“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. However, a full dose of excerpts from interesting news items and quotes from market commentators is provided. (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 US 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”?

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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, 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 …

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The US 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 US 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.

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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:

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Source: Northern Trust.

Click here 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.

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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.

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