Before highlighting some memorable quotes from market commentators during the past week, let’s briefly review the week’s market action on the basis of a few performance charts.
Global stock markets were generally higher, with the top performance coming from emerging markets – again spearheaded by China and Hong Kong – and Japan. American equities were mildly disappointing compared with global markets, with only the Nasdaq Composite Index registering a positive return.
GLOBAL STOCK MARKETS
Interest rates were lower across the yield curve during the week, whereas exchange rates were mostly flat.
FIXED-INTEREST AND CURRENCY MARKETS
There was action aplenty in the commodities markets, with solid increases all round, but with the energy complex stealing the limelight. The only bad apple was livestock registering a loss for the week.
Now for some words from the investment wise to help explain the still rather perplexing markets.
Business confidence for world
“Business sentiment fell again last week to its lowest level since in the middle of the Iraq invasion in early 2003. Confidence is now consistent with an economy that is barely expanding. Assessments of present conditions and expectations regarding the six-month outlook are both negative for the first time in the history of the survey. Business are nervous across the globe, with Asian businesses most upbeat and European businesses most negative. Pricing pressures have vanished, despite still very high commodity prices, providing the Federal Reserve substantial latitude to ease monetary policy.”
Source: Moody’s Economy.com, August 27, 2007.
Bush to expand government role to deal with subprime
“I don’t know how much good the Bush plan will do, but I do know that it will cost money. But hey, where’s the money coming from? They’ll print it dummy, they’ll print it. And did you happen to notice gold today?”
Source: Richard Russell, Dow Theory Letters, August 31, 2007.
“One of the main fears stalking the market today is that the collapse of the subprime mortgage market will result in a crash for the wider housing market and the economy generally. Any measure put in place by the US administration to help out the millions of people at risk of losing their homes should help restore confidence in the credit markets. The longer-term effects of this bailout are likely to be inflationary, but given the current heightened sensitivity to perceived deflationary risks, this result is likely to be swept under the carpet at least for the moment.”
Source: Eoin Treacy, Fullermoney, August 24, 2007.
Ed Hyman: Slowing, but no recession
The Federal Reserve will probably cut its benchmark interest rate to 4 percent as slowing US economic growth restrains inflation, said Edward Hyman, chairman of International Strategy and Investment Group.
“They will start to ease in a measured way, 25 basis points every meeting,” he said in an interview in New York, referring to Fed policy makers. “I think the economy will react favorably to it” and probably avoid a recession, he said. A basis point is 0.01 percentage point.
Hyman, the top-rated economist on Wall Street by Institutional Investor for the past 27 years, predicted a “better economy next year,” with stocks and Treasury yields rising. In the meantime, slacker growth will “put inflation aside” as a concern for the Fed, he added.
It will take time for the economy to respond to interest- rate reductions, Hyman said, in predicting that growth would slow to as low as a 1 percent or 1.5 percent annual rate later this year before picking up in 2008.
“I don’t think we will have a recession,” he said. Still, judging from history, the housing recession could last another three years and subprime issues will linger, he said.
Source: Bloomberg.com, August 29, 2007.
The Fed’s next move
“The Fed’s next move is, in all likelihood, a cut in the federal funds rate. However, the timing of this move is less certain as it is tied to behavior of incoming data related to real economic performance, which lags the behavior of financial markets.”
Source: Asha Bangalore, Northern Trust’s Daily Global Commentary, August 30, 2007.
US subprime losses to total $200 billion
“… we estimate that the losses on bad subprime and alt-A paper could amount to about $200 billion over the 2007 to 2011 period (1.5% of today’s GDP). This compares with $153 billion (2.5% of 1990 GDP) in losses associated with the S&L meltdown in the late 1980s. Spread out over several years, such losses do not seem overwhelming on their own. However, it is the knock-on effects that are the larger risk to the economy, including a hit to consumer confidence and wealth, a curtailment of credit availability, and increased selling pressure in the housing market. Fed rate cuts cannot solve the subprime mess, but can limit the negative impact on the economy.”
Source: BCA Research, August 30, 2007.
So where do we go from here?
“Just as LTCM’s collapse signaled the market bottom during the Asian crisis, so too should the recent wave of quant fund blowups do so today. Indeed, what happened to LTCM 10 years ago and to the quant hedge funds this time around are signs of a significant breakdown in global capital markets. These funds are, we believe, the victims rather than the culprits, since long-term market relationships formed the basis and foundation of their respective investment approaches.
“During the Asian crisis, the nadir of the markets involved a number of policy related events – the Hong Kong government’s intervention in its domestic equity market, the bailout of LTCM by a Fed-organized consortium, central bank rate cuts, etc. The central banks took their time in acting (the Asian Crisis started in July 1997, and the rescue did not come until October 1998), since the balance sheets of the Western World’s banks did not look threatened. However, once bank shares started collapsing, central banks were quick to act.
This time around, with the Western World’s bank balance sheets at the epicenter of the crisis, the Western World’s central banks have been much quicker to act – cutting the discount rates; injecting billions of dollars, euros, Canadian dollars…, encouraging major banks to borrow money from the discount window, throwing Glass-Steagall out of the window, etc.… Looking ahead, it seems inconceivable to us that the Fed will not cut interest rates at its forthcoming meetings.
Source: Louis-Vincent Gave, GaveKal Ad Hoc Comment, August 28, 2007.
Richard Russell on where to invest
“As I see it, the primary trend of stocks, worldwide, is bullish. The primary trend of gold is bullish. The primary trend of the dollar is bearish. The primary trend of most tangibles is bullish. The primary trend of all fiat currencies is bearish.
“All the major stock averages are now graded bullish. The bull is pawing the ground and snorting. Make sure you get out of his way. If you have any shorts, get the out of them first thing Tuesday morning. This is not a shorters market.
“… at this point I hold basically the diamonds (DIA), (which I’ll double and triple on), and I guess I’ll hold them until I’m convinced that the great bull market is close to over, and that a bear market is near, that is, if I’m smart enough and maybe lucky enough to be able to identify the approaching top.”
Source: Richard Russell, Dow Theory Letters, August 31, 2007.
A maturing equity bull market
“Narrowing breadth of asset price inflation is a typical characteristic of a maturing market. In this cycle, commodities, government bonds, real estate and credit products have already largely been inflated but stocks still have room for further multiple expansion once the current turmoil in the credit market subsides. However, investors should be prepared for permanently higher volatility, which tends to accompany richer valuations. The bull market in equities, while in a maturing phase, should offer investors significant upside over the next two years.”
Source: BCA Research, August 28, 2007