Favoring the Downside

Today, Germany’s IFO Institute announced that its business climate index for September fell to 92.9 (from 94.8), which was below expectations. With that, key measures of business confidence in Germany, France, the United Kingdom, Italy, Japan and the United States are all below where they were three years ago. Not exactly a picture of health for the global economy.

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Respondents polled in Bloomberg’s latest monthly survey of more than 50 economists see a roughly 50-50 chance of a U.S. recession during the next 12 months, down from a peak of 70% in April. American Research Group, meanwhile, reports that more than two-thirds of Americans believe that the economy is already in recession (in fact, more than half have answered this way each month since March). Given the track record of the so-called experts, the smart money is betting on the man in the street.

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According to the National Association of Realtors, the median sales price of a previously-owned home fell in August by a record 9.5% from year-ago levels. Meanwhile, the number of homes on the market equaled 10.4 months worth of supply (based on the current sales pace), not far below the record 11.2 level seen in April and more than twice this decade's 4.7-month median.
Given the hefty supply overhang (and the fact that winter is fast approaching), odds are that home prices will continue to slip-slide lower in the months ahead.

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If the “TED Spread” was a stock chart, more than a few technical analysts might consider jumping aboard the recent breakout in the hopes of further gains. With that in mind, some might argue this gauge of financial system stress is signaling that there is much worse to come despite the recent Mother-of-All-Bailouts-inspired turnaround in equity and other markets.

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Stocks ended the day mixed. Strength in technology and defensive shares offset weakness in financials, which fell in spite of a rally in the shares of Goldman Sachs (+6.4%) following news that Warren Buffett’s Berkshire Hathaway would invest billion in the investment bank.

At the close, the Dow Jones Industrial Average shed 29, or .3%, to 10,825.17. The S&P 500 Index declined by 2.35, or .2%, to 1,192.70. The Nasdaq Composite Index rose 2.35, or .1%, to 1,155.68.

December gold eased $3 to $888.20, while the U.S. Dollar index rose 0.7%. Ten-year Treasury bond yields were more-or-less unchanged at 3.8%.

Michael Panzner

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Author, Finance Faculty Member
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