November 20, 2008
With the Dow Jones Industrial Average hitting 5 year lows today, the burning question on everyone’s mind is, how far can stocks fall.
This is a perfect time to republish a post that I wrote in the middle of October titled DJIA: Does the Past Offer Hope?
Here is a very interesting chart published by Barclays Capital. They compare the current equity market movements to that of the “Panic of 1907.”
The similarities are striking. In 1907, the last leg lower in the Dow was the 37% decline that lasted from the second quarter to the fourth quarter. So far this year we have only seen a 34% decline from the August high of 11867 to the October low of 7882. Another 3 percent decline would bring the Dow down to 7475.
Click to Enlarge
Barclays Capital
The price action in the Dow in 1907 suggests that there could be one final push lower in equities before a long term bottom and when a rally does happen, it could be as much as 20 percent. Afterward, expect a long phase of consolidation. Back in 1907, there was a 15 year consolidation before the stock market picked up once again and we entered the Roaring 20s.
Here’s a chart of the Dow from 1900-2004 (click to enlarge)
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Posted in Dow, Forex, Forex News, Forex Technicals, Stock Market, US Dollar, euro, forex blog, usd/jpy
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November 20, 2008
I have long said that EUR/JPY is one of my favorite recession trades. With the Eurozone in a recession and the need for the European Central Bank to step up to the plate and lower interest rates, the rate differential between the Euro and Japanese Yen will close and close rapidly. Furthermore, as US equities continue to tumble, EUR/JPY will follow suit.
But what I really like about this currency pair is that it is breaking out of a recent consolidation to the downside. As indicated by the chart below, the currency pair has entered the “Sell Zone” which I determine using Bollinger Bands. That level coincides with triangle support and the 23.6% Fibonacci retracement. As long as the currency pair does not rebound and take out close above today’s high of 120.47, I think it’s headed to 115 and maybe even lower.
Source: eSignal
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Posted in Carry Trades, EURJPY, Forex News, Forex Technicals, euro, forex blog
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November 20, 2008
Every single day we have more reason to believe that the US unemployment rate will break 8 percent next year. Jobless claims rose to a 16 year high last week of 542k, driving the US dollar lower against the Japanese Yen. Continuing claims rose to 4.012 million, the highest level in close to 26 years.
The most powerful aspect of today’s report is the fact that the Veteran’s Day Holiday usually pushes jobless claims down which suggests that if there wasn’t a holiday, jobless claims could easily surpass 550k.
There is no question that the US labor market is in trouble and non-farm payrolls will continue to drop. However, with major layoffs from companies like Citigroup, there is a decent chance that we may see non-farm payrolls double dip like it has in past recessions. In analyzing non-farm payrolls data during the last 3 recessions, we see that at the beginning of an official recession, as defined by the National Bureau of Economic Research, non-farm payrolls start to decline rapidly. However after falling between 200k and 300k, job cuts stall and then pick up once again. We saw this trend in the 1981 to 1982 recession, the 1990 to 1991 recession and during the 2001 recession.
Therefore don’t expect the labor market to stabilize anytime soon - non-farm payrolls should top -300k, stabilize and then revisit that level once again in the first half of 2009.
1990-1991 and 1981-1982 NFP Charts
ZIRP? Recession Trades
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Posted in Bernanke, FOMC, Fed Rate Cut, Fed Rate Cut Expectations, Federal Reserve, Forex News, consumer spending, forex blog, jobs, non-farm payrolls
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November 19, 2008
Despite false rallies in the currency market, I have stressed that there is no reason for the liquidation to be over. I warned that the currency and stock market rallies were a mirage rather than a bottom and now, the pessimistic tone of the FOMC minutes has forced another wave of liquidation.
Tuesday’s rebound in risk appetite was short-lived as the FOMC minutes revealed that the contraction in the US economy could last well into the summer of 2009.
In light of the 400 point drop in the Dow, the US dollar and Japanese Yen regained strength as repatriation and risk aversion continues to drive demand for the low yielders. The greenback’s recent strength can be most clearly seen in USD/CHF, which hit a fresh 14 month high today.
As we predicted, the FOMC minutes was the trigger for a major move in the currency market. However the moves that we have seen today need to be sustained before we can see a more meaningful breakout of the recent consolidation that we have seen across the currency market.
Something more powerful such as a decision on bailing out the automakers, next week’s GDP report or another surprising abysmal loss in the corporate or financial sector may be needed before we see new trends develop.
FOMC Minutes Confirms that More Rate Cuts Needed
The tone in the FOMC minutes, like the tone of Bernanke’s testimony yesterday was unmistakably dovish. The members of the monetary policy committee lowered their growth and inflation forecasts, talked about the downside risks to growth and how the contraction in the US economy will not temper until the middle 2009, at the earliest. Some members of the committee even openly discussed the need for further rate cuts, which confirms that rates will be lowered again in December. The Fed feels frustrated that interest rates are closing in on zero and acknowledged that it leaves them with little room to maneuver. Fed fund futures are pricing in a 50bp rate cut with a minor chance of a 75bp cut to 0.25 percent. If the Fed cuts interest rates by 50bp and the US economy fails to recover, their credibility will go out the window as the market questions their ability to tap other tools to stimulate the economy.
Automakers, Philly Fed and Leading Indicators
The Big 3 Automakers (General Motors, Ford and Chrysler) were on Capitol Hill today pleading for a bailout. Although a bailout of the automobile industry is inevitable in our opinion, it remains to be seen whether lawmakers will act quickly. The longer this drags out, the more pain it will cause for US equities.
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Posted in Bernanke, Carry Trades, FOMC Minutes, Fed Rate Cut, Fed Rate Cut Expectations, Forex News, US Dollar, USD/CAD, consumer spending, eur/usd, forex blog, oil dollar, usd/jpy, weak dollar earnings
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November 19, 2008
US consumer prices dropped 1 percent last month, taking the annualized pace of growth to 3.7 percent, which is the lowest level since October 2007. Falling oil prices takes the credit for lower inflationary pressures with gasoline prices tracking the 50 percent decline in crude. Gas station receipts fell a whopping 14 percent and commodity prices have fallen in general, which has helped to push down transportation costs.
Although the core PPI numbers accelerated, core CPI dropped 0.1 percent and we expect it to head even lower. Less price pressure will give the Federal Reserve more room to cut interest rates. We expect the Fed to cut by another 50bp in December, but it is important to note that Fed Fund futures are pricing in a tiny chance of a 75bp rate cut next month.
The housing market continues to be one of the weakest links in the US economy. Housing starts fell to a record low while building permits dropped to the lowest level in close to 50 years. When you have an environment where foreclosures are rising at a very rapid pace, there is no desire by builders to break new ground.
This afternoon, we have the minutes from the latest FOMC meeting at which the Fed cut interest rates by 50bp to 1 percent. Given the continued concern reflected in Bernanke’s testimony to the House Financial Services Committee on Tuesday, the Fed is likely to support further easing.
All of the major currency pairs have been consolidating since the middle of last week and the FOMC minutes could be the trigger for a major breakout.
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Posted in Bernanke, FOMC Minutes, Fed Emergency Cut, Fed Rate Cut, Fed Rate Cut Expectations, Federal Reserve, Forex News, Forex Trading Expo, Japanese Yen, US Dollar, US Economy, forex blog
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