Tuesday, August 28, 2007

Stocks Sharply Lower into Final Hour on Credit, Housing Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Semi longs and Retail longs. I added to my (EEM) short and added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is substantially lower, almost every sector is declining and volume is below average. My intraday gauge of investor angst is back to elevated levels. The Case-Shiller Home Price Index fell more than estimates, but to put the home price decline into perspective, home prices are still 50.4% higher over the last five years and up 120.1% over the last 10. The Fed Aug. 7 minutes were just released. They said that growth estimates by staff economists had been cut and that strains in financial markets jeopardized the expansion. Further turmoil might require a response, they said. For the present, they said that the most likely outcome for the economy was continued moderate growth and that the upside risks to inflation remained the most significant policy concern. The Fed also said mortgage loans remained available to most potential borrowers and that the supply of credit to finance real investment did not appear significantly diminished. The market's initial reaction to these comments was slightly negative. I view them as a bit more constructive than anticipated. With the 10-year yield approaching 4.5%, the odds of an imminent rate cut are likely increasing rapidly. The Fed has a lot of firepower available. Recent Fed actions meaningfully improved credit anxieties. I think a fed funds rate cut would help even more. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain hunting.

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