Monday, June 25, 2007

Interesting market week coming

As the market week begins, it's still not known whether the CDO and CMO markets will have the liquidity to effectively price lower tier securities and provide some certainty to the Bear Stearns funds workouts. Then there is the ancillary issue of whether there is more of this toxic positioning somewhere out there in hedge fund world. This is the cloud over today's market.

Aside from that, we now have a positively shaped yield curve for the first time in about two years. That's supposed to be, historically speaking, a good thing. The inverted yield curve that we have lived with was, historically speaking, supposed to be a bad sign but that did not play out. Since WWII, there have been nine instances of inverted yield curves and seven of them led right into a recession. This time not so. A positive yield curve has generally indicated confidence in a growing economy, but economists and market players today are less certain that old truisms are valid. Will the weak dollar, questionable U.S. consumer, and the housing overhang lead investors to "sell on the news" that traditional bond market metrics suggest continued economic growth?

So that's the playing field for the week. The players are walking out of the dugout on this beautiful summer day and getting ready for the first pitch, an existing home sales number at 10am. More on the BS funds workout will definitely evolve during the game. If these issues don't shock, the game may be entertaining, in a positive way.

Getting beyond these issues will give the market two positives. First, like Amaranth last year, a significant hedge fund problem(as big as LTCM) will have been handled by the market without any kind of radical disruption. Second, investing in U.S. securities will reward those that ante up for longer dated maturies. Those are both healthy signs. Interest rates are by no means high today, despite recent market moves, so if a stabilization in the bond market occurs at these new levels, everyone can relax. That's of course assuming that credit market spreads for higher risk paper don't go through the roof. That's a tangent that opens a Pandora's box of outcomes.

The market's about to open. Have a good week.


Anonymous Anonymous said...

Great site. Your Irish friend Tim..

10:58 PM  

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