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Monday, December 29, 2008

The end of the Packer Dynasty

I think we will within the length of a generation see the end of the Packer Dynasty. The younger James Packer is preparing to sell his agricultural assets at a time when he should be buying. There are several reasons why these agricultural assets are valuable:
1. Changing diets - increasing meat consumption
2. Shortage of protein sources, particularly fish
3. Competition for feedlot feed - you might think this will undermine margins, but I would suggest it will justift greater investment in water reticulation schemes
4. Rising rainfalls in Northern Australia - where the Packer properties are located
5. Excellent food market fundamentals
6. Great $AUD outlook - subdued for 4-5 years due to weak metal prices, high debt levels
7. Inflation hedge
8. Great opportunities to buy out other homesteads at low margins
9. Great opportunity to globally integrate food delivery services

I would suggests the canny London investors who are buying out Australian food producing assets know something that Packer and his advisors know, aside from the benefit they enjoy buy buying at a time of a weak AUD. Of course this is probably the 'short term' reason Packer is selling too since current revenues will be much improved. But is he factoring in a weak AUD for several years? High food prices? Higher rainfalls in North Australia over 5 decades? Increased consolidation and securitisation of farm assets? Increased globalisation of farm output? This last trend might be thwarted by quarantine issues, but the rest are already 'on-trend'. But this is not the best of it. He is missing out on the rising value of these properties, even if the weaker AUD will increase the local revenue value.
Well we don't have to worry about seeing the Packers on the unemployment lines just yet.
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Andrew Sheldon www.sheldonthinks.com

Sunday, December 07, 2008

Conversations with a trader

I have been having a conversation (or disagreement if you like) with a forex trader which will provide an insight into 2 people’s thinking on a few issues...people get pretty heated when it comes to understanding the global economy, but hang in there. This trader kicked off the dialogue with a press release. I'll disguise his identity because it serves no purpose to disclose it, and it was a private conservation.

Over the last couple of years a couple of the major warnings we have been clearly stating have taken hold this year;

1. Credit to implode: started, but we should have a long way yet to go as subprime and highly leveraged instruments are the first two steps in a 50 year overuse of credit.

2. Short Financials: spot on

3. Looking for a massive devaluation of all assets and major pullbacks in most major indices and markets: underway

4. Looking for either Ford or GM to not exist within the next 2-5years: cracks becoming more evident now, lets see what the government pulls out of its….hat.

5. Dollar strength as a safe haven and place where unwinding assets highly leveraged would have to go: underway

There are a number of other opportunities that have arisen but these as you are likely now aware of, are a few of the bigger ones.

The question then beckon’s….where do we go and what do we do for 2009???

The biggest answer is going to be CASH! Cash takes a number of forms in deflationary periods, such as increasing savings and paying down debt…….but another cash play that the average person cannot usually take advantage of is the trading of financial instruments such as currencies and indexes, bonds and commodities.

Well this differed from my view of the outlook so I was intrigued....I responded....

Why does there need to be an asset price collapse? Can't currency just be debased by creating more credit or printing money? Do you think the government is going to do nothing? For that reason I just bought a house in NZ. They produce food. I guess South Africa would be good too given the precious metal exposure, but the crime, and also a lot of these precious metal producers will go broke when the currency rises again, as happened last time. So for silver/gold stocks Aust is better, or USA/Canada.

Hi Andrew, it is all just a matter of opinion and analysis, but the devaluation of assets should encompass all assets in even the countries you mention according to our analysis. NZ has already experienced a 30% drop across many areas, hope you were able to buy after the dip. Australia I feel will eventually experience even heavier falls than NZ as they have a larger economy reliant on commodities as you mention and larger debt. NZ is often a safe haven currency and at some point shall find a reasonable bottom as
debt will only run so far in NZ versus countries such as Australia. As far as Gold/silver we have already seen 38%-45% drops already which may mean we are close to a bottom, but I wouldn't be looking to those assets as lifesavers during the next couple of years particularly....CASH will be King!

Yep, I appreciate the need for asset deflation, but there is also an opportunity for ‘cost of living’ inflation as well. Afterall in an emergency governments can also print money or subsidise debt creation. I think NZ is just as reliant on commodities as Australia, just Australia has more diversity, and obviously more towards minerals. NZ has greater welfare statism, less savings, but a new PM should change that. NZ debt is pretty bad as well, but Aust has compulsory savings scheme of around 9-10%, compared to just 2-4% in NZ. I wouldn’t call NZ or Aust safe haven currencies, as they are both extremely volatile, which is why they are traded relatively more compared to their economic significance. They are great countries though because they have a natural hedge. Commodity prices collapse, so does the currency, which is why you buy assets in such countries - - when they are cheap that is. When asset prices bottom as you are alluding too, we will see more ‘cost of living’ inflation. The governments will not allow a total wasting of assets, so there will be some stimulus. And I agree with gold, we should see some upturn soon, though the best equity prices I think were available in the recent dumping.

Just quickly to clarify, I don't see a turn up soon in Gold....I see a lower bottom followed by a number of years in a range trade that may eventually pop higher. As for governments and their ability to fix problems, I do not agree. I believe governments help make problems bigger and serve to eventually hurt those they seek to protect, therefore I don't agree with much of what you have said regarding debt creation. We are already at an historic high in terms of debt worldwide and that credit bubble is the cause of the problems....creating more debt will not fix the problem. Savings levels in Australia and the rest of the western world is horrendous regardless of the enforced superannuation which really is useless in terms of savings.

I don't understand your reasoning of hedging either? Why would I buy property in those countries if I believe the asset values have a lot further to fall and that the currencies also have a lot further to fall? On the currencies, a major reason volumes had been high in OZ and kiwi dollars was the carry trade and false belief that the commodity boom would last forever based on the China and India phenomenon....a joke in itself that don't have time to cover here. As for inflation, I do not see any chance of it over the next 5 years at least.

Wondering why you are negative on gold? Because of current asset deflation? Holding up quite well really given the collapse of other asset markets. I didn't mean to suggest government was a solution, merely that governments think short term and have a desire to hold up asset prices (keep people solvent) if it serves their short term interests. In that sense I see them increasing spending, in cases like Aust & NZ, and even the USA can print money or underwrite credit creation (since they are the base currency) without much concern. And yes I agree, they can only defer the problem, to the extent that problems can be deferred....that's why I see more inflationary outlook than you, and thus higher gold.

Yep, I agree with some of your points on debt, but in the short term option I think there are more possibilities than simply unwinding private debt through liquidation or foreclosure, though there will be some of that. I think the government will take over where the private sector left town. This will of course debase currencies through inflation & higher interest rates. This keeps asset prices artificially high and tax revenues healthy to fund more unemployment. There is a tendency to treat inflation as simply a demand phenomenon, but it actually has dual elements - assets and cost of living, and they are not just a demand phenomena, but a monetary one, as I see it.

I wasn't suggesting that Australian savings will fully salvage the Aust economy, just its a positive over NZ which has none, but NZ is more positive in that food is a greater necessity (my assertion) than over-supplied iron ore given the capacity increases. More farms are becoming housing, lifestyle jaunts, or unsustainable in the case of Japan, EU and aspects of USA.

By 'natural hedge' I mean that commodities are denominated in USD terms so commodity prices have collapsed, but so have the currencies of commodity produces. If I can shift money from yen or USD to those currencies (as I have done), then I can position myself for the day (say in 4-5 years) when that surplus mineral producing capacity is absorbed. By hedging I mean that as commodity price falls in USD terms, the price in AUD or NZD term improves, or stays steady. Look at gold in $AUD terms, its never been higher. That will eventually be reflected in gold stocks there. The other metals are less impressive because of poorer outlook, say nickel, the collapse in AUD nickel is not as bad given the collapse in currency. That is why Aust always fares better in these times, same as NZ.

You argued that the AUD and NZD will fall further...hmmm..I don't see that because of the hedge impact I am talking about. I've not looked a great deal at them lately because I've been travelling, but I'd see them as close to a bottom. [I would say NZD will fall to USD50c]. That’s fine because the house I bought was on vendor finance and from a low $NZ point, and I have Yen assets to sell as well.

Well I kinda agree with your points on carry trade, other than the fact that I see the carry trade opening up again some time in the future when Japanese have more confidence. The currency is low, it offers superior yields to yen, the $A denominated revenues from mineral exports will be high, so Japanese investors who sold can now rebuild these positions. The carry trade is dynamic. Confidence was undermined, as it should have been, once the market sees a bottom, they will do it again. Clearly you see further falls, so that thinking might perturb you. I dare say Japanese investment banks will wonder about Aust+NZ monetary policy for a while, maybe wait to see the swap rate widen again.

Wondering why you dont see any change in inflation?

Interesting to see where you are going with your line of reasoning, but I tend to think we are in a completely different situation than the recent past. I see the majority of the world coming together in an almost zero rate monetary policy in reaction to these stresses, and therefore much of the carry trade thinking will have to change especially amongst the majors for a sustained period I would think. I don't believe interest rates will increase for a number of years.

As far as hedging with commodities, I think that is flawed as commodities and all demand and currencies come off although I agree that the USD should grow in relative strength as time moves forward....the problem is that demand once reduced significantly will mean reliance goes back to domestic demand and therefore negates the idea of hedging based on USD values of commodities.

Gold is down to around 770 at the moment from over 1000 and should target around 580-650 before more of a bottom is hit....and may then experience a few years in a range before it can see nice moves. But as you say if the Aussie gets down to below its previous lows of 45 to the US then Gold will start to gain in relative terms....but at what opportunity cost to other investments?

I don't think it makes much difference whether it’s a zero rate (as it was in Japan) or 3%, if nobody is lending then rates don’t much matter. I paid cash for my house despite having 80% equity. Safest loan they could have, they are just not interested despite the rhetoric of interest rate cuts, and the promise of a first home grant of $21K also makes policy look like stimulus, but if you can't get finance then it makes little difference for anyone except those buying $80-100K rural houses.

The carry trade will always be there, traded in & out of, because it is inherent in the risk premium that countries like Australia and NZ will always require. I was not suggested trading commodities; I was suggesting Australia receives more money in AUD terms because of lower AUD than it would if higher against the USD.

Yep, most commodities will stay weak. I differ on precious metals of course. My argument is that Japan could retain a zero policy rate because it was stimulating the economy with that zero rate by keeping its currency low, exports boosted at a time when it was adjusting to lost competitiveness, ie. shipping manufacturing capacity to China. If no one is growing, then governments are inclined to create stimulus rather than rely on exports. Aust & NZ get it from a lower currency, creditor nations get it by govt spending, debtor nations like USA get it from printing money, as long as they can sustain those policies, and policies only need it to be a short term solution for them to embrace it.

The idea of 'hedging' is used metaphorically. You can't deny if there is no demand for industrial commodities, which we both seem to agree, then the commodity price is low but also commodity currencies. Funds places in those countries make good sense at those levels, though these positions you have several years to place. Also, any export earnings from those countries have a higher local dollar value than they would under a strong economy. The perfect example is gold because it has not change much in price despite the collapse of the metal price complex. It is now in AUD terms far stronger than it was when the AUD was strong ($A1250/oz last time I looked to $A950/oz) before.

As for low inflation...I believe we are headed for deflation especially in the US and Europe. As for OZ and NZ...well, let’s see how the markets react over the next 3 months to get a better gauge. Should be a very telling period as the markets need to make up their minds before committing on a direction and nothing like a nice bounce to find out if the bounce will be a false one or the start of a further rally.

[Didn’t get an answer to my question]. Ok, I think you want to wind up this conversation. I engage in these conversations because you do learn. I learn even by talking to people who know little because they will help me express what I want to say, bring a new perspective, and most of all I am challenging myself by thinking about the words I say. I agree with you on inflation, but its important to differentiate between 2 types of inflation:

1. Asset inflation - currently falling

2. Cost of living inflation - non traded things, mostly expenses like rent, food, but there is some overlap.

That period of supposedly low inflation was actually a period of high (asset) inflation. most people dont even understand inflation. The media doesn't, many economists dont.

Here is a good article from the SMH - just arrived this instance.
http://business.smh.com.au/business/markets/the-bond-bubble-20081208-6td7.html?page=fullpage#contentSwap2
Some inflationary worries - printing money or credit creation it’s all inflationary to me because it’s all money creation with no corresponding productive capacity, not that the economy needs any at this point. But it will hold asset prices higher until prices are eroded by inflation, which as I say will be there intent. They are not going to let asset prices collapse too much, they will debase money to restore a monetary equilibrium.


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Andrew Sheldon www.sheldonthinks.com

Sunday, October 26, 2008

Investing in Australia

Filipinos and Americans will never have a better time to invest in Australia. Basically there are 3 classes of investment that make particular sense:
1. Gold stocks - of course it depends on which ones. We are looking for big stocks like Lihir Gold.
2. Food stocks - of course it depends on which ones. Food prices are collapsing but that does not change the fundamentals. People still eat in recessions, they though they might change the nature of what they eat. Less food? I think less meat, more fats and carbohydrates.
3. Rural property - of course it depends on where. I suggest rural properties around coal mining areas in the Liverpool Plains of NSW, and the Darling Downs of Queensland (because coal seam gas extraction in this area is going to see an immense increase in investment in future years).
4. Food stocks in NZ: The other alternative is food stocks in New Zealand. But I prefer Australia. NZ has more depth in food though. Mostly Australia is family-owned business, so unless you are looking at acquiring farms, its not the best market. There is a challenge here too with water rights regulation.

The peso and USD have seldom looked as good against the $A, but it wont stay that way, which is more the reason why people should be investing here. The country is in good shape, and it will just get better once the crisis shaking out metal markets achieves some stability. The A$ has fallen from 40 pesos to 30 pesos in recent months. The money should be flowing back the other way now. Too bad if your relatives spent it :)
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Andrew Sheldon www.sheldonthinks.com

The financial crisis in Europe & the Eastern Bloc

Here is a good article for its coverage of the European banking market. Ouch! I had no idea that the Eurozone was so profligate in its lending to the Eastern Bloc. I'd have thought they would have funded there development from petrodollars. But I guess with the collapse in dollars a lot of those loans will turn bad. Having said that. European banks might be expected to end up controlling valuable oilfields in the Eastern Bloc, to the extent that they are funding oilfield development. But no doubt they were also funding non-energy investments as well, which is where the greatest burden will arise.
Well this crisis never ceases to get deeper. This is the problem when you substitute principles for arbitrary laws. This is how governments undermine the market. This is not a failure of capitalism. Its a failure of government. This was destined to happen. It could and was foretold a decade ago.
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Andrew Sheldon www.sheldonthinks.com

Monday, October 13, 2008

Second shortest and best rally in human history

It seems likely that this stockmarket rally will be the 2nd best in human history and the shortest lived if the market behaviour of the early 1930s is anything to go by. Back then the market was extremely volatile. The reason I suspect was the injection of liquidity into the credit market to shore up the banking sector. The reason for the 2nd collapse was likely the resulting inflation. Yes, thats right, the governments and central banks are facilitating another period of debt creation. The difference this time is that there will be less spending, less productive capacity, which meaning a lot more inflation to rebalance markets.
But enjoy the benefits while they last. History has shown that gold prices collapsed 50% in the 1970s before they rallied 800%. I will be watching to see if that happens as it will take a little time for cost-of-living inflation to take off as asset prices (i.e. asset inflation) take off again.
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Andrew Sheldon www.sheldonthinks.com

Sunday, October 12, 2008

The history of the Dow Jones (1898-2008)

The following chart shows the 110-year history of the Dow Jones on a log-linear chart. It will be apparent that any comparison with the 1929 stock market crash is an exaggeration. We are not going to see 20% unemployment in the near term. Why? For several reasons:
1. This crisis is being blamed on the wrong people - the CEOs when the excesses fundamentally are caused by the government and Fed Reserve. The CEOs are just paid to support these monetary policies that stimulate debt creation. The central bankers around the world are also implicated for not speaking out, whether from ignorance or their tacit support. If the wrong people are being blamed the activity can happen again. I still believe we are looking at another rally, though not for another 3 years. Asset deflation will free up capacity and undermine investment and consumption.
2. There was not a huge industrial over-capacity prior to the crash. In fact markets were looking pretty tight. This asset deflation will cause an over-capacity, but a little stimulus from governments, inflation and a little further asset deflation will see the monetary base stabilise over the coming 10 years. In the meantime the market will probably go sideways. But since there is no huge over-capacity, I would expect even better than that. I'm actually expecting the US government to add further stimulus in future years. I think you will see even more abuse of derivatives, so I expect the real depression to be in another 10-15 years.
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Andrew Sheldon www.sheldonthinks.com

Dow Jones still off support - 7480 level

The Dow Jones recovered from 7930s to finish trading last week at 8541 pts. That's a big 600 point recovery - showing just volatile the market is at the moment. All it will take the market to reach a lower level I feel is bad data. We are going through a period of fear, and the only bad figures we have seen so far are bad employment figures, Conference Board Indices, debt, foreclosures. There is still a pile of bad news to come which should depress the markets and confidence.
The implication is that there still seems reason to expect a further 1060 point fall from the Dow Jones. I will attempt to put these numbers in a longer term perspective tomorrow.
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Andrew Sheldon www.sheldonthinks.com

Nikkei-225 looks like going to 7660 pts

The Nikkei 225 has broken support and looks like its heading to its historic support of 7660 points. The Nikkei closed at 8360 points over the weekend, implying that this market still has 700 points to fall before it reaches that level of support. The lack of news by the Japanese central bank might be reason enough for the trepidation, if not the falls on Wall Street. The G7 bank support does not strike me as great news because that was always coming.
There are a lot of commentators talking up the market, but it just keeps breaking important supports. It seems to be going back to long term support levels. Unfortunately I am somewhat limited with this chart because I don't have enough index history on this computer. Sorry my LT data is in Japan. :) For that reason I would look to other markets for guidance.
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Andrew Sheldon www.sheldonthinks.com

Friday, October 10, 2008

The state of the US monetary base

Here is a good essay on the state of US Treasury and Federal Reserve finances.

The concluding remarks of this essay suggest that we are going to move back to a gold standard. He does not say as much, but he implies it, leaving you to fill in the gaps. I actually don't agree with this for several reasons:
1. The gold market is a pretty illiquid one - the size of the gold market is a fraction of the amount of gold available. Why would the government bid up such an illiquid asset to collateralise a new money standard, or to recapitalise the USD.
2. In a monetarised economy there are a plethora of asset classes that can substitute for gold. Might I suggest property as a pretty good alternative in the USA in this time of financial crisis. Already there are signs that the government is planning to do that by taking over the dubious debts of the banks which are backed by property.

I have long followed the arguments of the gold bugs, and as much as I believe in gold, I don't delude myself into thinking its the only asset class. But yes its cheap and its going to do very well, and there is no reason why governments (in addition to private enterprise) won't be buying more of it in future.

Such a strategy could also be used in countries like Australia, not to resolve the debt crisis, but to resolve a housing crisis. Australia has a shortage of property rather than an excess. Might the government acquire foreclosed properties and finance the construction of leaseholds to address a housing shortage, and at the same time use that housing stock as tangible collateral for its money base. Its a possibility. The current shortage of property might however dry up as unemployment increases. Certainly people have to live somewhere, but if they lose their job they just might move in with mom. Overseas students are probably inclined to go back to Korea, etc. This will eliminate at least some part of the shortage. Australia is in a very different situation from other OECD countries. It has a few investment funds which has the capacity to create some demand. i.e. The $20bil infrastructure fund, which on top of a lot of energy and mining investments should see Australia pass through the next 3 years in healthy condition.
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Andrew Sheldon www.sheldonthinks.com

Tuesday, October 07, 2008

Dow surprise - going to 9,000 pts


The Dow Jones was surprisingly weak over night by my estimate because of concerns over the viability of EU banks. The Dow closed at 9447 points, its low for the session. This suggests to me that the market is going lower. In fact, we are on track for good support at 9,000. The reason why are 2-fold. Not only is 9,000 pts a stronger support & resistance level, it also makes a parallel trend line with the upper trend line. Why is this important? I think it suggests that the global economy has been deleveraged to a point which offers good value by historic comparison. That is not to suggest that I am expecting any great rally, but I can see the market going sideways for 3 years in the 9,000 to 11,000 point range. This will be a period of high inflation, so gold stocks will out-perform.
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Andrew Sheldon www.sheldonthinks.com

Monday, October 06, 2008

DJIA at support levels - start buying for trades

Today (Tuesday) is the day to buy. The Dow Jones might have closed down 369 points at 9952 pts, below the 10,000 pt psychological support, but that is still a support based on previous lines of support. More importantly, the market plummeted to 9525 points during the session, so it actually recovered 432 points - that's a significant recovery. Clearly sellers are shocked by what is occurring and jumping ship, but the smart investors should have been buying overnight, or today in Australia. This is the level we have been waiting for.
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Andrew Sheldon www.sheldonthinks.com

Thursday, October 02, 2008

Direction for the DJIA

The chart attached chart shows that the US market is around a support level at current prices. The good news is likely to come out overnight so there is no compelling reason for the Dow Jones to fall to a lower support of 10,000 pts in the near-term. The question is - What factor could stun the market in that fashion? I would think that there are several things:
1. An escalation in aggression by Russia or Iran
2. A recognition of the need for higher (energy) taxes
3. A significant increase in inflation
4. Signs of a slowdown in the EU and China
These are the factors which need to be watched.
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Andrew Sheldon www.sheldonthinks.com

Monday, September 29, 2008

Great Depression of 2008 - bad politics


The US Congress has reneged on a prior commitment to bail out investment banks. The bill was rejected overwhelmingly by Republicans in the Senate whereas Democrats supported the Bank Stabilisation Bill. Congress has collectively just undermined confidence in the whole global financial system. The implication will be an ongoing freeze in lending, a run on the banks and further bank failures. The Congress believes taxpayers should not bail out badly run banks. But this is not management issue, the problem is the lack of regulation of the banks and the Republicans only monetary policy.
You would think Republicans in the US Congress would have learned something from the Great Depression. In the 1920s the Congress supported the misuse of credit for over a decade. This was not however the sole cause of that protracted depression since the Fed at that time made the same mistake of not supporting the banks. This resulted in the collapse of thousands of banks.
In this economic cycle the Congress has embraced 'easy money' for two decades. It was amazing that Congress supported the blow out in US debt. Having done so , its current decision is even more surprising. It would be nice to think that the Republicans in Congress had principles. We knew they didn't for the two decades they supported easy money. But its reported that Republicans did not support the bill because the voters didn't want it. The problem of course is that the public don't understand the issues. Economics is a complex subject, but actually its a small challenge to understand the problem.

The US banking system is highly leveraged. Investment banks rely on derivatives to insure their risks. What insurance does is limit the risk on the downside so that the investment banks can expose themselves to all the upside. The risk is covered by the counter-party in the derivatives transaction. The counter-party is fully exposed to its position. It can hedge its risk with more derivatives contracts with other financial institutions. The problem is that this spreads the exposure. Derivatives make sense if debt levels are kept at reasonable levels, but if they aren't then the whole financial system is vulnerable. One large bank failure is likely to precipitate the collapse of the whole system.

It's hard to believe that Congress will not overturn this decision. More concerning is the lack of reason in this decision. The way this issue is being handled castes dispersions upon the way our financial system is managed, not to mention the way our political process functions. I have of course been highlighting these problems publicly for several years now. It should spark a debate about the legitimacy of our fragile democracy and our financial system. Reason needs to be the standard.

This decision highlights an abysmal incapacity of this government to communicate to vested interests. More concerning still is that it highlights an incapacity for Bush to lead his party. More concerning still is that Republicans are abandoning the party in order to comply with their constituency, the voter, who just doesn't understand the issues. Of course if the media frame a question to voters "Do you want to bail out the banks with your money?" - of course a voter is going to be strongly opposed. Some I dare say would be sending emails to their Congressman. If the media have framed the question "Are you willing to support the bail out of the banks to protect the financial system and your jobs?" then the voter is likely to support this.

The implication then is that the media has precipitated this crisis as much as the Republicans in Congress. The problem of course are journalists who don't understand how the economy works framing questions in a way which is driving policy rather than following it.

May one day we live in a society wherwe reason is the standard because people - most people - have totally lost their sense of reality. The reality however is that this is just political posturing. I can guarantee that Congress will meet again in the next day and miraculously agree to terms. The whole ploy was about Republican Congressmen distancing themselves from the Bush Administrration, whilst at the same time appearing to act in the interests of their electorate. At the end of the day, its about keeping their jobs.
CNN latest update. Click here.
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Andrew Sheldon http://www.blogger.com/www.sheldonthinks.com

Sunday, September 28, 2008

Asset deflation - It was no surprise

It is amazing how people can be so unthinking. For the last decade people have been drawing attention to the US market being problematic, and now that its happened journalists are saying they haven't had time to prepare. I have been warning about this type of incident since 2001. In 2005 I started researching the global economy to get a better idea of the implications. Glad to say things are going pretty well as scripted. There are a lot of people running around saying they forecast it. But really there are pretty well a million people who knew what was coming. These are people who read the right internet content. Not the crappy news about Paris Hilton, but websites like www.prudentbear.com.

This bailout is needed because without it the banking system will deflate, which is what happened in 1929 with the Great Depression. There is no time to stall really as that will only sap confidence. The whole system needs to be supported because there are heaps of derivatives contracts outstanding which are counter-party exposures for all the derivatives being traded.
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Andrew Sheldon www.sheldonthinks.com

Monday, September 22, 2008

Dow Jones and All Ords testing downtrends

The Australian and US markets have rallied for the last 2 days on the promise of $US 700 billion in Fed/government support for derivatives and sub-prime exposure. The market is happy. There are however several issues the market has to come to terms with:
1. Higher taxes in the USA to address the slower economic activity. The US government has used tax cuts as a means of stimulating the economy. Higher taxes are going to stifle it. Clearly the capacity to raise taxes is limited.
2. Higher interest rates can be expected to rebuild savings in the USA.

You might wonder if the problems in the USA are over. I would say that there was really never a problem that was never going to cause a depression. That was the 'fear campaign'. The only way the economy was going to deflate was if the Fed/US government did not bail out the banks. They knew that they needed to save the major banks to prevent the unwinding of cross-counterparty derivative positions. But clearly the latter considerations place a lid on global growth, particularly in the USA. We might however look forward to a stronger Asian scenario due to pressure on governments in those areas to stimulate domestic demand.
I would advice Australian investors to watch the US market overnight to get a sense of its directions. I'm expecting a pull back, however wait for the lead. The Dow Jones Index failed to break 11,500 points, however further news might achieve that overnight.
The ASX All Ordinaries likewise failed to break its downtrend, however that might come if the USA opens strongly. The market cannot be looking for a further period of stimulus from the USA, it can't come from Japan, but might it come from the Asian tigers?
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Andrew Sheldon www.sheldonthinks.com

Saturday, September 20, 2008

How much will this global economic crisis cost?

This economic crisis is not really an economic crisis, its really a political crisis. The taxpayers of the USA are about to be called upon to pay a lot more in taxation to cover the litany of burdens from misappropriated funds resulting from a system that was designed to enrich CEOs in control of banks and other major corporations. Why? Because they have the power to make party contributions which keep parties in power.
What should happen? Well in all honesty, I think most people no longer have principals. If you believe my book (and you should), then you will understand why these state of events arise. You will also understand that people are going to continue paying taxation because they don't appreciate the extent of the waste. People don't reflect on the fact that taxpayer funds are not used to support people (welfare & services) anymore, they are used to keep people in power. If you use public transport, if you use roads, hospitals, there are discrete taxes or user charges applied in order to fund these things.
The reality is that the US financial system is only going to go bankrupt if taxpayers stop paying tax. The question is - Would they? I could see that as a possibility if taxes increased a great deal, or if inflation totally destroyed the US economy. Bush has suggested the exposure could be $US 1 trillion, thats 2x more than the cost of the Iraqi War. He's what you might call an expensive president. He's done very well on Halliburton stock though.
The US constitution actually does not permit the government to collect income tax, so what will happen if people cynically stop paying tax? Particularly if there are no bonds in their pension plan. Asian governments own a good share of the US bonds. on issue It might be wise to run your own superannuation in future. Governments just cannot be trusted.
So is Barrack Obama any different? Well I think he will be assasinated if he is. I don't see him tracking down the retirement funds of former CEOs who have ill-begotten gains. But in fairness, a lot of people knew what was happening, they just decided not to think. The reason they didn't think is the topic of my current book - A Market Theory of Values.
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Andrew Sheldon www.sheldonthinks.com

The financial crisis has been resolved - everyone will pay

Markets rallied on Friday in the USA as George Bush unveiled plans for a $US 1 trillion bail out of the financial sector. This is no exaggeration because basically the Fed will be forced to cover the losses or exposure of most financial institutions. The reason for this is that the investment banks have counter-party exposure to other investment banks. The bigger problem is that its not just banks. AIG is one of the largest insurance group in the world. It was involved in derivatives trading. This is not surprising. The problem is that exposure is not spread around as they say, its anywhere and everywhere, and its just hard to know where exactly the risk is. Of course it lies with the taxpayer. It always lies with the taxpayer. Those CEOs who made billions playing the market for all they could get to keep their realised gains, including all those options pay-outs. The taxpayer and smaller passive investors just get screwed. That is the redistributive model of our time. The money flows to the banks, the power goes to the politicians, and negotiations between those two 'counterparties' ensure that the major political parties get financed, and the CEOs get to keep their payout, and I can bet you they will be spared prosecution.
The Fed has effectively stepped in as the lender of last resort at least to all the US financial intermediaries. I'm unsure what will happen in the case of British and European central banks, though a similar position can be expected for the financial institutions they manage. The problem is mostly in the USA one would think, but really its not because derivatives are needed by all groups. So what will be the cost? Bush has said it will be $US 1 trillion. The reality is that it could be far more.
The question is - What now? Do banks stop engage in derivatives trading? Does the Fed retain its position as the funder or insurer of last resort? Who knows? Its fair to say that the political system gains a great deal from this system, and so they are likely to fight to save it. Are we going to see a return to a gold standard? Its safe to say no politician is going to voluntarily liquidate these derivative contracts which have added so much liquidity to the market. I would suggest the only thing that would result in a gold standard would be a politician who supported it. Otherwise the issue is too technical for voters to campaign against. A soluition is unlikely to get voter support because its a 'conceptual' problem. The only thing that could change this travesty is a voter revolt. If voters take to the streets to campaign that they are not going to pay taxes to support the banking system, you can bet that would cause problems because it would result in banks again questioning the central banks ability to deliver.
Without a voter backlash, the world will continue under the current system, but it will need to live with higher inflation, higher taxation and subdued earnings. You might wonder how probable is the possibility of a taxpayer strike. I would suggest that its not probable unless there is a financial crisis which would place the burden on taxpayers. Currently there is no great burden on taxpayers. Inflation is another factor that could insight political upheaval. The threat is greatest in the USA because US citizens are actually not obliged to file income tax returns in the USA, but they do. In fact the US courts have occasionally recognised this illegality in the law, but on occasion they have chosen to breach the U.S. Constitution. Breaching the Constitution is considered good sport these days by politicians wanting to retain power. President Roosevelt was the first evil monger in the 1910s. But all politicians to my knowledge seem to celebrate the existence of the welfare state, and thus the system of government that finances it. Ron Paul is the only (Republican) presidential candidate who rejects the current paper money standard.
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Andrew Sheldon www.sheldonthinks.com

Wednesday, September 17, 2008

Nikkei-225 has found support

The Nikkei-225 is another market that has found a support level and is likely to recover after the US market finds support tonight. We know that markets often look for support on prior resistance anf the 12,000 level is strong resistance. It is also a bottom reached earlier in the year.
The question is what stocks to buy. I think the best entries are likely to be Sumitomo Metals since gold is likely to be stronger, nickel is close to its bottom, and copper is doing ok.
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Andrew Sheldon www.sheldonthinks.com

The Dow Jones will support at 10,000 pts

I think the Dow Jones is likely to be unsettled by the rash of institutional failures this week - Lehmans, AIG, Merril Lynch, as well as Fred & Fanny Mae. This will undermine confidence and have the market wondering whether there is more to come. I am thus expecting another bad day. I am expecting the Dow Jones Index to reach 10,000 pts overnight, but I am expecting it to recover in the afternoon. I thus think the time to buy in Asian markets (and Australia offers the best buying) is before closing tonight, because once investors see that the Dow recovered overnight they will read this as a time to buy. The message for American investors is to buy tomorrow around lunchtime. The times of stocks to buy are of course those with exposure to staples like utilities, food, and I would also suggest commodity based stocks, since the weaker USD outlook will be good for those, particularly in the food arena.
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Andrew Sheldon www.sheldonthinks.com

Australian ASX falls to 4620 support

Last week I suggested that the All Ordinaries Index was likely at a support level. In the wake of the financial fiasco over the course of last week, the market has fallen even further to a new support level of 4620 points. I do not expect this market to fall further again. In fact its 2:20pm and I think over the next 1.5 hours we are going to see the ASX fall back to its morning lows before we see bargain hunters to move in. So I see the last half hour as a time to buy in the Australian market.
I have considerable confidence that this is not the end of this 'super cycle', though I do believe the US will have to raise interest rates to increase savings. We are looking at a higher interest rate environment, we are looking at more subdued levels of economic activity, but there is not a huge overhang of capacity, so I see a full recovery within a few years, and likely a new rally being built within a year. I don't see any reason why people should not start buying.
It will be interesting to see how the market closes today. Its not good for the market to close at its low. It shows the Australian market is uncertain and looking to the US market for direction. I will be buying before the close because there will not be an opportunity when the US market shows its bottom tomorrow. I already identified my target stocks last week.
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Andrew Sheldon www.sheldonthinks.com

Saturday, September 13, 2008

The outlook for the US market

The following commentary comes from a Japanese forum I have contributed to.

I don't dismiss the fact that the US is going through pain, and I certainly appreciate that the world is looking at higher interest rates and inflation, but that does not spell depression, nor is the credit bubble going to unwind just yet. The sad reality is that people will recover from this thinking there will be no depression in future because people called 'wolf' on this occasion. That cannot be helped.
So why is the credit bubble not going to unwind? Because the mechanisms for expansion are still in place. China, India and other countries still have a lot of capacity to expand their output. Developing markets aside from China and a few Eastern European countries are not overvalued. So there is more scope for asset inflation, cost of living deflation, as we have become accustomed to. For this reason, I say there is another leg to this bull, and I would expect the Fed to support it. The evidence is they are doing just that.
I do agree with your comments on the Fed, just disagree on your premature diagnosis of mayhem.
Pachipro: "The reason why the world and the US did not go into recession in 2000 during the dot.com bubble bust was the implementation, by the Fed, of low cost housing loans to anyone who breathed and could sign their name at very low teaser rates of 2-3%. Thus, the US did not go into recession and housing prices went through the roof as many people hoped to make a huge profit flipping houses. Also, it enabled many people to buy more house than they could afford. This is the sole reason why the US did not go into recession in 2000 when it most definitely should have".
This is all true, but you have to make a case for why inflation should persist as a problem. It is rising because asset prices are falling. So I'm saying they will fall to a point, but they will turn around. Europe is already lowering its interest rates, Japan's are low, Australia is falling, NZ will. Just America is raising its rates. The US needs to attract savings, so US rates will be relatively high, but I don't think too excessive. The lack of returns in the US will cause an Asian property boom. China and India will be investing in global commodity projects.
Pachipro: "Now they are all broke and way in debt and the world back then was also duped into believing that the US economy was sound when the truth is, it was far from sound. The result today is the sad fact that the average American is upside down in their home and car and have more than, on average, more than $8,000 in credit card debt and 7 out of 10 households are 1 - 2 paychecks away from bankruptcy".
Those statements make for a great human interest story but actually they do not constitute statistics that support your argument. The reason the global economy will turn around is because of the critical issue you have missed - there is no big or significant capacity shortage. On the contrary, a lot of markets are tight. I'm focused on commodities, but notice how the prices for iron ore, coal, alumina and copper are still quite high. Even your precious housing stock will be absorbed within 2-3 years. Mass migration will bail the world out, and the credit tap will keep flowing. Sure few Americans will jump in at first, but they will.
Pachipro: "Sadly, Shouganai, you need to do a little more research as the majority of homeowners today are upside down in their mortgages and have no equity whatsoever; have not only a mortgage, but also a HELOC (Home Equity Line of Credit) and cannot afford to pay two mortgages today".
More sensational headlines. Where is the statistics showing that its so bad that we need to worry about depression. The depression was marked by a period of mass over-supply. Where is it - other than US housing stock? This was just an asset price correction causing a spike in inflation. It will recede.
Pachipro: "The simple fact is that real income for the average American DOES NOT support housing prices even at their currently depressed levels. 9% of US mortgages are either in default or foreclosure and the economy is worsening on a daily basis. Therefore, the government had no choice but to take over Fannie and Freddie".
Well I wouldn't be surprised if real income is falling at the moment, but unemployment is 6.1%, and I doubt it will breach 9%, which is a recession number, but it will be absorbed in 2-3 years tops. This boom will continue. Oil prices have already cooled, so those people in default or foreclosed (you say 9%, but have not sourced it and you dont even seem to differentiate. So let me cite Bloomberg's numbers are a lot lower than yours. See Bloomberg.
Bloomberg says "new foreclosures increased to 1.19%, rising above 1% for the first time in the survey's 29 years, the Mortgage Bankers Association said in a report today. The total inventory of homes in foreclosure reached 2.75 percent, almost tripling since the five-year housing boom ended in 2005. The share of loans with one or more payments overdue rose to a seasonally adjusted 6.41 percent of all mortgages, an all-time high, from 6.35 percent in the first quarter".
Now those figures will not take into account the falling oil prices and broader fall in some commodity prices, eg. zinc, lead, nickel. Some good new don't you think. Notice that foreclosures only marginally increased. The reason is that people are in default not because of failure to pay debt but because of falling asset values. So they are being forced to sell 2nd homes, knowing full well they have fully paid off one home. We are talking 2.75% of homes - not your 'scary 9%'.
Pachipro: "This amounts to bankruptcy and nationalization".
Actually there is a world of difference between foreclosure, debt delinquency and bankruptcy. You ignore the assets they hold. There is also a world of difference between absorbing a private banks debts and your presumption that they would be redeeming the housing stock.
Pachipro: "According to recent Treasury figures, foreign holdings of US Agency debt, that is debt of Fannie Mae and Freddie Mac, rose from $107 billion in 1994 to $1.304 billion as of June 30, 2008. Foreigners own about $800 billion of that debt. Thus, you can see why bondholders were bailed out. In addition, Fannie and Freddie are responsible for $5.3 trillion in mortgages, that impact, by comparison, is 13 times greater than the Bear Stearns failure".
I guess you are quite impressed by those numbers. I think you mean $1.3 trillion. The twin [quasi-government) underwriting agencies for the bulk of US housing debt, so of course their liabilities have grown considerably. Yes, the US government has over-stretched. Its just not going to cause more than 2-3 years of recessed US market, and the US will resume its growth.
Pachipro: "Now that the majority of homeowners have no equity, are "upside down in their mortgages, and many are being foreclosed upon, including the "flippers", they are just walking away and, if the US government did not step in to help Fannie and Freddie, foreigners would be very upset and may have sold their treasuries to make up for their losses. This would bankrupt the US".
Well I've established that 2.75% are in foreclosure, so I don't know how you get 'majority' have no equity. I assure you banks foreclose before they have no equity, so the implication is that less than 2.75% have no equity. We have to remember that some of these are 2nd home owners. A bit too early to hit the panic button don't you think.
Pachipro: Maybe you should think about investing in US foreclosures as anyone with cash is most welcomed today by banking institutions. However, the end is not in sight yet and may not be for at least two more years as now ALT-A mortgages are beginning to default.
Well I wouldn't invest in US foreclosures unless I was living there because the economy is going sideways for 2-3 years. I prefer the Philippines because it has far better dynamics. I guess all the US foreclosed you are talking about can afford to retire there.
Pachipro: "You don't have to believe me or call me names like "Pachipronomics". The partial story is here on Bloomberg "US Foreclosurers Hit Record in August As Housing Prices Fell".
Actually this article does not support your point, they say 11% increase, not 11% foreclosures I didn't call you any names.
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Andrew Sheldon www.sheldonthinks.com

Tuesday, September 09, 2008

Does the market know the full story - Lehmans

Its interesting that Lehmans is in 'free fall'. I was talking to a consultant to the Asian Development Bank and Macquarie Bank about 4 weeks ago, and he was saying that Lehmans was in real trouble. Its interesting how this information doesn't find its way onto the market for so long. Great opportunity to short sell I guess. :)
Someone suggested that this credit crunch would result in the failure of about 40 small banks. So far it seems to be the larger banks which are failing. SocGen, Lehmans. Fannie Mae, Freddie Mae.
Anyway, you get the impression that senior people in the market know the extent of the problems, just this information is not conveyed to the market. I guess that shouldn't surprise anyone.
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Andrew Sheldon www.sheldonthinks.com

Thursday, August 21, 2008

The Australian All Ords is likely at bottom

The Australian market is looking like pretty good buying at this point, though I don't see any need to rush in. I would suspect some more weakness in commodity based stocks, but I think we will see a flow of money back into banking, insurance and retail stocks. Sure commodity prices are looking a little weaker, but as far as the economy is concerned the economy is still generating large amounts of cash, and the contribution of the farm sector will kick in. I would suggest one of the biggest factors helping to hold up the market will be the huge amounts of investment in gas, iron ore, coal, coal seam methane projects in WA, NT, NSW and Qld. All this new capacity means Australia will be well positioned for the next decade, and the investment will help lift demand in the short term. The market will likely consolidate around this level for some time.
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Andrew Sheldon www.sheldonthinks.com

Weaker Dow for the present time

The Dow Jones is going back down to 11,000 pts.


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Andrew Sheldon www.sheldonthinks.com

The global economic super cycle

These are interesting times. We are told that this is an inflationary cycle. True enough. But its not exactly clear just how significant this credit squeeze is. My personal opinion is that this is just a medium term correction, that within 18 months we are going to see a new period of credit growth. My reasons for believing this are that this 23-years growth period (1984-2007) has been too limited or regional. It was in Asia ('the tiger economies'), then it was the West, then the commodity countries. I am looking for a period when it is everywhere, when all markets are booming. I know that we will be at the top of the economic cycle when the developing countries are having property booms, when there is an excess of industrial capacity rather than a shortage. You might say that over-supplies start with shortages since they are what ignite all the new capacities. But this is what differs. This is a super-cycle where the bottlenecks run so deep that there is no chance for sufficient supply to meet demand. For this reason, I think the current credit squeeze is a period of debottlenecking. That the relaxed demand will see softer prices, particularly in assets, but it will be a period of rebalancing. Everyone is going to be relatively rich because of the huge productivity gains that are going to come from technological change.

My understanding is that this is one of those economic cycles that come around every century or so, the last being the 1880s through to the 1920s, when the world goes through a economic revolution of soughts. The Modern Era started in the Rennnaissance in the 1570s, with Leonardo Da Vinci and others. Invention of the printing press and global exploration driven by news ideas and technology. This is such a period with global inter-connectedness which will do the following:
1. Allow people in third world countries to catch up on technical skills faster than at any time in the past. Every day more & more of the information we need is on the internet and its going to grow. So how does one differentiate oneself? By having better, more useful, more insightful information.
2. The culmination of that trend is going to be global outsourcing of services. It will start with basic things like accounting, bookkeeping, technical support for call centres, but eventually it will include sales roles and project management.
3. This of course has to push a lot of productivity incentive upon the Western countries who need to stay relevant. The key is for the West to appreciate their strengths.
4. The globalisation of markets will change the way we relate. The distinctiveness between cultures will die. The market will become global. already markets are aligning. Sadly there is no competition between governments so it looks like they will align themselves in their common goal of screwing taxpayers.

The big feature of this credit expansion is that its going to move to Asia. The ASEAN region is currently creating a framework for economic integration which I believe is going to make this a region not just of savings to finance the West, but a region of conspicuous consumption. We are going to see more Indians and Chinese holidaying in the Philippines, Indonesia, whilst these countries reform to embrace the benefits of capital inflows. China and India will continue to rapidly urbanise their populations, with those new pools of labour providing part of the productivity gains, the rest coming from better organisation and technology. Organisation will mostly mean more outsourcing and specialisation.

So what are the implications for markets and commodities?

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Andrew Sheldon www.sheldonthinks.com

Thursday, July 10, 2008

Iran threat an evolving issue

About a year ago gold prices rose as a result of escalating fears that Iran was developing nuclear weapons, though the threat seemed some time off. The latest news is that Iran has developed and successfully tested a long range missile capable of reaching Israel. the implication is that unless their nuclear program is terminated, they will have the capability of delivering a nuclear weapon. Clearly we are going to see an escalation in tensions between the USA and Iran, and we cannot dismiss the possibility that Israel will not take unilateral action.
The implication for the markets are:
1. Possibility of the USA scaling up its war machine - thats bad for the USD and the US deficit
2. More USD floating around the world means more inflation
3. Stronger gold (precious metal) prices are inevitable
4. A fall in market confidence can also be expected, particularly since the oil price will take off, and that will quash retail sales around the world.

On the strategy side, the US might take heart from the fact that they have a missile defence system. Will they rely on that? The other problem is the threat that Iran can terrorise the world by threatening to cut oil supplies. Iran is a significant exporter of oil, and with tight supplies, there is no question that threats by Iran will push oil prices higher. Of course it would only hurt non-Western countries since no supporter of the USA would buy from them. Given the sanctions against Iran, the country would benefit from higher oil prices (15% of its GDP) since its economy cannot benefit from any other exports. So intimidation works for it. The President of Iran is universally disliked in his country, mostly because of his poor efforts to improve the economy. Sanctions must carry a lot of the blame.


Clearly the oil and precious metal stocks are the best to consider.
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Andrew Sheldon www.sheldonthinks.com

Tuesday, July 08, 2008

Dow Jones at support

There is good reason to think that the Dow Jones and equities are about to rally. I think it will be a short term phenomena, but consider these facts:
1. Oil prices are down to $136/bbl - thats some relief - sorry excuse
2. The Dow is at a support level
3. The Dow in short term trading has been well supported
This is a strong support, given it has many points of support. My view has long been that the Dow will go sideways for the next 3 years, with successive rally & retracement. Well this marks a likely entry point.
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Andrew Sheldon www.sheldonthinks.com

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.
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Andrew Sheldon www.sheldonthinks.com

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