A Bourse Diary

Thoughts on stocks, speculation and ... life

Wednesday, November 16, 2005

Where is the Threshold?

Rising interests - both at the money market (Fed) of long bonds - is not good for the stock exchanges. Period. And here forget at first about valuations (no matter how you measure them) - they are not that important. We are confronted and (it is not over by now) with rising interest. If the money supply "narrows", the shares suffer. One should expect some difficulties on the stock exchanges for the coming time.

Now, the situation, as previously said, is somewhat more relaxed due to low interest rates. That why the US markets keep stable. Nevertheless, the increasing yields "endanger" the stocks. Don't get me wrong - no crash, no bear market. Possibly even easily improving Wall Street, but "with emergency brake on".

The danger of inflation is to a large extent well-known and well-considered. The prices reacted accordingly in October (downward). Nevertheless a decrease in liquidity can be hardly "discounted" - when it comes, it inevitably affects the market. However we speak of a tightening of liquidity from a high level. Therefore the monetary situation is not yet causing concern.

Secondly, the danger of inflation mainly comes from the energy prices (and in second place by the strong real estate market). Each easing here could let the Fed to pause with the interest rates increases. In my eyes this would move the fairly attractive valuation of the stocks relative to fixed income immediately into the focus of the investors.

If the inflation , i.e. the energy prices, should persistently stay high, the Fed will the go on for so long until the economy clearly cools down (if necessarily, naturally, until recession).

The question is, where is the threshold at that the commodity prices (energy) plus property market the USA eases (stops): an easy or strong cooling or only with recession?

Since I assume that by the increasing interests the American economy will just a little bit "weaken", i.e. show somewhat lower pace of growth, the real estate market will stop ("but not burst") and the energy prices will more promptly react (downward), the stocks are a Buy (or a Hold respectively). I expect possible corrections but not too sharp.


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Disclaimer: All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and are in no way intended to serve as personal investing advice and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Readers should not make any investment decision without first conducting their own thorough due diligence. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed.