Friday, July 27, 2007

The Teddy Bear's Stage.....

Some Question to be ask tonight ( 27 July 2007 ):

What will happen today?

  • The risk is to the downside, because the markets can easily drop another 3% to 5% before a sufficiently large number of people ask questions about oversold conditions.

  • There has been a lot of technical damage, and we're approaching the weekend.

  • Q2 GDP may not have the impact it usually has. Traders yesterday were already saying that the world was a different place from Q2 in light of the tightening in credit.

  • In fact, we're seeing if the strong GDP may be a negative, since traders are now agitating for a rate cut from the Fed.

Can we get a sustainable bounce?

  • If the market comes to believe that the Fed will step in and lower rates later in the year, that would help.

  • Also, clear signs in a month or two that banks and brokers were able to sell some of their LBO(Leverage Buyout) debt will go a long way toward calming markets

What is the main bear argument?

  • Credit and housing deterioration is creating a systemic crises that will lower the markets. Bears say the markets should not be 3% off all time highs with energy, credit, & housing major issues.
  • Many stocks in S&P were viewed as takeover targets. A "closed" sign on the debt markets is bad news.

What is the main bull argument?

  • Housing and credit issues do not represent systemic risk to the global markets

  • Repricing of leveraged bonds is good

  • At end of summer, when repricing occurs,much of the LBO debt will be sold, and stocks will get a lift in September and October when the markets realize the sky has not fallen.

  • In the meantime, the banks are not losing money on the LBO mezzanine loans--they are in fact earning interest on it.

  • No LBO deal has collapsed, and it's unlikely a major one will collapse.

  • The global growth story is the key. IMF raised its global growth forecast. China is the largest contributor to global growth this year. They see faster growth In Germany, China, Russia, India.

Why is the market so volatile?

  • The repricing of risk is the main reason.

  • Some also note that the elimination of the short-sale tick rule may be a factor in the market's volatility. This rule, which required that shorting of a stock could only be done on an uptick or sideways move (but not a downtick), was eliminated a few weeks ago. It is difficult to sort this out, because the recent period of volatility also corresponds with the concerns in the credit market. Most agree that removal of the rule is adding some degree of additional volatility.

Can we get an oversold bounce looking like a possibility?

  • Yes, at any moment. A surprising number of traders have covered some shorts position. But, any uptick is consider a correction for further Short !!

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