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