A Forex View From Afar

Still no green from equities

Still no green from equities
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I was talking some time ago about equity markets not wanting to show any sign of green even after 175 points cut and the President speaking about the resuscitation plan. You can read it here

Now, we are 6 days later, 225 points cut, from which 125 point in 8 days, and the famous plan has reached congress with real chances of being adopted and guess what: equities still don't want to grow.

We could say that equities don't show any green is a surprise, but really...it isn't such a big one.
The Fed rate cut was too late, much too late. After cutting 2 times 25points from October to December now they cut 125 in a week. That's a jump.
Wall Street guys were crying for such big cuts some time ago and now they have it. But now they are crying after the insurance companies to be saved. If we go on with thid, the insurance companies will be saved when Wall Street guys will cry for something else. This is what behind the curb (or simpler lagging) is all about.

About the insurance companies now, some rating agencies are starting to cut their ratings, from triple AAA (only goodness know how they got it) to AA and probably much lower, in the face of bankruptcy.
Once the insurance companies are downgraded, so are the bonds that were insuraned by those companies. Banks, mutual funds, pensions fund can't keep those bonds on the book, so they have to take those bonds off, and faces more huge losses.
This line should provide an interesting view from the inside:

"Industry experts say banks so far have been writing down their CDO holdings under the assumption that the insurers won't face sharp ratings downgrades"

Translation: We'll probably see more losses coming. By that time, who really knows what the sub-prime had destroyed in other parts of the economy? Oh, I forget, it has already draged down the entire economy...

Source:
WSJ: More Subprime Pain in Store

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Fox Mulder leaves aliens for sub-prime

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Fox Mulder has decided to leave behind aliens and extraterrestrial life and focus on US problems. One of those problems is the wide spread sub-prime, that almost bankrupt financial institutions.

FBI announced that it will start investigations on 14 companies related to the sub-prime crises, focusing on accounting fraud, securitization of loans and insider trading. These companies weren't nominated but they are probably the companies that made possible the sub-prime, from bundling to selling.

While Fox is on the run, chasing the sub-prime mess, Dana Scully will communicate with Justice Department, US Securities and Exchange Commission and various state attorneys.

I tend to agree with FBI by sending their top 2 agents; it's a miracle, a wonder, a rare phenomenal, all at the same time, how some bonds got AAA rating when some of them just didn't make out for triple C

Just for me (and the rest of planet) wasn't it easier just to have a real regulators on the financial system?

Source:
WSJ: FBI Launches Subprime Probe

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Please cut, we are baking another bubble.

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Markets do not want to move too much these days, everybody is waiting for the FOMC decision on Wednesday. This will clear up things for some time ahead, either letting markets run (see Forest Gump) or make them see (and feel) long forgotten levels like 11k,10k or even lower. Equity Markets are expecting a 50 basis point reduction. Whatever happens we would recommend trying to avoid the news, and stick with the momentum. It’s much safer this way when trading Forex

After the 75 point reduction last week, and with another 50 points likely coming this week, it would take us to 125 points cut between 2 FOMC meetings, which is a lot of lost Interest, imagine how the American saving population feels. (Mind you that is a bit of a Storm in a Tea Cup because the US Savings rate is in the negative; forget the lower Interest, it is not affecting Average Joe). Also, this would take us under the inflation benchmark, of 4.1% on a YoY, and 3.2%annualized, as measured by CPI.

What does this means? In the simplest form I can spell it out…spend as much as you can and when you reach your limit, go get a loan.
If this second rate cut materializes, another 50 point to 3.0%, we won’t have anything left to protect our self from the devaluing dollar but just spending or investing. Banks will offer negative return for your deposits, as probably most bonds will start to move to.
And why not take another loan, when inflation is 3% and you have to pay 4% interest rate. You’ll actually get a loan with a 1% interest rate. That’s a pretty good deal.

This is a risky move from the Fed, these strategies are taken to boost spending and cut savings and this is what usually leads to bubbles. We got the housing bubble the same way. If regulators refuse to stop the Boom and Bust Cycle, we’ll have soon another bubble to burst..

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US New Home Sales: Can you smell recession?

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We still don't have any good news out the US. Today was the time for New Home Sales release to disappoint us.
Markets expected 645k, but the numbers came in poorer, 604k, having a 4.7% drop Month over Month. Here you can check them out, at TheLFB.com calendar

Forex markets didn't look too impressed with these numbers, why would they? All day long we have negative numbers shooting out of the US and it seems the equities markets are leading the dance for now...so who is actually interested in those silly numbers? We are, because we can't just ignore the facts.

Even if trading should be boring, now we'll go to the fun part of forex trading...spotting a recession. The inventories of single family houses will be depleted in 11.7 months (not seasonally adjusted) at the current sales level, the Census Bureau tells us. We can see it in the chart.


click for larger view

Recognize the green shaded areas? They all are recession periods, when the house inventories would be depleted in 10 months or more.
Out of the last 6 periods, only twice did the inventories go above a 10 months period. Those 2 recessions are in 2001, the consequences of Y2K and the dot com Bubble, and 1970 that was mainly blamed on the gold-standard inflation. In the rest of 4 recessions, the inventories period went above the 10 month benchmark, but didn't stay too long there; the longest period was 5 months.
We are now 2 months above this 10 months benchmark, so in all of this there is a good sign that things can change.

It's very interesting that almost every time that these inventories went up, the US entered in a recession.
During the famous '87 market crash, the period to sell the house inventories also skyrocketed.

Please, add this fact to the list of reasons why we're heading to a recession.


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What to do, where to run?

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We had a rate cut and a very big one, not seen for some time, a 0.75% rate cut...we heard Bush plans to cut taxes , we missed them since 2001 (if I recall right, we are right now in a tax cut mode, until 2010) ...with all this, the stock markets still doesn’t grow.
The next step is to inject adrenalin to into the stock market's heart. There isn’t any other way to resuscitate it.

Seriously, what do they need or want to have some decent growth? The only step left for the Fed is to start giving money for free. Each one will receive a $10,000 coupon in your mail, of course tax free. Your only charge will be to spend it by the end of this quarter.
Maybe Wall Street will be happy, although I'm not really sure.

Going back to the rate cut, we took out some annalist opinions from one of Bloomberg’s article related to it. Here we go

Stanford University Professor John Taylor says the move ``made sense''

Harvard University's Martin Feldstein calls it a ``very good thing.''

Morgan Stanley's Stephen Roach counters that the decision was ``dangerous, reckless and irresponsible,''

Nobel Prize winner Joseph Stiglitz says it resulted from ``bad economic management.''

``By easing aggressively on the basis of no new information, they're sending a message that they have to protect and defend the markets,'' Roach, Morgan Stanley's Asia chairman

``Doing it at this time, I think it made sense,'' Taylor, author of a landmark monetary-policy formula and the Treasury Department

`A Bad Precedent'
``I am concerned that they moved a week before a scheduled meeting, seemingly in direct response to global equities, and that sets a bad precedent,'' says Mickey Levy, chief economist at Bank of America Corp. in New York. ``Waiting a week would not have affected the thrust of monetary policy.''

By contrast, former Fed governor Lyle Gramley says that ``this was a necessary move, and highly desirable.'' Up until this week, Bernanke and his colleagues were ``timid,'' he says.

``The Fed just didn't recognize the severity of this crisis and therefore didn't act in a timely fashion,'' says Gramley, now a senior economic adviser at Stanford Group Co. in Washington. ``Had the Fed not done it, it would have been considered not just in a slumber but in a coma.''

``The cut is not the problem,'' ``The communication is key. The Fed has to explain clearly to the market why it did what it did in order to avoid a panic scenario. From this point of view, the Fed still lacks clarity in its speeches.'' says Christophe Donay, head of economic research and investment strategy at Landsbanki Kepler in Paris.

George Soros said the Fed is ``doing the right thing,'' just not quickly enough. ``I think the Fed is well behind the curve, and has been reacting instead of being proactive,'' he said.

``The Fed rate cut showed that the Fed can be pushed around by the markets,'' says Nick Parsons, head of market strategy at National Australia Bank Ltd.'s NabCapital unit in London. ``The Fed is a follower and not a leader. In an attempt to gain control, the Fed has lost credibility.''

Mark MacQueen, partner and portfolio manager in Austin, Texas, at Sage Advisory Services Ltd., which oversees $5 billion.
``The 75 basis-point cut was too much too quick,'' Bernanke didn't get ``enough bang for his buck. He used a lot of ammo for very little reward.''

``The Fed has been aggressive and has been helpful,'' David Rubenstein, co-founder of buyout firm Carlyle Group, said in an interview in Davos. ``Probably, had it done what it did a little bit earlier, it might have been more helpful to the markets. But I think the key is the stimulus package.''

Sorry about this long list of quotes, but we had to get to grips with this.

Can you draw a conclusion? We can’t. Trade desks, financial annalists, economists still haven’t got a clue. Just watch how remote and opposite their opinions are.
For the moment, I think I’ll go with Mr. Christophe Donay “The Fed has to explain clearly to the market why it did what it did”.
How can we trade, if nobody has any clue?

It’s clear on the New World, things aren’t too clear, but on the Old World, things are perfectly clear enough; inflation is the only concern and nothing else. Mr. Weber, head of the Bundesbank, declared they are ready to act pre-mptively, on inflation of course, not on recession.

"If there is broad political support for wage claims that don't conform to price stability, this could require additional monetary policy action," said Mr. Weber

Saying about inflation fears in every possible sentence, the Heads of the Ecb will soon start to sound like Paulson singing his job’s anthem “We need a strong dollar”.
Traders, please remember, Trade Desks don’t buy dollars just out of desire, but because whenever they need a comfort blanket, they need it to buy $ denominated bonds.

Sources:
Fxstreet: ECB's Weber: Ready To Act Preemptively On CPI- Report
Bloomberg: Bernanke Earns Feldstein Cheers, Roach Jeers for Emergency Cut

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Rogue Trader's job applicantion

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Got some guts and some dice? If you do, let's go and hire on a bank's trade desk.
Don't worry about the losses, we have dices to show us the right path and we have guts, and a lot to support those loses.

Today, Societe Generale Bank in Paris took one of the biggest loses recorded from rogue traders: $7.2 billion from a Paris based trader who was deeply involved in the European index futures. He used his back-office experience to hide his losses.

Looks like he didn't know about the 2% rule, which Forex traders should worship, especially retail traders.

Add to this, the credit market loses (read sub-prime) and you get the perfect case of a bank which depleted its capital and it's now looking for investors. $5.5 in their pockets, bank sources tells.

Remember Nick Leeson? It's one of the most known cases of a rogue trader. He bankrupted Barings Bank through trading frauds on Nikkei Futures. He hid his loses through an account named 88888, which ironically is considered a lucky number by the Eastern cultures.
Want to hear the similarity between Nick Leeson and Societe General? They both got awards and trophies for trading before the losses were discovered...

Despite what I said in the opening paragraph, trading for a trade desk is something very hard. Immense pressure, a lot of money flowing around, money which a person is unlikely to see all his life, that pressure is huge. But this still doesn't excuse these traders who fraud the system to hide loses.

Wikipedia provides us a Hall Of Fame with trading loses. Watch out, don't you make it on the list. See it here

Sources:
Bloomberg: Societe Generale Reports Record Trading Loss of EU4.9 Billion
BBC: Rogue trader to cost SocGen $7bn

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Europe's own recession?

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Most of the major news sources, Bloomberg, WSJ, Reuters and FT are reporting the ECB's refuse to cut rates, because of still seeing inflations as a major risk.

To most analysts, it seems that Mr. Trichet is running against the wind, refusing to cut rates and still speaking of inflation. They all see the ECB cutting rates by summer of 2008.
As a note, the ECB is not alone, China is on that tack too, Russia stopped cutting rates in the summer of 2007.and how we said in an article all EU members with free currency float raise rates (link here)

Their Thoughts:

"BNP Paribas SA today said it now expects the ECB to lower its key rate to 3.75 percent in June rather than September. Barclays Capital said the central bank will reduce rates twice this year instead of keeping them unchanged."

`Europe is not going to get special dispensation from a global slowdown,'' Stephen Roach, chairman of Morgan Stanley in Asia

"This set of data will not change the ECB's rhetoric in the very near term, but it's becoming increasingly clear that... growth has started to down-shift," said Marco Valli, an economist at UniCredit in Milan. "A more cautious ECB stance seems warranted at this stage. We expect them to start cutting rates" sometime in the third quarter, he said."

Probably, Mr. Trichet runs on the idea that ECB is formed by more countries, not just one, like the other central banks are. This was quite unique until now; different countries have different ways to do things, like fiscal policy, trade routes, industries and so on. Fiscal Policy is as important as monetary policy, traders should note.

This may be a big plus for Europe, but until now no studies had been made.
While increasing rates twice in 2007, the M3 actually grew 12%, which is pretty big. M3 defines the liquidity in the market and a rate cut should have reduced it; but it didn't. Growing liquidity in the markets can be an answer to the credit crunch, and the ECB has a 'giving away' attitude through open markets operations.

The markets have been good to us giving 600+ pips this year, so we offer you the candy on top of the cake



It's an image generated by Google Trends showing how much volume the word "recession" generated, both in news (the smaller chart) and in google search (the big chart). With such an increase in volume, probably reaching everyone's ears, recession is one step closer.(this is only a joke)

One more thought, the source of most searches that came from US (and second in the world) is Washington. Should we imagine:

12:01 Oil_George> Paul, go google recession, see if something new came?
12:02 Paul_I_Count> Nope, nothing new...
12:03 Oil_George> How about now?
12:04 Paul_I_Count> Nothing new , probably they don't believe our tales
12:05 Oil_George> How about now, anything new?
And so on...
Sources:
Bloomberg: Trichet Says ECB Still Focused on Fighting Inflation
Reuters: Trichet says ECB must stay focused on inflation
WSJ: ECB Offers No Signs of Rate Cut as Central Banks Respond to Fed
FT: ECB resists pressure to cut rates

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Saving the economy, but how about the Dollar?

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It's pretty clear, Mr. Bush, Mr. Bernanke, the famous Plunge Protection Team; everyone is doing what they can to save the economy, but it looks like they are forgetting to save the Dollar.

The anticipated Rate cuts and Tax cuts are the hottest topic around, taking the Forex trader's eye from other points of view. Rate cuts aren't just about announcing them and then the speech after, Rates cuts are actually flooding markets artery with (cheap) money. Tax cuts are mostly the same thing, flooding consumers with money that otherwise the Government would take.



So the consumers now having more money in their pockets will start spending, unsold houses will find buyers, Banks won't have so many write-downs, everything will be fine. The same things Fed thought in 2001/2.

Money flowing around will make consumer spend again. Oh yeah, when did you look last time at the US trade balance? 1-2 weeks ago? Then maybe look again, because now it's much bigger and with consumers increase their spending, the Trade Balance will grow. We really don't see entire Industries shredded by outsourcing for decades, coming home so consumers can buy native products, as Mr. Bernanke has stated.

You know the strong Euro that some Traders say will destroy EU exports to US?...Well the Trade Balance between EU and US got smaller in a whole year by 1%, so there is not any good news for the weak Dollar there.

Houses will eventually find a bottom and they'll resume the normal house Boom and Bust cycle. The normal cycle was 10-15 years, and just now now was reduce to 5 years. How long will the next house cycle be, 2-3 years? The Last one really only held it together from 2003 until 2006.

Did you notice that Secretary Paulson has stopped singing "We need a strong dollar" anywhere, anyhow? Maybe he stopped believing in it. We too believe that he can wish whatever he likes, it is not happening.

Rate cuts and Tax cuts, will only make the Dollar weaker, by adding more Dollars into the markets. Going back to economics 101, we see that more is actually less. Let's compare sand to gold. Sand can be found anywhere, so it doesn't have a price, no rare value, but gold is hard to find, so it has a very big price tag; Same thing will happen to the dollar, as long as the Trade Balance continues to grow, more money will be printed. Low Rates with a weak currency won't help too much the poor old Trade Balance.

We are going to a recession or very near one and Commodities don't look too affected really. If gold and oil prices are so high now, how high will they be when the US goes out of a recession? Ooops, did a ball get dropped somewhere?


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Every Fed Chairman comes with a slump

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Two years ago, when a fresh-faced Mr. Bernanke took control, how many Traders had said we are going straight into a recession in short-time? Now, we are at the beginning of a recession, at least some Analysts say. Even if the Fed manages to avoid recession, the 2007 sub-prime crises will certainly remain in history, like the '87 market crash or the '98 LTCM crash.
A simple history study shows us that in the last 50 years, every new Fed Chairman came with a recession in his briefcase. Mr. Bernanke is about to open his briefcase and take a good look at what Mr Greenspan packed in there for him.

We'll begin our journey from the end of the Second World War, which leads us directly to the '48 recession. Thomas B. McCabe was there to handle it as a Chairman for just 6 months. In the year 1951 William McChesney Martin arrives as Chairman. Almost 3 years after his appointment he encounters his first recession, by July 1953.

From 1970 to 1978, Arthur F. Burns serves as Chairman, meeting his first recession after 3 year.
In 1978, G. William Miller is voted in as the Fed's Chairman and he is seen as one of the weakest. He had only a short stay at Fed, about 18 months. The Economist newspaper said that "America's central bankers have all made their weight felt across the political sphere, with the possible exception of William Miller, whose brief tenure in 1978-79 was notable for his attempts to ban smoking at the board".
In his short time staying at Fed, he didn't have any recessions going around, but he caused a recession that his successor, Mr. Paul A. Volcker had to fight between 1981 and 1983. Since the Great Depression, this is the longest recession US has had; 16 months.

Mr. Volcker's stay as Chairman from 1979 to 1987 and was followed by Mr. Greenspan. Only two months after taking his role, he had to fight the 1987 stock market crash, also known as black Monday.



Now, Mr. Bernanke was appointed as the Fed Chairman and he finds himself in the same situation as his predecessors, facing a market crises.

So, what do you think? Is it a curse or a baptism from the Dollar Witch? This dilemma will certainly affect the Markets again right now. Ahhhh, the life of the Fed Chairman....

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Euro struggling under its own weight?

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Since the beginning of 2008, the Euro-Zone started to fail at beating, or at least reaching, analyst expectations for News releases.

Out of 31 releases, 12 came worse then expected, 12 came as expected while only 7 beat market expectations.
What is important to distinguish is that most of the releases that came worse than expected were related to future expectations by consumers, managers or financial analysts. Out of 7 releases, 5 came negative and 2 as expected.
Most pooled persons, change their view on future growth since the summer of 2007, around the appearing of sub-prime.

This can have a long-term impact, Central Banks put a lot of weight to the public's expectations regarding future development and growth. With lower consumer expectations, they will spend less (retail sales were reported lower in Europe) and tends to cool down inflation. No more rate increase speeches, no more Mr. (Hawk) Trichet sending the Euro as far as he can

Most traders see this lack of confidence in consumers as a result of the Euro strength; we see it as media intoxication.

Markets are now in a frenzied state, it is unclear whether the US is going into a recession, markets don't have a clear direction and it is very possible this then affect consumers through diverse media channels. Since Globalization is at our front door, it is nothing new that people in remote part of the world talk about US recession. Hearing only negative things from the world leader can have a great influence in future expectations.
It's a matter of time until we see the result of these new future expectations; whether US will drag the world down, or will they escape and run wild.



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FOMC Members paid in Euros?

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Mr. Bernanke, chairman of the Fed, testified today in front of the Congress regarding the Economic present and future outlook.
The statement didn’t say anything new, just a few interesting lines here and a few others there, but the Q & A session was pretty fascinating.
Among those few interesting lines, some really attracted Thelfb.com trade-desk attention, one article already being out here

Mr. Bernanke talked about growth at a slower pace, specially in Q4 2007 but in the second part of 2008 to recover. The housing market contraction to continue, moderate GDP grow, fiscal policy should be quick and should be temporary, in order to help the markets, and of course all this with the support of consumers.
In general, nothing new, except the sarcasm of requesting backup from the population now.

During his speech, Mr. Bernanke placed a lot of weight on fiscal policy and how they can help the market. At the same time, he said “I do not forecast a recession, but slower growth”. So, why are we cutting Rates at this pace if we aren’t heading towards a recession? It’s just a slow growth, nothing dangerous.

Every nation experience from time to time slow growth, but markets don’t see Central Bankers running as fast as they can, wherever they can, to cool tensions…
Fiscal policies are generally used with monetary policy for the shorter time to take effect, unlike monetary policy which can take 18 months (on average). If we are only slowing, what is whith all this rush for cuts and fiscal policies. We are intrigued…

Another line that definitely caught the market eye was “Outside the United States, however, economic activity in our major trading partners has continued to expand vigorously”. This isn’t a big surprise, traders can take this more as a confirmation. While Mr Trichet talks about rate increase and significant inflationist pressure, it pretty clear that sub-prime haven’t reach so far; neither has Japan been hit too hard; amongst the BoJ, there aren’t any talks about cutting. When asked, Mr. Bernanke replied that “there is no slowdown in growth in Europe and Asia”. Is he long on eur/usd???

Mr. Bernanke sees inflation slowing in the second half of 2008. Pretty much, inflation is now omnipresent in the US, while the Fed is cutting plus adding more money through tax cuts. This view can leave clueless almost any person, expect of course the FOMC members.
Mr. Bernanke said he reached this conclusion by opinion poll, inflation indexed bonds (TIPS) and futures markets.
I wonder if these are the same opinion polls that showed last month the financial industry added jobs, whilst in reality they fired everything they could…TIPS, those bond to reduce inflation-risks measured by CPI, the indicator which leaves the financial markets wordless. And futures market? Mr. Trichet said in his last conference that futures markets aren’t reliable for future predictions.
Just in case someone wonders where this “no inflation expectation” views came from.

The next big step for the FOMC crew is to ask to be paid in foreign currencies, because we don’t see the greenback getting strength for some time

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Bank of England; Be Careful Shorting The Pound.

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Evidence of a damaging cocktail of faltering growth and inflationary pressures was revealed in the British Chambers of Commerce's (BCC) latest quarterly survey today.

The BCC said the figures signaled that the Bank of England's Monetary Policy Committee is facing a tough decision on whether to hold or reduce borrowing costs. Nevertheless, it repeated recent calls for a small interest rate cut early in the year.

However, the Bank of England's Deputy Governor, Sir John Gieve hinted that interest rates may not fall as sharply as expected. Sir John said the recent financial market turmoil had strengthened the case for lower borrowing costs but that inflationary pressures mean policymakers faced difficult decisions.

He also suggested conditions warranted a shift "from restrictive monetary policy to a more neutral stance”.

The number of British manufacturers reporting pressure to raise prices climbed by 9 points in the fourth quarter to a record. Among service firms, the balance of firms expecting to raise prices also reached a record.

Of particular concern for the services sector, export balances were "disturbingly weak" while profitability confidence has plummeted by 17 points.

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Slice and dice baby, because there is no inflation (part 2)

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CPI came in at 0.3%, higher than the market expectations, of 0.2%, but like the recent PPI release, the numbers are mot impressing, even if they are month over month. Last month the CPI release came 0.8%, a large of a number as seen for a long time; so even if it sounds small in comparison to last month, 0.3% is a big number.

On a 12 month view, inflation is now at 4.1%. Remember the interest rate is now at 4.25%, with Fed Fund Futures seeing a rate cut of 0.50 or 0.75 as likely.



If the above charts run true to form, it would take the Interest Rate to below the Inflation numbers. This measure is taken usually when the economy is recovering from a trough. As the Fed cuts Rates the US Dollar loses more value, and so Commodities become more expensive. It's an inflationist spiral, and this is what Mr. Trichet the Head of the ECB referred to in the recent Press Conference after they held Rates last week.

Are we in a trough right now, or is the FED acting aggressively, by reducing 0.5%, so that the Wall Street Guys won't push the US into a recession? To reach the trough we need to pass first through a recession, and I didn't hear about one officially recently, or is this a State-of-Mind Recession?

We have to think that sub-prime problems, credit crises, stock markets falling, are by definition deflationist, but until now it didn't show. Probably deflation is too shy to show itself...

Inflation is a Central Bank's ultimate nightmare(except if you are the Bank of Japan), they all try to pre-empt it. Mr. Bernanke is adept in his Inflation Targeting policy, so letting it run wild, it seems, would not be his style.(If you want to read more about Central Bank and how they work, click here)

We have a bubble that just collapsed on its own, nobody burst it, and cutting Rates too far, for too long will eventually create another bubble. The Cycle of Boom and Bust is getting closer and closer together. This cost that is being paid right now is from the consequences of Tax and Interest Rate cuts from 2002, the last time the economy needed to be jump-started. Big cuts now will equate to another dose of Bust in 2012 maybe. That may just be far enough away for the public to not worry too much about it.

Giving the Markets all that they want is a bad thing to do, create a dangerous precursor. The liquidity will not suddenly appear in lower Mortgages and easier credit, and in reality the US economy is just starting to pay for Sub-Prime (the lending of money to those not qualified to receive it), do they really want to start that over again? The Fed needs to take a good hard look at the period from July 2006 when Rate increases stopped, through to late 2007 when the first cuts came, and say; "What REALLY was the delay in acting", if for no other reason than to not repeat the same mistakes next time.

The US will eventually recover and start growing like in the old days, and when the smallest problem will appear, Markets will start yelling "CUTS MORE CUTS". We can only hope that somebody is there to hear the screams.

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Slice and dice baby, because there is no inflation (part 1)

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Actually there is inflation, and a lot of it too. I won't go to the point of questioning how inflation number are calculated, or how are they taken in account, I'll only show actual data.

The release for Producer Price Index (also known as PPI) came out -0.1%, beating market expectations of 0.2%.
One could easy say with -0.1% Producer Price Index, there is no inflation, go ahead and cut the rates. But actually the PPI came so low because this is the month over month number, and last month we had an all time record of 3.2% prices increase.

Over year to year basis, inflation experience by factories is up to 6.8% (seasonally adjusted). Since 1993, only one time inflation had such a big number. This is huge and it's more likely to be submitted to the CPI.



Since these days the hottest topic around is oil prices, we'll focus a little on them, but before a little story.

We have a factory producing bread. We mix all the ingredients and we put them in the baking oven. Because energy got sky high in 2007, baking will cost us more. After the bread is ready, we need to transport it to retailers. So, we load it in a truck and ship it. Again, because energy (fuel) cost more, we will have to pay more for the shipment. Note that we didn't include here the price for wheat (for flour) that doubled during 2007.
In the end we'll have somehow to increase our incomes, because expenses take us out of business and the easiest way to increase our incomes is to increase prices.
According to Reuters-crb energy index we had a 55% increase in prices in 2007.

Returning to oil prices and PPI, do you actually have any idea what inflation are we experiencing in raw materials on a YoY basis? 20.6% and it's up from -4.7%.

Incredible high! But there is more to come. Energy crude materials on YoY rate is 17% up from -15.7%.
Some of this inflation has already been passed to intermediate goods, which are up too, and as said before, it's very likely these prices will be passing to consumers.

So, go ahead and cut and slice interest rates, because there is no inflation.
Part 2 will follow after tomorrow's CPI.

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Cut my jobs and I'll cut my spending. Hopefully

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More bad news for the financial sector, with Citigroup cutting 4000 jobs, and according to Challenger Gray last year, with the industry shredding more then 153.000 jobs, from which 86.000 were mortgage related.

Leaving behind the bogus payroll release, we are seeing how the "job market" really is. Spring Nextel just announced to continue cutting 5000 jobs and almost 40.000 in the Pharmaceutical industry were cut last year
Even the Hollywood guys aren't doing so well, Warren Bros studios warned they'll have to cut 1000 jobs.

Job cuts are seen as good for companies, they reduce the fixed cost and boost profit, but job loss in macro economical terms is very bad.
Seeing colleagues remaining without a job, our Average Joe will reduce spending on his own, thinking the same thing may happen to him, and since major industry are loosing jobs it's more likely that consumer will reduce spending in the coming month. Remember, US is all about spending? 70% of the Gross Domestic Product lays in the consumer's ability to spend.

The GDP will probably take another hit this year from the market turmoil, with the financial industry adding up to 20% of it, and most banks taking big loses on their accounts.

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Sources:
Forbes: Report: Sprint Nextel to Cut More Jobs
39,870
Warner Bros. Warns Up To 1,000 Job Cuts Due To Writers' Strike
Bloomberg: Citigroup Posts Record Loss on $18 Billion Writedown

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No one wants to be in the Citi

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Recently, the Chinese Authorities have rejected an investment in Citigroup by China Development Bank. This is big image loss for Citi, until recently, the Chinese Investment Corp was seen as a piggy bank of Wall Street bankers and investors.

It seems not only Citi is in search of foreign capital, Merrill is too. Sources have reported an $925 million investment from Mizuho, the Japan-based bank. Quite a small sum, isn't it?

Going again to Citi, a planed deal for some time was suddenly rejected by the Chinese Government. This can be taken as a strange behavior of the communist gathering, to show who the is in charge. In 2007 we had one of this moments, it was March and the markets plunged like there was no tomorrow.
China Investment Corporation is still criticized from the Blackstone investment made in June 2007, which until now lead to a 30% loss, and to a bigger loss of credibility.

What traders should found strange is the rejection came one day earlier then Citigroup earning. Maybe Citigrup CEO wants to show the markets there are reasons to buy its shares, despite the fact tomorrow they will confirm financial loses. They could say “Yes, we had billions in loses, but we have a bright future, China Investment Corp had invested in us”.
It seems they will only say the first part...

Merrill is expected to show a 15 billion loss, so a 925$ millions investment is close to nothing. This investment made by Mizuho looks more like a watchful one, and the rejected bill by the Chinese Government make traders think if financial markets had really found a bottom yet?


Source:
WSJ: China Balks at Pumping Fresh Capital to Citigroup
Reuters: Mizuho in talks to invest in Merrill

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Earnings Season; Yummy.

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Markets find themselves already in the middle of January, and that means that they are heading straight into the Equity Earnings Season.
Usually, Forex Traders don't put too much importance on Earnings Season, but this year it is something that will define the Sentiment for weeks, and possibly months to come. The reason? The Credit Crisis.

Traders will be looking for the Earnings reports of Financial Institutions to confirm whether Market expectations are anywhere near to reality. This coming week Citigroup will publish it's earning for Q4, the period that it announced that it was hit by sub-prime. The Markets are expecting a $1 loss per share

The following week Merrill Lynch & Co Inc will publish its earnings. Merrill has an EPS of -4.57 down from 2.02 in June 2007. Things don't look rosy. However, this year Analysts have reduced income expectations, so it’s very likely that some Companies will handily beat those expectations.

For Forex Traders, a strong Stock Market will be a one way ticket to 1.5000 on the Euro, (and maybe 1.6000), and lower on the Swissy, Cad and Aussie; all as Trade Desks move out of the safety of Bonds, and take on risk again. Strong Earnings may sky-rocket the Commodity Markets, maybe then showing that consumers are still spending, and Commodities still have strong demand. The 'last but not least' line goes to the Yen; Equities Higher = Yen Cross Pairs Higher, (and they need a boost to clear the Daily Chart Log-Jam).

You can see some important earnings releases here:
http://online.wsj.com/mdc/public/page/markets_calendar.html

Watch out; during Earnings Season you never know what the following morning brings!

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A New Forex Trader's Intro to the US Dollar Index

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The US$ is under pressure because of growth forecasts, debt obligations and being on the wrong side of Oil and Gold movements. The one saving grace is that US Treasury Notes, the vehicle that overseas investors move to in times of fear, can only be purchased in US$’s and therefore those investors need to swap their local currency to buy US Dollars, and then buy the Treasury Notes. That however has been tempered by the rush to get Long on Gold, the ultimate hedge against Inflationary pressures.

The US$ is on 90% of all currency trades, it is a dominant currency. The Euro is now making up a large portion of those trades, and at 58% of the Dollar Index, one cannot move very far without automatically impacting the other.

The Index is made up of Euro 58%, Yen 13%, Pound 12%, Canadian 9%, Swedish Kroner 4% and Swiss Franc 4%. The Index was developed in March 1973, its value each day is reflection of the value of the US$ now compared to what it was worth in 1973. A read of 75.00 on the Index equates to the US$ value being 75% of what it was three decades ago. A weaker dollar> It here already.
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Shopping is fun when you don't pay with your money

Shopping is fun; can you afford it?

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The Trade Balance was released in the US; and it's bad, very bad. US consumers spend more and more, without having any pocket limits in place it seems.
A $5b increase in Trade Balance deficit, in a time when the Markets expected $1.5b decrease it is huge. That is over 9% on a month-to-month basis, by far the biggest gain this year. Add to this that the Markets see a weak US dollar as an Exporters Paradise, what this number would be without the weaker Dollar attracting foreign buyers of US products that seem cheap, does not bear thinking about..

Yes, Exports have reached a never heard level at $142b. But get this, in 2005 the annual export growth rate was 11%, in 2006 the same rate was 11%, and now, in 2007 guess what the rate is? If you're thinking 11% you're right. How does that work?
The numbers released are for November, but at the current growth rate of Exports, around $1b each month, the overall percentage won't go to far from 11%.

In 2005 the Dollar Index closed at 90.00 points, now it is trading around 75.00. This is a loss of US Dollar strength of 13%.

Getting to the Import problems, except the fact they are getting bigger and bigger as we speak, there is one thing that probably caught the Market Player's eye: the seasonally adjusted Petroleum import actually got cheaper in November 2007 then in January 2007. Remember Oil in January, opened at $60$ and reached its low at $51. On the other hand, in November Oil reached its 2007 high of $98.70. Is this not ironic?

TheLFB Team Released released an internal article that showed while Imports are getting more expensive, Exports are getting even more expensive. Mostly, this is because Taxes, Services, and Commodities are priced in US Dollars. As Dollars gets cheaper, there is a general rise in prices. TheLFB Economic Article Archives.

In all of this the Markets should see a positive point; US is running a positive Service Balance. This is mostly good news, but, Traders should note Services Exports are in the most part related to the Banking industry, that industry today does not know in what account to hide its losses, and what foreign investors to attract. Service Exports may not be a reliable thing to bank of anchoring the Trade Balance where it is right now. This Trade Imbalance really may have a long way to run.

On a year to year basis, even the Trade Deficit with Europe has grown

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US Debt Downgrades. British humor on US soil.

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Moody's just warned the US that it is at the point of losing its top Bond rating status, due to huge US spending. This rating was given back in 1917, when Moody's first rated US debt.

I can only find two reasons why Moody's would say something like this. First it's a political play. We are in an electoral year now and probably everything that can influence votes will be used, even something serious like this.
At the same time JP Morgan just signed a part-time deal with former PM Tony Blair with a salary said to exceed $1m (£500,000) a year. This needs some thinking about; is it either returning a service, or either JP is trying to attract some Middle East investors?
So, doing a favor at a high level is not so uncommon, and looks very profitable too.

The second reason why Moody's would cut US debt rating is perhaps that they know something we don't know. We have to think behind Moody's there is Berkshire Hathaway run by Warren Buffett the Omaha Oracle. Is he expecting something much worse to come?

And now the irony of British Humor hits US soil, when most of the Bonds are downgraded from triple A rating (the best and the most secured) to mostly junk, even US debt will be downgraded from triple A.
If more rating agencies will announce this, it could be huge for the Markets. In uncertain Market times (like now), the riskier assets are sold and the flight to the safety moves things to US Treasuries. From this safety flights, the dollar get a lot of support.
With the Moody’s downgrade, these Bonds won't have the same appeal to investors, who in turn will be looking for some other safe assets to hedge their risk, outside of the Greenback.

Watch out for other Rating Agencies moving in on US Debt valuations, they may assist a major market shift.


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Source: FT: Moody’s says spending threatens US rating
The Guardian: Blair joins JP Morgan as $1m-a-year adviser

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Are You A 'Good' Trader?

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• A good Trader is not born; a good Trader is only ever somebody that has been taught well. A good Trader has been willing to expand their thought process, and to willingly move outside of their comfort zone

• Most Traders expect an instant reward, which is something that is completely unrealistic. Positive results will not just come because a Trader expended energy, the Markets do not really care how much time and effort is put in. There is no ‘Time=Reward ‘ equation in any Tradable Market

• Work Smart, NOT Hard. Concentrating on a Trading Plan and learning what has already proven to be reliable, will not guarantee results (see above note). It will though ensure that a Trader stacks the odds of success in their favor

• Knowledge is NOT Power, the proper use of Knowledge is Power. Get focused on the system at hand, learn things one at a time and trust in common sense in decision making

• Research the Euro when trading the Forex, it is the largest $ denominated trading Pair and therefore will serve as a guide to overall $ strength or weakness

• Do not expect instant results, but DO expect a feeling of calm, security and clarity in what you are doing each day once you have a Plan to follow, and a path to walk

• Do not be a SNIOP (Susceptible to the Negative Influence Of Other People). Most Plans will work out given time if they are well prepared and executed, all well thought out systems tend to.

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Trichet The Hawk Has Dollar Bulls Running. 1.6000?

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Traders who listened to Trichet statement have heard his ultra hawkish words, seeing the Euro Zone economy in a strong shape which wasn’t affected by sub-prime.

Markets should listen very well to this line
“The growth of bank loans to the domestic private sector has remained robust in recent months, which may suggest that the supply of credit has not been impacted so far”

The markets are dividend in two camps, one which believes sub-prime is spreading thru Euro land and the other which say that Europe will flourish despite US speeding toward recession.

Since Trichet spoke only about rate hike, spiral inflation, act pre-emptively (this was the most used phrase), inflationist pressures and most importantly Euro-zone reaching its potential GDP rate in Q4, made a lot of traders switch camp.

This big shift was seen in charts, and what is more important, institutional trade desk are starting to realign their position to dollar short euro long.

Don’t get this wrong, there isn’t a big party going on in Europe and the rest of the globe wasn’t invited; downside risk still exist, specially when someone such influencial as Mr. Trichet says that uncertainly in the markets are high and the impact of financial turnover in the real economy is not fully known.

Traders should note that all except one EU members that have a free currency float, increased rates in the last period and still, Trichet warns them about inflation a couple of times.

Poland, Sweden, Czech Republic and Romania hike while Hungary cut interest rates. All these countries showed in the last months, increasing HICP numbers.

Does this look like a measure to reduce some inflationist pressures? To us it does, but it’s probably a temporally method only. None the less, we have been euro Bulls through all of 2007, set our stall out that we are not selling Euros to buy Dollars, and now await the test of 1.5000 and maybe a kiss of the 1.6000 if the Dollar Index breaks 75.00.

Do you fancy getting into Pro level Forex Opinions (Opinions, not Options!!), as a relief from the constant flow of facts? We thought so, and so did we. How about getting some really strong Opinions on what all this noise REALLY means to Pro Traders?

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Who's to blame?

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Bloomberg relates today that economists are starting to blame Alan Greenspan for today's housing bubble, for keeping Rates too low for too long.
``He's had a bubble reputation that derived from the growth of U.S. household wealth,'' said Edward Chancellor
Alan Blinder a professor at Princeton University and former Fed Vice Chairman says
``The Fed and the other regulatory agencies were slow on the draw,''
``They could have made this debacle substantially smaller, not by better monetary policy, but by better regulatory and supervisory policy.''

I tend to agree with them, monetary policy has its own limitation, a higher Interest Rate wouldn't have stop Sub-Prime, but neither would have it been so spread out as it is today; better regulations would have stopped sub prime. I guess Greenspan doesn't take all the fault for these. There are others to blame too; the S&P and Moody's maybe? They took forever to downgrade what many thought were smelly packages of LDO and CDO debts, but all the time that the ratings were high the Investment world were allowed to hold them.

I the mean time, I would blame Alan Greenspan for changing the way CPI is viewed, and by cutting out M3. I also would blame him for always trying to save Corporate, and not the Investors rear ends. I feel like that may be the same thing Bernanke may be seeing now; first save the big guys with racing boats and after throw air filled bags to small investors, maybe they can swim to the shoreline.

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Source: Bloomberg: Greenspan's Reputation at Risk as Recession Odds Grow

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France's way of growing

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Don't know if the news has reached US shores, but in Europe, all the media-fuzz is about the President Sarkozy's wedding with a former supermodel.

Since his Election the only things I have heard about him are about his fiancé, and complaining about the Euro's strength. On the same note, I hear the ECB members complaining about the France deficit budget which is an outstanding 52.17 billion (and growing). Soon we will hear them fighting.

France has developed a 2 years cycle, and if we follow this, France in 2008 will reach its peak. Since the US is heading toward recession, the French peak may not now be possible; this year's economic peak should be around 4%, if we believe the Charts.
I'm really curios how the relationship between ECB and France's president will evolve this year. Whatever happens at least Mr Sarkozy now has other things to take his mind off the deficit.


If you have opinions about this, please, feel free to post them in our forum

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OK, Who Stole All The Oil? Come On, Put It Back.

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Where have all the Barrels gone? The US is refining Crude at a faster rate than new supplies can get into inventory. The twelve week total now runs at Negative 39 Million Barrels of crude. That is nearly twice the daily GLOBAL production of Oil; how easily do you make that negative number go away?

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Mr. Bernanke called again

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Mr. Bernanke was called again, on 17 January to testify about the economy, by the Congress. In case you didn't see the fist meeting, you really should. Ron Paul did quite a show. We can only hope he will be there.
(For those who don't know what we're talking about:
http://www.youtube.com/watch?v=yAwvlDJgJbM)

Getting back to currencies and macroeconomics, after Goldman reported yesterday we are going in a recession this year, Merrill Lynch say we are already in recession. This is the first major bank that says we are already in a recession. Probably more to follow...

Again, getting back to currencies, it seems that the dollar gets real support from the Bond traders. The dollar index made a small bottom this week, last stop before 75.
There are a lot of traders out there, that think the US economy will boom from a weak dollar and the markets are really expecting this. But to their disappointment, it seems that things aren't like this.
Ford just announced they'll cut jobs and production in the US in search of profitability, while Goldman Sachs cut earnings for all US vehicle manufacturers.
It seems that a weak dollar doesn't support the car manufacturing industry; the overseas investment in 'US' car manufacturing repatriates Dollar profits and sends them home. The US component may add up to the badge and the design.

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Housing in search for a bottom

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Housing in search for a bottom? Not in our opinion

Full Details and Analysis. Please add your Comments.
Today we had the Pending Home Sale release in the US and it came much worse then markets expectations. The only good news is the last release was revised up, from 0.6% to 3.6%.

The pending home sales are in a clear downtrend, from the top reached in 2005. During that year, the index closed at 124.4, now being around the 87 area. This is a 40% drop in 2 years, which is huge for the real estate industry, known for its steady (and secure) gains. In 2001, when the index was created, it was 100. Remember 2001, it was a recession year? Well now we are under that level.
Just look at that cover attached, it could be easy put in thelfb.com "Humor area".



The real estate industry is generally associated with high prices and allots of expenses that come with a new house, like furniture, electric appliances and of course a new loan.
Buying a new house is the biggest expense in the life of a consumer and this way its given so much importance.

Today, the Boston Fed Rosengren made it clear that the housing market still didn't find a bottom and either they [FOMC] can't predict its consequences.

"The sharp declines experienced in many regions of the country have occurred despite low real interest rates and, until December, an unemployment rate below 5 percent. This highlights a risk to the housing sector going forward: Since prices have declined substantially even in a relatively benign economic environment, one cannot discount the possibility that they could fall more rapidly should economic performance not remain strong in 2008."

"Let me be clear -- this is an unusual economic situation and we cannot predict exactly what is going to happen"

This looks like another series of rate cuts are coming.

To make matters even worse, CountyWide Financial, the nations largest mortgage lender, spoke of bankruptcy. We had this news covered in our Alerts and Broadcast yesterday, and it seems that it paid off, Dow Jones closing negative in the last 2 hours.

If someone asks me about the housing problems, I'll say that housing sector is in search of a bottom, but that bottom is far down, not reachable any time soon.

"Equity Market and Carry Trading Negative"

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Inflation in Europe and the Dollar trend

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Inflation in Europe and the Dollar Trend; It may not be what you want to hear.

Full Details and Analysis. Please add your Comments.

Inflation is sweeping through Europe, and the Central Bank, ECB, has to take an important decision this week; either to keep the current rate of 4.00% or to follow the US and UK and to cut Rates to counter the vicious effects of sub-prime lending.

Within the Industrial Production Prices, Energy Inflation is the biggest of them all, growing 7.8% a year, and 3.2% from one month before.

Inflation is out there, affecting the European price stability but also some other serious problems, like sub-prime, are out there, which by definition are appealing as deflationary. Even if the Euro-area hasn't been already been hit by the sub-prime, except UK, the global environment has been, and it has to follow the trend, to provide liquidity to the markets.

Now, the Euro-Zone may not need a Rate cut, but neither does it need a Rate increase. Reaching price stability over the long and medium term can be done without having to adjust the main Interest Rate. It can be reached, even temporarily, by steering short term Rates, influencing money markets or the best method of them all, using fiscal policy (what US is trying to implement now).

Traders are expecting that Mr Trichet will use the word "vigilant" in his speech at 08:30 EDT as many times as he can, doubled by words like "strong,” “continued” and “extremely", his usual Hawkish lines. His words will be complemented by the usual volatility in price valuations on the Euro based Pairs.

As we covered in our Broadcasts and Alerts, the Markets are now caught in channel and until the Interest Rate decisions, any major breakouts will come with huge volume if they are to hold.

Even if most Traders say that the US is going into recession, the Dollar is now getting support from traders buying Bonds. They could also expect the Dollar to get a boost from Mr. Bush's plan to cut taxes in order to help consumers.

We are really curios if this will lead to obscurity over time, like the SIV Super Fund maybe.

"Dollar slightly positive"

You can watch Trichet speech here: http://event.netvision.de/basic_dispatching/?ecb_080110_stream_video

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Commodities beating Bonds and Equities

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Commodity markets enjoyed an extraordinary start to 2008 with prices for gold, platinum, crude oil, heating oil, gasoline, palm oil, rapeseed and rice all reaching record levels this week, helped by new investment flows at the start of the new year.

Commodities comfortably outperformed global equities and bonds last year and pensions funds and asset managers are expected to increase their allocations to the asset class in 2008.

Market talk suggested that between $1bn and $5bn of new investment money could flow into commodities at the beginning of the new year.

Oil breached the key $100 level, setting a record of $100.09 a barrel on Thursday, stealing the spotlight from gold, which surged beyond its previous record of $850 set in January 1980.

Falling inventories, strong demand from emerging markets, disappointing supply growth from non-Opec countries and speculative money flows have all been blamed as factors for record oil prices.

 

Non-Farm payroll and unemployment rate

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Today, the NFP release, the most lagging indicator in my opinion me, showed that US economy is slowing.
There were only 18k jobs created by the US, even though the markets expected around 70k. If there are no major revisions, this will be the lowest release since 2003,.

The big losers were the factory jobs and the construction sector.
Yesterday, we saw that factory orders grew 1.5% (from a much lower expectation), and today we see a big number of lost jobs in factories, 31k. This could indicate that factories are trying to reduce expenses, even if they have orders. To me, this is a clear sign that expenses got to high, while incomes didn’t go any higher. Should we blame this on the weakening dollar, or on Commodity inflation?

At the same time as the NFP release, the unemployment numbers came in at 5.0%, showing an increase, again beating market expectations, just not positively beating them!
The unemployment rate for minorities grew at the fastest rate, showing again that industries are trying to ditch low paid workers in the search for profitability.

After all this, I am really looking for the Earnings Season to start. I’m really curios as to how many companies will end Q4, or all year, with losses.

Until now, the major stock Indices are on negative ground, while the Yen makes hay whilst the sun shines.

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Subprime Bailout

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Source: http://www.bendweekly.com/Opinion/Editorials/4013.html

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More bears are coming

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It seems that the ADP came lower then expected, and what is worst, it showed that hiring in the goods production industry was down for 13 months in a straight and a 16.000 loss of workers in the manufacturing industry.
This combined with the ISM numbers (link for that post here) is starting to give me a hunch that Exporters aren’t doing so well after all.
It just a premonition, we’ll need more time to see the truth.

On the other part of the Atlantic, the German steam engine showed the lowest unemployment in 15 years especially in the manufacturing industry, as Marco related in thelfb.com subscription newsletter.
It seems that a strong euro isn’t so bad for Germany (until now)

Let’s see what the wind brings us tomorrow, at the NFP release…

Ps. Thanks to our great trading team, yesterday we caught 100 pips.

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FOMC meeting and inflation

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FOMC Minutes 9-1
Mostly, the minutes were concerning the tight credit conditions, the deteriorating market conditions and fading consumer spending.
Also, in the minutes, every time the word inflation appears, it is closely followed by a statement that says inflationist pressure will be reduced, but they don't mention how or why.

This line caught my eye
"Members generally saw overall inflation as likely to be lower next year, and core inflation as
likely to be stable, even if policy were eased somewhat at this meeting;"
Overall inflation will be lower next year? If we use the CPI to measure it, yes, I have no doubts about it.

"Members also recognized that financial market conditions might improve more rapidly than members expected, in which case a reversal of some of the rate cuts might become appropriate."
I don't know, after they say everywhere that inflation will be lower, maybe paving their way for some other rate-cuts, they come then with this line saying that condition will improve.
Also, if inflation will be lower, what is the need of rate-hikes?

Actually, part of the CPI inflation showed this during the spring, prices were to lower. Here they say
"The pickup in core consumer inflation over this period reflected an acceleration in some prices that were unusually soft last spring"

| Posted in » economic preview, forex, stocks  

The Gainers and Losers of 2007

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The Wall Street Journal made a quick statistic with winner and gainer for 2007. Amex had the best run, while Dow Jones and S&P 500 didn't beat any expectations (is it the subprime fault?)
Anyhow, Eur/Usd with 10% gain is somewhere in the middle, while Oil and Gold gained 39% and 21%.
How we laid out in our 2008 trade plan, we agree that Gold and Oil will likely go even further, but not on a big pace. They, as everything else, are under the supply and demand law, which tells that at as the price grows, fewer buyers will find. If we speak on YoY performance, both gold and oil will be affected by the current high price. Soybeans went up in 2007 by 59%, while wheat 119%

We now reach the worst performers of 2007 smashing with orange juice at a whapping
-29%, the Yen with -10%( I personally don't find any surprise here) and the Venezuelan currency, which lost 29%.
About the Yen now, we think that the it will outperform this year, while US is near a recession and the stock market doesn't receive any good news soon.
You know what they say...there are plenty of motives to sell, but they just need one good reason to buy.

source1: http://online.wsj.com/article/SB119889054579156857.html
source2: http://nz.news.yahoo.com/071227/3/3f60.html
source3: http://www.marketoracle.co.uk/Article3194.html

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What is the ISM saying?

What is the ISM saying?
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The Institute of Supply Management manufacturing numbers for December didn't report very well for the US economic outlook in 2008. It seems that in December there was a shift of power, from the Manufacturing Industry growing, to a contraction now, and in doing so breaking a 10 months run of positive reads.

It seems as though all Industries are suffering (see some of the Respondent's responses), except those in the the Export industry which up untill now is growing, albeit if at a slower pace then before.

In November export index came 58, and in December it printed at 52, a six percent decline.

The worst of all is that we see an increase in prices, showing that inflation from raw materials is starting to pick up. Prices are increasing on the back of a 12 month trend, and to add gas to a fire, all of the monitored Commodities showed price increases. All Commodities are on an uptrend in prices, as experienced by business' for 2 or more months.
I really wonder when the CPI will start to pick up on the Inflation number? We, at the thelfb.com related about this in the article called: Inflation? The ‘When 1+1 = Anything But 2″ Theory

To conclude; US Manufacturing has decline from growth to contraction, but with all that said, the overall US economy has a 74 month growth pattern to break...

To all the readers out there, here is a question; When do you think that the "overall economy" will be downgraded to "slowing" or "contraction"? Click this Link to cast your Vote.

I say 3 months, and I am about to cast my vote now. If we get to hear the official word 'Contraction' what will happen to the Dollar. One commentator said recently that it is going "to Hell in a Handbag". What do you think?

Here is what respondents have answered:

• "Have received a large volume of price increase notices in the last month with increases between 3 percent to as much as 15 percent." (Chemical Products)
  

• "Business is good, but higher raw material prices are squeezing margins." (Primary Metals)
  

• "The heavy truck industry is not recovering as expected. The latest forecast does not show an increase in orders until Q3 2008." (Fabricated Metal Products)
  

• "General business conditions are slow." (Paper Products)
  

• "Upward price of raw materials, plus low inventories, is pushing price of resins skyward." (Plastics & Rubber Products)
  

| Posted in » economic preview  

Soveriegn Wealth Funds

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Morgan Stanley became the third top bank in a month to raise capital from a sovereign wealth fund after announcing higher-than-expected writedowns of $9.4bn because of subprime losses.
John Mack, chief executive, said that the $5bn capital injection from China Investment Corporation would bolster its balance sheet and strengthen its deep ties in China. It is the second Wall Street bank to find a big Chinese investor, following in the footsteps of Bear Stearns.
China’s newly formed sovereign wealth fund, which earlier this year paid $3bn for 10 per cent of Blackstone, the US private equity group, will get a stake of up to 9.9 per cent in Morgan Stanley.
Morgan Stanley does not foresee any political or regulatory concerns about the investment. The deal underlines the growing importance of sovereign wealth funds in the Middle East and Asia, and their increasingly bold moves to take advantage of the need for capital among western financial institutions.

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Credit Squeeze Hitting Home Globally

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Blackstone’s PHH deal hit by credit squeeze

A $1.8bn deal between General Electric and Blackstone to acquire PHH, a mortgage and leasing business, became the latest casualty of turmoil in the credit markets as PHH said on Tuesday it had terminated the agreement.
Blackstone Group immediately put out a statement suggesting it held its banks responsible for the failure of the deal to go through.

“Blackstone was prepared to close its end of the transaction using the financing that in March was originally committed to be made available,” it said. “We regret that the banks are now unwilling to provide financing under the terms they originally agreed to.”
However, the banks have insisted that the buying group needed to renegotiate the terms of the financing. The PHH deal is unusual because the lending commitment depends on the value of assets in the mortgage lender’s portfolio. The banks have said some of the underlying mortgage assets did not meet the standards under the original agreement.
PHH is not in the subprime mortgage business, but the value of its mortgages has deteriorated since September, when PHH announced there could be a $750m shortfall in the debt financing from banks led by JPMorgan and Lehman Brothers.
It was not clear who, if anyone, is liable to pay the $50m break-up fee in the deal. PHH’s demand that Blackstone pay the fee for not completing the deal by the December 31 deadline indicates that it blames the private equity group for the delay.