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With only a few tidbits of economic news today, traders and market analysts are looking for follow-through of yesterday’s market action following the minutes of the Fed meeting. The overall consensus has the Federal Reserve backing-off on future rate increases with possibly one or two quarter-point hikes to come. With the news, stocks took off while the dollar and bonds were sold lower. In afternoon trading the Dow Industrials are only a few points higher, with the smaller cap stocks in the NASDAQ performing slightly better. The U.S. dollar is still selling-off, but bonds have firmed as traders look toward economic data tomorrow and Friday. The economic data was light, but stocks didn’t get much help from the report on Factory Orders this morning. Orders in November came close to expectations with a gain of 2.5%, but excluding transportation orders showed no increase. The results for October were adjusted lower from the estimated 2.2% gain to the actual gain of 1.7%. Non-defense capital goods orders excluding aircraft declined 2.1%. This is the second decline in the last three months and doesn’t bode well for capital spending over the near term. The minutes of the Fed meeting said they expect slower growth this year and the economic data looks to be proving them correct. Yesterday construction spending came in weaker than expected and the ISM manufacturing report showed a bigger decline than analysts expected. Today Ford announced auto sales in December were down by 9% and DaimlerChrysler said their sales were down by 2%. (I don’t have the results from GM yet.) It is presumed that Asian manufacturers led by Toyota are gaining market share over U.S. auto makers. Mortgages and Treasury Bonds The Mortgage Bankers Association said its applications index fell 1.5% with the purchase index down by 3.4% and the refinance index higher by 8.3%. It appears some home owners are consolidating their Holiday Season credit card debt into lower rates with mortgage borrowing. The 8.3% increase in re-fi’s looks like a strong number on face value, but refinancing is down by 20% from last year. Similarly, the overall applications index was down 1.5%, but it doesn’t tell the whole story. Mortgage applications are at their lowest level since May 2002 and are down by 10% from last year. Activity has slowed, but rates are still at historically low levels. The 30-year fixed rate fell six basis points to 6.15% and the average one-year ARM moved five basis points higher to 5.41%. U.S. Treasuries have caught a very modest bid following yesterday’s gain from the release of the Fed minutes. The Feds are finally starting to back off their hawkish language after briefly inverting the yield curve last week. Alan Greenspan tried to convince everyone the inverted/flat yield curve doesn’t necessarily portend economic weakness to come because it is distorted with Asian buying of U.S. Treasury debt. Seven out of the last eight times the yield curve was inverted the economy went into recession. Recent reports indicate a weakening economy, so I believe Mr. Greenspan was just blowing smoke. The big boys in the bond pits are waiting for more data to determine the overall strength of the U.S. economy. A strong economy with rising inflation will see a sell-off in bonds, while a weakening economy would cause bond traders to buy the debt thereby pushing rates lower. Tomorrow the big report everyone will be watching is the ISM non-manufacturing index. According to a Bloomberg survey of 50 economists, the index is expected to rise to 59 for December following a 58.5 reading in November. The next report they are waiting for comes from the Labor Department on Friday showing job creation for the month of December. Economists are forecasting the U.S. economy added 200,000 jobs last month following the creation of 215,000 jobs in November. Dollar Travels a Rough Road in Iran Dollar Falls on Speculation Fed Closer to Halting Rate Policy Jan. 4 (Bloomberg) -- The dollar had the biggest two-day drop against the euro in five years after the Federal Reserve suggested it is closer to halting its interest-rate increases. A shift in Fed policy may prevent a further widening of the yield advantage on U.S. assets that pushed the dollar up more than 14 percent against the euro and yen in 2005. A European Union report today showed inflation exceeded the European Central Bank's target for an 11th consecutive month. The article goes on to say some traders are nervous about whether or not the dollar will move higher and are simply taking profits to reduce their overall long dollar positions. They continue with a brief discussion of the interest rate gap and suggest a good report from the ISM tomorrow and a good labor report on Friday will cause traders to buy the dollar again. To put it very bluntly, I believe this is a bunch of smoke and mirrors for what is really going on behind the scenes in the dollar-euro relationship. Certainly interest rates and economic growth are part of the formula to determine currency values, but there is one VERY BIG event that could happen within ten short weeks.
I believe that one of two things is going to happen. We will either have a large escalation of the war in the Middle East to include Iran, or the dollar will lose its global monopoly as the world’s reserve currency to share that position with the euro. Back in August, Toni Straka submitted an article to the Financial Sense University titled, “Iranian Oil Bourse Could Kill the U.S. Dollar.” An oil bourse is an exchange where oil is traded such as the N.Y. Mercantile Exchange. As it stands, all current exchanges are denominated in U.S. dollars, but the proposal for the Iranian exchange has them doing business exclusively in euros. In the article Mr. Straka makes the point that, “A renunciation of the dollar is worse than an Iranian nuclear attack.” Believe me folks, HE IS RIGHT!! Mr. Straka had a few sentences that really caught my attention. “An abdication from the current status quo has only one real enemy: the USA, where less than five percent of the global population consume roughly one third of global production. Oil in Euros would benefit several million people more in the EU and its trading partners though.” He went on to say, “As this development poses a very real and big danger to the superior status of the greenback and the interests of the USA the "president of war" can be expected to steer a close reach against the winds blowing from the Middle East. One may be reminded that the Iraqi despot Saddam Hussein had entered into discreet talks with the EU, proposing to sell his oil for Euros. That was in the year before the first oil war of this century.” I believe the Bush Administration will prefer war over negotiations since that is how they dealt with Iraq, even as the rest of the world protested the invasion of Iraq. The Iranian oil exchange is supposed to begin doing business on March 20, 2006, so the timetable is very clear. WHAT IS THE POTENTIAL IMPACT TO YOUR INVESTMENTS? I also believe this is one of the reasons we are seeing continued strength in the gold price…it smells something is coming! Mr. Bush is still on the ropes for the invasion of Iraq, so he will need a little help from some friends. He can’t afford to preemptively strike Iran. My best guess says Israel will attack Iran because of their nuclear program, them we come in to help…..(protect the dollar). When we hear the dollar describer as the “petro-dollar” it all becomes very complicated. Most of us have no clue how oil is traded and paid for on the international markets. Without any doubt, the best article I have read to better understand the “petro-dollar” came from Mr. Jim Willie CB on April 6, 2005 when he wrote, “The Petro-Dollar & Protection Racket” Mr. Willie is very bright and not one bit afraid to call a spade a spade. He states, “Changes are occurring under our feet to a critical foundation of both world commerce and world banking.” He goes on to describe how it works and then makes the tie to U.S. corporations such as Halliburton, General Electric, Bechtel, and others. In Mr. Willie’s words: “Practical advantages to the USA are two-fold, industrial but mainly monetary. World banks are absolutely drowning in US$-based assets, which grants US firms a favored position in contract awards. Numerous large contracts are won with large US firms, downstream in their economies. See Halliburton, General Electric, Bechtel, and others. Large US energy service firms typically win contracts with oil producing nations. It is part of the Petro-Dollar game, with attached military protection unwritten into the contracts. We protect their governments, even if they are corrupt. We induce both monetary corruption and bank dependence, even when other governments are honest and object to pressured tactics. We are the big bully on the block.” “With the USDollar as world reserve currency, the USGovt abuses the privilege on a grand scale.” He goes on to say that few observers seem to attach many military implications to the Petro-Dollar…he is correct! I believe the single biggest reason we attacked Iraq was because Saddam was selling oil for euros. If you believe this kind of reporting is unpatriotic, you better open your eyes and get real with what is going on in this crazy world we live in. You may not like to read what Jim Willie has to say, but it would be your loss if you don’t take the time to read his essay. I found another article that goes into much greater detail on the coming oil bourse and its implications for war. Petrodollar
Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse “This
notion that the United States is getting ready to attack Iran is simply
ridiculous...Having said that, all options are on the table.” “Contemporary warfare has traditionally involved underlying conflicts regarding economics and resources. Today these intertwined conflicts also involve international currencies, and thus increased complexity. Current geopolitical tensions between the United States and Iran extend beyond the publicly stated concerns regarding Iran’s nuclear intentions, and likely include a proposed Iranian “petroeuro” system for oil trade.” “The proposed Iranian oil bourse signifies that without some sort of US intervention, the euro is going to establish a firm foothold in the international oil trade. Given U.S. debt levels and the stated neoconservative project of U.S. global domination, Tehran’s objective constitutes an obvious encroachment on dollar supremacy in the crucial international oil market.” Please take the time to read Mr. Clark’s most excellent essay, even if the topic is uncomfortable. I believe it will help you make sense of what is going on around the globe and what we could be headed for in a couple short months. President Bush has made it very clear that we will be in continual warfare against terrorism, but look what James Madison had to say back in 1795: “Of
all the enemies to public liberty war is, perhaps, the most to be
dreaded because it comprises and develops the germ of every other. War
is the parent of armies; from these proceed debts and taxes...known
instruments for bringing the many under the domination of the few…No
nation could preserve its freedom in the midst of continual
warfare.” The article on Petro-Dollar Warfare by Mr. Clark is supported heavily with 23 footnotes and accompanying links if you want to research more background information. These developments are very real and could have a very significant impact on your investment positions. Gold and silver along with foreign currencies should be at least a portion of your portfolio. Energy stocks with no exposure to the Middle East could go through the roof. This could be the reason Goldman Sachs has reiterated their call for an oil spike to $105 a barrel. Do ya’ think they might know something we don’t? Have a Great Evening! Mike Hartman
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