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Please note….My timing wave analysis is flashing a potential MAJOR/MAJOR inflection period looming right ahead of us what is referred to as a (market trend-period) like it did on 7/12 and 8/12 (I’m usually early a tad) is suggesting that we are once again getting very close to significant inflection period (wave which should hit between 7/18 and 7/21, and the intensity is quite large) most often it is a reversal-of-the existing trend, but there is always a chance 30% that it could be a rapid continuation of the existing trend, This inflection period could last between 12-27 trading days; and I believe we could be in store what I call a surprise market inflection point, a development that catches most investors flatfooted; which could adversely derail all the euphoric sentiment....that has been building in this market. According to my technical and fundamental/economic analysis I do not believe that this buying cycle can last till the end-of-the-year...so please be careful. Remember folks when in doubt CASH is king. I believe we are close to another major inflection period for the markets, so please trade cautiously and be quick to protect profits. Please remember folks there are usually 7-8 bullish (participants) to every 2+/- bearish traders/investors, so the propensity for bullishness is almost always stronger! However the reason that the market drops 4-5 times faster then it goes up is that liquidity and lack of buyers due to fear, can feed on itself very quickly like a plague or a quick acting cancer. So prepare yourselves for a potential rollercoaster ride starting in my opinion tomorrow as the battle will certainly pick up in intensity. This rally has been built on hopes and prayers, a limestone foundation, and if/when it cracks the drop could be violent and very-steep. Its worth noting (see table at the end) that this week is a HUGE week for economics releases with the PPI report to be released on Tuesday which is expected to show slippage and the Fed-heads will be looking at the inflationary rate within their ridiculous core level to see if producers are able to pass rising costs on to consumers. Then on Wednesday the CPI will show the recent impact of that pass through of producer prices from the prior months; these are important reports! In my opinion this trend is bearish for the markets as the fuel, hype and speculation is fading as I saw reports that indicate M&A activity hit the low for the year this past week with only 135 deals announced totaling a mere $5.9 billion according to Thomson Financial. This was the lightest volume and the lowest dollar-value announced this year (not something touted on bubblevision at all) for the year. The next lightest weeks were August 19th with 154 deals and $12.1 billion and January 6th with 235 deals for only $6.9 billion. the reasons are quite simple....risky high-leveraged credit is drying up and when you can't be assured of obtaining funding for these deals which for the most part I believe are grossly overpriced it makes it ridiculous to execute a contract which normally including a breakup fees if the deal does not close. PLEASE key in on the Russell-2000 as this is the big-weak-sister in this bullish scenario being hyped throughout bubblevision. We have seen what they call a flight to blue-chips, I call this a very-defensive posturing-mentality; yes large cap stocks are making relatively new highs on at times is very decent volume while at the same time small and mid caps are at best just treading water. This is a normal distribution process as many Fund Managers are what I call avoiding risk and avoiding liquidity issues in this period of uncertainty. They are favoring the large caps where a quick exit is always possible when the markets reverses and players head for the exits. Nevertheless, the indexes spent most of this past churning in anticipation of what will come develop or not develop this week…if not for Thursday’s sharp gains the index would have basically traded the week flat…for the most part the indices showed some resilience; after the priors week’s deep selling. The main focus this week coming up will be split between the Fed policy meeting on Tuesday and the earnings reports by the large brokerage-firms/banks. There remains significant uncertainty as to whether the Fed-heads will cut their fed funds rate by 25 or 50 basis points; but none as to whether they will cut, as it is widely expected. This is despite the fact that recent statements from Fed-heads have tended to reduce this likelihood as they have stressed economic strengths and they are quite calm showing no signs of panic; there is a distinct possibility (slight as most believe it may be) that the Fed will not cut at all instead they will again lower the discount-window rates by 50-basis points which is the camp that I am in! And if I’m right and my primary scenario plays out this lack of action would certainly disappoint the current market participants big-time and they would sell-off precipitously; but the PPT has ensured a buffer zone with this recent relief rally from mid-August, and this may have been their intention! Scenario #2 if the fed-heads only cut 25-basis points and still remain focused inflationary pressures; the markets would not act very-favorably Also there is a high degree of uncertainty surrounding the earnings and exposure of the major brokerage firms, to the subprime slime/ CDO’s etc and the following big-time firms will report earnings this week! If they somehow post OK earnings and manage to mask/cloud the contagions looming on their balance sheet then the markets could respond quite favorably however if they miss earnings, and express poor guidance going forward then the financial sector could take a nose dive…so we will need to monitor these earnings very-carefully as these releases will surely add to the market volatility this week!
Merrill Lynch (MER) warned on Friday that the subprime/slim contagions and the current credit crunch in corporate paper was forcing it to reduce the value of securities on their books. This would likely result in lower than expected profit in Q3. The earnings warning was made in a SEC filing in regard to a $1.3 billion buyout of subprime lender First Franklin Financial in late December; a smoke-filled cloudy attempt to mask the issue. Merrill also packaged and sold mortgage backed securities on subprime loans acquired elsewhere. Merrill did not state how much the write down would be. PLEASE NOTE....if Merrill is warning and likely reducing earnings due to their exposure in subprime/slime issues we have to infer that the other brokers are also going to face similar contagions, possibly in a much harsher fashion. Contributing to investors' uneasiness this week were comments made at a Lehman Brothers financial-services conference by Washington Mutual, they stated that the housing markets are weakening, creating a ''near perfect storm'' that may force it to set aside more reserves for increasing bad loans....as I mentioned this past week there's growing speculation that earnings for BSC/LEH aren't going to be as bad as people are expecting plus the news that the British billionaire Joseph Lewis amassed a 6.97% stake in Bear Stearns helped the sector stabilize as well....time will tell Wachovia CEO Thompson said that while Wachovia is grabbing more mortgage business as a result of the recent shakeout in the industry, its investment bank may have trouble selling loans intended to fund leveraged buyouts. "The volatility in the fixed-income markets is being felt at Wachovia," Mr. Thompson said. "We don't know when markets will normalize." Washington Mutual will set aside as much as $2.2 billion this year to cover potential loan losses; $500 million more than they thought was needed just a few weeks ago. They cautioned that they will book lower gain-on-sale income from selling mortgage loans instead of keeping them on the company's balance sheet. Thompson said the bank has a 3% to 4% market share of financing for leveraged buyouts, with more than $300 billion in such loans waiting to hit the market, Wachovia's exposure could be more than $12 billion. Wachovia could have been on the hook for more; but he said the bank had reined in its risk appetite over the past year and passed up opportunities to finance some LBOs. Goldman (GS) announced this past week that another of their manipulative hedge funds has posted another significant loss. I continue to hear rhetoric that of the 9000+ hedge funds that exist today will reduced by 30% or more as many as 2300 may not be solvent enough to carry on and as such will close (roll-up) their funds over the next several years. Most are hanging on to that last thread of hope for a miraculous recovery in the credit markets to bail their sorry asses out of the contagions they created; the lack of a market in debt-credit sectors will likely cause many to hemorrhage. Once the major brokers identify at least pro forma debt valuations this week so many of these overleveraged funds will have to mark to market their books and many will be significantly underwater which will likely cause a huge wave of additional redemptions as a sell-off will ensue (One reason why I'm so bearish right now!!). Best Buy (BBY) reports their earnings Tuesday (another potential market-moving release) and this report will be our proverbial portal into the current state and health of the consumer when it comes to discretionary spending. The retail sales for August showed electronics as one of the few sectors still positive. After they report it should provide clues and insight ahead of the Holiday-Shopping season. Another earnings report that should be closely watched is FedEx (FDX), as they report earnings on Thursday. It will not be the earnings that are so important but the guidance about the state of the shipping business currently and heading forward (great-insight for the economies expansion or not) also their guidance and thoughts about the energy-contagions and hot they affect their business will also provide us some great insight as well. YRC Worldwide (YRCW) came out last week and basically hit their knees and begged for a rate cut to head off a recession as their CEO claimed there was no build up in progress for holiday orders and the trucking sector has been under pressure. Will FedEx to come to the rescue, and revitalize hope in this sector or will they be the catalysts that starts the transports in a near-term selling-spiral; we have seen that the transports are struggling to hold support at 4700 and positive guidance by FDX would surely help with $80 a barrel oil, a warnings and we could quickly sell-off to 4000. This week we discovered that it will be the next president and not Bush who will have to figure out a way to extricate the country from his personal Iraq quagmire/debacle as after more than four years with some 33,000 casualties, including nearly 4,000 dead, the increasingly unpopular war appears nowhere near a military victory. And In his speech Thursday evening, Bush said that his strategy was paying off and that success meant troop levels could be cut. But he also said the country would have an enduring relationship with Iraq that would extend beyond his presidency. He gave his speech on the same day that a well known Sunni sheik that stood supposedly with the United States against jihad forces (he was once responsible for killing American-troops) was assassinated with a car bomb, the latest development to suggest that the situation in Iraq is not getting any better. Ironically Bush's speech also coincided with oil's closing above $80 a barrel for the first time ever, an unrelated event for sure, but one that nonetheless highlights the importance of our presence in and developments in the Middle East foreign policy arena. IS THIS Instability going to rock the markets or will they shrug it off! Right now many market participants are struggling to assess the potential for a consumer-contagion, and the potential extent of it….as even I ponder how much longer can the consumer bare this massive load of debt and spending. From my vantage point I believe that the majority are exhausted, and will/are starting to retrenching into a cocoon as they have the debt-screws clamping down on them, hence why I’m so bearish on the economy long-term as I believe the contagions to American consumers are exponentially growing and will eventually start to act as heavy-anchor on the markets and economic well being of our nation and some of these issues will certainly surface at a faster rate than others…but the mega-negative fall-out is very apparent to this old savvy investor. Unfortunately I do not see any serious actions being taken to resolve or mitigate the looming contagions or disastrous negative impact. Our once highly regarded dollar has been on a stead decline since the Bush administration has come into power and it has been on a free-fall of late (see-chart) and this will surely impact firms (like Wal-Mart) not to mention those who rely on Wal-Mart’s cheap prices; as Wal-Mart relies on and exploits cheap imports and cheap labor abroad. The buying power of consumers will also be impacted as their real wages haven’t kept pace with inflation, or the slippage in the dollars value. This isn’t all doom and gloom, as the persistent weak dollar could positively impact tourism and recreation and as a magnet (most-likely why resorts and casinos have enjoyed nice bullish runs as Europeans and Asians could flock to out hot spots to take advantage of their positive currency transactions. Our Federal Reserve (see link) continues to jack-up and pump liquidity in the system which will as a result logically result in inflation (I wish we had the M-3 numbers, but as you are aware they have decided to stop reporting on them.) Commodities have been on a stead steep-incline for a few years now and they has been on a parabolic rise since late 2001 with only a small-recent pull-back but due to the weakening dollar they are once again gaining upward traction (see-chart) and this will surely negatively impact consumers who have maxed out their credit cards, and since the value of their personal ATM machines *their homes* is slipping, hence limiting the availability of access of funds. Consumers will likely be forced to absorb the increases and those industrial firms (like PG/DD/GE/GM/F to name a few) who rely on commodities to manufacture real products will also feels the negative affects if they are not able to pass the costs along the chain; right now if it were not for the weak dollar our pro forma inflationary would certainly be out of control (we already know that real inflationary pressures are escalating and I peg inflation at 8.9%)…I have been asked many times the question that with commodity prices soaring, why hasn’t real inflation been more of an issue…well its simple, those in control of the numbers or what I would refer to as direct-manipulators (even down outright liars) are keeping the numbers artificially lows, for some reason they and of course that Fed-heads think that energy/food/rents and various others material components should note be included in the overall calculation of inflation, as they claim they are to volatile (I some what agree they have been volatile but in only one direction, up-up-and away); notwithstanding this I have been befuddled as the very items/goods that are needed to sustain our lives and standard of living are not counted in the overall inflationary numbers (while the costs of computes, ipods, game-boys are). Then again its simply, as they elect not to count these items as it would mean higher payments to those on fixed incomes, (SSN, Veteran’s benefits etc.) who rely on COLA’s (cost of living adjustments) which are based on the CPI data (core) to sustain their lives and standard of living. To name a few areas that have increased exponentially during the past 3-7 years with no signs of abatement:
These increases in what I believe to be the staples of life have far out stripped the increases in real-wages for most Americans and the data confirms this premise/conjecture; but so many taint it; as so many folks have been left behind in this great-expansion as they have experienced a real decrease in real wages especially when adjusted for inflation and the increase costs/burden of healthcare etc, is backed out…those families making under $75,000 a year and especially those making less than $35,000 a year, (72-78% of the population); have seen their real-wages not even keep pace with inflation; as such these ballooning debt loads that they have taken on are going to hit them like a nuclear-bomb. While our government officials try their very-best to mask and manipulate the real-inflation numbers and their impact to our economy through their fuzzy-math and direct manipulation of the data we see that inflation is soaring in most of emerging Europe, propelled by rising food and energy prices (oh my they do not ignore this data, its what our manipulators do) as well as rapid wage growth, and as such this data highlights the vulnerability of these economies to their own imbalances as well as to deteriorating global credit conditions. There's a clear sign in most of central and Eastern Europe that inflation is increasing and even accelerating; but its something like a bad-relative that no-one wants to advertise. The data suggests a rather unpleasant witch’s brew of higher food prices and energy prices at the same time that domestic demand has been pushing inflationary pressures higher (thank goodness they do not have a crumbling Euro to make matters even worse like our greenback is doing to us). We have seen that deepening contagions in the our subprime-mortgage market has spilled over into global credit and equity markets, causing turmoil/volatility and prompting many investors to slash their exposure to risky assets, including those in emerging markets; where we are still seeing bubble formations. A global rise in the prices of wheat, corn and other food products, combined with a drought in southeastern Europe, are pushing food prices higher in emerging Europe; and we all know what soaring energy prices are doing to the average consumer’s pocket-books. The problem is that inflation is a problem in itself, but it's also a reflection of imbalances in these economies, (ours as well) and it's not surprising that in countries where we have the largest inflationary pressures we also have problems with ballooning current account deficits (ours is humongous, but we are immune according to our officials) our twin deficits are like twin mountains-peaks that have no bounds. We also saw a report this week that indicated that tight global energy supplies are expected to keep energy prices relatively high throughout 2008, the Energy Department stated in its monthly short-term outlook. They stated that barring a slowdown in oil demand growth, continued high demand and low surplus capacity leave the market vulnerable to unexpected supply disruptions through 2008…I wonder what would happen if the rumors come true about an imminent Iranian surgical-military strike…. Prices of West Texas crude oil are expected to average $67 per barrel in 2007 and $71 in 2008. Natural gas prices at the Henry Hub are expected to average $7.30 per thousand cubic feet this year and just over $8 next year according to the report while retail gasoline prices are expected to average $2.93 a gallon this summer and $2.63 in December. The $164,000 (had to raise the amount for inflation and weak greenback) question that we need to develop answers too is how close are we are to the crippling of the American consumer as during the past few weeks/months, we have been seeing data suggesting a distinct slow down in their spending habits, and an unnerving situational development of excessive unserviceable debt, in an pending environment of resetting AMR's and maxed out credit cards....I sill believe the main concern confronting the markets right now is whether consumer spending can hold up and stay on their euphoric path of spending for the remainder of the year or will the consumers start to take a beating and thereafter retrench into what I call a steep buyers-strike-cocoon, due to their ballooning unserviceable debt-loads in an environment of increasing energy expenses (especially gasoline). Energy prices (crude and gasoline) prices remain at or near-record highs, and home heating prices this upcoming winter could be more brutal especially if the weather gets nastier (we had a very mild winter again this past year and this trend is unsustainable....consumers locking in heating rates are facing some new surprises again. A gallon of heating oil according to the new forecast puts heating oil prices at $2.76 to $2.80 per gallon, nationally, it have more than tripled since Bush came to power, according to the U.S. Energy Information Administration. Also worth noting is that natural gas, is expected to cost $13.36 to $13.51 per cubic foot for residential customers, according to the federal government's Short-Term Energy Outlook. (no inflation here right!). Gasoline costs have continued to crawl higher as well this past year....this past week gasoline came in at $2.84 a gallon on a national basis compared to the first week in August last year where the average price cane in at $2.77 a gallon, this is a looming contagion for the average consumer as costs have risen significantly over the past 4-5 years (no inflation here right!). This week’s pro forma jobs report indicated that the average weekly earnings of non-supervisory workers came in at preliminary $591.26 an increase of approximately $20.43 from last years level of $570.83….now that means that as of August Americans are making about $20.43 more a week *(before taxes) than the previous year….a mere pittance when you factor in that heating oil costs have increased so dramatically alone , lets change a paradigm here….the average American utilizes 600-700 gallons of heating oil a year….an estimated increase in expenditures $260-$280 on a year/year basis just to heat their homes or ... and the average American is paying almost $10.95 - $12.50 per week in extra gasoline costs year/year. So if we just look at the increase cost of energy, you can see that consumers are not keeping up with the soaring costs...to bad those on bubblevision fail to realize that the Average American need to heat their homes and drive to work/school etc. ands as such they can-not avoid these inflating costs So just from the energy patch you can see the perfect storm is brewing and the underlying contagions wrecking havoc with the American consumer are growing, the question that remains to be answered is when will this huge weight/anchor will start to act as suffocating tightening noose for the American consumers the life blood of our economy and the global economy as well. I believe that the consumer and their spending is about to stall in a significant manner. Despite what the talking-butt-heads on bubble-vision have professed and hyping; soaring natural-gas and gasoline prices are dealing consumers a troublesome contagionous rift. Which will adversely impacting in a large way their spending, as high energy prices will no doubt start to siphon potential sales away from other spending categories, and will most likely slow the economy down significantly if prices do not retrace very soon. We at the…$80.00 a barrel oil and thereafter we need to ask how long will it take to get to $100-a-barrel oil: not long if Emperor BUSH attacks IRAN (Great for energy company profits) however this is HUGE contagion for consumers (heating costs, gasoline costs etc.) that many are ignoring…we have seen $70-75.00 a barrel oil for most of the second-quarter, and the third-quarter looks to see even stronger prices. I am still of the belief that the U.S. consumer is the proverbial “weakest link” and the underlying contagions to their personal balance sheets will be the real undoing to our economic well-being; the primary reason I believe this premise to be true is that Americans are carrying record household debt loads and we have seen a steady stream of economic data that is still showing a steady decline in their real wages and ability to service the debt….this contagion will become a major worry this fall, but for now I expect this contagion to be very under-reported if reported at all. When will the proverbial shit-hit-the-fan for American consumers as crude, gasoline and heating oil are hitting record levels; this week crude futures prices peaked over $80 a barrel a level never before seen; it subsequently backed off as a bout of profiteers emerged as October crude-oil futures fell $0.99 to close at $79.10 a barrel giving back some gains from a record-high close of $80.09 during the previous trading session as traders locked in some gains. We saw that comments by the manipulative-terrorists called OPEC stating that $80 oil was unsustainable given current market conditions also weighed slightly on prices. For the week, crude rose 3.1% on supply concerns heading into the winter heating season. Meanwhile, natural-gas futures rose 4% on Friday close out the week at $6.279mbtu as a new tropical storm entered the Atlantic (see weather chart); natural-gas rose a whopping 14.1% on the week, and these were stellar gains; the energy patch as a whole also helped place a floor under the SPX. These escalating prices should start to weigh heavily on consumers discretionary spending as many must be very-worried of when as they still have to drive to work, and heat their homes and the winter season is right around the corner. Heating-oil has climbed almost 12% to new record levels this month while gasoline futures rose almost 8%, but so far retail gasoline prices have only risen 1.6%; I almost during the past month crude prices have also increased almost 12%. How long will it take for consumers to become bloodied (they are already suffering from anguishing paper-cuts) from rising heating-oil, gasoline and oil into record territory, on Wednesday crude futures prices peaked at $80.05 a barrel, a level never before. As I believe that these record prices will soon start to torment consumers both in their pocket books and with questions of when and how this commodity/energy rally will impact discretionary as soaring gasoline and heating oil prices will no doubt inflict pain as the winter heating season quickly approaches. The markets are drowning in bullish-training-momentum, base on speculation, not on fundamentals as I believe that the supply data that we have been seeing is tainted to indicate false demand/supply as all other data is pointing toward other trends…nevertheless the data is leading most to believe that we're going into this peak heating oil season the same way we went into the summer driving season as pro forma supplies are well below normal. During the past month we have seen that heating-oil futures have gained almost 12% hitting record levels, while we will see collateral damage being felt as reformulated gasoline has also increased 8%, however so far retail gasoline prices have only gained 1.6%; something is about to give in this arena. Due to scheduled outages, and very suspicious ad hoc disruptions as refinery rates have not kept up with the need to produce more gasoline and heating oil for the pro forma consumption….EIA-crude data….EIA-weekly-summary and then we have the API heating-oil-data U.S. refinery utilization stood at 90.5% of capacity for the week ending 9/7 according to the Energy Department as reported Wednesday; down from 92.1% in the previous week; and they really have no explanation for the drop. As a result, supplies of gasoline are down 9.6% from the year-ago level and distillates, which include heating oil, are down 8% from a year ago, the data indicated. Meanwhile crude supplies are still about 1.5% above the year-ago levels, which is very confusing as crude has managed to continue to rise in price to record gains as such there's little doubt that there's a bit of a disconnect here. The heating closed at an all-time high this week. The previous record price came in the aftermath of Hurricane Katrina in September of 2005, what has changed…other then big-oil taking production and refinery capacity off line, but of course they would never tamper with such an important commodity-supply chain now would they! From my technical perspective…we could be in for a very-chilly-and costly heating season as winter hasn't even arrived yet, and if the market sees an early cold front period forming say in December-January, heating-oil prices could easily run to $3.00-3.40 a gallon; not very-friendly for consumers now is it! Keep in mind that the "the typical correlation is that for every dollar per barrel increase in the cost of crude oil, there is a corresponding rise of about $0.035 to $0.04 cents per gallon at the gas pump for the consumer. This would translate that the increase in the cost of crude over the past month, if it holds for several weeks would likely translate to an additional $0.26-0.33 cents per gallon at the pumps if none of the other forces, like demand and profit margins, hold constant. Let’s hope we stay hurricane free as if a hurricane hit a central production area and cuts a significant amount of supply from production then prices could spike $0.50-0.75.Most likely, however, the market won't see record high retail gasoline prices again this year, he said. What is perplexing to the average consumer is that they have seen lower pump prices for gasoline even as they hear about record crude prices hitting $80 per barrel, but they fail to realize there is a lag of 4-6 weeks and as such real damage could be forth coming at a time when so many budgets are already stretched to their limits. One of the Big-industry-dogs that are very-concerned with this contagion is the trucking industry as with high fuel prices, especially now that they are moving their peak holiday-transportation season; they will have to pass the increase along resulting in higher end-prices….hey isn’t this inflationary I wonder what the fed-heads are think and inferring from this data. For many trucking firms the cost of fuel is their second-highest operating expense and equals as much as 26% of overall operating costs, (the highest cost is labor). As according to the “ATA” American Trucking Associations, trucking is projected to spend more than $107 billion on fuel this year, whish is significantly higher than last years $94 billion and $85 billion spent in 2005. Railroads are worried too. The markets have been reiterating all month (In the infamous word of the great Martin Luther King), I have a dream, a dream that the Fed-heads will come to the rescue of the greedy-manipulative overleveraged financial market participants by granting them a deep cut in interest rates…but be hind their hopes/prayers lurks a huge problem, called a moral hazard. For those young-folks reading this report this concept moral hazard is an old economic concept with its roots in the insurance business. The premise is goes something like this: If you protect a business entity; hedge fund or brokerage firm against any unwanted/undesired outcome, they may increase their risky behavior that placed them in peril in the first place. The market's yearning for the fed-heads to cut interest-rates is they back-stop for their reckless behavior. As far too many believe the Fed-heads will rescue them from their excessive and overleveraged greedy behaviors, as they (its human nature) will take greater risks and, ultimately, suffer greater consequences, and their actions will ultimately snowball. Greenspam created this moral dilemma when he rode his white horse and came to the market’s rescue in the past during contagions in 1998, 1999 and 2003. Greenspam was in my opinion the main contributor to the technology-stock market bubble of the late 1990s; and in 1998 he quickly cut rates to support the bond market after it was swamped by a Russian debt default and the near-collapse of a huge hedge fund that specialized in bonds, LTCM, and this is why the markets feel so invulnerable.
Despite some contradictory words in recent days from Fed-head about how much the financial market turmoil might affect the economy, Fed watchers and market-participants are nearly certain that the FOMCs will ease monetary policy when they meet next Tuesday. After Bernanke speech yesterday we will see that Fed officials will begin their traditional weeklong quiet period ahead of their 9/18 meeting. Bernanke didn't comment on the economic outlook in his speech yesterday, hence this could spook the markets as we head forward! Despite the mixed comments (that leaned toward–no-action) many economists (mostly paid shills hyping their own firms books) are looking past the various comments and negative-rate cutting implications from the various fed-heads and are concentrating on the weak employment report as their ace in the hole so to speak, which showed an unexpected 4,000 drop in payrolls, the first decline in four years; as if this data point is the only thing that they will hang their hit on. The economy is giving off mixed signals. Recently we saw that our pro forma government reported that GDP grew at 4% in the second quarter 2007; and then last week Atlanta Fed-head Lockhart, who isn't a voting member of the FOMC, (hence these comments didn’t spook the markets) said that while the economic outlook is now less assured, there's still no clear sign that the misery in the U.S. housing sector is taking a significant toll on the rest of the economy. He went on to state that “Weakening home prices, less available credit, and higher interest rates could cause a slowdown in home equity withdrawal for consumption.” But that data has materialized yet! The market believes (I think-somewhat incorrectly) that any chance the Fed-heads would hold their rate steady has evaporated with just that one-negative employment report; what I believe to be a baseless premise. So many have moved past the $64,000 question of whether the Fed will cut rates and they are now squabbling over the prospective size of the rate-cut….this could be disastrous if the fed-fails-to-deliver….as the vast-majority believe that there is relatively no chance that they will keep rates on hold and not provide a cut as the markets have priced in! I believe that they will likely only reduce the Fed's discount rate; however I’m in such a small minority that I’m even questioning the herd-psychology! I believe that their reduction in the discount rate could also be accompanied by extending financing beyond 30 days likely to 60-days in an attempt to infuse more liquidity into the markets. Liquidity-Credit-Crunch, or just sensible lending practices The credit markets beyond the mortgage sector is facing a much tougher scenario/situation as we saw data released from Thompson Financial stating that leveraged buyouts in August were at their lowest level in two years; as you are aware leveraged buyouts rely on bank loans to finance their deals most often. These banks due in my opinion to a lack-of-balance-sheet transparency are taking a more guarded/careful look at their overall risk exposure to these deals, since they are facing a much more difficult situation when selling off their so called participation in these loans to other institutions and investors. We have seen that due to excessive-greedy-over-leveraged wall-street firms and various hedge-funds that ridiculous-speculative bets on subprime exposure etc. is now a major contagion; as even high yield bond activity fell to its lowest level since 1991. Corporations are now also facing an extension of the credit crises as their market for commercial paper has become much more restrictive (looks like they may actually have to prove that they can-potentially-pay back these loans, a new paradigm), especially firms with less than excellent credit. According to a recent Federal Reserve report the level of commercial paper has decreased by $243 billion, an 11%. This is one of the reasons the Fed has lowered the Discount Rate to encourage banks to help shore up this path of short term financing. If this situation continues, expect companies to slowdown their spending which would further hurt the economy. It is likely to take time for the debt markets to return to a more rational environment as they work through the transition from an overheated-extremely-speculative-risky lending practice to more rational and sober pricing of credit worthiness. There are many loans that are on the books of banks hedge funds, pensions, and other institutions that do not have sufficient documentation of the value of their underlying assets; and this is the contagion that the markets are embroiled with pricing in right now. Then all those ARM’s that will be resetting and as such they are causing so many borrowers major problems; as they will see their rates increase substantially and their rates continue to rise over time. Yes, they might be able to convert to a fixed rate if they can find the financing or if the government (you and I bail out these folks some of those very same folks working at Wal-Mart that speculated on buying 350-500K homes that they had no business even thinking about). They will still have a hard time making the payments; as their incomes in real-inflation adjusted basis has been stagnant at best, and way so many squeezed into these homes with a 1-3% proverbial teaser rate…and they just barely cover these payments by working multiple jobs…and even if they were able to qualify for a fixed rate it would be in the 6.5 to7.5% area, and they would not-even-come close to making these payments in my opinion. How
will a 25-50-basis rate cut help solve these major contagions; sure it
might help a smidgeon; but it’s like a grain of salt in a slat
shaker. What I believe really needs to happen is that these
greedy-reckless lenders and those with the loans that they should
never qualified for with-out fuzzy-math manipulations need to work out
the problems they have created. Lowering rates by the fed-heads will
only make it easier for them to get new loans at lower rates; that
they still can-not truly afford; it does not fix the real problem of
miss-pricing the risk of these loans of the ridiculous lending
practices that lead-us-on this dangerous path. Moody’s came out on Tuesday and stated that the current credit crunch (I say the current period of uncertainty over the lack of clarity regarding exposure and balance sheet health) nevertheless they stated that it has cut off access to borrowing for many weaker companies, which will likely trigger a surge in corporate defaults. What began as a subprime mortgage problem earlier this year has according to Moody’s (they should be reading T-Waves) spread across other credit markets. Investors are still willing to lend money to financially secure companies, but new demand for debt issued by less creditworthy firms has been "largely wiped out" Moody's said in their report (go figure). As I have written before very-few firms have struggled to repay debt in recent years, mainly because booming credit markets (a bubble-in-speculation, due to easy and almost free monies) allowed weak firms to get rescue financing to avoid bankruptcy. However, this recent credit crunch so to speak has changed all that, and its about time in my opinion as the business cycle has far-to-long been manipulated by the mega-bubble creators called the FOMC. They stated that "going forward ... many more weak companies will be unable to obtain new financing and will default either when debt maturities come due or when they run out of cash," Moody’s said. The default rate among U.S. speculative-grade companies will more than double to 4% during the next year they predict, I think this is very low as I’m carrying 9-11%. Homebuilders, auto makers, retailers and consumer durable companies may be most affected, their report indicated and I agree as many firms in these industries have been acquired in leveraged buyouts in recent years and these firms have borrowed a ton of money in the process; which they may not be able to repay. The report agreed with my premise and assessment, but I think the contagion is very-serious as it stated that “The bumper crop of highly leveraged new issuance in 2006 and 2007 expanded the number of these low-rated, highly leveraged issuers to a record level. We expect defaults to rise substantially among the large population of companies that have been aggressively financed with less than two times EBITDA/interest coverage and little or no free cash flow." What has been the major credit/Debit market catalyst How have the current financial difficulties grown and metamorphed into these ballooning contagions affecting so many financial institutions as at first blush the troubles appear to have been set off by relatively negligible problems, from rising defaults in a subsection (small as it was) of the US housing market, at a period of time when we were embroiled in global expansion when in the rest of the world especially the emerging-markets economic conditions were otherwise still strong. If this contagion to our housing-market was enough to cause the financial system to have such a serious heart attack, there must be underlying systemic problem that currently is being buried from the public eye for the most part, by central-bankers, large financial-institutions and hedge-funds. The major issue confronting us right now is determining what these issues really are and their potential impact. First and foremost in my opinion is there is once again a mega-lack of transparency, and clarity within the reports and balance sheets of financial institutions and large banks and brokerage-firms along with a MEGA increase in the use derivatives which are professed to be free-from-risk! THE PROBLEM RESTS HERE as in my opinion is the greatest Ponzi schemes of all-times! One of the smartest investment individuals on the planet that I have studied and learnt from is Warren Buffett the Oracle of Omaha and he stated in a very stern warning in 2003 before the mega-boom in these instruments really took off; that he believed the rapidly growing trade in derivatives poses a "mega-catastrophic risk" for the economy. The derivatives market has exploded in recent years, with investment banks selling billions/trillions of dollars worth of these (easily manipulated relating- to-real-asset-value) investments to clients (a huge segment to pension and other retirement vehicles) as a way to off-load and/or manage what I believe is ridiculously over-leveraged and speculative market risk. Buffett argued back in March 2003 and I agreed wholeheartedly that these often highly complex financial instruments are ticking time bombs and "financial weapons of mass destruction" that could harm not only their buyers and sellers, but the whole economic system…if he only knew that in 2003 when he issued his warnings that he would be ignored, and worse yet the derivatives market would more than double, he would be utterly-dumbfounded as I am. He called them then contracts devised by “madmen” I am taking it one step further **contracts made by drunk with greed insane-men** In a nut shell, derivatives are basically financial instruments that allow investors (especially high-leveraged traders) to place speculate (at times very-speculative and overleveraged bets) on the future price of investing instruments such as commodities, currencies, equities, and loan-portfolios to name a few. Now for the rest-of-the-story…and what is the best part of this scheme as I see it…those using these instruments can (and so many have) take on massive-overleveraged-positions without buying the underlying investment-assets. Most of the largest investment banks, brokerage firms and hedge-funds along with many growth funds have been utilizing these instruments {in a massive-magnitude-of-scale that eclipses all-common investment sense} with growing frequency and those using this strategy are so often vastly overleveraged while the real-risk is masked, hidden and at time misrepresented and worse yet most of these derivatives are vastly over-priced while the true value is extremely overstated. We have seen in during the past 5 years that these instruments have grown into a massive-mega-bubble, and any deflation/popping of this bubble could send a roaring disastrous 1000-foot financial tsunami around the globe! Why would these firms have created and produced these instruments called derivatives in such a massive scale, its quite simple **GREED** this derivative generating Ponzi ion game e reported earnings that are often wildly overstated and based on estimates whose inaccuracy may not be exposed for many years.
1. Morgan Stanley enjoyed a jump in revenue from credit products which helped spur a whopping 70% increase in Q1 2. Bear Stearns, said credit derivatives trading contributed to an 8% increase in first-quarter profit. 3. Goldman Sachs derivatives trading contributed to an 59% increase in first-quarter profit. 4. Deutsche Bank reported record revenue from trading debt and credit derivatives, helping lift their first-quarter profit by over 30%. Derivates like futures, options and swaps were developed to allow investors to hedge risks (responsible risks) in financial markets in effect buy insurance against market movements but they have now quickly become a means of investment in their own right. These derivatives not only pose a dangerous incentive for outright-false accounting of profits they so often are utilized in fuzzy-math procedures. This is because profits and losses (losses had been almost always masked and under-reported in the past) from derivates deals are booked and counted on the bottom line right away, even though no actual money changed hand, a very-interesting-speculative revenue enhancement scenario.. In most cases the real costs hit firm many years later, such as we are seeing right now! This can and in my opinion has resulted in horrible accounting manipulation/errors. Now before you all, jump on my premise, some of them will of course spring forth from "honest" optimism. But in my opinion the vast majority of losses will be directly tied into massive huge fraudulent accounting. Remember Enron! Now please do not discount my mega-warning folks (yes this is the 3rd-year I have written about this). Remember we saw a mega-warning about the near certainty of disaster concerning New Orleans as its unique geography and hurricane-track position put it is a mega-risk-position and it was only a matter of when, not if, a powerful hurricane would eventually overwhelm and destroy the city. Minor steps were taken beforehand to try and minimize the potential disastrous impact. Nonetheless, when the event many thought would never materialized finally did, much of those efforts seemed for naught; as massive chaos was the result! Well this is the same for the derivatives market but on a far-greater and far-reaching scale in my opinion. What is going to make this mega-financial storm even more disastrous is that the underlying contagions have manifested from a long chain of seemingly benign interactions and financial relationships throughout the banking and financial system. The modern derivatives market has flourished because of big money, complex technology, and highly manipulative products and the actual straw that will no-doubt start the process to unravel and crash is likely to be the simplest of market emotions greed and then fear that has ballooned to gigantic proportions unchecked. For most people, the word derivative has little meaning; and I’m sure that many here will skip this section of my report due to suspected complexity. Because most of these manipulative financial instruments are mystical-ghostly aberrations largely created out of thin air; and in reality they have no value in and of themselves (one of the major issues). They are also hard to comprehend because, like many intangible concepts that occasionally involve a great deal of theory and calculation, those utilizing the instruments have transforming the rather complex principle into and mountainous incomprehensible mess, with pure intent to keep the masses ignorant. In their simplest form, derivatives simple provide for certain rights or obligations between two different parties, or counterparties; and the manner in which these instruments are so often evaluated (valued) almost always takes into account that they are linked to some security, commodity, event, or any of a wide variety of agreed-upon conditions; in essence, they derive their value hence the term "derivative" evolved from something else. Essentially, these instruments/ derivatives call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values etc.. As such derivatives contracts are of varying duration (running sometimes 1-10 years or more) and their value is often tied to several variables some of which are suppose to be risk-less. However unless these derivatives contracts are collateralized or guaranteed, their ultimate value depends on the creditworthiness of the counterparties that are bound to them. In the meantime, long before a contract is settled, the counterparties record profits and losses often these are huge amounts within their current earnings statements without so much as a penny changing hands **mysterious profits** I call them lost-in-space profits; as they do not yet exist. The range of derivatives contracts is limited only by the imagination of the investor/institution (I call them fuzzy-math manipulators)…again remember Enron! Derivatives generate reportable earnings that are often wildly overstated; that’s because they are usually based on estimates whose inaccuracies may not be exposed for many years and far too often they are off-balance-sheet transactions. Can you just imagine when reflecting on the powerful human emotion called GREED how so often the parties these derivatives have enormous incentives to cheat in their accounting for them. Those who trade derivatives are usually paid on “earnings” calculated by mark-to-market accounting. But so-very-often there is no real market and as such a mark-to-market-model is utilized...fuzzy-math at its best. This substitution revenue enhancement process can bring with it large-scale manipulative actions. Of course, both internal and outside auditors review the numbers, but so often the processes and conjecture is so deeply buried and disbursed it’s no easy job to accurately assess the underlying premises made. Almost invariably, these manipulative-actions have either favored the trader eyeing a multimillion-dollar bonus or the CEO wanting to report great “earnings” (or both). The bonuses were paid, and the CEO profited from his options, a win/win for both. Only much later do shareholders and institutional bag-holders learn that the reported earnings were nothing but a Ponzi scheme or out right sham (most often long after the CEO/CFO have departed as their average tenure is 3-4 years). History has demonstrated that a crisis often causes deep-problems to correlate in manners undreamt of in more tranquil times; it’s what I call the speed-domino affect! In the banking and financial arena, the recognition of a so called “linkage” problem was one of the reasons for the formation of the Federal Reserve System many years ago. However there is no central bank assigned to police or prevent these derivatives dominoes from toppling. Back in 1998, the overly leveraged and derivatives-heavy activities of just a single hedge fund called Long Term Capital Management, caused a mini-melt-down and the Federal Reserve was hitting the Prozac as the concerns were so severe that the fed-heads hastily orchestrated a rescue effort (hence why today so many feel that the fed-heads will again come to their rescue). Fed-heads later acknowledged that, had they not intervened, the outstanding trades of just a one single hedge fund (we now have over 9500 such funds) LTCM could well have developed into a serious threat to the stability of our markets. This near-disaster; though it paralyzed many parts of the fixed-income market for weeks, was far from a worst-case scenario. Now ask your self what would happen if just 1% or 95 hedge firms like LTMC get hit because over being ridiculously leveraged into highly overpriced often very-illiquid derivatives-instruments. Central banks and governments have so far found no effective way to control, or even monitor, the monstrous risks posed by these highly manipulated contracts. Derivatives are the true weapons of mass destruction, carrying with them dangers that could dethrone a super-financial-power, while most of their contagions are still latent, the combined potentially destruction capability is so lethal most do not even want to think about it! Now getting back to our current scenario and question how did we get into this mess and will it grow! Well I will tell you that from my vantage point we had many-participants to this fiasco/debacle. In my opinion these type of massive-contagious problems can-not exist in a vacuum all by themselves they need participatory participants in what I believe to be one of the largest of all ponzi schemes of all-time, what most would refer to a conspiracy (I hate that word as so many automatically discount the premise associated with it) Where were/are the regulators, yes many in their financial stability reviews, have been complaining for years that financial fuzzy-math-innovation has made it very difficult for them to determine where risk has become concentrated on balance sheet. So far too often ion my opinion it was overlooked as it was to time consuming many claimed for auditors to observe. So how does one know how many structured investment vehicles your bank, brokerage-house, pension fund, mutual-fund have tucked away in their off-balance-sheet transactions? Next where-oh-where were the ratings agencies that so many utilize to back-stop-risk such as (Moody’s, S&P, Fitch etc.) as they basically gave their professional stamp of approval of these instruments as they dropped the proverbial ball as for the most part they failed (intentionally due to intrinsic relationships or through ignorance) to provide real-quality up-to-date ratings assessments, and many institutional investments through pension funds and other large funds are significantly based on agencies’ ratings (such as AAA) rather than on direct credit analysis; they paid for this analysis. When those conducting the ratings come under suspicion, entire funds and institutions likewise become suspect and so are their reported earnings. Next comes our illustrious banking system as like the central bank is the lender of last resort to banks, so banks are lenders of last resort to the capital markets, especially to their own clients in these markets. And unfortunately when those markets start to seize up, whether they are private equity deals or asset-backed commercial paper (ABCP), contingent claims on these banks become transformed into huge loan obligations that are cancerous. Such sudden extensions of risky credit can cause banks to reach lending limits quickly. Whether regulators have had sufficient information on, and control over, such contingent commitments is a question that the markets will ponder and search for these answers. HOUSING CONTAGION Let’s reflect for just a moment that just as ballooning home prices were responsible for fueling the Bush pro forma economic expansion during the past 6-years by making people wealthier via home-equity we are now seeing that subsequent declining home prices will stunt economic growth for the foreseeable future by making these same folks relativity poorer especially those who bought in the past 2-3 years at vastly elevated prices, they are now upside down in their homes. This is basic economics as we have a significant buildup of inventory of unsold homes amidst falling demand, thus these negatives will in my opinion only grow in magnitude as the months tick away putting downward pressure on home prices; from recent data home prices have already dropped at a 9% annual as seen in the most recent data; and I expect that home prices could roll-over another 17-22% over the next-several-years. With
more than 2 million loans expected to "reset"
to higher rates over the next two years and with thousands of
foreclosures expected to result lawmakers and Bush administration
officials have been scrambling to address the weakened home market and
afford relief for beleaguered homeowners. As an example of the panic and distress amongst the homebuilders we saw that home builder Hovnanian this weekend is holding a nationwide three-day sales event effectively cutting home prices The company resorts to 20% or six-figure discounts on some of their properties this weekend. Recently we saw that San Francisco Federal Reserve Bank President Janet Yellen stated in a recent speech, "Should the decline in house prices occur in the context of rising unemployment, the risks could be significant." Economists are forecasting that home prices will decline more than 5% this year and nearly 4% next year, according to the latest survey by Blue Chip Economic Indicators. Those same economists expect consumer spending to slow from 3.1% last year to 2.8% this year and 2.3% next year. While a cumulative 8% drop in home prices (after nearly doubling in the previous six years) doesn't sound so ominous, such a decline would be the largest since the Great Depression. Because most owners are reluctant to sell at a loss unless they are forced to, as such it's extremely unusual to see home prices fall. Remember sellers don't quickly adjust their prices to a new market reality and as such when prices do start to fall there could be far reaching underlying contagions. Simply because prices don't fall to bring demand into balance with supply, the volume of homes sold plunges during a correction as sellers are reluctant to release their positions. Home sales are now down 24% from the peak more than two years ago. In most housing corrections, sales remain very weak until excess supply is worked off; and we have yet to see any signs of that happening as yet; prices usually trough for years. So why are prices falling now…there are a number of knucklehead theories being bantered about on bubblevision, however it come down to a simple premise in my opinion….supply and demand are getting even further out of whack. We have seen that the number of vacant homes (these are usually speculator properties) is at a record levels and more new homes are coming on the market every day. Foreclosures are rising at a brisk clip; which just increases available supplies even more. Then we will see significantly more ATM’s adjustable-rate mortgages resetting at higher monthly payment in the next several years, pressuring more homeowners to sell or risk defaulting. Let’s add one more ingredient to this witches brew the rationing of credit which is also reducing demand. The subprime and Alt-A mortgage markets, which represented about 40% of mortgages last year, have almost completely dried up; (unless you listen to the same teaser advertisements on the various bubblevision media channels). Lenders are (and have been forced, to increase their standards and criteria for approving loans, and as such interest rates for jumbo loans have risen substantially. Another piece of negative housing data…is starting to become the norm….U.S. housing industry looks to be in for a much steeper downturn, as the data released by the National Association of Realtors on Tuesday stated it slashed their forecasts for home sales and construction for this year and next. Tighter credit conditions will likely postpone the recovery even further, said Lawrence Yun, senior economist for the trade group. In their monthly forecast, the NAR cut their estimates for all housing-related indicators for this year and next compared with last month's forecast. The group expects housing starts and sales of new homes to continue falling through 2008, but forecasts a mild recovery in sales of existing homes next year. Housing starts are now expected to fall 24% this year and an additional 8% next year to 1.26 million, about 10% less than the realtors' forecast from just a month ago this is a stark revision; as this would be the lowest since 1992. Starts of single-family homes are projected to fall 26.5% this year and an additional 11% next year to 954,000, about 11% less than last month's forecast; and these would be the lowest totals since 1991. New home sales are projected to fall 24% this year and an additional 7.4% next year to 741,000, about 13% less than the forecast a month ago; and that would the lowest level since 1995. Existing-home sales are projected to fall 8.6% this year and rise 5.8% next year to 6.28 million, about 2% less than last month's forecast. The median price for existing-homes is expected to fall 1.7% this year to $218,200 and rise 2.2% next year to $223,000. MONEY markets remain in the grip of the international liquidity crisis, as we have seen that the short-term interest rate surged above 7% this past week. The three-month bank bill rate the rate banks charge when they lend to one another punched to a decade-long high of 7.07%, raising the threat of higher borrowing costs for millions of home-buyers and businesses. Please understand that I believe that if money market rates stay elevated, it will only be a matter of time before banks pushed up mortgage-rates to compensate for higher borrowing costs; this is a fundamental economic 101 theory. And if this happens home-owners will have to spend more on mortgage payments, and as such it would take away from their discretionary consumer spending and as such it would start a domino affect that would surely drag on economic growth. If we slug through another 4-5 weeks of escalating short-term rates, then banks will be forced to pass it on to the un-savvy consumer. This could act like an economic cancer; the key question will surely be debated and the data will take time to digest the implications for this economic contagion; as I believe that once the first domino is toppled the impact on the economy will be quite significant. Amid a widespread crisis of confidence (way to much-undocumented speculation, that has not been revealed) triggered by US mortgage defaults, many banks are either hoarding cash or starting to charge much higher rates to lend to other banks driving up the cost of money in short-term markets….this is a potential contagion that could spark a FED-head-cut in October in my opinion! Since the carry-trade brought with it humongous speculation on a global basis this contagion is a global phenomenon as all the major central banks at the moment are working hard in the money markets to try and limit the rise in global interest rates; while balancing increasing inflationary pressures. From what I can see there is plenty of liquidity going into the various systems, however it appears that most institutions lack the confidence or clarity from those seeking loans to lend it out. I was reading a report that indicated that hedge funds lost an average of 1.31% in August, according to Hedge Fund Research Inc., as common investment strategies were hammered by volatility in equity and bond markets.The loss, as measured by early reporters in HFR's composite index, was a bit less than many investors feared after market conditions that have been described as the worst since Long-Term Capital Management collapsed in 1998 continue to unwind. Funds specializing in emerging markets, macroeconomic strategies and high-yield bonds had the biggest losses, while short sellers had a third positive month in a row, gaining 1.29%. Funds focused on Latin America and Russia/Eastern Europe did the worst within emerging markets, posting respective declines of 2.93% and 3.89%. Gains in strategies focused on China helped balance the 2.54% loss across the emerging markets category, HFR said. Macro funds that use computer models or managers' discretion to take bets on currencies, interest rates and other asset prices fell 2.18%, as reversals in popular currency pairs such as dollar-yen left many funds with heavy losses. Also we saw that fixed-income hedge funds suffered as corporate bond yields rose and those on U.S. Treasury’s fell; while diversified fixed-income strategies were down 1.55%, while high-yield managers lost an average of 1.97%. The returns were based on reporting by more than 40% of the constituents in Hedge Fund Research's composite index of about 2,000 funds; they said the returns include a number of funds that have been liquidated. Strategies that posted positive performance in August included market timing, merger arbitrage and convertible bonds, but the gains were slim, at less than 1%. Meanwhile, HFR said investors put $16.8 billion of net new money into hedge funds in July, bringing industry assets to $1.76 trillion. July was another positive month for the industry in terms of capital inflows, with performance volatility occurring into July-end, said Ken Heinz, president of HFR. "Dispersion in asset growth also increased, with evidence of investors reallocating capital to specific funds demonstrating positive performance in this volatile environment." We saw reports this week that Goldman Sachs (GS) Global Alpha hedge fund fell 22.5% in August, its largest monthly decline, on losses from currency and stock related trades, according to the update sent to investors from the fund. The fund has dropped by 34% in 2007 and 44% from its peak in March 2006. many investors notified Goldman last month that they plan to withdraw $1.6 bln from the fund, or almost 20% of the assets as of 7/31... In another hedge fund report Red Kite Metals, the world's largest hedge fund dedicated to metals, dropped almost 20% last month. The decline at Red Kite, extends its loss to 29% this year, according to investors in the fund who declined to be identified because the information is private. On the plus side Paul Touradji's largest fund, the $2 bln Touradji Global Resources, rose 2.5% last month, as indicated by investors who declined to be identified. It's up 21-25% this year, depending on the share class. The US Dollar will it Reverse or Crash we are on the cliff's edge! What has happened to our precious greenback? It appears that not only has the Bush administration abandoned the dollar but many of the talking butt-heads on the various financial media channels have forgotten all about the crumbling greenback and its massive-negative USA economic contagion {Hell it is not in Wall Street’s best interest to publicize dollar weakness, as it leads to lower foreign investment in US stocks and bonds} you wouldn’t know it from the mainstream financial hyping talking-butt-heads on the dollar that has been stricken with a fast acting cancer. Right now our greenback is in a secular bear market and it appears that we could very soon be heading into an abyss if protective measure are not implemented immediately (one reason why I do not believe the fed-heads can-cut rates right now!) In my opinion if our greenback continues on its steady decline and fails to reverse course very-soon the implications will probably be profound and quite negative. Especially for American investors and speculators, as our greenback is the linchpin of our and for that matter most of the world’s financial systems. When foreign investors who have been keeping our markets propped up with their savings start to see see new dollar lows. they will start to pull their longer-term investments from our shores (granted it is a pseudo benefit for newbie foreign investors) but for those who invested their monies back in 2003/2004 on any weakness in the markets and they could easily panic out, as such I am forecasting that the massive inflows of capital (petro-dollars, commodity dollars, and dollars as a result of our massive trade imbalance) that they have been pumping into our financial markets could stall and worse yet start to reverse. I am very concerned folks as Daily Chart shows a very definite down-trend despite a remarkable bullish stock market performance which should have attracted many foreign investment, the dollar has been sold repeatedly during the past 17-18 months by central banks, investors on a global basis. Since its last interim high in 11/16/2005 2005 [92.63] the US Dollar Index has relentlessly dropped to its recent low of [79.30] posted on Thursday of this week, and this has been a drop of almost 15% in a little over a year. Over the identical span of time, the SPX low on 11/16/2005 was 1230.72 and it has risen to 1484.25 this Friday this is a whopping rose 20.0% (not something the fed-needs to protect, but that is another story) thus if you were a foreign investor buying US stocks in late 2005, about 65% of your stock gains since then have been erased (evaporated) by your dollar losses, a currency translation repatriation nightmare. Such a big negative swing in a currency’s value will not in my opinion continue to motivate foreign investors to place their monies into our markets. The dollar has been falling in value for 18 months because of the ongoing global dollar glut as supply thanks to Greenspam and Helicopter Bernanke, who have had the printing presses working 24/7! As such supply exceeds global dollar demand; and when such a structural surplus exists in any market place the only possible resulting price action is weakness and a further decline on balance until the imbalance is corrected. When we reflect on the longer-term time frame Weekly chart we see an even more dismal picture; as our dollar has been on a down trend since October 2002, which coincides with our recent stock market bottom, and the bottom as well for the gold (see-chart) market as well as crude (weekly crude chart) as these are direct correlations with inverse relationships. Now for the really bad-news….imagine if foreign central banks, become unnerved or become fatigued after 5-6 years of huge dollar losses and they start to diversify out of their dollar assets/holdings. They would have to first sell their US assets, primarily US Treasuries and other high-grade bonds, in order to turn them into our greenbacks. This first act alone would drive down bond prices and subsequently drive up interest rates. If this dismal scenario plays out it doesn’t take much imagination to see all the market bombs that could explode as if long rates rise (which mortgage rates are tied into) in these precarious times when we are embroiled in a subprime fiasco, with a huge-stream of resetting-ARMs in the next several-years and this could be a force 5-hurricane unleashed into the mortgage and US debt/credit markets. If the foreign central banks or foreign international investors sold their US bonds, they would in turn sell their US dollars and buy stronger currencies such as the euro/pound etc. This would in turn drive the dollar even lower! Thus a worst-case scenario is that this could be a vicious circle forming and the eventual crashing of our overall economy. Hence China and Asia and other emerging countries could hold us hostage. If enough foreign investors start to panic and sell US assets then dollars this could result in driving prices lower then further panic could set in and the dollar could utterly collapse. An basically speaking a crumbling greenback in such a scenario would become a market Tsunami wreaking havoc on stocks, bonds, interest rates. Everything I’ve discussed up to this point should be a alarming wake up call, as if anything even slightly resembling a dollar panic starts all of our asset-classes will take a beating. Unfortunately I haven’t even addressed the scariest part yet. Thanks to dollar inflation most investment assets appreciate in nominal value over time, so for example there is never a danger that a stock index will hit an all-time low. So who knows how traders and investors will react to such an exceedingly rare event if we get some panic selling in our greenback? When the dollar slips again as I expect it will break-to-new and god forbid drops under the demarcation line in the sand {79} could inflict tremendous damage to market sentiment. The last time the US Dollar Index came close |
