Market Analysis

Since 1985
5 Years
1 yearSource: St. Louis Fed

Also look @ previous post on this issue on Aug 29, '08

Current Fed Fund Rate: 2.00%

Fed Fund Target Rate 1 year
Fed Fund Target Rate 5 months
Source: St. Louis Fed

Via Big Picture
Source: S&PVia Big Picture
Source: http://www.tfsbrokers.com/property_derivatives.html

Via Bloomberg.....

Roll Call of each member
Via NY Times....

Source:
http://www.nytimes.com/imagepages/2008/09/28/weekinreview/20080928_MARSH_GRFK.html

Box#1 is a clear winner, because you have 100% Freedom of Choice.
Box#4 is a clear loser, because you have 0% Freedom of Choice.

Now, let's take current example of Fed & U.S. Treasury about to spend more than 1,000,000,000,000 (One Trillion) of US tax payers money to bail out big banks & other financials on Wall Street. Sounds familiar???? Box#4.....

God Bless America....

First United States had "Free Market Capitalism".... Then there was an era of "Regulated Market Capitalism" after birth of Federal Reserve.....Now, we have a whole new thing called"Socialism Market Capitalism"..... Socialism for rich..........

What would be the after effects of this Socialism in the country according to Milton Friedman?

Seven Sharks according to Kevin Phillips

1. Financialization
2. Huge built up of U.S. debt
3. Home prices collapsing
4. Global Commodity inflation building up
5. Fraud Government Statistics
6. Peak Oil-Shortage of Oil
7. Collapsing Dollar

Who is Kevin Phillips?

"Summary and Conclusions

Conventional wisdom has it that, as a government fiscalises the contingent liabilities of nationalised banks, the currency of the country in question should depreciate. More generally, banking crises are, very often, accompanied by balance of payments (or currency) crises. The US, being a country with still out-sized ‘twin deficits’ (fiscal and external deficits), will likely see the dollar weaken because of the Treasury and the Fed’s decision to effectively nationalise some of the large financial institutions, so the argument goes. An inconvenient fact, however, is that nationalisation of banks, historically, did not tend to lead to further currency weakness. In fact, very often the financial sector and the currency in question reach a trough just as the government takes steps to address the banking crisis. Thus, currency weakness tends to precede, not follow nationalisation.

Popular Thesis on Nationalisation and the Dollar

The notion that nationalisation of banks should lead to currency weakness is popular mainly because it is intuitive. Since nationalisation of banks is ‘not good news’, and runs counter to the principles of capitalism and the free market, some have the visceral reaction to sell the currency in question.

Further, as highlighted by Kaminsky and Reinhart (K&R) (see Graciela Kaminsky and Carmen Reinhart (1999), “The Twin Crises: The Causes of Banking and Balance-of-Payments Problems”, The American Economic Review 89: 3, June), there are many historical examples of ‘twin crises’, whereby banking crises and currency crises occurred simultaneously. The more memorable examples include Argentina in the early 1980s, Sweden and Norway in the early 1990s, Japan in the late 1990s and Thailand in the late 1990s. In fact, K&R found that, during 1980-1995, of the 23 banking crises, 18 were accompanied by balance-of-payments crises.

This link between banking crises and currency crises is genuine, and the usual dynamics are well-summarised by ex-Governor of the Riksbank (Sweden’s central bank) Mr. Bäckström (see What Lessons Can Be Learned from Recent Financial Crises? The Swedish Experience, Kansas City Fed Seminar in Jackson Hole, August 1997): “Credit market deregulation in 1985 … meant that the monetary conditions became more expansionary. This coincided, moreover, with rising activity, relatively high inflation expectations, … (T)he freer credit market led to a rapidly growing stock of debt… The credit boom coincided with rising share and real estate prices… The expansion of credit was also associated with increased real economic demand. Private financial savings dropped by as much as 7 percentage points of GDP and turned negative. The economy became overheated and inflation accelerated. Sizeable C/A deficits, accompanied by large outflows of … capital, led to a growing stock of private sector short-term debt in foreign currency”. This description applies quite well to the US right now.

Moreover, nationalisation of banks will increase the fiscal burden of the government. For a country that already has a large fiscal deficit, this is clearly negative for the interest rate outlook. For one that also has an external deficit, a large public borrowing need, ceteris paribus, should translate into a weaker currency, so the logic goes. At the same time, the central bank may be tempted to ‘monetise’ the debt, or run a monetary stance that is easier than otherwise – again currency-negative.

The Inconvenient Historical Fact

While the arguments above may sound logical and compelling to many, the inconvenient fact is that the historical pattern of how currencies perform before and after nationalisation or bail-outs tells a very different story. Averaged across five episodes of prominent banking crises, the nominal exchange rate tended to fall before nationalisation, but rise thereafter.

The historical pattern suggests that financial markets tend to be forward-looking and try to price in the deterioration in the state of the banking system by selling down the currency and financial sector stocks, but the government is usually not compelled to act until conditions deteriorate significantly. As a result, more often than not, government interventions have coincided with the lows in currency values. In other words, even though K&R’s observation that currency crises often occur simultaneously with banking crises is correct, there is no strong proof that nationalisation leads to further currency weakness.

Other more visible examples are consistent with this link between banking crises and currency crises. The S&L Crisis and its bail-out spanned a protracted period of time. The dollar index did continue to fall from 1986 – the beginning of the S&L Crisis – until 1989 or so. (In 1986, the FSLIC (Federal Savings and Loan Insurance Corporation) – the deposit insurance scheme funded by the thrift industry but guaranteed by the government – first reported being insolvent (incidentally, the main reason why 1986 is remembered as the beginning of the S&L Crisis). The RTC (Resolution Trust Corporation) was established in 1989, and by 2003, the RTC had ‘resolved’ US$394 billion worth of non-performing assets of US savings and loans. (The total cost of the clean-up of the US S&L Crisis reached US$153 billion, in ‘current’ terms equivalent to some 2.6% of US GDP in 1991. This translates to US$375 billion in 2008 dollar terms.) The dollar index essentially moved sideways in the early 1990s. The dollar did falter in 1994/95, but that was attributed more to the inflation scare than to the S&L Crisis. Similarly, Japan’s government did not explicitly address its banking crisis until 1998-99 and again in 2002-03. After each episode, USD/JPY actually collapsed toward 100, i.e., JPY strengthened in the ensuing quarters. Finally, in the case of Thailand, the banking crisis did indeed lead the currency crisis. But bank bail-outs did not take place until 1998, and USD/THB drifted in the 36-42 range between 1998 and 2000 – significantly below the peak of 56 reached in January 1998.

The case of the US at present is also illustrative. Between the onset of the credit crisis in August 2007 and the collapse of Bear Stearns on March 16, 2008, EUR/USD rose from 1.35 to 1.58, and lingered around the latter level as the Fed and Treasury assisted other financial institutions in the subsequent months. Since July, EUR/USD has collapsed from 1.60 to a low of 1.39 last week. Even with recent dramatic events, there is no evidence that ‘nationalisation = currency weakness’. If anything, the dollar has held up remarkably well this week, despite several dollar-negative factors, including: (i) a higher probability of the Fed cutting the FFR than the ECB reducing the refi rate; (ii) a diluted Fed balance sheet, from the substitution of US Treasuries for other lower-rated securities; and (iii) large increases in the future fiscal burden of the US, from the contingent liabilities that are fiscalised. In fact, the only dollar-positive factor this past week was lower oil prices. EUR/USD seems to be drifting back toward 1.45, but we see this move as rather innocuous, given the severity of the financial stress in the US.

In sum, banking crises are unambiguously bad for currencies, but nationalisation per se does not make the situation worse for currencies. In fact, it often marks the low in the currencies.

The US Fiscal Worries Over the Medium Term

Having said the above, the US does have quite a worrisome fiscal outlook in the years ahead, which may eventually have an impact on the dollar. Setting aside the issue of the fiscal burden associated with the assistance the official sector has provided the financial sector, US expenditures may be too high and revenue buoyancy may be undermined by the weak equity and property markets.

The Congressional Budget Office (CBO) released its budget update last week, and predicted that the US federal deficit will rise from US$161 billion (1.2% of GDP) in 2007 to US$407 billion (2.9%) in 2008. This sharp deterioration in the fiscal balance reflects a simultaneous increase in spending and a decline in tax revenues. (Total government spending will increase by US$226 billion, to close to US$3.0 trillion, reflecting both discretionary and mandatory spending.) The CBO forecasts that deficits will remain above US$400 billion in each of the next two years.

Investors will likely see it as key for the next Administration to control spending. However, it is also important for investors to appreciate how sensitive US revenue collection is to GDP. During 2001-02, for example, as the US economy fell into a brief recession, revenue collection plummeted from 21% of GDP to close to 16%. Thus, the strength of the US economic recovery in the coming years will have important implications for the overall budget position. These fundamental trends in revenue collection and ‘core’ spending are at least as important as the costs associated with nationalisation. The performance of the dollar in the coming years will, therefore, be a function of how the US government deals with spending and how rapidly the US economy recovers, in our view.

Bottom Line

Banking crises are bad for currencies, but nationalisation per se does not necessarily make it worse for currencies. In fact, it often marks the low in the currencies. We believe this is the case for the dollar in the current episode. What remains a lingering risk for the dollar over the medium term is the US fiscal position, unrelated to the costs of nationalisation."

Source:

http://www.morganstanley.com/views/gef/archive/2008/20080919-Fri.html#anchor6931

Source:
WSJ

"This is not a stimulus to the economy. It's just try to stop bleeding."

From beginning of August this year, GBP/USD & EUR/USD correlation coefficient is more than 0.90. Let's see how long will it last. USD/JPY is already off the correlation with AUD, EUR & CHF. But Cable joins The Party now. ;)

Happy Trading.....

http://www.spp.gov/
http://www.agoracosmopolitan.com/home/Frontpage/2008/09/15/02612.html

Source: Wall Street Journal

Finally WSJ admits that these crisis are worst since Great Depression. I wonder when McCain & Obama will admit that. They both have same policies & they are called "SPENDINGS, BUT NO SAVINGS." Funnily enough current president of United States is saying that "WE ARE JUST HAVING SMALL CORRECTION."

Previous S&P 500 weekly analysis post

Source: CNBC

This is an amazing interactive created by NY TIMES. I am really amazed by their work. There are total 29 US Financial Firms who have already lost 1.86 TRILLION US $$$$. And their total exposure is into TRILLIONS.... Biggest ever in History of market.... Fasten your seat belts, a lot more to come.

Gold has risen so far near 53$ today, but AUD & EUR have failed to make highs against US Dollar. It is not a divergence of Gold with EUR & AUD to go long against US Dollar. So, be cautious in placing long EUR/USD or AUD/USD or USD/CHF short. Gold is in actual bull mood today due to money supply increased drastically by ECB, RBA & Fed.

Following charts are Gold against EUR, Gold/AUD, Gold/JPY

I was doing some research on Behavioral Finance with FX market & found this site called Cognitrend. They are leading FX analyst with Deutsche Bank. I don't know how accurate their models are, but worth a shot.

Sources:
Cognitrend
DB-Markets

In previous article I said increase gold demand from India may boost price of gold in short term, but one of Gold expert in modern market has something simple & different view.
Rest of the article.....

After pumping $200 billion by central banks around the globe + Fed's bailing out role of AIG, MER-BOA, GS, JP Morgan things, market should calm down at least for a while. I am expecting new buyers to kick in & SPX should go back up near 1300 until next big news comes out.

Crude oil is down & there is temporary enough liquidity in market. Fed & other central banks are really committed to continue their Term Auction Facility program to pump up money. So, I am not seeing any other reasons right now for SPX, not to go back 1300 in coming months.
That means, USD/JPY back to previous key level of 108-109.

EUR/USD should remain in pressure due to ECB's dovishness towards interest rate. Check previous post on currency analysis for detail fundamental view.

I'll be watching Gold really carefully becase in India key festival season (Diwali) of the year is coming next month. India is the largest consumer of Gold. If consumer demand increases for gold for the season more than expected than surely there'll temporary rise on AUD & EUR, but rise would be really limited.

So, let's keep watching volume & open interest and make some money.

Happy trading.

Source: NY Times

Source: wsj
FOMC September 16th, 2008 vs. August 5th, 2008

more....

Link

Other Links....
http://www.traderfeed.blogspot.com/
http://www.brettsteenbarger.com/weblog.htm

via Wall Street Journal

Via CNBC...

The end result of the global economic slowdown may be the U.S. announcing national bankruptcy as the government cannot afford the bailouts that it promised and the market will not bail out the government, Martin Hennecke, senior manager of private clients at Tyche, told CNBC on Thursday.

"We expect a depression in the United States. We expect a depression, very possibly, also in Europe," Hennecke said on "Worldwide Exchange."

2007 Currency Market Correlations Outlines:

Foreign Banks(ECB, RBA, RBNZ, BOC, BOE) were raising Interest Rates because of their Inflation Focused policies.

Inflation - Higher Crude Oil price were leading to higher prices of goods & slowing spending.

Foreign Banks were not lowering Interest Rates because they were not hit that much on Banking/Credit crisis compare to United States. Instead lowering rates, they started lending money through Term Auction Facilities to various Banks.

Due to declining growth in United States, high crude oil price & credit problems, Japan/Asia was having less exports to US which made JPY to rise & carry trades started declining since then.

So, that is why due to Higher Interest Rates in G7 nations & rise in commodities AUD, NZ, EUR were gaining while at same time due to credit problems in USD/ JPY was also gaining. Correlation Coefficient between JPY and other majors at that time was high.
*************************************************************************************

Swissie has largest exports-imports to EU nations compare to other G7 countries like US, AUD, JPY, so naturally Swissie would follow direction of EURO. US Dollar/Swiss Franc & Euro/US Dollar has >0.95 correlation coefficient.

Britain also got into trouble of Inflation & Credit Crunch immidiately after US sneezzed. Bank of England started lowering interest rate from end of 2007. GBP/USD had high correlation with EUR/USD, AUD/USD, USD/JPY, USD/CHF until end of November 2007. But since BOE officials started talking about lowering interest rates GBP lost correlation since then with other majors.

Canadian Dollar made highest high against US Dollar in first week of November '07. BOC started lowering interst rate from first week of December '07. Since Canadians & Americans both were lowering rates at same time, USD/CAD remained sideways for long time until first week of August '08. US & Canada are biggest exporter/importer to each other.

Australian Dollar started falling big time from end of July '08. Australia is one of the largest exporter of metals to world. As we noticed Gold had failed to make new high in that month. Also, crude oil started declining after $146 high due to big time slow down (less demand) in United States & Britain. Land of Aussies also had somewhat effect on US/Britain Credit Crunch. Less demand of commodities & metals made Aussie Dollar drop big time. Low prices of commodities help somewhat RBA to fight inflation. But due to credit worries AUS was also forced to join Kiwis, Canadians, Americans & Britishers.

EUR/USD exchage rate decline was mainly by two factors: drop in commodities & slowing down in German Businesses. Euro holds 57.6% of US Dollar Index & we know that Gold and US Dollar has inverse connection. So, naturally Euro has to fall with falling price of Gold. Germany factory orders has declined big time since April of this year which also contributed falling price of EURO big time. ECB is still fighting with Credit Crunch & bank problems which started in United States. Trichet in last meeting already mentioned that ECB is not planning to raise interest rate in this year. Therefore traders started betting towards short side of EUR/USD.
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So now what in last quater of 2008 & 2009?
ECB will have to lower interest rate sooner in next meeting or meeting after due to demand of credit expansion in Euro Zone. Banks are still in trouble in United States & having their global effect. Slowing down in consumer spending & businesses in Germany & other EU Nations will make ECB to lower interest rate soon. Right now, EUR/USD is being traded near 1.39. And since we are expecting lowering rate from ECB soon, next stop for EUR/USD are 1.35 & 1.32.

Swissie will follow direction of EUR & Gold since it also has safe haven status due to SNB's gold reserve.

Aussie will depend on rise & fall on prices of commodities. Since ECB will lower interest rate next, Gold & Silver will fall further & it'll make AUD more weaker. On weekly chart, AUD hasn't made lower high yet, but 7% interest rate from 7.25% has already lowered demand of AUD a bit. AUD may fall further if credit expansion demand increases & retail sales, factory orders of metals/commodities declines. Recently RBNZ has lowered interest rate to 7.50% from 8.00% which gives us higher probability that RBA will also soon lower rate speaking from AUD-NZD correlation ratio.

We don't know how many more write downs are coming. And I am already bearish on SPX & Nikkei (less demand of Japanese goods due slow down in United States) which will make JPY only stronger. JPY will test previous lows against USD if it fails to hold current daily time frame channle.

GBP can go only one way due to Banking problems & slowing down in British Pound. It may rise against EUR once ECB reduces interest rate. GBP ain't world's reserve currency, so hypothesis like The Dollar Smile cannot be applied on Cable.

Swissie will follow direction of EUR & Gold since it also has safe haven status due to SNB's gold reserve.

Canadian Dollar is also solid on selling side because of it's heavy exports of commodity products to United States.

I am not expecting for Fed to raise interest rate until banks hit the bottom. So far there are no signs of Financials in United States hitting bottom, not till 2009. But US Dollar will continue strenghning, not because US has solid economy, but rest of world is slowing down.

Note:

• Correlation Coefficient ratio of JPY with EUR, AUD & SWISSIE & GOLD, Oil is <>
• JPY still has strong correlation coefficient ratio with Nikkie, SPX, VIX & TNX.
• GBP & CAD are now somewhat back with a bit strong correlation ration with EUR, SWISSIE & AUD.
• Situation will be different if ECB doesn't lower the rate as expected & some unexpected Geopolitics plays a big role in Crude Oil.
  

"This held that the dollar had a “convex” relationship to US economic growth.

On this theory, if the US economy goes into a severe decline, or hard landing, then the dollar should rise. The rest of the world suffers, and the dollar is a relative safe haven.

If the US economy goes on a growth spurt, outpacing the rest of the world, the dollar gains.

But between these two outcomes lies a “soft landing”, where the US economy muddles through. If this happens, the dollar gets pummelled. Other countries have higher interest rates, and there is nothing to defend the dollar."

Source:
Read more on Financial Times

Who is Stephen Jen?

Dark line represents Capital Raised
Light line represents Write Downs & Loses.....