Global Stock Markets: The Deleveraging Process Continues

As I am traveling in Europe at the moment (see “Another town, another train…”), this week’s edition does not provide the customary review of the financial markets’ movements and economic statistics.

Below 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 …

Economic reports

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Sep 24	10:00 AM	Existing Home Sales	Aug	4.91M	4.95M	4.93M	5.02M
Sep 24	10:35 AM	Crude Inventories	09/20	-1520K	NA	NA	-6328K
Sep 25	8:30 AM	Durable Orders	Aug	-4.5%	-1.5%	-1.3%	0.8%
Sep 25	8:30 AM	Initial Claims	09/20	493K	445K	450K	461K
Sep 25	10:00 AM	New Home Sales	Aug	460K	515K	518K	520K
Sep 26	8:30 AM	Chain Deflator-Final	Q2	1.1%	1.2%	NA	1.2%
Sep 26	8:30 AM	GDP-Final	Q2	2.8%	3.4%	3.4%	3.3%
Sep 26	10:00 AM	Mich Sentiment-Rev.	Sep	70.3	71.0	70.9	73.1

Source: Yahoo Finance, September 26, 2008.

In addition to the European Central Bank’s interest rate announcement (Thursday, October 2), next week’s economic highlights, courtesy of Northern Trust, include the following:

1. Personal Income and Spending (September 29): Consensus: Personal income +0.2%, consumer spending +0.2%.
2. ISM Manufacturing Survey (October 1): The consensus for the manufacturing ISM composite index is 49.5 versus 49.9 in August.
3. Employment Situation (October 3): Payroll employment in September is expected to post the ninth monthly decline (-100,000), following a loss of 84,000 jobs in August. The jobless rate is predicted to have risen to 6.2% from 6.1% in August. Consensus: Payrolls – -100,000 versus -84,000 in August, unemployment rate – unchanged at 6.1%
4. Other reports: Consumer Confidence (September 30).

Click here for a summary of Wachovia’s weekly economic and financial commentary.

A summary of the release dates of economic reports in the U.K., Eurozone, Japan and China is provided here (pdf file). It is important to keep an eye on growth trends in these economies for clues on, among others, the trend of the U.S. dollar.

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

The world is still steeped in its deleveraging process, and from all accounts this process has not been completed. For this reason, caution should still be exercised, since the economic background remains, at best, precarious. And do remember Charles Darwin’s words:

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

That’s the way it looks from Cape Town (or rather from economically depressed London and Dublin for the next four days).

Source: Bill Perkins, via New York Times, September 24, 2008.

Comments

[investor88:]

The usd700bn bailout is being approved by Congress and the President. Markets will be up but question is for how long. Will the bailout affect the article's theme "the deleveraging process continues"? - I think not much as global and US deleveraging is a basic economic force which is not easily reversed, not even by this mega bailout.

2008 Sep 28 05:41 AM

[OldLimey:]

Investor88: Entirely agree.

2008 Sep 28 08:28 AM

[Absolved:]

It's time we all question the basic assumptions again. The bailout, taking shape under whatever guise, will NOT work. It will serve the one purpose for which it was intended, the rescue of the Federal Reserve System. If you actually think that is worth raising the tax burden on every American, their children, and their children's children, THINK AGAIN. We actually have a chance to cut the chains of bondage from the Fed, get back onto a system of real money (gold standard). It will be hard for a while, but companies fail all the time. Banks are no different. Don't believe the lie, there is no such thing as too big to fail (part of the fear-mongering). A bailout will make us all tax slaves forever, we will suffer a period of deflation as they unwind their self-created bubble, then they will turn on the cash printing press and hyperinflation will follow, and the plan still might not work and could plunge us into war with creditor nations! Call Congress and tell them:

NO DEAL, NO WAY, NO HOW

2008 Sep 28 08:36 AM

[NOWHEREMAN:]

The Bail Out is woefully short of what is actually needed. The push for enactment has nothing to do with the Financial System outside of the US and everything to do with Sarbanes and Mark to Market.

For the last 3 quarters, the Financials have been masking the value of their assets by moving assets between the 3 tiers. Merrill screwed the pooch by taking a writedown of almost 80% on some of its assets. It assigned a value. Because of Sarbanes and the Mark to Market Rule, ALL of the Financials now have to report accordingly. Similar assets would have to be marked at similar prices accross the board for the current quarter.

From the start, the Bail Out plan referred to Toxic Assets but the Various Financial Reports have never reflected the Full extent by Company. Which means they have been hidden in violation of Sarbanes. This is the Crisis which must be averted. This also the reason why Massive Bankruptcies have occurred without warning and a scapegoat had to be found.

As I understand it both Sarbanes and the Mark to Market Rule will be eliminated under this Bill.

There is a GSE called Farmer Mac, AGM, which was included in the do not short list but has dropped from around $30 to under $5 in less than 2 weeks. I would hazard that fundamentals are at work not shortsellers of any type.

IMHO, our Financials can't stand the Scrutiny any longer. Even if the legislative bill is finalized after Sept. 30, it will be effective retroactively to reflect the current quarter.

This is just my opinion but it fits the sudden urgency which started after Merrill's financial transaction.

2008 Sep 28 08:58 AM

[OldLimey:]

paultaut: If you're right, the credit markets will tell us soon enough.

2008 Sep 28 09:39 AM

[whidbey:]

It is worse. The bailout leaves us the droll consumer who has nothing left to spend. Since is he 70% of the economy, suppose he slows down 5%, employment will show, and then the spiral. This is just half of the bail out. Look at the history of Japan's last decade. And not a thing works without the consumer having the funds to spend. How slowly we learn

2008 Sep 28 12:57 PM

[SW Richmond:]

"It will serve the one purpose for which it was intended, the rescue of the Federal Reserve System."

Absolutely correct. The Fed wants its balance sheet back.

2008 Sep 28 01:29 PM

[Diane Ritter:]

Call your Congressman and Senator's people, or reap the consequences. Rumor has it that the vote on the Bailout is going to be Monday in the House, and Wednesday in the Senate. You need to call now if you want to have any influence on their votes.

2008 Sep 28 02:41 PM

[ussmls7:]

I agree with SWRichmond,also,dlr!Th... is a web site that I like to read this mans comments,because of his own experence with the FED.!Goldprice.org. Americans better wake up & forget about Party lines & flood the phone & fax systems to DC or we will pay a heavy price in both our Freedoms & any Wealth this Nation will have left,after the Federal Reserve finishs off what it set out to do!

2008 Sep 28 03:19 PM

[NOWHEREMAN:]

The "new" proposal appears to be close to the originally proposed one, "Mortgage" related securities.

Both House and Senate will supposedly vote on Monday. If the added Pork has been removed (Acorn Funding, $25 Billion to Auto makers, etc) and greater oversight is included, it might pass. Between today and tommorow over 100 pages will have to scrutinized.

Meanwhile, the FBI, SEC, and various State's Attys are going through the Books of Bear, Lehman, AIG and Frannie. They apparently feel that Sarbanes and Mark to Market Rules were violated and are trying to prove same.

The real issue is the Pressure the US has been putting on Foreign Accounting practices for years and the consequences of not "practicing what we preach" in the Global Financial Arena.

I have been following 3 month LIBOR since the Bail Out began, it rose over 30% as the drama unfolded and fell slighly on Friday. Where it goes Monday morning should give me an idea whether the Overseas Financial Markets approve of the revisions.

Wachovia has something like $120 Billion in Option Arms due for adjustment over the next year, they might actually survive with this bailout.

One thing I do not have a clue about is the CDS market which has over $60 Trillion involved. Are Credit Default Swaps considered to be "mortgage" related? I do not know.

I hope this Bill passes not because it will solve anything but because it will Buy more time. I would hate to become a citizen of a Banana Republic overnight.

2008 Sep 28 04:40 PM

[Osterix:]

Re Paultaut
1) As I understand it, CDS's can involve any type of debt. that is why it is so huge a number because it is not just mortgages.
2) I agree with you that things are moving to fast to deal with. We do need more time.

2008 Sep 28 06:12 PM

[NOWHEREMAN:]

The idiots in Congress changed the Bail Out rules with only $250 Billion up front, Neither the EU or other Markets are taking this well. 5:11 AM CDT.

2008 Sep 29 06:11 AM

[NOWHEREMAN:]

3 month LIBOR went up before Wachovia was added to the mix. One thing our economy can't afford is a stronger dollar at this point. Take away overseas sales and the last pocket of strength disappears.

2008 Sep 29 10:16 AM