So Much For Optimism

This is the second morning I have awaken to a nice pop in the equity markets. Yesterday was long NVT - today was short CFC.

Countrywide - the largest subprime mortgage lender in the nation - has to date been able to avoid the implosion faced by many of its smaller rivals, primarily by focusing on the story of its diversification away from subprime lending. Today's announcement shows that this has not prevented the challenges in the credit markets from hurting its results: CFC Reports a Little Problem and here is a jaw-dropper on their current foreclosures: Countrywide Foreclosures Blog

I also found another good article explaining some of the challenges in the credit derivatives markets. This one discusses the difference between basic CDOs (which are real estate-backed) and CLOs (which are corporate-backed). The article states that spreads have widened 4 percent for certain tranches in the last few months.

KKR, Homeowners Face Funding Drain as CDO Sales Slow

The bottom line is that reality is setting in as risk is repriced throughout the credit markets and the ramifications are huge.

Just as homeowners across the country are running into trouble as the interest rate ARM's kick to floating at the same time the housing market is falling, so too a corporate borrower (especially a highly leveraged one) may become squeezed as inflation drives up costs, even in China , and borrowing gets more expensive.