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Stocks Bull Markets Climb a Wall of Fear

Stock-Markets / Trader Psychology Nov 16, 2007 - 12:32 AM GMT

By: Regent_Markets

Stock-Markets After the party comes the hangover, and of course the bigger the party, the bigger the hangover. Over the last few years, financial companies have been gorging themselves on 'foolproof' credit trades, based on sub prime debt. Now the party is over and companies are having to face up to their antics in the cold light of day, says's Michael Wright.

Last week was no different, with E-trade (A US discount stock broker) announcing that they incurred major losses in their 3 billion dollar fund, and rumours circulated that they were going into bankruptcy. Once this news hit the wires, the Dow and the SP500 both dipped into red territory, as investors yet again became jittery about the health of any stock that has dealings with mortgage lending or investing.

More bad news came from Britain's HSBC, which said it would have to write down a further $3.4 billion from its U.S. business during the third quarter, again because of exposure to sub prime loans. This comes on top of the billions in losses already reported earlier in the year, and just a few days after a 1.2 billion dollar write down for the 4th quarter by Bears and Stearns Co. The hedge fund was one of the first financial institutions to confirm losses due to sub prime exposure.

Finally, Barclays bank reported that it wrote down 1.3 billion pounds ($2.7 billion) on credit related securities. This was actually much less than many analysts were predicting, and the shares initially rallied on Thursday with the relief that things weren't as bad as many had feared.

However, the question currently being asked by most analysts, is not who will release announcements of credit related write downs, but how much these will be. The stock market is a forward-looking animal, and many analysts are already pricing in losses to certain financial stocks.

Attention may now turn to insurance companies and pension funds. Both of these invest in mortgage bonds, which is a bond secured by a mortgage on a property. Since they are backed by real estate or physical equipment that can be liquidated, they are usually considered high-grade, safe investments. This however has been not the case lately with the implosion of the US mortgage market.

While relatively few of the pension funds are publicly traded companies, a lot of the bigger insurance companies are. This means that soon they will have no choice but to explain why their earnings per share, aren't as good as Wall Street had expected them to be.

It is a common truism that "bull markets climb a wall of fear". Nobody can deny the level of fear in the markets right now, but it is also true that markets hate uncertainty. Losses and write downs may not be as bad as expected, but only the companies themselves know the actual figures. With many losses still unknown, and a fresh round of bad news from insurers presenting a potential hazard, any recovery from here may be jittery at best. There may be rallies over the next month, but they could be tempered by the fear of unknown losses lurking round the corner.

With the average trader can take advantage of these possible events by buying a "no touch" option, which will compensate the investor if the underlying index doesn't touch the predetermined level, for a specific period of time.

A "no touch" option on the S&P 500, set not to touch a level 100 points higher in the next 32 days, yields 12%. This means that we can rally tamely, trade in a range or drop further, and you could still win.

By Karen
Tel: + 448003762737 /

Address: Regent Markets (IOM) Limited
3rd Floor, 1-5 Church Street
Douglas, Isle of Man IM1 2AG

About Regent Markets Group:   Regent Markets is the world's leading fixed odds financial trading group. Through its main multi-awarding winning websites, and, it has established itself as the leading global provider of a unique, powerful way to trade the world's major financial markets. The number, length and variety of trades available to our clients exists nowhere else in the world. Tel  (+44) 0800 3762 737

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