Words from the wise for the week that was (September 1 to 7, 2007)
Talk in financial markets during the past week was dominated by increasing worries about the US economy, as illustrated by the reaction to the US Labor Department’s poor August jobs report. Before gleaning some wisdom from an assortment of quotes from market commentators, let’s briefly review the week’s ups and downs on the basis of a few bar charts.
US equities were adversely affected by economic concerns and closed the week in negative territory. The Nasdaq Composite Index, however, bucked the trend with a positive return (albeit in the second decimal), thereby extending its recent relative strength. Emerging markets again occupied the top of the performance table, with China and Hong Kong looking unstoppable (but very overbought).
GLOBAL STOCK MARKETS
Bond yields were lower across the yield curve during the week, discounting softer economic activity. US 3-month Treasury Bills, however, jumped as liquidity concerns persisted. On the exchange rate front, the US dollar came under renewed pressure in the expectation of lower interest rates. The yen rose strongly, focusing the attention on the implications of the reversal of carry trade positions.
FIXED-INTEREST AND CURRENCY MARKETS
The commodities markets were characterized by strong increases in precious metals (with gold breaking the psychological barrier of $700), energy (with oil approaching its highs) and agriculture. The notable exceptions were industrial metals and livestock, where losses were registered.
Now for words from the investment wise to cast some light on the increasingly complex set of circumstances confronting investors.
Business confidence for world
Source: Moody’s Economy.com, September 5, 2007.
Beige Book for United States
Source: Moody’s Economy.com, September 5, 2007.
What created the conditions for the crisis?
Source: Martin Wolf, Financial Times, September 5, 2007.
US house prices: still too high?
Source: BCA Research, August 31, 2007.
A September 18 cut in federal funds rate is very likely
Source: Asha Bangalore, Northern Trust’s Daily Global Commentary, August 30, 2007.
Aggressive Fed action on house prices
“My guess is that an aggressive Fed, now in rate cutting mode, will underpin the government bond market for the short to medium term, producing a somewhat bigger rally of longer duration, before the secular trend of rising yields resumes.
“This should cushion downside risk for the stock market, although we can expect some further choppy, ranging action in a convalescence phase.
“The US Dollar Index should remain generally weak against the background of Fed reflation and a soft economy. This would be bullish for gold, which has also strengthened against other currencies this week.
Source, David Fuller, Fullermoney, September 7, 2007
Should the Fed cut interest rates?
“After today’s unemployment number, the futures market is pricing in a rate cut for the September FOMC meeting. If they do not get it, their will be lynch mobs forming. You do not want to be long the S&P if there is no rate cut. It will be ugly.”
Source: John Mauldin, Thoughts from the Frontline, September 7, 2007.
Outlook for equities
“… the market climate for stocks remained characterized by unfavorable valuations and unfavorable market action. The market has now cleared the oversold condition that we observed several weeks ago, yet breadth and trading volume have not evidenced the strength and persistence that we typically associate with more sustained recoveries from oversold conditions. That’s not to say that we can’t observe further market strength, but at present we have no evidence either from valuations or from market action to reliably speculate on such strength.”
“In the face of such a whiplash (referring to equities’ rebound subsequent to the US discount rate cut), most investors (ourselves included) are currently breathing a deep sigh of relief and wondering what to do next? Should they increase, or curtail, risk in portfolios? As we see it, looking at today’s investment environment, it might be more sensible to err on the side of caution. After all:
All of the above might argue for a more cautious approach to risk in portfolios.”
Source: Checking the Boxes, GaveKal Research, September 3, 2007.
Richard Russell on gold
“At this point, gold fundamentals are being helped tremendously by the various central banks. No nation wants a strong currency, since a strong currency equals contracting exports. US M-3 has been expanding at a 13% rate, Britain’s M-4 has been doing the same, Russia has been grinding out rubles at a fantastic 50% rate, and all over the world the blizzard of “counterfeit” paper continues. The fundamental escape from hyper-paper-creation is to buy anything tangible. The wealthy of the world are well aware of this. Classic paintings, gem stones, diamonds, collectibles, seaside real estate, and gold are rising steadily in terms of paper. The incredible fraud of fiat currency goes on and on. It will continue on until – well, until it morphs into dreaded hyper-inflation.”
Source: Richard Russell, Dow Theory Letters, August 31, 2007.
Source: Rita Rudner
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