Currency Portfolio Management

Chart of the day

Crude oil chart

How bad are things in the US industrial sector

How bad are things in the retail sector

The economist

Soros on the credit crunch and Bear Stearns

Dow / Gold chart

Is the stock market performing well? It all depends on how you measure. When measured in US dollars, the Dow currently trades approximately 11% off its all-time record highs. However, when measured with that other world currency (gold), the picture is more bleak. To help illustrate the point, today's chart presents the Dow divided by the price of one ounce of gold. This results in what is referred to as the Dow / gold ratio or the cost of the Dow in ounces of gold. For example, it currently takes 14 ounces of gold to “buy the Dow.” This is considerably less that the 44.8 ounces back in the year 1999. When priced in gold, the 21st century US stock market remains in one big bear market.

Bear Stearns 2

Bearn Stearns

10 items to prove we are in a recession

1. After hovering above 50 in      recent months, the Chicago ISM number dropped sharply to 44.5 in February,      notching its lowest reading since December 2001 and coming in well below      expectations. This brings this survey in line with the disastrous services      survey of last month.
   
2. The University of Michigan Consumer Sentiment Survey for the United States came in at 70.8. This is the lowest      reading for the index in 16 years.
   
3. "The New York City Purchasing      Manager's Survey fell for the second consecutive month to 427.7 in      February. The current conditions index fell to 43.4, down from 47.9 in      January. The six-month outlook index was below 50 for the second      consecutive month for the first time in the survey's history; at 47.5 it      was down from 70 in February of 2007. The worsening conditions reflect      rising prices coupled with slower job growth and layoffs in financial      services, as well as tightening credit conditions and higher unemployment."      (economy.com)
   
4. The dollar hit an all-time low      against the euro and fell this week against nearly every currency in the      world, except Zimbabwe's. And with inflation running there at 100,000%, I      think we will have at least one currency against which we will stay      strong. As an aside, and as I wrote in my annual forecast, I think we are      seeing a top forming on the dollar against the euro over the next few      months, but the dollar will continue to fall against Asian currencies.
   
5. Oil is over $101 a barrel, and      rising energy prices act as a tax on consumers, who have less available to      spend on other items To add insult to injury, much of that money is sent      to foreign countries that are hostile to the US. Of course, we should be      grateful that some of the countries recycle those dollars back to the US,      buying large positions in our major banks and keeping them from going bankrupt.
   
6. Home prices continue to fall      and home construction is slowing dramatically, even while the available      supply of new homes rises to all-time high. Foreclosures are running at      record levels and rising everywhere. And everywhere there are "foreclosure      tours" as real estate agents charter buses to take prospective buyers to      homes which can be bought very cheaply. The number of vacant homes is now      over 2,000,000. There is no sign of a bottom in the housing markets. The      inventory of unsold homes continues to rise, and is now at almost a 10-month      supply.
   
7. Commercial real estate      construction has held up well, but there are clear signs this is about to      come to an end, as lending for commercial real estate is becoming harder      to get. Indexes which track commercial real estate are softening and      commercial real estate credit default swap prices are soaring. Look at the      next chart. It shows that prices for credit default swaps have almost      tripled in the last four months for highly rated investment-grade      commercial paper. I can't do the math quickly, but the back-of-my-napkin      analysis of CDS rates for the lowest-quality commercial paper (junk bond      levels) suggests default rates approaching 50%. Only in a major depression      of biblical proportions could we expect to see something like that. But it      means the securitization market for commercial mortgages is drying up,      which means available capital for new construction is going to be much      harder to find. This is going to be a drag on growth in the coming quarters.
   

8. Personal income for the      average US consumer rose by the same amount as inflation, around 0.4%, and      with rising energy and food costs (which we will look at later) it is no      wonder that retail sales are down and falling. The savings rate is still      negative, which means consumers are using savings to maintain their      consumption.
   
9. Jobless claims continue to      climb toward recessionary levels. Remember that unemployment is a lagging      indicator. Jobs are one of the last things to fall in a recession, as      employers are reluctant to cut back but then begin to do so more rapidly      as it becomes clear we are in a recession and not just a temporary      slowdown.
   
10. The index of Leading Economic      Indicators continues to plunge, and is not far away from levels last seen      in 2001. Such a drop by the LEI has always been accompanied by a      recession.

from John Mauldin' newsletter

Personal income and consumption

Consumer spending in the U.S. rose more than forecast in January. The 0.4 percent rise in spending followed a revised 0.3 percent gain in December, the Commerce Department published today. The Federal Reserve's preferred measure of inflation climbed 0.3 percent, the most in four months. Anyway, some parts of economic reports are really worrisome. In fact, there is no any consumer consumption in data because their growth reflects a jump in prices with eroding buying power. Lets have a look at the graph representing Real Personal Consumption which takes into account inflation and shows the consumption of the economy.



What is a driving power of the consumer consumption? The answer is easy - personal incomes, of course! If folks will earn more, they will spend more. American consumers do not save money. They spend as much as they can and will even borrow to spend more than they can afford And now, please have a look at the graph of Real Personal Income and you will get a real picture of what is happening in  the economy right now. 

Chart of the Day

For some perspective into the all-important US real estate market, today's chart illustrates the US median price of a single-family home over the past 38 years. Thanks, in part, to low long-term interest rates, the trend from 1991 to 2005 was impressive. Not only did housing prices increase at a rapid rate, the rate at which housing prices increased - increased. That brings us to today's chart which illustrates how housing prices have dropped well below their accelerated upward trend. In fact, nearly half (48.9%) of the 1991 to 2005 gains have been erased in slightly less than three years.

Dow / Gold chart

The Dow currently trades 13% below its all-time record high. For some further perspective into how the stock market is actually performing, today's chart presents the Dow divided by the price of one ounce of gold. This results in what is referred to as the Dow / gold ratio or the cost of the Dow in ounces of gold. For example, it currently takes 12.9 ounces of gold to “buy the Dow.” This is considerably less that the 44.8 ounces back in the year 1999. When priced in that other world currency (gold), the Dow is in the midst of a massive eight year bear market.

A rough day at the office...

The Last Laugh