The whole world market is panicking amid fears of a global recession brought on by the U.S. subprime and the resultant many billions of dollars lost by the financial institutions.
The subprime is a high risk housing loan offered, through brokers, to those who had little chance of meeting the repayments (in many cases those with bad credit records) during the housing boom. Many of these loans are now defaulting. The plummeting value of the housing market is affecting consumer spending which is hitting the American economy hard.
On top of this, for many of those who are managing to hang onto their properties they are now finding their mortgages are of greater value then their real estate and are beginning to wonder if they should keep up with their mortgage repayments.
The resultant loss by the financial institutions has brought about a temporary squeeze on credit. Unemployment figures are on the increase. There are those who feel that the U.S. slow down could damage the world economy - hence panic selling.
George Bush has promised to pump 140 billion dollars, among other measures, into the American economy by means of a temporary tax cut in order to boost consumer spending. Some believe the 'feel-good measure' will quickly evaporate. So much joy for traders there.
There is general feeling among analysts a recession is a real possibility, though not inevitable. Odd ones are saying the U.S. is already in a recession. A recession is negative growth for at least two consecutive quarters. It is interesting to note the Federal Reserve Chairman; Ben Bernanke is not forecasting a recession for this year. Many on Wall Street back Bernanke.
The fundamentals of the U.S. economy seem to suggest to me a possible recession could be brief and shallow. The Fed did a brilliant job last summer by flooding the banks with money to prevent a full-scale credit crunch. Exports of American goods to the world continue to be strong thanks to the weaker dollar. We still have China, India, Middle East, South American and other economies continuing to boom ahead.
In order to appease the present fear there is a general feeling among traders the Fed would need to come in with at least a 50 basis point cut at the Fed's meeting on the 29th of this month, if not sooner to help offset the drag on housing.
Realistically, a lot of the fear is media driven which is not helping matters in the market. Many of the large U.S. corporations continue to come in with good earnings, meeting or exceeding analyst’s expectations. So, all is not gloom and doom.
The other point of interesting is the lack of buying interest. (At present there are more sellers than buyers pushing the price down - the fear factor - for now the amateur's are in control) The professional traders saw the downturn coming, got out early, are now sitting on the side lines waiting for all the hoo haa to settle before re-entering the market.
With so much aggressive selling, realistically it will take some time for confidence to return and the markets to recover.
The present market has been great for puts. Some have been making a killing.
As for OBJ (small cap stocks are taking a hammering as well) I am hanging in there knowing the price will recover and bounce on what I believe is good news coming.
Sorry about the long read. Trust it helped to give some understanding as to what is going on behind the scenes.
Regards
Drafthorse
OBJ Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
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