Recently, I have fielded many questions about the credit markets and how to recognize improvements or weakness. To understand the credit markets, one must understand the basic concept of LIBOR. Below is an explanation of LIBOR taken from www.investopedia.com
“An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers’ Association. The LIBOR is derived from a filtered average of the world’s most creditworthy banks’ interbank deposit rates for larger loans with maturities between overnight and one full year.
The LIBOR is the world’s most widely used benchmark for short-term interest rates. It’s important because it is the rate at which the world’s most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points.
Countries that rely on the LIBOR for a reference rate include the United States, Canada, Switzerland and the U.K.�
Basically as credit markets freeze, LIBOR rises; and as credit markets thaw, LIBOR falls. A falling LIBOR rate is a sign that banks are more willing to lend to each other and such interbank lending can lead to broader market lending where companies can now access the credit they need.
Keep an eye on LIBOR rates…as they fall, the stock market will most likely rise.
Happy Trades!
Jeff
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