As some high-risk assets take a hit, investors fear worse is to come

13 july 2014

(Reuters) – World financial markets became reacquainted with fear last week, and even if it was short-lived, the ructions in some riskier assets looked to some like a precursor to a much rougher ride down the road.

Concerns that Portugal’s largest listed bank, Banco Espirito Santo was badly exposed to its owners’ accounting problems raised eyebrows in Europe and the U.S., getting investors to ask whether there were more shoes to drop in European banking.

Also some excess speculation that has been building up in various corners has bubbled over. Examples included the halt in trading in the stock of a company, Cynk Technology, with no assets or revenue, that had soared to a $6.4 billion market value, and the sudden collapse of Spanish wireless provider Gowex after a massive accounting fraud.

Add in the big reversal in fortunes for some companies who recently did U.S. IPOs, plus Puerto Rico’s increasingly troubled debt picture, and it was tempting to remember Warren Buffett’s old saying: “Only when the tide goes out do you discover who’s been swimming naked.”

Billionaire investor Carl Icahn said he has become very wary. “In my mind, it is time to be cautious about the U.S. stock markets,” he said in a telephone interview on Thursday. “While we are having a great year, I am being very selective about the companies I purchase.”

It all comes against a backdrop of anxiety about whether global markets and economies are resilient enough to cope when the U.S. Federal Reserve takes the punch bowl away by ending its bond buying program and then starts to raise interest rates – probably next year – for the first time since 2006.

The sense of complacency that had set in among many investors has begun to disappear. Small-cap U.S. stocks fell more than 4 percent last week, their worst one-week performance in more than two years, while Spain’s Banco Popular postponed a bond offering and Greece could only place about half of what it wanted in a debt sale.

What’s unclear is whether this is all about a short-lived, modest correction in some high-risk assets that had gotten out of control, or if its a harbinger of something more dramatic to come. Some are confident there will be a correction.

“I don’t care if it’s Portugal, Ukraine, Russia or the Fed, markets are due for at least a pause or potentially a 10 to 12 percent pullback on a trading basis,” said Jeffrey Saut, chief investment strategist at Raymond James Financial in St. Petersburg, Florida.

A correction of about 10 percent would generally be welcomed by large institutional managers, as the S&P 500 has not dropped by that amount in about three years. In recent weeks it has come within range of the 2,000 mark for the first time ever, having nearly tripled from its lows in 2009 during the financial crisis.





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