Wow — another week where the numbers do not do justice to the volatility. Most indices actually gained for the week, though it sure as hell didn’t feel that way.

Hotnot_20070810_2After going negative on the year, the Russell 2000 popped 4.4%. REITs were close on the Russell’s tail, grabbing a 3.8% gain. The S&P500 was up 1.4%, while the Nasdaq added 1.3%. The Dow was the index laggard, tacking on a mere 0.4%. U.S. corporate bonds, emerging market paper, and the U.S. Dollar were all slightly to the green side.   

The losers? Well, Crude Oil got whacked for 5.3%, while emerging market stocks gave up 3.4%. European stocks were also in the red 2.5%. So too did Global stocks get schmeissed for 1%. Gold, Treasuries and Investment grade bonds were all slightly down.             

Barron’s Trader column observed:

"The Market’s worst fear is summed up by James Melcher, who runs Balestra Capital. "The equity market is just a sideshow to the main event, which is the bursting of the credit-market bubble," he says.

A decade of muted borrowing costs and lax credit have created a vast pool of liquidity that has inflated home prices and reduced sensitivity to risk. Liquidity has flooded so much of the financial system that mopping up its excesses will take time, "and we’re not there yet," Melcher says. Because money managers cannot accurately gauge the value of mortgage securities on their books, the losses suffered have yet to be fully quantified, and selling assets to meet redemption calls can play out for some time. That’s one reason gold prices have slipped 3% even during the flight to safety over the past three weeks, and why energy bulls nonetheless are selling oil stocks — because that’s where they have profits."

Hmmm, that’s something to chew on.

Well, at least I have a slew of positive articles queued up for tomorrow. Loosen up your mousing wrist, and get ready to roll  Its clobberin time!:

INVESTING & TRADING

Central Banks React to Liquidity Crisis:  Central banks around the world have been injecting funds into markets in response to an undesired and unwelcome spike in short-term rates suggested that demand for reserves was outstripping supply. The Wall Street Journal’s Real Time Economics runs down the totals.

Subprime Nonsense: The Fed chairman and treasury secretary say the subprime mess has been contained. Are they joking? The treasury secretary and chairman of the Federal Reserve play important symbolic roles as knowledgeable guardians of the global financial system. Yet sometimes it’s scary how little they seem to know. Speaking in China last week, Treasury Secretary Henry Paulson reminded journalists that "in today’s world, it’s quite easy to stay close to the markets, and it’s my job to be vigilant and stay close to the markets." In a June speech, Federal Reserve Chairman Ben Bernanke assured listeners that "we will follow developments in the subprime market closely." (Slate)  See also Bernanke Was Wrong: Subprime Contagion Is Spreading

• We can always count on Barron’s Alan Abelson to lay blame precisely where it belongs: At the feet of the maestro, Sir Alan Greenspan. (If no Barron’s, go here)

• Is there a more imperfect messenger claiming the credit situation is just fine than Bear Stearns? Even more
absurd, on the same day this foolish WSJ Op-Ed came out, we learned Bear Stearns was liquidating their bankrupt hedge funds in the Cayman Islands — instead of New York, in order to limit creditors’/investors’ ability to get their money back. How pathetic. l called it The "Chutzpah" of Bear Stearns.      

• Amidst all of the mortgage based turmoil this week, the Home
builder caught a bounce. Why? Perhaps this magazine cover had something
to do with it: Bonfire of the Builders    

Behind the Stock Market’s Zigzag: The stock market in the past few days has looked like it has gone haywire. Shares that would have been expected to fall have risen, and shares that might be considered safe have taken big hits.During Thursday’s rout, for example, Beazer Homes USA (BZH) and Hovnanian Enterprises (HOV) — two home builders beaten up by the housing downturn — each rose more than 10%. Other stocks that have long been targets of short sellers, who profit when stocks fall, rose. Behind the bizarre behavior: quantitative hedge funds. These funds rely on computer models to pick which stocks to bet on and which to bet against. They’ve been liquidating positions to raise cash. They sold stocks they liked, forcing prices lower. For the stocks they sold short, the opposite occurred; to exit from those positions, they were forced to buy.  (Wall Street Journal)  See also Market’s Flaws Surface

How the Bubble Started: Nobel Laurelate Joseph Stiglitz writes:
"The pessimists who have long forecasted that America’s economy was in
for trouble are coming into their own. Of course, there is no glee in
seeing stock prices tumble as a result of soaring mortgage defaults.
But it was largely predictable, as are the likely consequences for both
the millions of Americans who will be facing financial distress and the
global economy."

What do Luxury Goods and Internet Stock have in common? Luxury-goods companies are starting to look like Internet stocks did in the 1990s, if only because indexes designed to track them are proliferating. At least six have come out this year, according to data compiled by Bloomberg.

Can buying a $5,000 watch save you $7 Million dollars?

What’s up with gold?  A triple-digit down day on financial system fears, but gold gaps down, too. What gives? (MarketWatch)

• Wikis are proliferating. The most recent one I came across relates to our favorite subject: WikiInvest

• From the people who brought you the Mortgage Lender Implode-o-meter, comes this new site: The Hedge Fund Implode-o-meter


ECONOMY

The Wall of worry continues to build:

• Run don’t walk to read the WSJ page one article on How Credit Got So Easy And Why It’s Tightening. (If no WSJ, go here: A Short History of the Credit Boom & Bust)

• In a coordinated effort, Central Banks got into their choppers and dispensed lots of cash into the banking system: Time to Warm Up The Helicopters? (be sure to see the video)

U.S. Import Prices Gained 1.5% in July on Energy Costs:  The era of imported disinflation may have come to an end for the U.S. Import prices swelled for a fifth-straight month in July on higher energy prices and another record increase in the prices of products from China, suggesting the U.S. can no longer count on cheap overseas goods to offset domestic price pressures (Wall Street Journal)

• Lost amongst the tumult was this tidbit: The Unemployment Rate is actually closer to 5.4% than 4.6%: A Closer Look at July NFP



HOUSING

Who can’t get a mortgage now:  Buyers with good credit and a down payment will make out well – all others, prepare to pay (CNN Money)    

Notice to Loan Officers/Brokers: A letter from the home office to brokers provides a glimmer of insight into what is going on in the mortgage lending industry.    

U.S. agency rejects Fannie Mae’s request for larger loan portfolio:
The Office of Federal Housing Enterprise Oversight said late Friday it
would not allow Fannie Mae (FNM) to increase its portfolio beyond the
$727 billion limit created in May 2006, despite arguments by the
company and senior Democrats that a change would provide much-needed
stability to the shaky mortgage market. The agency’s announcement comes
after a tense week of public posturing in Washington. Several major
mortgage companies have complained about difficulty selling loans to
investors, and Fannie Mae said it could pump liquidity into this area.
(Marketwatch)

Mortgage Brokers: The salesman factor: In the next five years, 1.4 million Americans will see their
mortgage payments more than double. Already, half a million homeowners
are 90 days behind on their payments. Foreclosure rates are up 30
percent from 2006. How did so many end up in trouble? Was it
consumer overreaching or a bull market in bad advice? Many consumer
advocates and legislators believe that the latter played a big role -
and are blaming mortgage brokers, the independent agents who in the
past few years have sold nearly 70 percent of the nation’s home loans. (CNN Money)



TECHNOLOGY & SCIENCE

Judge Says Unix Copyrights Rightfully Belong to Novell (NOVL)   

Google News Offers Rebuttal Time

• The WTF? story of the week: President Bush was treated for Lyme disease last August, the White House announced Wednesday after failing to disclose the problem for nearly a year.

5 Virgin America In-Flight Gadgets That Should Be on Every Flight

Farewell to the Yangtze River Dolphin    

• Where do the candidates stand on major issues? This handy chart explains all. (flickr)

  



MUSIC BOOKS MOVIES TV FUN!

• Two movie worth checking out:

-Inside Man is a  taught thriller with a terrific cast. It is, quite simply, the best movie Spike Lee has ever made.   

-Thank You For Smoking is a wrly sardonic look at today’s "culture of spin." I found it quite amusing. 

Giant Hot Dog Busted by Chicago Cops 


Looks like we have a spectacular weekend in store. Get the sunscreen out, were taking the boat to the Great South Bay. See you at Zachs Bay!

~~~

Got a comment, suggestion, link idea? Or do you just have
something on your mind?
The linkfest loves to get email!  If you’ve got something to say, then by all means please do.

Category: Financial Press

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “Volatility Spike Linkfest: Week-in-Review”

  1. Chief Tomahawk says:

    “Thank You for Smoking” Someone with an ability to actually write made a movie = quite a change from what Hollywood usually trots out.

  2. megan adams says:

    Just wondering: is this financial wizardry gone bad evidence that too many of America’s brainiest students are going into the financial industry?

    These fancy incomprehensible debt instruments, these ‘securities’, seem like certain folks have been dreaming up crazy complex schemes when they could have been, oh, doing something useful.

    We’ve downgraded science and engineering and our best go to Wall Street. Now it looks like our best and brightest have been too smart for their own good.

    Something is wrong with the incentive structure.

  3. Dave says:

    As a relative beginner at investing, could you explain how everyone seems to think there’s a crisis going on but the market is going up?

    It sounds like most folks are predicting a fed rate cut. Should we always be long on the market because the fed will never let it drop more than 5 points?

    This isn’t meant rhetorically–there may be good reasons why the fed is adding money in to the market or why stocks are staying high. I’ve lost plenty of money recently betting it would go down, but if I’m wrong about all this, I’d like to learn for next time…

    Thanks all.

  4. donna says:

    Megan,

    You got it right. Some of the best physicists I know are working on Wall Street because the business majors “can’t handle the math”.

    I knew finance was in trouble when that went down.

  5. m3 says:

    dave-

    not to be a smart ass, but asking for free investment advice from complete strangers on the internet isn’t the smartest thing to do.

    i’d recommend reading the intelligent investor if you haven’t already.

  6. M3 is correct . . . I’d go a step further than and suggest the following reading list:

    Reading Is Fundamental
    http://www.thestreet.com/_tscs/comment/barryritholtz/10255830.html

  7. W.Edwards says:

    Donna,

    There are two problems with people on Wall Street.

    1) Engineers/physicists/etc may understand the math but not have a full appreciation for how to evaluate the risks inherent in the system.

    Models typically assume that there is less than perfect correlation between asset classes (ie. when one asset goes bad, there are other classes that are flat to positive) which will help offset each other. However, the models usually don’t assume that when things go really bad, everything is fully correlated!

    2) Regardless of what the brainy-types do, it’s the business majors that still by-and-large that run the show.

  8. W.Edwards says:

    Please ignore the bad grammar. It appears that I have a case of “fat-thumb” affliction.

  9. Winston Munn says:

    Dave:

    While I agree that reading is the way to go, a bit of generic information I think is O.K.

    Inexperienced traders should avoid trying to sell short.

  10. pj says:

    “…seem like certain folks have been dreaming up crazy complex schemes when they could have been, oh, doing something useful.
    …Something is wrong with the incentive structure.”

    Not anything wrong with the Incentive structure, just that more and more people have gotten incentive driven. And Finance has opened the doors for them. So where else but to go to that Street. Cancer, Climate, well, that can wait.

    Hell, even books are being read just to make some profits. Not that it helps, Dave. Markets are way too complex. No one has a clue; whatever the brains.