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D Fry Market Outlook 11 07 2007
Reports of my death have been greatly exaggerated.

S&P bit the bullet by acknowledging that 612 subprime mortgage issues would have their credit ratings much reduced with some falling to junk. They’re late to making these changes as usual.

There will be some serious losses in many portfolios as a consequence. Therefore a flight to quality as treasury bonds pushed prices higher and yields lower. Fixed income managers need to rotate out of these issues and upgrade to better quality bonds. Just think about it for a minute: how many so-called conservative fixed income mutual funds owned what was previously investment grade mortgage debt? And others like hedge funds and various leveraged players?? It could be a very serious problem.

Remember, most subprime issues, since they never trade daily, were priced to a model rather than to their true market worth. There are a lot of arguments going on right now over pricing these issues among holders. The SEC is watching the process.

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Let’s look around the planet a little.

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Given the S&P headline subprime downgrades, the market could have done a lot worse. Potentially $12 billion in subprime mortgage securities downgrades and even more spillover to hundreds of associated CDOs. This is a significant event, and the fall-out will continue for some time.

I don’t hear the helicopters yet, but it takes time to get the printing presses in gear with billions to print. Let’s see how Bernanke and Paulson deal with it.

Disclaimer: Among other issues, the ETF Digest maintains long or short positions in: PowerShares DB US Dollar Index Bearish (NYSEARCA:UDN), United States Oil Fund ETF (NYSEARCA:USO), PowerShares DB Energy Fund (NYSEARCA:DBE), PowerShares DB Commodity Index Tracking Fund (NYSEARCA:DBC), iShares Dow Jones US Real Estate ETF (NYSEARCA:IYR), streetTRACKS KBW Bank (NYSEARCA:KBE), iShares MSCI Emerging Markets ETF (NYSEARCA:EEM), iShares MSCI Brazil Index ETF (NYSEARCA:EWZ), Market Vector Russia ETF Trust (NYSEARCA:RSX), iPath MSCI India ETN (NYSEARCA:INP), iShares Trust FTSE-Xinhua China 25 Index Fund (NYSEARCA:FXI), iShares MSCI Australia Index Fund (NYSEARCA:EWA) and iShares MSCI United Kingdom (NYSEARCA:EWU).

Source: David Fry's Market Outlook for Wednesday