Update On The Markets For 1Q 200

The markets started the new year adding to the gains of 2006 with the DJIA racing to a substantial of twelve,786.64, the S&ampP 500 rising to one,459.68 and the NASDAQ reaching two,524.94 ahead of hitting some headwinds in February.  At the close of the 1st quarter, the DJIA was down .9% for the year closing at twelve,354.35, although the S&ampP 500 closed the quarter up .2% at one,420.86 and the NASDAQ finished at two,421.64 up .3% for 2007.  Although the Dow is even now over its large set for the duration of the Tech Wreck of 2000, the S&ampP 500 nevertheless has not reached it prior high of one,527.46, which is a technical feat I truly feel needs to take place for this bull industry to continue.  Because the S&ampP 500 is an index that tracks a broad array of significant companies, its march toward the all time record is an indicator of the overall well being of the market place and the economic system.

The headwinds I spoke of earlier came in the form of greater oil rates, Greenspan’s recession remarks and the slumping housing market.  Oil prices have been bouncing around in between and a barrel, rebounding from just beneath a barrel in January.  The  tensions in the Persian Gulf above British sailors staying taken hostage by the Iranian Navy (shades of 1979) has been the newest culprit fueling the rise in the value of oil.  Their subsequent release has resulted in a moderate decline in oil prices in the opening days of the 2nd quarter, and the DJIA regaining a lot of its initial quarter reduction.

 

Greenspan’s speech placing the odds of recession in 2007 at 25% stopped the market’s advance in its tracks in February.  While it really should genuinely come as no surprise that the possibility of a recession exists, specifically because we are in the mature phase of the latest expansion, know as prosperity.  There are many aspects which could tip the economic system into adverse development and end this present expansion, but that is just the nature of the financial cycle.  For the foreseeable future, it looks as if interest prices will stay on hold and growth will continue to ease from the pace of 2006.

One of the most significant drags on the economic climate of late is the continued slump in the housing marketplace exacerbated by the concern that the meltdown in the sub prime mortgage market will spill above into the prime market place.  Even though defaults by borrowers are escalating, which in turn has triggered bankruptcies by lenders, the actual concern is how the sub prime debacle will impact the many derivative investments which have been securitized from these sub prime loans.  Mortgages in several cases are not held by the businesses that create them, but are bundled into securities and sold to investors to spread the chance.  As the worth of these assets declines, banking institutions, hedge funds and private equity companies head for the exits.  This unwinding of positions constantly leaves someone “holding the bag”.  I hope the threat management resources employed in the collateralized mortgage loan obligation industry are far better than the risk management tools used by Amaranth Advisors in assessing the threat of the organic gas markets in September 2006!   

Just to add a touch of irony to the existing rage of private equity ventures taking public businesses private, the granddaddy of personal equity companies, Blackstone Group, has filed its plans to go public.  Blackstone has been very effective and according to Mike Santoli of Barrons, ” Blackstone will have tiny difficulty attaining a billion industry cap”, and no doubt, “it will turn into a core holding in an alternate asset management sector.” The stock will “open with a large pop-which implies it instantly will be unattractively valued.  The idea of obtaining access to permanent capital instead than dialing up pension funds for every single cent Blackstone invests can make some sense.  In other words, you can respect the logic of the deal without having getting the stock.”

Tags: ,