Words from the (investment) wise for the week that was (March 17 – 23, 2008)

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Phew – what a tumultuous week! Once again, the fall-out of the subprime mess had a lot to do with it. For some variety, however, it was not only financials that were in the limelight, but also commodities that corrected sharply.


Unrelated to St Patrick’s Day, the week started off with a sense of fear for a market meltdown after it had been announced over the weekend that the Federal Reserve of New York facilitated the sale of Bear Stearns (BSC) to JPMorgan Chase (JPM) for the princely sum of $2.00 per share.

Stock Trader’s Almanac succinctly reminded us of the words of Norwegian playwright Henrik Ibsen who opined over a century ago: “Those heroes of finance are like beads on a string, when one slips off, the rest follow.” With faith in the US financial system fragile, pundits questioned whether Bear would be the only casualty. Though, better-than-expected earnings reports by Morgan Stanley (MS), Goldman Sachs (GS) and Lehman Brothers (LEH) allayed some of the market’s concerns about the shape of the financial sector.

In the Fed’s first weekend action in more than 25 years, it announced a 25 basis-point cut in the discount rate to 3.25% and created a new lending facility to provide financing to participants in securitization markets. “You only cut on a Sunday if you’re trying to avert all-out panic on a Monday,” said John Hussman of Hussman Funds.

Two days later the Federal Open Market Committee (FOMC) cut the Fed funds rate by 75 basis points to 2.25% and the discount rate by another 75 basis points to 2.50%. Although the FOMC’s statement noted increased uncertainty surrounding the inflation outlook, it still believed inflation would moderate. However, the downside risk to growth remained the Fed’s main concern and it was implied that it was ready to cut rates again if necessary.

The Office of Federal Housing Enterprise Oversight (Ofheo) announced that it was relaxing the excess capital requirement for Fannie Mae (FNM) and Freddie Mac (FRE) in an effort to increase liquidity in the US mortgage market by as much as $200 billion .

Capping a busy week, the Fed also announced that it was planning to expand the list of eligible collateral for next week’s Term Securities Lending Facility to include difficult-to-trade securities.

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance round-up.

In addition to the Fed’s interest rate announcements and other actions mentioned above, the past week’s US economic reports included: industrial production showing a steep decline; higher-than-expected jobless claims, pointing to a weakening labor market; the Philadelphia Fed manufacturing survey showing contraction for the fourth consecutive month; and a current account deficit narrowing in the fourth quarter from 5.1% to 4.9% of GDP, partly as a result of the weak dollar.

The US Producer Price Index carried mixed news with total PPI up less than expected, but core-PPI, which excludes food and energy, exceeding the consensus number. On a year-to-year basis, total PPI was 6.4%, marking the fifth monthly reading in excess of 6.0%.

On balance, there appears to be a growing list of economic indicators that are signaling contraction in the US economy. This was also reflected by the Index of Leading Indicators, showing the biggest drop in the current cycle (on a quarterly basis) – consistent with readings seen in past recessions.

Elsewhere in the world, the Bank of England’s minutes showed the BoE balancing strong inflationary pressures with slower economic growth. February retail sales surprised on the upside, but also suggested that UK consumers were continuing to drive themselves deeper into debt to fund purchases.



Time (ET)




Briefing Forecast

Market Expects


Mar 17

8:30 AM

NY Empire State Index






Mar 17

9:00 AM

Net Foreign Purchases






Mar 17

9:15 AM

Capacity Utilization





Mar 17

9:15 AM

Industrial Production






Mar 17

9:15 AM

Capacity Utilization






Mar 18

8:30 AM

Building Permits





Mar 18

8:30 AM

Core PPI





Mar 18

8:30 AM

Housing Starts






Mar 18

8:30 AM






Mar 18

8:30 AM

Building Permits






Mar 18

8:30 AM







Mar 18

8:30 AM

Core PPI






Mar 18

2:15 PM

FOMC Policy Statement

Mar 19

10:30 AM

Crude Inventories






Mar 20

8:30 AM

Initial Claims






Mar 20

10:00 AM

Leading Indicators






Mar 20

10:00 AM

Philadelphia Fed






Source: Yahoo Finance, March 21, 2008.

The next week’s economic highlights, courtesy of Northern Trust, include the following:

1. Existing Sales (March 24): Sales of existing homes are predicted to have declined in February. Existing home sales have dropped 31.5% from their peak in September 2005. Sales of existing homes have fallen 22.4% from a year ago in January. Consensus: 4.85 million versus 4.89 million in January.

2. New Home Sales (March 26): Sales of new homes are expected to have fallen in February. Purchases of new homes have fallen 57.9% from their peak in July 2005. Sales of new homes have declined 34.9% from a year ago. Consensus: 575,000 versus 588,000 in January.

3. Durable Goods Orders (March 26): Durable goods orders (+0.5%) are predicted to reverse a part of the sharp 5.1% decline seen in January. Orders of aircraft and defense may have risen following a big drop in January. Consensus: 0.7% versus -5.1% in January.

4. Real GDP (March 27): The downward revision of retail sales in December and a smaller trade gap in December could result in no change in the headline GDP from the preliminary estimate of a 0.6% annualized increase. Consensus: 0.6%.

5. Personal Income and Spending (March 28): The earnings and payroll numbers for February suggest only a small gain in personal income (+0.1%). Auto sales were nearly flat in February and non-auto retail sales were noticeably weak, which points to likely drop in consumer spending (-0.1%). Consensus: personal income +0.3%; consumer spending 0.1%.

6. Other reports: Consumer Confidence (March 25).

The performance chart obtained from the
Wall Street Journal Online shows how different global markets fared during the past week.


Source: Wall Street Journal Online, March 23, 2008.

Global stock markets closed the week lower, with the MSCI World Index declining 0.3%. As was the case during the previous two weeks, emerging markets again came under strong selling pressure and lost 4.3%. European stocks (-2.4%) also dropped markedly.

The major US indexes closed the shortened week on a high note, with the Dow Jones Industrial Index recording a four-day gain of 3.4%, the S&P 500 Index +3.2%, the Nasdaq Composite Index +2.1% and the Russell 2000 Index (small stocks) +2.8%.

Dick Bove, highly-regarded analyst of Punk Ziegel, proclaimed the financial crisis was over. The Financial Sector SPDR jumped 10.5% over the week, followed by REIT stocks with a gain of 7.9%. The Materials Sector SPDR, however, reflected the sell-off in commodities with a loss of 5.8%. Gold stocks (-16.7%) and oil services stocks (-6.5%) fared particularly badly.

Click here for a scorecard for a number of global stock markets, indicating the index movements since each of the respective market’s highs.

The yield on the 3-month Treasury Bill dropped to 0.54%, marking its lowest level in nearly 50 years. “Pretty soon we’ll be paying the Treasury for the privilege of owning T-bills. Yikes,” said Richard Russell, author of the
Dow Theory Letters.

The past week saw a mixed performance of benchmark government bonds. The yield on the two-year US Treasury Note dropped 2 basis points over the week to 1.6%, the 10-year yield declined 21 basis points to 3.34% and the 30-year yield shed 30 basis points to 4.17%.

Fading prospects for an imminent rate cut in the eurozone area resulted in the yield of the two-year Schatz bond jumping 17 basis points to 3.32%.

The beleaguered US dollar improved markedly after the FOMC’s rate announcement and continued to rebound for the rest of the week. The greenback gained 1.4% against the euro during the week and also strengthened against the Swiss Franc (+1.1%), the British pound (1.7%) and the Japanese yen (+0.4%).

Commodity-related currencies were at the forefront of the selling pressure against the US dollar, with the Australian dollar losing 3.9%, the Canadian dollar 3.3% and the New Zealand dollar 2.8%.

The Swiss Franc and Japanese yen benefited as risk aversion caused investors to reduce carry trades.

Commodity prices recorded all-time highs at the start of the week, but came under strong selling pressure as safe-have considerations became paramount and positions were de-leveraged before the Easter break. This resulted in the CRB Index experiencing its two sharpest daily declines (4.6% and 4.1% respectively) on record.

West Texas Intermediate oil hit a record $111.80 on Monday before correcting to $101.84 by the end of trading on Thursday. Gold plunged from an all-time peak of $1 030.80 on Monday to $920.30 by the close of the week, including its worst one-day fall (-5.9%) in 18 years on Wednesday.

The damage was equally bad across the rest of the commodities complex, as illustrated by the following chart:


Source: StockCharts.com

Click here for my recent post “Commodities – too much too quickly”.

Now for a few news items and some words and pictures from the investment wise that will hopefully assist in guiding us in making correct investment decisions in these uncertain times.


Source: Steven Benson, Slate, March 20, 2008.

Moody’s Economy.com: Global business confidence consistent with recession
“Global business confidence fell back in mid-March and is consistent with recession in the US, near recession in Europe and Canada, below potential growth in South America, and growth just at potential in Asia. Business assessments of current conditions and hiring weakened notably last week. Sales remain soft, and businesses continue to pare inventories. Real estate firms, financial institutions and business service firms are the most worried.”


Source: Moody’s Economy.com, March 17, 2008.

IFO Viewpoint: The party is over
“With the United States teetering into recession, the global economic boom has ended. The boom was unusually long and persistent, with four years of roughly 5% growth – a period of sustained economic dynamism not seen since around 1970.

“The clearest sign that the boom is ending is the IMF’s forecast of 1.5% growth for the US in 2008. That may not sound like a recession, but the Fund’s marginally positive projection primarily reflects the growth overhang from 2007, with hardly any new contribution in 2008. It is compatible with three consecutive quarters of zero growth in 2008.

“Many argue that a US recession will no longer affect the world because China has supplanted America as an engine of the global economy. Wrong.

Although China is growing fast, its economic power remains tiny. While the US contributes 28% to world GDP, China accounts for only 5%. The whole of Asia, from Turkey to China, contributes 24%, less than the US alone.

“At some stage, the world may no longer catch a cold when the US sneezes, but that is far from being true now. 21% of China’s exports and 23% of the EU’s exports to non-member countries go to the US. Thus, the world cannot help but be pulled down by a US slump.”

Click here for the full article.

Source: Hans-Werner Sinn, IFO Viewpoint, March 18, 2008.

Charlie Rose: A discussion with Paul Volcker on the US economy
“Former Federal Reserve Chairman Paul Volcker said the Fed’s decision to lend money to Bear Stearns to keep it from collapsing is unprecedented and ‘raises some real questions’ about whether that’s the appropriate role for the Fed. The wisdom of the decision depends on ‘how severe this crisis was and their judgment about the threat of demise of Bear Stearns,’ Mr. Volcker said on the Charlie Rose Show on Tuesday evening. ‘That’s a judgment they had to make and an understandable judgment.’ It is ‘absolutely’ not ‘what you want for the longstanding regulatory support system.’”


Source: Charlie Rose, March 18, 2008.

Jon Stewart (The Daily Show): Broken arrow
“Jon Stewart responds to President Bush’s rosy outlook on Wall Street and Jim Cramer’s terrible Bear Stearns advice.”


Source: Jon Stewart, The Daily Show, March 17, 2008.

Credit Suisse: US credit crisis – A monster with many heads
“The credit crisis continues to be the dominant issue in the financial markets and it’s leaving its mark on the real economy. The US Federal Reserve has made moves to subdue the deepening credit crisis – at least for the short term. In an interview, Giles Keating, head of the Credit Suisse Global Economics and Strategy Group, sheds light on the issues impacting the world economy.”

Click here for the full article.

Source: Michèle Bodmer & Joy Bolli, Credit Suisse, March 17, 2008.

Bill King (The King Report): It’s déjà vu all over again!
“Exactly one week from yesterday we had a 416-point DJIA rally after historic Fed intervention. It was extensively heralded as a clear sign of a bottom in everything, including Yankee pitching. The Street went CNBC jiggy. Three days later, the financial system almost imploded.

“The rally on March 11, just like yesterday’s 420-point rally, occurred because the Fed, US solons and their Street stooges had to manipulate markets to prevent a financial system at the abyss from implosion. Once again Bubblevision and their barkers proclaimed ‘bottom’ and ‘buying opportunity’.

“If the March 11, 416-points DJIA rally was a lark, a ruse, a product of legerdemain, what is different now – except Bear is gone, the Fed has less bullets and a worse balance sheet, the dollar is substantially lower and credit markets continue to flounder?

“There have been consecutive weeks of unprecedented Fed intervention in order to prevent a system implosion. Will we need weekly market interventions and manipulations to keep the system functioning? How about bi-weekly? Bi-monthly? Bi-quarterly? Is everything now okay?

“How many times will people fall into traps sprung by crafted bear market rallies, market intervention and manipulation and strident shilling by the financial media and Street? The answer is almost every time, because most people will lose the most money ‘all the way down.’”

Source: Bill King, The King Report, March 19, 2008.

Goldseek: Flashback – A good laugh at Art Laffer’s CNBC’s discussion with Peter Schiff
“Arthur Laffer (Laffer Investments) debates Peter Schiff on CNBC, August 28, 2006, allowing history to judge who was really off base. We would like to know why CNBC continues to provide Mr. Laffer prime exposure while Mr. Schiff has not been invited back since late 2007?

“We would also like to know if Mr. Schiff has received his penny …”


Source: Goldseek,, March 16, 2008.

Asha Banglore (Northern Trust): LEI report confirms weak US economic conditions
“The Index of Leading Economic Indicators (LEI) dropped 0.3% in February, the fifth consecutive monthly decline of the index. On a year-to-year basis, the index is down 1.5%, marking the sixth monthly decline. On a quarterly basis, the year-to-year change of the January-February fell 1.8% – the biggest drop in the current cycle and consistent with readings seen in past recessions. A larger negative reading would seal the case of a recession; it should not be surprising to see to this in the months ahead.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 20, 2008.

Asha Bangalore (Northern Trust): FOMC meeting – growth is predominant concern
“The FOMC lowered the federal funds rate and discount rate 75 bps to 2.25% and 2.50% respectively. The Fed has lowered the federal funds rate from 5.25% to 2.25% in a six-month period, which works out to a 600 bps cut on an annualized basis. By contrast, the Fed raised the federal funds rate from 1.00% to 5.25% at a slower pace and extended the tightening cycle over a two-year period. The Fed’s concern about financial market stress and economic growth are the main reasons for today’s move.


“The statement indicated that the slowing of consumer spending, soft labor market, financial market stress and the deepening of the housing market contraction are factors affecting economic growth which justifies the aggressive move.

“The most telling aspect of the Fed’s remarks today is that of the statements between December 11 and March 18, today’s statement was the most concerned about inflation and yet the Fed lowered the federal funds rate 75bps, which leads one to conclude that were inflation more contained, the Fed would have moved more aggressively. Despite the tough stance about inflation, there is an element of optimism about the moderation of inflation in the statement because the Fed expects energy and other commodity prices to stabilize and pressures on resource utilization to diminish.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 18, 2008.

BCA Research: Fed Policy – An aggressive stance
“The Fed did not meet expectations of a 100 basis point rate cut, but policy is being eased at an aggressive pace. If the latest moves fail to work, then the next step probably is outright purchases of non-Treasury securities.

“The Fed is pulling out all the stops in its efforts to stabilize the credit markets and reduce risk aversion. Thus far, the main achievement has been to drive the dollar sharply lower, and in the process, push up oil and gold prices.

“Many key non-Treasury rates are still higher than in September, when the Fed started to lower the funds rate. A decline in these rates and in spreads would be the key indication that conditions are finally improving.”


Source: BCA Research, March 19, 2008.

Asha Bangalore (Northern Trust): If it is only a mild slowdown in economic activity, why are actions of the Fed unprecedented?
“The Fed’s record in the August 2007 – March 2008 period will probably go down in history as the most aggressive and creative. The TAF, TSLF, and PDCF programs are its creative endeavors aimed at reducing the credit crunch and liquidity problems, while the sharp reduction in the federal funds rate is the aggressive feature of monetary policy changes in recent months. The FOMC has reduced the funds rate 300 bps between September 18, 2007 and March 2008. In nearly 26 years, such an eye popping drop in the federal funds rate in a seven-month period occurred only between August 1984 and March 1985 during Chairman Paul Volcker’s term.


“In terms of a percent change, the latest 300 bps cut in the federal funds rate is the largest (57.1% drop) since September 1982. The only period when it was close to the recent drop was a 55.5% decline in the seven months ended November 2001.

“If in fact the economy is projected to show only a mild slowdown as the Fed expects why has the Fed undertaken a historically aggressive decline in the federal funds rate? The FOMC forecast is a 1.3% to 2.0% Q4-to-Q4 increase in real GDP during 2008.

“If the economy is projected to grow in 2008, according to the Fed’s forecast and rhetoric, it is not clear why the Fed has taken these aggressive steps. The Fed may have to use the ‘R’ word soon.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 19, 2008.

Bloomberg: Harvard’s Feldstein says US economy in recession
“Harvard University economist Martin Feldstein, a member of the group that dates business cycles in the US, said the nation has entered a recession that could be the worst since World War II.

“‘I believe the US economy is now in recession,’ Feldstein, president of the National Bureau of Economic Research, told the Futures Industry Association conference in Boca Raton, Florida. ‘Could this become the worst recession we have seen in the post-war period? I think the answer is yes. I would emphasize the word ‘could’.’

“Feldstein’s remarks represent the first time that a member of the NBER’s business-cycle dating committee has publicly described the current downturn as a recession. The economy may not respond quickly to Federal Reserve interest-rate cuts, and a package of tax rebates and investment incentives will offer only a temporary boost, he said.”

“Bush administration officials including Treasury Secretary Henry Paulson have avoided saying the economy is in a recession. ‘We have slowed down very significantly,’ Paulson said in a National Public Radio interview yesterday. ‘I’m not getting into’ whether it is a recession.

“The economy expanded 0.6 percent at an annualized pace last quarter, and economists surveyed by Bloomberg News this month predicted the pace will slow to 0.1 percent in January to March.”

Source: Matthew Leising and Steve Matthews, Bloomberg, March 14, 2008.

The Washington Post: Mr. Bernanke’s bet
“There are risks in the Fed’s approach. It is possible that Mr. Bernanke’s drastic steps will communicate desperation rather than, as intended, confidence to financial markets. His policy could exacerbate inflation, which is already above the Fed’s target range; and it will further weaken the dollar, which is trading at an all-time low against the euro. Though it also drives up oil prices, the weaker dollar otherwise improves the US trade balance – and, though US officials don’t like to say so publicly, it inflates away US debts to foreigners. It is not clear, though, how much longer investors in the rest of the world will let the Fed continue to play this game.

“Mr. Bernanke is well aware of these downsides. But faced with no good options – only bad and worse – he decided, with the Bush administration’s support, to assume the risks. The hope is that he has correctly assessed the situation and that the Fed does succeed in averting financial catastrophe or spiraling inflation. If not, his actions could make a gloomy case study for some future professor of the dismal science.”

Source: The Washington Post, March 18, 2008.

Ambrose Evans-Pritchard (Telegraph): Foreign investors veto Fed rescue
“As feared, foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.

“Asian, Mid East and European investors stood aside at last week’s auction of 10-year US Treasury notes. ‘It was a disaster,’ said Ray Attrill from 4castweb. ‘We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed.’

“The share of foreign buyers (‘indirect bidders’) plummeted to 5.8%, from an average 25% over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.

“Rightly or wrongly, a view has taken hold that Washington is cynically debasing the coinage, hoping to export its day of reckoning through beggar-thy-neighbour policies. It is not my view. I believe the forces of debt deflation now engulfing America – and soon half the world – are so powerful that nobody will be worrying about inflation a year hence.

“Yes, the Fed caused this mess by setting the price of credit too low for too long, feeding the cancer of debt dependency. But we are in the eye of the storm now. This is not a time for priggery. With the ‘financial accelerator’ kicking into top gear – downwards – we may need everything that Ben Bernanke can offer.”

Source: Ambrose Evans-Pritchard, Telegraph, March 17, 2008.

The New York Times: The “B” Word
“OK, here it comes: The unthinkable is about to become the inevitable. Let’s talk about why a bailout is inevitable.

“The US savings and loan crisis of the 1980s ended up costing taxpayers 3.2 % of GDP, the equivalent of $450 billion today. Some estimates put the fiscal cost of Japan’s post-bubble cleanup at more than 20 % of GDP – the equivalent of $3 trillion for the United States.

“If these numbers shock you, they should. But the big bailout is coming. The only question is how well it will be managed.”

Source: Paul Krugman, The New York Times, March 17, 2008.

Paul Craig Roberts (321gold): US inflation twice as high as government’s figures
“Today the US, heavily dependent on imports, is subject to double-barrel inflation from both domestic money creation and decline in the dollar’s foreign exchange value.

“The US inflation rate is about twice as high as the government’s inflation measures report. In order to hold down Social Security payments, the government changed the way it measures inflation. In the old measure, inflation measured the nominal cost of a defined standard of living. If the price of steak rose, up went the inflation rate. Today if the price of steak rises, the government assumes that people switch to hamburger. Inflation doesn’t go up. Instead, the standard of living it measures goes down.

“This is just one of the many ways that the government pulls the wool over our eyes.”

Source: Paul Craig Roberts, 321Gold, March 17, 2008.

Paul Kedrosky (Infectious Greed): Alan Greenspan loses his mind
“Judging by a just-released
Washington Post interview, ex-Fed chair Alan Greenspan has gone mad.

“Here is Alan, talking in an interview about how misguided his critics are for suggesting that the recently-ended real estate bubble had its roots in the post dot-com bubble low rates. Implicit in this, of course, is that he should have increased rates sooner to arrest the real estate bubble’s expansion:

“‘Those who argue that you can incrementally increase interest rates to defuse bubbles ought to try it some time.’

“Well, there’s no denying you can’t get any evidence on the matter from Greenspan’s career: He avoided raising rates during both bubbles with which he was faced.

“And Greenspan continues, offering the following:

“‘If it weren’t the subprime crisis it would have been something else,’ he said. That is because an era was ending that had seen ‘disinflationary forces’ from developing countries such as China and a ‘protracted period’ in which there was an ‘underpricing of risk’.

“Really? Really? Greenspan’s Fed didn’t prick the real estate bubble because it was saving us from another bubble, whatever it was, that would have been worse? What was it? A lava dome under Los Angeles? Sewer gas under New York? Something else? Because it’s really hard to imagine what would have been worse than the real estate bubble, but maybe I lack imagination.

“But the tricksy Mr. Greenspan doesn’t stop there. Having first said that raising rates doesn’t prick asset bubbles, and then sneaking around the side of the issue by arguing that another bubble would have formed anyway, he then spun about and said the following:

“Even after the Fed starting raising short-term rates, long-term rates did not rise. He said that at the time ‘it became apparent that we lost control’ of long-term interest rates ‘as did the Bank of England and all the central banks. As a consequence, we had very little ability to put a brake on the rise in home prices’.

“Oooh, awesomely argued Alan. In short, even if you had raised rates — which you wouldn’t have, because the Fed can’t prick bubbles, and because another worse (unnamed) bubble would have happened anyway – nothing would have happened, because the Fed lost control of long-term rates. You were totally boxed, and anyone who criticizes you is a clueless nitwit for not seeing that.

“Does anyone buy that? I know I don’t. Greenspan ably demonstrated that he would cut rates in the face of falling asset prices, so why so skittish about raising them in the face of rapid asset price increases? Something doesn’t work in that illogic.

“Then again, what does Greenspan care. He has built a career out of this sort of thing, of dancing around clumsy questioners’ questions, and this is easy stuff for a skilled obfuscator. Greenspan’s minting money as a hedge fund advisor, speaker, and author, and likely giggling every day at the mess that he left on Ben Bernanke’s desk.”

Source: Paul Kedrosky, Infectious Greed, March 21, 2008.

Asha Bangalore (Northern Trust): Wholesale prices continue to advance
“On a year-to-year basis, the PPI for finished goods is up 6.4%, marking the fifth monthly reading that exceeds 6.0%. Energy prices have advanced 19.6% and food prices have risen 6.0% during past twelve months.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 18, 2008.

Asha Bangalore (Northern Trust): Housing Starts post largest cyclical decline on record
“Construction of new homes declined 0.6% to an annual rate of 1.065 million units in February. Starts of homes have now fallen 53.5% from the peak reading of 2.292 million in January 2006. There should be additional declines in the months ahead because the bottom of the housing market crisis is not here yet.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 18, 2008.

Financial Times: Fannie, Freddie to boost mortgage market
“Fannie Mae and Freddie Mac, the government-chartered mortgage financiers, yesterday got the go-ahead from their regulator to pump as much as $200 billion of liquidity into the beleaguered US mortgage market.

“The Office of Federal Housing Enterprise Oversight (Ofheo) reduced surplus regulatory capital requirements for the mortgage companies from 30% to 20% and secured a commitment that they would each soon raise a ‘significant’ amount of new capital to allow them to buy and guarantee more mortgages.

“Ofheo said the move was a bid to give Fannie and Freddie the flexibility to support the highly distressed market for so-called ‘jumbo’ mortgages greater than $417,000, as well as the capacity to refinance more subprime home loans and conduct loan modifications for struggling borrowers.

“Henry Paulson, US Treasury secretary, said the decision was ‘encouraging’ and should provide a boost for the mortgage market.

“But some analysts doubted the new flexibility for the agencies would go far enough. Josh Rosner, consultant at Graham Fisher, said: ‘This will make a psychological difference in the short term, but the agencies are not going to be very aggressive – they have become very risk averse from a credit perspective.’

“Dan Alpert, managing partner of Westwood Capital, an investment bank, said: ‘Washington believes this is a liquidity crisis. But this is a credit crisis brought on by the falling value of underlying housing assets.’”

Source: Saskia Scholtes, Financial Times, March 19, 2008.

The Wall Street Journal: Lehman finds itself in center of a storm

Source: Susanne Craig, The Wall Street Journal, March 18, 2008.

Bloomberg: HBOS has “ready access” to funding
“HBOS, Britain’s biggest mortgage lender, declined to its lowest-ever price in London trading even after saying it has ‘ready access’ to funding.

“‘There are no liquidity problems,’ HBOS spokesman Shane O’Riordain said in an interview today after the shares initially fell 17%. ‘We have ready access to a deep pool of deposits. We can access the wholesale markets whenever we feel appropriate to do so.’

“Edinburgh-based HBOS recovered to close down 7.1% at 446.25 pence, the lowest level since it began trading in September 2001. HBOS has fallen 32% in the past three weeks on concern it may face writedowns and higher inter-bank lending costs.

“HBOS is ‘reliant on wholesale funding, and from their most recent reports, we saw the bank wasn’t just under pressure from a balance-sheet perspective, but also from a funding point of view,’ said Graham Neale, head of equities at Killik & Co. in London. ‘It’s clearly at risk’ should funding spreads widen or money-market borrowing costs rise, he said.”

Source: Jon Menon and Ben Livesey, Bloomberg, March 19, 2008.

Times Online: How UBS got bitten by betting
“Dear UBS shareholder, We Swiss are thorough. Our 2007 annual report stretches to a mammoth 464 pages in four separate documents. After translating from German, the text can be a bit hard going. Wrestling with fondue would be easier. In the interests of brevity, therefore, I have summarised the main points below.

1. In a matter of months we have managed to turn our investment banking arm, built out of the old SG Warburg, once the greatest merchant bank in Europe, into the laughing stock of the securities industry. Losses from mortgage-backed securities by our in-house traders have reached $18 billion and led to our first full-year loss, and there could be more pain to come. Our lawyers won’t let us apologise in print in case that brings a volley of lawsuits, but we really are terribly regretful.

2. We know what went wrong. The UBS name and balance sheet was so strong that we were able to borrow laughably cheaply in the benign markets prevailing before last summer. That meant all ki999nds of leveraged bets looked attractive. Our biggest competitors seemed to be making lots of money in US mortgage-backed securities, so we piled in, too. It worked so well initially that we doubled up, creating an in-house hedge fund to take even bigger bets. Our stress-testing was inadequate: we failed to make pessimistic enough assumptions about what could go wrong.

3. We’ve put in place reforms to prevent anything similar happening again. Trading activities will be financed at rates prevailing in the wider market, rather than at the cheapo rates achievable by UBS. We’re going back to the basics of looking after clients and partly pulling out of proprietary trading. Our risk-management experts have been given a kick up the backside and told to imagine a wider range of outcomes when stress-testing particular investment positions. And we have strengthened our balance sheet, courtesy of a capital injection from the Singaporeans and an anonymous friend from the Middle East.

4. Even at 464 pages, there, er, wasn’t room to apportion individual blame for this fiasco. Both I and my new chief executive, Marcel Rohner, have forgone any bonus and my total pay is down 90% to $2.6 million. By contrast, three ousted executives have walked away with $90 million. Rewards for failure? I couldn’t possibly comment.

“Yours sincerely, Marcel Ospel, Chairman.”

Source: Patrick Hosking, Times Online, March 19, 2008.

Jeffrey Saut (Raymond James): Markets offer opportunity and danger
“As for the equity markets, they are clearly involved in a ‘selling panic’ … However, for the well prepared investor this kind of volatility affords opportunity. Remember, the Japanese kanji symbol for the word ‘crisis’ consists of two characters. One of them represents ‘danger’, the other ‘opportunity’.”

Source: Jeffrey Saut, Raymond James, March 17, 2008.

Mike Burke & John Gray (IIAS): Bearish sentiment pointing to buy signal
“Advisors continued to express new pessimism regarding the market, and the bulls fell further to 30.9% this week. That extends last week’s dramatic drop to 31.1%, from the previous reading at 41.3%.

“There were also more bears at 44.7%, up from 43.3% and 36.2% the prior two weeks. The bears remain well above the level of the bulls.

“The advisors calling for a correction were 24.4%, down from 25.6% a week ago. This group is short term bearish but longer term bullish and wish to buy on weakness.

“The sentiment reading for the last two weeks are very positive for long term markets gains. The means we expect substantially higher index levels a year from now. To find comparable sentiment levels you have to look back to October 2002. That was the last time we had fewer bulls, with reading at 28.4% on October 11, 2002 and 31.0% the week before that. October 2002 was the middle of the bear market bottom that extended from that July through March 2003.”


Source: Mike Burke & John Gray, Investors Intelligence Advisors Sentiment, March 19, 2008.

David Fuller (Fullermoney): Stock market already discounts bearish news
“Just as a crescendo of bearish news stories tell us that the media is feeding on known fears, stock market action tells us the extent to which it has already been discounted. … consensus expectations are always worst at the bottom of the trend, not least because at that stage of the cycle everyone knows why the market fell; they have had ample time to sell; bear traders are talking their book, and potential buyers are hoping for even better bargains. The same process works in reverse near market peaks.

“Today’s Advisors Sentiment readings from Investors Intelligence tell us that Wall Street has either seen its lows or is quite close to them. There is a possibility that this could be wrong, in that we live in an uncertain world and no signal comes with a money back guarantee. However, if it were to be proved wrong, I suspect it would be due to factors that few people are talking about today. Meanwhile, II’s Advisors Sentiment Indicator has an enviable track record at market bottoms.

“The main uncertainty, as far as I am concerned, is the length of convalescence time required before meaningful gains are seen. I suspect it could vary considerably from sector to sector.”

Source: David Fuller, Fullermoney, March 19, 2008.

John Authers (Financial Times): Bear market rally?
“It has been a terrible week. Can the stock market now indulge in a brief bear market rally?

Wednesday’s Merrill Lynch survey of fund managers made clear that the preconditions are in place. More global fund managers are overweight in cash, compared to their benchmarks, than at any time since the survey started in 1998. Fund managers also believe that equities are undervalued by the biggest margin since the bear market bottomed in 2003, and that bonds are overvalued.

“So, there is a lot of cash on the sidelines, in the hands of managers who believe stocks are cheap, and the end of the quarter is close. Many may want to use that cash to buy stocks before the quarter is up.

“There is another reason to expect a rally: the bounce from Monday’s panic levels, as traders realised that Wall Street’s banks were not about to collapse one after another, has led to a rash of predictions that the bottom has been hit.

“There are also hopes that the authorities have at last found a ‘silver bullet’ to end the crisis. False hopes have been invested in several other putative silver bullets, but the news that Fannie Mae and Freddie Mac, the powerful US mortgage agencies, will be allowed to buy more mortgage-backed securities is as good a candidate as any.

“Does a bear market rally need a catalyst? Not necessarily. Tuesday’s surge was triggered by terrible results from two investment banks. Given how negative sentiment had become, the mere fact that they were not epochally disastrous was enough to trigger a rally. In the short term, the mere absence of bad news (which is not a given) might allow the markets to enjoy a bounce.”

Source: John Authers, Financial Times, March 19, 2008.

Richard Russell (Dow Theory Letters): Are stock markets at lows?
“Now check this out – today both the Dow and the Transports were trading well ABOVE their January lows. What, after all this horrendous news those two are still above their January lows? Makes me wonder if Bennie and the Feds could be winning the game.

“It’s really remarkable to note how many millions of words are being written about the ‘awful economy’ and the ‘recession’, but it’s also remarkable how little is being written about the market’s reaction to all the negative news. And from an investment standpoint, of course, what we’re interested in is not the news of the day – no, what we’re interested in is the market’s reaction to the news. Right now it seems that the analysts and the newspapers are so transfixed by the depressing news of the day that they fail to note the stock market’s action.”

Source: Richard Russell, Dow Theory Letters, March 18, 2008.

GaveKal: Fed and tape point to stock market rally
“In recent weeks, we have seen two of the oldest Wall Street adages – namely ‘don’t fight the Fed’ and ‘don’t fight the tape’ – in an open clash. And just as it looked like ‘don’t fight the tape’ was about to win, the Fed took out the heavy artillery and a) slashed rates further (-75bp yesterday) and b) announced a new policy whereby all non-junk-rated paper could be deposited at the Fed.

“We are now in a situation where both the Fed and the tape are pointing in the same direction. This should mean that, if nothing else, the markets rally hard over the coming weeks.”

Source: GaveKal – Checking the Boxes, March 19, 2008.

Bloomberg: Barton Biggs expects 1,000-point gain in Dow
“The decline in US stocks is ‘way overdone’ and the Dow Jones Industrial Average may rally 1,000 points, investor Barton Biggs said.

“‘We’re in a financial panic,’ Biggs said during a telephone interview with Bloomberg Television from New York. ‘We’re setting up for a really big rally. I don’t mean three or four hundred points on the Dow, I mean 1,000 points on the Dow. I don’t know if we’re going to get it next week or the week after. But this thing has gotten crazy and is overdone.’

“Biggs, a former Morgan Stanley strategist who now runs the $1.5 billion hedge fund Traxis Partners LLC, said stock markets from Germany to Hong Kong may bottom out soon after tumbling this year.

“‘We’re at a really crucial point,’ Biggs said. ‘This is a time to be buying stocks around the world and not to be selling them. Yeah, it’s scary. It’s always scary at bottoms. But I don’t believe the economy is collapsing,’ Biggs said. ‘This is not the end of the world.’”

Source: Brian Sullivan and Michael Patterson, Bloomberg, March 14, 2008.

Bill King (The King Report): Merrill’s Rosenberg – We’re a long way from a stock market bottom
“We’re a long way from a bottom. The sentiment is way too bullish and the calls for a bottom or to do bargain hunting are far too pervasive and far outnumber the calls for capital preservation.

“… [from] David Rosenberg’s (Merrill Lynch) latest research piece: There is a legitimate case to be made that as bad as things are, we may only be at the halfway point of this bear market in equities in general and consumer cyclicals in particular …

“Mr. Rosenberg echoes our view that few people on the Street have experienced a credit cycle turn or a vicious recession. The problem is that so many of the economists that are calling for a recession believe it will be mild. We are not sure why, except that many Wall Street pundits have lived through at most two downturns, and indeed, the last two recessions (2001 and 1990 to 1991) were mild by historical standards, both in terms of magnitude (a peak-to-trough 1.3% decline in real GDP for the former and -0.4% for the latter) and duration (both lasted just eight months). The models that economists use may be skewed by undue reliance on the experience of the last two recessions.

“David also asserts, ‘monetary policy alone will not solve the problem; current backdrop has more in common with 1973-75 cycle.’”


Source: Bill King, The King Report, March 19, 2008 and The Wall Street Journal, March 20, 2008.

Reuters: US dollars tough to sell
“The US dollar’s value is dropping so fast against the euro that small currency outlets in Amsterdam are turning away tourists seeking to sell their dollars for local money while on vacation in the Netherlands.

“‘Our dollar is worth maybe zero over here,’ said Mary Kelly, an American tourist from Indianapolis, Indiana, in front of the Anne Frank house. ‘It’s hard to find a place to exchange. We have to go downtown, to the central station or post office.’

“That’s because the smaller currency exchanges – despite buy/sell spreads that make it easier for them to make money by exchanging small amounts of currency – don’t want to be caught holding dollars that could be worth less by the time they can sell them.”

Source: Svebor Kranjc, Reuters, March 18, 2008.

Times Online: US dollar tumble spells trouble for yen carry trade
“Deepening misery on Wall Street, prophesies of recession and the recent freefall of the dollar could set off a $300 billion time bomb in the global yen carry trade, dealers are giving warning.

“The carry trade, which involves cheaply borrowing the Japanese currency to buy other assets, comes unstuck in volatile currency markets. If the carry trade does implode, sending the yen to new heights against a wide basket of currencies, dealers say that the cast of victims could include individuals, corporates and hedge funds.

“The yen is at a 12-year high against the greenback and Tokyo-based economists are speculating that a severe crash in the carry trade could trigger a more devastating ruction in the $1 trillion overseas investments of Japanese mutual funds as the dollar/yen exchange rate edges towards the pain threshold of individual investors.

“Hedge funds have long used the carry trade for cheap leverage, but there are also thought to be vast exposures to yen volatility in the Thai, Korean and Indonesian banking sectors, where the Japanese currency has been borrowed heavily to meet funding needs. Because the trade has been so popular, Goldman Sachs analysts said yesterday that the sharp fall in the US dollar against the yen had prompted them to reassess the ‘cash-call risks’ for Asian banks and corporates.

“But the practice is also uniquely sensitive to general global risk appetites: when investors batten down the hatches, as they have done in the wake of the Bear Stearns collapse, the carry trade unwinds, often spectacularly.

“It was advanced fear of that unwind, currency analysts at Mitsubishi Tokyo UFJ said, that has caused so much volatility over the past few days in the so-called yen cross-trades – where the low Japanese lending rate is exploited to buy high-yield currencies such as the New Zealand dollar, the South African rand, the Mexican peso and the Icelandic krone. Sudden spikes in the yen against the Australian dollar, euro and sterling, Nomura dealers said, indicated a first wave of fleeing from carry trades as risk appetites collapse.”

Source: Leo Lewis, Times Online, March 19, 2008.

Daisaku Ueno (Nomura): Yen intervention on the cards?
“The sharp strengthening of the yen has prompted talk of intervention by the Japanese authorities to stem the currency’s advance, says Daisaku Ueno, senior economist at Nomura.

“Mr Ueno sees only a limited likelihood of Japan intervening on its own, as neither the Japanese government nor the Bank of Japan has adopted policies aimed at stimulating the economy. He adds that any impact from selling the yen to buy the dollar would likely be short-lived as long as the US continues to cut interest rates while Japan holds its rates steady.

“But he says the possibility remains of a co-ordinated international response if the dollar’s weakness intensifies. ‘The recent acceleration in the dollar’s decline has lifted US inflation expectations, raising concerns of reduced leeway for US monetary policy,’ he says.

“‘If the dollar were to weaken further, we think attention would increasingly focus on co-ordination of monetary policy as well as whether the dollar appears headed for a steady recovery.’”

Source: Daisaku Ueno, Nomura (via Financial Times), March 19, 2008.

Richard Russell (Dow Theory Letters): Ride the gold bull
“What would be the reaction of the world’s central banks be to deflation or even a slowdown? My guess is that they’ll fight those trends tooth and nail. They’ll fight it by creating more fiat money. You remember my old adage, my old warning – ‘INFLATE or DIE’. I think that’s where we’re heading or maybe where we are.

“How will this affect gold? It should put bearish short-term pressure on gold and bullish long-term pressure on gold. Gold’s first reaction to deflation? We’re seeing it now, and the direction is down (besides, gold was technically overbought anyway). Gold’s later reaction to central bank massive creation of paper – upward pressure on gold.

“I’ve been a bull on gold ever since 1999, and I’ve never tried to time the moves. My theme song has been: ‘Ride the gold bull and don’t let it buck you off’, and so far that’s been the way to go. I’ve always maintained that the hardest thing to do in this business is to get into a bull market early, stay with that bull market, and ride it to somewhere near its final top.

“I don’t believe we’ve seen the phase of frantic global gold-buying yet. That phase, I’m convinced, lies ahead. The gold bull market should wind up with some eye-opening fireworks. It should end up in a state of speculative fever. Or as my old-timer subscribers remember, ‘There’s no fever like gold fever.’ Believe me, we haven’t seen the gold-fever yet – at least not during this bull market.”

Source: Richard Russell, Dow Theory Letters, March 18 & 20, 2008.

MarketWatch: $2,000 an ounce gold is in the cards
“Frank Holmes, chief executive officer at US Global Investors, says that gold will hit $2,000 an ounce and that while the move won’t be straight there from current levels investors should not be surprised by it.

“Holmes noted that virtually all commodities have gone through their ‘inflation-adjusted 1980 price levels’, with the notable exception of gold, and that to get to that range the price of gold would have to top $2,000 an ounce. Holmes said he expects a short-term pull-back in gold – based on a correction he sees coming in oil and a short rally in the dollar, both of which will impact gold prices – but that the long-term trend will be strongly upward.

“In a radio interview with Chuck Jaffe, MarketWatch senior columnist, Holmes noted that gold correlates to the price of oil 90% of the time – meaning it moves with oil prices almost all the time – and has an inverse relation to the dollar 70% of the time. With oil prices on the rise and the dollar weakening, it’s a market condition that bodes well for gold, especially because gold is ‘not at astronomical levels yet, when compared to other commodities … There’s a lot more room.’

“Holmes also noted that he’s more concerned with the market entering a ‘big deflationary cycle’ than he is about Federal Reserve rate cuts sparking inflation, noting that ‘inflation is easy to stop’.

“Holmes recommended that investors looking for a plan to follow through the current whipsaw conditions should take a long-term approach that divides a portfolio as follows: 25% in international investments, 25% in resources, 25% in domestic stocks and 25% in high-income and dividend-paying stocks.”

Source: MarketWatch, March 18, 2008.

David Fuller & Eoin Treacy (Fullermoney): Commodities susceptible to medium-term corrections
“Commodity price headlines again today but this time for not maintaining record highs. I do not think that it has much to do with a global slowdown, which is mainly in the west. However I do think deleveraging is a big factor. A number of the better hedge funds with a global brief have done very well in commodities, as have many individual investors who have profited from commodities …

“To risk a brave contrarian call today, I think many commodities, great secular theme that they undoubtedly are, have run ahead too quickly during the frenzy to buy the one sector with upside momentum. Those that have accelerated the most are increasingly susceptible to medium-term corrections, which I would describe as anything from a few months to two years.

“Undeniably, billions have flowed into commodities over the last few months, but given recent action, at least some of that money is being taken off the table. Additionally, the US dollar is looking quite oversold and ripe for a technical rally. This could encourage investors to go elsewhere in search of returns.”

Source: David Fuller & Eoin Treacy, Fullermoney, March 17 & 19, 2008.

Richard Russell (Dow Theory Letters): Commodities topping out?
“One very negative development that I see is the potential topping out of commodities and materials. This provides early hints of a world slowdown in commerce and activity. Below we see a daily chart of Dr. Copper, long considered a barometer of global activity, since copper is used worldwide in almost everything that’s manufactured. Note the rolling over of MACD on the chart below. Copper could be topping out. If so, that’s not good, not good at all.”


Source: Richard Russell, Dow Theory Letters, March 19, 2008.

John Hussman (Hussman Funds): Cyclicality in commodity prices to remain
“… the main downside risk for commodities is likely to emerge after the year-over-year CPI inflation rate falls below 10-year Treasury bond yields. We are not at that point, so my impression is that further weakness in the dollar will help to sustain commodity prices despite growing evidence of a recession (which we view as baked-in-the-cake).

“Still, it is again important to emphasize that commodity prices are cyclical, and there is no reason to believe that this has changed despite demand from China and other developing countries. We may observe higher levels of commodity prices in the years ahead, but cyclicality – the tendency for commodities to experience parabolic advances followed by precipitous drops – is likely to remain a feature of these markets.”

Source: John Hussman, Hussman Funds, March 17, 2008.

Bill King (The King Report): Chinese behind commodity dump?
“On Wednesday, the market teemed with rumors and rationales for the commodity dump. We noted in Tuesday’s missive that China Premier Wen Jiabao vowed to move against inflation. Except for gold and oil, commodities rolled over a week ago. Who and what was Wen signaling?

“For the past few years, China has adroitly played commodities. When prices surge too far, particularly copper, a Chinese official makes inflation warnings or issues policy directives aimed at curtailing inflation. This forces leveraged speculators out of commodities and gives the Chinese a later opportunity to keep building their strategic commodity reserves at better prices.”

Source: Bill King, The King Report, March 20, 2008.

Reuters: China buyer defaults on US soy as CBOT slumps –trade
“Word that a Chinese buyer had defaulted on the purchase of a US soy cargo has stoked concerns that more defaults may occur, as international prices of oilseeds and vegetable oils slide from record highs early this month.

“‘There has been a default on an expensive soy by a small player in Shandong. This has been confirmed,’ said a senior trader at an international house. The trader added there had been some defaults on soyoil and possibly as much as 150,000-200,000 tonnes of palmoil.”

Source: Nao Nakanishi, Reuters, March 19, 2008.

Minyanville: Fashionomics point the way
“Economists use an array of tools to forecast where the economy is headed – like hair length and hem lines. Whether the trends are bullish or bearish, Hoofy and Boo reveal what the latest fashions mean for finance.”


Source: Minyanville

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2 comments to Words from the (investment) wise for the week that was (March 17 – 23, 2008)

  • Words from the investment wise (March 17 – 23, 2008)…

    Phew – what a tumultuous week! Once again, the fall-out of the subprime mess had a lot to do with it. For some variety, however, it was not only financials that were in the limelight, but also commodities that corrected sharply.

    Read all about this…

  • I would like to respond to the comments made by Mike Burke & John Gray in their artilce “Bearish sentiment pointing to buy signal”. First let me say that I totally disagree with the analysis, and I am surprised that they could reach such a conclusion as they do especially when you consider the entirety of the Investors Intelligence data series.

    First, I would agree wholeheartedly that going against the herd -when the herd is extremely bearish – is a winning strategy. However, it isn’t as easy as these authors make it out to be.

    Let’s agree on this: that the number of bearish advisors in their pole is currently greater than the number of bullish advisors. Now let’s ask the question that these authors did not: how does the market perform (SP500) during those times bearish advisors are greater than bullish advisors and we will consider the entirety of the data series going back to 1970. In other words, we will craft a strategy such that we buy the SP500 when bears are greater than bulls and we will sell our position when bulls are greater bears.

    Since 1970, there have been 75 unique signals. 70% of the signals produced winning trades and your total time in the market was about 22%. The total SP500 earned from this strategy was 691. Buy and hold (without dividends) generated 1250 SP500 points. The good news is this: with 22% market exposure you can earn a return that is over half the return of the SP500 (dividends excluded). That’s pretty good and basically tells you the power of betting against the herd.

    Now for the bad news: often times in investing it isn’t your endpoint that is important but how you arrived at that endpoint. And if you look at the entire data, you will note that there were some pretty hefty drawdowns despite the extremes in bearish sentiment. For example, on July 10, 1981 the number of bears became greater than bulls and it wasn’t until November 6, 1981 that the number of bulls became greater than bears. During this time, the SP500 lost about 15% of its value and the position was closed out with a 6% loss.

    More information: out of the 75 signals there 12 (~15%) that had a drawdown greater than 10%. I always ask myself: Can I invest in a strategy that has such a drawdown? Of these 12 failed signals, 9 were pre -1981. The other three dates are notable: 1) October, 1987 (market crash); 2) August, 1990 (recession); and 3) October, 1998 (LTCM).

    What the authors fail to consider is this: 1) this is a bull market signal that has worked primarily since 1982. 2) If you would have traded this strategy only since 1970, it would have taken until 1988 until your equity curve would have turned positive. That’s 18 years of being underwater!!

    At my website, http://www.thetechnicaltake.com, I discuss a better way to approach this data. Yes, I think sentiment is a great tool and it has a strong foundation in my own models, but the data presented here is misleading.

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