С* Reading

  1. l. Read the text and answer the questions.
  1. Why does the author compare investing with a manic depressive market?
  2. What are the markets usually influenced by?
  3. Analyze the situation with the government bonds and corporate bonds.
  4. Give the general characteristic of the financial markets of America.

America\'s Financial Markets

“The Economist”

Messages of Hope?

Investing, said the father of security analysis, Benjamin Graham, is like being in business with a Mr.

Market, a manic depressive whose mood swings sharply between fear and enthusiasm. Sometimes Mr. Market’s price is wildly above (or wildly below) any intrinsic value, and this is when the investor should sell (or buy). The trick is to work out when his mood is reasonable, and when it is unhinged.

Wartime has made Mr. Market more volatile than usual, with initial despair about the economic outlook after September 11th giving way more recently to euphoria, to judge by the prices of some financial assets. As Wall Streeters headed off for Thanksgiving, financial markets seemed to be looking ahead to an early economic recovery in America.

Although they have dipped this week, share prices are still up sharply from their recent lows on September 21st. A rally of this speed and size (with prices up by about one-fifth) is unusual this early in a recession. Since 1932, Bianco Research has found seven similar-sized rallies of the Samp;P 500 index during a recession. And on each occasion, the rally preceded the end of the recession by an average of three-and-a-half months. Moreover, such stock-market rallies have usually continued into the following quarter, with share prices gaining on average a further 22 %. “Bluntly, the rally signals the market’s belief that the recession is over,” says Jim Bianco, the firm’s boss.

The prices of government bonds, of all maturities, have been falling since early November. In the week of November 12th falling prices pushed up the yield on 30-year Treasury bonds by 39 basis points (hundredths of a

percentage point) — the biggest weekly rise since 1987. In the same week, the yield on ten-year Treasuries saw the biggest weekly increase since 1982. After an attempted rally ran out of steam this week, Treasury-bond prices resumed their fall, and yields — their rise. Plenty of commentators say this reflects expectations of stronger growth before long — and thus of higher inflation.

Corporate bonds with an investment grade tell a similar story, with yields rising over the past couple of weeks. Because the risk of default on these bonds is small, their prices are driven by the same economic forces as government bonds. The yields on junk bonds, on the other hand, are much more sensitive to the risk of default, which typically declines as the economic outlook improves. Yields on junk bonds have fallen over the past two weeks, and the gap in yields between investment-grade bonds and junk has narrowed, from 688 basis points to 600.

Commodity prices are sending mixed signals. Oil prices have fallen by one-third since September 11th, and do not appear to have hit bottom. Falling oil prices usually point to economic weakness. However, the fall in prices may be driven mostly by expectations of increased supply, especially from Russia, rather than of falling demand. Other commodity prices are behaving as one might expect if economic activity were turning up. The Economist’s commodity price index is up by 5 % from its low on October 23rd, almost back to where it was before the terrorist attacks. Copper — known as the metal with a PhD in economics, because of its usefulness as a leading indicator — is up by 12 % in the past weeks, and is now higher than it was September 11th.

Perhaps the clearest indicator of what the markets think is the price of federal-funds futures contracts.

As recently as November 9th, these assumed that an interest-rate cut of at least a quarter-point and quite likely a half-point, was a racing certainty at the Federal Reserve meeting on December 11th. Now, the market reckons there is only a 30% chance of a cut in December, and that the Fed may even start to tighten again early next year.

It is possible that the markets are being driven by factors other than expectations of economic recovery. The government-bond market has been confused since the Treasury’s surprise decision in late October to stop issuing 30-year bonds. Prices of junk bonds may have been bid up by investment funds trying to use up large cash balances before the end of the year, rather than by expectations of economic recovery, says Martin Frid- son of Merrill Lynch. Shares may be benefiting from looser monetary policy, not improved fundamentals, just as they did when the Fed eased in anticipation of a millennium bug.

And, as Graham knew, Mr. Market is often wrong. He may have read too much into better-than-expected data on consumption. Even if the corporate sector is over the worst, share prices still look high by most historic measures. PIMCO, America’s largest bond fund, reckons the market is overdoing its optimism about the economy, and sees opportunities to buy bonds.

  1. 2. Decide whether the statements are True (T) or False (F).
  1. Financial markets are usually more stable at wartime.
  2. The rally of share prices rise is usual in a recession.
  3. Stock market rally signals that the recession is in full swing.
  4. The yields on junk bonds are more sensitive to the risk of default than the corporate bonds.
  5. The gap in yields between investment grade bonds and junk has widened.
  6. Falling of oil prices points to strong economy.
  7. The fall in prices may be driven by expectations of increased demand.

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Источник: Е. Н. Малюга. Английский язык для экономистов: Учебник для вузов / Е. Н. Малюга, Н.              В. Ваванова, Г. Н. Куприянова, И. В. Пушнова. — СПб.: Питер,2005. — 304 с.: ил.. 2005

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