No new report available until Friday, November 2nd.
Overview
After waiting weeks on Tuesday we felt that the nervous balancing act had tipped slightly and that things would start to unravel imminently. The jury is still out on this one, but we urge investors to consider the wider implications of a lack of cheap money and, for some, no money at all. Reviewing the ‘carry trade’ and its most obvious incumbent – Yen crosses - these appear to have stopped rallying, at least for now; same idea for Euro/Swiss. These charts all have variations of a ‘triple’ top, as do many stock indices. Nerves have seen people scurrying back into Treasury paper, especially two and five-year maturities plus index-linked ones, taking some yields to their lowest in four or five weeks. Libor rates however remain well above the central banks’ target. A chronically weak US dollar helped Commodities higher. The Euro set a new all-time high of $1.4320, the Czech koruna at 27.191 its strongest ever against the single currency, and the US Dollar Index future to an all-time low of 77.35. Needless to say this supplied a bid tone to commodities setting up for record highs in NYMEX Crude Oil ($90.07 per barrel), spot Platinum ($1454 per ounce), CBOT Soy Bean Oil (41.15 cents per pound) and Baltic Freight Rate Indices (terrifying with the Dry Index at 10,732 and Capesize at 15,477). All stock indices sold off, some like Mumbai’s Sensex a lot more than others dropping 10% from a new all-time high at 19,198. The Hang Seng was the only one to clearly post a new record high at 30,025.
Political and Economic Developments
US September Housing Starts were far lower than expected at 1191K annualised, the slowest rate since March 1993, and Building Permits also slumped to 1226K. Add to this news warnings from the Fed’s Bernanke and the Treasury’s Paulson, two highly clever talented men, that problems in the housing market could take longer to resolve that initially hoped, and the outlook for the next six months or so is very tough. Then mix in the standstill in the interbank money market, a virtually non-existent Commercial Paper market, and no interest in buying Certificates of Deposit and what do you get? Not pretty. CME Lumber futures at $227.80 per 1000/board feet are close to their lowest price in 15 years or so. US August Total Net TIC Flows were -$163B, an unprecedented number in a series that goes back decades. The next closest negative number was –$42.25B in March 2001 and compares with a recent mean of +$58B. It should be noted that as well as selling Treasury paper there was a very significant increase in foreigners selling US equities. It was a period of sharp price declines in Indices, as was March 2001, and hints of ruthless slashing in jittery times.
Underlying Themes
US investment banks are toying with the idea, allegedly a US Treasury initiative, to create a ‘super fund’ of about $100B to buy quality sub-prime paper. Surely a contradiction in terms and anyone joining this club would immediately be stigmatised like those who have to go begging at the Bank of England’s window. Meanwhile Ken Lewis, Bank of America’s CEO, reporting a Q3 93% drop in earnings from corporate and investment banking said: ‘I’ve had all the fun I can stand in the investment banking business at the moment. You can’t have a business where you make money for five years, then give it all back in one year’. Coming at a time where 80% of outside directors think US chief executives are overpaid. Oh dear!
What to watch for next week
Monday, a New Zealand holiday, just Japan September Supermarket Sales and German October Import Prices due from this day. Tuesday Japan September Convenience Store Sales, Eurozone August Industrial New Orders, and UK October CBI Industrial Trends. Wednesday Japan September Trade Balance, EZ13 August Current Account and October PMI’s, plus US Existing Home Sales. Thursday Japan September Corporate Services Prices, Germany’s October IFO, US September Durable Goods Orders, Help Wanted Index and New Home Sales. Overnight the Reserve Bank of New Zealand decides on interest rates (expected unchanged at 8.25%). From Friday October CPI for the different German states, Tokyo CPI, September Japan Nationwide CPI and Industrial Production, German November GfK Consumer Confidence, Eurozone September Money Supply and final October University of Michigan Confidence. Sunday 28th Argentine Presidential election and Summer Time ends: Europe’s clocks go back one hour; the UK will be on Greenwich Mean Time.
Positioning and Technical Analysis
We continue to fret about the ‘carry trade’, in all its many guises, and will pencil in ‘exit’ mode for many during this quarter. In an attempt to salvage something from this year’s business/investments decisive action and ruthless cuts are the most likely option. Propping up ailing positions and window-dressing is not possible when cash is tight. By month-end we expect more, possibly dramatic, US dollar weakness which will be translated into higher prices for many commodities. Precious metals, especially the Platinum Group, are likely to outperform. Most if not all major equity indices are likely to slip a little further again next week and probably until the end of this month. This should send Treasury yields down to test pivotal chart levels.
