More There Than Meets the Eye?

by Michael Panzner, Financial Armageddon. October 17, 2007

Analysts were quick to blame upheaval in credit markets for the record outflows from U.S. investments during August, detailed in yesterday's Treasury Department report on monthly "TIC" flows. However, a chart of the running 12-month totals going back several years suggests foreigners had already reached some sort of threshold as far as their exposure to U.S. assets is concerned. Arguably, recent events may simply have been the last straw for some of them.

There's been a lot of talk lately about problems in the financial sector. But if you dig below the surface and look at the relative performance of various constituents, it seems fairly clear that investors believe banks are at the center of the storm. The group's shares have not only lost ground vs. the broad market, they've lagged behind other financials.

Investors rely on a variety of indicators to gauge sentiment. One measure, the 25-day moving average of the CBOE�s Composite Put/Call Ratio, has recently been flashing a warning signal about growing complacency. This particular indicator is currently near the lows seen in July, just before share prices fell out of bed, and is also testing a two-year uptrend that suggests the upside is limited. While that doesn't mean that prices can’tmove higher in the short run, it is another sign that the market's sell-by date draws ever closer.

And finally, for those who still believe in fairy tales – i.e., that Wall Street analysts actually know what is going on – have a look at what follows. These are some of the headlines that scrolled across Bloomberg in the 36 hours AFTER Swedish telecommunications giant Ericsson announced third quarter results that missed consensus forecasts by a wide margin and the stock had already plunged more than 20% (to around SK20) in local market trading:

ERICSSON CUT TO `REDUCE' FROM `BUY' AT WESTLB
ERICSSON CUT TO `NEUTRAL' FROM `OUTPERFORM' AT CREDIT SUISSE
ERICSSON CUT TO `SECTOR PERFORM' FROM `OUTPERFORM' AT RBC
ERICSSON CUT TO `MARKET PERFORM' AT PIPER JAFFRAY
ERICSSON PRICE EST. CUT TO SK28 FROM SK35 AT CITIGROUP
ERICSSON PRICE EST. CUT TO SK27 VS SK33 AT MORGAN STANLEY
ERICSSON CUT TO `EQUAL WEIGHT' VS `OVERWEIGHT' AT LEHMAN
ERICSSON PRICE EST. CUT TO SK22 VS SK30 AT LEHMAN
ERICSSON CUT TO `NEUTRAL' VS `OVERWEIGHT' AT JPMORGAN
ERICSSON PRICE EST. CUT TO SK27 VS SK33 AT MORGAN STANLEY
ERICSSON PRICE ESTIMATE CUT TO SK25 FROM SK34 AT SOCGEN
ERICSSON PRICE EST. CUT TO SK25 FROM SK33 AT HSBC

Today's Market

Stocks finished mostly higher in choppy trading, with strength in technology shares offsetting weakness in oils and financials. Housing starts in the U.S. dropped to their lowest level since 1993.

At the close, the Dow Jones Industrial Average fell 20.4, or 0.15%, to 13,892.54. The S&P 500 Index rose 2.71, or 0.18%, to 1,541.24, and the Nasdaq Composite Index jumped 28.76, or 1.04%, to 2,792.67.

The technology sector was buoyed by better-than-expected results from Intel (4.87%) and Yahoo (7.98%), as well as a positive holiday sales outlook from Research in Motion (3.76%). Financials were weighed down by a warning from home loan insurer MGIC Investment (-15.26%) and continued weakness in the shares of Citigroup (-0.29%), which partially recovered by the close.

Other winning groups included railroads, steels, and a smattering of cyclical sectors. Among the biggest losers were home builders and gold stocks, with the Philadelphia Stock Exchange Gold and Silver Index posting a loss of 2.0%.

December gold futures rose $0.30 to $762.30 and the U.S. Dollar index drifted slightly lower. Ten-year Treasury bond yields lost 9 basis points to 4.56, while the discount on three-month bills fell by a steep 25 basis points to close at 3.99%.

Michael Panzner

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