Top Line: This week has the potential for continued volatile trading. We still think the path to the January lows is the correct path. The fear on Main Street is building after the significant fear on Wall Street seems to be ebbing.
This evening, we still can't believe the events of the past ten days, with the crowning moment being the JPMorgan $2 buyout of Bear Stearns. If that calmed the troubled waters of liquidity in the banking world, we will be surprised. It may have tempered the stock market's fall, at least for the short run, but it certainly did little to calm the credit markets. We note that the three month T-bill traded down below 0.40% on Thursday.
The stock market breathed a collective sigh of relief as the events of the week seemed to bring a moment akin to a baby being held by its mother, the stock market being the baby curled up in the fetal position with the Fed as its metaphorical mother. We think this false sense of security will not last for very long and the week ahead will give another chance to scratch your head and wonder how the Fed will clear up the next problem.
Speaking of the Fed clearing up the problems...we noticed another great article from Gretchen Morgenson of the New York Times. We mention her and feature some of her articles here because she writes about things we are interested in following and she gives us a slightly different angle of view. This article is about the possible fallout from the JPM/BSC deal of the century and how there must be some losses out there somewhere that will surface, maybe the CDSs held by a number of different parties/counterparties. [If you sign up for online NY Times, this and many other great articles are available to you for free.]
As we mentioned, we are still stunned by last week's events. Even Friday, with the markets closed, probably by design, the S&P said that two other Wall Street firms, Goldman Sachs and Lehman, would have significant trouble in the year ahead with profits falling 20% to 30%. By now that news is Old news so it doesn't bother the stock market any...
Let's pay attention to the market this week. There is so much pessimism in the media, we are starting to think we are getting close to a trading low. No, we're not ready to go there just yet, but we have our eyes and ears open for the possibility. We still see too much optimism out there as people are looking over the valley of lower prices and seeing the future runup after that so they don't see any reason to sell. Even our copy of Barron's told us there was someone predicting 20,000 in the Dow.