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David Fry, ETF Digest (67 clicks)
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D Fry Market Outlook 26 06 2007

Sometimes bad news really is just that -- bad news. When Monday's poor housing data hit the wires, bulls jumped for joy thinking that lower interest rates were certainly ahead. That feeling, while possibly true, was misplaced.

The hangover from Bear Stearns subprime troubles lingered with rumors of more problems at municipal bond insurers MBIA Inc. (MBI) and Ambac Financial Group Inc. (ABK), hitting those stocks. MBIA is reported to have $24.7 billion in exposure to high-risk debt, while Ambac has $18.7 billion which amounts to 284% of the company's capital according to MarketWatch.

I guess you better check the true credit quality of that AAA-insured municipal bond you own to see if the underlying credit rating is investment grade or worse -- non-rated. When I was a bond principal, bonds with higher underlying credit ratings than those given by Moody or S&P due to insurance always traded at a premium. Best check your bond portfolio, since over the last 10-15 years almost all revenue municipal bonds have insurance, and with it, higher credit ratings.

Just as the Nigerian oil strike was settled, Venezuela's Hugo Chavez stimulated prices to the plus side with implications of more oil industry nationalizations.

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Previously investors were worried about rising interest rates, but the subprime troubles have taken prominence. A flight to quality is the result, with lower yields and higher prices. If the government has to step-in and "monetize" [print money] our way out of trouble, that would represent a sizable increase in the supply of bonds and hurt prices. While this plays out, the sidelines may be the safest place for bond investors.

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It must feel pretty good to be David Lereah, former chief economist of the NAR [National Assn. of Realtors]. No longer does he have to spin that trash about the real estate market being "stable," "we're just about to turn the corner," etc.

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Let's go down to the BRIC-K yard and check out the happenings.

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Clearly there's widening concern about subprime issues.

By the way, did you know a third U.S. carrier is heading to the gulf near Iran? That could turn into a "prime" issue.

The week is young. Monday's action was a bull's false start. Anytime they think interest rates will be cut, no matter the reason, they throw money at the market. But sometimes bad news is really bad news, despite the Alice-in-Wonderland logic that often dominates Wall Street. Please remember, trading desks at primary dealers are loaded with nearly $40 billion in recent Treasury short-term loans, as pointed-out all last week. That's a lot of firepower to either cure subprime issues and/or push stocks higher.

Disclaimer: Among other issues the ETF Digest maintains long or short positions in: S&P 500 Index (SPY), MidCap SPDRs ETF (MDY), iShares Russell 2000 Index ETF (IWM), iShares Goldman Sachs Technology Index Fund (IGM), United States Oil Fund ETF (USO), PowerShares DB Energy Fund (DBE), PowerShares DB Commodity Index Tracking Fund (DBC), PowerShares DB US Dollar Index Bearish (UDN), streetTRACKS KBW Bank (KBE), streetTRACKS KBW Insurance (KIE), iShares MSCI Brazil Index ETF (EWZ), iPath MSCI India ETN (INP), iShares Trust FTSE-Xinhua China 25 Index Fund (FXI), iShares MSCI South Korea Index Fund ETF (EWY), iShares MSCI Australia Index Fund (EWA) and iShares MSCI Canada Index ETF (EWC).

Source: David Fry's Market Outlook for Tuesday