I hate to be so skeptical of the last week’s Geithner based rally (trust me, I hate this volatile, grinding, sleepless and difficult market more than anyone and would love to return to the mildly bullish 30 point daily swings of 2004-2006), but the credit markets have not improved one iota in the last 4 weeks.  This whole economic problem is predicated on the fact that the credit markets are tied up due to the housing market woes.  If credit markets were confident that Geithner’s plan was going to work we’d be seeing vast improvement in spreads.

Instead, we are actually seeing deterioration.  Below is the TED spread one of many credit indicators that have not improved at all during this 4 week rally.  This entire equity market rally is based on improvement in the credit markets, but the credit markets aren’t improving.  At some point you have to wonder how much of this is rally is just momentum/sentiment based and how much is fundamentally based?   Equity markets are screaming for you to buy right now, but bond markets are still raising the caution flag.   If you’ve been taking your cues from the bond market during the last 2 years you’ve spared yourself substantial money even though the short-term swings can fool you into thinking it’s okay to get back into the water.

Please bear in mind that I’m no perma-bear as my email box might imply (these readers clearly missed my 666 buy call) – I just relay the facts as I see them and hear them.   I don’t invest to catch every down swing and every up swing.  I simply allocate capital appropriately where I see favorable risk/reward opportunities.   Currently, risk levels are elevated and warrant substantial caution.

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Summer Rerun: It’s Official: “A Potential Credit Crunch” (naked capitalism, 7/20/10)

Is the US Under-Class Busting at the Seams? (Wall St. Cheat Sheet, 8/18/10)

Meredith Whitney: State Job Cuts, Small Business Credit Crunch, and Harmful Regulatory Reform (Expected Returns, 5/17/10)

New Mortgage Broker Hires Point to End of the Credit Crunch (Energy and Capital, 7/2/10)

Read more on 2007 Credit Crunch at Wikinvest