A Forex View From Afar

Bailing out the Wall-Street

Written by A Forex View From Afar on Thursday, February 28, 2008

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Mr. Paulson, in a recent interview, said all of these plans to bailout home-owners are made for the Wall-Street guys.

"I'm seeing a series of ideas suggested involving major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes," Mr. Paulson said. "Then when you look at them more carefully what they really amount to is a bailout for financial institutions or Wall Street."

Tend to agree with him, but taxpayers money to bail-out private companies? Maybe you noticed; they are to cure the effects and not the source of problems

Source:
WSJ: Paulson Dismisses Mortgage Rescue Plans

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More write-downs?

Written by A Forex View From Afar on Thursday, February 28, 2008

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This is what I've said on 14 February

"(...)who could say in front of the whole Nation that inflation is rocking, consumer are not spending, nor are they saving, they pay mortgages to banks who are just preparing for another wave of write downs, and the financial crises was totally contained? The economy is in a mess, most of the public seem fully aware of that."

Well, we found out who could say all those things in front of the whole Nations, it was Mr B. testifying under the Senate Committee.

Today we found a person who supports the claim about further write-downs on banks, Josef Ackermann the Deutsche Bank AG Chief Executive Officer.

Being an insider, I'm pretty sure we can take its word as granted. DB has avoided, so far, sub-prime related losses by hedging earlier on.

While Mr. B was saying the worse, and Mr Ackermann was confirming our thoughts, Royal Bank of Scotland revealed another 450£ mil (980$ mil) losses coming from miscalculated risk on sub-prime. This is what ahead of the Curve really is...predicting 2 weeks earlier.

Financial sources have revealed an eventual bail-out plan organize by the government to save US home-owners will costs the Government between 200-250bn $. Adding up the cost of the current rate cuts (which will be seen over time) and the cost of the Financial Stimulus Package end up to fortune spend because of some reckless banks.


Source:
Bloomberg: Ackermann Forecasts More Writedowns at World's Banks
FT: RBS reveals further £450m losses from turmoil

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Foreclosure and Defaults

Written by A Forex View From Afar on Wednesday, February 27, 2008

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House Foreclosures for January are up 90% then a year ago, while foreclosure filings increased 57%.

RealtyTrac, an online real estate service specialized in foreclosure home sales, said most of the defaults are coming from adjustable rate mortgages. About $460 billion ARM's will reset this year raising the monthly rates payments.
While in January, about 233.000 houses were in foreclosure, bank anticipate about 1 million houses will default in 2008, adding more pressure on inventories that are already way up and sending prices down even further.



With such a big number of defaults, plus more coming, most can't see the housing market turning around too quick. Maybe it will hit a bottom and stay there for a while.

Source:
Bloomberg: U.S. Home Foreclosures Jump 90% as Mortgages Reset

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Second view on sub-prime

Written by A Forex View From Afar on Wednesday, February 27, 2008

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HSH, a German Bank, had sued UBS for selling sub-prime debt. This lawsuit provides us a chance to take a look at the Big Guys-way of doing things*.

Those Big Guys had lost a fortune, so it's not a good idea to do like them.



More lawsuits are happening against Banks for losses taken from sub-prime, and that may be the reason that the write-downs that are on the books of most investment firms cannot be realized.



Source:
WSJ: Did UBS Dump Toxic Assets?

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No Help Yet on Rates

Written by A Forex View From Afar on Tuesday, February 26, 2008

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One of the reasons the Fed reduced rates in September 2007 was the lack of liquidity from financial market, mostly credit markets. After a quick road-trip to 3% in Funds Rate, liquidity still hasn’t reach the credit market. The Auction Bond market, used by hospitals, schools and Government Institutions to access long term funds with adjustable interest rate on short term, is almost at a freeze point. With every failed Bond auction that we see, the interest rate is adjusted higher, this is called the penalty rate.

On his famous paper on The Great Depression, Mr. Bernanke said a recession is when liquidity can’t meet current liabilities. Auction Bonds shows that liquidity is hard to find, and expensive once it is found. Please Mr B, take a look at what you wrote previously.

The Housing numbers today are clearly showing that the lower rates are not impacting inventories, they will take 6-9 months, if at all at these levels because Institutions are just absorbing previous losses with the cheaper money, it would seem. Can you afford to wait, and why were these cuts not delivered in small 0.25% offerings over a longer period of time from July of last year when the LDO and CDO debt was first downgraded? We need the answers if we are to avert another Bust Cycle in 4 years time.

Who got it wrong?

Written by A Forex View From Afar on Monday, February 25, 2008

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In the last few days, some news-sources have started to say that financial markets have got it all wrong, and Mr Trichet, the Head of the ECB, will not cut this year. This claim is supported by economists at Merrill Lynch, Goldman Sachs Group Inc., ABN Amro Holding NV and Morgan Stanley.

"The gap between market expectations and the ECB's thinking is unusually wide".
We cannot dismiss this line, we have the same ideas here as well, but still do not know why they consider that they Markets got it wrong. It seems that it was only a small number of retail traders and a small number of Annalists saying this, and not the stream of people that the initial headlines indicate. Plus, if the markets really thought that the ECB will cut, they would have sent the Euro down, like they did with the Pound, and right now that is not happening.



Inflation is accelerating in the Euro-Zone, as seen in the chart above, but the best part is that Mr. Trichet warned about wage inflation coming from Unions around Europe, demanding higher wages. Guess what, they got those wage increases.

Back in 2006, inflation was around 2.5%, when the ECB gradual raised from 2.50% to 4.0%. Now inflation is at 3.1%.
It's just a hunch but I think as soon the US starts raising rates, or at least indicates that there are no more cuts, the ECB will follow in quick time. That now maybe equates to the Euro being around Fair Value.

Source:
Bloomberg: Trichet May Not Cut Rates in 2008, Say Merrill, ABN


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Homer Simpson on Risk Management

Written by A Forex View From Afar on Saturday, February 23, 2008

Talking about Risk Management...

Hedge this irony...

Written by A Forex View From Afar on Friday, February 22, 2008

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Equity sell-offs in January brought red numbers to most indexes around the world. The Eureka Hedge Fund Index, an index which tracks 2,467 hedge funds across the world said they dropped 3.3% in January, the sharpest decline in assets since 2000.

The MSCI World Index is down 7.7% percent in January while reports made by Greenwich Alternative Investments shows world-wide funds are down on average 2.4%. Both of them show this was the biggest decline in 5 years.

The Hedge Fund Research showed stock-orientated Hedge Funds have lost 4.1% in January, being the biggest monthly lost in the last 7 years.

The source for this blog post was a Bloomberg article with the BIG news that hedge funds across the world lost money... at the end of the page there was a commercial saying "Advertisement: Top hedge fund managers reveal how they profit in good times and bad".



Oh yeah, how credible can this ad be now? They sure know what to do with money in bad times.

The other irony is us retail forex traders made money in January and we don't have any fancy-ad. TheLFB winning trades percentage in January was 70%.


Source:
Bloomberg: Hedge Funds Record Worst Month Since 2000 in January

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Another wave of bad numbers

Written by A Forex View From Afar on Thursday, February 21, 2008

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Another day, another wave of bad figures has hit the markets around the world, from Forex to Equities, passing through Bonds.

The first hot news of the day was that another fund had been rescued from bankruptcy resulting from sub-prime. The third largest bank in Germany, Dresdner, will provide a credit line to save its $18.8bn fund, which had been reduce by $31.2bn since July.
How big did the losses generated by sub-prime get? They are so widespread that I've lost the count.

Economist Intelligence Unit had cut today the GDP prognoses for 2008, as for 2009. This year's estimate is 0.8% growth, down from 1.5%, which was released in January (not so long ago). Next year GDP prognosis is down to 1.4% from 2.0%. This looks like two years of slow growth. The analysts were expecting a 3% growth from Q3 2008.

The Philly Fed Index came -24, versus analyst estimations of -10. It's not a surprise that is the lowest reading since '01 recession, but it is a surprise that the respondent's six-month forecast is at the lowest level since the last decade.



Manufacturers, both in the ISM and Philly index had accused higher input prices, and as I write Gold makes another top at $951, while Oil is trading around $99.

Sources:
WSJ: Secondary Sources: 2009 May Not Be Better Than 2008
Bloomberg: Dresdner Rescues $19 Billion SIV, Follows Citigroup


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Bad time story

Written by A Forex View From Afar on Thursday, February 21, 2008

Wal-Mart and future hopes

Written by A Forex View From Afar on Wednesday, February 20, 2008

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Wal-Mart just posed better then expected results both for the Q4 and all of 2007, beating analyst expectations.

Wall Street Journal tells us:

"For the quarter ended Jan. 31, the discount retailer reported net income of $4.1 billion, or $1.02 a share, up from $3.94 billion, or 95 cents a share, a year earlier

Total revenue climbed 9.5% to $107.43 billion, the first time a retailer has topped $100 billion in a quarter. The mean estimates of analysts polled by Thomson Financial were for earnings of $1.02 a share on $106.92 billion in revenue."

This shows consumers wasn't so reluctant to spend, they just need it a little boost, materialized in "lowering prices between 10% and 30%" and the best of all "no interest for 18 months on purchases of $250 or more with a Wal-Mart credit card"

It's very interesting that Wal-Mart, a barometer for US economy, posted good results with the high energy prices. High energy prices are transmitted in food and apparels, by higher transport prices and higher production prices. It seems consumers aren't too affected by these high prices. Should we draw the conclusion there is more room to grow for oil?

Wal-Mart is proof that things for consumers were not as bad as they looked, as a consequence, equities markets around the world went into the green.
This may look like a fake hope, because Wal-Mart, in the same statement, said it expects it's Q1 2008 revenues to fall to somewhere around of 70 cents to 74 cents a share.
It's a big drop from the current $1.02 per share.
Maybe things are starting to look good.

Source:
Wal-Mart's Net Rises 4% On Strong International

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Dollar Value

Written by A Forex View From Afar on Wednesday, February 20, 2008

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The dollar bill in the background corresponds to the dollar value in 1973, when the UD Dollar Index was formed. The smaller dollar bill is today's value of the dollar. That is 25% smaller.

We must see the bright side, we have more in our pockets now.


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Commodities Thoughts

Written by A Forex View From Afar on Tuesday, February 19, 2008

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As we are told, we are very close to a recession in the US, and usually, during these periods the demand side of the economy slows, as demand drops. With all this commodities this time around are not getting affected by this; Gold and Oil are almost at historical highs, $926 and $97 while other commodities are already at the top. Maybe commodity Traders don’t read financial news, they are seeing the bright side of things, or the Global economy is way ahead of the US and continuing the expansion-lead rally in Commodity prices..

Oil has traded above $90 barrel since November, while gold is holding above $900, and has done for a month now. As soon as the recession fears are forgotten, it is very likely Commodities will get more expensive. Better keep an eye on them, as well as on the Cad and Aussie, both currencies could be getting ready for a period of Trending Trade.

I'm Leaving Forex for Wheat

Written by A Forex View From Afar on Monday, February 18, 2008

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The price for Spring Wheat had gone up 90% since January 2008, which is almost 2% per day and 400% since February, last year. Commodities traders really know what they want, nice trending markets.

In a time when equities cry for help in the face of recession, wheat is making new tops. Commodities markets say, because of the massive exports, wheat inventories can fall to a 60-year low this year.

Can someone please call up to the top, and say these prices will definitely pass to consumers. It's all about food inflation.

Source:
FT: Wheat prices surge to new high

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Don't worry, be happy

Written by A Forex View From Afar on Friday, February 15, 2008

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O.K. consumers, you've had your rate cuts and the road to 1% doesn't seem to be a long one, the government will send you your check by the spring to fund your big Summer barbecue (South American meat, oriental spices, Import Beer) or to sponsor your new plasma T.V. (should I say Japan). So what reasons do you have to be pessimistic about the future? How often do you receive money from the government without asking?

Consumer Sentiment just came in at 69.6, the lowest reading in 16 years. The sub-prime has been screaming for 6 months and only now we can see the masses being affected by it, a big note to self, this indicator is very lagging. Even if the sub-prime and housing problems will be resolved tomorrow, we'll need another 6 months for the media to inform consumers. This somehow shows me, until checks will physically reach consumers, things will be red, and even when they reach their destination...miracles don't last long

Markets are seeing a 50 point rate cut at the next FOMC meeting and I'm starting to get used to waking up in the morning and seeing positive swap from my long Euro trades. It’s not so bad after all.

PS. Did you see the TIC numbers? Probably the next sub-prime is the US Debt

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Retail Sales counted twice actually

Written by A Forex View From Afar on Friday, February 15, 2008

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Equities rose today on better then expected Retail Sales numbers. Markets had expected a -0.2% decline on month to month basis, while the released numbers came in at 0.3%.
Lately, almost every major news release has something pessimistic to say. This report was a breath of air that equities and markets around the world really needed. With all this, I have to say markets have been tricked again this time.

Two things I’ll like to point out, firstly Retail Sales are not adjusted to inflation. It’s very likely inflation will be bigger or at least equal to 0.3% (how it was on the last 4 releases).
This will bring down Retail Sales to 0.0% growth or very close to it, which means Retail Sales didn’t do so well.

The best part comes now and we’ll start with a puzzle…What are the similarities between NFP and Retail Sales?

They are both calculated based on previous data. Remember the infamous death/bird model? Retail Sales are very close too.
The Numbers released today are mostly based on 2006 retail sales and those numbers were very good. From January 2005 to January 2006 there was a 10% growth in Retail Sales, while the average for this period is about 5%.

I’m starting to feel that the retail sales are just a fake hope, but don’t worry, tomorrow could be much worse

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Extending The Bush Tax Cut?

Written by A Forex View From Afar on Thursday, February 14, 2008

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NY Times provides us with a chart showing the consequences of extending President Bush's Tax cut, how some Presidential Candidates are saying.



4.3$ Trillion by 2018 to a Budget already running huge deficits will certainly have a big drag over time.
Hopefully Presidential Candidates don't actually want to extend this the Tax Cut...

Source:
NY Times: The Bag of Tricks Is Almost Empty

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St Valentine Humor

Written by A Forex View From Afar on Thursday, February 14, 2008

Fiscal Stimulus: Modest, but welcome.

Written by A Forex View From Afar on Wednesday, February 13, 2008

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The Mighty Armada formed by Secretary Paulson, Mr. Bush, Congress and Senate have finalized and signed the Fiscal Stimulus Plan which will save the economy. Or not.

In case you didn't know what the stimulus pack contains here is a brief introduction:

"To be eligible for a full rebate, single tax filers must have 2007 adjusted gross income (AGI) below $75,000 and joint filers must have AGI below $150,000.

Adjusted gross income is not your annual salary. It's equal to gross income minus "above the line deductions," which are reported on page 1 of the 1040 tax form. Above-the-line deductions include deductible IRA contributions, alimony paid and, for the self-employed, some portion of money spent on health insurance or Social Security.

Single filers with AGI below $75,000 will get rebates of as much as $600. Couples with AGI below $150,000 will receive rebates of up to $1,200.

In addition, parents will also receive $300 rebates per child under 17; there is no cap on the number of qualifying children eligible."

Rebates will be received as checks, between May and July. A long time till then.
The first interest rate cut was back in September and by May we may see the effects of that rate cut in the economy too, hopefully.
It's no wonder most economists, questioned by the Wall street Journal, have said the Fiscal Stimulus Plan has a modest but welcome effect. The stimulus plan is seen more as a temporary boost, then a long term solution.

Going back to trading, this will probably give an anchor to equities somewhere in the future. Even if Wall Street and economists aren't too impressed, when numbers from May-June-July appear, equities could be poised to start a Bull Trend.

Source:
CNN: Rebates: What you need to know
WSJ: Economic Forecasting Survey, February 2008

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How bad can it be down there?

Written by A Forex View From Afar on Tuesday, February 12, 2008

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Banks have just announced another plan to save what is left from the sub-prime debacle. This is now the third attempt. First was the Super SIV Fund, which actually was not a Fund at all, because no money was put into it, there was only an intention, and Funds can’t live with promises, they need money.

Their second try was with the tax rebate. Most economists agree the fiscal stimulus is more like a future-hope then a nearby-certainty.

Now we are at the third attempt trying to save something from sub-prime, with the same cast that caused the sub-prime issues in the first place….So strange….

All this makes me wonder, how bad can it really be? Three attempts, a President and a Congress who pushed the bill as fast as it could, almost overnight, and a Fed that cuts every time it can.

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G7 - Nothing to See or Hear

Written by A Forex View From Afar on Monday, February 11, 2008

The G7 weekend came and passed, with nothing special in the middle. The only important thing discussed at the Finance Ministers Reunion from the most industrialized 7 countries was that sub-prime losses may reach $400bn. That is quite a loss.

The fading G7 meeting was also not observed in the Marketplace; the once notorious Forex Gaps refused to show themselves. Markets refused to see the G7 meeting as anything to concern themselves about, that cue was followed by the financial press, who reserved the last pages for it.

Don’t worry guys, we noted another $300b may be leaving financial institutions on top of the $130bn loss already booked.

Euro accepted in Manhattan

Written by A Forex View From Afar on Thursday, February 07, 2008

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Don't know what it is exactly that Mr. Trichet and the ECB does, but they sure have aneffect on the media. Remember Gisele Bündchen asking to be paid in Euro's or rapper Jay-Z waving Euro's instead of dollars in some music video?
Now another sign of international acknowledgemebt for the Euro comes straight from the heart of the dollar: New York shoppers are starting to we accept the Euro. That's a hard hit.



There are only 2 ways left for the Euro to totally own the dollar: to be able to buy US Treasury Bond in Euros and to see guys wearing Euro medallions instead of the dollar medallion.

But the hardest hit for the dollar will be if the Fed announces that they'll start printing Euro's, for a small fee of course. Hope not, because they are going to destroy it, as they did with the dollar.

Source:
Yahoo: "Euros Accepted" signs pop up in New York City

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ECB Press Conference Bullet Points

Written by A Forex View From Afar on Thursday, February 07, 2008

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The ECB held its Press Conference after the decision to hold Interest Rates at 4.00% today. Here were the points covered by the Head of the Bank, Jean Claude Trichet;

• The decision reflects that price stability in medium term are to the upside
• Short-tern inflation must not spill over into the long-term
• Economic Fundamentals are sound, risk to growth are on the downside
• Moderate pace of Growth, inline with Business and Consumer Confidence
• Slow-down of Trading Partner Growth will impact GDP numbers, Exports may be affected
• Euro-Zone has maintained stability in labor Markets
• Consumption growth will increase in-line with labor growth
• Economic activity growth may be impacted by Financial Markets
• Additional Commodity price increases may impact growth
• Inflationary numbers were 3.2% in January 08
• The Growth Rate will continue at around 2%, with a slow-down later in the year
• Looking at Commodity price increases to moderate, and will not now affect Wage and Price growth
• High Capacity Utilization and strong labor Markets
• Second Round Inflation, due to excessive wage demands, must be contained
• Monetary Analysis remains vigorous at 11% per annum, temporary factors include a flattening of the Yield Curve
• Underlying Rate of Monetary expansion, Loans to the private sector and Business, remained very strong
• A cooling Housing Market has nor affected Loan amounts issued
• Little evidence that Financial Markets have not lead to a huge move to other Financial Instruments
• Strong Loan growth has not been impaired by the Credit-Crisis
• Upside Risks to price stability, but sound growth, the ongoing risk surround the unusually high volatility in Financial Markets has Growth forecasts lower in the near-term, but Inflation targets are still in place for the year

We covered this in the Global News Section of our website. You can check it for further news and analysis.

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There are some winners from sub-prime too!

Written by A Forex View From Afar on Wednesday, February 06, 2008

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Since the beginning, we have heard only bad things about sub-prime, but there are some positive aspects too.

First of all, if it wasn't for sub-prime, Mr. Bernanke would still have a fight with wage inflation. Now he has abandoned that objective and he just wants to see the economy running like it did in the old days, and for that to happen he had to cut rates.
Interest rates are now real negative (or very close) which actually means the lender pays to the borrower. Odd situation...
If you have a good credit score you can access credit with much lower interest rates than a year ago and until inflation rises and interest rates drop, you are the real winner in this deal.

The rate cut sent the Dollar Libor and Bonds Yield much lower. Many existing ARM's are set by these two, so it basically means existing loans are, or will, become easier to pay, by adjusting the interest rate.

The Sub-prime crisis has sent in some areas house price's down, way down, creating new opportunities for getting your long dreamed of10.000 sq. ft house. Maybe you'll appear on MTV Cribs someday. Who knows?

If you don't like real estate but still want to make some investments, look at the stock market. Every stock analyst is screaming stocks are cheap now. Apparently nobody listens to them, since they are more red then green. If you're looking for a very long term investment it appears to be a good call.

The best thing about sub-prime and a recession is the fact the biggest growth in U.S. history came after such periods and this may very well happen again.

It may destroy financial institutions, drag down your house value, increase your credit card interest rate, bring the US one step closer to a recession, make almost impossible your trip to Europe or Asia because of the expense and make some people never able to afford a loan again, but we should see the other side too...

PS. Sub-prime has helped destroy the myth that Big Guys can't lose. They can, and they do.

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Surprise from ISM Non-Manufacturing

Written by A Forex View From Afar on Tuesday, February 05, 2008

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ISM Non-Manufacturing gave us today a big surprise packet as a recession warning.
The index came 41.9, far below annalyst expectations of 53. This number was also below the neutral line of 50 defining contraction from expansion. This is the first read that showed contraction since March 2003.

Out of 17 industries, only 3 reported growth, whilst 14 reported contraction, including Real Estate, Retailers and Finance & Insurance industries (no surprise here although)
Here we have some responses from the survey:

"Recession fears taking hold as cost containment strategies have been dusted off from 2002." (Finance & Insurance)

"Business is tough coming into Q1 after a very tough, unprofitable Q4. Competitive pricing is driving rates to unreasonable levels as competition is over fleeted." (Real Estate, Rental & Leasing)

Remember when Mr. Bernanke said the sub-prime won't spill over the economy? Well, it did, but he may actually have a smile or two when he reads this: 85.4% of respondents reported that the financial turmoil still didn't have any impact on their abilty to obtain credit.
Even if the sub-prime didn't have a large impact on business, it surely had on its consumers. In December, 22% of the respondents said activity was lower whilst in January this number jumped to 42%, almost double. This was a big shift in sentiment for business owners.
Apart from Exports, most categories jumped from growing, to contraction, in areas like New Orders, Employment or Backlog of Orders.

This is the second weakest read in ten years, after the 40.5 in October 2001. Maybe next time we'll manage to beat it.

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Oh My Goodness! Where are we???

Written by A Forex View From Afar on Friday, February 01, 2008

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Last week was like no other. In essence, everything we were told was dismissed a couple of days later, starting from the most simple releases to the most complex.
Here starts the story;

Jobs: The ADP announced there were 70k new jobs created, while NFP said that 17k jobs were shredded from the economy. The ADP number was revised down 3k to 37k, the NFP was revised to 82k up from 18k. Unemployment Claims rose while the Unemployment rate measured by the NFP actually dropped. ISM also showed contraction in the employment sector.

Prices: PCE said prices remain somehow stable at 0.2%, while ISM Manufacturing Index indicated the price index has increased 8%

Income: The Personal Income index showed that income had increased 1.1%, while the NFP's Average Hourly Earnings told us income had increase a feeble 0.2%

Spending: Retailers announced this December as being one of the worst, while statistics such as Durable good and Personal Spending indicated that consumers are actually spending more.

Business: Chicago PMI showed contraction in the Business sector while ISM actually shows they are expanding.

GDP: ISM shows expansions, and quoting from the ISM release "The past relationship between the PMI and the overall economy indicates that the PMI for January (50.7) corresponds to a 3 percent increase in real gross domestic product (GDP) on an annual basis." but the GDP came in at 0.6% with lower odds of increase in the future, and with the 3.0% growth in GDP seen by ISM, the Fed had cut another 50 points.
Despite the rate cut, consumer confidence is very high (probably dreaming of a bigger house, with teaser interest rates)

This is why I like the Swiss economy. The most important national statistic is the income sheet of UBS and Credit Suisse :))

After this past week of important economic releases, the question has to be asked: Where are we? and the answer seems to be, right where we were before last week.

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