I have no idea how the markets will shake out today. The world markets are jitterey over this sub prime thing. i found this article which I thought helped explain some of the market moves as of late. This is an interesting read;
“Posted by Jim Kingsland at 10:07 PM
Dow Down 146, or Lesson Number 316 That Structured Credit REALLY Matters
Talk about a trading range today – about 300 points for the Dow and we nearly nearly tested upward resistance at S&P 1490 only to hit at brick wall at the 50 day moving average in the 1484 area and then see the index close down at 1455. C’mon did you really expect that all would be forgotten and that Friday’s low was a buying opportunity? There were a lot of ‘sparkies’ out there thinking that, apparently. This is not last February and a brief Shanghai stock market plunge. The market is dealing with some pretty complicated stuff that will make it hard for the short-attention-span people to keep from buying on every dip.
Last night I briefly ruminated that bad news in structured credit (eg. subprime), or corporate high yield credit would spur carry trade unwinding. It happened again today.
Let me be clear: Carry trade unwinding is driven in large part by the perception that risk taking ability is dropping here in the U.S. due to recent structured credit troubles.
There’s a lack of understanding concerning the above emboldened line. Why? Because there are too many folks blaming things like subprime, or LCDX exclusively for stock market declines and ignoring the carry trade, or citing the carry trade as the sole culprit for market declines. Rising risk aversion due to the mortgage meltdown and contagion into corporate high yield debt are intertwined with the carry trade.
It’s really a vicious and dangerous cycle because as more yen carry trade unwinding occurs there will come a trigger point when the Japanese yen rises enough for carry trade unwinding to go from orderly and voluntary to forced and disorderly. When carry trade unwinding takes on a disorderly life of its own it will then beget liquidation of whatever speculation it previously funded which would bring on further pressure to stocks and any other paper tied to speculative bets. It’s a financial super highway with lots of traffic, no speed limit and no center barrier. It’s this vicious cycle that one of these days bring us a 1,000 point down day for the Dow.
The risk game has always relied on the ability to take risks. Duh. How so many still fail to grasp that a meltdown in one risky area of the market can simply be “contained” (eg. subprime) and not impact risk in other areas, I’ll never know.”
Paulson just came out and said subprime is contained. Talk about looking like Baghdad Bob.
