CIT Rescue Shows Credit Isn’t Dead

by The Investment U Research Team

We may not be out of the woods yet in terms of the global economic picture, but the news from CIT Group (NYSE: CIT) is a big indicator that things are getting (slightly) better.

CIT announced that it would take a $3 billion loan from their bondholders to save the company from bankruptcy. Shares had plummeted 80% in a crash last week that was eerily similar to Lehman Brothers and Bear Stearns.

Rescues like this are a part of normal market where at some point there are buyers for assets. When assets can fall well below their value without buyers stepping in – as we’ve seen over the past six months – its unusual and mean the markets aren’t operating efficiently.

CIT’s demise was almost certain, enough so that the S&P 500 had already replaced it with Red Hat (NYSE: RHT).

The fact that buyers had stepped in for the assets of CIT and that they were willing to risk that much in a last minute rescue shows that credit markets, while still shaky, are much more confident and stable.

It’s a far cry from the hot potato attitude we saw earlier this year with few player wanting to hold anything hot for long and, more often than not, dropping the “potato.”

Confidence is rising, and economic indicators like housing starts have booked some improvements. As traders and investors alike digest a more stable credit environment, these emotional up days will help us build a base for a new long leg up in the indices.

As an interesting aside, investors who bet that CIT wouldn’t go under and bought at .31 are looking at a 300% return in three days. Not a bad feat of contrarian investing.

Symbols mentioned in this article: CIT and RHT.

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