Markets Experience Sharp Selloff after hitting New Highs

Thursday began as another bullish day in the extended rally for the North American markets as the Dow Jones set record highs on sales guidance from mega-retailer WalMart (WMT). Technology also got off to a good start as earnings estimates and price targets were getting bumped higher virtually across the board.

Apple (AAPL) received two price target bumps this morning from analysts at Merrill Lynch and Goldman Sachs pushing shares to an all time high above $170. Similar highs were seen in momentum favourites Research In Motion (RIMM), Google (GOOG), Baidu (BIDU) and VMWare (VMW).

Just before 2pm in this afternoon's trading the markets were up over half a percentage point. It appears whispers travelled and the buyers dam broke and flooded into a massive sell-off. Within minutes the Nasdaq was in the red and major technology stocks saw their new highs evaporating. Cautious comments from JP Morgan regarding Chinese Internet portal Baidu's revenue for the upcoming quarter sparked slight profit taking which seemed to snowball throughout the technology sector. Further adding to the panic were comments made in Europe by European Central Bank Council member Axel Weber who insinuated that 1) the ECB may need to raise rates in order to keep inflation in check, and 2) that inflation should be priority number 1, not economic stability.

There was concern with the Federal Reserve's half point rate cut that the action signified a more worrisome approach to economic stability, rather than inflation. These comments out of Europe show that the ECB seems to be standing firmer towards the side of inflation concerns.

These comments seemed to rekindle trader fears of Inflation and pushed the selling further. A rally that was built around the Fed cutting rates by half a percentage point will certainly not hold up well if there's talk of a potential rate hike being needed to curb inflation. The sectors that have been gaining the most during the rally were the ones hit the hardest; Technology and Energy.

Investors should take heed that the indices were brought back after the drop, meaning that the Dow was able to hold and close above 14,000. If inflationary comments come further to light this could add tremendous volatility for the markets ahead, but investors should be concerned with specific company fundamentals, especially as the earnings season gets into high gear.

Disclosure: Author is long AAPL, GOOG

Goldman's Flagship Alpha Fund Showing Problem Signs

Markets, domestic and abroad went lower in trading Thursday Aug 9th as renewed credit fears swept in again. The European Central Bank officially said that it injected almost 100Billion Euros into Money Markets to provide liquidity. This news only raised concerns of credit tightening and was compounded negatively by reports of more hedge fund losses.

BNP Parisbas, the French-based global financial firm officially suspended 3 of its funds due to losses and exposure to the American sub-prime industry. Adding to that were persisting rumors of cracks in the armor at Goldman Sachs (GS).

Goldman's flagship Alpha fund reportedly lost 8% in one week in July and now stands at -16% in year to date performance. Talk amongst traders began yesterday that GS would have an after-market announcement regarding concerns in fund operations. This quickly turned the market lower, but a denial from Goldman Sachs sent American markets back to near highs of yesterday's session. Further reports today quantified Alpha Fund losses and required the firm to respond with the poignant "business as usual at Alpha" rebuttal. Rumors persisted that the fund was liquidating assets in various risky investments in order to stabilize its major fund. The Alpha fund has a history of successful performance but Goldman's consecutive earnings reports showed steep falls in asset management incentive fees. A sign of uneasiness for the investment bank not to be taken lightly by traders. The comparisons come against a very strong 2006 year for the investment firm and industry as a whole, so these numbers have to compared more closely to historic levels. Even so, a troubling trend is certainly forming.

Is this the time to jump out of the best investment bank on the market? While the stock may be stagnant or drifting slightly lower during the panic of the sub-prime meltdown, it is till a top tier company sporting very low P/E and PEG ratios. Goldman just won a bid for ownership of large portions of toll roads in Mexico for an astonishing 30 years. It has gotten approval from China to purchase a 12% stake in Chengdu Yangzhiguang Industrial Co., a tool making company, and it just agreed to purchase Nursefinders Inc., a health-care staffing organization. Clearly Goldman is diversifying its investment strategies for the long term, and this is a positive thing for the company and will be a good thing for investors down the road.

Goldman's next earnings report will be crucial, as a slowdown in Mergers & Acquisitions activity and the fall out from more sub-prime sector losses will weigh on all the investment banks. It will be hard for GS to get close to all-time highs of $230 in the near term as the growth story is being silenced by credit worries. However it seems as though the bottom is near and within the next few months buying opportunities could be plentiful for longer term investors.

Those holding may feel some pain during this storm as losses are realized throughout the industry but the plan that Goldman has in motion should lead it to calmer seas well ahead.

Disclosure: Author is long GS