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Prieur's Perspective: 2008 in Like a Bear, Out Like a Lamb?


Markets seem to shrug off bad news.


Despite a litany of bleak economic and corporate news during the past week, global stock markets digested the bearish fodder with a sense of aplomb. The MSCI World Index and the MSCI Emerging Markets Index gained 4.4% and 10.9% respectively on the week, with other reflation trades such as gold (+9.1%) and oil (+20.4%) also putting in a strong performance.

But investor angst was never completely allayed as seen from the yields on US 1 and 3-month Treasury Bills briefly trading in negative territory for the first time since 1940, indicating the willingness of risk-averse investors to pay the government for the "privilege" of holding their money. 3-month T-Bills ended the week in positive territory but barely so at a minuscule 0.036% yield, indicating that liquidity was still being hoarded. (See my Credit Crisis Watch.)

The week kicked off on a positive note after US President-elect Barack Obama spelled out his plans on Sunday for the biggest infrastructure investment in the US since the 1950s.

According to CNN, Obama said:

"We understand that we've got to provide a blood infusion to the patient right now to make sure that the patient is stabilized. And that means that we can't worry short term about the deficit [which might surpass $1 trillion before his spending plans are included]. We've got to make sure that the economic stimulus plan is large enough to get the economy moving."

Bill King (The King Report) remarked:

"The resultant infrastructure and physical assets will be far better than endowing busted banks, insurance companies and other financial entities with US taxpayers' cash, which effectively goes down a black hole."

Financial markets reacted negatively to the US Senate's failure to agree on a $14 billion loan to troubled automakers. The prospect of the biggest industrial failure in US history caused a sell-off on global stock markets, a widening of credit spreads and an onslaught on the US dollar.

However, the US Treasury was quick to signal its readiness to provide funds to prop up the "Big 3," as quoted in the Financial Times: "Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry." This indication resulted in an improved tone on financial markets by the close of the week.

Back to the issue of markets shrugging off bad news for the second week running. Richard Russell (Dow Theory Letters) commented as follows:

"On top of everything else, Lowry's Selling Pressure Index dropped substantially yesterday [Wednesday] and is now in a definite declining trend. At the same time, Lowry's Buying Power Index is trending higher. Thus, the odds are saying that the trend of the stock market is turning up.

"This is all the more dramatic since this potential upturn has arrived in the face of black-bearish news. Markets bottoming and rising in the face of bearish news are often the most profitable ones. I have never seen a bear market hit its low amid happy news headlines."

On a fundamental note, 39% of the constituents of the MSCI World Index sell at a discount to shareholders' equity. "The cash-rich companies allow investors to pay nothing for future earnings streams," said Jean-Marie Eveillard in an interview with Bloomberg.
No positions in stocks mentioned.
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