The Oxford Dictionary defines “volatility” as “liable to change rapidly and unpredictably, especially for the worse”. It’s not as if investors do not know this by now, as global stock markets were again subjected to extreme fluctuations during the past week.

The red line in the chart below shows the daily percentage change in the S&P 500 Index, illustrating the severe movements stock markets have seen in recent times.


Turbulence was rife as more data pointed to the world economy facing a longer and more intense downturn than feared. Battle-weary investors were also spooked by continued financial trauma and a bleak corporate earnings outlook for at least the next few quarters, and found little comfort in hints of additional interest rate cuts.

Global stock markets were beset by angst and plunged by more than 6% over the week in the case of the MSCI Word and Emerging Markets indices, with the only safe havens for risk-averse investors being the US dollar, developed-market government bonds and gold bullion. Unsurprisingly, the US one- and three-month Treasury Bills declined to minuscule yields of 0.066% and 0.117% respectively.

Financial markets reacted badly to US Treasury Secretary Henry Paulson’s decision to shelve plans to buy troubled mortgage assets, shifting the focus of the government’s TARP bailout plan to non-bank financial institutions and consumer credit. Priorities going forward are: 1) to strengthen the capital base of the financial system; 2) to provide support for securitization of credit-card receivables, auto loans and student loans; and 3) to explore ways of reducing the risk of foreclosure.

Further dealings in Washington were concerned with the debate over whether to provide government aid to the US auto industry in what looks to be a showdown among the lame-duck US Congress, President Bush and the incoming Obama administration.

According to MarketWatch, Deutsche Bank analyst Rod Lache slashed his price target for General Motors (GM) from $4 to $0. Meanwhile, Richard Russell (Dow Theory Letters) pointed out: “Mattel (MAT) makes toy cars. Mattel is now worth more as a company than General Motors.” It gives one pause for thought.


An end to the credit turmoil does not seem to be in sight as AIG (AIG) and Fannie Mae (FNM) reported huge losses, and renewed strains surfaced in the money markets after the US Treasury’s decision not to buy toxic assets. The three-month dollar Libor rate ended a 23-day run of consecutive falls and edged up from 2.13% to 2.24% on Thursday and Friday.

In the spirit of the tumultuous times, a microbrewery in British Columbia is toasting the economic downturn by launching a special brand of recession-style beer, naming its brew “Bailout Bitter” in honor of the government bailouts, reported CBC News. Truly a “bitter ale for bitter times”!

Next, a tag cloud of the text of the dozens of articles I have devoured during the past week. This is a way of visualizing word frequencies at a glance. As expected, keywords such as “market”, “economy” and “bank” feature prominently. “Gold” has also been receiving a fair bit of publicity as the yellow metal improved in price during the past week.


Back to Richard Russell for more wisdom from the venerable analyst: “This bear market is a bloody brute. I’m not trying to frighten my subscribers. What I am trying to do is to caution subscribers, and notify them that the lows for this bear market may still be far away. We simply do not know, nor do we have evidence to indicate that the bottom is in or near. I continue to believe that the 2002 Dow low will be closely tested, and that the test will fail in that the Dow will break through the 2002 low of 7,286.”

Regarding the shorter-term outlook, Michael Panzer (Financial Armageddon) commented: “It’s been said that markets do whatever is necessary to hurt the most people. That is why prices sometimes shoot higher when news flow, investor sentiment and speculative positions are skewed to the negative, and why rampant euphoria is occasionally the set-up for a violent correction. With that in mind, I still believe the path of least resistance for the equity market over the next month or two is up, in large part because bad news and increasing volatility have so many people worrying and thinking – and betting – otherwise.”

A further positive for the bulls is that, according to Jeffrey Hirsch (Stock Trader’s Almanac), the Dow has been up 12 out of the last 14 years during the week before Thanksgiving.

I summarized my current views in a post (“Is Stock Market Rally ‘Real’”) on Friday: “Stock markets are caught between the actions of central banks, governments and the IMF frantically fending off a total economic meltdown on the one hand, and a worsening economic and corporate picture on the other. This situation has a ‘no-man’s-land’ feel to it. By all means try to play a possible nascent rally, but be cognizant that, failing further technical and fundamental evidence, you are trading against the primary trend. Caution is still warranted!” (Also, read my post of Wednesday: “Stock Markets: Which Way José”.)

I will be donning my winter woollies and visiting New York City from December 3 to 7, 2008. There are still a few gaps on my itinerary for those wishing to meet me to discuss global financial markets, financial blogging or, for that matter, any money-making ideas. If you happen to be in the Big Apple at the same time, let’s get together and share a cup of coffee (or glass of wine).

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

Economic reports
“Global business confidence continues to evaporate, as sentiment fell again during the first week of November to another new record low,” said the latest Survey of Business Confidence of the World conducted by
Moody’s “Sentiment is extraordinarily negative everywhere, including heretofore stalwart Asia. The global financial panic which hit in early September and has yet to abate has been a body blow to global business confidence.” The global economy is now in recession according to the Survey.


Economic reports released in the US during the past week confirmed the severity of the economic recession and included the following:

• Initial claims for unemployment insurance increased by 32,000 to 516,000 for the week ended November 8. This was well above expectations and could be an early indication that labor market slack is beginning to grow more quickly.

• Falling for a fourth consecutive month, total retail sales plunged by 2.8% in October, somewhat more than expected due to tumbling gas station sales and widespread weakness elsewhere. The October drop is the largest since record keeping for the current series began in 1992.

Weak retail sales set a poor foundation for the PCE component of the fourth quarter GDP report. Asha Bangalore (Northern Trust) commented as follows: “It is important to note that the boom in consumer spending has come to a screeching halt after an extended period of spending that began in the fourth quarter of 1991 and ended with the 3.1% annualized decline in real consumer spending in the third quarter (see chart below).

“The drop in net worth of households resulting from declines in prices of homes and equity, the historically high debt levels of households and the debt service burden associated with the debt, the rising trend of the jobless rate, additional likely layoffs, and a serious lack of savings are factors that will hold back consumer spending.”


Elsewhere in the world, economic reports showed an acceleration in the weakening of activity.

Notably, the 15-nation Eurozone entered its first recession since the launch of the single currency in 1999. The region’s third-quarter GDP shrank by 0.2% compared to the previous quarter, following a second quarter that also saw a 0.2% decline.

Europe’s largest economy, Germany, fell into a recession after government data showed that the economy contracted by 0.5% in the third quarter. This is the second consecutive quarter that the economy has shrunk after a 0.4% contraction in the second quarter.


GDP growth in the UK declined by 0.5% during the third quarter – the first official evidence that the economy is heading for recession and the first decline since 1992. The Bank of England’s GDP projection for 2009 was slashed, showing a low point of close to -2.0% year on year from the previous forecast of +0.5%.

Further afield, Hong Kong became the second Asian economy, after Singapore, to officially tip into recession. Economic figures also showed worse-than-expected declines in output growth in China and Japan.

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


Time (ET)




Briefing Forecast

Market Expects


Nov 13

8:30 AM

Initial Claims






Nov 13

8:30 AM

Trade Balance






Nov 13

2:00 PM

Treasury Budget






Nov 14

8:30 AM

Export Prices ex-agriculture






Nov 14

8:30 AM

Import Prices ex-oil






Nov 14

8:30 AM

Retail Sales






Nov 14

8:30 AM

Retail Sales ex-auto






Nov 14

10:00 AM

Business Inventories






Nov 14

10:00 AM

Michigan Sentiment-preliminary






Source: Yahoo Finance, November 14, 2008.

In addition to the release of the minutes of the FOMC’s October meeting on Wednesday, November 19, next week’s US economic highlights, courtesy of Northern Trust, include the following:


Other reports include the NAHB Survey (November 18) and the Philadelphia Fed Survey (November 20).

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

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, November 14, 2008.

Stock markets experienced another wild week on the back of large swings in sentiment as investors focused on a more severe economic downturn and worsening earnings outlook. Developed and emerging markets alike closed a second straight week with significant losses, with the MSCI World Index down by 6.4% and the MSCI Emerging Markets Index losing 6.1%.

Among developed markets, the Nikkei 225 Average (-1.4%) fared the best, whereas some of the US markets such as the Russell 2000 Index (-9.7%) and the Nasdaq Composite Index (-7.9%), Australia (-7.0%) and Canada (-5.6%) were at the bottom end of the performance rankings.

As far as emerging markets are concerned, Russia bore the full brunt of the selling pressure with a decline of 15.3%, taking its losses since the peak of about six months ago to a massive 74.1%. On the other hand, the Philippines (+3.0%) and China (+13.7%) were two of the few markets to register gains.

The Shanghai Stock Exchange Composite Index has bounced by 16.4% off its low of November 4 on the back of the Chinese government announcing a $586 billion economic stimulus package. This makes for an interesting-looking chart with the Index challenging its 50-day moving average and roundophobia 2,000 level. Also, the Chinese trailing price-earnings multiple has fallen from 45.9 to 14.3 – cheap for a country still seen as a top growth situation over the medium term.


The US stock markets all declined over the week as shown by the major index movements: Dow Jones Industrial Index -5.0 (YTD -35.9%) and S&P 500 Index -6.2% (YTD -40.5%). The Dow closed 321 basis points (3.9%) above its October 27 low of 8,176 and the S&P 500 24 basis points (2.8%) above its low of 849.

Click here or on the thumbnail below for a (predominantly red) market map, obtained from, providing a quick overview of the performance of the various segments of the S&P 500 Index over the week.


The bar chart below, also from Finviz, shows the US sector performance for the past week, and specifically how defensive sectors such as utilities and healthcare outperformed on a relative basis.


A reason for Wall Street’s extreme volatility is the great uncertainty regarding the outlook for US companies’ earnings. During the past week, Best Buy (BBY), the leading consumer electronics retailer, and Intel (INTC), the world’s largest semiconductor company, were key contributors to analysts’ concerns as both companies reduced their forecasts sharply.

Putting the stock market outlook in perspective, Jim Rogers was quoted by Bloomberg as saying: “Stocks in the West are still expensive on any historical valuation method, while bonds are going to be a terrible place to be for the next 10, 20 years”. Equities in the West will be “in a trading range for years to come”, he said.

Fixed-interest instruments
Yields on government bonds, especially shorter maturities, declined during the past week as a result of escalating economic woes prompting safe-haven buying.

The two-year US Treasury Note yield declined by 10 basis points to 1.24%, the UK two-year Gilt yield dropped by 39 basis points to 1.86% and the German two-year Schatz yield fell by 18 basis points to 2.23%. However, emerging-market bonds, in general, lost ground as further deleveraging took its toll on risky assets.

But not everybody was enamored with investing in bonds. Bill King (The King Report) posed the question: “Who will buy all the bonds that will be issued throughout the known universe in coming days?”

US mortgage rates edged higher, with the 30-year fixed rate rising by 4 basis points to 6.18% and the 5-year ARM by 6 basis points to 5.98%.

The cost of buying credit insurance for US and European companies increased as shown by the wider spreads for both the CDX (North American, investment grade) Index (up from 188 to 203) and the Markit iTraxx Europe Crossover Index (up from 762 to 813).

The three-month dollar Libor rate edged up on Thursday and Friday, limiting the week’s decline to 5 basis points from 2.29% to 2.24% – 124 basis points (compared to 43 basis points at the start of 2008) above the Fed’s target rate of 1.0%. The TED spread (i.e. three-month dollar Libor less three-month Treasury Bills) also perked up, indicating that credit strains are not quite back to normal yet.


The week’s feature among currencies was the dramatic collapse of the British pound as the market factored in further aggressive easing of UK monetary policy and dumped the currency. Sterling dropped to a 13-year low against a basket of currencies and to its lowest level ($1.47) since 2002 against the US dollar.


Over the week the US dollar gained against the euro (+0.9%), the British pound (+5.8%), the Swiss franc (+1.4%), the Canadian dollar (+3.9%), the Australian dollar (+3.7%) and the New Zealand dollar (+3.9%). However, the greenback lost ground against the Japanese yen (-1.2%) as investors liquidated assets previously funded with low-yielding currencies such as the yen.

Emerging-market currencies had a torrid time as investors shunted risky assets. Examples of losses against the US dollar include: the Brazilian real ( 6.2%), the Turkish lira (-4.8%), the South Korean won (-5.3%), the South African rand (-3.2%) and the Russian ruble (-1.2%). The ruble lost 15.4% against the US dollar over the past four months as the downturn in commodity prices negatively impacted the Russian economy.

The Reuters/Jeffries CRB Index (-3.6%) witnessed a further decline on the back of an ailing economy and a slump in global demand for commodities.

Gold (+1.1%) bucked the trend and edged higher as some commentators punted the yellow metal as being poised for a rally.

On the other hand, West Texas Intermediate crude declined by a further 5.6% to levels last seen in the first quarter of last year. This has prompted OPEC to call an emergency “consultation” meeting on November 29 to consider a further production cut.

The graph below shows the movements for various commodities since the peak of July 2. Interestingly, the Baltic Dry Index, which is closely correlated with economic growth and demand for commodities, declined by 91.0% over the same period.


Now for a few news items and some words and charts from the investment wise that will hopefully assist in optimally managing our wealth in these troubled times. Also remember what John Kenneth Galbraith said: “The conventional view serves to protect us from the painful job of thinking.”

That’s the way it looks from Cape Town.


Source: McClatchy

Financial Times: Obama set to push “big bang” reform package
“US President-elect Barack Obama intends to push a comprehensive programme of social and economic reform beyond an immediate emergency stimulus package, Rahm Emanuel, the next White House chief of staff, indicated on Sunday.

“Mr Emanuel brushed aside concerns that an Obama administration would risk taking on too much when it takes office in January. He said Mr Obama saw the financial meltdown as an historic opportunity to deliver the large-scale investments that Democrats had promised for years.

“Tackling the meltdown would not entail delays in plans for far-reaching energy, healthcare and education reforms when all three were also in crisis, he said. ‘These are crises you can no longer afford to postpone.’

“Mr Emanuel, Mr Obama’s first appointment after his emphatic victory over John McCain last week, added that Mr Obama would push hard during the 11-week transition before he is inaugurated for early assistance to the collapsing US car industry, which he described as ‘an essential part of our economy’.

“His comments increased pressure on George W. Bush to approve a widely-touted $25 billion emergency package for Detroit – possibly as part of a second emergency stimulus package to stave off further decline in the rapidly deteriorating US economy.

“Sunday’s comments also reinforce the impression that Mr Obama’s transition economic advisory board – which includes leading lights of the Clinton era, such as Lawrence Summers and Robert Rubin – is tilting heavily towards a ‘big bang’ approach that would combine a short-term stimulus with large public investments to raise the longer-term US growth rate.”

Source: Edward Luce, Financial Times, November 9, 2008.

Bloomberg: Paulson shifts focus of rescue to consumer lending


Click here for the full article.

Source: Simon Kennedy, Bloomberg, November 12, 2008.