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Sunday, June 29, 2008

Another big bank failure

For the last few weeks I have been debating with a guy that I think the USD is going down, gold was going up. I saw it returning to the Y85 support. He was saying I was wrong, and maybe so. The reason for my trepidation was the believe the market would get worse, that a Goldman Sachs size financial institution would fail. I specifically mentioned Goldman Sachs and J.P. Morgan because years ago they had the biggest exposure to derivatives. With this (until recently unregulated) market having contracts 3x larger than the physical market, and higher for some commodities, and with there being a risk on counter-party exposure, it would seem natural to expect folly. Well, if this news is correct - Fortis Bank (former ABN Bank) - and its all over the internet, then the Dow is going to break 11, 400 pts support when the market opens this week.
The flipside is that the USD is likely to be a safe haven, but I would suggest not as safe as the Japanese Yen. Last time I looked it was Y107 to the USD. I'm a long way off target though. This will be big news. You would expect a significant rate cut in the wake of it. We might just get to my 1% Fed rate soon.

PS: I though it was convention to change the name of a bank after it restructures, not before.
Andrew Sheldon

Thursday, June 26, 2008

The Dow Jones at a critical point

The Dow Jones Industrial Average fell 358.41 points overnight, that's more than 3%, closing at 11,453 pts. I had previously said support was around 11,680 pts, however these things are not cut and dry. Support can come at the tip of candle wicks, or at the candle bars themselves. The market is in an interesting position because:
1. The Dow fell a great deal, and it closed at a support level
2. The Dow closed at its low for the day
I consider this information as inconclusive, so I will be looking for a strong OR weak day from the Dow overnight. The Asian market can only take its money off the table, or try to anticipate what will happen based on the trading action in today's trading action. Might Fed chairman Ben Bernacke try to comfort the market with talk of a rate cut, or oil prices might rally further. Actually in trading oil prices have fallen back to $138/barrel. The USD is mixed in cross trading. The gold price is looking good. Might have to wait for the US market to open. I expect it to hold, but if its breaks the next support is 11,000 pts.
Andrew Sheldon
The US market took a big tumble overnight as the oil price raced over $140/barrel. There seems no reason it won't go higher unless there is a severe squeeze on the global economy, or if India and China don't curtail demand with the removal of subsidies. The reality however is that the oil price is being pushed to speculative highs by the Fed policy on interest rates. It makes you ask whether Bush has a deal with his oil buddies to push oil to $200/barrel. Why? Well if oil went to $200/barrel, the oil executives would do very well, the US government might be forgiven for a market-sponsored slowdown, and he might be able to secure a lot more funding from oil companies for his presidential campaign. Well, its just a conspiracy theory. But its not like he needs to identify the implicaitions as such. He need only convey to Bernacke that lower interest rates are required to hold up the economy.
Higher interest rates are the surest way to reduce demand for oil. Not just physical demand but speculative demand. As soon as the Fed starts raising rates we will see a fall in oil prices because the speculators will see a downward path for oil. No doubt that would be another basis for a Dow Jones rally, though not likely to be sustained. The Fed is waiting for bad news to take the Fed rate down to 1%, then I think it will be looking for bad inflation to raise it. The USD strength is surprising me.
Andrew Sheldon

Thursday, June 19, 2008

Dow Jones close to support

If you like equities, you might want to take a look at the Dow Jones and various indices that correlate with it. The Dow Jones is hanging just above 12,000 pts. This is a support level, though it might be broken, so its worth waiting for news that would sustain a rally. The market might yet fall to 11,680 pts, its previous support. I am not all to gether negative on equities. There are several reasons for this:
1. Some markets like Australia, Canada, South Africa have a considerable exposure to commodities, so it goes without saying that those markets will be positively impacted by the bouyancy of commodity prices.
2. Broader equities will be hurt by higher interest rates, but they will be bouyed by inflation and industry consolidation, ie. takeovers & mergers.

For this reason I see equities going sideways. Might the Dow and other indices slip to a lower rung of 'hell'? Possibly, but I dont see that happening without higher interest rates or the failure of a large financial institution. So at this point its worth looking for evidence of a turn around. A rally to 12,400 pts would be pretty convincing evidence at this point.
Andrew Sheldon

Market outlook

[Gaijin 06] Gold is still under the $930 levels you were tipping it at earlier in this thread.. and not all equity markets are down that much - Topix is down just 5 or 6% this year. Pretty similar performance to gold.... with a lot more upside risk in the long term.
Here is my response to some negative sentiment towards gold...

Firstly I am tipping $2400/oz gold price, but that is subject to 'some' revising as events unfold, so I think this Japan Forum writer is responding to someone else. Most things dont happen overnight. Equities are holding because companies are actually making money from inflation, ie. inventories & plant are revalued up by inflation, and because of all the money floating around, consumer sentiment is actually holding up quiet well. It is not until you see sustained strong inflation that will demand higher interest rates that you will see stronger gold prices. At the moment the Fed is giving priority to holding asset prices rather than reining in inflation. It is of course silly to hold asset prices because that actually would result in less inflation later, but governments like stealthy destruction of purchasing power (by inflation) rather than debt liquidations, foreclosures, etc. The reality is - the result is the same, just the timing is different.
Job levels are still high, and interest rates are still low, so that is helping to hold equity markets. Over the long term equities will go sideways, but you can trade the rallies. Just dont buy & hold.
Gold will do very well yet.
Andrew Sheldon

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