According to the press reports, three things helped investors chow down again this week.
First, Chinese stocks took off. After a brief and feeble panic-attack a couple of weeks ago, the Shanghai stock market is as fat and happy as ever. The index is nearly in record territory again.
Second, a whole new selection of merger and acquisition targets was added to the menu. How could investors resist? All that delicious, syrupy, rich sauce floating around! There is even talk of a major acquisition in the gold mining sector. Barrick is said to have its eye on Newmont whose shares are expected to bring in the mid-50s.
And third, investors are coming to terms with the whole subprime issue. Tim Harris, a strategist at JP Morgan, put the matter in perspective:
“It is estimated that the U.S. mortgage market is worth some $10,000 billion, approximately 10 percent of which is cumulatively classified as subprime; 12-15% of which may be in or approaching distress/default.”
No biggie, in other words. But wait! Ten trillion dollars is still a lot of money. And 10% of it is still $1 trillion…and 15% of $1 trillion is still $150 billion. Who’s got $150 billion to lose?
And the problem – again, according to the press – is the risks now overflowing into other segments of the mortgage market – notably into Alt-A and Jumbo loans. The same stretch for profit that led lenders to make loans to people who couldn’t pay them back…led investors to buy the loans packaged as debt-back securities…along with high priced stocks in a communist country…and a great deal more. They will keep stretching until something snaps, we figure. Maybe it already has.
Time will tell.
Markets and Money