Another deleveraging scenario this summer? Markets for the week ending 10-Jul

Market Update: Standard & Poor's 500 Index fell into a bear market
The benchmark index for American equities plunged to a two-year low on Tuesday, bringing the loss since its October record to 20 percent.
Shares have been declining for five straight weeks, and a drop in the index of another 12 percent would match the average retreat of 11 bear markets since 1946.

Reasons suggesting another deleveraging scenario this summer:
- Nervous investors sell bonds, driving prices down; Traditional bond managers may start losing their clients if they have another poor quarter.
- Hedge-fund managers may find prime brokers cutting off funding if their positions deteriorate.
- Bank loans have been contracting at an annualised rate of 8% over the past 13 weeks to June 25th.
- Fundamentals for the corporate-bond market have worsened since last August.
- Expectations for corporate profits are being revised down, as margins come under pressure from slower growth and higher commodity prices.
- Headline inflation is well above target, so central banks are unlikely to ride to the rescue with interest-rate cuts, preferring to tighten monetary policy.


? Sell Signal : Financials
Fannie Mae, Freddie Mac, speculations runs rife
- Rising borrowing costs spurred concern that America's biggest sources of home-mortgage financing may not be able to fund their businesses.
- Fannie Mae and Freddie Mac fell to their the lowest since 1992.
With $5.2 billion more owed than its assets were worth in the first quarter, Freddie Mac would be technically insolvent under fair value accounting rules.
Implications:Until investors see what write-offs are going to be and second-quarter earnings of financial companies, they're not interested in buying at any price.
Word on the street is that it's been far too early to buy and the loan-loss reserves need to stabilize before investors return to the markets.

Worth noting:
Lehman-LEH put volume & volatility Spike; LEH down 12%
LEH is recently down $2.54 to $17.20. LEH call option volume of 15,588 contracts compares to put volume of 41,549 contracts.
LEH July option implied volatility is at 188, August is at 170; above its 26-week average of 75, suggesting larger risk.

Earnings announcements:
JPM : 17-Jul
MER : 17-Jul
Citigroup : 18-Jul

Eric Tan, London