Friday, March 16, 2007

Uncomfortable Market Thoughts

I have just a few thoughts on the market today. The market has been acting quite suspiciously and I am not too comfortable with this. Some of the activity may well be due to today’s expiration and the typical bullish bias during expiration week, but I believe investors (the market) have ignored some pretty stern “warnings” over the past few days.

The sub-prime lending issue is an isolated event, but it has further implications in the housing market, which ultimately has an effect on the health of the economy. The decrease in unemployment over the past few years can be mainly attributed to the housing market. If the housing market continues to weaken (as it easily could), then the economy will feel the ill effects in the form of lost jobs and lost growth. The economy is already slowing as seen in both manufacturing numbers and earnings guidance. Throw in slightly higher oil prices, inflation pressures, global tensions/risks, the “yen carry trade”, hawkish comments from Alan Greenspan and investors that have seen their egos battered for better or worse and we have a market that might just pay attention to the economy’s health.

A side note on Greenspan: Now that he is out of the public office as
chairman of the Federal Reserve, he feels as if he can more freely talk about
the economy and his views on certain risks. In fact, groups of banks and
institutional firms pay a hefty price tag for his opinions at conferences and
meetings. Let it be known that he does see risks in the economy, specifically
the housing market as he noted in a March 15th speech mentioning that “if home
prices go down from here, I think we’ll have problems”. Maybe this is his
irrational exuberance speech from the 1990s. Is it going to be a time that we
look back 6 months later and said, the warnings were there, why didn’t we see
this coming? I guess we’ll see.
Although Wednesday was a technical key reversal day (hitting new lows at 1363, then bouncing and finishing substantially higher at 1387). A 10% correction may not have been made quite yet, but may be in for a little rough and tumble ride over the next few months while the housing market, inflation and global tensions play out even further. False rallies, false bottoms and higher volatility is what I see in the coming months.

Source: eSignal

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