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Thread: TRANSPARENCY - April 2007 - Eric Hodges

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    Join Date
    Jun 2006
    US, Europe and Asia

    Default TRANSPARENCY - April 2007 - Eric Hodges

    A Distilled Markets and Macroeconomic Letter
    April 2007

    Transparency Snapshot

    The Markets

    Stocks - Short Term - High Risk - Positive Mode in Question
    On a valuation basis, I believe that the market is expensive. The VIX (the ďfear gaugeĒ) is at 14.53 (4/2/07), which is low. There seems to be little fear in the markets.

    Stocks - Medium Term - Elevated Risk
    The story here is that gold took a beating along with most asset classes rather than moving in the opposite direction. It may eventually return to itís more negative correlation to stocks. Gold is up modestly vs US stocks this year.

    Bonds - Inverted yields pointing towards recession?
    Yields are down a bit and the yield curve is still inverted. In the short run bonds may rise in price with a slowing economy but the longer-term bonds (5 year and longer) may eventually fall significantly.

    The story here is that gold took a beating along with most asset classes rather than moving in the opposite direction. It may eventually return to itís more negative correlation to stocks. Gold is up modestly vs US stocks this year.

    Oil - Probably Stays High Unless...
    Oil is at $65.59 (4/2/07). Factors for increased price near-term: terrorism, war, or other supply disruptions. Factors for a reduced price near-term: an economic slowdown, less terrorism, Middle East Peace.

    The Economy
    Subprime loans are in meltdown mode and the distress may spill over to other securities. The housing crisis continues to worsen there are plenty of Adjustable Rate Mortgages that could still reset to higher payments. New car sales are still off. Consumers are loaded with debt. The USD is at 82.86 and the chart looks bad ( ticker: $USD). I feel that dollar based assets may be at risk in general, both near and longer term.

    Fed Funds still at 5.25%. The Fed may not want to cut rates immediately in the face of an economic slowdown, which would probably be unpleasant for the markets.

    Transparency Detail

    Geopolitics and Housing
    Despite the recent capture and release of British sailors by Iran and the ongoing war in Iraq, I feel that tensions in the Middle East are not nearly as bad as they could be. A wider war would probably restrict the flow of oil and have a negative effect on the markets.
    Congress has instituted steep duties against paper products from China. This is a terrible precedent and could cause a serious problems for the US Dollar as well as the markets.

    Another geopolitical concern is the potential for increased tension over Taiwan between the US and China. Remember that China can now shoot down satellites.

    The main stream media has been talking about the housing crisis being ďcontainedĒ to the sub-prime sector of the market, but the problem is much bigger in my opinion. Iíve been writing about this since 2005 and have been talking to clients about their mortgages since 2003. If you want to read detail on this issue, there are many articles on On iTulip Select thereís a very interesting interview with Dr. Michael Hudson that relates the risk of housing to the broader economy, along with other economic risks.

    Housing in summary: If housing, in general, goes down enough to slow consumer spending and/or create further restrictions on home lending, we could have real economic and market problems.

    The Markets

    Technicals: The market might move higher again from here (4/2/07) in the very near term. If this is the case, the next question is if it can move past the Feb. 27 levels. If the market is weak it may touch those levels and then start to head lower again. If itís strong it will pass through those levels and head higher.

    Fundamentals: You might want to read John Hussmanís commentary on market valuations. In short, the market is overvalued on an historical basis and most people just donít believe this to be the case. I agree with Hussman.

    Stock summary: High market valuations meet geopolitical risk and a weakening housing market.

    The yield curve is still inverted. Or, in other words, short duration bonds are higher in price when compared to longer duration bonds. This inversion along with other indicators point to a higher likelihood of a coming recession.

    Gold has continued to move higher. If gold now moves lower, I will be concerned that it is pricing in a recession. Gold stocks showing significant volatility.

    Reminder: fiat currencies are not tied to anything of tangible value. They are only worth whatever the market, and the public, feels they are worth. As more fiat money is created the value of this paper money should go down. In my opinion, the U.S. is creating too much money and so are China, Japan, and Europe.

    Dollar | Currencies
    The Dollar has resumed its slide but has not broken down below the key level of 82. Long-term Iím still negative on the Dollar. The real story is the Dollar against gold, where the Dollar has lost a huge amount of value and may lose much more.

    Oil is at $65.53 (4/2/07). The risk is that oil stays high. If oil prices move downward substantially, they may be pricing in a recession. A major concern with oil is the potential for a wider conflict in the Middle East, which could crimp supply. There are many other potential geopolitical risks to oil as well.

    The Economy

    The Fed
    The Fed is in pause mode and it seems that they will stay in pause mode for a while. If housing and the economy slow enough the Fed should start cutting rates again. There is risk that the Fed will not cut even in the face of a recession in order to support the Dollar.

    I feel that the housing picture could become much worse and now, at least in the Subprime market, it seems to be happening.

    ~ $1 Trillion in mortgages may reset in 2007.

    The key chart to reference on housing via the New York Times.

    The Consumer
    I believe that many consumers have less home equity now than before because they have taken money out of their homes and spent those funds. Consumer savings rates are very low or negative. I believe that consumers are being gradually squeezed by high oil prices on one side and rising interest rates on another.

    Transparency Strategy
    My concept is to bring you a the most transparent look possible on the economy/markets via a quick read with plain language. This letter is geared toward the busy executive/business owner. If you are really short on time just look at the Snapshot section where I keep everything as brief as possible. In the Detail section I try to give a little more insight into my thinking without delving so deep that I stifle the reader.

    When constructing portfolios, I take the client situation into consideration first and then combine that with the current economic/market factors presented in this letter along with well researched asset allocation strategies.

    If you have specific questions on where I see things, or would like to discuss your portfolio, please feel free to contact me.

    Eric Hodges
    Financial Advisor
    Stahlschmidt Financial Group

    925 906 4600

    500 Ygnacio Valley Road
    Suite 150
    Walnut Creek CA 94596

    The information being provided is strictly as a courtesy. When you link to any of these web-sites provided herein, FSC Securities Corporation, makes no representation as to the completeness or accuracy of information provided at these sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, sites, information and programs made available through this site.

    The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Investing involves risks including potential loss of principal.

    The price of gold is subject to substantial price fluctuations over short periods of time and may be affected by unpredictable international monetary and political policies.

    Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors. In General the bond market is volatile, bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

    The price of commodities is subject to substantial price fluctuations in short periods of time and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated and concentrated investing may lead to higher price volatility.

    The views expressed are not necessarily the opinion of FSC Securities Corporation, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results.

    Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness of reliability cannot be guaranteed.

    Registered Representative offering securities and advisory services through FSC Securities Corporation, a registered broker-dealer member NASD, SIPC & A SEC registered investment advisor.
    Last edited by FRED; 04-06-07 at 12:53 AM.



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