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8:30 AM EST, Monday, July 30, 2007: Wall Street is a product machine. It makes financial packages to sell them. Some of the packages are good. Some are lousy. Wall Street cares less about the quality and far more about the answer to the question: "Can it sold today?" If it can be sold, Wall Street will earn a commission and someone else will enjoy the "benefits." As an investor (individual or institution) you had to be totally stupid to buy bundles of housing loans made to deadbeats. These deadbeats were buying homes with interest-only loans -- the interest being less than rent on a grungy apartment. (Wouldn't you take the loan also if you were poor?) Predictably most of the sub-prime loans blew up. Sub-prime was Wall Street's euphemism for drek.

The sub-prime loans problems have freaked Wall Street out, calling into question all the other loans it makes, bundles, peddles and sells. Wall Street relies on cheap money. It uses the cheap money to help buy public companies outright. Hedge funds use the money to buy more shares than they otherwise could afford. etc. etc.

When the money suddenly gets uncertain or expensive, Wall Street is spooked. Which goes to explain much of what happened last week. At least what started it. What continued it were all those computers programmed to trade the market the direction the market is momentarily going. This exacerbates things. This makes markets even more volatile.

What happened last week was gruesome. This week may be different. Asian markets went up today.

A credit crunch or a credit squeeze? The Economist's Buttonwood did a piece this weekend called "Spreading caution." It's worth reading:

The credit market suffers from a spot of apprehension and indigestion.

CALLING it a credit crunch might be an overstatement. But it does look like a credit squeeze. In recent years, investors' enthusiasm for high-yield products has allowed borrowers free rein in the debt markets. Blessed by strong profits and buoyant economic conditions, companies seemed more than capable of paying back their debts; default rates have been remarkably low.

Indeed, such was the power of borrowers, private-equity groups chief among them, that they were able to dispense with the market's traditional safeguards. They dropped some of the covenants that gave lenders the right to act if the borrower's finances deteriorated.

Suddenly, however, investors are turning their noses up at some deals. Banks that had lent large sums to finance the buy-out of Chrysler, the car giant, and AllianceBoots, the drugs retailer, had hoped to sell these loans to an eager market. This week both debt sales were postponed in the face of sniffy investors. A similar sale to fund the buy-out of US Foodservice, a food distributor, was scrapped last month. Even before the latest news Baring Asset Management counted 28 corporate-bond or loan deals, worth around $17 billion, that had been pulled since June 22nd.

What has prompted this change of heart? Many point to the problems in the American subprime-mortgage market, where defaults have risen and several hedge funds have been wiped out in the process. Countrywide, a mortgage bank, has triggered further concerns by admitting that bad-debt problems are now spreading to conventional loans.

When investors suffer losses in one part of their portfolio they get nervous about potential problems elsewhere. On July 20th the European crossover index, which covers riskier corporate debt, suffered the worst day in its short history. The spread (excess interest rate) over government bonds widened by two-fifths of a percentage point.

Investors may also be suffering from indigestion. According to Moody's, a rating agency, nearly $1 trillion was raised in European credit markets in the first half of the year. Greg Peters, a Morgan Stanley strategist, says that $57 billion of bonds and more than $200 billion of loans are already in the pipeline: a plentiful supply of debt to absorb the potential demand.

It is hardly surprising, therefore, that investors have decided that higher yields are needed. This has caused a temporary hiatus as issuers get used to the new regime. But it looks more like a return to normality than a buyers' strike. Credit-default swaps (which insure investors against a failure to repay) reflect this shift in sentiment. Jim Reid, the credit strategist at Deutsche Bank, says swap spreads in the European high-yield market are now wide enough to compensate for the average historic default rate. In America spreads are well above that level.

Pushing spreads further might require some actual defaults. That, in turn, would probably require the global economy to weaken significantly. At the moment, however, economists seem pretty sanguine, forecasting output growth of 2.7% for America in 2008 and 2.3% for both the euro area and Japan.

A benign view of the economic outlook may be why the Dow Jones industrial Average recently passed the 14,000 level for the first time. But stockmarkets have shown signs of concern at developments in the credit markets; their latest wobble was on July 24th.

Some of the fundamental supports for equities are being eroded. In America, corporate profits are on course to grow by 5.5% in the year to the second quarter, a long way below the double-digit rises to which investors have grown accustomed. The proportion of firms beating expectations in the second quarter was at its lowest since late 2002. By the measure derived from America's national accounts, profits fell in the fourth quarter of 2006.

And the takeover boom may be near its peak. “The tide appears to be going out for leveraged equity financiers,” says Bill Gross of the bond giant Pimco. Bids have become more expensive to finance while share prices have been rising. Citigroup says that, in mid-2005, the corporate-bond yield was 4.4% and the trailing earnings yield on European equities was 6.8%. That made it highly attractive to issue debt to buy shares. But by mid-July the bond yield was 6.1% and the earnings yield 6.3%, a much less attractive trade.

Predators can be inventive in finding sources of finance for their deals, as Barclays has shown. At the margin, however, bids are becoming harder to pull off. The banks are now stuck with the risk of the AllianceBoots and Chrysler deals. They won't want to make that mistake again.

The Chief Strategist speaks:
My Citigroup broker kindly sent me a copy of a paper the bank issued over the weekend. It was called, "Monday Morning Musings: A Finer Focus on Financials--Chief Strategist Comments." I read it and emailed back, "You know what all this means?" I was happy to receive an email reply this morning, "Not a clue." My sentiments precisely.

Be careful of attached PDFs files. Bad people are sending you emails with a PDF attachment. It looks like an Adobe Acrobat file containing a document or photos. Beware, it's not. It's a virus. Don't open PDFs from people you don't know. Here's what one looks like:

You'll notice: No subject, no content, the wrong email address and from someone I don't know. Worse, my spam filter thinks it's a genuine message (because of pdf attachment) and let it through.

The Jewish divorce.
A New York judge is presiding over the divorce proceedings of a Jewish couple. When the final papers have been signed and the divorce is complete the woman thanks the judge and says, "Now I have to arrange for a Ghet."

The judge inquires what is a Ghet. The woman explains that a Ghet is a religious ceremony required under the Jewish religion in order to receive a divorce recognized by the Jewish faith.

The judge says, "You mean a religious ceremony like a Bris?"

She replies,” Yes, very similar. Only in this case you get rid of the entire prick."

The Talking Clock
A drunk was proudly showing off his new apartment to a couple of his friends late one night. He led the way to his bedroom where there was a big brass gong and a mallet.

"What's that big brass gong?" one of the guests asked.

"It's not a gong. It's a talking clock," the drunk replied.

"A talking clock? Seriously?" asked his astonished friend.

"Yup," replied the drunk.

"How's it work?" the friend asked, squinting at it.

"Watch," the drunk replied. He picked up the mallet, gave the gong an ear-shattering pound, and stepped back.

The three stood looking at one another for a moment.......

Suddenly, someone on the other side of the wall screamed, "You asshole..it's three-fifteen in the morning!"

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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