Monday, June 30, 2008

Bear Factors & CFTC

Thanks to Friday's 106.91-point drop left the Dow Jones Industrial Average at 11346.51, down 19.9% from its October record, after it had fallen as low as 11297.99 during the day. At the day's low the Dow was down 20.2% from October. Investors typically consider a decline of 20% or more the mark of a bear market. The last bear market, which extended from January 2000 until October 2002 for the Dow, was accompanied by a mild recession.

The usual bear markets are due to one or more of these factors: inflated stock values, mounting inflation, rising interest rates or a recession. Inflated stock values - not really this time. Mounting inflation - yes for sure. Rising interest rates - not yet but will have to rise to fight off inflations in the coming months. Recession - despite the many wolf calls, a recession is not likely globally, even in the US.

Since 1960, the average bear market has lasted about 14 months and has taken stocks down about 31% before they hit bottom. The mildest bear market saw a 21% Dow decline in the early 1990s, and the worst, during the 1970s oil crisis, a 45% drop. We have to remember that markets are forward discounters. Having reached the 20% correction, it is difficult to bounce back from that level immediately. If we mark to the mean which is 30% correction, its another 10% from here.

However I think we will not get anywhere near 30% as the "inflation" though widespread, its not pervasive enough. The inflation is largely due to commodity and fuel in particular moving its way into food, transportation logistics and salaries. However, unlike previous inflationary scare, the world is not at the tip of recession as much of the inflation had been due to productivity/consumption growth and the US printing tons of money for the past 7 years.

The US currency is already paying for the excessive printing. If inflation is due to productivity and consumption. Those are not essentially bad things. The biggest argument is that a 20% correction in oil prices would soothe the inflationary pressures substantially. If we have that, the rest of the world should have little problem coming to grips with higher food and related prices as most of the global economy is still chugging along.

What has zipped across the media screen but deserves greater attention was that the US House of Representatives on Thursday passed a bill that directs the Commodity Futures Trading Commission to use all its authority to curb speculation in energy futures markets. In just one of a slew of bills, the House of Representatives overwhelmingly passed largely symbolic legislation on Thursday ordering regulators to "curb immediately" excessive speculation in commodity markets. Many Democrats in the House and Senate are blaming loopholes in the regulatory system and want the CFTC to lower the boom on the Las Vegas world of commodities trading. Of course the White House could over-ride the bill but its not just Democrats, there are some Republicans as well willing to cross the fence to support the bill.

Of all the bills, market players are most concerned about the Senate's End of Speculation Act which calls for an increase in margin requirements as a blunt tool to tackle price speculation. That bill has yet to be debated. The chess players have begun moving their pieces. You all know whom I am rooting for.

p/s photo: Pinchaseeni


Anonymous said...

Although US not in recession yet but
their US Dollar is in the very DEPRESSION state with no end of stopping the fall !!!!!!!!!!!!!

irrational said...


I thought US will fight high oil prices by inflating their US dollar now? That was what I have understood from announcement by the Fed and US Secretary of Treasury.


lsb said...

look at history, whenever the US economy sank, its currency firmed. it invariably firmed in all past recessions.

Salvatore_Dali said...

anonymous, pls use a nick next time cos it will get difficult to address so many diff anonymous posters... yes the fact that usd has fallen a lot is also what is saving the economy for the past year and a half... the low usd has made stocks cheap and act as a buffer to keep us asset "cheap"... and at the same time allowing them to export INFLATION to other more economically active countries. Cheap usd also invites short and long term FDIs and more purchases of Treasuries. E.g. properties may have fallen 30% over the past 2 years but factor in the usd, it may have been 40%-45% which is attractive to many foreign investors.

irrational... yes they r supposed to use the usd to fight the oil px, but the Fed is now stuck as it cannot really raise rates amidst a slowing economy and a housing market that is still correcting. To have a stronger dollar, the interest rates must start going up, leaving the rates flat recently basically brought out USD shorts again.

delta said...


Although a cheap US dollar will act as buffer to keep US assets cheap,but how long can Fed keep inflating their economy by printing a massive amount of US dollar that is backed only by your faith in its values as reserve currency of the world . The portfolio insurance bubble in 1987; technology dot com bubble ; subprime housing bubble and commodities bubble are result of Fed keep on inflating the economy and depreciating their currency to make their assets look cheap !!!!!

somewhat said...

Hi Dali,

I agree with you about inflation. This inflation is rooted at high oil price. Increase in Food price and others is due to high oil price.OIL PRICE IS NEVER
A PRODUCT OF SUPPLY-DEMAND. It is a product of political and military power. Once the cowboy cum oil boy Bush step down, oil price will turn south. Then all the inflation scare /hype will go away.

sopsky said...

Hi Dali,

With a mean benchmark of 30%, there is some 10% more to fall. In view of that, are you also going to lower down your target entry of KCLI from your initial target? Just curious. Thanks

lsb said...

At the heart of the US deficit is what 1 U S guy said, we own the printing press for USD. To print money without backing, what is that? U S is the biggest counterfeiter of USD.

solomon said...

I am waiting to see how CTCF going to curb speculation. When you have so many hands on the table, you cann't afford to throw the axe out and scare everyone out.

If the oil price falls too drastic, it is not very good because it will again attract the high consumption pattern we used to have. This is a good time for re-adjustment before oil resources extincted.

Now, when you too many holes to fix in the sick economy, we have to priorities the work.
1) Sub-prime
2) Weakeaning dollar
3) Inflation
You name it. Structurally, have anyone fix the problem yet? Or they are merely fire-fight....Well, it may be time to invite R.Ruben to implement the full financial revamp with his "Strong dollar" principle.

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