Brave New World

Back to Gloom 03/03/2009

Following this morning’s post the markets have resumed their downward trajectory after the all too brief respite in Asia and early morning trading in Europe. Equity markets in Europe have continued to decline: the FTSE 100 closing down 3.14%,DAX closing 0.52% down. In the Foreign Exchange market the USD has regained strength, reaching a 2006 high against the currencies of its six main trading partners, following Bernanke’s comments that the financial system isn’t yet stabilised reduced risk appetite and a flight to safety. In particular, EURUSD is back to near its 1.2515 January 19 lows. The pair looks vulnerable, given the event risk of surrounding the ECB’s rate decision later in the week. The same applies to Cable, which has been trading in a narrow range- just above the key resistance level of 1.40. Given the lack of decisive break yesterday, I would expect any decisive break to occur below the 1.3940 level, also a possibility given the imminent BOE rate decision. The RBA’s completely unexpected decision to keep  its cash rate at 3.25% demonstrates bank rate decisions are not a one way bet. 

One crumb of comfort to gain from today was the positive, or should it be lack of, response to Time Geithner’s call to the House Ways and Means Committee that the efforts to stabilize the financial system “might cost more”. The Treasury Secretary’s performance in recent weeks has not been surefooted or consistent. Today’s performance has calmed some nerves.

Even Buffet Has Had It Rough 03/03/2009

Not even the Sage of Omaha has managed to negotiate the madness of the markets over the last year. An interesting section of his annual letter to investors:

“During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt. I will tell you more about these later. Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action.

Additionally, the market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie and me. Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.

I told you in an earlier part of this report that last year I made a major mistake of commission (and maybe more; this one sticks out). Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.

I made some other already-recognizable errors as well. They were smaller, but unfortunately not that small. During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me. At yearend we wrote these holdings down to market: $27 million, for an 89% loss. Since then, the two stocks have declined even further. The tennis crowd would call my mistakes “unforced errors.” “

Support for the USD in 2008 03/03/2009

The Bank of International Settlements provides an explanation for the USD Dollar shortage in late 2008.

US Housing Woes 26/02/2009

New Home Sales are at a record low. Here is John Authers’ gloom assessment.

Market Roundup 26/02/2009

The foreign exchange market price action proved lack lustre today, despite awful US data, continued digestion of the new US budget and focus in the UK about the future of the banking sector. The main story to catch the eyes of market participants was the continued descent of the JPY and the end of its inverse correlation to equity markets and, more generally, risk sentiment. As the market has absorbed the truly horrific numbers coming from Japan. It is now very likely to be the first developed economy to enter depression- measured as a fall of 10% of GDP. As mentioned in the earlier post today an important driver for the weakness in the JPY has been Japanese domestic demand for foreign bonds- lending a net $6 trillion in the 4 weeks to February 20th. USDJPY reached a high of 98.70. From a technical viewpoint USDJPY may pullback before retesting the psychologically important 100.00 level, given that the Daily RSI is now above 75 for the fourth day in row- a strong signal that the pair is overbought. 

Both EURUSD and GBPUSD continued to trade in relatively narrow ranges. EUR remained within a 90 pip range from 1330 to 2030GMT, from 1.2720 to 1.2810. The same goes for sterling, with Cable trading between 1.4260 1.4360. This is despite news of the UK government taking further, as yet unofficial, steps to nationalize troubled UK banks. US Durable Orders fell a larger than expected 5.2% in January, meaning that since January 2008 leading to decline by 26.2%. Non-defence capital goods orders excluding aircraft – a gauge of business investment – tumbled 5.4% during the month and 20.2% from a year ago. All told, the declines suggest that the US economy is suffering at the hands of waning demand on both the consumer and business level.

Long Hot Summer 2.0 23/02/2009

Police predict a middle class revolt.

Midday FX Update 19/02/2009

Fears about the future of eurozone economy and financial system have been tempered today by reports that the German government would back assistance to a troubled Euro-zone member states. This is in spite of an EU rule known as the “no bail-out” clause which prohibits collective liability for debt incurred by an EU member state. Western European banks are massively exposed to Eastern European debt. Eastern European countries have taken a huge hit from the loss of their chief engine for growth, exports. Risk appetite has picked up, with oil increasing and gold selling off. EURUSD rallied strongly in European morning trading from an overnight low of 1.2526 to over 1.27 by 1pm GMT. Also helping the Euro was release of the the German DIHK, which concluded that the weaker Euro was starting to be helpful for exports. Nevertheless its outlook for 2009 was “bleak”. GBPUSD also benefited from the more sanguine mood, rising in European morning trading from 1.4260 to 1.4420. This was despite data showing a large drop in tax receipts in January,  precipitating a sharp increase in the fiscal deficit. European equity markets were in positive territory for the first time in seven days. US data, which showed a smaller than expected decline in producer prices and much higher then expected initial (627k) and continuing (4987k) jobless claims, had surprisingly little effect on the foreign exchange market. The BOJ left rates unchanged at 0.1% as expected while the government has downgraded its assessment of the economy for the 5th straight month and describes the economy as being in a severe state. USDJPY continued its ascent, testing the key 94.50 level.

Overall, the market appears to be catching its breath from the sharp decline in sentiment over the last couple of days. The comment made by the German official about rescuing other countries, was just that- a comment, and an unattributable one at that. Conditions remain dire and the recent pause in the sell off in Euro currencies and the JPY is merely a result of profit-taking by dollar bulls. Technically, EURUSD and GBPUSD are reaching strong resistance levels, with may traders looking to re-enter a short trade in these currencies: EURUSD targeting 1.25, and GBPUSD targeting 1.40.  USDJPY is close to testing the key 94.50 level (it reach 94.44). A break higher would change fundamentally the landscape of the FX market- confirming the end of the strong JPY.

UK “close to depression”- BNP FX Head 19/02/2009

This clip from yesterday morning gives a depressing assessment of the UK economy. From Hans Redeker, BNP’s Head of FX Strategy

HBOS Head of Risk Management Revealed 18/02/2009

The legendary Evel Kneivel! The Daily Mash comes up trumps.