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The Financials Pit Review

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For the week of July 28th, 2008

Tue, Jul 29 2008, 05:57 GMT
by Kalvin O’Brian

Pit Guru

U.S. Economy

In the past year, 256 companies who reported earnings this quarter in the Standard & Poor’s 500 index saw profits fall an average of 24%. This has undoubtedly dealt a blow to stocks and corporate bonds. Investors have accumulated an amazing $3.47 trillion in money market funds, coming just under the record set in April, according to the Money Fund Report newsletter. This does not breathe confidence about the future. The worst may be ahead. So far for 2008, new home sales are down 35%. New home sales in July were down .6% from May; however it was still better than expected. May’s new home sales were also revised higher from an annual rate of 512,000 to 533,000 units. The US Commerce Department said that durable goods orders were up .8% in June, excluding defense, orders were only up .1%. The sell off in crude over the last 9 trading days should be helping a lot more than we are seeing. This market appears it will have trouble getting back to 1300 unless crude continues to slide. I am still looking at positive movements in the S&P as an opportunity to get short with close stops.

Currencies

The real estate problems continue across the pond. The average cost of a residential property in England and Wales dropped 4.4% from the previous year. This marks the most in about seven years and the property slump may continue for months. Despite the problems in the UK, there will be no major move unless the dollar can find some strength. I am taking a longer term bearish approach to the pound.

The US dollar desperately needs to get on track. We have seen a major sell off in crude over the last 9 trading days and still the dollar is lagging. It appears that there will need to be some real intervention to help this currency gain any life. This could come in the form of the FOMC meeting coming the first week in August. Most analysts had anticipated the Fed would refrain from increasing the interest rate until the fall, but recent statements have revealed an underlying tone that hints an increase may come earlier. I have a feeling that next week’s meeting will surprise us one way or another and trade in the US dollar will remain choppy until then.

Japan's Statistics Bureau reported consumer prices were up .5% in June and up 2.0% from last year. In Tokyo, consumer prices were up 1.6% in July from a year ago, the largest gain in a decade. The yen seems to be holding support. I am not completely convinced we have bottomed and will look for a break out if the support fails.

Published on  Tue, Jul 29 2008, 07:03 GMT