Crude Oil Futures Long Positions has shruck as Fund managers flee

The Nov NYMEX Crude oil futures contract opened at $106.89, near the high, but closed down at $96.37, near the low ($95.04), on a couple of big factors, the first of which is imminent recession in the US.

The other is wholesale abandonment of the market by various fund managers. One Crude Oil Futures analyst said $85 million in long positions a month ago has shrunk to $8 million. But today Bloomberg reports thatoil rose as much as $2.93, or 3%, to $99.30 on expectations that Congress will take action tomorrow. Oil is $98.78 at 12:41 pm GMT.

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Barbara Rockefeller - Forex Trading Reports

Forex Technical Analysis

Forex Technical Analysis : Intraday moves are so big that our once-a-day price-fixing (at 5-6 am ET) is at risk of failing to represent sentiment. Today’s charts show the US dollar exchange rate falling except against the Australian Dollar and Canadian Exchange Rate and the Mexican peso futures. Is that accurate? Time will tell. We can write two equally plausible scenarios in which the US dollar rises on flight-to-safety (“the devil you know” argument) or falls on a cold-eyed assessment of looming US recession and ongoing financial market turmoil.

Under these circumstances, we imagine the one clear winner would be the Swiss franc, somewhat isolated from both Europe and the US, and yet the USD to CHF has risen steadily from the spike low yesterday at 1.0811 to 1.1028 so far today. It’s only on the 5 am prices that we see a Swiss franc exchange rate bounce upward. So which is right? We picked the 5 am price as the most representative twenty years ago, so we will stick with it.

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Barbara Rockefeller - Forex Trading Reports

Paulson is that rare animal in Washington, a can-do guy

Foreign Exchange Currency Outlook : Consolidation in the US banking sector has been on-going for over two decades, so mergers and acquisitions don’t necessary cause contraction in the sector. A liquidity and credit crisis does cause contraction, and contraction in turn causes recession. We have seen little sign of recession yet, just slowdown. That is about to change. Some analysts say that even when the House meets again on Wednesday night or Thursday morning, the Paulson plan will not get passed - and there will not have been enough time for major changes to have been made that would make it acceptable to those who voted against it Monday. Of course, Pelosi could grovel and change enough minds or some other political event could occur—the presidential candidates promising administrative office if the pro-plan members lose their elections, for example.

The latest word seems to be that the Senate Banking Committee's ranking Republican (Gregg) and Obama both said the plan will eventually pass; the FT reports that the FTSE 100 rose on the news.

Meanwhile, Bush will address the nation on TV this morning. TreasSec Paulson was visibly angry when he addressed the press after the vote yesterday, and it would not surprise us at all if Bush announces a series of initiatives that the Treasury can take immediately without Congressional authorization. It could tap the FDIC or other Executive-branch money pool (to buy equity or warrants), it could suspend mark-to-market, it could increase the size of swap lines with everybody for any reason, and probably a few other things.

It could even sell gold (gasp!).

The reason the House was involved in the first place is that this is where the power of the purse resides.

It’s called “revenue power,” but in the end, the Executive Branch can do (and has often done) an end-run around it. We can just imagine Paulson egging Bush on, like a coach with a sports team. Bush is likely to respond heartily to such macho stuff. Paulson is that rare animal in Washington, a can-do guy. Do we really think he went to bed last night or will sit around waiting for these childish bozos in the House? It’s a Jewish holiday today, actually a good time (in somewhat thinner markets) to take strong action. It’s also possible the Fed could cut rates, even inter-meeting, but nobody thinks that’s a good idea or an idea that would work.

This is the basis on which we imagine the US Dollar exchange rate could rise today. Foreign Exchange traders just love vigorous, decisive action from can-do guys.

They bought the dollar upon the US invasion of Kuwait and then the US invasion of Iraq not because they are a blood-thirty lot, but because they like decisiveness.

If Bush/ Paulson come up with a new initiative today, the US Dollar futures should go up.

If Congress comes up with a bill that passes tomorrow, the dollar could go up.

But we can’t count on it. This is just one more reason to stand aside and let the market gyrate on too much noise. Most retail forex traders can’t push the button fast enough to take advantage of warp-speed markets. A lot of professionals can’t, either. The one big mistake to avoid is thinking that sound macro analysis is a good basis for a short-term trade. It’s not.

The right timeframe for Foreign Exchange Markets today is 5 minutes, or maybe three.

Bye for Now

Barbara Rockefeller - Forex Trading Reports

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Comex Gold Futures was already floppy on Friday

Comex Gold Futures was already floppy on Friday, putting an inside day and closing near the low at $882.90(continuous futures contract). Today Reuters reports that spot gold in London “was quoted at$873.85/875.85 at 5:38 a.m. EDT, down half a percent from $878.40 at the nominal New York close on Friday.” This is about $5. The reason is seen as unwinding some of the flight to quality (!)on relief that the US bailout deal is done.

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Barbara Rockefeller - Forex Trading Reports

Crude Oil prices stress the channel top on our chart

The Nov NYMEX oil futures contract opened at $107.70 on Friday and closed down at $106.89, but not before touching a high of $108.11. The week’s prices stress the channel top on our chart. Overnight, though, crude oil was nearly $3 lower at $103.94 in Singapore.

Bloomberg reports that Commodities fell, led by oil, copper and lead, on concern the U.S. plan to spend $700 billion propping up America's banks will fail to unlock credit markets and avert a slowdown in the world's largest economy. Crude Oil Futures, gasoline, heating oil, copper, lead, corn, soybeans, silver and rice all dropped more than 2 percent, leading the S&P Goldman Sachs Commodity Index to a 3.2 percent decline… ‘The fear is that the rescue package is not enough to stop the economy falling into a full-blown recession,’” said a German bank analyst.

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Barbara Rockefeller - Forex Trading Reports

Wall Street Bailout - This whole thing cannot end well…

Foreign Exchange Currency Outlook : Today we get personal income and spending, but since the data is backward-looking and the world has changed forever, probably not of much interest. Bloomberg reports that consumer spending probably rose in August on auto “incentives” for a rise of 0.2%, the same as July. “The average gain was 0.3% a month during the last official recession, in 2001.” Economists surveyed by Bloomberg in the first week of September forecast consumer spending in the third quarter will be flat, the weakest since 1991, following a 1.2% pace in the second quarter.

Economists forecast overall economic growth of 1.2 percent in Q3. Note that everybody is watching spending, but incomes count, too. Incomes probably rose 0.2% in Aug, after a drop of 0.7% in July. If incomes and spending are the same, that means no savings.

The details of the Paulson bailout plan are available online. The market is not judging details, just the fact that a deal was reached, even though the Senate won’t vote on it until Wednesday. Constructive criticism was slow to emerge this time, for some reason. To cries of “let the bastards fail,” we are astonished that Bernanke, the great expert on the Great Depression, failed to make more of what happened the last time the country engaged in letting the bastards fail. The Treasury Secretary at the time was Mellon, and his watchword was “Liquidate! Liquidate! Liquidate!” In other words, the emotional response (to a dyed in the wool capitalist) is to throw the miscreants under the bus, but it was the wrong thing in the 19030’s and would have been the wrong thing today.

Even as things stand today, with relief that the main political fight is over, we will now have a horrible period, perhaps lasting years, about what other plans could have been devised to do the job better without violating core principles. Every little piece of data that comes in will be viewed under the lens of the bailout plan. This is “woulda, coulda, shoulda” and is inevitable under the circs. It will be tiresome but it’s essential. Everyone is making jokes about “socialism” for the rich—and nobody is defining “socialism” or even nationalization. If a government takeover is intended to be short-term, lasting only until the entity can go back to being fully private, is it really “socialism”? We could spend all day on this kind of thing, to no real purpose. At a guess, government really should not be in the business of business because it almost always does it really badly, and this time whoever gets hired to do the actual work is going to be under a microscope. This is good but then we tend to miss the forest for the trees.

This whole thing cannot end well…

Everyone is mad as hell, but refusing to accept the lesson from Sweden’s financial sector crisis in
1991-93. Sweden selected the banks that could survive and injected equity capital into them. It worked, even though it took three years and cost the country a 5% contraction in GDP over the three years. Paulson is trying to avoid this outcome but it’s not clear it can be done with the current plan. It fact, many observers say it cannot be done with the current plan. It’s too little money, and it doesn’t address the need for capital. We are starting to get scared. The Japanese response to the US bailout and the European rescue operations is interesting-foreign exchange traders say they are relieved the Paulson plan got resolved, but they worry that it won’t work because it’s not big enough or comprehensive enough or pointed directly at the core issue, which is the housing sector. Accordingly, the the US Dollar Exchange Rate first went up during the Tokyo session but then gave it back. A loss of confidence in the US tells in the dollar. We will know probably by the end of this week whether loss of confidence is going to be the dominant theme.

On the bright side, expectations of the plan’s failure and/or upcoming US recession tend to lower oil and other commodity prices, and in the short-term, that tends to be dollar-supportive. So we have conflicting factors, lots of them, and the charts are of little help. Late Friday it really looked like the US Dollar correction was ending—but then fundamentals (bad news from the UK and Europe) trumped the charts. We try to reconcile the fundamentals with what the charts are saying, but today both the analysis of the fundamentals and chart-reading are giving off too much noise.

The solution is a situation like this is to retreat to the sidelines.

Bye for Now

Barbara Rockefeller - Forex Trading Reports

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Overall, commodity prices are recovering

The Nov NYMEX Crude oil futures contract opened near the low and closed at $108.02, near the high ($108.67). Conversely, gold opened at the high $891.50 and closed at the low ($877.70). What’s going on? Overall, commodity prices are recovering a bit but flat on the day yesterday—see the chart of the commodity price index.

Delay in passing the Paulson plan has been helpful to crude oil futures prices today (or rather, helpful to the dollar and to the consumer of oil)—the price fell to a low of $104.25 overnight and is languishing at $105.38 at 11:44 am GMT.

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Barbara Rockefeller - Forex Trading Reports

To defy Paulson and Bernanke today would be irresponsible

Foreign Exchange Currency Outlook : To the extent that uncertainty over the Paulson plan is driving the foreign exchange market today, we say relief is in sight. Congressmen at heart are cowards who will not dare defy the financial experts for long. We admire the Republicans who are saying the emperor has no clothes, but they are in a minority and their party does not control Congress. They may be right but being right is not what counts—what counts is that Congress take action when the experts tell us we must take action. To defy Paulson and Bernanke today would be irresponsible and the voter would turn on these guys if the sky does fall.

The voter may think he doesn’t like the plan now, but they would like the sky falling even less.

Therefore, Congress will act. When?

Probably Sunday night or Monday.

For one thing, politically it’s the right thing to do (taking the stage from McCain). For another, the Treasury is likely to find a goad to scare Congress with—maybe something having to do with Wachovia and Morgan Stanley. Third, it’s likely Bush steps in again, despite the utter failure of last night’s effort. It’s his job to step in, lame duck or not.

The real problem is that the US dollar exchange rate rises on the prospect of a plan and falls when uncertainty over the plan emerges. But what if we get a plan and it doesn’t work?

Despite this delay, we still think the dollar exchange rate is getting a boost on the prospect of the plan getting passed and will get a relief rally when it is passed—but after that, watch out. The market will then judge whether the plan is big enough and will work. It’s always possible that $700 billion is not enough—Bernanke had saidin testimony this week that it’s about 5% of total mortgages at risk—but it’s not clear that this is the sole criterion for rescue. If the plan looks insufficient or wrongly structured in any way, the dollar is toast.

The dollar exchange rate is also toast after other consequences, intended and unintended, start becoming clearer. What if foreign banks do not improve liquidity? Is the Treasury going to keep extending swap lines? Voters will start asking who is paying for it, can we trust them to repay, and why are these guys operating in dollars in the first place—let them eat cake, er, use their own currencies. At a guess, the American chapter will be over next week but other chapters in other places will get opened. This is not the end or even the beginning of the end. We can’t see how the US dollar exchange rate can come out if the storm to come at higher levels. The only thing in the US dollars favor today would be worse conditions elsewhere. Dollar bulls want a banking crisis in Europe, not a nice thing to wish for (and not a realistic wish today, with the ECB keeping things so tightly wrapped up).

So we may go into the weekend long the dollar, but don’t be fooled—it’s a temporary thing.

Bye For Now

Barbara Rockefeller - Forex Trading Reports

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If the US dollar exchange rate weakens, oil will go up.

The Nov Nymex oil futures contract put in a lower high—$109.50 vs. $109.58 the day
before. This seems small but is a big deal. The close was lower, too, $105.73 vs. $106.61 the day
before. One bar doesn’t necessarily mean a move has been derailed but it helps a lot.

Unfortunately, today Algerian oil minister and OPEC president OPEC President Khelil said oil prices may rise as investors use it again as a hedge against the US dollar.

“The price depends on the US dollar, it has nothing to do with oil demand and supply. If the US dollar exchange rate weakens, crude oil futures will go up.''

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Barbara Rockefeller - Forex Trading Reports

Bernanke - $700 billion injection of new money into the economy is not an inflation threat

Foreign Exchange Outlook : Bloomberg reports that Fed funds futures are pricing in an 80% chance the Fed will cut rates at the October FOMC, up from 58% only on Tuesday and 23% last week. Meanwhile, both the Bank of England (in the form of policy member Sentence) and the European Central Bank (various officials) continue to concentrate on taming inflation, chiefly in the form of keeping it creeping into wages. This dichotomy is disturbing, especially since Bernanke said yesterday that the $700 billion injection of new money into the economy is not an inflation threat (without also explaining how it will be sterilized).

Today the FT has a report on comments by German FinMin Steinbrueck, who told the German Parliament that the US will lose its status as the superpower of the world financial system. This world will become “multipolar” as stronger, better-capitalized financial centers emerge in Asia and Europe. “The world will never be the same again.” The FT calls it a “biting attack” on the US for having resisted urgent pleas for better regulation starting last year.

Crisis management alone will not rebuild the lost confidence. We must civilise financial markets, and not just through moral appeals against excess and speculation. Self-regulation is no longer sufficient.

The FT writes that he said The US belief in “laisser-faire capitalism; the notion that markets should be as free as possible from regulation; these arguments were wrong and dangerous,” he said. “This largely under-regulated system is collapsing today.” He pointed the finger at Washington for failing to take seriously proposals Berlin had made as it chaired the Group of Eight industrial nations last year. These proposals, he said, “elicited mockery at best or were seen as a typical example of Germans’ know-better attitude.”

“Unlike the US two-tier banking system, he said, Germany’s three-pillar system had weathered the storm. The network of savings banks, much derided in the past by US critics, had provided business with more credit in the first half of this year than in the same period last year.

“Mr Steinbrück put forward eight proposals to help resolve the current crisis and prevent future financial meltdowns on a similar scale. Among these were a ban on “purely speculative short-selling”; a crackdown on variable pay for bank managers, which had encouraged reckless risk-taking; a ban on banks scrutinising [sic] more than 80 per cent of the debt they hold; international standards making bank managers personally responsible for the consequences of their trades; and increased co-operation between European supervisors, culminating in the long term in a European supervisory system.”

Steinbrueck is an important guy and he has one giant germ of truth in here - that the absence of savings in the US made the banking system vulnerable to raising funds by inventing new classes of debt. It’s not really true that the German banking system is better than the US system structurally except for this aspect—but banks don’t get credit for it. Social norms and tax policy get credit for it.

German banking is notoriously inefficient.

Banks fail left and right.

The state-owned banks get special treatment, much like Freddie and Fannie used to get.

And Steinbrueck is wrong that the world is throwing the US away as the leader in favor of other centers in Europe and Asia.

Financial institutions in Europe and Asia have not disclosed their problem assets to the same degree as the US.

There is a lot of rotten paper in London and Frankfurt, hiding under the rug. And the preeminence of the US system is due in part to the size of the US economy but also to the rule of law (hello, India?), the primacy of individual property rights (yes, China?), and the freedom of markets from undue regulation. What? Yes. Even when the US is in full regulaotry mode, we have less red tape and regulatory burdens than in Europe and certainly less than in Japan. We also have a higher degree of greed, which inspires financial market innovation, not all of which is evil and unethical (the concept of CD’s, commercial paper, ATM’s, credit and debit cards, linked accounts, etc.—all invented here, not in Germany).

The US has much to be ashamed about now. In the 1930’s the chairman of the New York Stock Exchange (Whitney) was indicted and went to jail for stealing frm his customers’ brokerage accounts.

In other words, it was ever thus - the financial system running off the rails. But stupidity and cupidity are not solely American traits - think Herstatt. Think Barings. Think Mitsubishi.

In sum, we will get over this whatever the Congress and Treasury Secretary do and whether the recession is long or short. Three hundred million people are not going to go live in a cave and use barter to get food. The system is not broken beyond repair—it just has a big hole in it. Banking, with any luck, will become boring again as the hotshots and math whizzes go wreak havoc in some other field.

But to say the US will come out of this one day is not to help with the imemdiate US dollar forecast. While we have to expect a relief rally at some point, and perhaps very soon as Congress does the deed, the longer term outlook for the US dollar exchange rate is grim. And we still want to hear how Bernanke is going to sterilize $700 billion.

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Barbara Rockefeller - Forex Trading Reports

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Comex Gold Futures opened at $942.40 and closed at the low

Comex Gold Futures opened at $942.40 and closed at the low, $885.50, presumably on the firmer US Dollar exchange rate. Still, a breakout this big has to be respected.

Bye for Now

Barbara Rockefeller

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Higher Crude Oil Prices ahead unless recession story geta a grip

The Nov Nymex crude oil futures contract opened at $108.98, hit a high of $109.58 but closed down at $106.61. It was fairly tame in Asia overnight, helping equities, but this morning in London, it’s rising again to a high of $109.50 and is near that at 7:30 am ET. Reasons include a fire in Texas, the upcoming crude oil inventory report today from the US Energy Dept (sure to be a drop in just about every category because of the hurricanes), and genral uncertainty about the bailout and resulting economic outlook. We say the chart is very discouraging—it looks like an upside breakout really did form and higher prices are ahead.

This could be reversed if the recession story gets a grip again.

Bye For Now

Barbara Rockefeller

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The Paulson plan - violates the principles of American capitalism

Foreign Exchange Currency Rates : It doesn’t matter whether we approve of the $700 billion plan—Congress is not consulting us—but it does matter whether the market likes it. We say Kentucky Senator Bunning is right--it violates the principles of American capitalism. Forget whether it’s “socialistic”—that’s just a word with little real meaning in the US. But it means we do not really believe our system is valid. A loss of confidence in the system by the very people hired to oversee the system, the Treasury secretary and the head of the Fed—is extremely bad for the image of the US.

How can anyone trust a US security from now on except US government paper, and with the rising deficit, perhaps not even that?

The Paulson plan would raise the ratio of government debt to GDP to 70%, the highest since 1954, according to Bloomberg. Something named TD Securities Ltd. In Sydney says this number could drive the dollar to $1.95 against the euro. The firm claims to be able to show a correlation of the deficit ratio to the dollar.

We continue to believe that the Fannie/Freddie bailout and then the AIG takeover were motivated in large part by concerns over getting capital inflows from Asian and Middle East investors, including central bank reserve managers. Overnight there was a run on a bank in Hong Kong rumored (falsely) to have giant losses from Lehman, and Market News Singapore reports that investors feel swindled by Lehman-based derivative offerings. Well, too bad.

They were aiming for high yield, right?

We hear from Bernanke this morning starting at 10 am. Today will be interesting—let’s watch to see how and to what extent opposition rises to the Paulson plan, not least the urgency part. Congress is showing a commendable reluctance to be stampeded. We are suffering from the Chinese curse of living in interesting times. And speaking of the Chinese, what lesson are they taking from all this? That Paulson was speaking with forked tongue when he urged them to deregulate their own markets.

We say the US dollar cannot be favored in this environment. It seems not to be under much pressure at the moment, but just wait—unless we get more Buffett-style votes of confidence in the US system, the US system weak and being kicked while it’s down, and by the very people charged with supporting and defending it.

We would not go as far as to predict 1.95, but the days of 1.40 and the glimmer of hope for 1.35 are fading fast, even if crude oil were to fall again. At a guess, the dollar will reach the July high of 1.6038 within a week or two, depending on the outcome of the Paulson plan. Note that this $700 billion crisis is overwhelming the oil factor. If oil keeps rising, it’s another leg kicked out from under the dollar. Europe and G7 are clamoring to be heard and to have a voice in the outcome in the US.

This is going to be interesting—foreigners often have a sounder grasp of US principles and ideals than the citizens themselves.

Bye for Now

Barbara Rockefeller

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Tomorrow we get the US Crude Oil inventory report

The Oct Nymex Crude oil futures contract spiked to a high of $130 yesterday and closed at $120.92 off the low of $103.35. Don’t panic—the high is a function of the Oct contract rolling off into the Nov. Crude Oil Traders were massively short and since the contract was expiring, had to buy to cover. Oil should calm down today and the rest of the week-although it can still be an upside breakout. This morning at 6:15 am, the Nov Oil futures contract is down to $106.85.

Tomorrow we get the US inventory report, probably a crop in supplies due to production and refining cutbacks due to the hurricanes. This suggests prices could rise. But more interesting is whether oil traders buy back into the recession scenario that has “demand destruction” as its core theme, in which case we can hope for the oil price downtrend to resume.

Bye For Now

Barbara Rockefeller - Forex Trading Reports

US Dollar suffers as perhaps the $700 billion is not enough.

Foreign Exchange Currency Outlook : Some foreign exchange traders are fearful the Paulson plan will get watered down or otherwise hijacked by a Congress more concerned about the voter (in election season) than about the banks. We say it would be smarter to fear that it will not be modified and even watered down. Bubbles always proceed the same way. They start with excess money supply, according to Kindleberger, balloon out on fantasies, hopes and scams, and burst on nothing much as all, just their own excess. The human mind somehow collectively comes to know when too much really is too much. For the government to try to prevent the bursting with more hot air, so to speak, is to try to turn back the tide or change the course of a mighty river. It can be done and has been done, but it’s cheaper and healthier to let the process roll out naturally. People who do not get punished for crimes commit them again when the act is well-rewarded.

Bankers are recidivists just like hold-up artists.

Or perhaps the $700 billion is not enough.

Market News cites research by Merrill Lynch indicating it’s about 10% of the potentially troubled assets. “To put the size of TARP in perspective, outstanding residential mortgage backed securities (RMBS either securitized or whole loan) total about $5.8 trillion. Outstanding commercial mortgage backed securities (CMBS securitized or whole loan) total about $3.4 billion. Merrill Lynch mortgage strategists say at distressed prices $700 billion equates to more than $1 trillion at face value and so the TARP program could acquire 10% of the outstanding market RMBS and CMBS market.”

It goes without saying that nobody has the slightest idea whether 10% is enough.

But clearly some initiative is going to be taken and however bad or good it turns out to be, vigorous and speedy action should be rewarded. While a banking crisis is always bad for a country and its economy, it’s not always bad for a currency. Again, the only model we have is Japan in the 1990’s after the real estate and stock market bubble burst in 1989. It took nearly two decades for the banking sector to get back on its feet, but the yen was not always affected by the crisis. In fact, the market often simply ignored the banking crisis and we recall writing many a morning briefing marveling that the yen was rising to ridiculous levels considering the deflationary effect of the crisis. Japan came close to a 1930’s era Depression, the only other time in modern history. From this we got the Keynes’ phrase “pushing on string” as one initiative after another failed, including stimulus checks. But the US dollar to Japanese yen moved sometimes independently of the crisis. It rose from 101.41 at end-1999 to 134.80 in Feb ’02, but the Japanese yen strengthened to 102.34 by end 2004.

This is a point made also by Morgan Stanley economist Stephen Jen. The crisis doesn’t necessarily tell us anything about the dollar. But Japan was not the issuer of the primary reserve currency and not the main military superpower, nor the leading world economy. Technically the Japanese economy is still the world’s second largest and certainly one of the most innovative, but not the “leading” economy. If Japan sneezes, the rest of the world doesn’t catch a cold. This is demonstrably not true for the US role.

When the US sneezes, stock markets around the world go down.

Then there is the argument that “it’s worse for the other guy.” It’s not nice to say so, but the dollar can be rescued by a bad Event or worse conditions someplace else. In this instance, it’s Europe. Signs of recession are appearing, along with signs that unions will be firm in their demands, although we are always impressed by European union statements and they almost always fold in the end. The word for this is stagflation, and Europe has less ability to get out of it than the US because of the famous labor market inflexibility. So let’s say Europe gets recession but the US squeaks by without recession.

Isn’t that US dollar favorable?

We say the answer lies not in the economics but in two other places—the election and the chart. Starting with the chart-prices never move in a straight line. We must expect pullbacks. In fact, by Friday, if the Paulson plan is looking better and if Congress gets adjustments that seem sensible to the public, the US dollar futures could rally. We would not sell US dollars into the weekend as things look today. Having said that, we have to expect a “sell on the bounce” mentality. The US and the US dollar are unpopular today. Economic comparisons are not at the top of anyone’s list. Growth doesn’t count when a system is being screwed up by its managers.

The other factor is the election. Let’s say the Paulson deal gets done and we don’t like it. McCain, if elected, would let the foxes keep control of the henhouse. It’s the Republican Party thing to do. It’s what his advisors and campaign contributors would want him to do. We saw how that worked out with the Bush-Cheney administration and the oil industry (specifically, Enron). But if Obama gets the job, he would not be shy about going back and un-doing what Paulson is doing today.

This is only one of the reasons we think that a McCain administration is bad for the US Dollar and an Obama one is good for it, whatever our old-fashioned ideas about Dems being tax-and-spend and the GOP being the party of business. Clinton should have put an end to those old prejudices—he is the one who balanced the budget, after all—but somehow they linger. The world likes it when the US takes the initiative. We need to fear that the Dems might be protectionist and impose trade barriers, and other things like that—but on the whole, when you’ve got a mess caused by rich fat-cats, bring in the Dem janitors. They can’t make it worse—can they? This is not a poltiical prefernce. We think Obama is an empty suit and McCain may be trigger-happy, and we don’t like either one of them. But as a commentary on the mood in the US today and the rest of the world—they don’t vote but they do invest

Obama has the edge in the dollar’s favor.

Bye For Now

Barbara Rockefeller

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Comex gold futures contract

The Reuters Comex gold futures contract gives us only a single data point for Friday ($860.60), but we see elsewhere (kitco website) that spot gold closed Friday at $871.88 and is at $884.68 as of 8 am today. Gold is a stupid asset-it costs a lot to hold and has no inherent yield-but it’s a dandy symbol of confidence and trust. Right now those are in short supply so we expect the gold bugs to have a field day. But $2000?

No, because governments know that the price of gold implies the level of confidence in them.

They will sell into a rising market to maintain their own legitimacy.

Bye For Now

Barbara Rockefeller - Forex Trading Reports

What happened to vastly lower demand in Crude Oil due to the impending recession?

The Oct NYMEX crude oil futures contract opened at $97.95 and made a new high of $105.25, and closed near the high at $104.55. This morning around 7 am it is quoted at $105.55, implying the bottom may be in. Issues include Nigerian rebel action.

What happened to vastly lower demand due to the impending recession?

Bye For Now

Barbara Rockefeller - Forex Trading Reports

how $200 billion of bad mortgages could have created such a falling-pyramid effect

Foreign Exchange Currency Outlook : It’s conceivable that if oil were still falling and if gold were not rallying so strongly that the US dollar could survive this latest “fix” for the financial sector mess. But oil is rising and gold is rallying, and the perception is spreading that we are probably only half-way through the plans that will be needed, and haven’t even started the economic consequences of the failure. Many other shoes are out there to be dropped, especially now that the Feds have their wallet open for the picking.

We wrote last week that we are happy to see a vigorous initiative from the US government and a comprehensive one instead of the case-by-case situation we have had since Bear Stearns. But don’t be misled—nobody in his right mind can be “happy” about this outcome.

It’s awful in just about every way imaginable.

It favors the institutions that created this mess in the first place (those still standing, that is) and nowhere is there a single provision for the ordinary Joe, whether as mortagee or investor. It may just manage to resolve the liquidity crisis, but it doesn’t solve the problem of under-capitalization of the banks, which still need to raise more funds. With the Middle East and Asian investors already licking their wounds from having jumped in with both feet at the beginning of this crisis, where is the capital going to come from? The need for US government’s action has already demonstrated that the private sector isn’t willing to cough up fresh capital.

This means more bank failures, more mergers, and a giant contraction of credit everywhere in the world, not just the US.

We are having a hard time understanding how $200 billion of bad mortgages could have created such a falling-pyramid effect. It’s true that banks and brokers tried to make a silk purse out of a sow’s ear, with the aid of the ratings agencies, believing modern portfolio theory was the alchemist’s stone, but still, how did something so small become so big? The answer is that it didn’t. The $200 billion in liar’s loan mortgages were not magically, virally multiplied to infect every CDO and other alphabet-soup asset class to the extent of $700 billion or $1.5 trillion or any other number. In fact, because of various accounting and mark-to-model rules, the ultimate owners of a lot of this paper are going to make a tidy profit of it. It’s not bad, just not trusted. (That doesn‘t mean the US taxpayer will get the profit. The agencies tasked with buying and then selling the paper will manage to siphon off the gains to the insiders and interested parties).

The key is “not trusted.” Trust is everything. It’s everything in romance, commerce and finance. In a nutshell, the banks don’t trust one another today, perhaps projecting their own bad actions on others, and the old banker’s principle of “know your customer” is out the window. You can’t legislate trust. Critics are moaning about how the fat cats will only get fatter from the bailout while the little guy gets hosed, but anyone with a 401k plan is not complaining too loudly and in any case, the immediate losses or escape from losses is not the main event. The main event is the loss of trust in society at large, not just the financial sector. The social contract was broken, and it was broken in Washington. Raw naked capitalism may be good at setting optimal prices, but that’s about it. To say total lack of regulation is a necessary corollary of capitalism is to have read no economic history and to misread human nature.

And gosh, isn’t Washington where the rescue is coming from? If a poll were taken today asking the public whether it trusts Wall Street or Washington to “do the right thing,” the answer would be an overwhelming “no.” This is not a political statement (please don’t write) but rather an economic observation. Trust is essential to economic activity. You need trust to get new companies funded and trade conducted (think of letters of credit, not to mention open account trade). You need trust to let the gas tank in your car go down to one-quarter and not be filling it up every day just to be sure you can get it. You need trust to have a successful economy.

Observers in less developed countries note that the key reason they do not get growth is that they have no banking sector or capital markets.

Well, why not?

In large part because Tribe A doesn’t trust Tribe B.

We can see nothing that Washington or Wall Street can do this week to reverse the situation. In fact, more bad news is surely on the plate. The only thing that can save the US Dollar Outlook now is a Shock from elsewhere, like Germany. (Japan seems safe for the moment.) Aside from the mysterious yen, the US dollar is toast. This doesn’t mean take a short position and walk away. Prices never move in a straight line and after the giant move Friday, we must expect a corrective move on profit-taking and re-consideration…. But let’s start looking at foreign exchange charts on a weekly basis. Aside from the nice summer rally, we are back to the multi-year euro uptrend.

Bye for now

Barbara Rockefeller

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Spot Gold is slipping back to $838.35

Comex Gold futures rose dramatically for the second day. The continuous futures contract opened at $869.90, near the low of $836.00 but closed at $892.70, near the high of $910.90. It’s a huge bar and it breaks the 200-day moving average. But this is panic buying and hardly ever sustainable. The FT reports that sure enough, spot gold is slipping back to $838.35, but doesn’t name the exact time.

Bye For Now

Barbara Rockefeller Forex trading reports

Nymex Crude Oil back above $100

The Oct NYMEX crude oil contract opened at $97.10 and closed at $97.88, near the low at $95.75 and failing to hold the new higher high at $102.24. This is very good. So far overnight it has risen only to $100.25 and is flirting with a sub-$100 level at only $100.08 at 11:11 am GMT.

By For Now

Barbara Rockefeller

The response was needed because conditions were dire. Conditions are still dire.

Foreign Exchange Currency Outlook : We are very happy to see the Treasury and Fed taking a vigorous initiative. We are even happier that it’s a comprehensive approach to “systemic” risk and not the one-by-one approach of the past few weeks. A lot has happened in just two weeks, the failure of Freddie and Fannie, Lehman, the break-the-buck money market fund, and questions about Morgan Stanley (about which the Chinese may feel “it can solve its own problems,” according to one report today).

The market is happy to see such a vigorous response, too. With stocks rallying everywhere and the US dollar reversing direction, things sure look good today.

But wait a minute.

The response was needed because conditions were dire.

Conditions are still dire.

The rescue plans have not yet been tested and found sufficient. What other terrible thing can happen that is not foreseen today? While nobody expects Congress to pull back from any of the plans, the fact remains that the government is about to commit to nearly $1 trillion of money that it doesn’t actually have. Unlike the Resolution Trust situation, where the government had already seized the S&L’s, this time the government has to go out and buy the toxic assets from the current holders. Nobody knows what the price is or should be. Sounds like Russia when it opened markets for the first time… and the oligarchs began to emerge, the very essence of crony capitalism. This problem will become severe as buyers start to emerge. Will there be favoritism? Just as some make a fortune on short-selling before the SEC finally stopped it (and note that the ban on short-selling ends in Oct-and Jan in the UK), are some players getting preferential treatment?

This is a nightmare of imputed sovereign risk.

And what will be the price and yield of the new paper the US will have to issue to backstop the new entities and plans? As we wrote yesterday, the US will have to pay a premium to get the money. Rising yields are usually good for a currency but you have to consider the context. The US is forced to sell paper but buyers are not forced to buy it (unless the State Dept is twisting arms behind the scenes in China and the Middle East, which wouldn’t surprise us at all).

In short, it’s still a crisis and it’s a crisis home-grown on American soil.

It’s a little premature to say the dollar is going to come out of it unscathed. Watch gold (and as always, oil) today. If the recessionary tendency (and deflationary tendency) proceed as expected, oil should resume its decline and that is US dollar supportive. But if fear is not banished, gold will hang on to gains. It’s a symbol, perhaps, not an asset class into which intelligent people put capital, but still—it’s not without meaning. Be still feel quite fearful. We doubt the dollar can make a full recovery—but it’s still early, and we have a lot of confidence in the brainpower and willpower of Bernanke and Paulson. At a guess, we will want to go into the weekend square, unless the chart shows something compelling after the close today.

Friday’s are important.

Bye for Now

Barbara Rockefeller

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Comex Gold Futures rose dramatically

Comex Gold Futures rose dramatically. Risk aversion won over fear of deflation. Gold futures opened at the low $782.90 and closed at the high, $846.60, one of the biggest one-day bars we have ever seen. It broke the downsloping channel and is thus a “trading breakout.” It’s also over the green 200-day moving average.

We hope it’s a flash in the pan but a breakout must always be respected. We say “hope” because a continued out-of-control rise in gold means loss of faith in the global financial and political system.

Conversely, if liquidity (trust) rises again and risk appetite returns, that implies flows into equities, and that raises the question of who has the most undervalued market?

It might be the US.

Bye for Now

Barbara Rockefeller

Foreign Exchange types selling US dollars fell because oil went up

The Oct NYMEX crude oil futures contract opened higher at $92.81 and closed near the high at $97.16. Currency Analysts are back to naming that old saw, “oil rose because the US dollar fell” (and Foreign Exchange types selling US dollars fell because oil went up). This circular stuff is maddening and destructive. We had hoped it was broken by deleveraging, causing the exodus of some players and increased carefulness by others under the watchful eye of Congress, if not the CFTC.

But alas, no.

Overnight, Nymex Crude oil Futures rose to $98.57 at the high and Oil Trading at $98.16 at 11:00 am GMT.

Bye for Now

Barbara Rockefeller

We think the US Dollar might bounce up today

Foreign Exchange Currency Outlook : Not to sound like a broken record, but if the Fed and other central banks are intervening in the money markets to prop up liquidity, why are we not assuming they are also intervening in Foreign Exchange - or did intervene Sunday night but have now relaxed, and could come back to defend the dollar at a later time? We don’t have to assume intervention-the pattern of the dollar matches events pretty well-but let’s not assume the Fed and Treasury are taking an attitude of benign neglect. We assume the US dollar is firmly on their radar screen raising the question of where do they want it to go?

At a guess, they don’t have a level in mind but they must have a direction they prefer. If it’s up for the US dollar, that means confidence in the US is the top priority. If it’s down, that means the economy comes first (exports). It’s not even a toss-up this morning-confidence would surely be the winner.

More important is the issue of trust, which underlies all credit quality. You can’t force trust any more than you can legislate morality, and forcing trust is just what the central banks are now trying to do as they act as lenders of last resort.

In this matter, the US absolutely, positively has to win.

Any skepticism on the part of global investors would be a disaster for the US financial sector, including equities, as well as the US dollar exchange rate. Bloomberg reports that the tarnished image of the US from the need for bailouts can already be seen in the cost of insuring against US sovereign default, which rose to a record high yesterday.

“Benchmark 10-year credit-default swaps on Treasuries increased 4 basis points to 30, more than double those on government debt sold by Austria, Finland or Sweden, according to BNP Paribas SA.”

As we saw from the Treasury capital flow report, foreign investors were already withdrawing from the US in July. Today Bloomberg reports that “Sovereign-wealth funds invested just $900 million in new capital in U.S. and European financial institutions so far this quarter. That's down from $6.43 billion in the second quarter, $19.7 billion in the first and $28.5 billion in the final quarter of last year.” This data includes Europe, but the point in not invalidated since the US got the lion’s share.

It’s wrong to assume that the US can always issue its way out of trouble, and by "issue" we mean sell government paper at nice, low rates. We have always said that it’s over when the Treasury holds an auction and nobody comes. Right now risk aversion is so high that Treasuries are the safe haven of choice. But when the dust settles, it seems obvious that the newly increased risk of the US financial system (so many top firms needing to be rescued) means the US will soon have to pay a risk premium. In other words, yields must rise. Nobel winner Stiglitz, by the way, is noting the same thing we noted the other day about the Fed getting too much discretionary power—it’s not the rule of law applied to everyone when the Fed bails out AIG but declines to save Lehman. We understand it, but it’s still not the way things are supposed to work. Stiglitz thinks this adds to perception of higher sovereign risk in the US, and we agree.

Longer-run, the US system was not as robust as people thought, although we can’t fault the government for failing to be nimble, flexible and lightning fast. We may not like the form that the various rescues are taking, but problems are getting addressed and by credible, capable people. It took Japan ten years and it still hasn’t fully come out of its bank restructuring, but the US will do it faster and more thoroughly. The critics (like Buffett) were right-excess leverage was pure poison. Financial Markets are responding very fast, too, and at a guess, unless another shoe drops today, we could see things calm down. We keep mentioning a possible rise in equities because we imagine that will be the symbol of renewed risk appetite and exhaustion of panic. Panic is very hard to sustain, especially if fresh data comes that offers a glimmer of offset. Is the offset the swap lines?

Well, liquidity is everything today. And money leaving money market funds, which will almost certainly occur, probably means bank deposits, not the mattress or a hole in the back yard. Rising deposits at banks can’t be all bad—as long as another fund doesn’t fail.

Out of all this it’s hard to discover a US dollar forecast for any time horizon. We think the dollar might bounce up today, but don’t count on it. Longer-term forex outlook, like a week, we guess 1.4950 is not an unreasonable expectation.

Bye for Now

Barbara Rockefeller Forex Trading Reports

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US crude oil inventory report today

The Oct NYMEX crude oil contract closed lower at $91.15 and is down a vast amount (38%) from $146.73 on July 15, two months ago. A move of this size in such a short period of time has to trigger suspicions that a correction must be coming. Bloomberg writes that so far today, we are already seeing prices up, with the overnight high at $95 and the price at 11:25 am GMT at $93.75. We get the US inventory report today, no doubt a drop because of the hurricanes and with Nigerian unrest going into the th day. “Goldman Sachs cut its three-month forecast for crude oil to $115 a barrel from $149, citing the global credit crisis and demand weakness,” says Bloomberg. This is still over $100 and not the drop to the low of the year around $86 that we all want so fervently.

bye for now

Barbara Rockefeller

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11 US banks having collapsed since January

Foreign Exchange Currency Outlook : The Fed left rates on hold yesterday, on a unanimous vote, evidently thinking that “targeted emergency loans” are a more refined and direct way to deal with the credit crisis than a wholesale rate cut for everyone. While we may say this is a sensible way to address things in a crisis, it also opens the door for discrimination and special favors, or crony capitalism. It puts tremendous power in an institution that may not be equipped to handle it.

Power corrupts.

At what point does the Fed get the kind of oversight such power warrants? Neither the executive nor the legislative branches have shown themselves capable of overseeing the Fed. Think of those Congressmen totally transfixed (deer in the headlights) and paralyzed by Mr. Greenspan’s obfuscations. It’s no match at all. Structurally, giving the Fed this kind of power is the biggest threat to sovereign foreign investment. We have no evidence the Fed is now or will soon become corrupt and abuse its power. We have faith in the good intentions and noble ideals of Mr. Bernanke. But just wait. Charges of unequal treatment are sure to follow, and in our lifetime.

This sad observation leads us to wonder what other unforeseen consequences are lucking in the bushes. When Thailand set off the Asian credit crisis in 1997, nobody foresaw that Brazil and Russia were next and that the Russia situation would crash Long Term Capital. This time the logical deduction is that credit losses and write-downs will indeed reach the $1 trillion mark originally estimated by the IMF last year. According to Bloomberg, write-downs and losses add up to $516 billion, with 11 US banks having collapsed since January. “Corporate bond sales in the U.S. and Europe have slumped 42% from a year ago.” We are back to dreading hearing the sound of other shoes dropping.

Again thinking about confidence in the US, what does it say about it that the largest broker Merrill Lynch, the largest savings bank Washington Mutual and the largest insurance company AIG are all in trouble and needing rescue at the same time? More US debt has to be the outcome. You have to wonder what the ratings agencies will make of the vast new debt being taken on by the government. Unlike Japan, the US government can’t be assumed able to tax its way out of it. We said at the time Japan’s ratings were downgraded that it was an erroneous understanding of the will of the Japanese people. Just as they were prepared to defend Japanese soil with pitchforks near the end of WW II, they would allow themselves to be taxed to death before they would allow a sovereign default.

Not so in the US.

Could the US take on so much debt that taxpayers would revolt?

Yes.

If Newt Gingrich was happy to have the US default to make some petty political point during the Clinton administration, imagine what could happen today when the debt burden per capita is so much higher… Foreign investors in US paper, including especially the Chinese and Middle Easterners, are very smart people. They will not miss this potential. Yesterday’s TICS report is perhaps just a harbinger of things to come. The US needs capital inflows of about $60 billion per month, whether long-term or short-term, to cover the current account deficit. What happens if the money doesn’t flow in? In the old days, governments would sell gold or other reserves, but that doesn’t seem possible today for lots of reasons, including the appearance of desperation. The country suffering a deficit without offsetting capital inflows can issue more debt, and so far foreign buyers like US paper as a safe haven, but these are crisis times. It’s not guaranteed to last. The third option is devaluation to the point where every US asset is a screaming buy.

This is the doomsday scenario long hawked by the fear-mongers we normally disdain. Well, today we disdain the scenario at our peril. The probability of the extreme-devaluation outcome is no longer really tiny. It’s still less than 50%, but not nearly zero. The problem, as always, is where do the world’s savers put their money if not the US?

Name a nice safe place. Well, there’s always Switzerland.

Or perhaps we are just feeling gloomier than usual today out of disappointment at the bad behavior of just about every player in this drama. Individual greed won, and society loses. Worse, the very people who caused or allowed the problems are still in charge of fixing it, not least Mr. Paulson and the Fed, along with just about everybody else on Wall Street and Washington. And worse again, the public blames Wall Street and Washington instead of blaming itself. Blame must attach to all those people who bought houses knowing full well in their heart if not their mind that they couldn’t afford them. Everybody winked and looked away from the inflation of house prices and subprime shenanigans. Flipping houses became the subject of their own TV shows, for crying out loud. We still watch them, too. It’s a crisis of morals and ethics that is not being seen for the higher drama of big-shots going down in flames. The only upside we can see is that the housing price crisis may be ending next year and throughout all of this, US citizens may start getting the idea that saving a little is not a bad idea and spending everything and beyond is a bad idea.

The whole point of modern enlightened “modified” capitalism was that the extremes of cyclical ups and downs would be muted. The business cycle has indeed seemed tamer than in previous decades before the war, and certainly since before the Fed was established. The crises of the 19th century were disastrous. This time we had the institutions and the well-educated managers, but lost the moral compass. Regulations are not a substitute for morals, but it’s all we have. Just as Russia collapsed when raw free-market capitalism was introduced without adequate safeguards against abuse of power and corruption, the US economy is collapsing inward. It won’t fail like Russia did, but it’s the same situation in essence. Still, get ready for contraction. The economy will contract if savings rise, and will contract on the reduction in credit capacity. Economists are already talking about the drop in GDP to come by year-end as a result of the financial sector.

So far we are sticking to the strong US Dollar exchange rate story but we admit it’s on crutches.

A reversal is all too possible.

If you are risk-averse, stay away until some of the dust settles.

Bye for Now

Barbara Rockefeller

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global recession story has a total grip

The Oct NYMEX crude oil contract closed lower at $95.71 from $100.18 the day before, having hit a low of $94.00. Today the global recession story has a total grip, with oil down over $10 in the past two days to $90.83, the lowest intraday price since Feb 8. It was at $91.36 at 12:50 pm GMT.

Bye for Now

Barbara Rockefeller

Jim Cramer’s forecast of the house price bottom in June 2009.

Foreign Exchange Currency Outlook :

The consensus is coming down on the side of the Fed not cutting rates today. The FT says “An emergency cut would risk dividing the committee, some of whose members regret backing big cuts at the time of the Bear Stearns crisis in March. However, Fed hawks might rally behind a position that held out the prospect of a cut later if needed, sending a signal of unity at a moment of crisis.” In contrast, Bloomberg reports that Fed funds futures are now pricing in a 90% probability of a cut.

Who to believe?

We say the Fed is in a win-win situation. It would get good marks for holding fast in the face of Wall Street, which will look like a form of resisting moral hazard since Wall Street is always crying for rate cuts under all circumstances, and it equally would get good marks for a cut on the grounds that the Fed has the ability to be nimble and flexible in the face of a crisis.

Until we get the decision and statement at 2:15 pm today, other data will get less than full attention. Of the data on the schedule today, we favor the Treasury capital flow report at 9 am. The release tends not to have a market-moving effect, but it’s the only data-based indicator of overall confidence in the US economy and financial system. We like to see the capital inflow roughly match the outflow from the trade deficit.

The other big factor remains the assumption that the US and global economies are sinking into recession due to credit contraction arising out of the current crisis, and as a result, commodity prices will continue to drop, especially crude oil. We are more willing than before to concede that recessionary tendencies logically should start to appear, even if technically the two quarters of negative growth do not. But doesn’t the falling crude oil price give a boost to growth that offsets other negatives?

Also taking this stance is IMF Deputy Director Lipsky, who says “there is still no obvious reason to expect the global economy to go into recession,” according to Market News. “Lipsky told Financial Times Deutschland that housing prices might now be experiencing undershooting and that risk aversion may have become too pronounced. Industrialized economies will be in a very ‘sluggish or nearly stagnant phase’ in the second half of this year, but a ‘gradual recovery’ will proceed in 2009, he said. ‘This, however, will not be able to dispel quickly the financial tensions,’ he added. Lipsky suggested that asset prices had dropped more than fundamentals warranted: ‘After years of overshooting of asset prices and of too-low risk perception, we may now be seeing a kind of overshooting of the prices and a too-strong risk aversion.’ “Still, he said, ‘We are operating on the assumption that next year we will see an end of the decline of asset prices.’ In particular, the US housing market ‘will bottom out in the course of the first half of 2009,’ he predicted. ‘The considerable decline of US housing prices is slowly resulting in the indices for the affordability of housing returning to levels that are reasonably normal.’"

Note that this match Jim Cramer’s forecast of the house price bottom in June 2009.

Conditions are very bad.

McCain got criticized sharply yesterday saying “the fundamentals” are sound, seemingly downplaying the crisis or perhaps not understanding it, and then pretending he was talking about the worker and productivity. This was a dumb ploy and confuses the issues. Are “the fundamentals” sound? Well if we define “the fundamentals” as factories still producing and people still going to work, even with terrible income inequality, yes. We say these are not the conditions of the Great Depression. The banking system is not losing 30% of capacity in a short time even if 30% will be the eventual number after the contraction is over.

Foreclosures are nowhere near 1930’s levels. We do not have deflation and we do have a wiser government and Fed. To say today is better than (say) 1933-34 may not be saying much, but honestly, can we get along without Lehman? Yes. Therefore, we are not so sure that money flooding into the dollar and Treasuries will exit just as fast. Tentatively we say the dollar trend will resume, helped mightily by crude oil. This suggests the japanese yen futures trend will last, too, and that’s harder to swallow.

But keep the fiath—the trend is your friend and the chart the best tool.

Bye for Now

Barbara Rockefeller

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Comex Gold opened at the low and closed at the high

Comex Gold opened at the low and closed at the high, and can easily spike up to the 20-day moving average at $801.36. It looks like a screaming buy on the chart, but consider comments from gold traders ahead of the Comex open today - they are disappointed that spot gold was at $772.90/774.10 at 6:22 am EDT, up $9.45 from Friday's nominal close in New York but off session highs of $784.90. “’With the kind of turmoil we have had at Lehmans, you would think there would have been a bit more of a boost,’ said Standard Chartered analyst Daniel Smith.”

Bye For Now

Barbara Rockefeller

oil is surviving Hurricane Ike

The Oct NYMEX crude oil contract closed lower at $100.18 from the close at $100.87 the day before. Normally we would be marveling at what a penny means, but this time it’s not clear that a lower low and lower close are going to survive a crashing dollar, if that’s what’s happening. The downtrend in oil is surviving Hurricane Ike, which took out only ten oil platforms this time, compared to 100 in Katrina. In short, the infrastructure is okay even if production and refining is halted, and overnight in Singapore the oil price dipped $2.28 to $98.90. Reuters reports that “crude dropped $4.28 to $96.90 barrel by 6:24 am EDT after touching a nearly seventh-month low of $96.31 a barrel. U.S. oil dropped below $100 briefly on Friday for the first time since early April, with trade open for a special session on Sunday due to Hurricane Ike.”

There’s even more militant action in Nigeria, and yet the price did not rise on the news, with fear of global recession so deep and wide that it overwhelms these normally price-positive factors. We are stunned. The price drops are across the board, too—the WSJ reports that “in other Nymex trading, heating oil futures fell 2.91 cents to $2.91 a gallon, while gasoline prices dropped 10.56 cents to $2.66 a gallon. Natural gas for October delivery rose 2.7 cents to $7.339 per 1,000 cubic feet. In London, October Brent crude fell $1.85 to $95.73 a barrel on the ICE Futures exchange.” Japan: The Nikkei didn’t trade today because of a holiday in Japan. Other Asian markets were closed, too (China, Hong Kong and S. Korea). The NKS reports that the BoJ confirmed it is in close contact with the Fed ahead of the money markets re-opening tomorrow.

Bye for Now

Barbara Rockefeller

Is there any possibility of a US Rate Cut?

Foreign Exchange Currency Outlook : The third week of every month is the big data week. See the WSJ calendar below. Tuesday and Wednesday are the heavy dates, with the Fed meeting on Tuesday the biggie and all activity grinding to a halt ahead of the 2:15 pm statement. Is there any possibility of a rate cut? The answer lies in whether the Fed thinks a marginal amount might be useful to an important player. At a guess, it widened the allowable collateral in its auctions to avoid lowering rates, but from the vantage point of Monday morning at 6 am, well before the bell, Tuesday at 2 pm is far away. Should stocks continue south as futures now indicate, the Fed might cut just to show it has a heart.
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Realistically, the contracting financial sector and contracting credit is the same thing as a rate hike, so the Fed could find justification for a cut without straining too hard. Bloomberg reports that “futures on the Chicago Board of Trade soared to a 86 percent chance that the Fed will lower its 2 percent target rate for overnight lending between banks by a quarter-percentage point, compared with no chance a week ago.” This is reported in the context of the falling dollar.
Weirdly, a rate cut is not such a bad thing for the dollar in the current environment. It could signal flexibility, adaptability, and decisiveness, characteristics sorely lacking in Japan’s lost decade and also in Britain and Europe today, where governments and central banks can see nothing other than inflation under the bed and lurking in the closet.

Inflation is simply not the only important economic variable under the current circumstances. It may be the most important if you are a new central bank trying to earn your spurs, or if in the past you have botched managing inflation, and also in the grand scheme of things of macro theory, or at least some versions of maco theory.

But during a financial sector crisis that is sure to result in severely deflationary conditions, you need to throw out the rule book. Will we get deflation? You bet. Bank failures, falling house prices and contracting credit mean deflationary conditions, not to mention the bubble having been burst on commodity prices, especially oil. This doesn’t mean oil is going back to $30-40 (and if it does, we will all be eating a steady diet of only potatoes), but it does mean that $60-80 is not a silly forecast, nor is a rate cut by the Fed tomorrow.

Again, this doesn’t mean the dollar necessarily falls, although normally it would.

Context matters.

Until we find out what is going on, we advise clients to exit the market and stay out. Whether there was or is intervention or not, we need more information before we can judge whether the strong dollar scenario still has legs. We can make the argument either way. We think the factors favor the dollar hanging on, especially if there was intervention, but let’s face it, the market turmoil today is going to be just awful and we advise a policy of risk aversion in which cash is king.

If you are not in the market, you are taking no risk.

Bye for Now

Barbara Rockefeller

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CFTC report on oil speculation

The Oct NYMEX crude oil contract closed lower at $100.87, less than a dollar from the low at $100.10, despite the availability of the news yesterday that Hurricane Ike is category 2 and will hit Houston this weekend. It rose 94 cents to $101.81 in Singapore. About 26% of US oil production is in the Gulf, and Bloomberg reports that the Minerals Management Service said yesterday evacuations have halted 97% of Gulf crude output and 93% of natural gas production. As of 11:17 am GMT, oil is up to $102.26, or over $2 from the low yesterday, but even so, this is a muted response to a potential disaster. If we were still in full Katrina mode, oil would have risen by a lot more than $2. Something is clearly going on. Insiders call it “demand destruction” but whose demand? We wonder if it’s not speculators fearful of regulators, or rather Congress.

They have little to fear from the bumbling regulators. The WSJ reports that the CFTC report on oil speculation, especially by index managers, is inconclusive. The CFTC panel got data from 32 swap-dealer entities and examined millions of transactions worth billions of dollars over a six-month period from Dec. 31 to June 30. And they couldn’t figure out what they were looking at. It’s not clear they got any of the numbers right, saying it found “$200 billion in total investment in commodity index investments, whereas independent estimates by Wall Street firms and other researchers are significantly closer to $300 billion.” The panel admits the data in inadequate.

Gee.

Bye for Now

Barbara Rockefeller

Spot Gold fell again

Spot Gold fell again yesterday, with the futures contract closing at $741.30, near the low at $739.00. Bloomberg reports that this morning, as the dollar has dipped, gold is recovering. It cites the Dec Comex contract up $12.70, or 1.7%, to $758.20 and spot gold up $8.11 or 1.1% to $754.58 in London this morning. Bloomberg also says “Gold has had a correlation of 0.68 to the euro dollar exchange rate this year, up from 0.58 last year.”

Bye for Now

Barbara Rockefeller

A jump up in oil prices will see Traders Sell Dollars

Foreign Exchange Currency Outlook : We get some evidence of the mood of the consumer today with retail sales. Bloomberg reports that non-auto purchases probably fell 0.2% after a 0.4% gain the month before. We get the announcement at 8:30 this morning ET, with the forecast range a shockingly wide -0.6% to +0.6% in the Bloomberg survey.

We also get PPI for Aug, with the core PPI expected up only 0.2% after 0.7% in Aug. Then it’s the Reuters/University of Michigan consumer sentiment index, probably a bump up as gas prices fell, to 64 from 63 and the 18-year low of 56.4 in June.

We say the biggest threat to the Foreign Exchange Outlook is not Lehman, which will get resolved soon to little overall effect (if higher moral hazard), or the readings of the consumer’s mood these days, but rather than darn hurricane. So far the US Dollar is escaping a big effect from oil, which is remarkably tame under the circumstances, but that could change very fast if the damage to producing and refining is big. Oil has been the driver and seems likely to remain so. A jump up in oil prices to (say) $110 and more would be a watershed event for the dollar. We don’t expect it, but it’s a risk. The hurricane is 500 miles wide, Anything can happen. We hate it when market outcomes depend on the weather (which is why we never diversified into the ag commodities).

Overall, we remain a raging US dollar bull, with 1.3250 or 1.3000 in sight, but to repeat, anything can happen.

Bye For Now

Barbara Rockefeller

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Oil to drop under $100 per barrel

The Oct NYMEX crude oil contract closed lower at $102.58 off the low of the day at $101.36. It remains soft at $102.18 at 12:10 pm GMYT, despite Hurricane Ike being upgraded to Category 2 and a drop in US oil inventories yesterday. Normally such news would feed a rise, so bigger factors than the immediate news are fuelling the price move.

Everyone is awaiting a drop under the round-number $100, already achieved in the European benchmark price, Brent crude oil, which hit $98.72 at 11:44 am GMT. Barclay’s told Bloomberg that it thinks Saudi Arabia would be content with oil at $90-100 and it lowered its forecasts for year-end according. Japan: The Nikkei fell 244.13 points, or 1.98%, to 12,102.50, the lowest level since March 18, when it closed at 11,964.16.

The cause is ongoing fear of a crash in the US financial sector stocks because of Lehman.

commodity prices crashing down around our ears

Foreign Currency Exchange Outlook : For the price of oil to continue south despite lower US stocks and despite a hurricane headed for the Gulf Coast implies extreme bearishness about the global economy. For gold to have fallen to the lowest price in a year implies a spreading fear of deflation. Declines in both oil and gold suggest that investors and speculators are getting more interested in recession-proof assets. For the financial sector to be leading global stocks downward means investors are starting to batten down the hatches.

All of this suggests that bonds should be the flavor of the day and we can’t expect yields to recover as long as fear is ruling. Since the US is the safe-haven bond of choice these days, the dollar can only gain as these trends gather momentum, which is nice for the dollar but an unhappy development for the Fed. The Fed would prefer to see rising yields since that helps the banking sector, which can get deposits cheaply and in the worst case scenario (a drop in lending), just buy Treasuries for a nice spread. Now that banks are de-leveraging and foregoing fees on iffy “products,” recovery in the financial sector should be painfully slow.
Longer run, of course, the US dollars “should” have a higher relative real yield, but for the moment, foreign exchange traders and investors are willing to overlook that. Look at pound to Japanese yen if you don’t believe it. Risk aversion has a powerful grip and can overcome even the juiciest of carry-trade spreads, at least sometimes.

That brings us to the question of whether the Fed would consider a rate cut on the grounds that a rising dollar is the same thing as tightening credit conditions. This is muddied by banks being unwilling to lend for reasons other than credit quality. Also arguing against a rate cut is the high inflation rate in the US, technically over 5%, although the Fed might argue that with oil and other commodity prices crashing down around our ears, we have to forecast falling inflation. (Note that we get fresh inflation data next Tuesday, although they are lagging and will not reflect the recent drop in commodity prices.)

Some observers imagined that Yellen, in remarks last week, suggested that ever-rising interest rates are not a foregone conclusion. We didn’t see it that way, but her comment was ambiguous. Nobody expects the Fed to take any action at next week’s policy meeting, but it’s conceivable, just, that we could get a more balanced outlook in the press release. If the Fed were to say the outlook for inflation has improved by a lot, it could put a serious dent in dollar’s uptrend. That would imply the Fed willing to ease while the ECB is still in full-dress hawk mode. It’s probably a remote possibility and yet we can detect the faintest whiff of such risk.

The most interesting aspect of it is where it leaves the UK, which seems to be siding (so far) with the ECB on fighting inflation and to hell with the fading domestic economy. The Bank of England seems to think it is stuck with falling activity and rising inflation and unemployment, but because it can see light at the end of the tunnel (in 2010), no rate action is appropriate.

Well, they are entitled to their opinion.

At this point, the deflation scenario has not yet captured everyone’s imagination. The market is in the grip of the chartists, and chartists have as their first principle the observation from Charles Dow that once a trend is in place, we expect to remain in place until something Big comes along to disturb it. Any suggestion the Fed might cut rates could be Big, but then again, maybe it’s not, since it doesn’t necessarily flatten the yield curve. Besides, lower rates promote whatever lending is left to get done, cheer up the stock market, and would show the world that the US is still on a growth path and not headed into technical recession. Most of all, it would show that the US is pro-active, unlike others. It’s a bit bizarre to say so, but a rate cut or rate-cut talk from the Fed next week would probably be dollar-favorable! And even if the Fed refrains from saying anything remotely lucid about rate levels potentially going down, we are pretty sure it will be increasing liquidity to financial institutions at quarter-end and year-end, which is almost the same thing, if without the announcement effect.

Today is the anniversary of the 9/11 attacks on the World Trader Center and Pentagon. Is there increased wariness and nervousness? Yes, probably, but it’s unwarranted. It’s those of us in the Western mode who think in terms of higher risk on an anniversary.

We have no evidence that the bad guys think that way, too.

Bye for Now

Barbara Rockefeller

Best Exchange Rates when you Buy US or Canadian Dollars

a cartel is a dangerous thing

The Oct NYMEX crude oil contract closed at $103.26, near the low of $101.74, which is close enough to the psychologically significant round number $100 to be really interesting. Even better, the price didn’t move much after OPEC decided to cut output a little, only to $103.48 by 6:13 am ET today, over a half hour since the OPEC story came out. OPEC will cut production by around 520,000 barrels per day for the next 40 days, or about 1% of supply and putting production back where it was during the first quarter, according to the WSJ.

What the WSJ fails to report is that when Indonesia resigned from OPEC, having become a net oil importer, OPEC lost “control” of its production of 865,000 barrels per day, so a cut has to be expected in the first place. Also, OPEC had been producing 520,000 above quota in July, according to OPEC president Khelil, as the “cut” of 520,000 is actually a confirmation of the existing quotas (in place since Sept 2007). In short, it’s not really a cut. Oil prices initially rallied on the production cut announcement (to $104.82) but then the the market got smart and realized OPEC had done as expected, affirmed existing quotas.

In addition, the International Energy Agency again cut its forecast for global oil demand in 2008 by 100,000 barrels and in 2009 by 140,000 barrels, due to global slowdown and changing consumer behavior. This pretty much leaves us where we were before, and with speculative demand deeply on the wane, the impetus for higher prices is defused.

Bloomberg reports that according to critic Masters, who runs a hedge fund and lambasted index managers in Congressional testimony in July, now says commodity index investors sold $39 billion worth of crude oil futures between the July record high price and Sept. 2. This is what is behind the drop in the price of oil.

His report will presumably be available to one and all today, thank goodness. His timing is terrific, since the CFTC has to present its own report to Congress tomorrow. The CFTC claims Masters doesn’t have the data he needs to make his case, but Congress has found him credible. Bloomberg says “He has been cited by lawmakers who introduced at least 20 measures to curb speculation.”

Masters says that Congressional pressure on the CFTC to step up enforcement and restrict anonymous trades has pushed index traders out of their positions. “I don't think it's just coincidence that the money came out after the pressure was put on these folks.''

Who are these people? It’s JPMorgan Chase, Goldman Sachs, Barclays and Morgan Stanley, who together control 70% of the commodities swaps positions, and swaps dealers are the largest holders of Nymex crude oil futures contracts, according to Masters. “These large financial players have become the primary source of the recent dramatic and damaging price volatility,'' Masters said in the report. The banks decline comment but realistically, they have to be in the grip of the lawyers and public relations folks at this point. We are inclined to think Masters is right and even if he isn’t, Congress thinks he is right. Speculators are certainly pulling back as we see from the price. Masters thinks it could be $65-70 in their absence.

And it is clear that the propensity to panic and shove prices higher on the slightest excuse seems to have fled entirely, or to have been overwhelmed by other considerations. Russia proposed to OPEC an "extensive cooperation" understanding that normally would have fallen like a bomb on the oil futures market. According to the WSJ, Russia says “the memorandum of understanding could take two months to sign, suggesting it could be finalized in October when OPEC representatives come to an international oil conference in Russia.” This is a high-stakes game.

Russia would not have disclosed the existence of a possible deal if OPEC had not already indicated it will get done… and yet what’s in it for OPEC in general and Saudi Arabia in particular to make pals with the “enemy” of its best customers? We put “enemy” in quote marks because it’s a strong word—maybe “adversary” is a better one.

The FT is much calmer about it, saying Russia is an “observer member” that doesn’t share in the voting or quota system. “The last time Russia cut its output in solidarity with Opec was in 1999, when Mexico and Norway also reduced their production to help boost prices that had fallen to 9 dollars a barrel.” So-called “closer cooperation” between Russia (11% of world output) and OPEC (40% of world output) is not cause for alarm, with OPEC having “recently held a relatively benign position and become a reliable supplier of oil to the world for more than two decades.”

But wait a minute—a cartel is a dangerous thing. OPEC has been a weak cartel, unwilling or unable to enforce quotas that many producers openly flouted. Any change that makes OPEC stronger as a cartel has to be a bigger risk to the consuming countries, not to mention the diplomatic aspects. The US is already concerned on Europe’s behalf that Russia can and does dominate the oil supply scene there. This is not ithe US interfering in other people’s business but rather a realastic assessment of potential future costs to the US. After all, to whom will Europe turn if Russia closes the spigot?

Bye For Now

Barbara Rockefeller