It’s interesing to note that the market is rallying today on the news that CIT will be rescued.  Of course, last week’s news of CIT’s demise did nothing to dent the market.  Meanwhile, the commercial paper market continues to display the weakness that is apparent in CIT’s underlying businesses.  As we’ve mentioned before, the commercial paper market is a clear sign that the lending markets are far from healthy.

David Rosenberg has a nice note on the recent declines in the ABCP markets:

We continue to hear from strategists and economists that the credit clouds have parted, and yet the U.S. commercial paper market continues to contract (by $40 billion in the July 15th week) to a level not seen since 1998. And, the declines are right across the board — financial issuers, non-financial, asset backed — in fact, the asset backed market is all the way down to $440 billion of outstandings from $1.2 trillion at the credit bubble peak in the summer of 2007. Commercial bank balance sheets also continue to shrink — by $12 billion in the latest week, with outstanding consumer credit falling the fastest.

This is another clear sign of the state of the current rally in equities.  While the underlying fundamentals remain little changed and even deteriorate in some lending markets we continue to see rampant bullishness in equity market participants that anticipate higher stock prices later in the earnings season.   After an 8% move in stocks in less than a week (on weak underlying earnings) we are beginning to see the risk/reward take a turn for the worse.