17 replies to this topic

[ogm]

Look at those charts again.....Change the duration to 1 year.....Note they peaked out before this maket peaked....With the massive rally we had, those guys hardly moved....Why?

The question is where they will stabilize. Maybe even here.

What is the default rate, and what is the acceptable level of interest rate to take on high yield risks.

Thats the question.

The highs for those charts was an incredibly poor risk/reward. As everyone has piled on in search of yield. Risk spreads got too low.
Now that risk is getting repriced. And high yields aren't trading at a miserable spread with treasuries anymore.

But is 9-10% an acceptable level of risk ? Maybe. Maybe 15% is. No one knows yet. But the speculation and fear are running high.

So far defaults in mortgages aren't that high. Yes, comparing to last year in % terms it may look awful, but overall its still low. And mortgage securities got repriced significantly. I'd say that overdone.

Edited by ogm, 18 August 2007 - 10:00 AM.

[emdee]

I will be a lot more confident in the bullish case when (if) the SnP clears the 1454-1461 area, an area of recent s/r as well as the 200 sma and February top. We should find out very early next week as that is only about 1% above yesterday's close.

http://stockcharts.com/c-sc/sc?s=$SPX&p=D&yr=0&mn=8&dy=0&i=p12541616282&a=114730748&r=2972.png

Edited by Brickie86, 18 August 2007 - 10:28 AM.

[Trend-Signals]

Tp,

For me, I have to admit this is probably the most interest point in the stock market in my whole career or 15 years.

I think the weight of evidence goes to the upside. Putting aside technicals, which we all see and know here.

The equity pool is shrinking.
Hedge funds as an asset class are less attractive.
Policy has responded early, and quickly. Expect more to come.
I find it difficult to accept a repeat of Nov 2001, post tech bubble.
Liquidity and money supply strong.
Downside protection is high.
What other assets are there to buy? Bonds? not really. Hedge? What are you buying is the question and people are sceptical now. Commodities? Maybe a bit long in the tooth??? housing? No way. Cash? Possibly.

Equities compete with cash, but I dont think we are there in terms of consumer preferences.

What exactly is out there? A credit crunch based on sub prime lending spreading? I have heard of a few funds losing a lot of money and closing shop, but that is a rich mans issue.

Does the mainstream consumer remain in tact? For the moment it seems so to me.

Good reasoning.....


Could be 1997 - 1998 de ja vu price actions


As commented that RE/subprime bubble is burst, so now we can resume reviving Economy.

Bernanke's Master Hand to manage the health of Economy given the current condition.

We are in good global economy which is my position as I noted during the last few years and I do not think that we are in bear market.

Remember the Buffett and CSCO Chamber's comments


http://www.traders-t...showtopic=75006

Edited by Trend-Signals, 18 August 2007 - 10:42 AM.

[Tor]

I will be a lot more confident in the bullish case when (if) the SnP clears the 1454-1461 area, an area of recent s/r as well as the 200 sma and February top. We should find out very early next week as that is only about 1% above yesterday's close.

http://stockcharts.com/c-sc/sc?s=$SPX&p=D&yr=0&mn=8&dy=0&i=p12541616282&a=114730748&r=2972.png

Yes its what I see, but I think if it deas clear it then it willbe a start of a wave 2 down of a bigger wave 3 up.

It could be a 4 of a 5 down however, but that is not my central scenario.

At the monet we just test the 50 dma from below, which has to be bearish. alternatively i see the capitulation data last week. that is why basically why i have no clue right here.

[DraggdOut]

Tp,

For me, I have to admit this is probably the most interest point in the stock market in my whole career or 15 years.

I think the weight of evidence goes to the upside. Putting aside technicals, which we all see and know here.

The equity pool is shrinking.
Hedge funds as an asset class are less attractive.
Policy has responded early, and quickly. Expect more to come.
I find it difficult to accept a repeat of Nov 2001, post tech bubble.
Liquidity and money supply strong.
Downside protection is high.
What other assets are there to buy? Bonds? not really. Hedge? What are you buying is the question and people are sceptical now. Commodities? Maybe a bit long in the tooth??? housing? No way. Cash? Possibly.

Equities compete with cash, but I dont think we are there in terms of consumer preferences.

What exactly is out there? A credit crunch based on sub prime lending spreading? I have heard of a few funds losing a lot of money and closing shop, but that is a rich mans issue.

Does the mainstream consumer remain in tact? For the moment it seems so to me.

<<The equity pool is shrinking.>>

Not any more. Maybe that's what this correction is, the PE floor being priced out of the market. If that's the case then there is not much cause for concern, but I am not of that outlook.

<<Hedge funds as an asset class are less attractive.>>

Hedge funds as an 'asset class' are getting routed. August 15th was the nail in the coffin for a lot of funds, a far larger population than has been publicized to date. Their arb & carry models don't work in these types of environments.

BUT, allow me to play devil's advocate about this for a second. If capital is retreated out of alternatives, particularly hedge funds on a large scale, doesn't that also imply that the capital base the hedgies can lever up has also shrunk? and what might be the implications of that..? has the market priced this in? has the market priced in the 8/15 event risk?

<<Policy has responded early, and quickly. Expect more to come.>>

How does the fed lowering the discount window do anything to improve the illiquidity in the structured credit market? If they start aggressively cutting rates that is one thing, right now this is more a soothing gesture & some moral suasion...

<<I find it difficult to accept a repeat of Nov 2001, post tech bubble.>>

Agreed.

<<Liquidity and money supply strong.>>

I think we are perched on a very slippery slope right now. I am not looking to be a harbringer of ill but you have to realize liquidity is a double-edged sword, and its existence propping up equity valuations is very much dependent on the ease of credit and the survival of these hedgies many so malign...

<<Downside protection is high.>>

Care to qualify that? Institutional buy under the market? or do you just mean the fed?

<<What other assets are there to buy? Bonds? not really. Hedge? What are you buying is the question and people are sceptical now. Commodities? Maybe a bit long in the tooth??? housing? No way. Cash? Possibly.>>

But again, let's back up and ask ourselves the question, how much of this money was real to begin with vs. leverage? let's think about the Bear Stearns fiasco for a second. When they said shareholder equity was equivalent to nil, nada, they weren't saying the assets were worthless, marked-to-market. What that implied, factually, is that they were levered up 20:1 if I recall correctly, and the initial mark-down was the nail in the coffin. That's the problem with a lot of this structured credit; you can discount it 96 cents on the dollar but nobody wants to bid because they know if they wait another day your ask will be 93 and so on.

<<What exactly is out there? A credit crunch based on sub prime lending spreading? I have heard of a few funds losing a lot of money and closing shop, but that is a rich mans issue.>>

If the fed doesn't do something to lower rates all these ARMs that are about to reset are a pauper's issue that could get very upsetting very quickly.

Also, a by-product of globalization and the explosion of derivatives is the globalizing of credit risk. What if, purely conjecturally, a bunch of Asian and European banks turn out to be holding some awfully hot potatoes...

Edited by DraggdOut, 18 August 2007 - 01:20 PM.

[Tor]

In the short term I really dont know, trading view, but beyond that I don't think any market participant will fight this fed. Surely they have instilled an element of upside surprise? price will tell all, but hedge funds were low risk, and now are percieved as high or higher risk. Their less attraction will abate selling pressure and increase buying pressure, as long only investment becomes the less risky asset. All just hypothesising and IMO. I have been pulling my clients out of hedge funds, for one. Not sure if its the right thing to do, but I feel more comfortable buying a blue chip with a good yield and strong balance sheet. I thnk it could be a highly bullish environment, as I still think the equity shrinkage arguement remains valid according to what I read and see.

Edited by Tor, 18 August 2007 - 02:01 PM.

[Tor]

<<Downside protection is high.>> Care to qualify that? Institutional buy under the market? or do you just mean the fed? Yes I mean both of those, plus put premium. This has been a well advertised selloff, with so many fund managers buying puts as protection.

[ed rader]

[quote name='Trend-Signals' date='Aug 18 2007, 10:33 AM' post='309435']
[quote name='Tor' post='309417' date='Aug 18 2007, 10:17 AM']


Remember the Buffett and CSCO Chamber's comments


http://www.traders-t...showtopic=75006
[/quote]


i remember their comments back in 2000. both were laughing stocks.

ed rader