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Prieur Perspective: Recession Without Borders?


Volatility goes global.


The Oxford English Dictionary defines "volatile" as "liable to change rapidly and unpredictably, especially for the worse." It's not as if investors don't know what that's like -once again over the past week, global stock markets were subjected to extreme fluctuations.

The red line in the chart below shows the daily percentage change in the S&P 500, illustrating the severe movements seen in the stock markets in recent times.

Click here to enlarge.

Turbulence was rife, as more data showed the world economy facing an even longer and more intense downturn than many feared. Battle-weary investors were also spooked by continued financial trauma and a bleak corporate earnings outlook for at least the next few quarters, and found little comfort in hints of additional interest rate cuts.

Global stock markets were beset by angst and plunged by more than 6% over the week in the case of the MSCI World and Emerging Markets indices, with the only safe havens for risk-averse investors being the US dollar, developed-market government bonds and gold bullion. Unsurprisingly, the US 1- and 3-month Treasury Bills declined to minuscule yields of 0.066% and 0.117%, respectively.

Financial markets reacted badly to US Treasury Secretary Henry Paulson's decision to shelve plans to buy troubled mortgage assets, thereby shifting the focus of the government's TARP bailout plan to non-bank financial institutions and consumer credit. Priorities going forward are: 1) to strengthen the capital base of the financial system; 2) to provide support for securitization of credit-card receivables, auto loans and student loans; and 3) to explore ways of reducing the risk of foreclosure.

Further dealings in Washington concerned the debate over whether to provide government aid to the US auto industry in what looks to be a showdown among the lame-duck Congress, President Bush and the incoming Obama administration.

According to MarketWatch, Deutsche Bank analyst Rod Lache slashed his price target for General Motors (GM) from $4 to $0. Meanwhile, Richard Russell (Dow Theory Letters) pointed out: "Mattel (MAT) makes toy cars. Mattel is now worth more as a company than General Motors." It gives one pause for thought.

No end to the credit turmoil seems to be in sight, as AIG (AIG) and Fannie Mae (FNM) reported huge losses. Meanwhile, renewed strains surfaced in the money markets after the US Treasury's decision not to buy toxic assets. The 3-month dollar Libor rate ended a 23-day run of consecutive falls and edged up from 2.13% to 2.24% on Thursday and Friday.

In the spirit of the tumultuous times, a microbrewery in British Columbia is toasting the economic downturn by launching a special brand of recession-style beer, naming its brew "Bailout Bitter" in honor of the government bailouts, reported CBC News. Truly a "bitter ale for bitter times"!

For more wisdom, we turn to the venerable analyst Richard Russell:

"This bear market is a bloody brute. I'm not trying to frighten my subscribers. What I am trying to do is to caution subscribers, and notify them that the lows for this bear market may still be far away. We simply do not know, nor do we have evidence to indicate that the bottom is in or near. I continue to believe that the 2002 Dow low will be closely tested, and that the test will fail in that the Dow will break through the 2002 low of 7,286."
No positions in stocks mentioned.
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