Last Friday, I wrote about the condition of the credit market and how it was ominous for stocks. Well, there is no relief yet. Things are worse, as banks are only willing to lend to one another at rates too high to justify borrowing. Overnight LIBOR hit 6.88% today, and 3-month LIBOR was a record 350 basis points higher than 3-month T-bill rates. Here is a graph of that difference, the TED Spread, which, in calmer times, used to stay well under 50 basis points:

Source: Bloomberg

Here’s an excerpt from a Bloomberg piece today:

“The money markets have completely broken down, with no trading taking place at all,” said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. “There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.”

Credit markets have seized up, tipping banks toward insolvency and forcing U.S. and European governments to rescue five banks in the past two days, including Dexia SA, the world’s biggest lender to local governments, and Wachovia Corp. Money- market rates climbed even after the Federal Reserve yesterday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. Banks borrowed dollars from the ECB at almost six times the Fed’s benchmark interest rate today.

Libor Rate

The two-month Libor rose to 5.13 percent today, also a record. Libor, set by 16 banks including Citigroup Inc. and UBS AG in a daily survey by the BBA, is used to calculate rates on $360 trillion of financial products worldwide, from home loans to credit derivatives.

After a massive sell-off in the equity markets, you would typically look for a powerful bounce, and while US futures are indicating an open of a couple of percentage points over yesterday’s close, I suspect that stocks won’t have much more steam than that, maybe a few percent in all.

While we dropped a lot in one day yesterday, the Dow only closed at 10,365, less than 500 points beneath its intraday July 14 low. I’m looking for another 1000 points on the downside within a few weeks before calling for a meaningful bear market rally. There is so much emotion out there that anything is possible, but that also means that whatever happens will happen soon.