Smart Money with Keith Springer Saturdays at 1PM and Sundays at 6AM on NewsRadio KFBK 93.1 FM and 1530 AM

LIBOR Lesson

Posted At : May 22, 2009 9:56 AM

LIBOR is the interest rate banks charge each other for one-month, three-month, six-month and one-year loans. LIBOR is an acronym for “London Interbank Offered Rate” and is the rate charged by London banks. This rate is then published and used as the benchmark for bank rates around the world. Interbank lending rates – the three-month dollar, euro and sterling LIBOR rates – declined to record lows last week, indicating the easing of strain in the financial system. After having peaked at 4.82% on October 10, the three-month dollar LIBOR rate declined to 0.83% on Friday. LIBOR is therefore trading at 58 basis points above the upper band of the Fed’s target range – a substantial improvement, but still high compared to an average of 12 basis points in the year before the start of the credit crisis in August 2007.

Most recently the markets have been moving sideways, with another surprising run to retest the highs. This market has been unbelievably resilient, and we haven’t seen a rally this strong in my 25 years plus in the business. Paradoxically this is more a sign of a bear market rally than a new bull market. Long-term bull markets move up in a stair-step fashion and build bases along the way — that gives them staying power. The last strong bear market rally like this one occurred from 1975 into early 1976, and then the markets were ultimately down into late 1982. This rally is also very similar to the bear market rally from late 2001 into early 2002, which would also suggest a brief setback and then a rally to new highs–and then a retest of the lows.

What I don’t like is trader sentiment on the S&P 500 has moved from 2% to 85% in just two months. I initially went positive over 8 weeks ago, largely because of the intense pessimism that was abound. I still don’t think most people are in this market, which is why it should go higher. Everybody is talking about it, mostly in terms of “I’m waiting for a pullback to get back in”. that tells me that isn’t going to happen. However, with sentiment rising almost to the peak #’s in October 2007 which was 89%, that makes me nervous. That is simply nuts. How could traders be nearly as bullish as late 2007, after the massive shocks to our financial systems and the massive debt taken on by the government? Typical Bear Market low P/E ratios in the 5 – 8 range for a major bottom are the norm, not the 12 that we saw in early March.

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Regards – Keith Springer

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