Friday, November 17, 2006

Nasty Brutish and Short

EUR/USD 1.2792 Hi 1.2800 Low 1.2762
USD/JPY 118.05 Hi 118.48 Low 118.04
AUD/USD 0.7655 Hi 0.7679 Low 0.7643
EUR/JPY 151.02 Hi 151.34 Low 150.99

Well we are all shocked and horrified that the U.S. Residential Property Market is disappearing into a black hole. We had hoped that the merest whiff of a possibility that the FED may at some point stop PAUSING and go with EASE would be enough to stop that house of cards from imploding. Today's data quashed those flimsy hopes.

But still we can keep our hopes alive in other areas. The Democrats have taken back both houses, George W. is making noises about working with the Democrats and bi-partisanship (just like he did right at the beginning of his so-called mandate) and this means that really the U.S. is going to do something about peace in the Middle East and get out of Iraq.

Only not really. No-one seems to have explained this to George W., who may well be a down-home guy out of his depth in Washington, but he is also a seriously delusional President who seems to really believe that he takes his orders directly from God. Still, hope springs eternal. And his latest on Iraq can be summed up thus: "We are not leaving." Oh no, God forbid. The U.S. is not leaving and is gearing up to increase troop levels and to underline its committment to the Iraqi occupation. So you may as well count more money down the drain right now, more lives lost and more destruction. We have another two years of this. Just think how much money has been spent already. Then double it.

And then we have the Stock Market which, hey while the USD was rallying on the back of some vague remarks by some FED personage or other to the effect that inflation is a problem and so we may have to HIKE, was going hell for leather (well not really, but there was a rally and records) on the back of the hope that there would be an EASE some time in the future. And this EASE would, of course, save the U.S. economy from falling into a black hole, never to be seen again.

Only NOW we are told that no-one is actually buying the Stock Market. Capital Inflows into the U.S. Stock Market these past few months have actually been negligible.

What?

Yes, that's right negligible. So the explanation (now you are going to love this) is that Hedge Funds have been "caught short" since the Summer and have been forced to cover and this is what is causing the buying in U.S. Stocks.

OK. So it's not the PPT doing George W.'s dirty work before the election, it's the Hedge Funds. Caught Short. Now you only have to look at what is happening to commodities to know that when the Hedge Funds of the world get caught anything then the price action is, to misquote Hobbes: nasty, brutish and short. It's not the type of price action we have been seeing on the U.S. Stock Market over the past few months. Hedge Funds may have been buying but that wasn't short covering we have been seeing. Therefore the Hedge Funds aren't "caught short" if anything they are NOW long. Think about that. These guys haven't exactly proved themselves Masters of the Universe and they are long U.S. Stocks at a time that the U.S. economy is tanking, the Japanese economy looks like its struggling and greater minds are talking about an imminent slowdown in China. Essentially what we have here is a global economic slowdown and our friends, the Hedge Funds of this world, are LONG.

Sounds like a sell signal to me.

While Commodities dive on the back of the idea that the Global Economic Recovery may be stalling, stalled, is in serious trouble, the USD has remained steady, rallied a little even. The USD has taken its queue not from the data, oh no, but from comments by FED officials to the effect that the fight against inflation is "not over yet". If that strikes you as a slightly flimsy basis for a USD rally, which it is, then start selling USDs now. Because the FED is not going to hike any time soon.

OIL 55.60
GOLD 618.50

Commodities are taking a dive as the Hedge Funds of the world scramble for the exits now that it has become clear that there is a Global Economic Slowdown underway. This has taken some of the shine off GOLD. But not as much as could have been expected. Indeed, with the USD likely to see further selling interest the case for GOLD remains fairly solid. We may see USD 600 in the short term and even USD 580 is a possibility but the search for an alternative to the USD will continue to underpin the positive performance of GOLD for some time yet.

The OIL price is much more dependent on demand so the potential for further declines remain. Debt bubbles are popping all over the place and this will undoubtedly have an impact on global economic growth. A great deal of the good news is already priced into the OIL market. OPEC really has its work cut out for it here. Unless George W. actually succeeds in starting another war in the Middle East, the risk for the price of OIL remains to the downside.

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