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Bulls Catch a Summer Cold

Written By Brian Hicks

Posted August 3, 2007

After looking so dangerous only a couple of weeks ago as the Dow cracked the 14,000 mark for the first time, the bulls seem to have caught themselves a nasty summer cold.

Spurred on by the continuing saga being played out in the credit markets, the major market indices have since pulled back on average nearly 7%, proving that the bears present dangers of their own.

For the Dow, that has meant a nearly 1,000-point drop as the markets went on to test the 13,000 level earlier this week. Needless to say, that pushed the move to 15 K on the Dow that much farther away.

But despite this plunge, the markets do appear to have put in a near-term bottom earlier this week as the Dow bounced off its 100-day moving average.



The trade, though, has been volatile to say the least.

Wednesday’s reversal to the upside took place in the course of the session’s last 30 minutes, as the Dow closed up 151 points after spending the better part of the day in the red. The bulk of Thursday’s move to the upside also came in at the end of the day as the markets once again rallied on the close.

That volatility suggests that there is still the strong possibility of another move to the downside, particularly another retest of the 13,000 mark. But while the markets continue to work their way through this correction–and that’s what it is–the fundamentals that have underpinned the bull market remain largely unchanged.

One of them, of course, is the continuing story of global growth that is driving the world economy. That’s one of the pieces of the puzzle that is a little for us harder to grasp as Americans.

After leading the world economy for so long, believing that the rest of the world can pick up the slack is something that is not easily understandable to us.

But picked up the slack they have, as global growth continues to accelerate.


Our growth may be slowing to only 3% this year, but China will grow by 11%, India will grow by 8% and Latin America will grow by 6%. That’s a radical change from earlier days when these economies spent much of time on the sidelines.

That’s why business leaders and government officials continue to champion the globalized world markets. Because in the end they offer nothing but the opportunity of continued growth.

So just how hot is the current worldwide expansion? Well, according to U.S. Treasury Secretary Hank Paulson, it’s red hot. In fact, Paulson recently said, "This is far and away the strongest global economy I’ve seen in my lifetime."

That’s a sentiment that Cisco CEO John Chambers would definitely agree with. The networking giant opened its own new "Globalization Center" in Bangalore just last fall.

"This is," says Chambers, "the strongest global trend" of his career. "There is a unique balance today," he continued. "More than half of GDP growth is coming from emerging countries. And yet the developed countries are also doing pretty well. It is something we have never seen before."

That combination has created a total world GDP of $36 trillion in constant dollars in this year alone as the world economy continues to grow by nearly 5%. By comparison, during the 70s world GDP stood at only $13 trillion.

That’s why, despite the current weakness in the credit markets, the bull market in equities will eventually continue. The ripple effects of the housing markets are nothing compared to the waves given off by the growth of the world economy.

So in the short term there is still reason for caution.

Long-term, though, it’s nothing more than a cold.

See you at 15 K.

Wishing you happiness, health, and wealth,


Steve Christ, Editor