Look to bonds for signs of a turnaround

Everytime I turn on the television, someone is talking about the stock market.  Granted, I do watch an abnormal amount of CNBC, but even the regular stations are becoming saturated with financial market lingo. 

I watched about a half hour of Saturday Night Live this past weekend and there were two MacGruber skits making references to the stock market’s recent decline.  Here’s the link for MacGruber: Financial Ruin.   

I like stocks (well, at least talking about them) but it is time for people to stop watching and waiting on them for a definitive sign that the economy has changed its course.  Start paying attention to the bond market.  After all, this crisis wasn’t nicknamed the “credit crunch” for nothing.

The bond market provides banks with the money they need to make loans and companies with the financing they need in order to conduct business.  Newsflash: the stock market can’t do that!

Let me explain.  The stock market can provide companies with financing through the process of going public but, that only happens once.  If a company issues additional shares later, then it could happen again.  But, the trading news that we see each day is taking place in the secondary market for stock.  Trades in the secondary market provide no cash flow to the company, the cash flows between buyers and sellers.   While rising stock is a great thing for the company’s shareholders, it won’t keep the lights on.  So, instead of looking to the stock market for signs of an economic turnaround, look at bonds.

So much attention was paid to the Dow’s 500+ point decline today, that most people weren’t made aware of some good news: the bond market is showing renewed signs of life.

Lending rates are beginning to come down, making loans more affordable for businesses.  One rate in particular, LIBOR (London Interbank Offer Rate), fell for the eighth straight day.  LIBOR is an overseas rate, but it is a good rate to watch since many adjustable rate mortgages (ARMs) and home equity lines of credit (HELOCs) are linked to it.  A falling LIBOR rate means your mortgage should get cheaper.  Three cheers for that!

Anyway, once the credit markets pick up again, the stock market should become more stable but, until then things will continue to be wild.