After the past two weeks of declines in the market, this week began on an up-tick and remained so for most of the week, finishing the week with the biggest weekly gains since July. The rise of the market is primarily related to investors having more confidence in equities, which in turn renewed downside pressure on the dollar; more on the dollar a bit later.
Once again, the market has thrown investors a curve ball. It happened in June, in August, and now as the third quarter ended. Just when the skeptics think they are right in not getting into this market, they now find themselves on the defensive as they market continues it's upward climb. Our clients certainly are happy as they see their monthly and quarterly statements increasing in value, as we have gradually been deploying funds into the market and not listening to doomsayers.
This week brought about a handful of comments from some pessimists who heretofore have been riding their accurate predictions of the credit crisis in 2008. Here is a sampling of what some of these influential people are saying:
George Soros said this week that the US banking system is close to being bankrupt Whether Mr. Soros is correct or not, how can we explain that BofA Stock has gone from $3.00 per share in March to around $17.00 today? This is in sharp contrast to what Goldman Sachs recently did in upgrading the large bank sector.
Nouriel Roubini said this week that he believes the stock market has gone up excessively, and too quickly. I guess Mr. Roubini has a formula for how the market should behave? If so, he may be the only one on the planet who does. Our philosophy is that the Market dictates to investors, not analysts. If the Market is moving up we are in.
Joseph Stiglitz, the economist, this week took a page out of Alan Greenspan's vocabulary when he said that investors are becoming "irrationally exuberant" about an economic recovery. From our standpoint, while there certainly are risks ahead for the US Economy, for now, things are looking rosier and stocks are doing what we want them to do.
Meredith Whitney, Oppenheimer & Co. primary analyst and who is renowned for her criticisms of America's biggest banks, put her own views forward by warning of a possible credit crunch for small business. Everyone by now has realized that Banks are not interested in loaning money to help revive the economy for if they were home sales and re-finances would be moving faster. Big Banks' sole interest is increasing profits any way they can. So it should not come as a surprise that both individuals and business will have a hard time borrowing from this point forward. But how does this explain the up trend in the Market and in some big Bank stocks?
Sometimes, while there is no explanation or reasoning behind it, when the Market moves up it is paramount for an investor to be in and not try to over-think the cause.
GOLD & THE DOLLAR
Gold and commodities moved higher this week in reaction to Australia's Central Bank raising its key lending rate 25 basis points to 3.25%. However, the U.S. dollar continues to weaken as calls for its replacement as the world's reserve currency continue to grow. Rumors abound that countries like Saudi Arabia, Iran, Japan, France, Russia and China are considering replacing the dollar as the currency for oil trading. Of course we reported on this issue sometime in March of this year, and have commented on it numerous times.
The dollar surely will continue to decline, and the only question is how much and how quickly? This week the dollar traded at its lowest level in the past year against currencies of six major U.S. trading partners. The cause is global optimism as countries are seeing their GDP going up and signs normalcy on the horizon. With that confidence, investors now find themselves more willing to take risk, and that risk is in the market. For the past year or so, the dollar acted as a safe haven as investors bought dollars for security, since there really was no where else to invest.
Signs of a weakening dollar this week were exemplified by the euro which strengthened against the dollar after the European Central Bank announced that the region is emerging out of recession. One dollar analyst said this week that the US may have to prepare for sharp selling of the dollar. If that were to occur it may not be in everyone's best interest. A more orderly shift would allow the world economies to adjust and not spook investors.
Our own Treasury Secretary Timothy Geithner said last week during the G-7 financial meetings that "it is very important to the United States that we continue to have a strong dollar." This was echoed by the President of the European Central bank who agreed that supporting the dollar was the best strategy. A recent comment by David Malpass, former deputy assistant Treasury secretary from 1986 to 1989, is telling of Mr. Geithner's meaning. He indicated that "...Geithner was using a code phrase..." The comments really mean that the US approves a gradually weakening dollar, as opposed to an abrupt collapse of confidence.
In fact, this week as the dollar declined, Central banks in Thailand and Russia entered the market to buy dollars in support, at the expense of their own currencies. There certainly is more to what is going on in the financial markets than we will ever know. In the case of Russia, its central bank bought more than $700 million in order to lower its own currency, the ruble, from excessive strengthening
MORTGAGES & HOME SALES
In mortgage news, applications increased last week to the highest levels since mid-May. The Mortgage Bankers Association (MBA) said rates on 30-year fixed-rate mortgages, were below 5% for a third straight week, reaching a four-month low. Demand for home refinancing loans was the highest since mid-May. New home mortgage applications rose to the highest level since January. The only concern now is will these numbers decline when the Federal tax credit expires on November 30?
CONSUMER CREDIT
Finally, it appears that American consumers have finally realized that spending must be curtailed if families are to have any chance of financial survival in the aftermath of the credit crunch. Consumer credit fell by close to $12 billion in August. Many analysts and talking heads refer to this fact as "bad for the economy," citing the obvious that domestic GDP has for decades depended on consumer spending.
While that may be true, and while it may cause the current economy to sputter along for awhile, I can't help but feel that the more Americans can disengage themselves from the spending drug, and increase savings, the better off our children will be in the future. So if one of the byproducts of this recession is that American's save more and spend less, then this could be a silver lining in an otherwise unhealthy economic environment.
Make sure to enjoy life, and have a wonderful weekend!
