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to me this current period (summer 2002) presents a classic example of the divergence of price risk and information risk. given the corporate accounting scandals and the new accounting rules, the demise of andersen and their replacement by the other accounting firms, we currently have a very high level of information risk in the equity and high yield debt markets but experience shows time and time again that price risk is often lowest when information risk is highest. by the time information risk has been reduced, price will already have adjusted.

what we know: by the end of august, nearly all of the S&P 500 will have reported 2Q results to SEC under the new accounting rules and by november, with 3Q results reported, nearly every rock will have been turned over hence information risk will have peaked. and in fact may be peaking right now.

just my $0.02

tr
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tr,

I'm willing to bet we've already seen bottoms on things like MRK, JNJ, BRK.a, GE, PEP, SWY, SGP and a whole host of other oddballs (AVZ, GLK, GMT, TMK) that I would have loved to buy at mid-week prices (not that some of them aren't still relatively cheap). But it would be hard for me to pull the trigger on MRK at $46 when I know I missed an opportunity at $39 (notwithstanding that I also wanted to buy it in the low $50's last spring--I know it doesn't make any sense).

And I agree with you on high yield bonds. I'll probably sign up for Vanguard LT Corporate (VWESX) when I start my 401(k) in another month (I'd go with VWEHX if it was an option).

I think there will be some major blow-ups in banks, and in some more over-leveraged telecoms. FBF is acting like it wants to blow up. F and T probably ought to blow up. But there should also be tremendous opportunity on the long side if you can avoid the landmines.

And I'm especially bullish (albeit selectively) because I can't find anything obvious to short anymore.

Todd
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note that when this was first posted on 7/26, s&p was in 850s, now, post 8/14 deadline and earnings filings, market is at 940s. classic lesson in why price risk is often at minimum when information risk is highest.

tr
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