8/14/2019 Compass Financial - Weekly Market Commentary July 28, 2008

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Jeffrey Kleintop, CFAChief Market StrategistLPL Financial

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LPL F INANCIAL RESEARCH

Weekly Market Commentary

A pullback in the outlook for inflation would likely propel a powerful stock

market rally in the U.S. With the primary driver of overall inflation stemming

from global food and energy commodity price pressures, the key to falling

inflation may be a slower pace of emerging market growth. This slowdown

appears to be unfolding.

China has been an engine of growth for a long time. However, the Chinese

economy faces many challenges in the quarters ahead that may lead to a

slowdown in growth:

The Chinese government is increasingly allowing higher food and energy

prices to pass through to consumers.

Chinas central bankers have slowed the pace of lending by hiking the

reserve requirement ratio an unprecedented magnitude from 7.2 to 17.5

over the past two years and raising the base lending rate (the Chinese

version of the Federal Funds rate) by nearly 200 basis points.

The China Shanghai Composite Stock Index has plunged 53% since

peaking in October and is following the early 2000s path of the NASDAQ

Composite stock index the NASDAQ Composite bubble burst

preceded a recession in the U.S. [chart 1]

The start of an Olympic-size hangover may be underway from theslowdown in all the preparatory infrastructure spending combined with

the fact that nearly every country that has hosted the Olympics has

experienced a slowdown in economic growth in the following year.

July 28, 2008

Asian Contagion Part II?

Highlights

Chinas pace of economic growth has started to

slow, and other emerging market countries arealso seeing signs of slowdown.

In the aftermath of the 1997-1998 emerging

market led slowdown, oil prices fell by 60%

to about $10 per barrel and other non-energy

commodities experienced similarly large

declines. While we are not predicting the

Asian Contagion part II, as the global growth

engines shift into a lower gear, commodity

prices may continue to slide.

With the primary driver of overall inflation

stemming from global food and energy

commodity price pressures, the key to falling

inflation may be a slower pace of emerging

market growth. If global commodities prices

continue to come down and ease inflation

pressures in the U.S., the stock market could

post a powerful rally.

1 Shanghai Composite Mirroring NASDAQ Composite of Seven Years Ago

Source: Bloomberg, LPL Financial

7000

6000

5000

4000

3000

2000

1000

0

NASDAQ Composite from March 1997 to March 200 3

Shanghai Composite from July 2004 to present

July

2004

July

2005

July

2006

July

2007

July

2008

July

2009

July

2010

Olympic Year Country

Change in GDP Growth Rate

in Following Year

1964 Japan -5.9%

1968 Mexico -6.0%

1972 Germany +0.5%

1976 Canada -1.7%

1980 Russia +0.9%

1984 U.S. -1.4%

1988 Korea -5.3%

1992 Spain -2.0%

1996 U.S. -0.1%

2000 Australia -1.3%

2004 Greece -1.0%

2008 China ?

CHINA HEADED FOR OLYMPIC-SIZE HANGOVER IN 2009?

Source: Bloomberg, LPL Financia

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WEEKLY MARKET COMMENTARY

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Indeed, Chinas GDP growth has started to slow, posting second quarter

GDP of 10.2%, down 2.4% from 12.6% a year ago, and the index of leading

indicators, from the Chinese National Bureau of Statistics and Goldman

Sachs, reflects a slowing trend. Other so-called, BRIC (Brazil, Russia, India,and China) countries are also seeing signs of slowdownBrazil and India

have seen sharp downturns in their leading indicators of economic growth.

One of the countries that has been hit the hardest is Vietnam; the countrys

Ho Chi Minh stock index fell last week by the largest amount in four months

and has declined by -63% from the peak with inflation rising at a 27% pace

over the past year, pressuring five year government bonds to yield 20%.

In recent months, many emerging market nations are hiking interest rates

and passing on higher energy prices:

Rate hikes have been implemented in Brazil, Chile, Indonesia,

Philippines, South Africa, and Vietnam.

China has raised gasoline prices 17% and diesel by 18%.

India raised fuel prices by 13%.

South Korea announced an increase of 50% to natural gas prices.

Malaysia announced a 40% increase in gas prices.

Thailand raised gasoline prices by 41%.

Taiwan raised gasoline and electricity prices by 13%.

Indonesia raised fuel prices by 29%.

Nepal raised fuel prices by 25%.

Bhutan announced roughly 10% hike in gasoline prices.

Sri Lanka raised prices on gasoline, diesel and kerosene by 1447%.

The last time Southeast Asian economies were under this much stresswas in August of 1997, when fleeing capital triggered a cascade of financial

collapse among emerging nations. Within days of Thailands collapse, many

of its neighbors were brought down, and within months financial crashes

were seen in Japan and South Korea and reached as far as Russia and Brazil.

In the aftermath of 19971998 emerging market led slowdown, oil prices

fell by 60% to about $10 per barrel and other non-energy commodities

experienced similarly large declines. While we are not predicting the Asian

Contagion part II, as the global growth engines shift into a lower gear

commodity prices may continue to slide.

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This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial, UVEST Financial Services Group, Inc., Mutual Service Corporation,

Waterstone Financial Group, Inc., and Associated Securities Corp., each of which is a member of FINRA/SIPC.

IMPORTANT DISCLOSURES

This report has been prepared by LPL Financial from sources believed to be reliable but no guarantee can be

made as to its accuracy or completeness. The opinions expressed herein are for general information only, aresubject to change without notice, and are not intended to provide specific advice or recommendations for any

individuals. Please contact your advisor with any questions regarding this report.

Investing in international and emerging markets may entail additional risks such as currency fluctuation and

political instability. Investing in small-cap stocks includes specific risks such as greater volatility and potentiallyless liquidity.

Stock investing involves risk including loss of principal Past performance is not a guarantee of future results.

Indices are unmanaged and cannot be invested into directly.

In the U.S., inflation pressure is largely contained within commodities. If

global commodities prices continue to come down and ease inflationpressures in the U.S., the stock market could post a powerful rally. On

the other hand, many emerging market countries are experiencing a huge

surge in inflation, which has become embedded in wage growth and may

make inflation pressures slower to dissipate as commodity prices fall.

The potential combination of slowing growth and stubborn inflation in the

emerging markets leaves us negative on the prospects for emerging market

stock performance and in favor of developed markets, especially the U.S.

Commodity Price Change from Recent Peak

Corn -13.0%

Soybeans -15.0%

Wheat -34.9%

Rice -25.5%

Crude Oil -15.2%

Nat Gas -33.1%

Gold -7.3%

Silver -14.8%

Aluminum -10.8%

Copper -11.3%

Nickel -55.6%

EMERGING MARKET COUNTRIES PASSING HIGHER PRICES ON TO CONSUMERS

Source: Bloomberg, LPL Financia