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Prieur's Perspective: Welcome to Wall Street, President Obama


The economic landscape surrounding the President-Elect.


President-Elect Obama's victory signaled a change in US political direction, but the biggest Election-Day rally ever -- a 4.1% surge in the S&P 500 -- was quickly overshadowed by Wednesday's and Thursday's 10.0% loss, the biggest since 1987.

Mr. Obama gave his first press conference as President-elect on Friday afternoon, summarizing a discussion he had had with his economic advisory team. He pledged to confront the economic crisis "head-on," and said he wanted to see "a rescue plan for the middle class" that would include a new fiscal stimulus package.

The week closed on a positive note, as a late rush of buying on Friday left the stock market indices higher for the day, though still in the red for the week.

BCA Research said:

"While Obama has a laundry list of policy objectives, fixing the economy will be his top priority and will dominate the legislative agenda in 2009. A fiscal stimulus package to support consumers is already being drawn up in Congress, and Obama is likely to propose additional infrastructure spending programs shortly after taking office. But fiscal policy will be hamstrung – the budget deficit is already large, while aggressive tax increases would be inappropriate in the current economic climate and there is little scope for significant spending cuts in other areas."

Richard Russell (Dow Theory Letters) commented:

"I don't know how successful Obama will be in bringing back prosperity to the US, but his amazing victory in rising to the US Presidency has inspired billions of people around the world. It has also lifted America in the eyes of the world."

Underscoring economists' concerns about the depth of the global economic slowdown was a warning from the International Monetary Fund (IMF) that developed economies as a whole would shrink by 0.3% next year. It would mark the first overall contraction in developed economies since World War II. Aggressive interest rate cuts by a number of major central banks only partly assuaged investors' fears.

Nouriel Roubini (RGE Monitor) said:

"Deterioration in the health of the financial sector and related severe strains in funding markets have increased the tail risk of deflation for the real economy."

Although the banking system remains in the grips of a massive deleveraging process, there are early signs that the various central bank liquidity facilities and capital injections are beginning to have the desired effect. It will take time to restore confidence, but the narrowing of financial sector spreads, such as the TED spread (ie. 3-month dollar Libor less 3-month Treasury Bills), shows that the healing process is under way.

Click here to enlarge.

Richard Russell, relying on his 50 years' market experience, questioned whether we were dealing with another fake-out advance:

"One item that bothers me a bit is this – have we seen enough black pessimism to believe that this bear market has bottomed? My guess is that we will see more pessimism next year as unemployment climbs and as it becomes almost impossible to find a good job."

However, John Bogle, founder of the Vanguard Group, said in an interview with Reuters on Tuesday that the fundamentals of the US stock market had "improved radically" and that declines in valuations were overblown.

Across the pond, European equities received a boost from Morgan Stanley's European strategist Teun Draaisma, who said that stocks were now flashing a "full house" buy signal after markets have priced in an earnings recession, and retail investors, purchasing managers and sell-side analysts have all capitulated. Draaisma's prior calls were on the money.

Albert Edwards of Société Générale is less sure. "It has been a house of cards waiting to fall," he said, according to the Financial Times. "The market has to slide much further down the slope of hope into Dante's inferno." He believes markets are currently in the eighth of Dante's nine circles of hell.
No positions in stocks mentioned.
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