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Prieur's Perspective: Let the Gains Begin


US obvious candidate for a relief rally - at least in short term.


The Olympic Games kicked off at 8:08:08 pm on Friday night, the eighth day of the eighth month of 2008. Coincidence? Not at all. The number 8 is considered lucky by the Chinese, because in Cantonese (the language of South China) the word for prosperity is "fa," which sounds like "ba" (8).
Fortune also smiled upon stock markets, with the S&P 500 Index scoring its first back-to-back weekly gain since April as the US dollar rallied strongly and oil and commodities plummeted. The S&P 500's gain since the low of July 15 has been 6.7%, with the Financial SPDR up by 27.8%.
As expected, the Federal Open Market Committee (FOMC) held the Fed funds target rate steady at 2.0%. This is the second straight meeting with no change in the rate. The committee's statement discussed high inflation; although the FOMC expected inflation to decline in the months ahead, the members said "the inflation outlook remains highly uncertain." The statement acknowledged both downside risks to growth and upside risks to inflation, indicating no near-term change in monetary policy.

Click here for a comparison of the content of last week's communiqué with that of the previous one (June 25), courtesy of The King Report.
Casting light on the market situation, David Fuller (Fullermoney) said: "The obvious beneficiaries of weaker oil and a firmer US dollar are global stock markets. As the US has been The Rocky Horror Picture Show in terms of concerns, it is now one of the more obvious candidates for a relief [short covering?] rally."
GaveKal added: "Policy responses to the credit crunch have helped. To successfully get out of a financial squeeze you need 3 things: 1) a cheap currency, 2) a positive yield curve, and 3) the recapitalization of bank balance sheets. With surprising speed, all three of these conditions are now being met in the US."
I believe there's still no confirmation stock markets have bottomed, and I still maintain that the convalescence period will be an extended affair. From a short-term perspective, however, I would give the upside the benefit of the doubt unless the lows established on 1) July 28 and 2) July 15 are broken.

Interestingly, assets in US money market funds have increased by 1.8% to $3.56 trillion since the mid-July stock market lows. Running through my head are the words of the late Sir John Templeton: "Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria."

It's best to keep an open mind about matters.


"Global business sentiment remains weak and fragile," according to the Survey of Business Confidence of the World conducted by Moody's The survey results suggest that the global economy is skirting recession, but just barely.

Economic reports released in the US during the past week were mixed and included the following:

  • Personal income inched up 0.1% in June after soaring 1.8% in May. Excluding the tax rebate effect, personal income rose by 0.3% in June, up from 0.4% in May. Spending growth slipped to 0.6% from 0.8% the prior month. Real spending fell by 0.2% as prices soared. The core PCE deflator rose by 0.3%, the fastest since September, while the top-line deflator jumped 0.8%.

  • The ISM non-manufacturing index came in slightly better than expected in July. However, a decline in new orders and new export orders signaled weaker activity in the non-manufacturing economy in the months ahead.

  • Initial claims for unemployment insurance benefits increased 7,000 to 455,000 for the week ended August 2. Although expectations had been for claims to remain high, this figure exceeded them.

  • Friday's productivity and costs numbers came in worse than expected on the productivity side but better than expected on the cost side.

On Thursday, the European Central Bank (ECB) left interest rates on hold at 4.25% and stated that risks to economic growth were starting to materialize. Victoria Marklew (Northern Trust) commented: "Eurozone GDP almost certainly contracted in the second quarter - Eurostat will release its flash estimate on August 14, the same day that Germany and France release their own first estimates. If the numbers surprise on the downside, the markets will start anticipating a rate cut by the ECB on September 4."

"Europe has moved further along the road towards a recession than the US. The economic data of the past 2 weeks make that conclusion hard to avoid," reported John Authers in the Financial Times.

In line with market expectations, the Bank of England also decided to keep its key repo rate steady at 5.0% at its August monetary policy meeting last week. August marks the fifth consecutive month with no change in the repo rate. UK house prices fell by almost 11% in the year to July – one of the biggest year-on-year falls recorded in the UK -- prompting BCA Research to say: "The BoE will cut aggressively before year end."

Further afield, according to the Financial Times, the Japanese government conceded on Wednesday that the country's longest postwar period of economic expansion might be over as it reported a drop in its key measure of underlying economic conditions for June.

Here are this week's economic reports, courtesy of Yahoo Finance, August 8.

Next week's economic highlights in the US, courtesy of Northern Trust, include the following:
1. International Trade (August 12): The trade deficit is predicted to have widened to $61.5 billion in June from $59.7 billion in May, with the oil import bill showing a noticeable increase. Consensus: $59.5 billion.
2. Retail Sales (August 13): Auto sales fell sharply to 12.55 million units in July. Non-auto retail sales were soft. The decline in gasoline prices in July should trim back the headline reading. Consensus: 0.0% versus 0.1% in June; non-auto retail sales: 0.5% versus 0.8% in June.
3. Consumer Price Index (August 14): A 0.4% increase in the CPI is predicted for July after a 1.1% jump in June. The core CPI is expected to have moved up 0.2% versus a 0.3% increase in June. Consensus: +0.3%; core CPI +0.2%.
4. Industrial production (August 15): The 0.1% drop in the manufacturing man-hours index in July points to a drop in industrial production. The operating rate is projected to have declined to 79.8% in July, the lowest since September 2005, excluding the 79.6% rate in May 2008. Factory production had declined for three straight quarters, with the 3.7% annualized drop in the second quarter the largest since the fourth quarter of 2001. Consensus: -0.1%; Capacity Utilization 79.8% versus 79.9% in June.
5. Other reports: NFIB Survey (August 12), Inventories (August 13), Consumer Sentiment Index (August 15).
A summary of the release dates of economic reports in the UK, Eurozone, Japan and China is provided here. It is important to keep an eye on growth trends in these economies for clues on which way the US dollar is going to move and how strongly (among other concerns).


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


Developed stock markets, in general, soared during the past week, with gains in excess of 2.5% being the order of the day. As was the case during the previous week, the Japanese Nikkei 225 Average was the worst performer among mature markets, rising by a relatively modest 0.6%.
The emerging markets category, as a group, underperformed developed markets, with Russia (-11.3%), China (-7.0% – a 19-month low) Turkey (‑4.7%) and Hong Kong (-4.32%) leading the declines. On the other side of the scale, the Indian BSE 30 Sensex Index (+3.5%) scored a fifth successive weekly gain. The Philippines (+4.2%) and Taiwan (+3.0%) also delivered solid returns.
Interestingly, the MSCI World Index has been outperforming the MSCI Emerging Markets Index since the stock market peaks of the middle of May, gaining 4.0% in relative performance on the back of perceived increased risks in developing markets.

Click to enlarge

The US stock markets moved strongly higher, especially on Wednesday and Friday when the Dow Jones Industrial Index recorded gains in excess of 300 points. The major index movements were: Dow Jones +3.6% (YTD -11.5%), S&P 500 Index +2.9% (YTD -11.7%), Nasdaq Composite Index +4.5% (YTD ‑9.0%) and Russell 2000 Index +2.5% (YTD -4.1%).
It's noteworthy that the Dow Jones, Nasdaq Composite and Russell 2000 have all crept back to above their 50-day moving averages, with the S&P 500 closing the week a mere 1 point below. The Russell 2000 also managed to penetrate the key 200-day line – often used as an indicator of the primary trend.
Click here for a market map, courtesy of, providing a quick overview of the performance of the various segments of the S&P 500 Index over the week.
The apparel & accessory group outperformed last week, gaining 16%. Polo Ralph Lauren (RL) and Jones Apparel (JNY) reported earnings that handsomely beat the consensus estimates. Coach (COH), the largest member of the group, rose by 20% on the back of Coach's CEO increasing his holdings in the company's stock.
The casino & gaming group (+14%) was also among the top performers. Its single member, International Game Technology (IGT), reported that it had repurchased 3% of the company's outstanding shares since the end of June.
Stocks related to the energy sector (-4.6%) and materials sector (-3.0%) were at the bottom end of the week's performance table.
The thrifts & mortgage finance group was the worst-performing group for the week, down by 12%. The two largest members of the group, Fannie Mae (FNM) and Freddie Mac (FRE), both reported losses in excess of the analyst consensus estimates as they continue to be negatively affected by the housing decline and mortgage-related credit problems.
In other corporate news, Citigroup (C) and UBS (UBS) agreed to settle allegations of misrepresentation in the marketing of auction-rate securities. Separately, Moody's indicated that it had placed American Express' (AXP) A1 rating on review for a downgrade.
Fixed-interest instruments

UK, Eurozone and Japanese government bond yields declined during the past week as the economic outlook for those parts of the world worsened.
The UK ten-year Gilt yield declined by 17 basis points to 4.68%, the German ten-year Bund yield by 7 basis points to 4.26% and the Japanese ten-year bond yield by 4 basis points to 1.47%. The ten-year US Treasury Note, however, was almost unchanged at 1 basis point higher, closing at 3.95%.
US mortgage rates rose, with the 15-year fixed rate and the 5-year ARM both 7 basis points higher at 6.08% and 6.06% respectively.
Credit market stress was almost unchanged in the US, but worsened in Europe as reflected by the spread of the Markit iTraxx Europe Crossover Index widening from 531 to 563.

Source: Markit/Creditex


The US dollar surged following an acknowledgment of weakening growth in the Eurozone by ECB President Trichet, prompting traders to think the ECB would not be hiking rates further to fight inflation.

Click to enlarge

The US Dollar Index now trades above its 50-day and 200-day moving averages, signaling a breakout from its five-month trading range.
The greenback rose against the euro (+3.2% – a five-month high), the British pound (+2.9% -- a 20-month peak), the Swiss franc (+3.0%), the Japanese yen (+2.2%) and the Canadian dollar (+3.7%).
The Australian dollar (-3.9%) and New Zealand dollar (-3.1%) also lost badly against their US namesake as a result of slowing economic growth pointing to interest rate cuts.
The dollar's rally and growing concerns of slowing demand knocked down dollar-denominated commodity prices as seen in the Reuters/Jeffries CRB Index plunging by 7.4%.
Crude oil, understandably, received the most attention in the commodity sell-off given its strong link to the economy. The price of West Texas Intermediate crude dropped by 7.9% for the week to $115.20 a barrel, i.e. a decline of 20.9% since its high on July 11.
Precious metals remained out of favor, with silver down 12.5%, platinum 5.9% and gold bullion 5.6%. The yellow metal dropped to a three-month low, falling below its 200-day moving average. Among base metals, copper declined by 6.9%.
As far as agricultural commodities were concerned, an expected reassurance from the US Department of Agriculture on the outlook for this year's harvest caused corn to nosedive 11.8%, soyabeans 12.0% and wheat 2.8%.

The chart below shows the past week's damage for the various commodities.

Click to enlarge

In conclusion, it's a prerequisite for success at the Beijing Olympics that athletes be extraordinarily well prepared. Likewise with managing our investments.

That's the way it looks from Cape Town.

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