torsdag 23 april 2009

FX Thoughts

Will the U.S. dollar rally continue? I don't think so, and this is why:

The greenback has rallied strongly since the start of the financial crisis, and the reasons put forward by various observers have primarily been that the crisis has created "safe haven" demand for US assets, and also led to unwinding of positions considered risky.

As risk appetite again increases, I would expect the dollar to fall*. I am looking for a quick and steep plunge of around 10 % within the next 90 days and, after that initial fall, a more gradual downward move.

*Against the EUR, CAD, GBP and SEK, to name the major ones i track. Against the JPY, I would, however, expect the USD to rise, as carry trade positions get set up.

torsdag 16 april 2009

Revisiting the bottom call

With a month and a half elapsed since my equity price bottom call, the stock market has gained about 28 % from its bear market cycle low.

I do not expect a big consolidatory correction of prices, and any such event would likely, at the most, take down equity prices as measured in the value of the S&P 500 10 % from present levels. Therefore, individuals should continue to aggressively poisition their financial allocation for strong gains in assets positively correlated with risk appetite appreciation.

Examining the economic data published since the last post, we can observe all the indicators we would expect to see in the early stages of a trough in the economy developing:

Builder confidence increasing strongly, industrial production collapsing and capacity utilization plummeting, port activity rising sharply and Store Sales increasing 0.9 % Y/Y, as reported by Redbook.

You must be wondering if the incorporation of the dismal industrial production figures was a typo. Nope, it was not. A characteristic some other indicators also share; a very low level of capacity utilization indicates that the recession has run its course, that enough demand has evaporated, and that enough pent-up demand has been built to end the down cycle.

As Donald Trump said on CNBC yesterday, the "...biggest obstacle is loans. Banks won't lend." Well, in a fiat money system, there will not be such an obstacle for very long, given policy makers, such as Ben S. Bernanke, that are inclined to do anything to extend credit and print money.

In the long run, the policies adopted today will prove damaging. However, for the short and medium term, they will work, and they will end the recession. Sooner rather than later.

"It's all about timing." -- Hugh Hendry

onsdag 25 mars 2009

Bull or Bear?

Even though I expect the current recession to end relatively soon, the stock market to rally, taking the DOW up to 10 000, and job losses to turn to gains, this only is my short term expectation of economic aggregates. In the longer term, all the policies being taken by the Fed and the Government are bound to seriously damage the ability of the U.S. economy to expand at its potential trend rate of growth for a very long time. You simply cannot solve a problem of excess consumption and debt by more consumption and debt.

The reason why I believe that the economy will end its current recession shortly and embark on yet another expansion is that I judge that the actions taken by policy makers address the [current] fundamental obstacle: the availability of money and credit. Contrary to other pundits, I firmly believe that demand for credit is still there. And if only credit can be extended to consumers, they will once again start to consume over their means, and companies will stop firing, and start hiring.

That will not, however, continue forever, and sometime in the not so distant future, both the demand for credit and also the ability of policy makers to even facilitate its issuance, will shrink severely.

I am of the view that, the most likely scenario for the coming depression, is increasing yields on government debt, taking the cost of servicing it to levels not bearable for the U.S. government, leaving it to two options: either to default or inflate.

Timing will be crucial. The next economic expansion may be very short, perhaps only 1.5 - 2 years. Or it may be 5 years. Who knows? Just keep your eyes on those yields. For they will determine the extent to which the coming expansion goes, and the extent to which the coming depression leaves its chronological footprint.

Fresh data

Today, we got to know that New Home Sales increased 4.7 % compared to the previous month. As I have written before, my hunch is that this variable has bottomed, with enormous implications for GDP projections, and thus for the stock market.

The whole crisis we are in today is a direct result of the housing depression. If housing has bottomed, so has the crisis. Let me be clear: when I write about a bottom in housing, I am refering to Sales of New Homes. Existing Home Sales have probably a lot further down to go before they reach the floor-- currently, 45 % of all existing homes sold are distressed. As foreclosures decrease, we can expect a drop off in such sales. Exerting opposite influence, however, will be the demand created following the bottom of GDP contraction.

Thus, I would not be shocked if New Home Sales in the month of December, 2009, would be at a SAAR of 550. The rate of existing home sales could at the same time be down 20 %, compared to today.

The stock market has most likely bottomed for this cycle, and will probably not retest the lows reached earlier this month.

I also believe the current recession will end in Q3 or, at the latest, by Q4 of this year.

tisdag 3 mars 2009

Gettin' close...

Another day, another major sell off in the markets. Listening to Louise Yamada on CNBC's "Chartology" reminded me of my similar bearish view on the markets a couple of months ago. A clear, utterly bearish "double top" pattern on the S&P 500. However, if you look at the DOW 30, no such pattern can be observed. Thus, there is a conflict between the S&P & the DOW.

Without the backing of a long term trendline & my self discovered stock bottoming pattern, I would have probably been a short seller today. I am not, however, and I expect a long term bottom to be set in the markets close to these levels. As Warren Buffet said in October: "Buy American. I Am."

Oh, and by the way, the ISM manufacturing index is showing stabilization and PCE posted its first gain in seven months. Contrary to popular view, the stock market is not nearly always a leading indicator; it often is a coincident indicator.

torsdag 26 februari 2009

New Home Sales

As expected, data on New Home Sales for the first month of 2009 was downbeat. Indeed, sales reached their lowest level ever recorded since the start of data gathering in 1963. Adding gasoline to the fire, months of supply is now at a record 13.3. There is no question about it-- this data is very, very weak. The incredibly high level of supply is going to keep house price decline rates severely elevated for the forseeable future.

So, am I forced to abandon my view regarding the stock market bottoming process? Not at all, and this is why:

Compared to employment statistics, data on New Home Sales is a leading indicator. New Home Sales always bottom before the economy reaches its trough, with a mean lead time of around 4 months, give or take a few. The stock market usually bottoms 3.5 months before or after New Home Sales bottom. I believe we may have hit the absoulte bottom for New Home Sales in January and, if that were to prove wrong, we will, at the latest, by summer.

More good news

Today, a slew of yet more dismal economic data were unveiled. Continued unemployment claims in the U.S. topped 5 million. Orders for durable goods plunged more than expected.

And the reaction in the futures market for equity indices? Decidedly positive. Although some market observers might imply that the upbeat tone largely stems from talk that the United Kingdom's goverment intends to insure bank assets, protecting the financial institutions from disruptive losses, I believe something else, and of greater importance, is taking place-- the positioning of ´smart money´ in anticipation of an economic recovery and stock market bottom.

It must be understood that employment statistics, and in particular claims for initial and coninued unemployment, are coincident indicators. These indicators tend to be at the weakest data point just before the recession ends. Hopefully, this downturn is no different than other, previous business cycles, (except for the depth and speed of the contraction) and this summer it will be clear a bottom has been struck in the stock market and broader economy.

Thus, keep hoping for more bad (good) news to be published.

More later today on New Home Sales.