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Prieur Perspective: Markets Hit by Tidal Wave?


Banking troubles hit equities, stoke fears.

A perfect storm of a deepening global recession and banking woes last week battered equities and supported the safe havens of the US dollar, government bonds and gold bullion.

A dismal corporate earnings outlook, fears about bank nationalizations -- especially Bank of America (BAC) and Citigroup (C) -- and a warning by Moody's Investors Service of possible downgrades of European banks exposed to the slumping economies of Central and Eastern Europe, stoked investors' fears.

Few stock markets escaped the selling pressure as summarized by the week's movements of the MSCI Global Index (-7.7%, YTD -16.0%) and the MSCI Emerging Markets Index (-9.3%, YTD -11.4%). Venezuela (+6.7%), Pakistan (+6.1%) and Morocco (+3.7%) were the top 3 performers, whereas potential debt defaulters -- Russia (-17.1%), Ukraine (-12.5%) and Hungary ( 12.4%) -- occupied the bottom-end of the ranking (data courtesy of Emerginvest).

The major US indices suffered their worst weekly losses this year (to record 6 losing weeks out of 7): Dow Jones Industrial Index -6.2% (YTD 16.1%), S&P 500 Index -6.9% (YTD -14.7%), Nasdaq Composite Index 6.1% (YTD -8.6%) and Russell 2000 Index -8.3% (YTD -17.7%).

Negative sentiment dragged the S&P 500 to 7 points below its October 2002 low, whereas the Dow stopped only 80 points short of this key level. It's noteworthy that it took 5 years for the latter to increase from 7,286 to 14,165, but only 16 months to wipe out the entire 2002-2007 advance.

With the bears prowling Wall Street, none of the main economic sectors registered positive returns on the week. Among exchange-traded funds (ETFs), the KBW Bank Index ETF (KBE) and the Financial Select Sector SPDR ETF (XLF) lost 16.6% and 15.9% respectively. However, as highlighted by John Nyaradi (Wall Street Sector Selector), inverse exchange-traded funds (ETFs) such as ProShares Short S&P 500 (SH) (+6.8%), ProShares Short Dow30 (DOG) (+5.8%) and Short QQQ ProShares (PSQ) (+5.1%) gained handsomely.

As was the case the previous week with the announcement of Treasury Secretary Timothy Geithner's financial stability plan, last week's mortgage relief plan, designed to stem the foreclosure crisis, also made scant impression on the stock market. President Barack Obama earmarked $275 billion to help reduce mortgage payments for up to $9 million struggling borrowers and enable Fannie Mae (FNM) and Freddie Mac (FRE) to keep mortgage rates down.

Jeff Randall (Telegraph) wrote:

"... we are in denial about the causes of recession and therefore cannot face up to the action required to lift us out of it. As Niall Ferguson, professor of history at Harvard University, wrote: 'The reality being repressed is that the Western world is suffering a crisis of indebtedness.' In which case, pumping out yet more debt will not be the answer. It is simply a short-term fix that in the long run creates an even bigger disaster, like giving a shivering alcoholic a case of Special Brew." (Also read RGE Monitor's recent guest post on the US's financing needs.)
No positions in stocks mentioned.
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