Sense on Cents

Did the market merely take a breather this week or is the ‘little engine that could’ getting tired? Are we distinguishing the winners from the laggards? Are the cracks in our economic foundation repairing or are some just too large to hold back the flow of red ink, i.e. embedded losses? Perhaps we are experiencing all of the above as we continue our journey along the new and varied trails of our economy. Let’s review the major economic statistics for the week, along with the month to date returns across a wide array of market segments.

I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents. If you have any questions, please do not hesitate to ask.

ECONOMIC DATA

I largely discount positive news on the housing front as I view them largely manipulated by Uncle Sam while delinquencies, defaults, and foreclosures move ever higher. This may be an oversight on my part, but so be it.

Aside from that, I believe the most meaningful news this week was the GDP report from the UK. Please see my Friday morning commentary highlighting how the UK remains mired in recession.

Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis:

U.S. DOLLAR

$/Yen: 92.08 versus 89.68, +2.7%
Euro/Dollar: 1.500 versus 1.4635, +2.5%
U.S. Dollar Index: 75.44 versus 76.72, -1.7%

Commentary: the overall U.S. Dollar Index declined marginally this week. The dollar has improved versus the Japanese yen, but remains decidedly weak versus the Euro. The U.S. Dollar Index did break below 75.00 at one point early Friday. The correlation between the U.S. Dollar Index and the equity markets remains quite high. Both markets ended the week close to unchanged. Have too many people bought equities and commodities while having sold the U.S. greenback? I have been asking that question for the last month so no reason to stop now. The biggest impact of the weak dollar is seen in the commodity markets and long term interest rates. Commodities continue to trade with a firm tone while interest rates move higher.

I reiterate my comment from previous weeks: while I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade. On this topic, please read “Brazil Wants A ‘Real’ity Check.”

COMMODITIES

Oil: $79.65/barrel versus $70.39, +13.1% REMAINS VERY FIRM
Gold: $1055/oz. versus $1008.2, +4.6%
DJ-UBS Commodity Index: 137.32 versus 127.683, +7.5%

Commentary: I repeat from last week, unless you grow your own crops or have your own source of energy, you should expect to get increasingly squeezed as prices at the supermarket and gas station are likely to head higher. While Washington will not address this development, these price moves are directly correlated with Washington’s weak dollar policy. The banks and others able to borrow cheap money for trading and investing benefit from the weak dollar. American consumers and savers get stuck with the bill.

The  Baltic Dry Index once again moved higher and got back above the 3000 level. Is the improvement in the non-Japan Asian economic bloc for real? Certainly the economies in Europe and North American remain decidedly challenged.

I continue to believe these commodity tea leaves are an indication of inflationary expectations in these ‘inputs,’ while we encounter deflationary pressures in wages and real estate.

Summary/Conclusion

I am seeing a widening in the gap of those traveling along our global economic landscape. Clearly, the economies of Australia, China, India, and Brazil are in decidedly stronger shape than other larger developed nations. The U.K.’s GDP report released Friday morning showing that once proud empire to still be in recession should not be underestimated.

On this side of the pond, Christina Romer, a White House economic adviser, admitted that our economy has benefited as much as we should expect from the economic stimulus provided. Ouch. That is not good. Housing, employment, municipal finance all remain mired with real problems. Some of the economic strength we have seen is more a function of government support than a robust rebound in fundamentals. Commercial real estate still has $100-$150 billion in likely losses yet to be recognized. That sector of the economy will be the bigger drag in 2010.

Against all this, the crowd on Wall Street is steamed over the compensation restrictions imposed by Uncle Sam. While I have little sympathy, I do not think it is good long term for our markets and economy to have Uncle Sam involved in the compensation process. Please read “The Wall Street Oligopoly Rails on Compensation Controls” for all my thoughts on this topic.

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Thoughts, comments, questions always appreciated.

By the way, please join me this Sunday evening on BlogTalkRadio (8-9pm EDT) for what will assuredly be a fascinating dialogue with a giant in financial investigative journalism, Allan Dodds Frank. Over the last thirty years if there was a major financial investigation to be covered, Allan was all over it. The recipient of two Emmys will provide riveting color on a number of financial intrigues. Don’t miss it.

Have a great day and weekend.

LD

This entry was posted on Saturday, October 24th, 2009 at 7:32 AM and is filed under bond market, commodities, currencies, Equity Markets, General, markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.