Words from the wise for the week that was (November 12 – 18, 2007)
This week’s article comes from Windhoek and Swakopmund in Namibia where I am on a brief business visit. This desert country is located along the southwestern coast of the African continent and lies north of my home country, South Africa. Namibia is known for its contrasting landscapes – from the Namib dune sea to teak woodlands to the Etosha Pan, a dried-out saline lake surrounded by grasslands and bush that support a large and varied wildlife – and for its hospitality and orderliness (largely as a result of the German influence that has remained since the days when it was a German colony at the end of the 19th century).
Speaking of contrasts almost as stark as those in Namibia, is the performance of stock markets out of step with an increasingly recessionary looking US economy? On Monday widely-respected John Hussman (Hussman Funds) said: “I expect that a US economic recession is immediately ahead”, but on “turnaround Tuesday” (November 13) the Dow Jones Industrial Index shot up by 320 points (2.5%), representing the 17th largest points increase on record.
But wait, are markets not simply fulfilling their traditional role as a discounting mechanism of future events? Here is Richard Russell’s (Dow Theory Letters) take on matters: “Doesn’t the stupid Dow Jones Industrial Average see what’s going on? Is the stock market crazy or what?! I went through this same experience in 1957 when the Dow turned up amid a deepening recession. Of course, the stock market knows what’s going on. The stock market in late-1957 was looking past the bad news to a coming boom. I think the market (the Dow) is doing the same thing now.”
More from Russell in the paragraphs below, but before highlighting some thought-provoking quotes from market commentators during the past week, let’s briefly review the markets’ actions on the basis of economic statistics and my customary performance charts.
Credit market concerns lingered, but without triggering the same degree of anxiety as in recent times, especially regarding the ongoing sub-prime-related write-downs by financial institutions. A large part of the economic debate focused on whether or not the American consumer is finally slowing down spending due to high energy costs, tighter credit conditions and a continuously falling dollar, and the implications thereof for global economic growth.
WEEK’S ECONOMIC REPORTS
Source: Gold Seeker Weekly Wrap-Up, November 16, 2007.
This week’s economic highlights include Building Permits, Housing Starts, and FOMC minutes on Tuesday, and Initial Jobless Claims, Leading Economic Indicators and Michigan Sentiment on Wednesday.
US markets will be closed on Thursday for the Thanksgiving Holiday and markets will close early on Friday.
Global stock markets
The Hang Seng Index declined by a further 4.1%, bringing its losses since an all-time high on October 30 to 13%.
Global fixed-interest and currency markets
Despite Kroszner’s comments, US treasuries gained over the week as the yield on the 2-year US Treasury Note declined to its lowest reading since February 2005 and the yield on the 10-year US Treasury Note dropped to a level not seen since September 2005. Elsewhere in the world the 10-year Japanese bond yield hit a 20-month low.
Gold bullion suffered from exhaustion and used the pause in the US dollar’s decline as an excuse to correct after its big run-up. Silver traded in lock-step with gold and also pulled back, but platinum bucked the trend.
The US Energy Department’s weekly inventory data showed the first increase in crude oil inventories in four weeks, thereby diminishing supply concerns and putting downward pressure on oil prices.
Base metals posted red numbers, but “Dr Copper” (usually a fairly good gauge of global economic activity) rebounded and ended higher for the week after a four-week slide.
Now for some words (and graphs) from the investment wise that will hopefully assist to make sense of the shenanigans of the credit debacle and other pertinent issues.
Economy.com: Business confidence for world
Source: Moody’s Economy.com, November 12, 2007.
John Hussman (Hussman Funds): US recession immediately ahead
“In every instance we’ve observed these conditions, the US economy has either already been in a recession, or has been within a few weeks of what turned out in hindsight to be the official beginning of a recession. There have been no false signals. Few things in investing or economics are certain, but my impression is that current evidence moves recession risk from ‘possible’ to ‘probable’.”
Source: John Hussman, Hussman Funds, November 12, 2007.
BCA Research: Has the Fed fallen behind curve?
Source: BCA Research, November 12, 2007.
Asha Bangalore (Northern Trust): Fed on hold in December?
“We are keeping close tabs on the message from economic reports between now and the FOMC meeting on December 11. The latest jobless claims report, the NFIB Small Business Optimism Index, and the six-months-ahead Business Outlook Index of the Federal Reserve Bank of Philadelphia point to a bearish outlook for the economy. But sluggish growth for the fourth quarter already is built into the FOMC’s forecast. The FOMC believes that the bulk of the effects of its cumulative 75 basis point cut in the fed funds rate will not start to be reflected in the economic data until 2008. Therefore, the FOMC is likely to keep its fed funds rate target steady at the December 11 meeting unless incoming data suggest that the economy has entered a recession.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 15, 2007.
John Mauldin (Thoughts from the Frontline): The Fed’s dilemma
“Not cutting rates risks an economy that could easily slip into recession due to a growing risk of a credit crisis turning into a credit crunch. Usually, that means that inflation will fall. Usually, but not always.
“The Fed is faced with a problem I predicted four years ago … as the Fed dramatically eased monetary conditions in an effort to fight deflation. In a word, stagflation. That terrible moment in time when an economy slows (is stagnant) yet inflation is high, limiting the monetary authority’s ability to act. With a clearly slowing economy, a credit crisis, and rising inflation, they have no good and clear choices. Whatever they do is likely to create problems in a multi-dimensional real world. I still think they cut, as core inflation is still close to their comfort zone. But if core inflation starts to rise, they will have to act. Or at least should.”
Source: John Mauldin, Thoughts from the Frontline, November 16, 2007.
Richard Russell (Dow Theory Letters): Dow is discounting US export boom
“What’s really happening with the Dow? The new ‘cheap’ dollar is changing the import-export equation. America’s big corporations, the ones that do a lot of exporting, they’re having a ball. In a short while I believe we’ll be reading about a US export boom. Of course, the boom will be led by the biggies, the type of giant stocks represented in the Dow. There, I’ve given the secret away, but don’t tell your friends. America is on the edge of an export boom.”
Source: Richard Russell, Dow Theory Letters, November 16, 2007.
Martin Spring (On Target): Go for large caps
“For the very short term, I think caution is called for. There are signs of dramatic change in the corporate earnings environment. Prices of many resources look too far above trend. And many of the charts of major stock markets seem to be signalling significant corrections ahead. Usually the November to February period is one of strength in global equity markets, but I fear that this time around we could suffer an unseasonal shock.”
Source: Martin Spring, On Target, November 14, 2007.
Richard Russell (Dow Theory Letters): Is this the end of gold as a monetary asset
Source: Richard Russell, Dow Theory Letters, November 12, 2007.
GaveKal: The ever-falling US dollar
“Finally, the ‘commodity currencies’ (AU$, NZ$, CA$, ZAR, BRL and NOK) are even more overbought than the ‘savings currencies’ and nearly as overvalued. However, thanks to solid commodity prices, they continue to show decent upward momentum (especially the CA$) though this will most likely slow if the current liquidity squeeze continues.
“Putting it all together, it seems to us that the best strategy is to remain long the ‘trading currencies’, followed by the US dollar, followed by the ‘commodity currencies’. The ‘savings currencies’ are best avoided or used as a source of funding.”
Source: Gavekal – Checking the Boxes, November 6, 2007.
BCA Research: German growth set to slow further
Source: BCA Research, November 14, 2007.
BCA Research: ECB can’t get any tighter
Source: BCA Research, November 16, 2007.
The Telegraph: Seeing little inflation, Bank of England ready to cut rates
“It is the firmest indication yet that it is preparing to cut the cost of borrowing for the first time since August 2005. The first of the interest rate cuts could come as soon as next month, although most experts think it will be more likely to arrive in the new year.
“The bank slashed its economic growth forecast, acknowledging that next year would be the hardest for the British economy for many years. Governor Mervyn King also said that the housing slowdown had arrived, and said he expected house price inflation to drop even further in the coming months.”
Source: Edmund Conway, The Telegraph, November 15, 2007.
GaveKal: Reigning in China’s inflation
“ … we seek comfort in the fact that Beijing has thus far provided every indication that it has the desire and agility to deal with its inflation and asset appreciation problems, without causing a severe crash. To do this, Beijing chooses, from its myriad of policy options, just where and how it wants to slow down its roaring economy and overheated asset markets. For example, it recently simply told its domestic, state-owned banks to reign in loan growth (and for select companies, such as those that are heavy polluters or those invested in real estate, credits are completely shut down). Of course, if this method were to usher in undesirable, or overly dramatic, consequences, then Beijing has shown itself perfectly willing to quickly adjust the plan accordingly. As such, we have confidence that Beijing has a handle on the issues surrounding food and asset prices, and, as such, neither should spiral out of control.”
Source: Gavekal – Checking the Boxes, November 14, 2007.
Martin Spring (On Target): Slow-burning credit crisis
“One example of how much further revaluation of structured-credit assets still has to go is that Merrill Lynch was recently forced to cut by 57 per cent the value of one chunk if its mortgage products that had been given the highest credit rating, AAA. Lots of toxic waste remains buried in packaged investments scattered around the world in the portfolios of conservative financial institutions such as pension funds. It will be take years for the losses to become apparent, when the lower market values of those credits are recognized and taken to book.
“However, more damaging than the losses themselves – which could well turn out to be not all that great, relative to total assets – will be the damaging impact on sentiment of ongoing uncertainty and the drip-feed of continual announcements of losses. A serious outbreak of caution.”
Source: Martin Spring, On Target, November 14, 2007.
Joseph Stiglitz (Vanity Fair): Economic consequences of Mr Bush
Source: Joseph Stiglitz, Vanity Fair, December 2007.
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