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Prieur Perspective: Market Shrugs Off Gloomy Data


Equities rise despite poor economic data.


A sense of relative calm descended upon financial markets over the past week. Although fears about the outlook for the U.S. economy persisted, a perception crept into markets that much of the bad news related to the credit crisis was now out in the open. The equity bulls had reason to feel rather pleased with their performance by the close of the week.

In his testimony on the economic outlook on Wednesday Federal Reserve chairman Ben Bernanke told the Joint Economic Committee he thought the U.S. economy wouldn't grow much, if at all, and could even contract slightly in the first half of 2008. Market participants took Bernanke's testimony in stride, cognizant he wasn't telling them anything they hadn't already feared.

Earlier in the week, Treasury Secretary Hank Paulson unveiled a 218-page plan to overhaul the U.S. regulatory system and give the Fed more power to oversee the entire financial system.

"Nothing I saw will help all that much in the current crisis. It's more like re-arranging the deck chairs as the ship is going down. It seems like most of it is being proposed to prevent another crisis like the one we are in from occurring in the future," said Professor Mauldin.

Bernanke made his second appearance on Capitol Hill when he and several top officials appeared before the Senate Committee on Banking, Housing and Urban Affairs to discuss their respective organizations' roles in the sale of Bear Stearns (BSC). No real new facts were revealed beyond that Bear Stearns had needed to be bailed out by JPMorgan Chase (JPM) and the Fed, in order to prevent broader market damage and a potential collapse of the entire financial system.

With all kinds of measures to stem the sub-prime fallout being announced virtually continuously, David Fuller said:

"... officials at both the U.S. Fed and Treasury now recognize the need to manage expectations during a crisis. The best way to accomplish this is by being seen to be proactive. Ideally, on a daily basis with comments, often repeated, proposals and actions as required. During a crisis, the crowd becomes emotional and infantilized. However one is less likely to panic when leadership and reassurances are provided. This is as important for the stock market as it is with a frightened child, because both are inclined to overreact."

Let's review of the financial markets' movements on the basis of economic statistics and a performance roundup.


U.S. business confidence slipped to a new record low during the last week of March, according to Moody's The past week's U.S. economic reports were generally negative and provided support to the recession arguments.

In a surprise move, initial jobless claims jumped by 38,000 to 407,000, well above expectations. March payroll data also provided further confirmation of a contracting economy. Payroll employment tumbled by 80,000 in March, while losses for the previous two months were revised downward. The U.S. labor market shed 232,000 jobs during the quarter and the jobless rate increased by 30 basis points to 5.1% – the highest level since September 2005.

Factory activity was weak, with the ISM Manufacturing Index coming in at 48.6 in March, compared with February's 48.3. Although it's encouraging that the Index didn't deteriorate substantially, it has remained below the neutral threshold of 50 for two consecutive months, suggesting that manufacturing was contracting. Similarly, the ISM Services Index was also again below 50 for March.

Professor Mauldin summarized the situation as follows:

"Buried in the data is a picture of a squeezed consumer. Inflation is now running ahead of the growth in wages. Average hourly earnings were up just 3.6%, but inflation was 4.5% higher. That means consumers must struggle to maintain their standard of living. No wonder retail stores shed 12,000 jobs last month. Light vehicle retail sales are down by 20% from last year. This all paints a picture of a very challenged consumer."

It comes as no surprise that a poll by the New York Times/CBS News reported that 81% of Americans felt the country was heading in the wrong direction.

The economic situation argues for the Fed funds rate to be lowered by at least 25 basis points to 2.0% at the April 29 to 30 FOMC meeting. Not surprisingly, interest rate futures moved to price in a 38% chance of a 50 basis points cut to 1.75%.

Elsewhere in the world, U.K. consumer confidence continued to deteriorate, Eurozone retail sales fell unexpectedly in February, a survey suggested growth in the Eurozone services sector slowed in March, and the Japanese Tankan Survey pointed to confidence among Japanese businesses plummeting in the first quarter.

Here are the week's economic reports, courtesy of Yahoo! Finance, April 4, 2008.

In addition to the minutes of the March 18 FOMC meeting being released on Tuesday, April 8, the next week's economic highlights, courtesy of Northern Trust, include the following:

1. International Trade (April 11): The trade deficit is predicted to have widened to $59.5 billion in February from $58.2 billion in January. The important information will be the strength in exports because it is the bright spot among the different components of GDP. Consensus: $57.5 billion

2. Other reports: Consumer Credit (April 7), NFIB Survey, Pending Home Sales (April 8), Wholesale Trade (April 9), Import prices, University of Michigan Consumer Sentiment Index (April 11).


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


Coming on the heels of the worst quarterly performance since 2002, stock markets across the globe recorded solid gains during the past week with the MSCI World Index up by 3.9%. Emerging markets, however, lagged the mature markets and gained a more modest 0.7%. The Shanghai Stock Exchange Composite Index in particular had a torrid time and fell by 3.7%.

On Tuesday April 1st, stock markets surged on the back of "kitchen sink" write-downs and capital-raising announcements by financial companies like UBS (UBS) and Deutsche Bank (DB) being interpreted that the worst might be over for the financial sector. The Dow Jones Industrial Index surged by 391 points (3.2%) on the day, spearheaded by financials.

The major U.S. indices put in a stellar performance last week with the Nasdaq Composite Index (+4.9%), the Russell 2000 (+4.5%), the S&P 500 Index (+4.2%) and the Dow Jones Industrial Index (+3.2%) all strongly higher.

Fixed-interest Instruments

Global government bonds were mixed during the week as the emphasis shifted from buying safe-haven bonds to equities.

In the U.S. the yield on the two-year Treasury Note increased by 17 basis points, whereas the 30-year Treasury Bond yield declined by 2 basis points, resulting in a flattening of the yield curve.

Currencies and Commodities

These markets were relatively quiet last week as reflected by the US Dollar Index, which was unchanged by the close of the week, and the Dow Jones-AIG Commodity Index, which was only marginally lower (-0.2%) from the previous week.

No Rope In Sight

Source: Slate, March 28, 2008.
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