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Prieur Perspective: Stock Markets - Fleeing For The Exits


Improvements in credit markets provide little encouragement.

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The past week witnessed mounting evidence that the world economy is facing a sharp downturn, causing unrest to engulf financial markets. Stocks, emerging-market currencies and bonds remained under heavy selling pressure, as risk-averse investors rushed to liquidate positions. The US dollar, Japanese yen and developed-market bonds provide perceived safe havens.

Improvements in the credit markets provided little encouragement to battle-weary investors in the face of weak US earnings reports and a poor outlook for at least the next few quarters. Forced selling by hedge funds needing to meet margin calls and redemption requests again featured prominently. The S&P 500 Index lost 6.8% on the week (YTD -40.3%), pulling the Index down to levels last seen in 2003.

With financial woes weighing on investor confidence, I couldn't help thinking of what President Thomas Jefferson said in 1802:

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered."

Fast forward to 2008, specifically to former Fed Chairman Alan Greenspan's testimony to a House Oversight Committee hearing on the roles and responsibilities of federal regulators in the current financial crisis.

Greenspan described the financial crisis as a "once-in-a-century credit tsunami." He acknowledged that the crisis exposed flaws in his thinking and to the working of the free market system, telling the Committee that his belief that the banks would be more prudent in their lending practices because of the need to protect their shareholders had been proven wrong by the crisis. He called this a "mistake" in his views and said he was "in a state of shocked disbelief."

He furthermore said: "The housing bubble became clear to me sometime in early 2006, in retrospect. I did not forecast a significant decline because we have never had a significant decline in price." Whew!

"Why did no one on Capitol Hill remind Easy Al that he mocked Americans for not taking adjustable-rate and other low-rate gimmick mortgages – only days before he hiked rates," commented Bill King (The King Report).

And while we are on the topic of the credit debacle, allow me to share with you, courtesy of David Fuller, a little light relief on the bailout workings:

"Young Chuck moved to Texas and bought a donkey from a farmer for $100. The farmer agreed to deliver the donkey the next day.

The next day the farmer drove up and said, 'Sorry son, but I have some bad news - the donkey died.'

Chuck replied, 'Well, then just give me my money back.'

The farmer said, 'Can't do that. I went and spent it already.'

Chuck said, 'Ok, then, just bring me the dead donkey.'

The farmer asked, 'What ya gonna do with him?' Chuck said, 'I'm going to raffle him off.' The farmer said, 'You can't raffle off a dead donkey!' Chuck said, 'Sure I can, watch me. I just won't tell anybody he's dead.'

A month later, the farmer met up with Chuck and asked, 'What happened with that dead donkey?' Chuck said, 'I raffled him off. I sold 500 tickets at two dollars a piece and made $998.' The farmer said, 'Didn't anyone complain?' Chuck said, 'Just the guy who won. So I gave him his two dollars back.' Chuck now leads the US bank bailout team."
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No positions in stocks mentioned.
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