Industrials have been my favorite sector for the fourth quarter of this year; my latest recommendati...
What’s Happening Now
08/16/2007 12:00 am EST
Tobin Smith, editor of ChangeWave Investing, cuts through the hype and fear-mongering and offers a succinct analysis of today's market events.
1) We have seen a general panic as winners are being sold because losers are too low to sell or liquidations are happening. Every one of our strongest stocks is off simply because they are winners-where profits are to be had. Stocks are down 7% from the highs of July and small caps are down even more.
2) There's no question that there is a risk-reduction trade out of smaller caps to Dow-style multinational companies, and that all smaller caps are being sold no matter their secular growth prospects.
3) The entire mortgage asset class (especially subprime-related debt) is being re-priced lower-from a "valuation model" to a market-based valuation (a real bid/ask spread). This will take months to sort out, as there is NO bid in virtually all private mortgage securities.
4) The mortgage derivatives ("credit swaps," etc.)-bets for and against credit products that are without a bid-are going to get washed out much faster. This will kill a few BIG players in the mysterious credit-derivative world.
5) Shaky energy trust holders are locking profits and/or taking down margin with oil off 8% from its high... again a panic sell where profits are getting locked in as losses are booked at the same time.
6) The markets are looking to the Fed to give some calming words.
7) A "systemic breakdown"-a crash in all types of assets-commodities, real estate, futures, Treasuries, etc.-of the markets has NOT happened.
The question of most importance: Has the bull market peaked?
The simple answer is no.
Virtually NONE of the market top indicators are here. When we hit a top, the vast majority of stocks will have already turned down and many will have been sharply lower-as in every market since 1929.
At the top of this bull run in July, all stocks except financials were participating. And since 2001, ChangeWave Alliance consumer and corporate capex spending data trends fell off the chart downward-another event we have not seen yet.
It's going to take months, not weeks, to work through the credit re-pricing. This process will be ugly for those who are hanging on by their fingernails to bonds that will be, market-to-market, much lower than the maturity value.
What should we do? We must be opportunistic and take advantage of those unfortunates who are forced to sell great secular growth companies to meet margin calls, cash calls, or stockholder redemption.
Three months from now the credit markets will be unseized, the Fed will have lowered rates, the global growth story will have replaced the US subprime-mortgage disaster, and stocks will be approaching old highs again."
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