	Generational Dynamics
	Forecasting America's Destiny ... and the World's

\| HOME \| WEB LOG \| COUNTRY WIKI \| COMMENT \| FORUM \| DOWNLOADS \| ABOUT \|

Generational Dynamics Web Log for 11-May-05
Credit market derivatives fall sharply, sparking big stock market losses

Web Log - May, 2005

Credit market derivatives fall sharply, sparking big stock market losses

A Wall Street Journal web site article appearing on Tuesday afternoon caused nervousness on Wall Street, leading to 1% losses in stock market indexes.

According to the article in today's paper, recent troubles at auto makers General Motors and Ford has caused a domino effect that's causing concern among investors.

The turmoil is occuring with so-called "collateralized-debt obligations," or CDOs.

Conceptually, these work as follows: Corporations incur debt by selling corporate bonds that pay interest -- unless the corporation goes bankrupt. You can purchase corporate bonds directly, but there are additional choices. Wall Street dealers will package together packages of bond debts from numerous corproations, and you can buy shares of those packages, allowing you to spread your risk over many corporations and many kinds of bonds. You can purchase high-risk CDOs, hoping to make a lot of money, or you can purchase safer low-risk CDOs that pay less.

While you may never have heard of, let alone owned, a CDO share, many large financial institutions are heavily invested in these CDOs.

Last week, S&P changed its rating on GM and Ford, giving their debt "junk bond" status. This caused the value of certain CDO holdings to fall sharply. The rumors are that Deutsche Bank is heavily invested in CDOs related to GM and Ford, resulting in substantial losses. The resulting investor nervousness has pushed down the values of all CDOs except those with the lowest risk, and has raised concerns about a domino effect causing big losses for many financial institutions holding CDOs. This resulted in the panic that caused the Dow to fall 103 points on Tuesday.

This is a fairly obscure situation that most people wouldn't even care about much, at least as long as the Jackson trial is going on.

But it's one more sign of extreme nervousness and volatility in the stock market. It's exactly this kind of volatility that precedes a stock market crash, although the appearance of such volatility doesn't mean that a crash must happen right away.

From the point of view of Generational Dynamics, a stock market crash to the Dow 3000-4000 range is 100% certain, but whether it will happen next week, next month, next year, or a year or two later cannot be predicted. But the increasing volatility indicates that it's more likely to occur sooner rather than later. (11-May-05) Permanent Link
Receive daily World View columns by e-mail
Donate to Generational Dynamics via PayPal

Web Log Pages

Current Web Log

Generational Dynamics Web Log for 11-May-05 Credit market derivatives fall sharply, sparking big stock market losses

Web Log Pages

Generational Dynamics Web Log for 11-May-05
Credit market derivatives fall sharply, sparking big stock market losses