Global Markets in Review: Fresh Economic Woes Impact Sentiment

“Words from the Wise” this week comes to you in a shortened format as pressure from my “day job” precludes me from doing my customary commentary. (For more discussion about economies and financial markets, also see my post “Video-o-rama: Global economy - banked into submission.“)

Just a side note: As President Obama’s economic stimulus package makes its way to the U.S. Senate and the government crafts plans to create a “bad bank,” the Chinese celebrated the Lunar New Year to usher in the Year of the Ox. According to Jim Trippon (China Stock Digest), the Chinese believe good and bad follow each other closely.

After a year of financial meltdowns in 2008, it is comforting to learn that the Year of the Ox is a sign of prosperity and has been very rewarding in the history of China. Are we unnecessarily concerned about the economic slowdown in China, and will the country’s vast foreign reserves come to the Western world’s rescue? If only hope were an investment strategy!

Why does the cartoon below remind me of Margaret Thatcher’s poignant observation: “The problem with socialism is that you eventually run out of other people’s money?”

Bill King (The King Report) said:

The Paradox of Thrift (or saving) is a reductio ad absurdum by John Maynard Keynes that avers that if everyone saves, aggregate demand will decline, and this will imperil the economy. We’d like to contribute the ‘Paradox of Spending’ to Econ 101. This maxim holds that if everyone spends, there are no savings; debt surges and the implosion of that debt collapses an economy.

Next, is a tag cloud of the text of all the articles I have read during the past week. This is a way of visualizing word frequencies at a glance. As the saying goes: A picture paints a thousand words …

The U.S. stock markets experienced their worst January in history, as seen from the movements of the major indices: Dow Jones Industrial Index -8.8%, S&P 500 Index -8.6%, Nasdaq Composite Index -6.4% and Russell 2000 Index -11.2%. This brings into question the January Barometer, stating, “As January goes, so goes the year.”

Key resistance and support levels for the U.S. indices are shown in the table below. The immediate upside target is the 50-day moving average, followed by the early-January highs. On the downside, the December 1 and all-important November 20 lows must hold in order to prevent considerable technical damage. As seen from the table, the Dow has already breached its January 2 low and closed the week only marginally above the roundophobia number of 8,000.

click to enlarge

As far as the outlook for the stock market is concerned, I will suffice with a comment from Richard Russell (Dow Theory Letters):

The stock market often tries to confuse us by coming up with something new. Assuming that the Averages do better than their preceding January peaks, it would have occurred without the usual heavy buying on rising volume. It may be that the January peaks will have to be bettered before the ‘real’ volume comes in. … we will have to monitor the stock market action carefully, to make sure we are not being sucked in to a fake rally as was the case following the 1929 crash.

Also make sure to read my recent posts: “Albert Edwards: Back in the bear camp” and “Jeremy Grantham - The bear buys stocks."

Week’s economic reports

Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Jan 26	10:00 AM	Existing Home Sales	Dec	4.74M	4.40M	4.40M	4.45M
Jan 26	10:00 AM	Leading Indicators	Dec	0.3%	-0.5%	-0.3%	-0.4%
Jan 27	9:00 AM	S&P/CaseShiller Composite	Nov	-18.18%	NA	-18.4%	-18.06%
Jan 27	10:00 AM	Consumer Confidence	Jan	37.7	39.0	39.0	38.6
Jan 28	2:15 PM	FOMC Rate Decision	Jan. 28	-	NA	NA	0-0.25
Jan 29	8:30 AM	Durable Orders	Dec	-2.6%	-2.2%	-2.0%	-3.7%
Jan 29	8:30 AM	Durable Orders, Ex-Tran	Dec	-3.6%	NA	-2.7%	-1.7%
Jan 29	8:30 AM	Initial Claims	01/24	588K	580K	575K	585K
Jan 29	10:00 AM	New Home Sales	Dec	331K	400K	397K	388K
Jan 30	8:30 AM	Chain Deflator-Adv.	Q4	-	0.5%	0.6%	3.9%
Jan 30	8:30 AM	Employment Cost Index	Q4	0.5%	0.7%	0.7%	0.7%
Jan 30	8:30 AM	GDP-Adv.	Q4	-3.8	-5.5%	-5.5%	-0.5%
Jan 30	8:30 AM	Chain Deflator-Adv.	Q4	-0.1	0.5%	0.4%	3.9%
Jan 30	9:45 AM	Chicago PMI	Jan	33.3	33.5	34.9	35.1
Jan 30	10:00 AM	Michigan Sentiment	Jan	61.2	62.0	61.9	61.9

Source: Yahoo Finance, January 30, 2009.

In addition to interest rate announcements by the Bank of England and the European Central Bank (Thursday, February 5), the US economic highlights for the week include the following:

click to enlarge

Source: Northern Trust.

Click here (pdf file) for a summary of Wachovia’s weekly economic and financial commentary.

Markets

The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, January 30, 2009.

Caution should be exercised, since the economic and earnings background remains precarious. And do remember Charles Darwin’s words:

It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.

That’s the way it looks from Cape Town.

Comments

[morph366:]

Thanks for citing Charles Darwin in this year which is the 200th anniversary of his birth.
It may not be too cynical to spell out how he may have perceived the most likely survivors in these troubled times. With most players in the world's financial system suffering from a black hole of non-valuable assets at the heart of their balance sheet there is one economic agent that should be able to honor its obligations, despite lack of capital, and that is the United States Treasury.

Feb 01 09:55 AM

[The Good Ne...:]

Prieur,

Good luck with the day job. We will look for whatever wisdom you can provide within the bounds of your ability to get real stuff done.

Always enjoy your posts and this is no exception.

I do take issue however with you presenting *data* to support the assertion that it "impacts sentiment"

Frequently it is other many other factors that drive a cascading downward spiral... or irrational exuberance to the upside...

Contrary to the tag cloud and many gloomy news headlines, consumer confidence is surprisingly up...
mast-economy.blogspot....

Most other economic indicators can be measured with charts and data. But consumer confidence and sediment is not one of them... it's always elusive... just outside of our analytical reach...

Like it or not, for an explanation of sentiment we need the psychologists... and as you know many of them can't explain the human condition well either...

GNE
goodnewseconomist.com

Feb 01 11:13 AM

[Tradememe:]

Thanks for the post. So, you are from Cape Town. I guess, the further one is away from Wall Street, the more common sense one has.

Feb 01 01:20 PM