A Global Perspective Following the U.S. Subprime Crisis

 |  Includes: DIA, QQQ, SPY
by: Dr Christophe Aubin Nury De Malicorne

Considering the current turmoil in the financial markets, the lack of confidence of investors, as well as the bearishness of most leading financial market strategists and the media, it seems essential to contribute to the market analysis from a global perspective:

  • Since the beginning of the 1990s, world trade has never been so global and growing so rapidly, thanks to new technologies, notably the internet.
  • Leading economists for 2008 are projecting a growth of about 1% in the US, 2% in Europe and an average of over 6% in the BRIC region, including a target over 8% in India and China which account for 40% of the world population.-Over the next two decades, the Chinese and Indian economies are expected to quadruple and to be part of the world leading countries in term of growth national product (with a population of over 2.6 billion individuals).
  • The subprime crisis has started in the US at the end of the summer 2007 and concerns a type of lending activities standardized in the United States, however traditionally unusual in the rest of the world leading industrialized countries.
  • The US Authorities have been proactive towards the subprime crisis: they have lowered interest rates by over 50% in less than 6 months and are implementing a fiscal and economic stimulus package of over 150 bn usd, representing 1% of US economic output. As well, they have clearly indicated throughout the 'Bear Stearns rescue' that they are ready to intervene directly to stabilize further the financial sector.
  • The US dollar is strongly depreciated, especially compared to the Euro (1.59). It provides a definite comparative advantage to US exports and particularly to all the companies in the index of the Dow Jones Industrial Average, which have the greater percentage of their activities outside the US.
  • The analysis of the rising number of individuals in the age group between 45 to 55 years old, has showed that it contributes dramatically to US economic growth and that it is strongly correlated to the rise of US stock market. This population will double in the next five years and a similar pattern can be observed in Europe.
  • The trend of first quarter earnings of S&P companies is currently showing a 63% rate of better results than expected.
  • Technically, the Dow Jones Industrial Average is sitting on its rising support trend line, established since beyond the1980s and tested but not broken during events such as the crash of 1987, the financial crisis of early 1990s, the wars in Kuwait or Iraq and the crash of the early 2000s due to the 'internet bubble'. This rising support trend line indicates a crossover of the 20 000 level by 2012-2013.

To conclude, as Mr. Warren Buffet said: 'be fearful when others are greedy and greedy when others are fearful'. Our extensive global economic research and market technical analysis indicate we have reached a bottom for the Dow Jones and the upward momentum shall accelerate by year end until 2012-2013.