Fundmastery Blog

Kurt Brouwer September 5th, 2007

This year it has been one bad thing after another. I have covered the many negatives that have occurred this year (see here), but in this post Barry Ritholtz publishes Jack McHugh’s definitive list of everything that has gone wrong [emphasis added]:

‘…Imagine it is January 1, 2007, and you have just been given the following information about what would unfold during the first 8 months of the year:

– Oil prices would rally back to over $75/bbl;
– The dollar would drop against every major currency;
– Corporate earnings would benefit from the greenback’s slide and continue to post double digit gains;
– The housing industry, instead of bottoming, would continue to slide all year;
– Home prices would actually be down in many major cities;
– Over 90 mortgage lenders would cease operating and the survivors would be on life support;
– The origination of subprime mortgages would all but cease;
– All but prime, conforming mortgage loans would be either hard to get or very pricey;
– Private equity deals would soar in the first half, but come to a halt after July 1;
– Some prominent LBO deals would have to be “eaten” by commercial and investment banks;
– The leveraged loan market would see stress;
– High yield bond spreads would widen markedly;
– Commercial paper would come into question and ABCP conduits would be in jeopardy;
– T-Bill yields would plummet into the 2% area before rebounding to fed funds minus 85 bps;
– LIBOR would actually rise from +10 bps to fed funds to +45 bps to fed funds;
– Loans for all second tier credits would either be very costly or unavailable;
– Prominent hedge funds would either blow up, face losses, or have investors seek redemptions;
– Volatility, as measured by the VIX, would triple from 12 to 37, before settling in the mid 20’s;

Given the above information, where would you expect the major stock averages to be in relation to their closes on December 31, 2006?…’

If you had given me this litany in January, I would have guessed the stock market would be down 5-10% or so. Surprisingly, it is still up for the year, with the S&P 500 up by about 5%, even after today’s down market. It has often been said that the stock market climbs a wall of worry and this is exactly what is meant by that phrase.

Both the stock market and the economy too are getting multiple shocks and body blows and yet both have kept on moving upward. At times, stocks were not climbing up the wall, but rather clinging to it. Yet, even though the upward movement is painful and labored, it still is happening. Long may it last.

• Geopolitics , Hedge Funds , Investing , Money
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