US EQUITIES: A CRAZY WEEK !

It's been a volatile and confusing week in the U.S. markets.
Poor economic data and then GDP data that beat estimates.

The Bearish News Blog has more analysis on Q3 GDP
Dissecting The “Rosy” Q3 GDP Data
The USD stages a comeback, and then loses ground, only to try to claw its way back yet again.

USD vs the BRAZILIAN REAL (R$)

The Brazilian Real is the currency in Brazil. The Brazilian Real is also known as Reals. The symbol for BRL can be written R$. The Brazilian Real is divided into 100 centavos.

I've been posting quite a bit on currencies recently.
While everyone's been analysing EUR/USD, GBP/USD, USD/CHF etc etc....here's a fresh take on the continuing slide in the USD.

USD/BRL is currently around 1.7550BRL to 1USD. In December 2004, it was well over 2.4O BRL to 1USD.

Being one of the emerging BRIC nations, this 'commodity and natural resources driven economy' has attracted significant fund flows as money moved away from the USD.
A quick glance at the USD/BRL chart below shows that USD has lost over 37% vs the BRL over the past 5 years. It's important to remember that the BRL is a 'commodity currrency', ie. it closely tracks the movement in commodity prices.
(Falling commodity prices are positive for the USD and negative for the BRL)

This explains the collapse of the BRL when commodity prices collapsed in July 2008.


Let me also mention that Brazilian Interest rates are nowhere close to the 'almost zero' interest rates in the US. At their Oct. 21 meeting, the Brazilian Central Bank rate committee members voted to hold the country's Selic base interest rate unchanged at a record low 8.75% annually.

Brazil plans to impose a 2% tax on foreign capital inflows toward equities and fixed-income investments in an effort to slow the ongoing appreciation of the country’s currency.

And while we're at it, let's not forget to compare the performance of the Bovespa ( Brazilian Equity Index: ^BVSP) vs. the DJIA. (the Chart says it all!)














The chart of USD Gold vs BRL Gold is also interesting. Gold has been rallying in all currencies.


So what exactly does this blogger make of all this?

Firstly, I must confess to be no expert on the Brazilian economy or currency.

What I can tell you, is that we are witnessing a gradual empowering of countries in the developing world, primarily the BRIC nations.

These are countries with significantly higher savings rates, hard working populations, cheaper labor rates and significant natural resources in the case of Brazil and Russia.

Brazilian blue chip companies are well known the world over - Vale: the world's largest iron ore miner & the petroleum giant -Petróleo Brasileiro S.A, better known as Petrobras to name two!

As I watch the latest 'Mega' Bond auctions in the USD sail through smoothly for now, I wonder how long it will take for the emerging BRIC nations to gradually stake their claim as dominant and financially strong members of the world economy.

The members of the once dominant G5 : France, Germany, Japan, the United Kingdom, and the United States.

The BRIC nations are : Brazil, Russia, India & China.

It's not going to be smooth sailing all the way through, and the BRIC nations are not insulated or decoupled from the ongoing collapse of consumer consumption and the banking sector pandemonium in the developed world,.................................. but over the long term, I'm betting on the BRIC guys!

INDIAN GOLD IMPORTS 2009

Here's a clipping from the Business Standard Newspaper, Mumbai. Tuesday 20th October, 2009.

USDX : US DOLLAR REBOUND FOR REAL ??

It's been a good week so far for the USD.

After sliding against most currencies since the start of the year, there are now calls for a USD bottom. Over the last few weeks, I cautioned Gold bugs about taking fresh positions in Gold, given that the USD was considerably oversold at the time.

Reasons for the USD rebound?

The USD has been quite oversold for a while, as money was flowing out of the USD to riskier assets - and equity markets everywhere got their fair share of this fund flow. Is the party over and will we see fundflow reversing back to the USD?

US Consumer confidence continues to stumble: Clearly the guys on Main Street aren't having as good a time as the suits on Wall Street. Could it be that this recovery is built on a foundation of sand!

Almost ironic that poor economic news and data is causing a stampede back into the USD.

Sceptics, contrarians and some conspiracy theorists find the timing of the USD rally and bad economic data quite convenient, given the on going mega USD Bond auction.
Its great to have a USD rally when you're having a humongous debt sale!

USD Carry trade: It seems that the USD has recently become a favoured borrowing currency for carry trade. You can thank Bernanke for his almost zero interest rate policy!
It's always risky when the borrowed currency is oversold. (Look at the 3rd chart)
As the stock markets start to correct and carry trades are unwound, we could see the USD rally still further.

Lastly, could this all be a movie trailer of the 'strong USD ' policy of the USA, before the G 20 meets next month. I mean the Chinese and the Europeans aren't too happy with the performance of the 'strong USD' policy of the US Treasury so far.

CONCLUSION:
It's too early to say if the USD has turned the corner for now.
For the record, I continue to be a long term USD Bear. Bear market rallies in the USD should not be confused with any significant improvements in the fundamentals of the USD!

Stock markets globally have been searching for reasons to continue their upward rise, and did look rather overbought! A USD rally has almost become a reason to sell stocks!
Unwinding carry trade is USD positive.

GOLD: It too was looking for a reason to correct. I think that any consolidation in the PM space is good. Its better to see a stable and sustainable rise rather than an unsustainable short term spike. A rallying USD could see gold drift downwards, as punters and traders close speculative positions in gold.

EDIT: US Dollar Future and a World Currency - by Chris Laird of 'The Prudent Squirrel Newsletter'. He's one of the 'experts' I pay close attention to

Dow Jones Industrial Average over 10,000 again : Is the lost decade behind us ?

.........but adjusted for currency losses, the last decade was terrible as far as net returns are concerned.
Besides, the 'buy and hold' investing approach got you nowhere at all !



While everyone seems to be talking about the recent slide in the USD, as the EUR/USD chart below shows, the USD has been weak since early 2002!

This brings me to a topic I will cover in my next post.
'Can the USA devalue its way to prosperity ? '

GOLD : Rallying in all major currencies

Take a closer look at the red line representing USD gold.

As a result of the recent slide in the USD, gold priced in USD has risen to new highs!

Also note that the GBP is one of the weaker major currencies in this non USD currency rally.(which has resulted in the massive rally in gold priced in GBP)

Good Reading:

Time to Hire Bernard Madoff to Run U.S. Treasury: William Pesek ...

THE GURU OUTLOOK

Financial Coup D'Etat and the Reaction of Gold

ARE GOLD PRICES AT AN ALL TIME HIGH?

Yes in nominal terms, but not if prices are inflation adjusted.

Barry Ritholtz has more on this
On a really long term chart, the current rise isn't parabolic at all!! Its been a good ten years since prices bottomed out in 1999.

GOLD FEVER!

When Gold gets a lot of coverage on CNBC, then you know something's up.
The rapid upmove in the precious metal, has given it front page coverage in the financial media.
The USD slipped below 76 on the USDX.
Ongoing momentum could depress it still further, despite the fact that it looks oversold




"""As David Rosenberg said - FEAR seems to be driving all asset classes these days.

Equity - Fear of missing the party
Bonds - Fears of deflation and Equity collapse
Gold - Fears of ''the end of the dominance'' of the USD, and general uncertainty. """

The biggest threat to the ongoing gold rush in my opinion would be a steep reversal in the fortunes of the equity markets ( that look overbought - ie: 60% rally despite rising unemployment) that would result in an equally sudden rebound in the currently oversold USD.

Ofcourse I could be wrong and gold prices could rocket still higher. ( I wouldn't mind it if they did!!!!!)
But I advise caution as far as fresh buying is concerned.
Buying anything near its all time highs( even if only in nominal term) always has its risks.
So place your bets accordingly!

GOLD : $ 1038.30

Well, there are all kinds of reasons flying around for today's gold spike!

The Australian Central Bank raising rates, or the pricing of Crude oil in USD or the return of inflation --- take your pick.

I'm a long term Gold Bug, but have no idea why it spiked up today.

While I'm not betting that the USD will collapse tomorrow, the recent rally in equity markets does appear to be built on a shaky foundation

.

Gold buyers must realise that punters, program and model based traders and short sellers covering their trades, are also playing their part in the current uptrend in Gold. So as we all wait for Gold to close above technical levels at $1040 & $1060, caution is warranted.

.

The USD continues to stay oversold,as it has been for quite some time. It has not dipped below the level of 76 on the USDX thus far. I'm monitoring it closely for now.

.

LINK:

Dollar's Pain Sets Up Record Setting Gold for More Gains - Futures and Commodities * US * News * Story - CNBC.com:

"Below are recent price forecasts for precious metals spot prices:
DEUTSCHE BANK—Gold will move above $1,100 an ounce during 2010, and the dollar versus the euro will hit $1.60, a level last breached in July 2008.
RBS GLOBAL BANKING & MARKETS —Gold will average $950 an ounce in 2009, to rise to $1,000 in 2010.
STANDARD CHARTERED— Bullion will average $1,050 an ounce for the fourth quarter of 2009.
BANK OF AMERICA/MERRILL LYNCH— Gold prices will hit $1,500 an ounce in 2011 when oil prices move back above $100 a barrel as emerging market growth creates shortages."

EDIT: 7 October 2009 : The Culture of Life News blog has an interesting post on this:
Secret Meeting Discussing Dumping US Dollar As Oil Currency ...

EDIT: 9 October 2009 : Jesse's Cafe Americain has an excellent note on Gold

Gold: Until the Banks Are Restrained and Balance Is Restored

Cartoonist Tom Toles on the Recession that just ended!

Tom Toles, who was awarded the Pulitzer Prize for editorial cartooning in 1990, is the editorial cartoonist for The Washington Post. I have been following his cartoons for a while.
He's in the LINKS list just below the Blogroll.

Here is the link to the cartoon:
Sep 18, 2009 Cartoon

2 YRS OLD TODAY!!

The Bullish Bear Blog turns '2' today. All in all its been a chaotic time in financial markets.
It's hard to believe how much the financial landscape has changed over the past 2 year ( Merrill, Bear Stearns etc).

At a time when caution is warranted, many are still leveraging up, expecting the party to resume. Over the last seven months equity markets have rallied from 'panic lows' to levels that are clearly not sustainable, with current unemployment and debt levels.

'End Cycle' valuations are here again it seems.

As they say in financial fine print - Caveat Emptor!

S&P500 vs the BALTIC DRY INDEX

With the equity market rally in full swing, its almost out of fashion to re - state a 'bearish' case scenario.
Container trade volumes and ocean freight rates have not mirrored the recovery in stock prices.
Here's more on the Baltic Dry Index.

Baltic Dry Index (BDI) (The thin black line is the BDI)

INDIAN EQUITIES : P/E RATIO ANALYSIS ! !

The Indian Stock markets have been rising steadily as the global 'stock market ' recovery continues.

Since markets hit their panic lows in March this year (yes, we can say so now, with the benefit of hindsight!!!!), the rally has been spectacular.

The world economy may not have recovered, but markets have clearly run ahead of themselves.
Below is some P/E ratio data from a recent article in the Business Standard newspaper (Thurs 29, September 2009).
Source: Current market valuations leave little scope for profit-making

It's worth remembering that markets usually overshoot both on the upside and the downside.

A quick glance at some sector P/E Ratios, and you could well think that we are back to the days of an invincible bull market.

P/E Ratios in the 25-30 x range leave no scope for disappointment.

If you exclude commodity sectors like cement and non-ferrous metals, the average P/E is even more expensive.

Risks to the economy still remain:

The monsoons this year have been rather unsatisfactory.
As stimulus packages are gradually withdrawn, sectors like autos and textiles could face head winds.

A global rally built on foundations of '''ginormous''' government money printing, stimulus packages, bailout packages and debt -----> can last longer than some bears can stay solvent.

...and when bears start to reluctantly convert to the bullish camp, it's time to take a step back and analyse your investment profile.

While you don't want to miss out on the party, it's probably more advisable to sell into the strength than buy anything now.
The risk -reward ratio is clearly not in favour of the long only investor.