October 20, 1998

Several weeks ago we wrote about how the financial crisis engulfing the world was analogous to a global margin call that would, in turn, lead to a credit crunch. Since then, the crunch has materialized and the question now is how to benefit from the insight. In previous commentary weve argued that the events surrounding the RTC-induced credit crunch of the early 90's provide a useful lesson in how to successfully benefit from the current crunch. Our argument is quite simple: The RTC crunch is similar to todays in that capital adequacy issues largely induced both. The strategy to follow, then, is to first identify the pertinent time periods surrounding the crunch, and then to separate the industry groups into those who outperformed the market and those who underperformed during those periods. Those groups that outperformed in the earlier period are likely to be those that will shine now, and vice versa.

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