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First Quarter Update

Title:

First Quarter Update

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633

Summary:

The markets began the new year adding to the gains of 2006 with the DJIA racing to a high of 12,786.64, the S&P 500 increasing to 1,459.68 and the NASDAQ reaching 2,524.94 before hitting some headwinds in February. At the close of the first quarter, the DJIA was down 0.9% for the year closing at 12,354.35, while the S&P 500 closed the quarter up 0.2% at 1,420.86 and the NASDAQ finished at 2,421.64 up 0.3% for 2007. While the Dow is still above its high set during the Tech W...

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The markets began the new year adding to the gains of 2006 with the DJIA racing to a high of 12,786.64, the S&P 500 increasing to 1,459.68 and the NASDAQ reaching 2,524.94 before hitting some headwinds in February. At the close of the first quarter, the DJIA was down 0.9% for the year closing at 12,354.35, while the S&P 500 closed the quarter up 0.2% at 1,420.86 and the NASDAQ finished at 2,421.64 up 0.3% for 2007. While the Dow is still above its high set during the Tech Wreck of 2000, the S&P 500 still has not reached it previous high of 1,527.46, which is a technical feat I feel needs to happen for this bull market to continue. Since the S&P 500 is an index that tracks a broad range of large companies, its march toward the all time record is an indicator of the overall health of the market and the economy.

The headwinds I spoke of earlier came in the form of higher oil prices, Greenspan’s recession remarks and the slumping housing market. Oil prices have been bouncing around between $60 and $67 a barrel, rebounding from just under $60 a barrel in January. The tensions in the Persian Gulf over British sailors being taken hostage by the Iranian Navy (shades of 1979) has been the latest culprit fueling the rise in the price of oil. Their subsequent release has resulted in a moderate decline in oil prices in the opening days of the second quarter, and the DJIA regaining much of its first quarter loss.

Greenspan’s speech placing the odds of recession in 2007 at 25% stopped the market’s advance in its tracks in February. While it should really come as no surprise that the possibility of a recession exists, especially since we are in the mature phase of the current expansion, know as prosperity. There are many factors which could tip the economy into negative growth and end this current expansion, but that is just the nature of the economic cycle. For the foreseeable future, it looks as if interest rates will remain on hold and growth will continue to ease from the pace of 2006.

One of the biggest drags on the economy of late is the continued slump in the housing market exacerbated by the concern that the meltdown in the sub prime mortgage market will spill over into the prime market. While defaults by borrowers are increasing, which in turn has caused bankruptcies by lenders, the real concern is how the sub prime debacle will effect the many derivative investments which have been securitized from these sub prime loans. Mortgages in many cases are not held by the companies that write them, but are bundled into securities and sold to investors to spread the risk. As the value of these assets declines, banks, hedge funds and private equity firms head for the exits. This unwinding of positions always leaves someone “holding the bag”. I hope the risk management tools used in the collateralized mortgage obligation market are better than the risk management tools used by Amaranth Advisors in assessing the risk of the natural gas markets in September 2006!

Just to add a touch of irony to the current rage of private equity ventures taking public companies private, the granddaddy of private equity firms, Blackstone Group, has filed its plans to go public. Blackstone has been highly successful and according to Mike Santoli of Barrons, “ Blackstone will have little problem achieving a $40 billion market cap”, and no doubt, “it will become a core holding in an alternate asset management sector.” The stock will “open with a big pop-which means it immediately will be unattractively valued. The idea of having access to permanent capital rather than dialing up pension funds for every cent Blackstone invests makes some sense. In other words, you can respect the logic of the deal without buying the stock.”