Monday, March 19, 2007

Equity Index Update

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Brad Sullivan

The index market continues to mirror its recent behavior of Yen/Dollar watching and is called to open higher by nearly 0.5% this morning in the SPM contract at 1406.50. The Yen/Dollar has fallen by about -0.7% relieving fears of the carry trade unwind – at least for the time being. This week is highlighted by the FOMC 2-day meeting that begins tomorrow and concludes with Wednesday afternoon’s statement. Typically, the indices have rallied into and through these meetings over the past several instances…however, with a peculiar batch of economic data it appears difficult for the market to get a clean gauge on Dr. Bernanke’s next play.

On the Monday merger mania front…Barclays Bank and ABN Amro are in discussions to merge and become a $160 billion behemoth. Even the once “given up for dead” Service Master was able to find a buyer in Private Equity Land for nearly $5 billion. If one adds the Blackstone IPO to this picture, it is hard to be overtly bearish looking down the road. I certainly do not want that statement to be misconstrued as the Sub-Prime blowout may have ramifications that we do not see on the horizon…however, I always try and construct my ideas around the money…Follow the money, is a message I try and repeat to myself when I think the markets are at a crossroads. Simply put, the liquidity driven marketplace remains intact and that is being seen in the appetite for deals. Let’s not forget that somehow LEND was able to find a buyer for some of its debt leading to rally in the entire Sub-prime sector. In my opinion, the short term picture remains shaky, but, it is worth reminding ourselves how resilient this equity market has been during this bull move. The fact remains that this is a liquidity driven bull market. Fears are rampant about the Carry trade being unwound and if something triggers a mass covering it would be awfully ugly for the indices. However, if the unwinding is gentle one has to wonder if the worst of this move is behind us.

As for short term trading, the best indicators for market direction remain GS, GOOG and the YEN/Dollar. Odds appear to favor a short term bracketing in the trade as we move from one end to the other in a range around 1.5% in the SPX.

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