Question: will the subprime mess send the market down 5-10%?

I do not know. No one knows. Those who think they know have been dead wrong in the past!

I follow my models, my indicators and when they tell me the market is at an interesting buy point, I will recommend my readers to buy.

For the time being the trend of yields and stock prices is one of the relationships I follow closely (see previous blogs).

And besides, I like to talk about sectors. In this market some groups are sinking. Others keep going up.

My suggestion is to think asset classes, not "market".

Bonds, for instance, have been, and are, strong, as I suggested here. They have to strengthen significantly for the market to stop declining. We are getting there.

More on http://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Bad news for the market

According to Bloomberg global corporate credit risk surged as concerns about accelerating subprime-mortgage losses caused investors to flee all but the safest assets.

Corporate bond risk rose to a two-year high in the U.S. and Europe, according to credit-default swap indexes that allow investors to speculate on the ability of companies to repay their debt or hedge against the risk they won't.

Indexes tied to the risk of owning high-yield, high-risk loans fell to records, suggesting demand is deteriorating for leveraged-buyout debt. Indexes of credit-default swaps on subprime mortgage bonds also plummeted to new lows.

The increase in risk is bad news for stocks. Especially financial stocks.

More on http://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Do you want to make money in this market?

Which are the weakest sectors to short?

You guessed it. Those closely related to credit risk: real estate and financial stocks.

This is where you want to look if you want to short this ugly market.

More on http://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Financials and dollar are sinking

I just cannot envision a strong stock market in the coming months with the dollar sinking to new lows and the financial sector in deep trouble.

It might be the first time this type of trends are associated with a strong market.

Is there somthing I do not see?

More on http://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

More news on the unwinding of M&A debt

M&A activity is going to slow down. A squeeze on liquidity is coming. Time to be cautious.

"JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said demand for leveraged buyout debt is drying up and banks may be left holding more loans that they can't sell.

There is ``kind of a little freeze in the marketplace,'' Dimon said on a conference call with investors to discuss the New York-based bank's second-quarter earnings. ``If you see this continue you will see the Street taking on a lot of bridge loans and more aggressive repricing of those things.''

JPMorgan, the third-largest U.S. bank, is among lenders that have been saddled with at least $11 billion of high-yield bonds and loans they haven't been able to readily sell, data compiled by Bear Stearns Cos. analysts show. Investors have balked at the increasing amounts of debt being taken on for LBOs (Source: Bloomberg)".

How will all the debt used in M&As unwind? This is bad news for financial stocks.

More on http://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Mr. Bernanke and the dollar

In today's testimony to Congress, answering a question about the weakness of the dollar, Mr. Bernanke declined to comment because the dollar is responsibility of the Treasury.

Oh, come on Mr. Bernanke, with all due respect you know better than that.

The dollar is an exquisite variable reflecting monetary policy and inflationary expectations.

The sagging dollar is a vote of no confidence in our policies, especially monetary policy.

More on http://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Crisis after crisis after crisis after crisis.........

We had an equity bubble in 2000 thanks to easy money in 1997-1998.

The Fed eased aggressively as the equity bubble imploded after 2000.

Interest rates close to 1% gave birth to the housing bubble, the subprime expansion, and the orgy of M&A activity.

The Fed raised interest rates to more normal levels (around 5%-6%) once they determined the financial markets were under control.

The outcome is the uncovering of the bubbles: housing, subprime, and junk bond financing of M&A activity.

What will the Fed do next? If the implosion of the three bubbles keeps unfolding you can rest assured they will lower interest rates. Especially if the equity markets tank.

And so we move happily from crisis to bubble to crisis to bubble ....

More on http://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

The beginning of the end?

A very interesting story by Bloomberg.

"July 17 (Bloomberg) -- Goldman Sachs Group Inc., JPMorgan Chase & Co. and the rest of Wall Street are stuck with at least $11 billion of loans and bonds they can't readily sell.

The banks have had to dig into their own pockets to finance parts of at least five leveraged buyouts over the past month because of the worst bear market in high-yield debt in more than two years, data compiled by Bloomberg show.

In most deals, investment banks promise to provide loans to the buyer. They then seek other lenders to take pieces of the loans and find buyers for bonds.

When buyers vanish, the banks must either buy the bonds themselves or provide a bridge loan to the borrower, tying up capital that would otherwise be used to finance more deals. The banks typically parcel out portions of bridge loans to reduce their risk.

Acquisitions by private equity firms such as New York's KKR and Blackstone Group LP helped push sales of high-yield bonds and loans worldwide up more than 70 percent during the first half of the year to a record $708 billion, according to data compiled by Bloomberg. High-yield, or junk, bonds are those rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's."

Bottom line. The private equity funds borrow from the banks. Banks sell the bonds. Oops! Investors do not want to buy those bonds. Deals go sour. High-yield bond prices decline (this is happening right now, as I predicted). Banks are stuck with losses of bonds that cannot be sold.

This situation and the subprime debacle are classic credit crises creating great buy opportunities. Eventually.

More on http://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

The economy will strengthen...Implications for the markets

The economy will strengthen. This is what our proprietary leading indicators are suggesting.

You can expect commodities to continue to rise and the dollar to weaken.

Commodities are a way to hedge the lower dollar and our loss of purchasing power.

Foreign investors are buying US assets at a discount with their strong currencies.

Yes, the world is flat.

How long will continue? I am smelling a bubble. But let's enjoy for as long as it lasts.

More on http://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Commodities and interest rates

Commodities are soaring across the board. Especially the metals.

This is a strong indication the economy is strong in spite of poor retail sales figures. Manufacturing is improving (see http://www.peterdag.com/) and proprietary indicators point to further growth head.

Interest rates cannot decline under these circumstances. Commodities, especially gold, need to be much weaker for this to happen.

Maybe this time is different. But I like to anchor my logic to historical and proven relationships.

More on http://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977