Words from the wise for the week that was (Sept 24 – 30, 2007)
Before highlighting some memorable quotes from market commentators during the past week, let’s briefly review the week’s ups and downs on the basis of a few bar charts.
Worries of the recent credit market turmoil diminished during the week as weak economic news was interpreted as ammunition for further interest rate reductions. Emerging markets as a group surged by 4.3%, with a number of individual emerging markets advancing to new all-time highs, but mature markets also did not disappoint investors.
The past week brought to an end a turbulent and nerve-wrecking third quarter, the end result of which surprised many pundits. Contrary to expectations of just a few weeks ago, the Dow Jones Industrial Index (+3.6%), the Nasdaq Composite Index (+3.8%) and the S&P 500 Index (+1.5%), by means of example, all tallied useful gains.
GLOBAL STOCK MARKETS
Global bond yields were lower on the week as investors focused on slower economic growth rather than on the inflationary implications of easy monetary policy. The rate of the US 3-month Treasury Bill, however, edged higher in the aftermath of the Fed’s rate cut.
On the currency front the US dollar remained under intense pressure in anticipation of a slowing economy and further interest rate cuts, and recorded an all-time low against a basket of currencies (using the US Dollar Index as a measure). The US dollar plunged to a 30-year low against the Canadian dollar, or so-called loonie or Canuck (not shown on the graph), and an all-time low against the euro.
FIXED-INTEREST AND CURRENCY MARKETS
The declining US dollar encouraged further strong gains in gold (hitting a 28-year high), silver and platinum (not shown as a result of a data error). Crude oil recovered from a mid-week low to close almost unchanged, but in the light of storm concerns, persistent geo-political problems and the dollar’s weakness, a breach of the $100 level is no longer regarded as a far-fetched prospect.
Solid demand from China and other developing countries, as well as weather-related issues, boosted the prices of agricultural commodities to another strong weekly increase. Wheat soared to an all-time high, having more than doubled over the past year.
Now for some words from the investment wise to navigate through the markets’ cross-currents:
Economy.com: Survey of business confidence for world
Source: Moody’s Economy.com, September 24, 2007.
Richard Russell: “Inflate or die” – poison for US dollar
“Unfortunately, this will play hell with the already weak dollar. Huge deficits, lower interest rates, a weakish economy, they’re all poison for any currency, and the dollar will be no exception. Who will benefit? The answer is that gold will benefit. When the dollar declines in value, it takes more dollars to buy an ounce of gold. In fact, it will take more dollars to buy diamonds, Picassos, top-grade collectibles, rare coins, objects of art, and so on. It will cost more dollars to buy anything of lasting tangible value.”
Source: Richard Russell, Dow Theory Letters, 28 September 2007.
Eric Fry (Rude Awakeing): Blame Bernanke
Source: Eric Fry, Rude Awakening, September 28, 2007.
Telegraph: Fears of dollar collapse as Saudis take fright
“Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signaling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.
“’This is a very dangerous situation for the dollar,’ said Hans Redeker, currency chief at BNP Paribas. ‘They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the US,’ he said.
“As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy. Inflation has risen to 4% and the M3 broad money supply is surging at 22%. The pressures are even worse in other parts of the Gulf. The United Arab Emirates now faces inflation of 9.3%, a 20-year high. In Qatar it has reached 13%. Kuwait became the first of the oil sheikhdoms to break its dollar peg in May, a move that has begun to rein in rampant money supply growth.”
Source: Telegraph.co.uk, September 21, 2007.
The Times: Predicting record gold run
“According to Christopher Wood, chief strategist at CLSA, market ructions and a collapse of the dollar could send gold prices to more than $3 400 an ounce within the next three years. Gold futures last night hit a 28-year high at $733 an ounce, but are more than $100 short of the record.
“Mr Wood said that the sub-prime conflagration would be the catalyst for a wider breakdown in markets. However, Wood predicted that investors would soon realise that the sub-prime crisis is simply the catalyst of a much wider breakdown, arguing that it has been the ‘Archduke Ferdinand assassination event’ that sparks a bigger calamity. ‘This is not a sub-prime crisis. Sub-prime has merely exposed the bigger scam of structured finance; a scam that is about pretending that bad credit is good credit,’ he said.”
Source: Leo Lewis, The Times, September 19, 2007.
Peter Spina (Goldforecaster): Gold returns to centre stage
Source: Peter Spina, Goldforecaster.com, September 28, 2007.
Bloomberg: Jim Rogers sees ‘skyrocketing’ prices for commodities
“On July 2, Rogers said agricultural commodities were ‘the place to be,’ and that investors should buy them over stocks and bonds. Today, he advised against buying wheat, which has become the most expensive ever relative to corn, soybeans and cotton. ‘I wouldn’t buy it now,’ Rogers said. ‘If you’re going to buy something, buy coffee or cotton or sugar. Wheat has been going straight up for about a year. I don’t like to jump on a moving bus.’”
Source: Betty Liu and Eric Martin, Bloomberg.com, September 24, 2007.
Asha Bangalore (Northern Trust): Issues haunting the Fed
“Each financial market crisis has its own special features that demand some creative solutions. The Fed’s response to the LTCM crisis in 1998 by lowering the federal funds rate 75 basis points was less challenging because the root of the problem was outside the country, the US economy was growing at a robust pace of 4.2%, the trade weighted value of the dollar was rising (not declining as now), and core inflation was slightly lower compared with the situation today.
“At the present time, the root of the problem is at home, the spillover effects of the housing market meltdown have been visible prior to the crisis, and the US economy has posted sub-par growth for four out of the last five quarters. Weak economic conditions are most likely to trump all other considerations in the weeks ahead. A lower federal funds rate in the months ahead is nearly certain but the timing of the cuts in the federal funds rate is not certain.”
Source: Asha Bangalore, Northern Trust’s Daily Global Commentary, September 24 & 27, 2007.
GaveKal: Fed decisions dependent on data releases
“Given the nature of the current investment environment … additional rate cuts are certainly possible. But given the above factors, we think it may be too early to be confident with that call. Instead, we think the outcomes of upcoming Fed meetings are going to be very dependent on data releases between now and then.”
Source: Checking the Boxes, GaveKal Research, September 24, 2007.
Asha Bangalore (Northern Trust): Existing home sales decline to 5-year low
Source: Asha Bangalore, Northern Trust’s Daily Global Commentary, September 25, 2007.
BCA Research: Homebuilders – the downward spiral continues
“It will take a substantial drop in interest rates, house prices, or a combination of the two, to bolster affordability sufficiently to clear excess housing stock. The latter is unlikely with lenders still in the early stages of tightening standards on mortgage loans and a still high level of home sales relative to the housing stock. Thus, while the industry has already been through a dreadful year, it is too soon to attempt any bottom fishing.”
Source: Daily Insights, BCA Research, September 27, 2007.
John Hussman (Hussman Funds): Market’s performance following two consecutive rate cuts
“Indeed, only two of those “second Discount Rate cuts” occurred with the S&P 500 P/E above 15 and advisory bullishness running over 50%. Those instances were December 1971 and January 2001. The average subsequent performance of the S&P 500 following those cuts was -1.22 over 3 months, 0.92% over 6 months, and 3.17% over the following year.”
Richard Russell: Amazing two-tier market
“I’m getting a bit nervous about this market. It’s not one thing that I can put my finger on, but I’m watching those Lowry’s figures. I’m watching the rising number of new lows, and I keep waiting for volume to expand on the days when the market is higher. So let me put it gingerly. My instinct tells me that this is not a great time to be loaded with a broad spectrum of stocks. I think the best thing that could happen now would be the majority of stocks fluctuating within a trading range, while the Dow and maybe the ‘big’ stock averages tend to head higher. This has become a true two-tier market.”
Source: Richard Russell, Dow Theory Letters, September 26, 2007.
BCA Research: Reflation trades – thanks Ben
Source: Daily Insights, BCA Research, September 20, 2007.
John Mauldin: A Chinese tsunami of money
“This will take off a lot of the market pressure for a stronger yuan, as the Chinese will need to buy dollars and euros and other currencies in order to make those investments. I think we will see the Chinese government open up the potential to invest and spend abroad before they float their currency.”
Source: John Mauldin: Thoughts from the Frontline, September 29, 2007.
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