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Prieur Perspective: A Week for the Record Books


Markets shot up, shot down.


What a crazy week! Last week was one in which the Dow Jones Industrial Average managed to record both its largest single-day points increase (+936 points on Monday) and its second-largest one-day points decline (-733 points on Wednesday) since its start in 1896. On Thursday the CBOE Volatility (VIX) Index surged to a record high of 81.17, with the Dow closing the week 4.7% higher after the previous week's record 18.2% decline.

Compiling this round-up, I invariable thought of John Crudele's (New York Post) comment: "… I'm as sick of writing about financial problems as you are of reading about them. But, as your mother probably said, just sit still and take the medicine. It's good for you."

Governments around the globe launched unprecedented and concerted rescue operations for major banks in order to unfreeze short-term credit markets and avoid a collapse of the world's financial system. It has also been announced, according to The New York Times, that President Bush had agreed to play host to a summit of world leaders soon to discuss the global response to the financial crisis.

Reflecting on the origins and fall-out of the credit debacle, a quote from Winston Churchill comes to mind: "The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery."

Throughout the week, investors remained preoccupied with concerns about the intensifying economic damage that inevitably follows financial damage. Deleveraging of hedge funds continued unabated, and commodities and emerging-market stocks, bonds and currencies plunged on the back of risk aversion.

On a positive note, credit markets saw signs of improvement, with the overnight dollar Libor rate dropping to 1.66% from 5.09% last week, commercial paper rates falling to 1.05% from 3.50%, and the Ted spread – the difference between what banks charge each other for three-month loans (three-month dollar Libor) and what the Treasury pays (three-month Treasury Bills) – narrowing by 100 basis points to 3.63%. (Chart source: Stockcube Research)

"By the time the Ted spread is safely beneath 100 basis points once again, I expect the next bull market in equities to be well under way. The global economy should be recovering as well," added David Fuller (Fullermoney) from across the pond.

Warren Buffett, in an op-ed article in The New York Times, said that he was buying American stocks for his personal portfolio and encouraged others to do the same:

"I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month – or a year – from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over."

Jeremy Grantham (GMO) summarized his investment recommendations in his latest quarterly newsletter as follows: "At under 1,000 on the S&P 500, US stocks are very reasonable buys for brave value managers willing to be early. The same applies to EAFE and emerging equities at October 10 prices, but even more so. History warns, though, that new lows are more likely than not.

"Fixed income has wide areas of very attractive, aberrant pricing. The dollar and the yen look okay for now, but the pound does not. Don't worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry!

"Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows. As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower. Good luck with your decisions."

I am of the opinion that stock markets are in a broad phase of bottoming out. In a post a few days ago I asked the question "Is the financial storm over?", concluding:

"One could argue that stock prices are oversold, creating the potential for a further advance through year end, especially if credit spreads tighten (i.e. normalize) further. However, stock market valuations are not at the same oversold level as prices, arguing that a secular low may not necessarily have been reached. The third-quarter earnings season should provide part of the puzzle."

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


"Global business confidence plunged last week to a record low. The financial panic has unnerved businesses, particularly in the US and Europe, but sentiment has also turned sharply lower in South America and even in Asia," according to the Survey of Business Confidence of the World conducted by Moody's "The global economy is taking a body blow from the financial turmoil."

Economic reports released in the US during the past week consisted of a battery of worrisome updates.

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