More on the state of the market

It is strange that I am reassuring people working on trading desks at major wall street firms. But here's how I see the market:

1) Earnings at US companies continue to be strong
2) Consumer confidence is high
3) the housing market is slowly unwinding -- yet there has not been the predicted fall in consumer spending
4) The dollar continues to be weak, which means that US manufacturing still has room to grow
5) Low unemployment
6) The main non-US economies are very strong -- India, China, and to a lesser extent the Euro zone.

What is going to change any of that? The subprime market was made up of 4 people -- people who were poor trying to buy a house; people trying to flip houses; shady loan shops; wall street speculators betting on subprime using MBS.

The first group, it's sad that they are losing houses, but they don't make up a huge percentage of the population and they were poor, so they weren't spending much money in the market in the first place (harsh, but true). The flippers could be more concerning -- markets need flow to keep them operating and that's what housing flippers provide -- a steady stream of inventory for regular buyers to compare and contrast. I wonder how many flippers were in the subprime market. Or how many people are trying to flip right now, flipping goes counter when inventory stays on the shelf (I wonder if we could come up with a metric for that?)

Now, onto wall street. They shady loan shops (american home) are gone, out of business. People are going to lose money on that (like in your 401k) but I think it's a situation where it's dispersed throughout the market -- everyone subtract a nickel from your portfolio for the loss of American Home shares. Now the wall street speculators who were buying up the securitised products, that will be interesting. B/c now we know you won't be getting the cash flow they were expecting in the future. On the other hand, they were booking that for the next 30 years, i.e. say a loan portfolio was worth 30 million. That's 30 million gone, but the owner of the securities would be looking at it as losing one million dollars every year for the next 30 years. So again, that's a drop in the bucket to most banks.

I don't think it will effect the wider market, it's similar to when Amaranth blew up b/c of their natural gas positions.

In fact, we should call these funds -- Amaranth, Sowood, Bear Credit Strat -- anti hedge funds b/c there was no hedge involved! These were guys playing roulette with their funds. Bizarre.