The stock market suffered another afternoon swoon, but showed signs of stabilization Tuesday as the implosions of two
hedge funds shrink in the rearview mirror.
Conditions remain shaky in the credit markets, where financing for leveraged buyouts is becoming more challenging. The deal to finance the leverage buyout of
U.S. foodservice business has been postponed, according to S&P Leveraged Commentary & Data group. The deal was expected to price Tuesday, but had been cut in size twice and the expected coupon for the offering was revised 0.75% to 1% higher than originally expected.
But any widening of risk premiums has been contained to the riskiest parts of the market. Critically, no new large hedge funds have blown up in the wake of the Bear funds. Indeed, some investors and traders note the skepticism in the market is one of the reasons stocks don't take a big leg down.
Fear can be a reliable contrarian indicator as long as it is absent panic. Indeed, it was the absence of fear amid the first quarter's initial subprime mortgage market woes that led to the market's panicky selloff in late February.
Panic here would be a rush to high-quality Treasury bonds, the dollar, gold and a major slide in stocks, says James Paulsen, chief investment strategist at Wells Capital Management. Instead, "I get the feeling we're not more than a half-day away from another new high," he says.
Indeed, the 10-year Treasury note saw no flight-to-quality bid Tuesday despite weaker-than-expected reports on new homes sales and consumer confidence. The 10-year fell 4/32 in price, its yield rising to 5.10% from 5.08% Monday. The price of gold fell 1.4% to $645.30 per ounce. The stock market continued on a roller coaster, but ended the day only slightly in the red.
After trading as high as 13,452.50 and as low as 13,308 intraday, the
Dow Jones Industrial Average
slipped 0.1% to close at 13,337.66. Meanwhile, the
fell 0.3% to close at 1492.90, and the
closed down 0.1% at 2574.16.
"This is about investors coming to terms with higher interest rates," says Paulsen, adding that investors can't seem to make up their minds on whether long-term rates over 5% are good, bad or indifferent.
One thing to count on is that while investors are undecided about rates, fear and volatility reign supreme; the CBOE Market Volatility Index, or VIX, was up 13.85% Tuesday to 18.89.
"There is certainly no excessive optimism in the market," says Richard Sparks, senior equities analyst at Schaeffer's Investment Research, who is moderately bullish on stocks. Sparks notes that short interest on the
New York Stock Exchange
has reached record high levels and that the ratio of investors buying puts vs. calls is nearing 1%, compared with the recent average of 0.84%.
Short selling and put buying indicates rising caution, which contrarians consider bullish. The caution helps stem a massive correction, as short interest and put buying set in motion an automatic and mechanical bid for stocks at various stages of a pullback, as Sparks explained Monday in a video
The American Association of Individual Investors' most recent survey of investor sentiment shows a higher-than-average 43% of investors are bullish, but it also shows a higher-than-average 34% are bearish. On the basis of a long-term average, 39% of AAII respondents are typically bullish, and 28% are bearish.
Likewise, earnings expectations remain in check. According to Thomson analyst John Butters, analysts expect second-quarter earnings to grow at a 4.4% pace, up slightly from earlier estimates of 3.9% due to rising expectations for energy company earnings amid higher oil prices.
While investors are expecting no rate changes out of Thursday's completion of the two-day FOMC meeting this week, the fed funds futures market has backed off a recent spike in odds of a cut by year end. Amid this latest worry of a subprime mortgage induced credit meltdown, odds of a single 25 basis point cut by year-end had reached 40% on Monday, but fell back to 30% Tuesday as Treasury bonds sold off in concert.
Also reflecting a modicum of relief Thursday, the brokerage and banking stocks, hammered recently amid fear of a liquidity crisis, found their footing.
Bear Stearns gained 0.2% on the day, while
added 0.6% and
As high-yield bond and syndicated loan deals to finance LBOs continued to struggle in those markets, risk premiums there stabilized, according to KDP Investment Advisors, a high yield investment and advisory firm. Nonetheless, shares of
slid 5.75% on the day to $30.75, below its IPO offering price of $31 per share.
The housing stocks had another bad day, as new home sales in May were reported slightly weaker than analysts expected and investors worried about more woes in the mortgage market. The Philadelphia Sector Homebuilders Index slid another 2% Tuesday, while homebuilders
, which reported dismal results, and
each fell over 3%.
As Todd Leone, head of listed trading at Cowen & Co., said best, "This is a topsy turvy market." But without these credit problems to focus on in this summer week absent earnings "there'd be nothing to do."
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click
to send her an email.