A Distilled Markets and Macroeconomic Letter
Stocks - Short Term - High Risk
Very near term, the market is in a positive mode (12/10/07). It will be interesting to see what happens after the Fed meeting tomorrow, Dec. 11. My guess would that the Fed makes a 25 or 50 basis point cut. The VIX (fear gauge) has been moving lower (20.74 on 12/10/07).
Stocks - Medium Term - Elevated Risk
I believe that the risk is the market averages may have quite low returns for some time or potentially flat/negative returns when inflation is taken into account. The fundamental picture is bleak in my opinion. The credit/insolvency crisis seems to be getting worse.
Bond yields have moved up a little. Iím still concerned about longer dated bonds loosing value.
Gold one month futures are at $813.50 (12/10/07). Iím watching Gold relative to stocks, Fed cuts, the Dollar, and other currencies.
Oil - Staying High
Oil is at $87.86 (12/10/07). If we have a slowdown or recession, oil might have a relatively steep sell-off. I think there is significant risk that with Fed rate cuts we could continue to see high/relatively high oil prices even with a slowdown/recession.
The housing/credit/insolvency crisis continues to worsen. Home prices have fallen in many areas, some quite significantly. The Fed is worried and seems poised to cut rates further. I donít think these cuts will have much of an impact.
The USD is at 76.05 (12/10/07) (stockcharts.com ticker: $USD). I feel that dollar based assets may be at risk in general, both near and longer term.
Fed Funds are at 4.50% (12/10/07). I think the Fed will continue to cut rates if more bad news in the financial sector comes to light. I, of course, expect to see plenty of bad news.
Hope Now/Paulson Plan: This plan may keep a narrow (some say 7 to 12% of problem mortgages) out of foreclosure, but I donít think it will have much of an effect on the overall problem. It is interesting that the plan seems to be focused on helping the lenders rather than the ďhome owners.Ē
UBS Sells Stake After Write-Down
Dec. 12, 2007 (NYTimes)
UBS (UBS) is taking a $10 billion write down and selling a 10% stake to the Government of Singapore Investment Corporation and an unidentified Middle East investor for $9.7 billion and $1.8 billion, respectively.Mortgage Crisis Forces Big Cuts at WaMuI think this development at Washington Mutual is significant and I would not be surprised to see other banks/savings and loans make similar announcements.
Dec. 10, 2007 (Jessica Mintz - AP Business)
Washington Mutual Inc. (WM), the nationís largest savings and loan, said Monday problems in the mortgage and credit markets are forcing it to close offices, slash over 3,100 jobs, and set aside far more than expected for loan losses in its fourth quarter. The company also said it was slashing its dividend 73 percent. WaMu said it will also cut its home loans business by discontinuing all remaining lending through its subprime mortgage channel, closing about 190 of 336 home loan centers and sales offices, getting rid of about 2,600 home loans positions -- or about 22 percent of its home loans staff -- and eliminating 550 corporate and other support jobs.
Eric Janszen wrote a piece at iTulip Mortgage Market Off the Rails, Economy to Follow on the mortgage issues that references an interesting article by someone inside the mortgage industry. I think this article is a must read as it has lot of information on why there could be problems with many loans that were of ďprimeĒ quality. Janszen also notes that ďreal estate expert Sean OíToole, based in California, CEO of ForeclosureRadar.com, tells us that for every home that sold in CA last quarter, five went into foreclosure.Ē
It seems that there could be serious problems in the London credit markets measured by the rise in the LIBOR rate (London Inter-Bank Offer Rate). This seems to signify that banks are less interested in lending to each other. I would watch this carefully.
Please send me email if you are reading this on iTulip.com and would like to read Transparency in its PDF version that I email each month.
Fundamentals: In short, I feel that the market is overvalued on a historical basis. If we see higher inflation, the market may move higher in Dollar terms but could well remain challenged in terms of other currencies.
Technical: On a very short term basis the market has had a strong rebound and is in a positive mode. The question is will this continue after the Fed meeting tomorrow Dec. 11, and if so, for how long? The recent strong rebound from the Nov. lows may be more symptomatic of a market that is weakening.
Iím concerned that longer dated bonds (5 years to 30 years) may fall in value at some point.
Gold has moved below the recent high prices. It will be interesting to see if it can maintain its recent rally.
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 small rally in the Dollar may be ending right before the Dec. Fed meeting. Long-term Iím still negative on the Dollar. The real story is the Dollar against gold and oil etc., where the Dollar has lost a huge amount of value and may lose much more.
Oil is at $87.86 (12/10/07). After moving up to $99 (intraday) oil has sold off a bit. There seems to have been quite a change in psychology where people feel relieved that oil is back below $90 as if it will just continue to fall. Of course, oil could continue to fall but there is significant risk, in my opinion, that it may stay relatively high indefinitely. If oil prices move downward substantially, this 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.
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.
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.
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