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How Far Does This Go?
This is shaping up to be one of the more interesting weekends, as the question of how far this all goes has to be uppermost in everyone's thoughts. My own opinion is that this has a lot more downside and that 12,600 on the DJIA is the next stop. As with all trends-things won't move in a straight line, but the overall trend is down and looks likely to stay that way for the immediate future. If you are of the belief that the two main drivers of the long bull market were global growth and global liquidity, you have to believe that one of the legs has been kicked out. The asset-backed global liquidity market is no longer functioning anywhere near the degree that it has been and does not look to make a recovery in the near future. As a matter of fact, to a large degree it's not functioning at all at this time. There's evidence that $200B worth of deals in the pipeline may be delayed. For example, the Cerebus deal to buy Chrysler has been held up for want of buyers willing to take on new debt. Several markets that track credit-default swaps, the "insurance" against coporate bond failure have seen prices risen to levels not seen since thier creation several years ago and spreads of corporate debt to government notes have widened to levels not seen since October 2001. But the bigger question lies with current debt holders. Their paper is now not returning fair rates of interest and even worse, they may be stuck holding notes who's prices have fallen in a very illiquid market. All those present holders of CDO's, CLO's etc are facing the daunting task of having to make new investments in an attempt to somewhat cover their loss and that new investment can only go one place: government debt. We're already in a bull market for bonds that is being driven by a frantic flight from risk. What are the chances that new collaterialized debt will get taken on under these circumstances-in other words-is good money likely to now chase after the bad? If you think that it will, then for you the bottom of this market is close. For me, it's not even within sight. What does this all mean for currency prices? More of the same that occured this week. Unwinding of carry trades will be the order of the day and the dollar will appreciate vs the high yielders and lose vs the Yen. The BoJ is rumored to have intervened when the Yen hit 118 on the dollar-so that's the level to watch because if it's breeched, it indicates that the BoJ may be unable to stop the Yen from gaining further. Please remember to use the box on the left to vote. If you feel the aritcle was useful-great. If not, vote that way too. Thanks.
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- Jul 28, 2007 10:19am Jul 28, 2007 10:19am
- Plutonite
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