Contained? Contain THIS!
Mr. Market had a good laugh at everyone’s expense this week, chuckling at all that chatter about the subprime fallout’s "containment." You see, amongst a certain contigent of mindless pundits, the blathering cognesceti
who have been clothing the emperor, there has been the steady drumbeat — mindbogglingly
transparent nonsense — that the fall in Housing would have no impact on either the economy or the markets.
Alas, we now know that to no longer be true. Whether its in retail numbers — think Best Buy, Starbucks, and Federal Express — or in the frenzied $3.2 billion dollar machinations by Bear Stearns to rescue two hedge funds, we now now beyond any shadow of a doubt, that the rise and fall of the Housing sector has had major repercussions for the markets, as well as the economy.
Regardless, the sub-prime Housing debacle is no longer contained.
The question before us now is whether the zookeepers can track down the thing,
tranquilize the beast, and drag it back to its stinking cage before this thing gets
All things considered, the damage this week was mild: The biggest losers were the REIT stocks, down 4.2%. Commodity’s gave up 3.2% (but Crude gained just under 1%). Amongst the major US indices, the
Dow Jones Industrial Average dropped 2.1% (its second-worst week this
year). The S&P 500 slid 2%. A 1.6% drop hit the Russell 2000. The Nasdaq held up relatively well, declining but 1.4% — a victory of sorts, considering the tech-laden indice’s predilection for volatility. Treasuries rallied slightly, regaining some of their losses from the prior week.
Barron’s Trader column summed up the week thusly: Bulls will put a positive spin on the pause, pronouncing such consolidation a constructive necessity for the bull’s onward charge. A wholly unscientific poll, conducted over several happy hours, also suggests that many traders do not see higher interest rates hurting stocks until the 10-year yield tops 5.5%.
Our review of the week finds a mix of good and bad news. Wanna know how this all went down? Get clickin’!:
INVESTING & TRADING
• Contain THIS! So much for THAT theory . . .
The Soft Underside of the Bull:
The battle between Bulls and Bears rules in any market, and this year
the bulls are reigning supreme. But the question many chart watchers
are now asking is whether this is due to sustainable demand for stocks
or from too much money chasing an ever-shrinking pool of available
shares in which to invest. To many, the thought is that when the well
of cheap funds dries up, so, too, will the bull market. The unusually
low interest rates in Japan make it possible to borrow money cheaply
there, and then invest it elsewhere in the world where interest rates
and investment return are higher. As long as both the interest-rate
differential and the currency exchange rates remain stable, there are
profits to be made with little additional risk. (Barron’s)
• Adding to this week’s volatility: The Russell Indices Rebalancing
Equity Squeezes the Shorts As short-selling has proliferated, it has become increasingly difficult to make money at the game. Whereas a profit-challenged enterprise may once have floundered until shutting down or filing for bankruptcy, many such companies are now targets for private equity firms that style themselves as turnaround artists. What’s more, such firms are often willing to pay a rich premium to the market price for troubled outfits in which they see promise. (BusinessWeek)
• Investing blogs are popping up from every corner of high finance. The Associated Press is your tour guide.
• Seven Factors Boosting Treasuries
: The U.S. Treasury market is advancing on a number of factors, some of
which would likely spur a significant advance if they developed
further, although this is not yet in sight. The best bet is for
stability in bonds — no moon shot — because many of the factors that
recently drove yields higher are still in place. Here are seven factors
boosting Treasuries. As you would imagine, I find these arguments quite interesting, but not compelling. (thestreet.com)
• A Short List of Cognitive Biases
• A decidely different take ont he Blackstone IPO — How Blackstone CEO Steve Schwarzman’s antics may cost him and his colleagues billions of dollars: The Golden Ass (Slate)
• What happens when you suggest we should replace subsidies for Oil and Ethanol with subsidies for Solar, and at the same time expedited processing for Nuclear Power plant permits? A whole lot of commentary! Crude Remains Strong Despite Inventory Build
• No test dummies:
At Consumer Reports’ auto center, engineers don’t pull any punches.
Carmakers may not like it, but they listen, says Fortune’s Alex Taylor. On a fact-finding mission to learn more about the auto business, Alan
Mulally, the new CEO of Ford Motor, traveled to an old drag strip in
East Haddam, Conn., to see how Consumer Reports tests cars. Mulally
spent four hours at the 327-acre site and got a model-by-model analysis
of Ford’s product line from CR’s head of auto testing, David Champion. See also: Ford Wins Most Vehicle Quality Awards
The Wall of worry continues to build:
• What do you call a 25% increase in the Goldman Sachs Commodity Index over the past five months? Agflation!
Roach’s Bookends: US
Two years – 1982 and 2007 – frame the window of my
experience as an economist at Morgan Stanley. When I walked in the door a
quarter century ago, my focus was on a $3 trillion high-inflation US economy that was mired in the depths of its worst recession of the post-World
War II era. Today, all eyes are on a low-inflation, increasingly
integrated $52 trillion world economy. There couldn’t be a greater
difference between then and now.
• What is the Inflation Consensus?
• Report from UCLA team skirts the R-word: The sluggish housing market is starting to drag down the rest of the economy, leading UCLA forecasters to conclude that although the U.S. is not actually in a recession, "it is certainly close." The nation’s economy grew by a sickly 0.6% in the first three months of the year, the smallest increase in four years and a sharp decline from the fourth quarter of 2006, according to the widely watched UCLA Anderson Forecast. "This is not a recession, but it is certainly close," Shulman said. The Anderson Forecast is closely watched because it predicted the 2001 recession before others. (Los Angeles Times)
• Out of touch with realty reality: What, me worry? Most Americans don’t seem to believe there’s a serious housing slump. Despite turmoil in the housing markets that includes record
foreclosure numbers, mortgage rate increases and home price
depreciation, homeowners don’t believe there’s a real estate slump,
according to a new poll. Most – 55 percent – are confident that
their homes continued to increase in value compared with a year ago,
according to a nationwide telephone survey conducted this month by The
Boston Consulting Group (BCG), a business and management strategy firm. The overconfidence of homeowners doesn’t jibe with the findings of
most home-price indices, which point to lower median single-family
house prices of about 2 percent nationwide. (CNN Money)
• Most Over/UnderValued U.S. Housing Markets
• Subprime storm winds will keep blowing: Home foreclosures in Minneapolis doubled in 2006 and are
on pace to double again this year. The number of vacant buildings is rising in
working-class neighborhoods with high levels of subprime loans. Some families
are simply walking away from once-secure homes. The fallout from a years-long surge in subprime lending —
higher-cost loans to borrowers with impaired credit — is far from finished. The
number of homes entering foreclosure is expected to top 1 million this year,
with 60% of those being subprime mortgages, says mortgage giant Freddie Mac. (USA Today)
• Rate Rise Pushes Housing, Economy to `Blood Bath’: The worst is yet to come for the U.S. housing market. The jump in 30-year mortgage rates by more than a half a percentage point to
6.74 percent in the past five weeks is putting a crimp on borrowers with the
best credit just as a crackdown in subprime lending standards limits the pool of
qualified buyers. The national median home price is poised for its first annual
decline since the Great Depression, and the supply of unsold homes is at a
record 4.2 million, the National Association of Realtors reported. (Bloomberg)
TECHNOLOGY & SCIENCE
Steve Jobs in a Box: It’s a stunning box, a wizard object with a passel of amazing features
(It’s a phone! An iPod! A Web browser!). But for all its marvels, the
iPhone inaugurates a dangerous new era for Jobs. Has he peaked? (NY Magazine)
• Microsoft vs. Google | The duel on your desktop
• 25 Web Sites to Watch (PC World.com)
• Mapping the Internet: The increased use of peer-to-peer communications could improve the overall capacity of the Internet and make it run much more smoothly. That’s the conclusion of a novel study mapping the structure of the Internet.
• The 50 Who Matter Now (CNN Money)
MUSIC BOOKS MOVIES TV FUN!
• A teaser trailer for Wall-E, Pixar’s newest movie, due out in summer 2008. That sounds like a heck of a lunch.
• Fascinating concept: An Earth Without People:
What if all human beings were suddenly whisked off the
planet? That premise is the starting point for The World Without Us, a
new book by science writer Alan Weisman, an associate professor of
journalism at the University of Arizona. In this extended thought
experiment, Weisman does not specify exactly what finishes off Homo
sapiens; instead he simply assumes the abrupt disappearance of our
species and projects the sequence of events that would most likely
occur in the years, decades and centuries afterward.
30-Second Bunnies Theatre Library ... in
which a troupe of bunnies parodies a collection of movies by re-enacting them
in 30 seconds, more or less.
• Top 10 plays of the 06/07 NBA season (Video)
• Cycling au naturel: Reuters reports on the annual Cyclists protest to take to the city streets across Europe for an eye-catching demonstration -- nude.
The rumor is that the Hamptons are going to be pretty quiet this weekend, especially amongst the hedge
fund set and their iBankers.
But that's not true -- I hear there's a big party over at Doug Kass place!
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« Fluctuat nec mergitur » or « asinus asinum fricat« ?
To be read « fluctuate but not sinking » or « donkey scratches donkey »
Who will remember the outcome of a Fed meeting at the time of Mr Greenspan where representatives came back on the scene and proclaimed the relaunching of the 30 years bond and its perennial value?
￼Greg Robb is a senior reporter for MarketWatch in Washington.
Interestingly, Greenspan spoke at a recent PIMCO Client Conference. ” ‘We are talking potentially real concerns out there,’ he said, referring to the fact that investors buying 30-year bonds now at very low yields do not appear to realize that they are taking on deficit risk in the decades ahead without being compensated for it. ‘When does discounting begin?’ he asked. ‘You buy a 30-year issue now–you are buying a big chunk of that out there. That is my next conundrum.’
Who will remember that UBS has ever been in the LBO’s business ?
June 19 – Financial Times (Richard McGregor and Jamil Anderlini): “The chief executive of UBS, the Swiss banking group, warned that the growing number of risky loans investment banks are making could lead to lawsuits and damaged reputations. The warning by Peter Wuffli highlights increasing concern among senior executives that a boom in leveraged finance could drag banks into litigation and damaging disputes with clients if the credit cycle turns.
With hedge funds and private equity firms pumping record sums of money around the world economy, central bankers fret that investors are taking on too much risk. As a result, the bankers are increasingly turning to the Basel, Switzerland-based BIS, the oldest international financial institution, for research and advice, and to coordinate damage-control plans.
Who thought that central banking was a Nano science ?
With hedge funds and private equity firms pumping record sums of money around the world economy, central bankers fret that investors are taking on too much risk. As a result, the bankers are increasingly turning to the Basel, Switzerland-based BIS, the oldest international financial institution, for research and advice, and to coordinate damage control plans.
Good thing inflation doesn’t include food as it appears that food cost inflation is bleeding into the pizza business
Pizza Makers Raising Prices Amid Higher Cheese Costs
We can only hope this is contained to Europe otherwise inflation ex inflation will become very painful:
Biofuels to blame as beer prices soar 40 per cent in Germany
Just one example of beer and pizza going up in cost. But I fear this won’t be contained. Sad part is it isn’t in any way controllable by monetary policy. Someone thought it would be a good idea to use food as fuel. Now we have high fuel and food prices.