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Weekend Reading: Temporary Relief

Paul Kedrosky

Welcome to another edition of Weekend Reading. First, a look back at the week that just finished, then a look forward to the week ahead, and lastly, a summary of some articles and papers worth reading.

What a week. The market turned the knob on its usual fear/greed flip-flops up to 11, and we went from massive gains on Monday to an air pocket on Wednesday, one where markets threatened to plummet straight through recent lows. But the indices managed to end the week up, with the Dow gaining 4.7%, the S&P 500 rising 4.6%, and the Nasdaq advancing 3.7%. Strangely enough, these were the Dow's best numbers in years.

So it's all over? Although third-quarter earnings are coming out in buckets and are bad, they're not that bad. Plus, we saw signs that credit markets were opening up a little last week, with Libor down and the much-watched TED spread a little less like a yawning chasm than usual.

Not so fast. You could more credibly make the case that we're seeing a massive head-fake as the market weakens further. Third-quarter earnings were never going to be as bad as fourth-quarter numbers will be, because consumers essentially shut down spending as September came to a close, and they show no signs of returning to the mall. Similarly, credit markets began closing in September, but they only went into a complete heart attack at the end of the month. As a result, third-quarter numbers are weak, but fourth-quarter earnings will be much worse. We could see a bounce between now and then, of course, but it is hard not to see the market being disappointed by what's coming.

Lastly, and perhaps most broadly, it is a mistake to get caught up in what is happening in the third and fourth quarters of this year. The U.S. is in the middle of a massive unwinding of leverage, with property prices still falling, unemployment at high and rising levels and a synchronized global recession looking set to unfold. Credit-bubble fueled downturns are never painless, and this one, given its size, cannot turn so speedily on lower rates and fiscal stimulus. It will take time and lower prices, with the main risk being deflation, not inflation.

Turning to economic indicators, on Monday we will see September's index of leading U.S. economic indicators. Wednesday will bring the weekly mortgage market index, followed Thursday by weekly U.S. jobless claims. On Friday, we'll get existing-home sales for September. We'll see Federal Reserve Chairman Ben Bernanke speak Monday in front of the House Budget Committee. Lastly, in what is likely to be a very contentious hearing, Bernanke's predecessor, Alan Greenspan, will testify Thursday about the role of regulators in the current crisis.

As for earnings, there are lots of names to watch. Some samples: Caterpillar(CAT Quote), 3M(MMM Quote), Boeing(BA Quote), McDonald's(MCD Quote), Apple(AAPL Quote), Yahoo!(YHOO Quote), Amazon.com(AMZN Quote) and Microsoft(MSFT Quote).

Lastly, here are some articles and papers worth reading:

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• There's an OPEC meeting this week, and a 1-million barrel cut may not be enough to stop falling prices. (AP)
• Dissecting how credit rating agencies lost the plot. (FT)
• Economist Keynes is newly more relevant than ever. (FT)
• Caisse d'Epargne gets hit by derivatives losses. (Bloomberg)
• Barron's seems increasingly adrift these days, with a cover piece saying the economy is better than you think. (Barron's)
• Capitalism at bay: What went wrong, and what didn't. (The Economist)
• Brazil is bruised, but not broken. (Globe and Mail)
• Businesses May Cut Back Spending on Storage. (Byte and Switch)
• SEMI book-to-bill slips to 0.76; lowest since '01. (EE Times)
• GSEs Face Sea Change in Counterparties. (Inside Mortgage Finance)
• The credit crisis in Eastern Europe. (IDD)
• Rate cuts and fiscal stimulus needed. (Bloomberg)
• South Korea joins global rescue, crisis summit planned. (Reuters)
• The work of play: How video game development is big in California. (Los Angeles Times)
• Negative equity 'affecting 60,000 families a month' in U.K.. (Telegraph)
• Building Flawed American Dreams: The U.S. obsession with homeownership. (The New York Times)
• Consumer goods categories most immune/vulnerable to a recession: soft drinks vs. beer. (Nielsen)
• Research: The Subprime Panic. (SSRN)
• Are we below the point at which lower oil prices are good for the economy? (The New York Times)
• GSEs Eye Subprime and Alt A MBS Purchases. (Inside Mortgage Finance)
• Jim Grant on the absence of confidence in the economy, and how the government is making it worse. (The Wall Street Journal)
• How basic industries are coping with the economic crash. (The Economist)
• U.S. commercial real estate loan delinquencies soared in September. (Fitch)
• Thirty years of the 30-year mortgage. (iGreed)
• A simple hedge fund redemption model. (iGreed)

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting