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Crash or Bear Market? Aug 8, 2007 By Daryl Montgomery
The Bull Market Has Been Gored • Liquidity makes markets move up and the liquidity (private equity, stock buy backs, real estate loans) has dried up. • Non-US Government Interest rates are skyrocketing (spread is widening). • If there is insufficient liquidity, even good earnings will not make the market move up (the market discounts future earnings anyway) • The Federal Reserve bailing out the Credit Markets will seriously damage the Dollar. • Volatility is out of control. Short-covering rallies are the source of future upside.
Recap from July Meeting • This bubble like all others will deflate. It is likely to cause a spike in Interest rates, which in turn will make the Stock Market Decline (Bear Stearns). • Sub-Prime and other iffy mortgages have been monetized and sold as multi-part bonds (RMBS). Barron’s estimates that $1 Trillion of this paper exists, most held by major financial institutions and a 7% default rate could wipe out its value. • Two million sub-prime mortgages will have their interest rates reset in the next several months. • Mortgage defaults are increasing rapidly even though the economy is in good shape.
What is Taking Place • A number of mortgage companies have failed so far, first in Dec 2006, AHM and LUM being the latest. More will follow. • BSC has had 2 Hedge Funds Fail, 3 rd in Trouble. Failure/Take Over of a Broker-Dealer possible. • Independent Hedge Funds have Failed, many more will follow. • Rumors of impending Bankruptcy for BZH. One or more Homebuilders likely to Fail. • Trouble in Australia and France. More Contagion Internationally will occur. • Market for Sub-Prime and Alt-A Debt has disappeared. It will not return. Jumbo Rates Rise.
American Home Mortgage One Year Daily
LUMINENT – 3 Months Daily
Bear Stearns – 5 Year Weekly
CISCO – 10 Year Weekly
Beazer Homes – 5 Day/5 Minute
Home Builders – 3 Year Weekly
US Dollar – 10 Years Monthly
Crash vs. Bear Market • Crash is basically a VERY short Bear Market. • A Crash takes place in Days (>5% drop in a Day, or waterfall decline), while Bear Markets can last a Year or more. • The ‘Bubble’ Sectors of the market suffer the most damage in both (now Finance and Real Estate). • New Leadership arises from the ashes. (likely to be Technology). • Biggest Danger: Buying Too Late in Crash, Buying Too Early in a Bear Market.
Crash Specifics • Panic reigns, Everything is Sold. Extreme Negative Breadth, Huge Volume. There appears to be No Bottom. • In a Major Crash, you will have no access to your Broker, Charts, or even reliable Quotes. • Market Bottoms and Recovers Quickly. • To Buy at the Bottom, need to Guess where it will be and enter orders the day before the Crash. Use Charts to Determine Buy Points. • Best Buys: High Beta Stocks with (actual) Good Fundamentals, Less than $10. This time Tech.
Bear Market Specifics • Usually take a year or more to Finish. • At least Two (powerful) Counter Rallies • Only Bottom when everyone turns Negative on the Market. NO ONE recommends you buy stocks at the Bottom. • There can be crashes at Beginning or End. • Must Wait and Wait to Buy.
DJIA – One Year Daily
SP 500 – One Year Daily
NASDAQ – One Year Daily
Russell 2000 – One Year Daily