Street Speak: Is the Dow Party Over?
Here's a roundup of comments from market strategists and economists Friday, as complied by Standard & Poor's MarketScope and BusinessWeek:
IS THE DOW PARTY OVER?
David Solin, Foreign Exchange Analytics, Stamford, Conn.: The whole DJIA rally over the last 5 years appears to be very close to completion with at least a year or 2 of correcting lower and minimum 2500 point/20% retracement after. For the longer term, this is clearly not the time to be a buyer ... would wait for better signs that a more important top is indeed in place before shorting. Major resistance remains at the ceiling of the 5 year bullish channel currently at 14250/350. Nearer term, the rally from the August low does not yet appear complete, as the recent fall from the 14198 high is seen as a correction and suggests a final upleg back to 14198 and even slightly above to complete a potentially major top.
Note, too, the extreme pessimism as the media has played up the 20th year anniversary of the 1987 crash, along with the general concern about the October timeframe, which in turn could fuel a sharp burst of short covering back to the 14198 high and even temporarily above.
WILL MORE SIV SHOES DROP?
Action Economics: The widening of 3-month Libor and Fed funds basis swaps jumped out 14 basis points this week to +71.25 basis points, the biggest leap since the early August credit contagion and the widest level in nearly a month, according to CBoT sources. The money markets are clearly bracing for another credit event, despite attempts to ring-fence problems in the structured investment vehicle (SIV) and asset-backed commercial paper (ABCP) markets, with persistent rumors of a couple of smaller SIV funds in jeopardy and bid lists floating around in the latter half of the week.
BRACE FOR ANOTHER ATTACK ON THE DOLLAR
Marc Chandler, Brown Brothers Harriman, New York: Despite our view that nothing substantive regarding the dollar is likely to emerge from G7, we suspect markets may be a little wary of being too short dollars heading into the weekend. As such, we may see the dollar recouping some ground during the North American session. Still, we expect dollar selling to resume with a vengeance next week. While housing data is usually regarded as minor, there is potential for downside surprises in both U.S. existing and new homes sales data due out next week. Given the market's renewed fixation on U.S. recession fears and a weak U.S. housing market, we expect dollar to remain vulnerable.
BERNANKE TALKS RISK MANAGEMENT
Drew Matus, Lehman Brothers, New York: [Federal Reserve Chariman Ben] Bernanke did not directly address the current state of the economy or monetary policy [in his speech Friday] but he repeated a risk management approach to policy noting that "stronger action by the central bank may be warranted to prevent particularly costly [economic] outcomes." Within that approach he argues that it is important for the Federal Reserve to "avoid overreacting to current economic information, and recognize the challenges of making real-time assessments of the sustainable level of real economic activity and employment."
This last comment seems to downplay the "output gap" concept that Bernanke had previously (in 2001) embraced. Indeed, this comment directly reflects the work of Orphanides, a Fed researcher who determined that the measurement error of the output gap was large enough to limit its usefulness in policymaking. Although the idea of not overreacting to data is not new, this shift suggests a willingness by Bernanke to adapt his methodology as new information warrants and suggests that the Fed will remain increasingly difficult to forecast.