Dark Tuesday

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Hollywood's picture
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Hollywood's picture
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Joined: 2007-02-23

Comments regarding a highly notable day in the financial markets from a Financial Advisor's perspective...

now_indy's picture
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Joined: 2006-07-28

I still think the Dow will hit 13,000 by the end of 2007. I don't assume that when investing money, it's just a guess.

planrcoach's picture
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Joined: 2006-12-13

If Nikos talked to Zorba today, he'd probably say, this has just been a Last Temptation kind of day, but don't panic.

blarmston's picture
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Joined: 2005-02-26

It was overdue. We havent had a correction of over 2% in one day of trading since 2003. In recent years, we have become accustomed to low volatility and an upward trend in the indexes (with exception May 2006-June).
One hopeful sign is that about an hour left in trading with the indexes down over 4%, some long money came in and helped the indexes bounce off the lows and recover somewhat. (Or maybe it was the shorts who were getting murdered who had to cover their positions...)...
The next 2-3 days will tell whether this is a knee-jerk reaction to some unexpected news... Or whether we are at the beginning of a 10-20% correction.... Either way, there is opportunity in this market.

jones&out's picture
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Joined: 2006-04-22

blarmston wrote:
It was overdue. We havent had a correction of over 2% in one day of trading since 2003. In recent years, we have become accustomed to low volatility and an upward trend in the indexes (with exception May 2006-June).
One hopeful sign is that about an hour left in trading with the indexes down over 4%, some long money came in and helped the indexes bounce off the lows and recover somewhat. (Or maybe it was the shorts who were getting murdered who had to cover their positions...)...
The next 2-3 days will tell whether this is a knee-jerk reaction to some unexpected news... Or whether we are at the beginning of a 10-20% correction.... Either way, there is opportunity in this market.

 
Maybe it was the fact that the indexes took a beating but I don't think the Shorts had to cover anything today

jones&out's picture
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Sorry, I should proof read but have had a busy day, should read that something tells me that the Shorts didn't have to cover anything today.
I would bet that most of them are going to bed with a pretty big smile

planrcoach's picture
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I would bet that most of them are going to bed with a pretty big smile
Like you say, we'll see. Maybe we'll get our 10% solution to the euphoria.

ezmoney's picture
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Joined: 2004-11-30

It recovered from -500 before close, so tomorrow should be o.k.

blarmston's picture
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(Or maybe it was the shorts who were getting murdered who had to cover their positions...)...
I deserve to be reamed for a comment like that one...Yup... That's what happens when you place little thought into a post... I am gonna take a power nap under my desk because I am exhausted and can't think straight...

troll's picture
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Joined: 2004-11-29

All I can say is QID rocks, and I'm glad I have some!

AllREIT's picture
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joedabrkr wrote:All I can say is QID rocks, and I'm glad I have some!

SRS was AllREIT.

More seriously, trash investments got hammered. Compare SDY to SPY.

Hollywood's picture
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Joined: 2007-02-23

Thanks for the comments.  With respect to client contact - any thoughts/stories?

AllREIT's picture
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Hollywood wrote:Thanks for the comments.  With respect to client contact - any thoughts/stories?

Hello Mr Jones, this is AllREIT at Falling Knife Capital, I just wanted
to touch base with you today about the stock market and answer any
questions you might have...

BTW Thanks for buying those BRIC fund A-shares last week,
your purchase put me over the top for this month, so I'll be driving to
our next meeting in my new Cadillac. If there is anything else I can do
for you don't hesitate to call.

Broker24's picture
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Joined: 2006-10-12

I'm willing to bet the market is up over 150 points tomorrow. The
domestic market is not overvalued enough to warrent an extended
pullback. There will be a lot of institutional longs jumping in - especially
fund managers with cash to spend.

However, the international markets (primarily developing markets) may be
in for an extended slump.

aldo63's picture
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Joined: 2006-09-11

Regardless of what happens tomorrow, the mortgage debt bubble is not going to go away. Type in "mortgage debt bubble" on google news and read some of the stories. The dot com bubble was traded for a real estate bubble when Greenspan lowered rates to 1 %. Dumb americans bid up houses and pulled out equity from their houses and this is going to be a mess.ONE trillion in arm mortgages reset this year. this is the problem , not china. take a look at NEW and the other subprime lenders, They have been getting crushed. Who is holding these securities, that is what I want to know. If the fed lowers rates, they kill the dollar. if they raise rates, they kill Real estate.. I don't know the answers. I  look at big name stocks and see PE's of 14, 15 and 16. and that is not bad. Again, which financial stocks, individuals, hedge funds are holding the pile of future defaults on mortgages.  Commercial Real estate collapsed in the late 1980's , this is going to be the residential collapse.

Soothsayer's picture
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Joined: 2005-02-24

It's not too late to short the regional bank ETF (RKH), the DJ Real Estate Index (IYR), and the retail holders trust (RTH).  I recently covered up my New Century Financial (NEW) and Accredited Home Lenders (LEND), but continue to remain short H&R Block (HRB).  That mess has a long way to go in my view.  Cover when they fire the current management team. 

AllREIT's picture
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Soothsayer wrote:It's not too late to short the regional bank ETF
(RKH), the DJ Real Estate Index (IYR), and the retail holders trust
(RTH).  I recently covered up my New Century Financial (NEW) and
Accredited Home Lenders (LEND), but continue to remain short H&R
Block (HRB).  That mess has a long way to go in my view. 
Cover when they fire the current management team. 

RKH, is one the idiotic HOLDR's ETFs, if you want regional bank exposure look at KRE the KBW Regional bank ETF.

Personally, I'm bullish on regional banks x-Florida and Upper Midwest.
Florida is a hellhole of bad loans of all sorts, and the bottom is
falling out of the rusty dusty midwest.

I'm bullish on HRB, and wish they would not sell Option One at the bottom of the market.
IMHO  Basicly, they need to put it on ice for a little while. Use
the cash flow from the tax business to buy up some prime mortgage
origination capacity during this period of market distress. When the
housing crisis blows over in 2-3 years, boom Option One can hit the
ground running.

IMHO there is good value in the mortgage finance sector right now,
especially in commercial mortgages. There is an awful lot of
unwarranted doom and gloom out there.

Indyone's picture
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AllREIT wrote: BTW Thanks for buying those BRIC fund A-shares last week...
The interesting thing is...I use a couple of BRIC funds and my net client loss from yesterday on 33 mil...less than $100K.  You stay with those TIPs funds and in ten years, let's see who's clients did better...deal?
 

AllREIT's picture
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Joined: 2006-12-16

Indyone wrote:AllREIT wrote: BTW Thanks for buying those BRIC fund A-shares last week...
The interesting thing is...I use a couple of BRIC funds and my net
client loss from yesterday on 33 mil...less than $100K.  You stay
with those TIPs funds and in ten years, let's see who's clients did
better...deal?
 

Someone made a similar bet with me back in 2000, wrt to TIPS @ %3.75 real vs QQQ @ 5000.

Indyone's picture
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Joined: 2005-05-30

You can bet that wasn't me...I didn't like tech/internet valuations at all back then (and yes, I told clients that BEFORE the collapse), but they're pretty attractive now...
My philosophy is pretty much in the center, but I don't rule out the long-term potential of emerging markets...I think there's still a lot of money to be made there...
Just following your posts, it's fairly obvious that your clients are positioned conservatively, and you have nothing to apologize for doing so, but I like my chances over the long haul...

skeedaddy2's picture
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Joined: 2005-09-14

We have seen the DJIA drop 400 points 6 times. One week later, the S&P 500
has gone up an average of 4.00% two thirds of the time. One month later,
the S&P 500 has gone up an average of 5.00% one hundred percent of the
time.

GO BUY SOMETHING.

doberman's picture
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Joined: 2005-02-22

Many subprime mortgages have been bundled, securitized, and then divided into tranches. These tranches have been divided into the best of the subprime all the way to the worst of the subprime.
What worries me is that some of the worst of the subprime tranches have received a AAA-rating. How, you may ask? Simply by sheer numbers of the subprime mortgages in that particular tranche and the mathematical formulas used to determine the risk of loss. It seems the greater the number of subprimes, the more predictable the potential default rate; hence, the "less" risk in holding that particular tranche. I think a lot of institutional holders of these tranches are going to be sorry. 
Just sayin'.

skeedaddy2's picture
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Joined: 2005-09-14

What you say may be very true, however I don't know much about the
structure of these tranches or how it relates to the 400 point decline in
the DJIA.

I believe the culprit for the market adjustment on Tuesday was the
increasing Japanese Yen or more specifiacally, the Yen carry trade. The
Yen trade is being used to finance investments all over the world;
Brazilian bonds, Turkish bonds, US stocks, Russian stocks and bonds, etc.

As the yen started to rise, hedge funds took action to limit their losses.
To do that they needed to buy yen which caused the yen to rise further
which caused other funds to buy yen, pushing the yen higher which
caused...you get the picture. To pay back the yen loans, the funds then
needed to liquidate the investments they had bought with the loans. That
would be the aforementioned bonds and stocks. And we got a 400 point
loss in the Dow. In other words, a "wholesale" adjustment.

The computer related pricing of the Dow Jones averages only exacerbated
the decline. I heard today that trading curbs are now set at 1,000+
decline.

jones&out's picture
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Joined: 2006-04-22

Skee - I think you heard about circuit breaker levels - when trading actually comes to a halt.
Here are the 07 first qtr numbers
http://www.nyse.com/press/circuit_breakers.html
This revolves mostly around % movement.

AllREIT's picture
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doberman wrote: It seems the greater the number of subprimes, the more predictable the potential default rate; hence, the "less" risk in holding that particular tranche. I think a lot of institutional holders of these tranches are going to be sorry. 
Just sayin'.

Doberman, that isn't how a residential mortgage securitisation works.

What happens is that you have a huge pool of mortgages, and a cashflow
waterfall, which directs the distribution of cashflows (principal and
interest) from the mortgages.

So first the AAA tranche gets paid, then the AA ---> BB tranche B,
and Equity tranches. The non investment grade (and especially equity)
tranches provide credit support for the upper tranches because over
time they get written down as credit losses happen.

There are other methods of credit support as well, such as overcollateralization and constant proportion reserving.

The credit ratings are derived from modeling the cashflow waterfall under various scenarios.

AllREIT's picture
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doberman wrote:I think a lot of institutional holders of these tranches are going to be sorry. 
Just sayin'.

You know what my sig says.

http://yahoo.reuters.com/news/articlehybrid.aspx?storyID=urn :newsml:reuters.com:20070228:MTFH21376_2007-02-28_18-19-03_N 28452118&type=comktNews&rpc=44

Subprime losses may extend to "A" rated bonds - UBS
I'd point out that the institutional holders of these bonds include
alot of mutual funds that bought various ABS for the yeild pickup.

Why don't investors realise that its alot better to hold the most
subordinated debt from a investment grade obligor vs the most senior
debt of a junk obligor?

Its one thing to securitise investment grade debt or even junk debt
arising from subordination to investment grade debt  (i.e various
types of commercial mortgage related debt). But to start with trash and
hope to convert it into gold just isn't a good gamble.

I expect to see some impressive blowups in the subprime RMBS, but also in CLO's that invest in junk loans. Essentially highly leveraged versions of floating rate income funds.

I'm not even going to start talking about synthetic CDO's.

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