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D Fry Market Outlook 22 08 2007

"Pray, who are those who brought your state
With such dispatch to meet its fate?
A crop of brand-new orators we grew,
And foolish, paltry lads who thought they knew."

Gnaeus Naevius
ca. 264-201 BC

To that Cicero added, "...the mightiest states have been brought into peril by young men, have been supported and restored by old."

So, what does all this have to do with current market conditions?

First, separating crooks of all ages from those fresh-faced youngsters with their newly minted PhDs or MBAs, Naevius and Cicero make the point well -- experience is worth something.

Corporate America has been on an efficiency binge with one aspect being the discarding of high-cost older veterans for younger, less-costly employees. With the cost savings, and the added benefit of lower cost stock options, companies could buy back shares looking good and enriching each other at the same time.

I know many disillusioned friends who thought they'd spend their career at some Fortune 500 company, but were shown the door as they aged. They're bitter naturally.

Would these cast-off workers have created subprime mortgages at "sell-side" firms or bought them at "buy-side" firms? It's a good question. A friend of mine worked as a bond portfolio manager for a well-known insurance company for over twenty five years and was let go. Management came to the conclusion that the market had become so efficient or commoditized that they no longer required his experience or salary. He was replaced by an entry-level employee who was instructed to just keep buying highly rated debt instruments. The replacement may have purchased some highly rated mortgage debt instruments that have since gone "poof."

Enter "Buffett the Old" to restore a firm like Countrywide or so the rumor goes. He has the capital and gray hair to fix things as Cicero suggests. And so it goes.

Okay, enough of this rant -- to the markets then.

Some reports suggested calm was returning to markets today as T-Bills returned to more normal levels. But the picture is mixed at best. The Treasury auctioned $32 billion in four-week bills at 4.75%, the largest since July 2001, and the auction was not well received.

Two-year notes on the other hand continue to rally.

There is over $550 billion in commercial paper coming due in the next few weeks. Some of these instruments have "extended" provisions, and will be, since a buyers strike exists for any instrument without government guarantees. Here's a summary of current conditions.

Mixed messages from the Fed continued. Fed Governor Lacker stated his belief to the effect to let the markets sort out their problems. On the other hand, political pressure from Senator Dodd [Chairman, Senate Banking Committee and presidential wannabe] yielded his statement that Fed Chairman Bernanke "...agreed to use all the tools at his disposal to restore stability and blah, blah, blah."

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The recent yield curve look from the U.S. Treasury website:

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More mortgage brokers either filed for Chapter 11 protection today [First Magnus] or are preparing to do so [ResCap]. The latter is a unit of GMAC, the majority interest just acquired by hedge fund behemoth Cerebus. Are they willing to let it fail? Some think not. But no matter, these are the stories that will continue as fallout from the housing bust.

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It was reported today that foreclosures increased at over a 90% rate from the previous year. The move of the day came from Bank of America Securities, which finally downgraded some homebuilders from "buy" to "neutral." What does a "neutral" classification really mean? It means that the Bank still hopes there will be some investment banking business with the homebuilders. But, as far as you're concerned it means they've abandoned ship.

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Stock markets did little today as evidenced in the table below [Yahoo appears to have it right today, but volume on the NASDAQ was especially light], so let's look at some commodity markets may be reflecting an economic downturn ahead.

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I'm just hoping that we flop around here for a little while making little progress in one direction or another. Why would that be? Well, we're mostly in "cash" silly! But now just what constitutes "cash" is becoming an issue. After reading the above Bloomberg story, you might consider taking all your funds out and putting them under a mattress somewhere. If that ever became a real concern then we're all in a lot of trouble.

I'll leave it there for today and raise my glass to all you gray haired folks!

Disclaimer: Among other issues the ETF Digest maintains long or short positions in: iShares Lehman 1-3 Year Treasury Bond ETF (NYSEARCA:SHY), iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT), Rydex S&P Equal Weight Consumer Discretionary ETF (NYSEARCA:RCD), PowerShares DB Commodity Index Tracking Fund (NYSEARCA:DBC), United States Oil Fund ETF (NYSEARCA:USO), CurrencyShares Japanese Yen Trust (NYSEARCA:FXY) and PowerShares DB G10 Currency Harvest Fund (NYSEARCA:DBV).

Source: David Fry's Market Outlook for Wednesday