Wednesday, September 17, 2008

Credit Call: buy cash AAA

-- Several credit market indices reveal the severity of the current turmoil felt by many market participants. None may be as severe as the recent spread widening experienced by AAA investment grade corporate credit. -- The cash spread of the Merrill Lynch AAA index was trading at 256 bp as of the 09/16/2008 end-of-day close. This marks the historic high of the index since 1997. To place this into another perspective, the highest level attained during the last recession in 2001 was 110 bp. -- The key constituents in the index are GE Capital Corp, and Berkshire Hathaway, Johnson and Johnson, and Toyota. GE Capital Corp comprises nearly half of the index. With diversified businesses of GE Commercial Finance, GE Money, and GE Infrastructure, GE Capital Corp is expected to maintain its AAA rating. -- Market participants who engage in a longer term buy and hold strategy and thus can weather the present storm may do well to consider the purchase of AAA investment grade credit in the corporate bond arena. --The bailout of AIG might cap the tumultuous run of credit crisis. Some aftershocks will persist. But none, execpt Citi, will rival, I believe, to the cases of Lehman and AIG. The credit environment will improve under Fed eased monetary policy and bailout of GSEs, fostering economic improvement.

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