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Bond Outlook November 14th

A rebound in stock prices after several days of falls could signal a change in mood, but we doubt it as the underlying US economic problems are far from resolved.

Bond Outlook [by bridport & cie, November 14th 2007]

We still find it hard to understand what can justify stock markets rebounding on so little positive news. As a very witty, but awfully true UK TV skit pits it, “Markets are driven by sentiment” ( Unless this is a “Tuesday effect”. On the same day that Goldman Sachs announced it was well protected against sub-prime related exposure, and Wal-Mart announced satisfactory results in its US stores, Bank of America announced a USD 3 billion sub-prime hit, money market funds were being bailed out by Legg Mason and others, and Home Depot reported a big drop on sales. Now HSBC, the first to report sub-prime losses, is “confessing” to still more.

The infamous “level three” assets on bank balance sheets almost certainly will give financial directors and auditors major headaches at year end. Just how do you value an asset with no secondary price? “SOX” infers a greater severity than even the accounting rules. No, we cannot believe that a “Tuesday stock market rebound” says much about whether the liquidity crisis is nearing an end, nor whether an improved Wal-Mart performance suggests that US consumers continue spending more than they earn.

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