Monday, April 27, 2009

German banks have $1.1 trillion in losses yet to be recognized

Foreign Exchange - Currency Outlook

Bloomberg has a story saying the US dollar exchnage rate wins whether it’s on the basis of risk aversion/ safe haven or the basis of FIFO (first-in, first-out). We are not so sure it’s that easy. For one thing, there is a component of market sentiment consisting of "confidence." Everyone likes Obama and the new robustness of Congress, with those saying they think the country is moving in the right direction at the highest level in 5 years. But criticism of the TreasSec Geithner is severe (that latest is that he's just a "bureaucrat") and it's not clear that the PPIPS program is a good one that will work. Alternatives are flying around the ether, and from reputable guys.

Meanwhile, Europe will be taking action at the policy meeting next week (May 7). The market has rewarded an active stance, paradoxically even if it entails a rate cut and what is really an admission of systemic failure by adoption of "unconventional measures." Unconventional measures are quantitative easing by another name, and we worry that the market will cheer the euro exchange rate when the ECB finally caves in and joins the rest of the developed world with both rate cuts and quantitative easing.

To complicate matters, we have more data and information this week than anyone can possibly absorb, let alone slot into a decent perspective. Tomorrow we get the Conference Board consumer confidence survey. We get first quarter advance GDP on Wednesday, along with a Fed policy meeting and the Treasury’s refunding announcement, which follows the Q2 and Q3 estimates the day before. Chrysler may declare bankruptcy on Wednesday ahead of the Thursday deadline for a deal with Fiat.

Wednesday is a day to stay in bed with your head under the covers.

The rest of the week is pretty awful, too. Thursday brings the first quarter Employment Cost index, a harbinger of the payrolls report on May 8. Friday gives us March factory orders, the April ISM report, and vehicle sales. Throughout all this, we continue to get earnings reports from all over the map. Considering that the stock market ended the week on an upbeat note, you have to wonder if US equity traders are just determined to plough ahead, refusing to be confused by any facts. The one fact that everyone plans to looks at is inventories. The idea has taken hold that if business inventories are really, really low, that's a good thing because it means business will soon start producing more.

We are suspicious of the US dollars move up on the swine flu story. We find the technical story more convincing, but of course a fresh fundamental can always trump the technicals. Since the stock markets seems determined to go up - while a related market, oil, is determined to go down on discouragement over the outlook - we have cognitive dissonance all over the place. The Foreign exchange market is where these controversies and conflicts get settled.

If the us dollar exchange rate continues firm today, that may mean the world is in worse shape than we thought last week. We are impressed by the story that German banks have $1.1 trillion in losses yet to be recognized. We have always said losses were being concealed in Europe. If this story is true and if it grows legs, we can see a good case for the dollar to recover in a more permanent way. Otherwise, watch out. The dollar can go back on the defensive in an hour.

Pounds to US Dollars = 1.4634
Pounds to Euros = 1.1143
Euro to Pounds = 0.8870
Pounds to Australian Dollars = 2.0444

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
Forex Trading Reports - Click for a free trial

Buying Euros? Buy Euros at the best euro Rates!
Buying Dollars? Buy US Dollars at the Best Dollar Rates!
Buying Australian Dollars? Buy Australian Dollars at the Best Australian Dollar Rates!

Contact IMS Foreign Exchange + 44 207 183 2790

Thursday, April 16, 2009

we can see no fundamental basis for a stock market recovery

Foreign Exchange - Currency Outlook

The Empire State Index from the New York Fed summarizes the situation as well as anything - it was less bad in April at -14.65 from -38.23 in March. This is not as bad as the -30 that was forecast, which would have been less bad than March but by less than the actual really-less-bad number.

Got that?

Remember that in a diffusion index, +50 is the dividing line between expansion and contraction, so an outright negative is really, really bad, even one in the teens. The sensible way to put it is to say the economy is still contracting but at a slower pace, but that fails to disclose and describe the true condition, and let's people grasp at the straw of "less-bad."

Evaluating these numbers is a bit like reconciling a falling income statement with a contracting balance sheet. At some point the numbers have to go positive just because the earlier numbers were so low, but that doesn't mean conditions are good.

We sometimes criticize "stockbroker economics" for misrepresenting economic truth, and this is one of them. What equity and some commodity markets are missing is that "less bad" doesn't mean "good." We like to assume that P/E ratios actually mean something. How can stock prices be rising while earnings are, or should be, or will be falling? We don’t care about equity prices for their own sake, but because they are the canary in the coal mine for the US dollar exchange rate. Rising stock indices in the US feed rises elsewhere in the world, with the odd exceptional Event like UBS' earnings announcement yesterday (that affected European bourses but not the US market, or by a lot less).

In sum, we can see no fundamental basis for a stock market recovery. If - a big if - the market starts seeing it that way, equity indices should fall. At this point they are being held up by an inaccurate assessment of economic conditions and unrealistic hope. The only possible rebuttal of this idea is that the Empire State also reported the six-month outlook jumping to 33.10 in April from 3.14 in March. Let's say the hopes of the survey respondents for improvement in six months is accurate. Therefore for stocks to rise as a leading indicator is okay, right?

No.

Expectations are exactly what the word says - expectations, not actual evidence, let alone proof. And 33.1 is a minority. It means the majority did not see an improving outlook in six months.
"Improvement" is a funny concept in economics. While we like the metaphor of the economy being organic and more like an animal than a machine, in this case the patient has the plague. It is getting big doses of antibiotics and being kept clean, warm and fed, but "improvement" is like saying the patient hasn't died yet and white blood cells are hard at work. Not dying is the good thing. Is this overly pessimistic? Maybe, but being overly optimistic is foolish. As Keynes is reported to have said, "The market can stay irrational longer than you can stay solvent."

Seeing an imaginary bottom is dangerous to your financial health.

Assuming more bad news is yet to come, foreign exchange traders will buy dollars as the dollar should benefit, even if the news is not as horrendous as what we already have seen (think of what we have already seen as the diagnosis of plague). To judge degrees of horrendousness is not really useful. Europe declining to be sufficiently scared is noticeable, though.

Weirdly, we expect pounds sterling to recover because the worst of all possible bad news is getting released.

Pounds to US Dollars = 1.4900
Pounds to Euros = 1.1292
Euro to Pounds = 0.8850
Pounds to Australian Dollars = 2.0685

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
Forex Trading Reports - Click for a free trial
Buying Euros? Buy Euros at the best euro Rates!
Buying Dollars? Buy US Dollars at the Best Dollar Rates!
Buying Australian Dollars? Buy Australian Dollars at the Best Australian Dollar Rates!

Contact IMS Foreign Exchange + 44 207 183 2790

Wednesday, April 15, 2009

buy us dollars as it is in an uptrend against the euro exchange rate


Foreign Exchange - Currency Outlook

We will continue to get important data today and this week, including the TICS capital flow report, industrial production (probably a drop of 0.9% for the 14th month), CPI (probably a minor rise of 0.1% after 0.4% in Feb), and the Empire State manufacturing survey (probably a contraction to –35 from –38.2). But we think the battle between the banks and the government is the key event.

Tomorrow we get the JP Morgan earnings report, and on Friday, Citigroup earnings report and GE Capital. Next week it’s Bank of America, American Express, Ford Motor, Credit Suisse and Morgan Stanley.

We should assume that all of these try to put lipstick on the pig.

Then it becomes a test of analysts' ability, and the government's ability, to spot the cooked numbers. This is absolutely critical for the long-term health of the economy. Banks and industrial companies cannot be allowed to lie anymore in their financial reports.

The whole world believes US accounting reporting is corrupt, rigged, dishonest - pick a word.

And they are right.

The financial sector became powerful during the last two decades, accounting for 40% of total corporate profits and populating Washington with lobbyists and lawmakers beholden to them. A financial elite was formed that has hardly been tamed by the humiliation of a few, and government has been in thrall to the money-men, exactly the conditions that brought about reform in the 1930's. This time, the financial elite is resisting restructuring with amazing muscularity, mostly by scaring people into believing they are too big to fail and the status quo must be maintained. Alas, we are more like Japan than we thought in this respect. In Japan, the banks were and are cross-shareholders with industrial companies, hence too big to fail. In the US, the fear of financial market chaos vies with loathing of using public money to bail out the very elite that caused it. This is more than an economic or financial issue - it’s a social and political one.

Obama is walking a tightrope, indeed.

We think its time to buy us dollars as it is in an uptrend against the euro exchange rate and never mind that the reasons are unclear. The commodity currencies are also strong ,which if we believe conventional intermarket analysis, should be a US dollar exchange rate negative. But overriding it all is a renewed sense that this is indeed a global recession and it's foolish to think otherwise.

In that case, the US dollar is the safe haven.

Pounds to US Dollars = 1.5000
Pounds to Euros = 1.1370
Euro to Pounds = 0.8789
Pounds to Australian Dollars = 2.0777

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
Forex Trading Reports - Click for a free trial

Buying Euros? Buy Euros at the best euro Rates!
Buying Dollars? Buy US Dollars at the Best Dollar Rates!
Buying Australian Dollars? Buy Australian Dollars at the Best Australian Dollar Rates!

Contact IMS Foreign Exchange + 44 207 183 2790