Greenspan Speaks

Former Fed Chairman Alan Greenspan seems to be getting bolder in his market prognostications lately. This may be related to his recent affiliation with the huge bond management firm PIMCO. As in the old E.F. Hutton commercial, when Greenspan speaks, people listen. They did so yesterday when he said a "dramatic contraction" seemed likely in the high-flying Chinese stock market.

Now Mr. Greenspan is a brilliant economist and a very smart man. As Fed chairman, he also had extraordinary power to influence the direction of the global economy. The current reality, however, is that Greenspan no longer has such power, and his record in short-term market forecasting is not exactly stellar. Remember this is the person who began talking about "irrational exuberance" in U.S. stocks in 1996, over three years ahead of the last bull market peak. So we are not convinced that his opinions about the Chinese markets are particularly noteworthy.

Nonetheless, at least two generations of traders learned that listening to Greenspan was an excellent way to make money, so the immediate response to his comments was to sell anything related to China. In today's economy, just about everything is related to China in some way. Add in the stubborn resistance U.S. benchmarks are encountering as they challenge new all-time highs, along with rising bond rates, and some short-term weakness should be no great surprise. The broader trends remain firm. A few more days like today will be necessary to begin changing the big picture. We are somewhat concerned about the decline in utilities this week and will be watching the sector closely.

Another notable news item today was an unexpected jump in new home sales. Some interpreted this as a sign of renewed strength in the economy, and this is one reason bonds fell in value. Look a little deeper and you will see that the price of the many homes that were sold last month fell significantly. In other words, real estate is on sale and buyers are doing what buyers do: snapping up bargains. What we still don't know is how far prices will need to drop in order to clear out unsold inventory.