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Prieur Perspective: Twists and Turns


Volatility and turmoil closed a wild week.


Whew – what a wild week! Global stock markets and commodities tumbled, whereas government bonds and the US dollar surged amid mounting fears that the ongoing turmoil in financial markets was foreshadowing a hard landing for the US and Europe.

The first-ever trillion-dollar loss (as measured by the Dow Jones Willshire 5000 Index) on Wall Street came on Monday in the wake of the US House of Representatives failing to gather enough votes to pass the $700 billion bank rescue package. Globally, more than $1.7 trillion got wiped off the MSCI World Index.

Considering the entire history of the Dow Jones Industrial Average since 1896, Monday's decline of 777 points ranked as the largest points decline in history (see Fear Grips Global Markets). However, and let's be thankful for small mercies, the percentage decrease of 6.98% was still significantly less than 1987's 22.61% decline.

Although the Senate's passing of the bailout plan on Wednesday brought temporary relief, the reversal on Friday of the House's earlier decision brought more volatility. In classic "buy on the rumor, sell on the news" fashion, the Dow Jones Industrial Index rallied by 3.0% leading up to the vote, but then sold off by a massive 486 points (4.5%) to end 1.5% down on the day and 7.3% lower on the week.

Now that the bailout deed has been done, attention is shifting to whether the plan will work and break the logjam in the credit markets (see Global Liquidity Crisis: What Now?).

BCA Research said:

"Our fear is that policymakers, including many central banks, still do not fully grasp the challenges facing the financial system. Governments must effectively guarantee the banking system on both the asset and liability side, and provide more relief to homeowners. Coordinated rate cuts are also necessary to stem the economic damage already evident in the latest purchasing managers' surveys in the US and Europe."

Asha Bangalore (Northern Trust) view the modified Paulson Plan as a first step to stabilize global financial markets, saying: "It will take time to accomplish this task with a combination of private sector deals and government programs. Warren Buffet type rescue measures such as the Goldman Sachs deal, FDIC intervention in the case of Washington Mutual, and Wachovia sale to Wells Fargo (that is under way) are examples of how a restructuring of the banking system would work."

Summarizing investors' concerns, Nouriel Roubini, professor at New York University and chairman of Roubini Global Economics, said: "It's plain that the current financial crisis is worsening in spite of – or perhaps because of – the Treasury rescue plan."

Commenting on the outlook for equities, Marc Faber, author of the Gloom, Boom & Doom Report, remarked as follows: "A stock rally in the event that a package is approved will be temporary and should be used as 'an opportunity' to sell."

David Fuller (Fullermoney) added: "… I doubt that the US stock market can commence a year-end, mean reversion rally towards its declining 200-day moving average until the Ted spread (i.e. three-month dollar Libor less three-month Treasury Bills) breaks its uptrend and falls sharply. The eventual downside reversal may be rapid, but until it occurs and Wall Street steadies, most other stock markets will also remain under pressure."

To add a ray of hope to the otherwise gloomy situation, Jeffrey Hirsch of Stock Trader's Almanac, said: "In this time of turmoil let us also remind you that although September is now the worst month of the year, October is a 'bear killer' and turned the tide in 11 post-WWII bear markets. We may find bottom in September, but October could ring in a new bull. However, it still can be dangerous; 2007 is a case in point. Expiration week can be tricky, but the last 15 days of the month are loaded with bullish days."

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No positions in stocks mentioned.
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