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Stock Ideas Top Headlines Subprime Mortgages, M&A activity, and Hedge funds Update
Stock Ideas Top Headlines Subprime Mortgages, M&A activity, and Hedge funds Update 
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Cocoa Futures Cocoa supplies are suffering as the crop deteriorates. In the largest producing area, the Ivory Coast, cocoa farmers are forced to curtail spending on fertilizer and pesticides due to high prices. This in turn has sent the price of cocoa to 28-year highs. |
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| Subprime Mortgages, M&A activity, and Hedge funds Update |
| Thursday, 18 October 2007 | ||||||||
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Dear Reader, The market slid through the first week of earnings with little surprise. This was probably due to investors continuing to focus on the prospects of another drop in interest rates rather than the slew of quarterly results getting ready to hit the market. This plays to the obvious point we’ve been making lately that monetary policy is driving this market more than the fundamentals. Despite common sense telling them to be cautious and hedge against a market decline, investors have chosen to bid stocks higher. This, of course, is typically one of the emotions that is present before the market forms short- to intermediate-term tops. Some news over the weekend caught our eye, especially given our outlook for the financials. The New York Times reported that several of the world’s largest banks are in discussions to pool up to $100 billion to purchase risky securities. Why? To avoid potential sell-offs in “securities owned by bank-affiliated investment vehicles.” Translation - securities owned by hedge funds.Think about this, though. Many financial companies have spent the past month trying to clear the air, or at least act like they are. Citigroup pre-announced their revenue shortfall weeks ago, stating that things should return to normal after this difficult quarter. Merrill Lynch hinted that they were going to go through some restructuring in order to return to normal, etc, etc.
The media was quick to grab the message and report that the financials were getting all the bad news out of the way this quarter, sending the all-clear that it was OK to now buy these stocks. Those of you who follow our writings know that this type of environment represents what we call the “slope of hope.” As we discussed in our recent report on the financials, the largest of these companies have had three strong revenue generators knocked offline over the past year (subprime mortgages, M&A activity, and hedge funds). As such, we continue to have concerns for the group. Bringing it back around to this weekend’s news, the potential formation of this bailout group (let’s call it what it is) tells us that all the financial dirty laundry has not yet been aired. Knowing that this group is the largest contributor to the S&P 500 indicates that risks remain for the market until the situation has truly cleared. As such, we continue to recommend that investors avoid the financials and find their bullish opportunities elsewhere. For what it’s worth, we recommended this trade to our ETF Edge subscribers less than two weeks ago in the form of an easy-to-execute trade involving two ETFs. So far, this position is up more than 13 percent (a little shameless self promotion). Have a great trading week. CJ P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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