Saturday, August 04, 2007

Is the sky really falling?

Reading some of the commentary, you would think the financial sky was falling. The trouble is that bearish commentators are always telling whoever will listen that the sky is falling, even on the financially sunniest of days. Some of these people are simply praying that markets will fall further because they have vested interests in market volatility, either through short positions on assets and indexes or that they are waiting to buy assets on the cheap or they simply collect transaction fees (commisions, etc.) and benefit from the greater transaction flow the comes with volatility.

Some of them had been betting a year ago that the Fed would have cut interest rates several times by now and are simply in denial about the underlying strength of the real economy and they have utilized widespread anxiety over markets as leverage to talk up their misguided outlook (for the sky to fall.)

Some of them see Bear Stearns as being "wounded" and now these financial vultures are trying to talk down markets in hopes of making a financial killing from Bear's misfortunes.

There is a semi-decent article on MarketWatch.com by  Rex Nutting and Nick Godt entitled "Credit debate rages on extent of emerging 'crunch' - Is an economic Katrina poised to overtake the financial system's levees?" which does cover a bit of both sides of the debate over whether there is really a credit crunch. They say:

While the stock market's gyrations are proof that credit-crunch fears are on the mind of many investors, thus far only a minority of market participants say they believe it will happen. Most seem to think it's far-fetched, largely because the global economy is strong, with ample reserves of liquidity.

"I think the market wants to believe that we're pretty much done with the shakeout, that the economy has been OK, and that the impact is more of a financial-related impact than an economic impact," said Paul Nolte, director of investments at Hinsdale Associates. "As long as those economic numbers stay solid, then we're fine."

Despite some signs that the carnage in the subprime sector has already slowed consumer spending growth, the problem is still mostly a financial one, said Tony Crescenzi, chief bond market strategist for Miller Tabak & Co., who asserts that corporations still have a ready source of funding for projects that will help the economy grow.

The loss of funding for the leveraged buyouts is a "yawn." Crescenzi said. "Good riddance to LBOs," which add no value to the economy except in the very long run.

In a research note to clients this past week, Crescenzi pointed to several factors that "weigh against the possibility of a broader credit crunch and make it likely that market turmoil will subside and credit formation will return to levels sufficient to power continued economic expansion."

Among Crescenzi's positive factors: Corporations are flush with cash and other highly liquid assets, some $1.7 trillion by one account. Banks are well capitalized. Money-supply growth rates are strong worldwide.

Incidentally, Fed officials continue to say "No." Some people are misguidedly expecting or hoping that the Fed will indicate a bias towards cutting rates in  their announcement after the FOMC meeting on Tuesday (August 7), but that is simply out of the question. The Fed may mention recent turmoil, but only as an aside and will mostly say that the economy is in decent shape and that inflation remains their biggest concern.

As a final bit of guidance, please not that the financial markets have always had a distinct manic-depressive character. A couple of weeks ago we saw some of the manic side with a new Dow high, and these past two weeks we saw some reasonable profit taking which has gotten blown out of proportion as the depressive side took over. Bottom line: wait a few weeks and the markets will have a whole new perspective. Never a dull moment.

-- Jack Krupansky

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