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Monday Morning Quarterback: Pressures Building Under a Calm Surface

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Asset class risks have been deemed inconsequential as they often are while screens are green and portfolios plush.

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Good morning and welcome back to the flickering pack. Following a full weekend of freaky football and bug-ridden baseball, we're back in the saddle for a fresh five-session span.

This seasonal stretch offers a little something for every sports enthusiast and that spirit of competition extends to the Street. The Bulls and Bears have battled it out but each time the ursine struck a nerve, the bovine responded with muscle and moxie that has come to define determination.

We've spoken at length about the "other side" to the asset class ride, namely deterioration in the dollar, seeds of stagflation and the cumulative pressures percolating under the seemingly calm financial surface. Those risks have been deemed inconsequential as they often are while screens are green and portfolios plush.

Given the price action last week-a dynamic that demanded attention in the face of fugly news from Citigroup (C), UBS (UBS), Washington Mutual (WM) and Merrill Lynch (MER) -we've arrived at the mirror image of the August scrimmage. Bad news is viewed as "kitchen sink" mea culpas while good news is embraced as validation of better times still.

Indeed, if you listen closely enough, you can almost hear McFadden and Whitehead buying stocks in the background!

The first of our Ten Trading Commandments is to respect-but not defer to-the price action. That will be the task at hand as we piece together the fourth quarter puzzle and ready ourselves for earnings season, which unofficially begins tomorrow with Alcoa's report.

Given the price action of late, it's hard to imagine that the fundamental metric will derail the year-end sail. Still, we wondered a few weeks back whether a Pop N' Drop following new highs (that suck in technical types) will prove to be the path of maximum frustration. That remains a viable scenario, particularly given that it seems so unlikely.

Thompson Financial recently reported that third-quarter earnings are on pace to show a flaccid 1.7% rise vs. last year's 20% growth. That may not matter given the motivated central banks but with volatility levels almost 60% below where they were six short weeks ago, it's worthy of a mention. The hedge fund herd has a habit of chasing protection when they need it least and being bare when they get a scare. It would not surprise me to see this wrong-way song unfold one more time before we wave goodbye to this whacky year.

Random thoughts

  • Perhaps I'm making a mountain out of a mole or two but I still think it's odd that Bernanke spoke to Wall Street honchos and hedge fund types during his time of need. Hey, it's probably nothing but the trading records for those firms and their derivative operations should most certainly have their tires checked.

  • So, Goldman Sachs (GS) foresees the continuation of the "vicious cycle" in housing with an additional 15% cumulative decline and prices in some regional markets falling 30%? Those with dry powder and fresh buy tickets should be in an enviable position.

  • The head of the IMF is warning that the credit squeeze was a "serious crisis" that is not over yet and would curtail growth worldwide. "Policymakers should not think that the problems will stay at the desk of the bankers," he said, "Problems are going to come to the real sector, come to the budgets-this is something we keep telling people."

  • JP Morgan (JPM) and Bank America (BAC) are expected to add another $3 billion in losses from mortgage securities and leveraged loans when they announce their 3Q results. That'll bring the tally towards $20 billion bananas (and counting).

  • I wish I could write off the two rather large desserts I had this weekend while at dinner. That would bring my tally down near 200 lbs again.

  • The Yanks, with their backs to the wall, fought back to force a game four tonight in the Bronx. One game at a time, boyz, so don't even think about how rested the Red Sox pitching staff will be if and when.

  • FOMC minutes are due out tomorrow and, as it stands, Fed Fund Futures suggest a 77% probability that we get another 25 bip snippet on Halloween.

  • On a housekeeping note, we'll be in a full morning meld today as we ready ourselves for a rocking fourth quarter. MV Kids, The Exchange and the Holiday Festivus are on tap-and that's only what I'm allowed to share, at present-so hang onto your hats, Minyans, the engine room is about to see a lot more steam!

  • Good luck this week!


R.P.

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