Some Panic Selling

Once markets get a bit tired of rising, they will decide to play around with volatility. Volatility happens when more big players take their chips off the table. Yesterday's correction was significant for the manner which it was sold down. At one point the Dow was down 430 points, highly significant.

What can we blame this on, the usual suspects: tight credit markets, a continuing housing slump, and the price of oil, which shot up past US$73-a-barrel for the second time ever. Same old, same old, I wouldn't be too disturbed with the sell factors. Price of oil, we all know its headed for US$80.

Subprime worries, we are seeing the end consequence, not the beginning of a slide. Some companies are bound to fail, some hedge funds are bound to lose money. More poor housing data only underlined the mortgage worry. Sales of single-family homes dropped 6.6% to a seasonally adjusted annual rate of 834,000 units, the Commerce Department said. Inventories stayed about even, and the median price of a new home fell 2.2% to US$237,900. The data failed to meet even low expectations. Like I mentioned before, this is more a sign of the end of the cycle rather than the height of the collapse - investors are getting antsy for the wrong reasons, if you ask me.

Tighter interest rates, well at least it will put some discipline to the leverage buyout formulas. So, what's so bad? Companies are still holding the most ever cash hoard in the history - they will buy out other companies for growth, and/or buyback shares to improve earnings. Earnings wise, most companies will still coming in beating estimates nicely - let's be clear here, markets are NOT OVERVALUED. Superhero Treasury Secretary Henry Paulson said subprime issues will be largely contained, helped markets gain ground back towards the afternoon session.

Ninety-seven percent of S&P 500 stocks fell in what may be may be the big drop on this week's rollercoaster. The S&P fell 35.42, or 2.33% to 1482.66. Twenty-nine of the stocks that make up the Dow Jones Industrial Average closed lower for the day. The Dow dropped 311.50, or 2.26% to 13473.57. The Nasdaq Composite Index fell 65.94, or 2.49% to 2582.23. The all around selling indicates a lack of liquidity to accommodate the sellers, hence the exaggerated sell off.

The yen carry trade could be a small factor as well, because the yen has hit a 3-month high against the dollar. Some unwinding of the yen carry trade is good, at least the bubble won't get to be so big. An orderly unwinding is preferred. You cannot stop a train, some unwinding of yen carry trade will hurt smaller markets but I don't see the selling pressure growing.

So, what has changed?

a) Subprime - Fears went up, but a broader viewpoint would show that we are at the end of the cycle.

b) Corporate profits - Still good.

c) Interest Rates - Up a bit, making leveraged buyouts harder to stomach. Support from private equity may diminish slightly.

d) Yen carry trade - Some unwinding, not panic buttons yet. BOJ not upping rates anytime soon. Yen's strength more due to USD weakness.

e) Liquidity - Still very ample and very good.

f) Emerging markets - Risk of implosion close to nil. Excessive surpluses provide good support. Consumer spending and imported inflation negated by stronger local currencies.

g) The US consumer - Jobs market still very tight despite subprime worries. As long as you have a job, the rest falls into place. We should be really worried when the unemployment starts to rise.

h) Corporate Liquidity - Still at historical highs, more share buybacks and buyouts by corporates.

i) Government Liquidity - Remember the Asian governments liquidity exercising their buying rights to divest away from USD assets. New factor in the works.

Don't worry, be happy!