Market Discussion

[berloga]

However dim the picture may look, the ecomony is no going to collapse due to the sub-prime mortgages' defaults. After all, having looked at www.foreclosure.com, I can tell that most homes that are listed there are below the median house price in that region. People who cannot afford a house should not buy in first place. Now they lose money and so do their lenders. But remember, that money went into someone else's POCKET! If the fat hedge funds lose money, they lose it to someone else!

As long as economy produces goods and services (aside from financial), it should keep up.

An important question to answer is "are the differences in modern US economy from that in the 1920's and 1930's, considering globalization and fast transportation and stronger rising economies of other countries, sufficient to make it a lot different from the Great Depression?".

There are also a lot more different professions nowadays that did not exist back then: IT, microelectronics, biotech, programmers, more types of doctors, more resorts and public recreation facilities, etc., etc. The point is, there is a much greater variety of jobs now than compared to the 1920's. That may make a difference, in my opinion.

[la-onda]

fyi:
Crisis or Opportunity?
Equity losses have been painful; however, this is a time for bargain-hunting – not panic selling.

Share prices around the globe fell sharply in reaction to the subprime mortgage mess in the United States. As so often happens in a situation like this, perceptions have gone far beyond the reality of the situation.

There was undoubtedly cause for concern in that market, but investors appear to have over-reacted. Panic selling that spread to other sectors of the investment world became a self-fulfilling prophecy as investors dumped other forms of debt and then equities. Falling prices were spurred on by selling caused by fund redemptions, accelerating the downward spiral.
There is so much nervousness in the markets that it is impossible to predict with any certainty what is coming next. A rational look at the markets suggests that a rebound is imminent, as has happened so many times in the past in a situation like this.

Let us start with an objective look at the subprime mortgage situation – the trigger for the melt down. First, subprime mortgages represent only a small portion of the overall mortgage market in the United States. Actual defaults on subprime mortgages have been about 5% to date. So far, 85% of borrowers in that market continue to make timely payments.
Inevitably, the default figures will get worse. But, remember, those loans are all backed by real estate. Undoubtedly, the value of the real estate will fall short of the loan amount in those cases where the borrowers default. To explore the potential implication, assume the delinquency rate was to soar to 25% and as an example, suppose that in each of those cases the realized value of the collateral falls 25% short of the loan amount. Then, the overall subprime market would lose about 7% of its value. That is hardly a catastrophic event for the world economy.

It is a classic reality that markets are driven by reactions to front page headlines. Profits are made by those investors who take the time to digest the details buried in the news articles. The present situation appears to follow that pattern.
A recent Associated Press headline screamed: "Existing Home Sales Fall in 41 States"and the lead paragraph expanded on that dire news with the observation that "home prices were down in one-third of the metropolitan areas surveyed."
Investors who took the time to read the whole article found that there were "price gains for 65 percent of the areas surveyed" compared to a year ago. That same article goes on to quote a real estate expert who notes that "the fundamental momentum clearly suggests stabilizing price trends in many local markets."
The subprime situation has spurred lenders and investors around the world to take a fresh look at risk with respect to their investments. That means that money for such things as leveraged buyouts has become harder to source. That is a good thing, as some of the private equity deals that were being done bordered on ludicrous.
Holders of subprime mortgages may be in jeapardy of seeing losses. However, the more important debt markets are still in good shape. For example, the global default rates on corporate bonds are at historic lows.
While hedge funds and private equity funds have reduced the rate of new investments, money is still coming in to the markets from two sources that are growing ever more important. Sovereign wealth funds are pumping huge amounts of capital into the global investment markets. Primarily backed by oil exporting nations, these funds are increasingly investing in Western capital markets.
Central Bank foreign currency reserves are also being deployed in more entrepreneurial ways than was the case in the past. China, with a $1.3 trillion of foreign reserves, now leads the world and is seeking to deploy a significant portion of its enormous wealth in ways that generate a real return.
In spite of the perception created by many of the headlines, the U. S. economy continues to expand, albeit slower than most investors would like. Most importantly, the rest of the world continues to grow at a fast pace, making the U. S. economy less important over time in the context of world economic growth.
One of the important implications is that the U. S. dollar remains under downward pressure. The steady shift of wealth away from the U. S. will continue to erode the value of the dollar. Hard assets such as gold and other metals will remain an important hedge. Resource backed currencies such as the Canadian dollar will hold value better than the U. S. dollar.
Global demand for metals has not been impacted in any way by the fears surrounding the American subprime mortgage market. Exploration and development companies will continue to be rewarded for success.

The most important implication is that panic selling of resource companies has created many outstanding buying opportunities. I expect prices to rebound fairly quickly as investors gain a better understanding of the realities of the current situation.

[David Randolph]

We're starting to see several economists forecasting the US economy will enter a recession in early 2008, due to a consumption retrenchment.

buddjas1 may very well be right in his doom and gloom economic outlook, I'm even going to risk saying he's probably right.

But, that's not a big deal in terms of the long term future for the stock market, as you can check in the following long term chart of the S&P 500:



Back then the S&P 500 fell 20% from top to bottom, and now we're "just" 10% off the highs, so perhaps we're just halfway through the decline phase.

But it's too late to sell now, in my view. I prefer to start getting ready to buy the 30% I have in available cash in fundamentally strong stocks when there are signs the downturn is over.

Why do I believe the long term bull market will continue beyond the current "short term" economic problems? Well, the fact that now we have several other growth engines in the World, besides Europe, North America and Japan, is a much larger and broader economic development than a consumption recession in the US, which everybody and his mother has been predicting for years.

The fact that now there are 3 billion or more people that are starting to get purchasing power for the goods and services American companies provide is a huge factor that will continue to drive long term profitability for US public companies. What is more important, a 3% increase or 1% decline in the US GDP, or a new US growing in China, another one in India, and another one in Russia? (if you join Eastern Europe the population size is about the same as the US). And South America too, another potential US there. What you have in the cards is a 1 or 2% decline in the US GDP and the potential emergence of four new economic blocks perhaps almost as powerful as the US over the long term.

The "globalization bubble" is still to happen, and it may very well provide an even larger long term advance for equities than the 1991-2000 five fold advance you see on the chart.

This is just my humble opinion, I can be wrong.

[berloga]

I agree with David. In fact I posted my comments above that are based off of the same assumptions. I went to Russia in May and saw a lot of developments going on there. The country seems to be on a long term track of raising its economy.

The other day there was a program on TV, I accidentally flipped channels, and saw something that resembled the star wars landscape: huge marvelous buildings of all sorts and proportions, great novel architeture. Well, this was not Star Wars, alright, it was modern Shanghai! The look of the city places NYC in misery. Of course, it is understandable, NYC had its sky scrapers built 50 years ago. Nevertheless, other economies will thrive.

[soxguy]

Does anyone know where to find a vix measurement? The talking heads have been saying that generally when it's in the 40's,a bottom is in or near. Anyone? Thanks>

[trexkerry]

You can find the vix at yahoo: enter ticker symbol ^vix.  It is a delayed quote but will tell you what you need to know.  You can also see historical charts.  Anyways, here it is, currently at 34.50:

http://finance.yahoo.com/q/bc?s=%5EVIX&t=1y

[BigSully1]

$VIX on my data feed and on stockcharts.

[soxguy]

Checking it out. Thanks.

[soxguy]

Ok,I found it on Yahoo and my scottrade data feed. Very cool. Anyway,the 40's are still a ways off,so there may still be more near term pain. GLTA

[jorgegr]

I'm attaching the vix monthly chart  (last 10 years).
Pls note we are currently among the highest of this indicator

[tokyopua]

Not sure about longer term, but I think we should see a bounce on the Dow around 12700 to 12800.  Tech should be OK till end of year.

Dow is down like 1000 points in 6 days, RSI is 31.6, quite oversold.  A bounce of some sort has to happen soon, at least it did in February when we hit this kind of situation.

[BigSully1]

Latin American markets really getting trashed today. ^MERV and ^BVSP both down nearly 9%. I've got my eyes on SDA for a possible buy soon, but how low will she go?

[BigSully1]

VIX hit 37.5 now at 36.11. I think today or tommorrow could present some really good buy opportunities. Options expiration tommorrow.

[BigSully1]

Made several purchases this morn, I hope not prematurely, but think not. Bought SDA, TDY,SRCL,AXYS today.

Lots of fire sales in Latin American stocks today. I've got an entire portfolio of about 30 Latin American stocks I've held for almost 4 years and not selling now.

By the way I  reactivated my account here. Decided that there is just way too much valuable information on this site to pass up for $50/month. Like La-ondas info on GIGM that gave me the courage to buy heavily before the ER came out. Yep, GIGM is definitely a keeper. Thanks La-onda.

[tokyopua]

Made several purchases this morn, I hope not prematurely, but think not. Bought SDA, TDY,SRCL,AXYS today.

Lots of fire sales in Latin American stocks today. I've got an entire portfolio of about 30 Latin American stocks I've held for almost 4 years and not selling now.

By the way I  reactivated my account here. Decided that there is just way too much valuable information on this site to pass up for $50/month. Like La-ondas info on GIGM that gave me the courage to buy heavily before the ER came out. Yep, GIGM is definitely a keeper. Thanks La-onda.

Applauds for sticking around, I've enjoyed your posts and learned a lot from you!