Indicators point to a bounce in the USD

You say "But EVERYONE is short the US Dollar?"
So what. Is the USD worth zero? We already have lost 20% of the value of our currency in a year. That is a huge move. Let's look forward.

There are fundamental factors that could facilitate a rebound in the USD. A default of Greece, Russia, Hungary, Latvia, Mexico, or a major international bank all might cause a flight back to the USD. Also the completion or ending of the mortgage purchase program, Treasury purchase program, and declining effect of the stimulus all will have a deflationary effect on the USD.

In fact there are market indicators that show the USD could head higher from here in the short term.

The first is the possible break in the USD downward trendline. The euro is foretelling a break of that six month trend.

Second is the options action on the USD Jan 10 Option Chain (expressed through the UUP - USD Bullish ETF). At least one major hedge fund or active market participant has engaged in a bull call spread that will make money as UUP crosses $25.25 or so. Minimal action on the put side of the equation is a bad sign for anyone short the USD.

These positions could be just foolish bets from large accounts dumb money. But sometimes making positions in front of any trend where lots of money is moving in the same direction is the best place to be, smart or dumb.

Time for a makeover!

Hi, this blog is going to get a makeover. Not just eyebrows and toes either. A whole new look!

If anyone has ideas for a motif, send them my way.

Unemployment peaking in 2011?

Good morning. I have had lots of family come and go over the past few weeks and it gave me a chance to take a breather from the market. Except for helping a friend out with some questions and stocking some gold, I have been pretty quiet.

News this morning... Goldman has released predictions that give us some food for thought for positions to take now.

"If Goldman Sachs is right, of course. Here is the firm’s 2011 forecast:

The key features of our 2011 outlook: (1) a strengthening in growth from 2.1% on average in 2010 to 2.4% in 2011, with real GDP rising at an above-potential 3½% pace in late 2011; (2) a peaking in unemployment in mid-2011 at about 10¾%; (3) extremely low inflation – close to zero on a core basis during 2011; and (4) a continuation of the Fed’s (near) zero interest rate policy (ZIRP) throughout 2011"

Let's examine each one and comment...

1) GDP growth of 2.1 % through 2010

From such a low base, this is just bouncing along the bottom

2) Unemployment peaking in mid-2011 at 10.75 %

Whoa. CalculatedRisk has noted that the Fed does not raise interest rates until "six months after peak unemployment". So monetary stimulus via the Fed will continue for at least another year. That means more downward pressure on the USD, and thus more upward pressure on commodity prices from domestic sources.

3) Extremely Low Inflation

If you think you can get a 6% yield over the next year with low risk of principal, I think you will have definitely beat S&P index returns and any low risk instrument. This is where you will sleep well.

4) Continuation of the ZIRP

The Fed will continue to create inflation to fight credit related deflation. Money, money, everywhere yet none of it to spend.

This blogger suggests buying Met Life A series at $20.90. Although all big insurers are suffering from investment losses and still holds significant exposures, Met Life must be gaining from the fall of it's biggest competitor in the marketplace.

This security will provide a solid yield while the Fed keeps rates low and includes protection if the Fed must quickly increase rates to address hyperinflation of any sort if it were to occur down the line. If the security is deemed by Met Life in the next few years, then the principal pop will provide an addtional 20%+ return over that time period (annualized rate will be lower).

"Met Life preferred A series securities at MetLife Inc., Floating Rating Non-Cumulative Preferred Stock, Series A, liquidation preference $25 per share, redeemable at the issuer's option on or after 9/15/2010 at $25 per share plus declared and unpaid dividends, with no stated maturity, and with non-cumulative floating rate distributions paid quarterly on 3/15, 6/15, 9/15 & 12/15 to holders of record on the 15th calendar day prior to the payment date or on the date fixed by the board, not more than 60 days or less than 10 days prior to the payment date. The floating rate will be the greater of 4.00% or 1.00% above the three month LIBOR rate. In regards to payment of dividends and upon liquidation, the preferred shares rank equally with other preferreds and senior to the common shares of the company."

Ambac heading for default???

JP Morgan thinks so, in the near term...

Does anyone remember February 2008 when the monolines were first being reviewed for downgrade and the market went in a frenzy and the CEO of Ambac was on CNBC? Who remembers that and what did you think then?

"We do not agree with the models! We repeat we are at no risk of defaulting. We have over $1B in claims paying resources!" the CEO Callen pleaded over and over again live on CNBC. Two years later and after at least two capital raising activities, Ambac is now at the end of their rope.

Even as recent as this Sept 26, 2008 interview with the CEO Michael Callen shows he is unrepentent about the financial risks to his firm and the system in general. Even in Sept 2008 the CEO claims to have $12B in claims paying resources. Good thing the rating agencies did not allow them to just shirk their responsibilities by moving those assets into a new subsidiary to avoid the existing liabilities (a.k.a. the shell game plan).

Here is the link -> "Ambac Insurance Unit May Be Put in Receivership"

Just a year ago this would have shook the financial sector. But since we started handing out money and the Dow is up, "hey, no problem!"

No recommendations other than encouraging everyone to stay defensive in general.

FHA: Lending with a 20%+ default rate expectation

This blog has mentioned before that FHA is subprime in sheep's clothing. But how bad is it?

"Although the FHA has tightened credit standards, many of the 2007 and early 2008 mortgages are going bad. The agency expects defaults on 24% of all loans insured in 2007, and 20% of those backed in 2008. "The orders from Congress and us were clear: We want to save as many families as we can, recognizing that a lot of loans people were looking to refinance out of should never have been made in the first place," said Brian Montgomery, who served as the agency's commissioner for four years ending in July."(1)

Although there have been lots of assurances to the contrary, it looks like a bailout is now in the works.

"Two House Republicans warned that growing losses at the Federal Housing Administration could lead to a taxpayer-funded bailout and have asked the Department of Housing and Urban Development for data backing up the FHA’s assertion that it won’t need to ask Congress for any taxpayer money.

“Congress and HUD must take whatever steps are necessary to ensure that this program operates in a manner that does not expose the taxpayer to yet another bailout,” wrote Republicans Darrell Issa of California and Spencer Bachus of Alabama in a letter, dated Monday, to HUD Secretary Shaun Donovan."

Apparently news leaked that the stress tests used in the audit showed FHA is doomed at current capital levels.

Likelihood that a bailout will be avoided, I put it at 10%. But who cares, the DOW is up. Right?

(1) "FHA digs out after loans sour", WSJ, written by Nick Timiraos, Nov 4, 2009

(2) "FHA postpones release of audit as bailout worries mount" WSJ, written by Nick Timiraos, Nov 5, 2009

Is it time for the USD to show some muscle?

The US dollar has been kicked, spit on, and left for dead in 2009. Gold bugs, fiscal conservatives, and doomsayers all have abandoned the US currency in anticipation of economic meltdown due to the massive amount of debt spending to slow the crisis.

But have USD critics gotten ahead of themselves?

* Oil has overshot against the USD

Since March, USD has fallen less than 20% vs the Euro, but oil futures have increased 40% in anticipation of a collapse in the purchasing power of the USD. Yet that has not happened...

...and as time ticks by, the disparity between the increasing inventory of oil in the market and the demand on the exchanges becomes more and more peculiar.

* Even weaker currencies have gained 30% vs USD

Emerging market currencies such as the Colombian Peso, Brazilian Real, and Turkish Lira all have gained over 25% vs the USD in a just six months. Although their futures are bright, there are still significant political risk to emerging countries that is now disregarded in the purchase price.

* Lots of deflation on the horizon

The market has been bearish on the USD since March. But considering the wind down of stimulus in the next few months (Treasury purchases, MBS purchases, Cash for Clunkers) and also housing programs (HAMP, Housing Tax Credit), the deflation of reduced economic activity should be significantly bullish for the USD.

* USD is reaching historical support levels

Emerging economies need the USD propped up to maintain exports and keep the flow of hard currency into their country. This historical chart underscores the importance of the US economy to the world.



* Traders have moved to a net long position on the USD

In fact, it has been noted recently that traders have switched to a net bullish dollar position.(1)

* USD reversal could cause market mayhem

Many journalists remark on how the investment banks borrow from the Fed for free and invest in other currencies to obtain a spread. This is called a carry trade and it has helped banks such as Goldman Sachs, Morgan Stanley and JP Morgan book billions during this year. Roubini thinks an uptick in the US dollar will lead to a massive carry trade unwind.

“Everybody’s playing the same game and this game is becoming dangerous.”

The dollar has dropped 12 percent in the past year against a basket of six major currencies as the Federal Reserve, led by Chairman Ben S. Bernanke, cut interest rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s. Roubini said the dollar will eventually “bottom out” as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and “rush to the exit,” he said.

“The risk is that we are planting the seeds of the next financial crisis,” said Roubini, chairman of New York-based research and advisory service Roubini Global Economics. “This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals.”(2)

The author of this blog thinks it is time for the USD to correct, but that it is too risky to play for a major spike in the USD. In the case there were unforeseen banking issues in Europe or in a significant emerging market, a run to the USD could be damaging to US banks who are leveraging USD.

The author recommends buying SCO under $13 and exiting above $15.5

(1) Forbes.com, "Stronger Buck Threatens Stocks And Commodities", Ryan Campbell, Nov 3, 2009

(2) Bloomberg.com, "Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble", Michael Patterson, Oct 27, 2009

If this is a recovery...

If this is a "recovery", then I need to take high school english again. Recovery from an injury means regaining health and mobility. I see little health in the following stats considering the massive stimulus it took us to get there.

First of all, how do job loss trends like this...

...translate into increasing home prices?

It must be this...

...since I don't see a rebound in Buffet's favorit metric...



...or here in US daily oil consumption (even though the reported numbers are only until July)...


Bottom line. All I see is a little prop up, not recovery. Remember, my previous blog mentioned that we are now at the peak effect of the stimulus and that it will wear off from here. At least the headlines have toned down from the cheery "That was easy!" messages of two months ago. Let's see if they turn into "This is kinda hard?" in March when the Treasury stops buying agency debt.