Re: USD Woes
- From: "ltlee1@xxxxxxxxxxx" <ltlee1@xxxxxxxxxxx>
- Date: 30 Apr 2007 11:11:52 -0700
The stock market and the economy is somewhat delinked. Investing
in American companies is not the same as investing in America. As the
results of globalization, the well being of the corporation is no
longer tied
to the well being of one country.
As long as the following two conditions hold, the stock markets can
rise
on improved corporate profits.
#1. The Fed's ability is to keep a flat yield curve which depends on
#2. Asian central banks not to sell their debt holdings.
On Apr 30, 1:19 pm, PaPaPeng <PaPaP...@xxxxxxxxx> wrote:
RISKY BUSINESS
Investing in a fool's paradise
By Jephraim P Gundzik
May 1, 2007http://www.atimes.com/atimes/Global_Economy/IE01Dj01.html
The rapid slowing of America's economy has been shrugged off by stock
markets worldwide, which continue to vault higher on the increasingly
misplaced notion that corporate profits will grow perpetually.
In sharp contrast, currency markets have grasped the idea that the US
economy is falling into recession, punishing the dollar. As economic
weakness intensifies in the months ahead, expect dollar depreciation
to accelerate. The dollar is likely to drop by at least 15% against
most currencies by the end of 2007.
Cracks in the facade of America's economy first appeared in early 2006
when the housing market abruptly began to whither. Rather than
tightening credit conditions, the housing market's decline was
initiated by plunging affordability of new and existing homes combined
with rampant overbuilding across America.
The growing weakness of the housing market was ignored by investors
and analysts who assumed that very easy credit conditions engineered
by the Federal Reserve would prompt a rebound.
Instead of rebounding, weakness intensified. According to statistics
produced by the Department of Commerce, new home sales plunged by 18%
in 2006, a decline unmatched since 1981. Though Commerce statistics
showed that new home prices edged higher in 2006, this data was
greatly distorted by enormous incentives that home builders lavished
on buyers, which artificially propped up prices.
Adjusting these statistics for the impact of incentives like free
swimming pools, landscaping, custom kitchens and even new cars would
show that actual new home prices fell sharply in 2006, an event
unprecedented in the US since 1970. As the housing market collapse
unfolded in 2006, it was joined by collapsing private investment.
Initially, the collapse of private investment was driven by plummeting
residential fixed investment, which was flat in the first quarter but
dropped at an annualized rate of 17% during the final three quarters
of 2006. The decline of residential fixed investment was the
predictable outcome of falling home prices and the subsequent drop in
home equity traditionally used to finance such investment.
During the fourth quarter of 2006, nonresidential or business fixed
investment also began to weaken, falling by three percent. This sudden
decline of business investment signaled that economic weakness
emanating from the housing sector had begun to spread throughout the
economy. It also signaled that much leaner economic times were close
at hand.
Equity investors and analysts universally ignored the obvious
weakening of the US economy and its negative implications for global
economic growth, relentlessly pushing stock markets around the world
to record highs during the final months of 2006 - a trend that has
continued during the first four months of 2007.
While stock markets have come to view economic recession as benign,
the same is not true for currency markets, which pushed the value of
the dollar down against most currencies beginning in late 2006. Dollar
weakness has accelerated in the first four months of 2007. The dollar
has plummeted to 25-year lows against sterling and has reached record
lows against the euro recently.
More broadly, the trade weighted value of the dollar is also falling
off a cliff. The Federal Reserve's Trade Weighted Currency Index
dropped to a record low last week, indicating that dollar weakness has
become pervasive. Economic statistics showing the US economy weakened
further in the first quarter of 2007 were the principal factor
prompting renewed downward pressure on the dollar.
From silver to lead lining
Like equity investors, most economists refuse to believe that growing
weakness in the economy portends economic recession later in 2007. As
of early April, the consensus forecast for US economic growth in 2007
among leading economists was 2.3%-plus. At the same time, less than
25% of economists surveyed expected the economy to fall into
recession. Such bewildering optimism has inspired the world's
financial media and fueled stock market advances.
This optimism will fade as America's very weak economic reality
dissipates the clouds on which investors and economists are floating.
Last week, several important economic indicators were released all of
which showed America's economy continued to weaken in the first
quarter of 2007. Commerce Department statistics showed that new home
sales fell by 23% in the first quarter of 2007 compared to the same
period in 2006.
Statistics produced by the National Association of Realtors showed a
similar decline of existing home sales and sliding home prices. The
housing market collapse is prompting a surge in foreclosure filings,
which were up 35% in the first quarter of 2007 compared with the same
period in 2006. During this period, one of every 264 households in
America was under some type of foreclosure. Rapidly rising
foreclosures are the main factor undermining America's besieged
subprime mortgage lenders.
Commerce Department statistics on durable goods orders, which showed a
rebound of 3.4% in March, impressed investors, prompting a stock
market rally. Somehow these investors ignored the fact that this
rebound was entirely driven by unusually large orders for aircraft.
Unnoticed within these statistics was data showing that business
capital spending orders went into freefall, contracting at an
annualized rate of over 15% in the first quarter.
The coup de grace of course, was the preliminary estimate of first
quarter growth released on Friday. According to the Commerce
Department, domestic growth was just 1.3% in the first quarter of
2007. Economists had expected growth to be closer to two percent,
revealing again that unfounded and widespread optimism is coloring
perceptions. This preliminary estimate of growth will be revised lower
as neither private consumption nor business investment was as strong
as initially indicated.
With foreclosures and subprime defaults spreading and credit standards
tightening across the banking system, a rebound in America's housing
market during 2007 is extremely unlikely. Without a housing market
recovery, business investment will continue to decline, prompting
layoffs, and much weaker private consumption growth. The probability
that the US economy will fall into recession during the second half of
2007 is about 75%.
As the US economy continues to weaken in the months ahead, the
dollar's depreciation will accelerate. A further decline in the value
of the dollar of at least 15% against most currencies is likely by the
end of 2007. This depreciation is likely to be fed by plunging US
equity values as economists are forced to revise their economic growth
forecasts much lower and America's weak economic reality overtakes
strong economic dreams.
Jephraim P Gundzik is president of Condor Advisers. Condor Advisers
provides investment risk analysis to individuals and institutions
worldwide. Visitwww.condoradvisers.comfor more information.
.
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- USD Woes
- From: PaPaPeng
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