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Prieur Perspective: The Ides of March


Credit crisis continues to take economic toll.


The first week of March started off with a deepening credit crisis that appears to have pushed the U.S. economy into recession. This calls to mind the infamous warning to Julius Caesar to beware the "Ides of March" – although referring to March 15 (the date of Caesar's assassination), the term has come to be used as a metaphor for impending doom.

Richard Russell, 83-year old author of the Dow Theory Letters, remarked: "The end of a costly (for most) and difficult week. ... this market has darn near worn me out, and I don't wear out easily."

Concerns grew that the Federal Reserve may not be able to prevent the credit slump from worsening and that contagion was spreading into the safest pockets of the U.S. credit universe, leading to further large-scale write-downs but this time of 'good' paper. Are the financial problems so vast that we are now in an era of 'too big to bail'?

Also weighing on markets were the lack of liquidity in the municipal bond and secondary mortgage markets, and the news that mortgage company Thornburg (TMA) was unable to meet more than half a billion dollars in margin calls and that Amsterdam-listed Carlyle Capital was having similar troubles.

The Fed announced on Friday that in an effort to address "heightened liquidity pressures in term funding markets" it would be increasing its bi-monthly Term Auction Facility (TAF) to $100 billion (from $60 billion) and be providing additional 28-day repos for a further $100 billion.

Let's briefly review the financial markets' movements on the basis of economic statistics and a performance round-up.


Economic and corporate readings during the past week did little to quell investors' fears, and recession and inflationary concerns remained elevated.

At the top of the list of weaker-than-expected economic reports were non-farm payrolls – reported to have declined by 63,000 positions, marking the biggest decline since March 2003.

Furthermore, home foreclosures in the fourth quarter of 2007 reached their highest level in the history of the Mortgage Bankers Association's survey. The mortgage delinquency rate was the highest since 1985, pointing to more foreclosure problems ahead.

On a somewhat more positive note, the ISM indexes for the manufacturing and services sectors both checked in a little stronger than expected, although below the 50 mark, which is the dividing line between expansion and contraction.

Summarizing the economic situation, Asha Bangalore of Northern Trust commented as follows: "The details of the February employment report point to a situation comparable to prior recessions, factory sector surveys have been weak, consumer confidence measures have fallen sharply, auto sales in January and February have been discouraging, and housing market data suggest that the bottom is not here yet. The message is that the downside risks to economic growth are growing every day."

For these reasons, further easing of monetary policy at the FOMC's meeting on March 18 appears a fait accompli. Following the jobs data on Friday the Fed funds futures market was pricing in a 98% probability of a 75 basis point cut to 2.25% and a 32% chance of a 100 basis point cut to 2%. Speculation that the Fed might step in sooner with an inter-meeting rate cut was rife on Friday.

Elsewhere in the world, inflation worries resulted in the European Central Bank and the Bank of England keeping their benchmark interest rates on hold, and Australia's Reserve Bank increasing rates by 25 basis points to the highest level in 12 years. In line with the US's easier monetary policy, Canada's central bank, on the other hand, cut rates by 50 basis points.

Here are the week's economic reports, courtesy of Yahoo Finance, March 7, 2008.

The next week's economic highlights, courtesy of Northern Trust, include the following:

1) International Trade (Mar 11): The trade deficit is predicted to have widened to $59.5 billion in January from $58.8 billion in December. Consensus: $59.5billion.

2) Retail Sales (Mar 13): Auto sales were nearly steady in February and non-auto retail sales are projected to be soft. Gasoline prices rose in the latter half of February. The headline may show a small gain to reflect the jump in gasoline prices, but excluding autos and gasoline, retail sales should be soft. Consensus: 0.2% versus 0.3% in January; non-auto retail sales: 0.2% versus 0.3% in January.

3) Consumer Price Index (Mar 14) A 0.2% increase in the CPI is predicted for February following a 0.4% gain in January. The core CPI is expected to have moved up 0.2% versus a 0.3% increase in January. Consensus: +0.3%, core CPI +0.2%.

4) Other reports: Inventories, Import prices (Mar 13), Consumer Sentiment Index (Mar14).


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


International equity markets were on the receiving end of the latest wave of credit market woes and global stock markets closed the week sharply lower, with the MSCI World Index declining by 3.1%.

The previous week's top performers, the Japanese Nikkei 225 Average and emerging markets, came under strong selling pressure and lost 6.1% and 4.3% respectively. Individual emerging markets such as India's BSE 30 Sensex Index (-9.1%) and Hong Kong's Hang Seng Index (-7.5%) were at the forefront of liquidations.

The U.S. indexes experienced the same fate as global markets during the past week, and also chalked up fairly painful returns for the year to date (given in brackets after the week's movements), as follows: S&P 500 Index -2.8% (11.9%), Dow Jones Industrial Index -3.0% (-10.3%), Nasdaq Composite Index -2.6% (-16.6%) and the Russell 2000 Index -3.8% (-13.8%).

In a repeat from the previous week, U.S. banks (-6.1%) and brokers (7.1%) were on the receiving end of the selling orders.

From a technical analysis point of view, all the major U.S. indexes (with the exception of the Dow Jones Transportation Index) breached their January 2008 lows and closed the week at multi-year lows.


Government bonds experienced a great deal of volatility as the week progressed from one announcement to the next. The yields on longer-dated U.S. government bonds were pushed somewhat higher as a result of mounting inflation concerns, whereas the shorter-dated maturities fared better on the expectation of rate cuts.

The U.S. 10-year and 30-year bond yields closed the week 2 and 14 basis points higher respectively, but the two-year yield declined by 13 basis points. This resulted in a spread of 203 basis points between two- and 10-year yields – the widest since June 2004.

The gap between 30-year agency mortgage bonds and 10-year Treasuries increased to 200 basis points, a spread not seen since 1986.

Short-dated government bond yields in Continental Europe were mostly higher as a result of the European Central Bank's decision not to cut its benchmark rate for the time being.


The past week again saw the U.S. greenback recording lifetime lows on a trade-weighted basis (-0.1%) and against the euro (-1.1%) as market participants focused on grim U.S. economic growth leading to further rate cuts by the Fed.

Rate decisions in Canada, Europe, England and Australia (see Economy section above) influenced currency movements, but the features of the week were the Japanese yen hitting an eight-year high against the U.S. dollar and the Swiss franc also gaining strongly on the back of risk-aversion flows.


The Dow Jones-AIG Commodity Index, which measures the movement of a basket of 19 different commodities, ended the week with a slight loss of 0.2% after being up 0.5% by mid-week. Contributing to the latter gain was gold's move to $1,000.10 an ounce on Wednesday and the strengthening of oil prices following OPEC's decision to leave its production levels unchanged, and an unexpected drawdown in crude inventories.

Oil prices closed at $106.53 on Friday and ended the week up 3.3%. Conversely, gold prices fell back to $979.10 per ounce, which was virtually unchanged from the previous week's close.

As far as other commodities were concerned, metals scaled new peaks, but soft commodities experienced some profit-taking.

Its Tough to Be a Bull

Source: CXO Advisory Group.

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