Master Rider Blog

A Quick Glance!

August 31st, 2007 NW Teong

Dow indeed fell as what I have predicted in my blog yesterday. My take is that Dow will have the tendency to fall in the next few days unless Fed ‘surprises’ the market by cutting the fed rates before its 18 Sept’s meeting.

Let’s have a quick look at the yield of the 10-year treasury again.

 Courtesy of Yahoo Finance

At 4.5%, the market has basically priced in a 100% chance of a cut in interest rates by Fed. In fact, at this moment, market has even priced in near 100% chance that Fed will cut up to 1% by end of the year. We have to view this with a pinch of salt. While I am more or less agree that the chance for a cut in its coming meeting is very high, I do not think Fed would want to cut the rates aggressively by year end. What we need to do is monitor closely and make educational guess along the way.

Someone has asked me how do I look at the market short-term (from now till before 18 Sept) yesterday? My answer is that, short-term, while market (US) is volatile, it has the tendency to move downward. The reason is simple, while we may have seen the worst of the sub-prime saga, we are clearly not out of the wood yet. This couple with a slow down in economic growth will further depress the market. Of course, the short-term biggest price trigger would be the interest rates. Also we have to bear in mind that there is a limit to every fall as well as rise (the ability to gauge this quantum is an art by itself!)

What strategy should I use then? This, of course needs to be in line with my macro and hence market view. Having bought some good fundamental stocks of relatively cheap valuation and with good earning potentials recently, I will also monitor the indices so as to buy Put option (warrant) on the indices. There are twin objectives in doing this. One is to provide some degree of hedge against my portfolio, the other is to lock in some good profits when I feel that market has dropped low enough. Please note that I do not have the intention (at least not at this moment) to sell my holding even if the market is trending downward.

Watch out for Fed’s next move, it can drive stocks crazy, at least for a short while! As I said before, market would be much clearer by end of Oct. Till we reach there, enjoy the wild ride! Cheers!

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Entry Filed under: Macro, Stocks