Wednesday, June 20, 2007

All around bad market day? Maybe not.

Slowly but surely the market slid and finally jumped down today, with stocks falling over 1% in the afternoon and bonds prices falling. They're linked of course, with bonds leading the way for now. A few comments:

---The biggest news by far from this vantage point is the unraveling of two CDO laden Bear Stearns hedge funds and the breakdown of the cohesiveness of the supporting credit group. Merrill Lynch pulled out their collateral and put it on the market, a Wall Street form of taking their ball and going home. Pulling out of a collateralized position before an overall solution had been reached to stabilize and salvage what could be saved of the funds means only one thing---that Merrill saw the possibility of further losses that would lead to a deficit beyond their collateral coverage. That's not good news for the market's view of mortgage securities. Since the major investment firms have many situations in which they have mutual interests and a quid quo pro motivation to work together, Merrill's risk in breaking away was not a small thing, and is noticed by everyone. It's is the biggest negative market moving news of the day. What happens here over the next week, and with any other similarly focused funds out there, is going to be watched with intense market interest.

---The rise in interest rates of late has led some heavyweights in the bond business to make what seem to be inflammatory comments. Note this comment by a PIMCO EVP today on the residential real estate market, "It's a blood bath. We're talking about a two to three year downturn...eventually it will take the stock market and corporate profit". Or a former Clinton official, economist, and NYU professor saying, "It's not just a housing recession anymore, it looks more and more like an economic recession". This is grim commentary for an economy that overall has reasonable profits and growth at the moment, and a stock market that is at an overall 16 p/e, by no means bubble territory by any historic measure. For the negative side to play out, corporate profits will need to fall significantly, and that seems to be less likely in our globalized economy. Old patterns may not apply.

---With that said, Morgan Stanley announced today that it had raised a record $8 billion fund to invest in real estate. Blackstone has so far raised $7.2 billion toward a goal of a $10 billion in two new real estate funds and Goldman Sachs and Lehman are in the real estate fund raising process as well. Are we still in the same post? Billions are being raised for real estate investments just as we hear the Cassandra's chorus in full voice. It's the same post, same day. They are global funds of commercial and residential investments to be made in Asia, emerging markets, and Western developed economies(including the U.S.), likely in that order. The world has not stopped.


Anonymous Jim said...

Believe me, the world does stop for some margined traders on days like this. It's a small world.

7:11 PM  

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