Wall Street suffered a bloody nose on Friday but investors can seek solace that US assets are looking attractive. Certain events confirmed that hot funds are plumping for US assets and some momentum trading is underway. In a volatile investment climate, the most dangerous place may actually turn out to be the safest.
Firstly, the US Presidential election is around the corner – both Democrat and Republican candidates accepted their nominations this week and the whole of America is caught up in a feel good sentiment. Barack Obama made his policy speech and a stinging attack on GOP Thursday in front of a roaring crowd of 80,000.
John McCain stunned pundits with his announcement of Sarah Palin as his vice presidential nominee, but promptly secured a record one-day haul of $6.8 million in donations.
The popular vote is with Barack Obama and he is riding strongly on economic reforms. Bill Clinton famously defeated his opponent with a clarion call: “It is the economy, stupid.” This economic mess will allow Obama to consolidate the voters but there are major stumbling blocks ahead. Foreign policy is his weakest link while the war on terror is McCain’s trump card.
Wall Street is also wary of an Obama presidency as they prefer Bush’s generous tax cuts. Obama’s earlier speech on regulations for “predatory” credit card companies which have deceived consumers into piling up massive debts have not won him many friends among financial firms. However, Warren Buffett is a firm supporter of Obama’s push to eradicate bad practices in the financial sector.
Regardless of which candidate ascends, the market will receive a boost. You do not have to try too hard to outperform George Bush. In the coming weeks, the national press will be hot on the campaign trails of both candidates rather than dwell on the bearish economy, housing or stock market. Everybody takes a breather from all the negative emotions and let some sanity sink in… great!
Coming to the U.S. housing market, it is still in the doldrums but is definitely edging closer to a bottom. Median home prices fell more than 7% in the past year and in some cities, fell nearly twice or thrice that rate. More than five million homes remain unsold.
However, there are some promising signs. The sale of existing and new homes is crawling upwards as bargain hunters sniff around and snap up cheap properties in foreclosures. Distressed debt funds are also picking up mortgages in fire-sales.
The recent surge in the value of the dollar against the euro (its biggest monthly advance since the European currency’s 1999 debut) is another indication that investors are favoring US assets again. This influx is spurred by a fall in crude oil prices and a global economic slowdown which allowed distressed assets in US a new lease of life.
Oil, commodities, euro and emerging markets were investment hot spots for the last few years but lately, have busted several over-extended investors. BRIC (Brazil, Russia, China and India) are the worst performers this year with runaway inflation and weakening trade and consumption figures. Europe are not faring much better with their own housing crisis and laggard economy.
There is an outside chance that the U.S. market could be up by at least 10% from today’s level by year end but it will take a series of factors to converge. Oil has to drop further to below $100 and investors have to adopt long term positions on US stocks and properties.
That is a very big IF but surely, there is nothing wrong with some optimism on a lazy weekend afternoon.