See you in 2006 Minyans!
Flashback! - Bill Meehan - 1:46 PM
This day in market history...
- Closing levels this day 3 years ago found
o DJIA: 8332.85
o S&P 500: 879.39
o Naz: 1339.54
o Crude: 31.41
o Gold: 343.60
This day in Minyanville history...
- Prof. Zucchi subbed in for Todd with some End of Year Pinch Hit Randoms
In other news...
In 1967, the Beatles topped the charts with Hello Goodbye
I'll also take the time to wish my dad a happy birthday on what would be his 54th. I'll raise a Budweiser (ok, maybe a couple more than one) to you tonight, ya Swine!
Wishing everyone a happy, healthy and prosperous New Year!
Butting in... - Tom Peterson - 12:10 PM
If I could jump into the fray, the comments made about excess liquidity in the real estate sector perhaps did not touch on the fact that much of recent real estate activity in the past couple of years, including but not limited to speculation, have been built on heavily leveraged borrowed money.
Given the advent of so much 'creative financing' recently, including the high-ratio mortgages; plus given the huge rise in adjustable rate mortgages since rates bottomed; it is reasonable to believe a substantial number of borrowers could be in jeopardy if there is even a normal 10 -15% price correction, let alone the 20% + being seen in some areas already.
While we can measure the number of questionable loans outstanding, no one knows at this point how many will go into arrears. While there is some 'excess liquidity' in real estate, it is also true there are large numbers of people with little or no equity left under a scenario assuming even a modest correction in the housing market.
The effect of derivatives on the market. - John Succo - 11:39 AM
Derivatives have gamma. At certain times, near an expiration, if those derivative positions are big enough they can overwhelm markets. When gamma kicks in there is not choice: re-hedging occurs.
Look back at November expiration. A hedge fund was short a large amount of out of the money calls that were near the strike expiring that day. As the market rallied, the fund short those calls began to buy them back to protect the position and set off a buying spree. Those calls started the day at $.20 and ended up $16 in the money. The sole reason for this move was the outsizing of risk by the fund.
This same fund has a very large short NDX put spread struck 1585-1565. If the NDX is near 1585 January expiration the same thing could happen on the downside.
Put it on your calendars.
Raise your hands in class... - David Miller - 11:25 AM
I had a relaxing evening with friends last night -- a fabulous group of people I met through the entreprenuer's class I co-teach. The topic turned to the stock market...
I was relating the bear case where a deflation in housing prices serves to crash the economy and stock prices when one of them says, "Wait. Didn't they say in 2000 the decline in the stock market would crash the housing market? House prices have gone through the roof in the last five years."
Gold star for that ex-pupil, methinks. There is a great deal of money sloshing around. As we move in to the new year, you can either take the point of view that all this money will quit sloshing or evaporate, or you can start working hard to figure out where it will slosh next.
People seek a return on their investments. We can foment intelligent arguments that the way people go about this is flawed, but that does not change the fact the behavior exists with tangible impacts on the value of investment instruments. When real estate becomes unattractive to investors, count me among the group that doubts the money will stop or evaporate.
Will it move into equities? I think that is the most likely scenario because the salient lesson neophyte real estate investors still need to learn is how illiquid that investment can be. If that indeed is the primary lesson learned, then these investors will seek particularly liquid assets (like stocks) to address the problem.
The trick is the time horizon, of course -- how long this shift in investment focus will take. Might it take years? Perhaps, but I think it's worth noting the dizzying speed with which investment trends shift these days. I expect the transition, when it comes, will be more rapid than most people expect.
Conundrum My Eye!!!!!!!!! - Bennet Sedacca - 8:56 AM
OK. I have now been asked 1,000 times since the curve inverted what I thought about it. The funny part is that probably 999 of the people that asked never even knew there was a yield curve! OK. I'll stop ranting and raving....But here is the deal as I see it.
There is no conundrum. There is simply an enormous amount of debt at every level and there is also an enormous amount of equity. So you could say that both sides of the consumer's balance sheet are bloated. If the left side doesn't keep growing, the right side takes over, kind of like a margin call. THAT is what the bond market smells and why it is actually feeding on itself. It is why the curve will likely invert further followed by a parallel shift down in rates as the economy slows in 2006 as I have stated I feel will happen many times before.
Finally, the COT data as we pointed out has hedge funds so far off sides along with the small speculators that a gigantic short squeeze is developing. It is a squeeze that, as I mentioned yesterday, we intend to sell into in January when seasonality trends turn negative. Happy New Year to all and have a great 2006.
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