FXIS Market Insights

Weekly Snapshot
• Irish 10-year yields breached 9% and Portugese yields 7% (Eurointelligence)
• S&P cuts long term credit ratings on four domestic Irish banks (Reuters)
• US new home sales were down 8.1% from September and 28.5% from last year (ESA)
• Industrial new orders for September were down by 3.8% in Euro area (Eurostat)
• US durable goods in October 2010 decreased 3.3 percent, to $196.0 billion (ESA)
• China’s current-account surplus stood at $102.3 billion in the third quarter (Economist)
• Asian stocks decline for third week as tensions rise on Korean Peninsula (Bloomberg)
• US personal income in October 2010 rose 0.5% (ESA)
• US personal savings rate as a percentage of DPI was 5.7% in October (ESA)
• Australia's central sees no further interest-rate increases in the near term (WSJ)
• US real GDP grew at an annual rate of 2.5% in the third quarter of 2010 (ESA)
• Business confidence in Germany this month reached its highest since 1990 (Economist)

Market Barometers

Chart Of The Week
Courtesy of Dshort.com comes a nice chart showing the yields of the main Treasury Bonds since 2007.  Interesting to see the impact of QE1 and and the beginning of QE2 on yields.   

Source:  www.dshort.com

Recommended Read
In the spirit of Thanksgiving please consider this excellent assessment of China’s economic prospects.  In his article Shadow over Asia, Vitaliy Katsenelson outlines a number of reasons why China’s economy might not continue to be as miraculous at it has been so far. If you wondered whether double-digit growth is sustainable, here is a good analogy:

One way to think about the Chinese economy is by comparing it to the bus in the movie Speed with Keanu Reeves and Dennis Hopper. In the movie, a bus was wired with explosives that would blow up if the bus’s speed dropped below 50 miles an hour.

Since China is manufacturer to the world, that manufacturing business comes with a lot of fixed costs. Factories, equipment need financing, and they are mainly financed by debt – another fixed cost. The high level of fixed costs doesn’t afford China an economic slowdown, but when it happens, the consequences will be dire. High fixed costs are great when revenues are rising as income grows at a faster rate than sales. But they are devastating to profitability when sales decline: costs decline at a slower rate than sales and you start losing money, fast.

Well then, if China isn’t going to be the locomotive pulling the world economy out of the mud and Europe pre-occupied with bailing out its problem children who can the global economy count on?  Perhaps the only way out still remains with the unbreakable spirit of the American consumer.  I harbor the hope that we still can. 

Happy Thanksgiving Everyone!

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. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

This week’s US inflation data were something else.  Core CPI increased only 0.6% on an annual basis, the slowest on record.  These kind of numbers give ample justification for the planned $600 billion treasury purchases by the Fed (QE2). But there is still this nagging question as to what type of inflation numbers we are looking at.  Regular readers of FXIS Market Insights know that your humble commentator is typically more concerned with inflation rather than deflation.  We have discussed our views in numerous articles, most recently in Inflation vs. Deflation, Market Insights 3 April 2010 and How much further for Gold? 

The debate on inflation won’t go away, not with QE2 and not with whatever the Fed will pull out next from its tool box. Speaking of tools, I’d like to refer to an excellent article by John Mauldin: O Deflation, Where is Thy Sting? 

John Mauldin explains his views on inflation and the (lack of) tools in the Fed’s bag of tricks when he surmises:

I wonder if the Fed is not trying to fix a modern 2010 economy with tools made in the ’50s, based on theories based in the writings of a bunch of dead white guys. They were smart guys, I give you that. But times have changed. And our measurement tools seem flawed to me.

Enjoy this very illuminating article and have a wonderful week-end!

Weekly Snapshot
• European Union and IMF meet in Dublin to discuss bail-out talks for Ireland (FT)
• China raises Bank reserve requirements for fifth time this year (FT)
• US Leading Economic Index increased 0.5% in October to 111.3 (Conference Board)
• The Federal Reserve plans to do another round of stress tests on top U.S. banks (WSJ)
• Euro area annual inflation was 1.9% in October, up from 1.8% in September (Eurointelligence)
• GM raises $20.1 billion in one of the largest IPOs (FT)
• Core US inflation slowest on record; CPI increased 0.2% in October (FT)
• China may impose temporary price controls to counter fastest inflation in two years (Bloomberg)
• Greece revises its 2010 projected deficit from 7.8% to 9.4% (Eurointelligence)
• South Korea raises interest rates to 2.5% and considers capital controls (FT)
• US Industrial production was unchanged in October after having fallen 0.2% in September (FRB)
• US Producer Price Index increased 0.4% percent in October, seasonally adjusted (BLS)
• Apple to sell Beatles songs by by adding the Beatles catalog on iTunes (WSJ)
• Britain's stubbornly high consumer inflation rate rose to 3.2% in October (Bloomberg)

Weekly Market Barometers

Chart Of The Week
Considering the recent announcement of another $600bn in quantitative easing and the possibility of more government stimulus in Europe,  who can really remember how it all started? How much money has actually been used in the various bailouts.  Remember TARP?  It all sounds so “yesteryear”.  With billions and trillions floating around, is anyone keeping track of where the money is going?  Thanks to the folks at ProPublica.org you can get a pretty good overview of where the bailout money went:

The Treasury Department is authorized to spend a maximum of $475 billion on the TARP (In July 2010, the financial regulation overhaul reduced TARP’s spending cap to $475 billion from the original $700 billion.) Altogether, accounting for both bailouts, $546 billion has gone out the door—invested, loaned, or paid out—while $221 billion has been returned. The Treasury has been earning a return on most of the money invested or loaned. So far, it has earned $43 billion. When those revenues are taken into account, $282 billion is the net still outstanding as of Nov. 19, 2010.

The chart below and more detailed information is available at: http://bailout.propublica.org/main/summary

Source:  http://bailout.propublica.org/main/summary

Recommended Read
Tired of financial analysts and economic forecasts?  I can’t blame you one bit.  Sometimes it’s all a blur and you don’t know what to do or whom to believe when it comes to investing.  If you are looking for some new and unusual market projections, please consider this highly interesting article by Keith Fitz-Gerald:  In China, Record Hairy Crab Prices Point to Continued Strong Economic Growth Next Year.

Now if you’ll excuse me, I will head over to my favorite Chinese Restaurant. 

Good luck and good investing!

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. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Weekly Snapshot
• Global Stocks and commodities were taking a nosedive on Chinese inflation data (AP)
• G20 fails to agree on trade and currencies (FT)
• US consumer sentiment index rose to 69.3, the highest level since June (Reuters)
• Euro area GDP up by 0.4%; industrial production down by 0.9% (Eurostat)
• Chinese stocks fell 5.2% on rumours of limiting foreigners' property purchases (AP)
• Google to give all its staff a 10% salary increase and a $1,000 bonus (Economist)
• Irish 10 year yields hit 8.7%; spread with German bonds is now 6.5% (Eurointelligence)
• Commodity exchanges raise margin requirements for silver futures (AP)
• Euro falls Versus most major currencies on European sovereign debt concern (Bloomberg)
• Gold climbed 30% this year, reaching a record of $1424.30 on Tuesday (Bloomberg)
• US trade deficit in September 2010 decreased 5.3% to $44.0 billion (ESA)
• Bond insurer Ambac sues U.S. and says IRS may ruin bankruptcy proceedings (Reuters)
• World Bank Chief calls for the establishment of a gold-backed Bretton Woods II system (AP)

Weekly Market Barometers

Charts Of The Week
The big story this week was about Europe where Ireland's sovereign debt crisis took a turn for the worse.  On Thursday, the Irish/German bond yield spread hit a record high of 665 basis points driving the borrowing cost for Ireland's sovereign debt to extremely difficult levels.  But unbeknownst to most, we might have our own sovereign debt crisis in the making.  Thanks to Barry Ritholz of the Big Picture Blog for figuring this one out.  Please consider: California Muni Bond Fund Shellacking

Is it just a small correction or are we getting a preview of what might hit the entire Bond market?  Bill Gross, the CEO of PIMCO sure knew what his own funds were about to be hit with when he published Run Turkey Run earlier this month.

Source:  www.ritholtz.com

Recommended Read
Please consider The Dollar: Every Man For Himself by Axel Merk.  In his assessment of the prospects for the US Dollar Mr. Merk hits the nail on the head when he writes:

“We believe a key impediment to the U.S. economy is that policy makers are fighting market forces.”

  

Recommended Video 
Much has been said about QE2 and its impact on the Dollar.  Interestingly, Alan Greenspan the former fed chairman declared that the US was pursuing a dollar weakening policy.  The timing of his remarks may have been unfortunate, considering the sensitivity of this issue at the G20 meeting in Korea this week.  However, this does not change the fact that he is right in principle.  Quantitative Easing must be viewed as a deliberate policy to inflate asset prices which in turn dilutes the value of the US Dollar.  Of course, the story doesn’t end here.  Enter Tim Geithner, the current US Treasury secretary who loudly proclaimed:

We will never seek to weaken our currency as a tool to gain a competitive advantage or to grow the economy; it’s not an effective strategy for any country, certainly not for the United States.

Whom can we believe then?  You be the judge…

Click image to view the video

Good luck and good investing!

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. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Weekly Snapshot 
• US nonfarm payroll employment increased by 151,000 in October (BLS)
• US unemployment rate was unchanged at 9.6% in October (BLS)
• Spot Gold rose to a new all-time high of $1397.80 just shy of $1,400 on Friday (Reuters)
• Spot Silver reached a new 30-year high of $26.89 on Friday (Reuters)
• US stock markets rose to a two-year high after Fed announcement of QE2 (NY Times)
• France's BNP Paribas is the world's No. 1 bank, with assets of $3.2 trillion (Bloomberg)
• The price of sugar hit a 30-year high amid forecasts of a sharply reduced harvest (Economist)
• Bank of England left rates unchanged and refrained from adding to asset purchases (Bloomberg)
• European Central Bank kept its benchmark interest rate unchanged at a record low (Reuters)
• Fed announced plans to buy $600 billion in long-term Treasury bonds by the of Q2 2011 (WSJ)
• India has hiked interest rates for the sixth time this year, in a bid to tackle high inflation (AP)
• Australia raised its benchmark interest rate by a quarter percentage point to 4.75% (Bloomberg)

Weekly Market Barometers

Chart Of The Week
Friday’s employment report was somewhat encouraging showing better than expected jobs numbers. However, the unemployment rate remained at 9.6% and there is a long way ahead to get back to a more robust labor market.  See the chart of the week to find out how far the US labor market has come since 2007.  

Source:  www.calculatedriskblog.com

QE2 Recap 
The much anticipated FOMC statement this week confirmed what many market observers had anticipated: More quantitative easing.  From the FOMC statement released on November 3rd, 2010:

The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.

There you have it then.  Another $600 billion down the hole or will QE2 have some positive consequences?  The market analysts have been pondering this question for quite some time examining the various scenarios.  In our view, the more likely scenarios have already been priced in.  This week’s market reaction has confirmed the overall theme of a loss of purchasing power in US Dollar terms.  See the following charts to get a sense of what may be next. 

US stocks at 2-year highs
Bond bubble resuming its course
Commodities gaining strength
Metals charging higher
Gold profits from Dollar weakness

The Fed wants higher inflation and the ongoing easy money policy i.e. the US printing press might just do that trick.  The markets are currently following suit with rising asset prices across the board.  Sadly, that is happening on the back of a gradually weakening Dollar. 

Recommended Video 
If the charts didn’t make the effects of QE2 clear enough, please consider this concise explanation below.  In no uncertain terms, Axel Merk explains what QE2 means and what we can expect once the Fed’s printing press is running at full speed again. 

Good luck and good investing!

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. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.