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Prieur Perspective: New Lows for Economic Sentiment


Markets, emotions remain fragile.


"This is one 'mother' of a market," wrote 84-year old market veteran Richard Russell of Dow Theory Letters, aptly describing what market participants were again faced with during the past week.

Although a sense of calm characterized financial markets, sentiment was fragile as the outlook was dominated by the familiar cast of deteriorating economic data, housing woes and concerns about the financial sector.

The Bear Stearns (BSC) bail-out transaction once again got the week going with JPMorgan Chase (JPM) agreeing to raise its buy-out bid for the embattled firm from $2 per share to $10 per share, and to stand in for the first billion dollars of losses (with the Federal Reserve taking responsibility for a further $29 billion).

Speaking of banks, remember the story of the bank customer who asked the bank manager what the difference was between a recession and a depression? "In a recession, you lose your job. In a depression, I lose mine," came the reply from the manager.

Now back to business. Central banks, especially the U.S. Fed, were again active in providing additional funds to financial institutions. The Fed lent $75 billion of Treasuries for a wide range of mortgage assets held by banks. Loans to banks from the Fed's discount window rose, while average daily borrowing for the Fed's primary dealer facility was a large $32.9 billion.

"What we are watching today is a fierce and unrelenting battle by the Fed and Europe's central banks to avoid a collapse of the global banking system. To say the battle is deadly serious is an understatement," remarked Russell.

Following last week's announcement of the Office of Federal Housing Enterprise Oversight (OFHEO) relaxing its capital surplus restrictions on Fannie Mae (FNM) and Freddie Mac (FRE), a further positive development saw the Federal Housing Finance Board authorizing Federal Home Loan Banks to increase their purchases of agency mortgage-backed securities.

Before highlighting some thought-provoking news items and quotes from market commentators, firstly a brief review of the financial markets' movements on the basis of economic statistics and a performance round-up.


The global picture is succinctly summarized by the conclusion of Moody's for its latest survey of business confidence for the world: "Global business confidence remains very weak, slipping again last week. Assessments of present conditions plunged to a new record low, probably reflecting the Bear Stearns collapse and the resulting financial turmoil. The sentiment of those working in the financial services industry fell sharply to a new low.

"Confidence declined across the globe last week, consistent with recession in the U.S., near-recession in Europe and Canada, below potential growth in South America, and growth just at potential in Asia."

U.S. economic reports released last week showed further weakness in the U.S. housing and consumer sectors, but a somewhat improved inflation reading.

The Conference Board's Consumer Confidence Index dropped to 64.5 in March, the lowest reading for the current business cycle, excluding the 61.4 mark seen in March 2003 when the war in Iraq commenced. Overall, the outlook for consumers is the gloomiest since October 1993.

Added concerns about the consumer arose with the Personal Income and Spending report for February, which showed only a 0.1% gain in spending and a flat reading on an inflation-adjusted basis.

The core PCE price index provided some good news from an inflation standpoint as it held steady at a year-to-year rate of 2.0%, albeit at the upper limit of the Fed's comfort zone of 1.0% to 2.0%.

The S&P/Case-Shiller Home Price Index, which measures prices in 20 US metropolitan areas, revealed prices declined by 10.7% in January – the largest drop on record (i.e. since 2001).

Commenting on a 2.9% increase in existing home sales for February, John Mauldin (Thoughts from the Frontline) explained: "Many of the home sales from February are foreclosures. Those are going to rise. The key pieces of data to look at will be the months of supply of homes for sale and foreclosures. Until the supply of homes gets back to six months, we will probably not have seen the bottom. Until we have worked through the millions of foreclosures that are in front of us, it is hard to think in terms of a bottom.

"We are in a [U.S.] recession, and that means rising unemployment and falling consumer spending. It means tighter profit margins, etc. It is going to take a long time for the economy to recover. Welcome to Muddle Through," said Mauldin.

Elsewhere in the world, U.K. consumer confidence fell to a 15-year low in March and home prices fell for the fifth straight month. On a more upbeat note, Germany's Ifo survey of business confidence surprised on the upside, rising for the third consecutive month.

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

In addition to Fed Chairman Ben Bernanke's testimony on the economic outlook in Washington on Wednesday, April 2, the next week's economic highlights, courtesy of Northern Trust, include the following:

1) ISM Manufacturing Survey (April 1): The consensus for the manufacturing ISM composite index is 48.0 versus 48.3 in February. If the consensus forecast is accurate, it would be the third monthly reading below 50.2 in the last four months. Consensus: 48.0 versus 43.3 in February.

2) Employment Situation (April 4): Payroll employment in March is expected to post the third monthly decline (-50,000) following a loss of 63,000 jobs in February. The jobless rate is predicted to have risen to 5.0% from 4.8% in February. Consensus: Payrolls: -50,000 versus -63,000 in February; unemployment rate: 5.0% versus 4.8% in February.

3) Other reports: Construction Spending, Auto Sales (April 1), Factory Orders (April 2), ISM Non-Manufacturing (April 3).


This performance chart obtained from The Wall Street Journal Online on March 29 shows how different global markets fared during the past week.


Global stock markets closed the week higher, with the MSCI World Index rising by 2.4%.

Emerging markets rebounded from the sell-off of the previous two weeks and surged by 6.4%. Leading the charge were the Hong Kong Hang Seng Index and the Indian BSE 30 Sensex Index with increases of 10.3% and 9.2% respectively. The Shanghai Stock Exchange Composite Index was the exception with a loss of 5.7% over the week, but made up excellent ground with a gain of 4.9% on Friday.

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