Navarro’s Broad Market Outlook: A Rally or
Range Bound?

“(I)t makes some sense to
ask whether, with hot-money types in unwinding mode, it’s nearing a time when
cool-minded traders should be readying their buy lists.  What’s pretty clear
is that the ingredients are slowly coming together for some short-term extreme
in anxiety that could turn into another tradable rally, albeit one that could
hit a wall before stretching to new highs.”

Michael Santoli, Barron’s

           

With the market heading
down, there is a lot of rally monkey chattering going on.  If this happens, it
has to be more of a technical bounce rather than any realistic appraisal of
the economic data.   There just isn’t sufficient evidence to support the
notion that the economy’s soft patch isn’t really a downward trend.  Just
witness the whipsawing of signals between a higher than expected retail sales
last week and a fall in consumer sentiment to its lowest level since March
2003. 

Accordingly, until the
yield curve starts to steepen again, the stock market is likely to remain
range bound or, far worse, continue its downward slide.  And of course as the
yield curve flattens, the 9-lives housing sector and mortgage market is
getting one more revival.  But get this: housing stocks are no longer
responding and from a technical perspective, they are on a downward slide. 
That’s more evidence that the economy is in trouble.

The good news last week
was, however, both a fall in the price of oil and a smaller than expected
trade deficit.  Both helped to give some buoyancy to the dollar, which has
been rallying against Euro.  While that helps with inflation, it does not,
however, bode well for bringing about further export-driven declines in the
trade deficit.  

Meanwhile, one of my bond
market mavens is totally convinced the 20-year bull market in bonds is over
and that the Fed is now key on pricking the speculative bubble in the housing
market.  As evidence, Greenspan’s very aggressive attacks on Fannie Mae and
Freddie Mac only continue to escalate — and watch this coming Thursday for
some more Greenspan-speak on this issue.  Looking for the exits, Mr. Maven is
getting ready to bail on a huge real estate empire — preferring cash to risk
at this point.

 

Market Movers of the Week:
Watch the PPI news on Tuesday and the CPI news on Weds.  Analysts are
calling for fairly tame numbers, but it you want something that could really
roil the markets, these numbers are it.  So be careful.

 

Hedging Your Bets With Matt Davio:
Convertible Arbs & Water on the Brain

This week I want to focus
on an obscure form of trading called “convertible arbitrage.”  It’s a strategy
in which a hedge fund manager will typically go long the convertible bond of a
company while shorting the underlying stock.  While this business doesn’t
directly affect most investors, it has the potential for seriously roiling the
markets. 

The story begins with the
fact the Dow Jones Convertible Arbitrage index is down 7.5% this year.  That’s
hardly enough to cause a hedge fund to turn off its lights.  However, these
funds are designed to limit volatility by hedging against interest rate risk
and market risk and all kinds of other risk; and the problem now is that the
fund-of-funds managers that were tossing dollars into these so-called
market-neutral pools of money to protect against risk are not used to watching
the pool evaporate, even slowly.

This is especially true
when there doesn’t seem to be a very good excuse for the shrinking pool. No
collapse in the Thai Baht, no Russian default…not even an Argentina currency
crisis.  So they are getting anxious.

At least that’s how
it sounded to me on last Friday’s Merrill Lynch conference call—