I know what you’re asking yourself. Who’s Ted? Why should I care?
Ted is not so much a who but, rather, a what.
The Ted Spread is the difference between the London interbank offered rate, or Libor, that banks say they charge each other for three-month loans in dollars and the yield on the three-month Treasury bill. Any narrowing of this spread is a positive indication that the credit markets are beginning to thaw.
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Today, the differential between these to benchmarks fell 12 basic points, to 98. The last time the Ted Spread closed below 100 was Aug. 15. In addition, the Dollar to Libor dropped to 1.09 percent, the lowest level since June of 2003.
The Domino Effect: Loosening, Eventually
To combat the seizure in the credit markets, Central banks around the world, like the U.S. Federal Reserve, have cut interest rates to their lowest levels in 40 years, and lent record amounts of cash directly to the banks. Although the credit markets are far from being normalized, this tightening of the Ted Spread indicates a reduction in borrowing costs that, ultimately, may signal a loosening of the credit markets.
Despite the anticipation of grim numbers on the corporate earnings’ side of the ledger this week, not all of the news from stock market is negative.
According to reports released by the CBOE, the Chicago Board of Options Exchange, options traders are betting stock swings in the Standard & Poor's 500 Index will decrease at the fastest rate since the aftermath of the market crash in 1987. Some analysts believe that this is a sign that equities may keep rallying.
Until recently, the difference between the benchmark index's historic volatility and a gauge of so-called implied volatility based on expected swings rose to the highest in 21 years. The gap widened as investors paid less to insure against price declines.
Look at the Trade Deficit
This year, the S&P 500 has posted its worst year since the Great Depression as the U.S, Europe and Japan entered the first simultaneous recessions since World War II. After hitting an 11-year low on Nov.20, however, the S&P has rallied nearly 16 percent.
A side benefit of the current economic slump has been a record contraction of the U.S. trade deficit.
The gap shrank by about 29 percent more than forecast, to $40.4 billion, the smallest since November of 2003. This is down from $56.7 billion in October. The narrowing of the deficit was much greater than the median forecast of $51 billion adopted by most economic predictors.
These numbers show that Americans bought about 12 percent fewer goods and services from overseas, sending imports to the lowest level in three years. By all indications, world trade is likely to contract as commodity prices fall and the credit crunch causes consumers and businesses worldwide to pare spending.
Unable to Shake Uneasiness
This consumer-led recession means the U.S. trade balance is likely to continue to improve. As we transition to a new presidential administration and push towards a recovery mode, most analysts agree that the shrinking trade balance should give the economy a little bit of a cushion.
Even with these positive indicators, the markets still remain on virtual pins and needles as the world awaits the next Tuesday's presidential inauguration.
There is no question that market expectations are riding heavily on the new President's ability to bring badly needed confidence back to the economy. The danger is that market patience may wane quickly if the economy does not show an immediate response to the President-elect's proposed stimulus package.
John Cohn is a senior partner in the Globe West Financial Group[ based in West Los Angeles. He may be contacted at www.globewestfinancial.com
