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Prieur Perspective: Soaring Oil Makes For Sour Market


Crude the key factor in last week's sell-off.


Soaring oil prices were mostly to blame for the past week's stock market sell-off, but renewed concerns about U.S. economic growth, corporate earnings and mounting angst about inflation pressures also featured prominently in determining the market's fate.

David Fuller (Fullermoney) commented as follows:

"As the world's most important commodity by far, this surge in the oil price is bearish for the majority of stock markets. Consequently, I would assume that rallies seen since March have either been capped or are unlikely to make much upward progress until investors see evidence that crude oil has commenced a medium-term correction."

The FOMC released the minutes from its April 30 meeting on Wednesday. Members acknowledged uncertainty about what constituted an appropriate monetary policy in the current economic environment, resulting in the rate reduction (by 25 basis points to 2.0%) being a "close call."

The surprise of the minutes was the Federal Reserve showing increasing concern about inflation expectations, as gleaned from the following: "... risks to growth were now thought to be more closely balanced by the risks to inflation ... several members noted it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term, unless economic and financial developments indicated a significant weakening of the economic outlook."

Market participants were further unnerved by the Fed slashing its real GDP growth projections for this year (0.3% to 1.2% – down from 1.3% to 2.0% in January), together with raising its forecasts for PCE inflation (3.1% to 3.4% – up from 2.1% to 2.4%) and the unemployment rate (5.5% to 5.7% – up from 5.2% to 5.3%).

I will be braving 34 hours of traveling time from Cape Town to Laguna Beach in California later this week to attend Rob Arnott's Research Affiliates' annual gathering of its advisory panel. My investment management company, Plexus Asset Management, has an exclusive licensing agreement with Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African region.

I am thrilled about attending this event as it will afford me the opportunity to meet with financial luminaries such as Peter Bernstein, Burton Malkiel, Harry Markowitz and Jack Treynor for the first time. This has the prospect of being a truly "whoa" experience! Needless to say, my blogging activity will be rather light over the next week, but I am sure that I will return with an abundance of interesting investment ideas.

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


The Ifo World Economic Climate Index has worsened further in the second quarter of 2008, the indicator having fallen to its lowest level in six years.

Overall, last week's U.S. economic reports failed to brighten up investors' mood. Weekly initial claims and the leading economic indicators data were mildly encouraging, but were overshadowed by inflation concerns tied to a gloomy Producer Price Index, the jump in oil prices and the downbeat statements in the FOMC's minutes. In addition, a stark housing inventory situation implied that additional price declines were in store.

BCA Research summarized the U.S. economic picture as follows:

"...policymakers remain nervous about the outlook, and are keeping their options open. The markets are pricing in a 50% chance that the Fed will hike rates by 25 basis points before the end of the year, but that seems premature given the prospect that the economy will continue to struggle."

Elsewhere in the world, the Bank of Japan elected to leave its official rate unchanged at 0.5%. The German ZEW economic sentiment index pointed to investors' outlook continuing to worsen, although the Ifo Business Climate Index edged up, suggesting German industry and trade are still doing well. The U.K. economy, however, seems to be heading for its most protracted slowdown since the early 1990s, according to detailed growth forecasts from the Bank of England.

Here are this week's economic reports, courtesy of Yahoo Finance, May 23, 2008.

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

1) New Home Sales (May 27): Sales of new homes are expected to have fallen in April. Purchases of new homes in March were down 62.1% from their peak in July 2005. Sales of new homes have declined by 36.3% from a year ago in March. Consensus: 522,000 versus 526,000 in March.

2) Durable Goods Orders (May 28): Durable goods orders (-0.5%) are predicted to have dropped in April largely due to aircraft orders that have risen for two straight months. Orders of defence items may have risen following a drop in March. Consensus: -1.1% versus -0.3% in March.

3) Real GDP (May 29): The net impact from recently published data is an upward revision of real GDP growth to 1.0% in the first quarter of 2008 from a 0.6% increase in the advance estimate. Consensus: 1.0%.

4) Personal Income and Spending (May 30): The earnings and payroll numbers for April suggest only a small gain in personal income (+0.1%). Auto sales fell sharply to 14.4 million units in April and non-auto retail sales were soft, which points to a steady reading for consumer spending with service outlays providing the offset. Consensus: Personal income +0.2%, consumer spending +0.2%.

5) Other reports: Consumer Confidence (May 27), Consumer Sentiment Index (May 30).


This performance chart obtained from the Wall Street Journal Online, May 2, 2008, shows how different global markets performed during the past week.


After a number of major stock market indices hit four-month highs on Monday, a surge in oil prices and renewed growth concerns triggered a sharp turnaround, taking the MSCI World Index 2.4% lower by the close on Friday.

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