So I am gone a week and get back and the market is unchanged from when I left, of course it crept up during the week of my absence only to get pummeled on Friday. I was off the beaten path so I only had glimpses of what was going on – I did keep tabs on the Euro/Dollar, Oil, and Gold. So over the week-end upon my return I was sitting in the Huston airport waiting for next flight (note: airports make for some interesting people watching) and was watching CNN. I felt so out of touch and that things have been getting significantly worse – first CNN reported that in New York several stores are now accepting Euros, instead of dollars. One store owner – said he prefers Euros and is offering discounts for Euro purchases. Then they zoomed to a roving reporter in Texas to talk about oil hitting $102 and he mentioned that in several border towns people are crossing over to the US side to make purchases because of the falling dollar – I said to myself – WHAT? I stayed tune for Pickens – who was being interviewed – he is sticking to his guns that oil will pull back to the low 90s / high 80s in the next qtr – but will rally back well above a hundred for the remainder of the year and into next year. Seems like the economy saw more bumps while I was gone. I was still having a weird vision in my head of Mexicans crossing the border to shop in the US because of a cheap dollar - it’s absurd I know.
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Oil Dollar Link
Oil has been rocketing and the US dollar continuing to slip – with more Rate Cuts on the way – expect the dollar to fall more. OPEC had been rumored last year that they had talked about repricing oil to the Euro (or other currency/s). When the US (along with most other countries) dropped the Gold Standard – the dollar became a FIAT currency. That means it’s only worth is BUYING POWER – fundamentally based on perception. I guess you could say OIL became the new Gold Standard – and since it was priced in US dollars – the dollar thus became the price which all things were measured by. Since every nation in the world needs oil – most nations started stock piling dollars in their coffers – since it was what oil (the world’s blood flow) was priced in. The US Dollar became the WORLD currency – the Reserve Currency. Gold was out of circulation as a currency and governments started selling their gold. There was also perceived trust that the Dollar could NEVER fail – the US is the greatest super power and economic power in the world – thus the Dollar could not fail, the government would not let it fail. Every country that needed oil – started buying US dollars, it helped stabilized their own currency, oil was priced in it, and in some cases they pegged their own currency to the US dollar (to give their own currency some legitimacy).
We started printing so many dollars that we cause a inflation (no matter how small) – the US Treasury started selling MORE and MORE bonds and the foreign nations became the biggest purchasers of those dollars. The US became a consumer nation, a nation of credit and debt. The US government started sliding further and further into debt – and foreign nations started purchasing more and more US bonds. You could say that foreign nations are the credit line for the US government. We rely on China, Japan, Korea, England, and many other nations for extending a credit line to the government (and ostensively ourselves – since banks borrow from the government to lend us money.) That circle of debt has ballooned and the debt of the government and the people is so massive that it is causing concerns around the world.
OPEC is seriously concerned about the strength of the dollar – they need oil to rise in price to off-set the depreciating dollar. The foreign nations that had purchased trillions of US bonds are no longer interested in buying them (especially with lower interest rates). China announced early last year that they would not renew purchasing US Bonds as they came due (instead purchasing Euro and Swiss Francs). Several other countries have taken similar stances. The US dollar as a reserve currency is still above 50%, but if OPEC reprices oil to Euro – it could send the US dollar down fast and hard.
We are seeing all the precious metals rally, Gold is almost at $1000 an ounce and Silver is starting a serious rally, Copper and the rest are also up. We are also seeing large currency forward trades – buying the Euro. The Euro broke a very serious resistance point $1.50 – which means we could see the dollar slip faster in the coming days.
These are precarious times and since the dollar is a FIAT currency (or as I like to call it a FAITH BACKED currency) – we are more reliant upon the Global view of how they perceive the US dollar. That is a huge risk – since we no longer live in a closed society (that ended in the 70s) but now are reliant on foreign energy and products and even food. It’s the Global perception of the US dollar that can make it or break it for this economy.
I am adamantly apposed to Bernanke lowering interest rates – the big picture is the US dollar – not bailing out banks, consumers, or lenders. Businesses and consumers will fail (have to fail) – so the government doesn’t take on more debt. Bernanke, by serving the banks and lenders with lower interest rates is seriously putting pressure on the dollar. The lower the rates – the less likely foreign nations will purchase US backed securities – we need money to flow INTO this country not OUT. Also – lower rates will feed the lower dollar and if we see an exit (both by OPEC and Foreign Nations) holding the dollar as a reserve currency – we could see rapid inflation.
If I had it my way, I would say to hell with the banks that made poor lending decisions – we need to strengthen our “faith” backed currency – and RAISE interest rates! Which would send the dollar higher – giving it more buying power – and bring back foreign investments. Sure the market might go down – but it will any way if the dollar goes into the toilet.
This is a precarious time – I think we are on the same road as Japan in the 80s (higher inflation, interest rates at zero, and currency devaluation) – that will be a very bumpy road.
Watch oil, gold, and the dollar – euro exchange rate – that will dictate the economy more than any government number, talking head, or economist. The market is telling you what is going on!
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Credit Problems increase for State and Local Governments
Over $150 billion in state and local governments bonds auctions are failing – more is to come. Two of the largest hospitals in the US (California and Boston) are looking to convert their bonds to other debt instruments as their bonds have exceeded 20% - from below 5%. Causing huge deficits for the hospitals. The same is happening to many state and local governments across the country.
The tsunami is coming as the problem is many of the state and local governments don’t have enough tax revenue to cover the massive increase in bond interest payments (an increase of 100s of millions in payments). Now S&P and other credit rating agencies are down grading state and local government bonds below investment grade – YEAH – you heard me right! Government (state and local) bonds are being downgraded below investment status (and not just one or two counties) – but many.
What is happening is unprecedented and it is another chapter that is creating GOOD cause for concern among foreign nations as to their perception as to the strength of the US dollar. When state and local governments can’t pay back their loans and are being downgraded to junk – well – that doesn’t send a very positive message does it?
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Futures Pre-open
They are looking fairly flat – but were down in the early session – specially after Friday’s sell off. The cash to futures spread is fairly narrow. We did hit a “weak” support area in the cash on Friday – but I would NOT get long at these levels.
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Support / Resistance
The market seemed unchanged from the day I left last week until this morning – of course it trickled up and got slammed on Friday. However the load is still charging and we will not stay at these levels for long (The longer here the bigger the move latter).
INDU 12250 / 12750 (I don’t give too much weight to 12250 and would be hesitant to get long at that level. Also 12750 will be hard to get through if we rally back. This market wants to go up – but reality is bringing it back down.)
NDX 1800? (We couldn’t close above 1800 and it seemed to be a magnet strike (pivot point) however – Friday it lost any juice and fell like a brick. 1700 is a very scary support area - they NEEDs to hold – but could fail. If you get long in the 1700-1750 level make sure you hedge 1:1 or over hedge)
SPX 1350 (It’s still the pivot point and the market pulled back through that level on Friday. 1300 or 1400 is the next stop. If we don’t hold 1325 today – it’s 1300 and fast!)
RUT 700 (It was the pivot point as well – but we could not hold. We need to get back to 700 to see any HOPE of this market not falling further into the toilet. I have a feeling we will see 650 before we close at 700 or above again anytime soon. And I am not getting long at 650.)
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Conclusion
It looks like the failing at the bond auction market could cast a darker shadow over the dollar, which translates to a weaker economy, which translates to a weaker market. I could not believe that I am still hearing debates about whether we are going into a recession or not. I don’t think we have seen the fall impact of the housing market – not by a long shot. Several banks are still carrying lots of 2nd mortgages that have totally failed – cause they are receiving payments on it. However, they have not “marked” them to zero yet. I got a little inside baseball on a bank that is going to see some very serious problems in the coming months – failure is a possibility (would love to get a look at the books).
I started thinking yesterday (as I have been buying gold) – I should be also loading up on silver – since it is not really made the kind of run that Gold has (yet?). If anyone has some pre-1964 quarter for sale – I will buy them at smelt value!
It’s going to be a bumpy road – don’t pick bottoms in this market. Have fun trading. Send me an email if you have any silver coins – I am in the market!
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