December 05, 2009

Market Insights - 5 December 2009

Dear Friends & Fellow Investors

Here is the latest issue of market insights.  For any questions, please email: info@fxistrategies.com.  Enjoy reading!

In This Week's Issue
▪   Weekly Snapshot
▪   Charts Of The Week
▪   Interesting Read 
▪   Job Recovery 
▪   Time For Optimism
▪   The Case For The Dollar

Weekly Snapshot
• US$ Index up about 1.5% on Friday following better than expected employment data (Stockcharts)
• Gold set a new all-time high at $1225 on Thursday before falling to $1,162 on Friday (eSignal)
• US unemployment rate fell to 10.0% percent in November, nonfarm payroll employment was -11,000 (BLS)
• Dubai concerns ease after talks began to restructure $26 billion of debt (Bloomberg)
• Euro zone rates remain at record low of 1%; ECB outlines plan to unwind liquidity support (Economy.com)
• Euro area GDP up by 0.4% and EU27 GDP up by 0.3% (Eurostat)
• Australia's Central Bank raised interest rates again by 0.25% for a third consecutive month (Economy.com)
• 30-year mortgage rates dropped to a record low of 4.71% this week (AP)
• Euro area unemployment rate stable at 9.8% (Eurostat)
• Euro area inflation estimated at 0.6%  (Eurostat)

Charts Of The Week   
As the calendar year draws to a close, let’s take a peek at how things have changed in the last 12 months.  The chart below shows that all major international stock indices performed exceptionally well compared to a year ago.  The big story of course is how much the developing countries outperformed the traditional G7 countries this year, despite seemingly less stimulus efforts and governmental support, particularly in countries like Brazil and India.

Stocks-2009-1204

Taking into account the drop in the value of the US Dollar, overseas markets when valued in US Dollars had an even more impressive run.  The chart below shows the stock market returns of international indices inclusive of the changes in currency exchange rates.  The biggest winners of the currency appreciation were Australia  and Brazil adding another 42% and 31% respectively to their returns.

Stocks-real-2009-1204 

Interesting Read 
Please consider this interesting article by Henry Blodget:  The United States of Wusses

As so often, Henry Blodget takes a very basic common sense approach to look at all things financial.  If nothing else, you have got to commend Mr. Blodget for his spot-on lingo.

Job Recovery  
Given the better than expected employment numbers on Friday, investors may get a new sense of optimism along the lines of “the worst is over” now that the employment data suggest an end to the decline in US jobs.

From the Bureau of Labor Statistics (BLS) Employment Report:

The unemployment rate edged down to 10.0 percent in November, and nonfarm payroll employment was essentially unchanged (-11,000). In the prior 3 months, payroll job losses had averaged 135,000 a month. In November, employment fell in construction, manufacturing, and information, while temporary help services and health care added jobs.

While this is good news, the unemployment rate is still at double digits and is the worst we have experienced since the early 80’s.

US unemployment

More importantly, some analysts debate the relevance of the data and point to an alarming development.  According to the BLS, there are a record 5.8 million workers who have been unemployed for more than 26 weeks.   Calculated Risk Blog has a great chart showing how a significantly larger share of the workforce has been unemployed for over 26 weeks.

UnemployedOver26WeeksNov

Time For Optimism 
Please consider a very good article by John Mauldin: Why I am an Optimist

I found this to be an excellent theme considering the state of the markets, the real economy and the presently dominant angst about the Dollar.  As he is making a strong case to be optimistic for the long-term, the following paragraph best reflects the case for a good dose of realism:

All that being said, while I am an optimist, I am a cautious and hopefully realistic optimist. I do not think the stock market compounds at 10% a year from today's valuations. I rather doubt the Fed will figure the exact and perfect path in removing its quantitative easing. I doubt we will pursue a path of rational fiscal discipline in 2010 or sadly even by 2012, although I pray we do. I expect my taxes to be much higher in a few years.

With this in mind and on the back of the market’s positive reaction to the employment numbers, let us examine the US markets and the US Dollar more closely.

The S&P closed the week at 1105.98 continuing an essentially side-ways pattern that started about 3 weeks ago.  Technically, we are at the same inflection point that we discussed two weeks ago.  The major bear market trend line (purple) has been touched and could potentially be broken if the current sentiment and the positive momentum from better employment numbers continues.  The major market trend line as well as the 50% Fibonacci retracement level (blue lines) are critical points for system traders and technical trend followers.  The upward pressure to break out increases with time but we should point out that these inflection points often trigger sell orders for downside protection as well.

SPX-2009-1204

The Case For The Dollar 
The US Dollar made a big turn-around as it rallied about 1.5% on Friday and closing the week up 1% .  As more and more people jumped on the band wagon, trashing the  Dollar Index in favor of other currencies this year, and as Gold reached new highs almost daily, it seemed like an opportune time to take some money off the table.  Sure enough, with just a bit of good news Gold fell over 4% on Friday and already some analysts have jumped ship calling for the end of the Dollar carry-trade.  The Dollar's inverse correlation with almost all asset classes in recent months has made investing away from the dollar almost fool-proof.  Buy anything other than US Dollar denominated assets and you are bound to make money in US Dollar terms. 

And yet, with this all around inverse correlation comes increased risk.  Assuming that the inverse correlation remains even partially consistent, it could cause a return to the perceived US Dollar safety, if problems in any of the non-Dollar asset classes were to arise.  For instance, the recent 2% tax Brazil imposed on foreign investments to slow down an overheated economy.  Or take the case of Gold’s massive one-day drop where investors were taking profits and turning them back into US$. Similar scenarios could be envisioned for many other investments in emerging market stocks, emerging market properties (the recent Dubai crisis) or commodities in general.  The higher one asset class rises, the higher the risk for a pull back out of that asset class and back into the US Dollar.

Having said all that, let’s not forget why everyone has been trashing the Dollar since the beginning of this decade (outside of a few episodes that countered the bearish Dollar trend).  Here is one reason:

US Debt

There are many more reasons including the still fragile US recovery. Despite the recent positive jobs data, underlying economic conditions of a largely consumer-driven US economy remain difficult.  Some of the underlying economic challenges include:

• Since Lehman’s fall, the US has lost about 6.2 million jobs
• The unemployment rate is 10% now, versus 6.2% the day before Lehman collapse
• About 25% of all U.S. mortgage holders are under water
• Real gross domestic product is still down 3% since the summer of 2008
• Bank credit has contracted by $500 billion
• Household net worth is down $7 trillion
• The US budget deficit has tripled

With 2009 in hindsight, it really paid off to be an optimist.  As seen above, all major stock markets had strong rallies and so did most other asset classes, except for the US Dollar itself.  However, one should carefully evaluate how the US can position itself long-term.  In terms of the US Dollar, beside the domestic and economic challenges, the US government’s financial condition would seem to be the pre-eminent factor weighing on the Dollar.  As long as the US has to revert to quantitative easing and near zero interest rates, money will flow to asset classes and places with higher returns.

Good luck and good trading!

Disclaimer
Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance.

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