Monday, August 13, 2007

Jim Cramer and the Rant of Truth!!

Today's Comment: This Friday marked a high on the European stock markets - but in terms of turbulence. Investors seem to be rushing the exits. Good fundamentals - a strong European economy and high corporate earnings - seem to have lost their appeal. We are sticking to our investment strategy - panic has never been a good counselor in the stock market. This week a number of economic statistics will be published, while the flow of company earnings figures is drying up. By the end of the week we should have a clearer picture of the state of the US economy.


This week should be an interesting one for the markets. Jim Cramer the renowned market commentator told it how it is on CNBC on Friday. The crush is the fixed interest and sub prime mortgage market. Meaning those whose credit is not great were borrowing money at higher rates and are now struggling to pay the mortgages.

Cramer is calling for a rate cut to calm fears in the market place but believes that the Federal Reserve (who decide rates) are 'asleep'.

See what he said here:

Jim did appear later to say 'don't panic' and still believes that the Dow will finish the year on a high, but he reiterated that it was important for the Fed to realise the seriousness of the situation and use interest rates to help the market place. Various reports also have the Fed injecting up to $100bn recently to prop up the markets and add liquidity.

Another issue is there will soon be the 'redemption window' coming up on a number of hedge funds, meaning this is the time when investors can get their money out of hedge funds. The problem with that is that if there is significant redemptions across a number of funds then the funds in question will have to sell positions to fund redemptions. The thing is, as leverage increases potential profits, it also amplifies sales.

For example, if you are in a a fund that has leveraged 3 to 1 and you invested $1mn, assuming your $1mn is still intact the fund would have to sell $3mn of a particular investment. Of course the fund will have cash to fund redemptions so this could dampen any affect, but if there is mass redemptions because of investor uneasiness the crisis could turn into a very large problem.

Its not all bad though. Most commentators are urging caution and believe that corporate earnings are good and the general economic outlook is good, at least in Europe, so don't panic.

A knock on affect from all of this will be the inevitable failure of more hedge funds crushed under the weight of redemptions or but the collapse of the niche markets in which they invest. Large quant funds such as the Barclay's Global Investors' 32 Capital Fund Ltd has described trading as "challenging", but it has not faced large-scale redemption requests from clients or liquidations of its holdings.

Goldman Sachs are due to report on their quants funds later in the week, so this is also one area to watch.

The bottom line is that there is no doubt that we are in dangerous territory at the moment and there could be just one factor that could send the market either way. A Fed rate cut for example would ease pressure, a huge hedge fund collapsing would, possibly, have a massive negative affect and cause major problems for the worlds markets.

We believe it is a time to keep your eye, very carefully, on the ball, but not to leave the game just yet.

No comments: