Sunday, January 20, 2008

Markets in Turmoil.....

This was quite an interesting week. The markets continued their downward spiral as Merrill reported even more losses and bond insurers were downgraded. Things look bleak and it will probably take many months (years?) for the financial system to work through this. During times like this I like to break things down to its simplest point and work backwards.

Is the consumer, stopping his spending ways? Well this is a good question. On the surface yes, retail store sales are slumping and most retailers have projected lower sales in the months to come. Clearly Housing prices/sales a main driver of the U.S. economy are heading lower. If the consumer doesn't buy a new house, there is no need for the new washer/dryer, dishwasher etc etc. I fully except that this is happening but I am still on the fence as to how bad things will get.

1. Yes housing in slumping, this is a fact, but I have recently tried hiring contractors at my house and found it very difficult to find one with time to come by.
2. Last week I stopped out for drinks on Monday night. The bar I was in was packed with people on Monday night!
3. Friday afternoon I met a friend for lunch. We needed to go to 3 places until we found one that only had a 20 minute wait.

As I said earlier I like to break things down to the simplest level possible. As such the consumer still seems to be spending. Sure people have mortgaged their homes to the limit, and that will certainly be the reason for the slowing economy going forward (people mortgaged their home for updates to their homes, new car, adult toys...ATV's, Jet Ski's etc etc) and as such will have no where to turn for additional cash. But I have not heard of anyone losing their homes due to not being able to make their mortgage payment (Yet...famous last words). Yes I have heard of 3 people this week who lost their jobs (and 68 in my firm since the beginning of the year)and this may be where my miscalculation comes in, but for now I think that we will have definite slowing and this situation will be with us for at least 12 mths.

I see a stimulus package hitting the American people very quickly putting 300-600 usd into our pockets immediately. Putting this money in everyone's hands is a waste as it needs to get to the people who will spend it the most. But what will this solve? It should give the economy a modest jolt but with little long lasting effects. The slowdown in 2001 was solved by lowing interest rates to 1.0%. This caused 30yr mortgage rates to fall to 4.5(ish)% and gave everyone to buy slightly more house then the needed. Also it allowed the average American the opportunity to refinance at lower rates giving them more dispensable income. This time around as rates begin to fall you see 30 year mortgages at higher rates then 12 months ago. This is because this time around the Banks are not lending as this is a credit situation. A real Credit Crunch. Lower rates will not help alone. I do not have the answers but I think it is one of those times where the market excesses have to get wrung out. Housing prices will continue lower, as will stock's, it could take a while so be ready. I do not see free fall in the works but rather a slow steady grind lower.

As for trades. If you believe in the de-coupling theory do not read below.

1. Short Euro and Gbp against the dollar.
2. Lower rates in Mexico and Brazil
3. Lower rates in the U.K.
4. Steepening curves in the U.S., Europe and the U.K. (2-10 years)
5. Lower rates in Europe. This is one I have been calling for, for quite some time with no success. I first wrote the last quarter of 07, pushed it to the first quarter of 08 and now I am looking at the second quarter of 08. I promise if (when) it happens I will not count that one as a "correct call".

Good Luck and Good Forex Trading.

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