The last week of August, 2007

In a continuation of last weeks theme, this blog post will give a quick summary of what occurred 5 years ago — at the edge of the financial crisis.  From Minyanville’s “Week in Review:  August 31, 2007:

Market Recap

“The SPX reclaimed its 200 day moving average this week even as volatility increased in the face of Tuesday’s 281 point sell off on the DJIA. Despite the fact that the commercial paper market remains under water, the lack of new bad news about credit markets and recent comments by Ben Bernanke and President Bush saying that the Federal Reserve and other government agencies will step in if needed have seemed to temporarily stabilize financial markets.

Critical levels remain overhead including last week’s high of 1480 on the SPX. Broker dealers begin reporting on September 13 with Bear Stearns (BSC) and Lehman (LEH). Most of the bad news relating to credit markets and sub prime is already priced in so numbers that don’t significantly miss expectations could ease investor anxiety. Next week important economic data to watch include the Federal Reserve’s Beige Book on Wednesday and Unemployment numbers on Friday.”

Here, we see the first occasion of jawboning by Ben Bernanke.  It continues unabated to this day.

And, in what may go down as one of the most ironic posts ever, Bear Stearns and Lehman are about to announce earnings — and the expectation was an easing of investor anxiety! 

Talk about being hoisted with your own petard!




Back to the Future?

Thanks to an article by Richard Whalen, I was reminded that today is the 5th anniversary of the Federal Reserve launching an emergency 50 basis point rate cut in response to Countrywide Financial’s inability to roll its commercial paper.

This was the first canary in the coal mine to drop dead in advance of the worst recession and housing collapse in 80 years.

In honor of this auspicious anniversary, I’ve decided to do something a little different with the blog in the upcoming weeks.  You see, we all have crystal clear hindsight regarding the financial meltdown, but what was the prevailing mindset in the weeks leading up to the disaster?

To answer that question, each week I will be posting Minyanville’s “Week in Review” from the appropriate week in 2007.  The first such post follows.  A word of warning, however…  There are some eerily similar “whistling through the graveyard” comments in these posts.  To wit, note how good durable goods and new home sales numbers were holding the market up on August 24, 2007.  Yep.  New home sales.

Market Recap

After the late summer’s wild ride, markets stabilized this week as the VIX dropped 25%. The SPX was able to retake its 200 day moving average as renewed takeover chatter resurfaced mid week while the DJIA retraced over 50% of its losses. Despite a sluggish Thursday after Countrywide’s (CFC) CEO dropped the “r word” investors’ jitters were eased after Friday’s upbeat durables and improved new home sales report.

With a lot of traders away from their desks next week before the Labor Day weekend, markets should be fairly range bound. It’s similar to a heavyweight fight… after several rounds of delivering heavy blows the Bulls and the Bears are now in the middle of the ring leaning on each other trying to catch their collective breath. When traders return to their desk post holiday, the battle will continue. With the damage done to the financial complex and the latest bounce coming on light volume, probabilities lie in retesting the August lows. For the Bears to gain the upper hand they must crack SPX 1375 and consequently cause the VIX to explode and the BKX to fall out of bed. Bulls need to hold above 1425 to change the psychology of the tape before moving higher and forcing the shorts to cover. Minyans it is important to remember during these volatile times… nobody likes a draw.