Trader Talk

Markets: Playing For Time And Readjustments


The 2.3% rise in the Dow last week, coupled with lower volume and lower volatility, has given the markets what it wants mosts: time. Time allows market participants to readjust risk. JP Morgan, in a note to clients this morning, said "The key issue for the months ahead will be to figure out the impact of tighter credit conditions on economic growth."

Take housing. How much tougher will it be to get a mortgage? Mortgage bulls note that rates for a 30-year fixed rate mortgage have been dropping, not rising, recently, to 6.5%. That's the good news.

The bad news is that the existing home sales figure today, while in line with expectations at 5.75 m, is still at a weak pace. At current sales rates it would take 9.6 months to sell off all the homes, a new high for this cycle. Credit Suisse noted today that existing home sales may drop up to 15% more into 2008.

Other industries look much stronger. Tech continues to be a bright spot. U.S. demand seems to be improving, and manufacturing output has been increasing in Asia.

As for interest rates, central banks are moving in somewhat different directions. The Bank of Japan has already declined to raise rates last week; they were left unchanged at 0.5%. The European Central Bank may raise rates at its September 6th meeting. China raised rates last week for the fourth time this year.

The markets believe the Fed will cut rates at its September 18th meeting, and will cite a downward adjustment in its growth forecast as a reason to do so.

Thoughts on Home Depot Supply sale. Credit Suisse echoed the rest of the Street this morning in a note to clients: "it now leaves HD with the slower growing division, a division losing share to LOW, and one that will require significant investment to reverse the margin deterioration that it is suffering from this year....we expect that spending on home improvement will decline in 2008, making it another tough year for HD."

I noted on our air on Friday that the important thing about the Home Depot deal is that it get done, even if it is at a lower price. HD Supply is being sold for $8.5 billion, 18% less than a previous agreed upon price, to Bain Capital, Carlyle Group, and Clayton, Dublier & Rice. Home Depot will hold 12.5% of the unit's equity, and guarantee $1 billion of the debt.

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