If there's one thing I hate it's when someone puts a bunch of coherent words together in one firmly written paragraph and it isn't me. My sense since the late-January price peaks is that the subprime loan problems, the surfacing of credit quality issues, the unwinding of the yen carry trade, the apparent increase in risk-aversion, central banks tightness- all are manifestations of a reverse in liquidity flows-- out of excessively risky, speculative situations, and towards safety. And this has just started... Can this be the case or are Goldman and the others just going to scoop up these supposed bad loans and make out like bandits. I'm still paying my mortgage and everyone I know is even those that filed for limited bankruptcy protection. This meltdown scenario is it hype or real? There's a long article I ripped out of the times Crisis Looms In Mortgages and they've been just so wrong about everything the past few years... this all could be hype driven excuse for a sell off. Can't decide.
Funny yesterday it was as if I was programming CNBC's schedule! They spent the day covering the reverse liquidity theme and thanks to a Maria interview I had my fears calmed quite a bit. The fact is the NY Times is a crap paper and for them to put the big scare story on the front page was a counter indicator-- I believe this sub prime " problem " is being emphasized so the brokerages can sweep in and make a killing. There I said it. All it took was Lehman to say the problem was well contained for the whole sector to lift. Why didn't Goldman say the same thing when they reported you wonder? Certainly they have the same risk protection as Lehman-- well I can't prove this (yet) but I would bet my bottom dollar that Goldman's trading room may have been short the very same index they are a part of! And they may be talking up the problem so they can take a few of these " bad loans " off some crumbling bank's books! Ok back to stagflation fears...
The S&P 500 broke last week's lows, which was expected. The sharp rebound on Wednesday was not anticipated. However, now that it has taken place, Wednesday's downside tail is a bullish development. Monday we saw very subtle positives from the NASD. It wasn't anything to hang your hat on, but was noticeable. Wednesday the NASD broke to a new low, but it was a much smaller breakdown than the Dow and S&P 500. The relative out performance of the NASD is viewed as a constructive development. The question now is whether the NASD can break its near-term downtrend line. A close above 2375 on Thursday will put the NASD on the other side of the line. Total breadth bottomed at -3100 and amazingly recovered to finish the day well above the zero mark. More often than not on recovery days of this nature, the breadth numbers will finish the day negative as there isn't enough time for them to fully recover. The fact they reached as far into positive territory as they did tells us that at the market lows it was a case of most stocks being down a small amount. From there many of them recovered their declines and then some. It is near-term constructive action
I love your cynicism and pessimism aimed at Wall Street Stoney A man after my own heart! It smacks of conspiracy theory, and I love that stuff. The machine just keeps moving the money around. They always find a way to put it in their pockets. My favorite quote: "XYZ firm neither confirmed nor denied any wrongdoing" Translation: "Here, let me put these millions of dollars in your front pocket Mr. Regulator/Bureaucrat/Agencyetc there for you my good man....say, isn't that some other firm performing some sort of thievery over there in that sector of the market??? Best we just forget about all of our unpleasantness, and you go look over in THAT corner now while I go back to the money presses"
Very nice thread Stoned. I'm in the same quandary as you. I'm short index products with big gains and I'm short bonds with zero gains. The virtual 100% anti-correlation between those two markets in the midst of this reallocation environment is crazy. I tend to agree with you, true panics aren't telegraphed by the mainstream media on near tops. How much lower than here were we when Fannie Mae was having her well published issues? I don't worry about the yen carry trade. There's zillions of "carry trades" out there. Always has been. Until there's a fundamental shift between JGB and Treasury rates, the micro moves are noise. Headline writers are always ascribing nebulous reasons to market moves.
Ask yourself what is currently unanticipated? Most market players right now are either longs too scared to buy, or shorts sitting on fat gains, either pressing their bets or just waiting for new lows to do so. There has been an abundance of bearish news in the last few days and weeks. Pretty much all active traders know about, and will have taken action on, the subprime concerns. It's now likely to be priced in, and it will take "new news" to push further declines IMO. How many people are anticipating a sharp snapback rally? I get the sense that this is the real minority position right now. We're also at a Friday, a classic day for reversals. IF we have price action today that confuses the bears (which would either be a small dip which reverses into a strong close; or a washout which then rallies strong in the last few hours to close unchanged or up slightly), then to me that would be a trigger to buy aggressively late today and on Monday (assuming follow-through). An additional factor is that we just had an extremely long bull run. It is rare for such a market to sell off from the highs and then just keep going down. Usually bullish feelings are entrenched enough that you get at least one "re-rally" attempt after the initial selloff. Right now it's a coin flip to me if we will rally from here. But if I see signs that is happening, the odds will improve significantly, and I'd be quick to hop on that trend. At the very least, all traders right now should be contingency planning for what to do in the event of a sharp bounce back. P.S. Pabst, I'm not sure I understand your point about stocks disconnecting with bonds. Any slowdown would imply lower rates and less inflation concerns, which would be bullish for bonds, no? Yet a slowdown would be driven by significant distress in the housing and lending sector, which is bad news for much of the stockmarket.
Any slowdown would imply lower rates and less inflation concerns, which would be bullish for bonds, no? Yet a slowdown would be driven by significant distress in the housing and lending sector, which is bad news for much of the stockmarket.... I think a slowdown combined with massive food inflation due to commodity supercycles would be bad news for bonds too. Michael Metz was on the tube this morning calling the 30 and 10 year the most overvalued crap in the whole stock market. Stick to the 2 year he said. Alan G said that adjustable rate mortgages, or ARMs, have been moving up recently and that has made them a problem for homeowners who are stressed by higher monthly payments. He also noted the problem would be quickly resolved if the housing sector regained its footing and prices moved up by 10 percent. Meantime, though, Greenspan said much of the strength in consumer spending over the past five years can be traced to capital gains on surging housing prices, whether they were both realized or not. That means that if home prices keep falling, there could be more of an impact on the broader economy's momentum, he indicated, since consumer spending fuels two-thirds of national economic activity. Merryl Lynch says Tighter credit standards among mortgage lenders might lower U.S. home prices by 10 percent this year and push the economy into recession if the Federal Reserve doesn't respond by lowering interest rates. Merrill analyst David Rosenberg, who previously forecast the Fed would lower interest rates in the second half of 2007, said there are two possible scenarios. With a rate cut, economic growth will slow to about 1 percent. If rates are left unchanged, and housing prices fall 10 percent, the probability of a recession is ``very close to 100 percent,'' Rosenberg wrote. Peter Schiff says Those who think that the sub-prime market is unrelated to the broader economy do not understand that the problem is not just the fiscal responsibility of marginal borrowers, but the inherent weakness of the entire U.S. economy. Itâs just that the sub-prime sector, being one of the most vulnerable spots, is where the problems are first surfacing. Think of the U.S. economy as an unstable dam. The first leaks will be seen in the damâs most vulnerable spot. But there will be many more leaks to follow. Before long the entire dam will collapse. It would be a fatal mistake for those living downstream to assume a leak is an isolated event, unrelated to the integrity of the dam itself. But that is exactly what those on Wall Street are doing with respect the horrific data emanating from the sub-prime market. The bottom line is that far too many Americas, not simply those with low credit scores, have borrowed more money then they are realistically capable of repaying. The credit boom was created by initially low adjustable rate mortgages, interest only, or negative amortization loans, and an appreciating real estate market that allowed homeowners to extract equity to help make mortgage payments. Now that real estate prices have stopped rising, and mortgage payments are resetting higher, borrowers can no longer âaffordâ to make these payments. Significantly, most sub-prime loans involved low âteaserâ rates that lasted for only two years. In contrast, teaser rates for most prime ARMs typically last for five years. This difference, rather than any inherent distinction in the fiscal health or credit worthiness of the borrowers, explains why the delinquencies are so much higher in the sub-prime sector. Doug Kass says the collapse of the subprime markets -- delinquencies now stand at 12.6% for subprime and 4.7% for the overall mortgage market -- within the context of the $6.5 trillion mortgage securities market will have a broad and negative multiplier effect on mortgage activity (housing turnover) and retail spending. It will also serve to further grease the current slide in new residential construction activity and hasten the drop in home prices. Stoney says when given the opportunity to lock in a 30 year under 6% these greedy foolios who took Adjustable mortgages deserve every ounce of pain they are going to get! Just don't spread it upon me innocently trading stocks for my bread,Irish butter, fancy chocolates and wine!
Stoned does an adequate job of summarizing the reasons for my bond shorts in the face of declining equity prices. I expect stagflation. I also anticipate higher rates being the ultimate catalyst for lower stocks. Each night I'm long a commodity or two and short stocks and bonds. IMO this strat will pay dividends in the next 18 months. Day to day my marks are quite whippy.
Quite a coherent discussion from one who is âstonedâ Some what ironic that Big Al noticed now that there may be a problem with mortgages - he inflated this 30 Trillion dollar bubble with his low interest high liquidity policy and then left the consequences to hapless Bernache. (30 Trillion is the increase in US housing stock values between 2000 & 2005.) China's decision a week ago, to get better return on $300 Billion with newly created committee reporting to politician and not the central bank also will reduce the demand for US's T- bills. This will tend to drive interest rates higher, perhaps slowing the US economy more. The PPI of yesterday and today's CPI indicated dollar's purchasing power is going lower. Holders of bonds have now had a net negative gain for some time when the dropping value of the dollar is considered against the interest earned. The FED might like to lower rates, to prevent the further slowing of the economy, counter China's decision to stop buying T-bills, falling housing market, etc. but the Iraq war costs, trade deficits, Central banks getting out of dollars, etc. make this impossible. Rates are going higher even thought this will added to the problems of US economy. FDI was up 67% in 2006 over 2005, but far from being a "vote of confidence" in the US economy, IMHO, it is part of the trend - get out of dollar, even if you must buy a money-losing, inefficient US factory, like Chrysler, to do so. Certainly don't want to get stuck holding dollars.