Linkfest 5.19.07

Another week, another record.

The newsflow has become predictable: Each week can be expected to bring some variation upon these five regular items: 1) a huge M&A announcement (or three); 2) a new Dow record; 3) some worsening Housing data; 4) more craziness in the Asian markets; 5) a major company going private.

As we note below, this week saw the 46th record high on the Dow since Q3 of last year. The gain of 1.7% for the Dow was its 7th winning week in a row. The S&P500 added 1.1%, taking it to less than five points from an all time high. The Wilshire 5000, also made a record close. The laggards, not surprisingly, have been the tech laden Nasdaq and the small cap Russell 2000. The Nazz dropped for thge 2nd week, giving up 0.1%, while the Russell 2000 fell 0.7%.

One worry spot: Market Breadth. As Barron’s Trader column observed:

"as the Dow eked out another intraday
high Thursday, market breadth — or the ratio of advancing stocks to
declining ones at the New York Stock Exchange — had turned negative.
It was a sign of flagging momentum and had already occurred four times
in the past month. Yet such combinations of a Dow record and flailing
breadth tended to be rare historically and were seen just five other
times since 1940. In four of those five prior examples, the Dow had
declined by an average 2% a month later, notes Jason Goepfert of
sentimentrader.com."

With Earnings season mostly over, and Options Expiry behind us — and the long Memorial Day weekend coming up (with summer not too far behind) — trading volumes are likely to slip. How this will impact breadth has yet to be determined. 

No matter. Loosen your wrists, its about that time! Here’s the full round up of what just went down this past week:

INVESTING & TRADING

The Dow Hits Its 46th High Since October: The Dow Jones Industrial Average has hit 46 new records since
early October, including one on Friday following a 79.81-point rally.
The string of new
Dow highs since October has left many Wall Street pros and investors
wondering whether the market is due for a slump. For now, the
worst-case scenario most analysts envision is a temporary setback. (free Wall Street Journal)

Is there a "stealth correction" going on? (sure doesn’t appear that way)

S&P 500 companies’ profit up 8.3%:  Wall Street analysts are calling it the first-quarter surprise — and wonder if it’s a harbinger of even better times to come. (Associated Press)

The alchemists of finance: The Economist has
a huge, broad review of investment banking, trading, and markets that
is quite fascinating. (free if you sit thru a flash advert) 

Closing the Door: Going Private Offers Rewards: Private-equity firms, which draw billions from rich folks and
institutions and supplement it with gobs of borrowing, have plenty of
money to spend. They have shown investors very fat returns, largely
because they bought companies cheap in 2002 and 2003. (free Wall Street Journal)

Top 10 Water Stocks to Quench a Thirst (TheStreet.com)

What Companies Stand to Benefit from the Subprime Implosion? Firms that maintain a strong balance sheet with plenty of liquidity and a diversified business are the way to go.Three names pop into our head almost immediately (Morningstar.com)

1st-Time Investors Buy Up Chinese Stocks: After watching Chinese stock prices gallop upward for months, Ding Xiurui wanted a piece of the action. The 45-year-old office worker stood in line at a bustling brokerage Friday to open her first trading account. She brought her sister, who opened an account too. They joined millions of other novice investors who are jumping into a market that has soared to dizzying heights, with prices up nearly 50 percent this year (Associated Press)

• Why is the market so sanguine in the face of deteriorating collateral values in the CDO mortgage market? One possible answer: Conflict of interest at the credit rating agencies

• HEAVY METAL:  Camaro’s value laps Dow:  Tom duPont thinks classic cars make better investments than stocks, because even if you lose your shirt, at least you’ll enjoy driving one around. “You can make money with either the right car or the right stock, but cars are more fun on weekends,” said duPont, whose magazine The duPont Registry recently found that classic cars sometimes outperform stocks. (Boston Herald)


ECONOMY

The Wall of Worry continues to build:

Why the cost of living in retirement keeps going up and up: "Expenses in later life are proving to be bigger and more unpredictable than many retirees anticipated."

The problem with inflation indices The first time I ever began to doubt my country’s cost of living index was in 2002 when euro banknotes and coins were introduced. In Germany, where I was living at the time, the prices charged by many hotels, restaurants and dry cleaners effectively doubled. If you spent a lot of time travelling, as I did at the time, the personal inflation shock was severe. I estimated my personal inflation rate in 2002 to be approximately 10 per cent. The central bankers were in denial because the official inflation index did not register any significant movements. See also Want to Measure Actual Inflation? See the Core/Headline CPI Spread

Got Milk? Not Enough, as Dairy Demand Outpaces Output: Milk prices worldwide are rising at
the fastest rate ever and won’t be falling anytime soon because
of growing demand in China and Latin America and dwindling
government supplies. Dairy farmers have failed to keep pace with a 3 percent
increase in annual milk consumption, according to Rabobank Groep
in the Netherlands, the world’s biggest agricultural lender. (Bloomberg)


HOUSING

Fun with Housing Charts !

Housing glut: From bad to worse: The number of homes for sale in major markets
ballooned in April, according to a new industry report, adding further
evidence that the U.S. housing slump is still trying to find a bottom. (CNNMoney.com)


SENTIMENT/PSYCHOLOGY

Risk Management and the Biology of Trading Psychology

Contrarians still smiling: The sentiment picture continues to be one that contrarians interpret bullishly.  (Marketwatch)

Ceiling Height Can Affect How A Person Thinks, Feels And Acts


TECHNOLOGY & SCIENCE

Microsoft takes on the free world:
There’s a shadow hanging over Linux and other free software, and it’s
being cast by Microsoft. The Redmond behemoth asserts that one reason
free software is of such high quality is that it violates more than 200
of Microsoft’s patents. And as a mature company facing unfavorable
market trends and fearsome competitors like Google, Microsoft is
pulling no punches: It wants royalties. If the company gets its way,
free software won’t be free anymore. (Fortune)

Google is taking no chances with Universal Search (Cringely)

Storage Strategies Computer users’ hard drives are bursting at the seams thanks to the floods of digital photos, videos and music they regularly consume. Now, numerous new products and services are trying to help manage the deluge. (Wall Street Journal)
 



MUSIC BOOKS MOVIES TV FUN!

Weekend Jazz: Metheny/Mehldau    

• Dan Gross’ book, Pop!: Why Bubbles Are Great For The Economy, gets the full treatment from TPM Cafe

That’s all from the rainy cloudy but blooming NorthEast, where chances of a someone special getting whacked tomorrow night are near 90%. Fuhgeddaboutit!

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What's been said:

Discussions found on the web:
  1. Michael C. commented on May 19

    Thanks for the links, BR!

    Love the China article. Stories of cleaning ladies and 70 year olds mortgaging their apartments to trade! It’s so easy because the government won’t let the market fall prior to Shanghai 2008. Since when did people have so much faith in the Chinese government?!

    Seems like speculation has gone parabolic with the number of accounts now being opened.

    What was it again they say about history?

  2. Philippe commented on May 20

    Hoping that interest rates will never ever matter?

    Very impressive score in the M&A scene, purchase are made at the top of the market plus 10%; few more figures may complete the landscape:
    Commercial paper outstanding as of may 2007 2.1 trillion USD as of 2004 around 1.2 trillion USD.
    « Combined Big Five (Morgan Stanley, Merrill Lynch, Goldman Sachs, Lehman, and Bear Stearns) first quarter asset growth $379bn (41% growth rate) to $4.033 TN. Big Five Assets inflated $843bn over the past year, or 26%. For comparison, Bank Credit is up about $580bn y-o-y. »
    Most of this expansion is in the securities and finance financed through « repo » i.e. buy back agreement.
    Total credit debt in US 44.5 trillion USD / Total GDP 13.4 Trillion USD i.e. 331.2 % source (ned davis)
    Is a study available on forward P/Es?

  3. William commented on May 20

    I truly respect your work. Your blog has exponentially expanded my understanding on a host of topics related to the markts, the economy and government data. For that i am deeply appreciative.

    Quick open question: What has surprised you the most about this market/economy over the past 6 months?

    Everyday i scratch my head as to whats going on – a fruitless activity for me since i just plain dont get it. But the excercise got me to wondering what you/everyone thinks about all of this and how it impacts your view on the way markets function going forward.

    I recently heard that a very high level trader at at a world famous hedge fund explains the market in the context of it being rigged. I had heard this before however the past few months have made it clearer to me.

    Its in virtually everyone’s best interest for the market to go up and central banks, politicians, wall street banks etc do their very best (which is pretty damn good) to keep it that way.

    For me, the past few months has shown me that to a much larger degree than i every expected. I wonder what the markets will look like in 10 years from now, if the world is that much richer – i cant imagine the amount of liquidity that will be floating around then…

  4. Barry Ritholtz commented on May 20

    The biggest shocker was the Goldman Sachs cut of Energy in their commodity index (GSCI) — I never saw that coming in advance, and after I learned about it, I was stunned at the subsequent collapse in energy prices Sept/Oct 2006.

    Markets were deeply oversold around the same time — I made a bullish call in mid-June — but the rally went faster and further then I expected. Also, Oil prices have since recovered, and gas prices are even higher, but both have had surprisingly little stock market impact.

    The 2nd one would be the massive buying by Private Equity at prices which appear surprising. Their metrics are obviously very different than those traditionally used — either that, or they care far less about pricer than we would have gueesses.

  5. Philippe commented on May 20

    Many many leverages indeed

    On purchasers whom are leveraging their debts and the company’s debts.
    On banks which balance sheets do not reveal the extent of their potential funded commitments more and more contingent liabilities.
    The benefit of the rigging is obvious
    Short-term capital gains on the markets for the club of speculative funds and banks.
    Preserve the collateral of the funding (shares collateral against funding)
    Improve the level of commissions for the transaction.
    Money collected has to be actively disbursed (private equity funds)
    It reveals many pitfalls among them:
    Borrower’s repayment ability (may we forget the prices and may we see the cash flows?)
    Little dispersion on holders of shares, which are mainly institutionals, banks and.. so many derivatives but these markets have shown little attraction to the private individuals.
    The exit strategy for these deals and the deals makers « the too big too large to fail? »
    a big gamble on the shape of the future interest rates?
    The largest gamble lies as usual in the market’s cornering process (spreading the risk to a larger base of participants)

  6. spencer commented on May 20

    Comment on got milk.

    Historically, every time another significant segment of the world population gets wealthy enough to eat meat regularly world agricultural prices spike. The last time we saw this was in the 1960s-1970s when the Russians started eating meat regularly.

    When you switch from getting your protein directly from grain to from meat the demand for grain increases severalfold.

  7. Eric commented on May 20

    The 2nd one would be the massive buying by Private Equity at prices which appear surprising. Their metrics are obviously very different than those traditionally used — either that, or they care far less about prices than we would have guessed.

    Paying as much as possible doesn’t really make much sense, does it? Whoever it is, unconventional investing practices may well mean unconventional investment goals.

    It would be nice to know who exactly the “Private Equity” people are. It would go a long way towards explaining this oddity if buyer and seller were the same in many cases.

    “Cerberus guarded the gate to Hades and ensured that spirits of the dead could enter, but none could exit.” –from the Wikipedia entry for Cerberus

  8. Winston Munn commented on May 20

    Kevin Landry, chief executive of the Boston private equity firm, TA Associates. Quote.

    “Debt markets that finance private equity transactions have changed in three important ways. They are charging lower interest rates, reducing the premium normally charged for greater risk. They are lending more money for the purchase of an operating company, exceeding normal caps based on the cash generated by the acquired business. Finally, debt markets are reducing or virtually eliminating covenants and other rules that now make it almost impossible for private equity investors to default on loans used to buy companies.”

    Low rates, more leverage, practically no conditions.

    Kids, can you say Subprime?

  9. Philippe commented on May 21

    “Recent high correlations among hedge fund returns could suggest concentrations of risk comparable to those preceding the hedge fund crisis of 1998,” according to a paper written by Tobias Adrian, capital markets economist at the central bank”

Read this next.

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