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Five Things You Need to Know: Is This the End, Our Only Friend, the End?; Speaking of Risk Aversion...; So What's the Worst That Can Happen?; Invincible! Also, Nutty!; Bear Market in the First?


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Is This the End, Our Only Friend, the End?

Last week U.S. stocks suffered the very worst week in the whole history of five years ever! Perhaps that's a bit melodramatic. The reality is that the S&P 500 did see its worst week since September 2002. But is this the end?

  • Only 33 stocks in the S&P 500 showed gains last week as the index
    declined to a 3 1/2-month low, according to Bloomberg data.
  • That leaves more than 75% of stocks in the index 10% or more away from their highs.
  • That's what one might refer to as a "correction," right?
  • Almost. We're still fans of the Large Cap stocks as relative outperformers theme.
  • Relative outperformance is not the same as absolute returns, however.
  • And speaking of relative performance, there a couple of things we want to look at today.
  • The first is the performance of the S&P 500 versus the Russell 2000.
  • The chart below shows this relationship expressed by a point and figure chart.
  • Xs means the S&P 500 is outperforming the Russell 2000.
  • Note the higher lows this ratio has shown since 2006 and the recent move breaking the pattern of lower highs during prior periods of risk aversion: October-November 2005, July - August 2006, February 2007.
  • Also, the Bullish Percent indexes for equities are saying supply is now in control of the markets, and that means the path of least resistance is no longer higher.
  • For more on these risk indicators visit the Gridiron on Minyanville's Education page.

    Risk Indicators
    July 27, 2007

    Team on Field
    NYSE Defense Os (supply)
    SPX Defense Os (supply)
    COMP Defense Os (supply)

    Field Position
    NYSE Neutral (>30% <70%)
    SPX Neutral (>30% <70%)
    COMP Neutral (>30% <70%)

    How to interpret this?
    Need a PnF primer?
    What's a PnF buy signal?
  • Perhaps it is not The End.
  • But the evidence does suggest this is a more important period of risk aversion than we have seen since the bull market begin.

2. Speaking of Risk Aversion...

What is the one thing liquidity-fueled markets need to advance? An appetite for risk. so check out the recent restructuring or (in some cases outright cancellations) of bond deals and loans over the past month.

  • At what point can we say this is a clear sign of growing risk aversion?
  • After 10 cancellations or restructurings?
  • 15?
  • What about 20?
  • Would 25 restructurings or cancellations be enough?
  • What about 30?
  • More than $16 billion worth of leveraged-loan and high-yield bond deals had been canceled or postponed this summer heading into last week, according to Fitch Ratings' estimates.
  • That number has continued to expand. This morning Merrill's David Rosenberg was out with a not counting at least 35 delays or outright cancellations.
  • Meanwhile, over the weekend, the Financial Times reported that prime brokerage departments at several investment banks have raised their margin requirements for certain hedge fund.

3. So What's the Worst That Can Happen?

Well, for starters, your investment in a mortgage lending company that specializes in Alt-A mortgages - you know, the class of mortgages one step above subprime that until last week were not part of the well contained subprime problems - could be worth anywhere from 40-50% less after the company announced it would delay paying its quarterly dividend and maybe payments on its preferred shares because its lenders are requiring the company put up more cash.

  • American Home Mortgage Investment (AHM) said in a statement late Friday that the board decided to delay common dividends and may halt payments on preferred shares until it obtains a "better understanding'' of how "disruptions'' in the mortgage market will affect its balance sheet and liquidity, according to Bloomberg.
  • AHM specializes in Alt-A mortgages.
  • The company in June - back when subprime issues were still "well contained" - said that second-quarter earnings would be lower because homeowners didn't
    keep up with payments.
  • But the company assured investors it would be able to pay its 70 cents a share dividend.
  • The company is currently halted for trading, but shares in the pre-open were 42% lower than Friday's close of $10.47.

4. Invincible! Also, Nutty!

But enough bad news for one day. A group that calls itself "Invincible America" (seriously) says they have prosperity under control and will use their powers of transcendental meditation to push the Dow Jones Industrial Average above 17,000 within a year, according to Reuters.

  • Since July 2006, Invincible America has had about 1800 people practicing Yogic Flying to "create an upsurge of coherence and positivity in national consciousness and radiate an urgently needed influence of harmony throughout the world."
  • So far, so good!
  • As the group noted in a press release back in July 2006, their efforts after just one week saw the Dow post its highest weekly gain in 14 months.
  • "The research proves that as little as the square root of one percent of the population of a country practicing Yogic Flying together in a group is sufficient to reduce negative trends and strengthen positive social and economic tendencies throughout the entire population," said Dr. John Hagelin, who serves as the Director of the Institute of Science, Technology and Public Policy at Maharishi University of Management in Fairfield, Iowa.
  • Dr. Hagelin explained that the number of Yogic Flyers required to produce this coherent effect for the United States is 1730.
  • However, he said, the initial group of 1200 experts was more than enough to create a calming, stabilizing effect in national consciousness.
  • The group now has 1,800 people practicing Yogic Flying, but the number is growing.
  • Hagelin told Reuters that when the number reaches 2,500 within the next 12 months, America will see a major drop in crime and the virtual elimination of all major social and political woes.
  • That's cool. But we'd settle for a clean public restroom.

5. Bear Market in the First?

Not so fast, Guru Yogic Bull!

  • If 1,800 people in Iowa can claim to control the stock market through transcendental meditation, then we're going to challenge them head-on with our new system of economic control and forecasting: the name of the winner in the first race at Saratoga Race Course yesterday.
  • The winner?
  • Cool the Economy, a three-year-old chestnut filly.
  • Should we mention that Globalization was a well-beaten third in the second race at Saratoga on Saturday?
  • Or that Secret Stocks failed to hit board on Friday?
  • We're not even going to discuss the disappointing performance last Thursday by one of the favored horses in the Sanford Stakes, Fed Watcher.

    Deflation surges to the lead from the inside!
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