"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

08 January 2007

`Disaster' Risk for Stocks May Be Rising After Four-Year Rally

Interesting Bloomberg article shows strategists are complacent and completely unprepared for a sharp S&P correction. With NO 2% decline in the SPX in four years, there is a catalyst is that the Fed will begin to panic like they did in 2000-2002. Maybe a raise first to defend the dollar, then a series of rate cuts....

Jan. 8 (Bloomberg) -- Bennet Sedacca, president of Atlantic Advisors LLC in Winter Park, Florida, recalls being an equity trader during the October 1987 stock-market crash, in which the Dow Jones Industrial Average had its biggest one-day plunge. He was trying to sell 25,000 shares of a company. ``For four days, no one answered the phone,'' he said. Today, as a manager of $200 million, he is protecting himself. In the last three months he has reduced his holdings of stocks and raised investments in short-term Treasury and other securities on the view that another crash may be coming, two decades later.``Disasters may be rare, but I see the kind of conditions that could make one happen,'' said Sedacca. ``It's like a big keg of dynamite with a fuse. I don't know when, but I think the conditions exist for the explosion to eventually occur.'' Even as strategists at the biggest banks in the world forecast stock rallies in the U.S., Europe and Japan, disaster scenarios are being spun from New York to Hong Kong.

* For Sedacca, the potential triggers are the Iraq war, the U.S. trade deficit and the fallout from a glut of global cash. Sedacca and Mouser point out that higher interest rates may curtail the supply of cash and credit that brought yields on 10- year notes in the U.S. and Europe below those of shorter-term securities last year. The European Central Bank and the Bank of Japan are likely to raise borrowing costs further this year from the current 3.5 percent and 0.25 percent, respectively, according to the median forecasts in economist surveys by Bloomberg News.

* For Phil Orlando, the chief equity market strategist for Federated Investors Inc., which manages $223 billion, it's the potential for a recession in the U.S.

* For David Mouser, who helps manage $350 million at Driehaus Capital Management, it's the buildup of debt to finance mergers and acquisitions. "The single biggest risk facing global financial markets is a change in the benign credit-market conditions prevailing the last three years,'' said Mouser. ``We've had record liquidity in global markets the last few years that has driven all asset classes to continued new highs." Given the ease of borrowing now, acquirers may be taking on too much debt, said Chicago-based Mouser. That in turn could lead to another possible cause of a market collapse, a bond-market blowup.

See this MSCI tracking index for emerging markets- NO FEAR !

Morgan Stanley Capital International's World Index, tracking stocks in 23 developed countries, has risen 87 percent in the past four years. The firm's Emerging Markets Index has soared 212 percent. The U.S. Dow closed at a record high on Dec. 27, while Europe's Dow Jones Stoxx 600 Index last week reached the highest since December 2000. In the U.S., strategists at 12 of the biggest Wall Street firms forecast a rally this year. European stocks will rise, according to the median of 35 forecasts, though at the slowest pace in five years. Japan's Topix index will reach its highest year-end level since 1989, according to the median estimate of eight strategists.

So somebody's got to question the euphoria.


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