and selling emotionally, contrarian analysis says to buy.

    Go back to a long term price chart of the Dow or the SP500 and compare the spike points from the graph above.

    Oh and don’t foget to have holidays!

  3. 3 scood

    Maybe this index explains why it feels like a 2 yr bear mkt. after only a few mos.
    But oh what a boodle you would have made if you bought C when this index maxxed out during the S&L crisis.

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