Here are my thoughts this Monday morning:
1) The problem for the markets is simple. Stocks have held up fairly well because of the belief that this is a liquidity problem and the economic fundamentals (absent housing) have slowed but held up reasonably well. Friday’s data has made that argument less clear.
There remain many positives for stocks: strong corporate balance sheets, relatively modest valuations and a paltry Treasury yield of 4.5% on the ten year. Most traders still feel the markets will be higher at the end of the year than they are now. Still, last week's economic data changed the rhetorical stance of the bulls.
The markets are now more than ever dependent on a rate cut. With the liquidity crisis still not solved, there is a real risk that corporate and household debt costs could rise. Four Fed members speak today on the economy.
2) Some Asian exporters are weak on concerns of a U.S. slowdown. Not surprisingly, strategists are stumbling all over themselves this morning to describe the effects of a possible slowdown on U.S. consumer spending on global economic growth. JP Morgan, for example, reviews the impact of slowing U.S. growth on Asian countries. Following are Asian countries with largest exposures to U.S. exports as a percentage of 2006 GDP:
Hong Kong 45.3%
As you can see, despite China's exports to the U.S., listed China is predominantly domestic demand oriented, so JP Morgan recommends buying the high growth domestic demand names.
They also note that Taiwan and Korea are the most exposed to U.S. demand when global capital expenditures are considered.
3) U.S. homebuilding execs bought $15.9 million in stock during August, most since records started in 1990.
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