Trader Talk

Why Bonds Are Up And Stocks Are Down


Bonds are up midday, stocks are down on:

1) The disappointing housing numbers, where the inventory for existing home sales is now over a 10 month supply.

2) Disappointment with some tech earnings. Broadcom , which makes chips for set-top boxes and cable modems, down big on higher expenses;Juniper  (internet hardware, network traffic management software) and Altera   (which makes chips--programmable logic devices or PLDs that are used in the telecom, industrial, and automotive businesses) both missed badly.

3) Disappointment with Merrill's large writedown.

Merrill's CEO and CFO were questioned extensively on the conference call about how the writedown of $7.9 b could have grown by over $3 b in just 3 weeks. Their answer was they simply decided to be more conservative in valuing the assets. They freely admitted that errors of judgment in the business itself and errors in risk management were made.

Merrill--and other brokerage stocks--weakened as the questions got more intense, though they have since stabilized.

The problem, traders believe, is very simple: what other banks and brokers will add substantial writedowns? The Street is again taking the whole group lower as they adopt their own form of "being conservative" to valuing these stocks.

Is there any good news? Well, traders are 100% convinced the Fed will cut 25 bp next week, and some feel the chances are much higher now that they will even cut 50 bp.

Questions?  Comments?