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Minyan Op-Ed: What the Markets See


There are striking similarities between today and the fall of 1998.


You wrote:

On top of that, the Fed has up and changed the rules again! I'll tell ya, between the coordinated agendas, discount window collateral changes, invisible hands, superfund conduits, sub-prime bailout plans and now, the biggest act of international economic cooperation since the 9/11 terrorist attacks, you can't help but wonder what the heck it sees that the markets, 5% off their highs, have yet to price in?

My friend, it may just be the opposite. With the markets, 5% off their highs, you can't help but wonder what the heck the markets see that the Fed (I personally trust the markets' wisdom much more then the Fed), the public, the pundits, and yourself do not see.

With pessimism palatable, most Tier 1 investment banks now calling for a recession, and headlines screaming fear, one has to really wonder what it would take to move the market significantly lower, as the "shock and awe" and all the recession talk has only been able to produce a "wiggle."

As John Templeton stated: "Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." You're dealing with the widest discrepancy between interest rates and P/Es that you've seen throughout the last 50 years and the long term put/call at levels from October '02. If, as I'm sure you do, you believe in market forces, these forces are powerful shock absorbers to whatever the perceptions of credit contraction can throw at it. These forces hardly classify as a combo of market euphoria.

There are striking similarities between today and the fall of 1998. Not only did the public acknowledgment of a "crisis" start on almost the same day in August, if you replace the phrase "sub-prime" with "emerging market debt/Japanese real estate exposure" you have the rhyme.

All of the financials were off 50%+, and all of the financials were holding toxic debt that was in the process of being written off. Earnings in the fall of 1998 declined y/y for the first time in the expansion, and the view that a mild recession was approaching was shared throughout the Street (dust off the memory and go back and listen to the numerous audio archives (Bloomberg) from Oct. 1-30th of the so called market pundits).

The story was that it would take months, if not years, to sort through the issues and equities, at best, would be choppy, and many were calling for the start of a prolonged bear. At that time, the S/P traded at 25x forward, rates were actually higher, and the P/C was nowhere near where it is today.

The market likes to cause maximum pain, and from my seat, that trade would be significantly higher, as the Hedgies are very short and have no exposure to the market right now (ISI surveys).

Minyan Derk
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