March 2007

All the last several weeks we are continuously getting more and more hints that inflation is coming back. As far as today, producer price index came well above expectations.

Intermediate matherials core is +0.2%, but PPI core is +0.4%. Very unwelcome development.

If you didn’t kiss those “Cramer rate cuts” goodbye yet now is the last time to do that. The Feds will rather make us go to recession then destroy the dollar franchise.

Oh, and destroying the dollar franchise will not save us from recession anyway.

The will use your name to trade real estate. You just get paid from every deal, up to $50k.

One day you will learn that you are foreclosed :-)

I probably will post once per week or so this topic “What to watch next week“. Everybody do that, me too.

Some event that happened this week:

  • Yen carry trade scare is fading, Yen retreated
  • New Century Financial went belly up
  • Many lenders are tightening the lending standards
  • Market bounced ater last week sell-off, that was no more than correction
  • Retail sales are below expectations, third month in a row

What to watch next week:

  • Fortunately (or unfortunately) there is no market moving news on schedule next week
  • Inflation reports will not make any surprise
  • Markets should decline 3-4%, as the correction is not done yet

We got relatively good payroll numbers, 97k new jobs in February. The bullets are:

  • Uncle Sam came to rescue by hiring about 39k people. We are probably just sending those who we don’t need to Iraq. Like Britain was sending criminals to Australia
  • 62k job lost in construction. This is just the beginning. I suppose some of them are already packing for Iraq and more to come
  • Manufacturing lost 14k. Toyota is just better
  • Unemployment fell back to 4.5%

Ok, so unemployment fell back to 4.5%. Good or bad? The futures show that probability of the rate cut anytime soon fell dramatically just few seconds after job report.

The mental Cramer on CNBC is jumping in front of the camera calling for the rate cut by May. And then the stocks will go up, up up – the sky is the limit.

We have a strange situation here. Sure the rate cuts are impossible when unemployment is 4.5%. The dollar will just collapse if Uncle Ben just hints that the rate cuts are possible before unemployment gets to 5%. Unlike Cramer, Ben is no idiot.

But at the same time we have all signs of consumer credit crunch:

  • December, January and February retail sales – all disappoint. People just don’t spend so much. Why’s that?
  • New Century and 33 other mortgage lenders went out of business. People just found that paying for the mortgage is just not a sound financial decision anymore. Even if they have money. Especially if they don’t. If you stop paying for mortgage and taxes you will have 6 month of free housing. Too good to ignore
  • There is absolutely no Spring rebound in home sales, as Goldilocks expected. We are still in early stage of the housing slump. 3-4 more years to come before it bottoms out

So we would like to have rate cuts, but we won’t get them. Cramer can shove them up his ass

Japanese Yen briefly visited the 115.5 Y/$ area few hours ago. It happened about 3 times in the last few days already.

Someone on CNBC said that the sub-114.5 level will trigger the Universal Margin Call.  What is exactly “Universal Margin Call“? I don’t know, it never happened before.

See for yourself on Google.

From this thread: it was discovered that starting from 9 am today New Century is:

  • Selectively funding only part of the loans that were already closed
  • Promise to fund all closed loans, but not today or tomorrow
  • Is calling the brokers handling loans that are not closed yet to find the backup

I suspect it will shut down by Friday or early next week.

Productivity is running at 10-year low, we never had it so bad since 1997:

The idea that Feds will come to rescue and cut rates is the principal Goldilocks illusion. Feds will not cut rates until they see productivity back on track.

There is another Goldilocks illusion that Feds will do everything to prevent recession. That’s very far from true. The Feds will rather prefer quick and mild recession now than long and severe depression later. Cheap credit of Greenspan’s era creates inefficiencies, anything that makes over 3% per year is funded. It depresses productivity and creates vicious cycle when inflation is running out of control and reinforces itself. Making money more expensive is the only way to fix it. And recession is just the side-effect of self curing economy.

At this point recession is probably good, because it will force everyone to cut fat, layoff non-productive workers and retain productive ones for less money. The non-profitable enterprises will have to go under and make more room for profitable onces. Trade balance and current account deficit will be fixed.

Just relax and prepare yourself for the recession. It’s all for our benefit, in the long run.

The brand new fresh rumor is that New Century declared bankruptcy. It doesn’t matter, really. If not tonight then next week.

It’s already Monday in Japan and Yen is up another 0.3% against the dollar. The market will drop again tomorrow, unless someone will get up early and save the dollar while I sleep.

I’m writing another article in follow-up to last week. The main developments are:

  • Subprime credit default swaps settled at impossibly low numbers, making further securitization practically impossible
  • The widespread repricing of risks is underway. Forget ABX.HE, look everywhere where risk was possible and see the retreat
  • Major investment banks are trading below 200-day line, it’s the market reaction to the dangerous games they are playing
  • Yen had jumped, people say carry trades are unwinding
  • There was the biggest jump in implied volatility VIX index ever

I think we are switching from violent corrections typical for bull markets to slow deterioration of a bear market. People will slowly understand that repricing of risks affects fundamentals, too. It’s not just a trading phenomena. What to watch next week:

  • Most important is Yen. If it grows another 3% the world markets will wet their collective pants. Even 1% will make trouble
  • Anything related to credit default swaps, that’s where the panic could be
  • Hedge funds will report Feb results – watch who’s belly up
  • March 6 is pending home sales. I expect bad surprise – watch market reaction
  • ISM report should be ok
  • Nonfarm payrolls should be non-event

I expect markets to slowly deteriorate, waiting for more bad news. This won’t be a fast correction and then move up, like last year. It will be slow and boring slide.

« Previous PageNext Page »


Get every new post delivered to your Inbox.