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[johngeorge]

http://www.syhardingblog.com/

Wednesday, August 1, 2007. 9 a.m.(eastern)




More volatility in store for today!

Yesterday was a bad day technically. The rally off the short-term oversold condition that began Monday with a 92 point gain by the Dow lasted long enough to have the Dow up another 140 points intraday yesterday. That was a total retracement of 232 points, or 31% of the 735 points the Dow had lost since its peak at 14,000 on July 19.

It then suffered a significant intraday downside reversal of almost 300 points, to close down 146 points, at a new correction low.

Bursting debt/credit bubble.

The culprit was the further spread of the credit/debt bubble bursting. Warnings from several hedge funds and lenders around the world of losses due to investments in mortgage-related holdings, and problems with the financing of LBOs that banks have already committed to finance.

American Home Mortgage, the 13th largest mortgage lender in the U.S., had warned Friday it might have to liquidate its assets to meet margin calls from lenders, and the exchange halted its trading. It re-opened yesterday 89% below its price on Friday.

Giant mortgage insurers MGIC and Radian reported their stakes in a firm that invests in mortgages have losses. MGIC's stock plunged 15% on the news.

Today.

After the close yesterday, more dark clouds gathered. Too many to discuss individually. Another Bear Stearns fund is in trouble over debt investments, and it has blocked investors from withdrawing their investments from the fund. And that fund did not borrow money, or have exposure to sub-prime mortgages. McQuarie Bank in Australia reported its Fortress hedge fund has losses of 25% for its investors, the 3rd Australian hedge fund to report problems so far.

So this morning we face an ugly situation again. Asian markets were a shambles overnight. Japan closed down 378 points (2.2%), Hong Kong down a huge 729 points (3.2%). European markets are down fairly sharply this morning at least at the moment. Earlier, U.S. futures were pointing to a somewhat negative open in the U.S., but have come back to virtually flat.

Wall Street will be out in force to try to hold back the tide. It has the buyout of Dow Jones it can focus attention on, and several economic numbers. And it has the potential support of the 'monthly strength period' for several more days. But that may not be enough. There is no denying now that the problems with debt investments are spreading well beyond the sub-prime mortgage market, and into concerns about the banks and other lenders that have exposure in better quality loans and mortgages (in addition to their loans to imploding hedge funds, and problems re-selling the debt for LBOs they have already committed themselves to financing).

At the very least volatility should be significant again today. Wall Street will be trying to prevent a rout, and as noted, already have pre-open futures well off earlier lows and close to flat, while traders will be watching for opportunities to short at the highs.

Gold continues to indicate that it is going to trade with the stock market, not as a safe haven, rising on the stock market's up-days and declining on its down days. It had been up $7.50 an ounce for the week so far as of yesterday's close. But is back down $4.90 an ounce this morning on indications of a negative stock market open today.

However, treasury bonds continue to act as a safe haven.

Needless to say, with roughly 50% of my recommended holdings in Street Smart Report portfolios in downside positions, 25% in treasury bonds, and 25% in cash, and no long-side exposure to stocks, I am liking the correction. But, as usually happens, it is still not a comfortable feeling to be making downside gains when the vast majority are having serious losses. It's much more enjoyable to all be making gains in a rising market. But you've got to play the cards that are dealt, and I believe we are only in the beginning stage of the bursting of the debt/credit bubble, and of a serious market correction.