Prague Twin

Tuesday, July 10, 2007

Jitters

Global Equity markets are down across the board today. The Dow, for example, closed down 150 points with subprime mortgages and disappointing earnings cited (Sears lost 10% of its value today, for example). Oil is back above $72 on the NYMEX and the dollar is at an all-time low against the Euro.

But this is really not as bad as it sounds. I've been saying that stocks are a bit overvalued citing "irrational exuberance" more than once. Earnings are not keeping pace with market valuations, so I see this correction as a healthy one. I have also been steadfast in my belief that the Fed will not cut rates anytime soon and there is a still a chance that they will hike rates before the year ends. Fed fund futures now agree with me as a rate-hike possibility is now derived as about 50-50 by year's end. With not a single major national bank seen cutting rates in the last year, and almost all in a rate-hike mode, I think my prediction is well safe.

One last thing I want to mention is that the Dow consolidating between 13,300 and 13,700. We are getting a shrinking range since the beginning of June. I haven't seen this kind of neutral pattern in years. I expect this cone to squeeze down further until the pattern breaks. If it breaks down, we could see a significant drop.

Will earnings prevent a serious bloodletting? We shall see.

2 Comments:

  • Can you explain for use simple folks these simple terms used in stock exchange and banking. An idea to start with: "interest rates" and why they keep changing them.

    By Anonymous romunov, at 10:22 PM  

  • Interest rates are raised to curb inflation, and lowered to stimulate the economy.

    Those are the most basic reasons.

    So in 2001, when the U.S. was in a recession, the Fed cut rates aggressively.

    Now, with inflation pressures cropping up, banks are raising rates to combat that inflation.

    Thanks for asking.

    By Blogger Praguetwin, at 12:14 AM  

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