Words from the wise for the week that was (November 19 – 25, 2007)
This week’s edition of “Words” is again a “high-altitude delivery” as it comes from above the clouds en route from Cape Town to Ljubljana, the romantic capital of Slovenia right in the heart of Central Europe. After three recent aircraft incidents in South Africa (my home country), notwithstanding the fact that none resulted in any serious injuries, I am acutely aware of the risks of spending a disproportionate amount of time in the sky. It sure is a long way to the ground from up here …
Does the stock market have a tried and tested parachute? We can only guess, but in the words of market veteran Richard Russell (Dow Theory Letters), “it’s always best to hope for the best and be prepared for the worst
In the aftermath of Thanksgiving, may I remind you of the following old stock market adage: “The bears have Thanksgiving and the bulls have Christmas.” Let’s hope for an early Christmas!
Before highlighting some thought-provoking quotes from market commentators during the past week, let’s briefly review the markets’ actions on the basis of a performance chart
Black Friday could not have arrived a moment sooner as the financial markets need a clearer picture of how the US consumer will be affected by this environment. The weekend numbers will be very important in assessing the lie of the economic land.
Source: Wall Street Journal Online, November 25, 2007.
Global stock markets continued their slide and ended the week in the red as investors concerned about an array of negative factors (as mentioned under “Economy”) dumped stocks. Emerging-market stocks in particular performed poorly and shed 4.8% during the week, although the 52-week performance of 37.4% was still highly respectable. China’s Shanghai Index has lost more than 17% since its peak in October.
Wednesday witnessed the Dow Jones Industrial Index tumbling by 211 points, thereby confirming a so-called Dow Theory bear market signal with both the Industrial Index and the Transportation Index trading below their lows of August 16, 2007. Financial stocks dominated investors’ worries, but the week’s losses were tempered by a low-volume relief rally on Friday.
Economic woes caused a further steepening of the US yield curve with the yield on 10-year Treasuries falling to a two-year low at 4.01% (after having dipped to below 4.0% at one stage) as investors switched from stocks to bonds perceived to offer safe-haven status. Eurozone and UK bond yields were also sharply lower.
With credit markets pricing in further US interest rate cuts, the US dollar had another dreadful week and recorded an all-time low against the euro (approaching $1.50) and a fresh 30-month low against the Japanese yen. The latter, as well as the Swiss franc, gained more ground on the back of further unwinding of carry trade transactions.
With the dollar hitting new lows, the Dow Jones-AIG Commodity Index strengthened by 1.4% to trade near its highs. The star performers among commodities were gold bullion (+4.9%) and crude oil (+4.6%), with the latter reaching its highest level ever in thin and volatile post-Thanksgiving trade. Platinum also recorded an all-time high. Industrial metals, including copper (-5.3%), were the only weak spot in the commodities complex.
This week promises to be a key week for the direction of financial markets. Hopefully the words (and graphs) from the investment wise below will assist in guiding us through the stormy waters and making the correct investment decisions.
Richard Russell (Dow Theory Letters): Dow Theory – bear market signal
“I expect a lot of wild and confusing movements from the stock market in the days ahead. But … a rally here, even a powerful rally, will not mean that the bull market has suddenly been reborn. Bear markets tend to be both costly and discouraging to stockholders. It is only natural and human nature that stockholders treat every rally as a sign that the bear market is over, and therefore that they’ll ‘get their money back.’ I warn subscribers not to be taken in by the powerful rallies that are certain to occur. They’ll be corrective rallies within the framework of a primary bear market.”
Source: Richard Russell, Dow Theory Letters, November 23, 2007.
John Hussman (Hussman Funds): Financial markets are at a critical point
Source: John Hussman, Hussman Funds, November 19, 2007.
GaveKal: Stocks – downside breakout or rebound?
“1. On the continued meltdown fears: The news, especially in the financial sector, continues to be dreadful! Needless to say, whipping oneself into a bearish frenzy is not such a hard thing to do today. And yet, there may still be hope …
“2. On the rebound hopes: The obvious hope is that, today, sentiment indicators are all once again painting a picture of a one-way market. Any kind of bad news is a reason to sell, while good pieces of news are swept away in the tide of negativity and uncertainty. … with a massively undervalued US$ and low interest rates, a recession would be quite surprising. Low rates and a weak US$ are the recipe for a boom, not a bust!
“We thus hope that the markets will be able to rebound from this important juncture. But we are fully cognizant of the fact that the next few days of trading are very important.”
Source: Gavekal – a Checking the Boxes, November 21, 2007
BCA Research: Too soon to bottom-fish global banks
Source: BCA Research, November 19, 2007.
“Historically, the yield curve has tended to steepen during recessions, meaning that long-term rates either fall slower than short-term rates, or increase (which they have done, on average). While I don’t place much faith in Fed actions (other than for psychological effect), Fed officials have attempted to discourage expectations for further cuts in the Fed Funds rate, most likely because of the weakness in the dollar, combined with the 4% year-over-year headline inflation rate that is virtually baked-in-the-cake for the November CPI. That may cause some re-adjustment in short-term rates, and in turn, a quick spike in long-term rates (not that I expect it would develop into a sustained uptrend). In any event, we’ll continue to respond to such yield spikes, if they occur, to modestly boost our exposure in TIPS.”
Source: John Hussman, Hussman Funds, November 19, 2007.
Paul Farrel (MarketWatch): America needs a recession
“To begin with, recession may be an understatement. Jeremy Grantham’s GMO firm manages $150 billion. In his midyear report before the credit crisis hit he predicted: ‘In 5 years I expect that at least one major ‘bank’ (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private-equity firms in existence today will have simply ceased to exist.’ He was ‘watching a very slow motion train wreck.’ By October, it was accelerating: ‘Train hits end of track at full speed.’
“Also back in August, The Economist took a hard look at the then emerging subprime/credit crisis: ‘The policy dilemma facing the Fed may not be a choice of recession or no recession. It may be between a mild recession now, and a nastier one later.’ However, the publication did admit that ‘even if a recession were in America’s long-term economic interest, it would be political suicide’ for Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson to suggest it. Then The Economist posed the big question: Yes, ‘central banks must stop recessions from turning into deep depressions. But it may be wrong to prevent them altogether.’
“Wrong to prevent a recession? Why? Because recessions are a natural and necessary part of the business cycle. Remember legendary economist Joseph Schumpeter, champion of innovation and entrepreneurship? Economists love Schumpeter’s ‘creative destruction': Obsolete firms get destroyed and capital released, making way for new technologies, new businesses …
“… for the folks at the Fed, Treasury and Wall Street, ‘eternal growth’ is still America’s mantra. Unfortunately, the American investors’ brain has also developed this blind obsession with ‘growth-at-all-costs,’ coupled with a deadly fear of all recessions, as if recessions are a lethal super-bug more powerful than Iran with a bomb.
“… the fact is, we let the housing/credit boom become a massive bubble, it popped and a recession is coming.”
Source: Paul Farrel, MarketWatch, November 19, 2007.
Asha Bangalore (Northern Trust): Leading Economic Indicators point to weak economy
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 21, 2007.
BCA Research: Fed – falling behind the curve
Source: BCA Research, November 22, 2007.
Asha Bangalore (Northern Trust): Fed remains biased toward easing
Source: Northern Trust Daily – Daily Global Commentary, November 20, 2007.
MarketWatch: Fed forecast sees slower growth, tame inflation in 2008
Source: Greg Robb, Market Watch, November 20, 2007.
Ambrose Evans-Pritchard (Telegraph): Credit ‘heart attack’ engulfs Asia
“‘This is a severe warning sign,’ said Hans Redeker, currency chief at BNP Paribas. ‘Asia ignored the credit crunch in August but now we’re seeing the poison beginning to paralyse the whole global economy,’ he said.
“Korean and Chinese three-month yields have fallen from 4% to 1% in a matter of days in a eerie replay of events on Wall Street in late August when flight from banks and the US commercial paper markets caused yields on three-month Treasuries to fall at the fastest rate ever recorded. Asian investors appear to be opting for deposit accounts with government guarantees.
“It is unclear what prompted this latest ‘heart attack’ in the credit system, though rumours abound that Asian banks have yet to own up to their share of the expected $400bn to $500bn losses from the US mortgage debacle.”
Source: Ambrose Evans-Pritchard, Telegraph, November 23, 2007.
David Fuller (Fullermoney): This is gold’s era
“Supply from mines is falling and central banks are not selling nearly as much. While on the demand side median incomes are increasing across the emerging world and gold continues to be a status symbol and the gift of choice for many grooms to their brides as well as comprising part of a dowry. On top of this, you have investment demand for the metal as a store of value in a fiat currency world.
“This uptrend will unavoidably be punctuated by corrections but these will most likely continue to provide good buying opportunities. Over the long-term, the secular theme would require a fundamental change to supply or demand to question its integrity.”
Source: David Fuller, Fullermoney, November 21 & 22, 2007.
Dave Galland (Casey Research): Realignment of Middle Eastern currencies on the horizon
“Well, this week we have heard a spate of announcements from central bankers in the Middle East saying that they have absolutely no plans to stop pegging their currencies to the US dollar, despite the pain that peg is beginning to cause. Foreign currency traders seem to be taking Dr. Shulman’s words to heart. This out of Bloomberg: ‘Merrill Lynch & Co. predicts either the United Arab Emirates or Qatar will cut their dollar peg within half a year. Standard Chartered Plc says the six Gulf Cooperation Council nations need to raise the value of their currencies 20 percent. The difference between the price of the Saudi Arabian riyal and the cost of buying it in a year using forward contracts has widened 10-fold since October as traders bet the kingdom will sever its 21-year-old link to the dollar.’
“The most immediate effect of the Middle East satrapies dropping their dollar pegs would be that oil would head much higher, much faster. That, in turn, will only add to the already rising inflationary pressure in the US. There is much more to this possible realignment in currencies. Consider, for instance, that sovereign wealth funds now control about $2.5 trillion, about half of the official currency reserves in the world … an amount estimated to grow to $17.5 trillion over the next 10 years. A trend toward central banks adopting a more ‘currency neutral’ stance for their reserves is entirely logical, and something we will almost certainly see more of.”
Source: Dave Galland, Casey Research – The Room, November 23, 2007.
Financial Times: Indian tourist sites refusing entry to dollar
“‘Keeping in view international practices and also to avoid any anomaly on account of falling exchange rates of the US dollar vis-a-vis rupee and consequent fall in revenues, the government has decided to denominate the entry fee for the foreigners for all the monuments in Indian rupees only,” the ministry said.
Source: Jo Johnson, Financial Times, November 16, 2007.
David Fuller (Fullermoney): US dollar – signs of short-term reversal?
“Similar levels can be identified and monitored on many of the US dollar’s other cross-rates. For instance, the euro stalled beneath $1.50 today. That is an understandable psychological resistance level, so for real deterioration we would need to see a break beneath $1.45. Sterling fell back against the dollar following the key day reversal earlier this month. A break beneath $2.035 would further question the ranging overall upward trend. The dollar’s downtrend against the yen is much more recent and a move back above ¥112 would be required to question sideways to lower scope.”
Source: David Fuller, Fullermoney, November 23, 2007.
Chuck Butler (EverBank World Markets): A strong dollar policy?
“And usually any time that line is uttered, it’s followed by “we also believe that the best way for a currency to become valued is through the markets.” Hmmm … To that I say, “the markets only give value to currencies with good fundamentals.” And I’m sure that Mr Paulson knows that all too well! So, when he tells us about a strong dollar policy, he’s got his fingers crossed behind his back!
“I think what the Government cares about is that the selling of the dollar is orderly.”
Source: Chuck Butler, Everbank World Markets, November 1, 2007.
David Fuller (Fullermoney): Bull market in agricultural commodities
“All of these factors point toward a sustained bull market for agricultural commodities. However this sector will continue to be volatile because every country in the world produces and consumes these commodities and weather will always play a role in how they are priced. This means that they are best purchased following corrections and patience is needed for them to recover.”
Source: David Fuller, Fullermoney, November 22, 2007.
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