Who Let the Bears Out?

Continuing the trend from yesterday, the Dow closed down a whopping 416 points for the day. Apparently the slide was exacerbated by a technical glitch at the end of the day, with traders still on the floor hours after closing trying to square up positions.

Reality-Based Educator asks if we can expect this to continue or if we will get a recovery by the end of the week. Well, if I knew that, I wouldn't have to work. For now, it doesn't look like we have hit the bottom. The European markets have opened lower than expected, another 1.5 to 3.0% depending on what index you look at. So for the time being, it doesn't seem like this is over. There is very heavy volume, and you have to figure the bears who have been hibernating for the last 6 months, are up big which means they have a lot of money behind them to continue to short the market.

This will be a real test of the effects of the hedge-funds. Analysts have warned that hedge-funds are exaggerating moves both to the positive and the negative. If this is truly the case, we could see an overblown move to the downside for the rest of the week.

If I had to bet, I'd say this move is going to continue, and we won't see any significant recovery this week. There may be a good buying opportunity at the end of the week, but the smart money says we haven't seen the bottom yet.

Update: European markets have recoved from their morning lows and are now down only 1% on average. Shanghai rebounded by nearly 4% overnight as well. Dow futures are up 100 points. This all bodes pretty well for the wall street open. So in the short term way very well may get a bounce. After that, I imagine a new low will be tested late this week or early next week.

Here Comes the Correction

Last Friday I posted on the Economy. It was a bit of a self-serving post, bragging I was, that I had outguessed the professional guessers with regards to interests rates. The one thing that hadn't gone the way I had planned was the deep correction in equities that would come along with the realization that the Fed would not cut rates.

If only I had waited a couple of days.

For no particular reason, Shanghai's equity market droped nearly 9% overnight. This has started a chain reaction around the world with European markets, and American markets well into the red today. The equities markets were clearly overextended, and I think a correction is actually quite welcome, but there is a danger of a pretty major pullback over the rest of the week. Now that traders have jitters, bad economic news (which is expected) could trigger some pretty sharp pullbacks this week.

I want to stress that this didn't happen because of a data release or a news event. This is a purely organic pullback, the kind that surprises everyone in the short term (i.e. no one predicted it would happend TODAY), but that is completely expected in the grander scheme of things (It has been too good for too long).

Side note: The Yen is starting to come back against world currencies, with the carry trade unwinding a bit. No one knows if this will continue, but if it does, expect major havoc. The U.S. dollar is dropping accross the board.

Next Stop: Iran

The tension in the air is almost palpable. Dick Cheney announced on Saturday that all options are on the table. Last week more Iranian manufactured weapons were found in Iraq, and to top it off, Israel is seeking clearance for airstikes on Iran, specifically, they want permission to overfly Amercian contolled airspace over Iraq. Finally, and perhaps most disturbingly, Sy Hersh reports that Cheney's office is running covert operations in Iran, possibly using money laundered in Iraq, to support Sunni minorities in Iran. If true, this would be perhaps the most damning, most hypocritical action undertaken by this administration thus far, and that is saying alot.

Ok, I think we all need to stop and take a deep breath. It seems like we are on a crash course with Iran. The most likely scenario in my view is that America grants Israel its wish and provides some cover for an Israeli airstike. Iran retaliates, or America fabricates an Iranian response against the fleets on the Indian Ocean side of the Strait of Hormuz, and BOOM, the U.S. unleashes it's Iran attack plan.

I'm still wondering what the administration hopes to gain with it's reckless behavior.

Mark my words, an attack on Iran will have only negative results, similiar to the Israeli attack on Lebanon, but on a grand scale.

A Funny Thing Happened to the Economy

Currently, most indications are of a strong economy in the U.S. Employment is nearly full, the Equity Markets continue to rise (although a pause seems to be in place for now) and inflation seems to be contained despite very low interest rates.

I can't help but to think that we are getting just a little bit over extended. Recently, there has been some worrisome data on industrial production which has even very unbiased economists muttering recession or even stagflation around the corner. Q4 GDP advance estimate was 3.5% growth, quite healthy. However, Bernanke warned recently that that number would likely be revised down. The consensus for the preliminary Q4 GDP report (to be released next Tuesday) is for a mere 2.3% growth.

Meanwhile, the Consumer Price Index (CPI), one of the most watched and broadest measures of inflation, surprised everyone with a month on month core (core being stripped of volatile food and energy prices) reading of .3% when most people were expecting a flat reading of 0. Education, tobacco, and health care led the charge for the recent gains. So quitely, all expectations for an interest rate cut have disappeared (as I expected) and now the question is, "when will the Fed raise again?" I have been casting doubt on the probablility of a rate cut since last summer in my comment sections (sorry, I'm not going to find the link) but in November I made it clear that I was not in agreement with market expectatons...

Put simply, despite evidence of a slowing economy and a weakening housing market, the Fed will be unable to reduce lending rates, as the market expects it to, due to inflation pressures. As it becomes clear that the Fed will not cut rates, there will be serious fallout for the equities market and the housing industry. Both the Fed futures market and the Bond market expect a rate cut, and in fact more than one. I can't imagine that I am smarter that the market, but I just don't see how the Fed can justify a rate cut until inflation pressures start to ease.

So here we are months later, and despite the realization that the Fed will not cut rates, the Dow is holding steady above 12,600 at least for now. While existing home sales are expected to start a modest rebound (Tuesday) new housing starts and permits are still way off and a further decline in new homes sales is expected on Wednesday. This indicates that we have not seen the bottom of the real estate undwinding.

Add to that the near collapse of the auto industry and it is no surprise that some people are talking about a recession.

But don't expect the Fed to do anything to try to stop it. Inflation will allow them to keep rates on hold at best.

UPDATE: The dollar is on it's heals from a series of small factors. Jitters over a possible conflict with Iran, worry about the fallout from the sub-prime loans (especially now that rate cuts look unlikely), and higher energy prices that will extend the trade deficit have combined to push the EUR/USD to 1.3190. Dealers look for a break of the 1.32 level to make a stronger move against the dollar. The BOE is selling pounds for dollars to try to stop the bloodletting. Only six hours until the close for the weekend. Will the dollar hang on?

UPDATE 2: The dollar hung on and closed at 1.3164 to the Euro. Have a nice weekend.

Iran knows how to talk

Say what you will about Ahmadinejad, but the guy knows how to use rhetoric. Today, he announced that Iran would accept the west's proposal that they stop the enrichment process if the west would do the same. This is a brilliant move that highlights the inherent hypocricy in the west's position.

"We are for talks but they have to be fair negotiations. That means, both sides hold talks under equal conditions," he said.

Iran wants to be considered an equal, and honestly, can you blame them? Can you blame them for wanting a nuclear weapon and yet denying that that is what they seek? The U.S. has toppled the government to their east and their west. Imagine how pressured the U.S. would feel if, say, Russia had toppled the Mexican and Canadian government. The only reason Iran is not honest about their plans for building a nuclear weapon is that the U.S. has made it clear through a deliberate leak that if it can be proved that Iran is developing nuclear weapons they will attack with full force. It seems reasonable at this point that they would want the deterrent that would be provided by a nuclear arsenal.

Meanwhile, the U.S. is doing everything it can to provoke Iran into making a move that would trigger a U.S. attack. Any sane observer at this point can clearly see that plans to attack Iran are in the works, and that it may indeed be too late to stop the attack. And yet it is exactly these plans that are pushing Iran towards the development of nuclear weapons.

The Americans are pushing Iran to become a nuclear state. Iran just wants to be a supplier of nuclear fuel. But [with their threats] they are pushing it further.

Usually it is clear why military action is in the works. If you follow the profit trail, almost everything the U.S. does has a profit motive. But I can't see any clear profit motive for an attack on Iran except the most cynical of all views that such an attack would generate the demand for even more weapons and other military equipment. I'm not quite that cynical yet, so I'm a really wondering now.

What does the United States stand to gain from attacking Iran? Further isolation. Further debt. Soaring oil prices. Oh, soaring oil prices. Are they really that depraved? It looks like we will soon find out.

I'm not a religious man, but god help us.

Happy New Year

Radom musings about Frankfurt

Germany always impresses me for one simple reason: stunning efficiency. The Messe exposition center directly adjacent to the city center, easily handles 135,000 visitors a day, and there is no major traffic jam coming into the city during the show. How do they do it? Amazingly efficient freeways is the answer. The speed limit is variable depending on the conditions. Sometimes the speed limit is even different in the right two lanes as the left two lanes. If traffic is backed up ahead, there are warnings and the speed limit starts to come down as you approach the traffic jam, virtually eliminating big rear-ender pile ups so common in Los Angeles.

The show itself is one of the biggest in Europe. Most of the stuff for sale is total crap, but there are some interesting things, ours included I would like to think. But what really bugs me is the amount of money, resources and work that is put into this five days of selling. I suppose it is a necessary evil to keep the wheels of capitalism spinning, but the sheer magnitude of the waste is mind-boggling. Thousands of stands set up for 5 days, only to be torn down again. Containers full of merchandise flown in from as far away as Australia and China, only to be flown right back a week later. During set up and break down, teams of trash collectors fill containers with empty boxes and bubble wrap one after the next. Carpets are layed the day before the show opens and are destroyed immediately and torn out. It is the most breathtaking display of sheer waste I have ever seen.

One of the high points for me, however, is seeing all of the people coming together from all over the world. I overheard the following languages (and some others I didn't recognize): English, German, French, Italian, Spanish, Portuguese, Dutch, Danish, Sweedish, Norwegian, Finnish, Polish, Russian, Czech, Slovak, Croatian, Greek, Arabic, Cantonese and Korean. I'm probably forgetting some, and it may have been Mandarin and not Cantonese, I'm really just guessing there. The only reason I could sort out the Skandanavian languages is because Danish I can recognise, and the others I knew where the people were from. Don't ask me to tell the difference between Norwegian and Sweedish, because I can't.

Aside from the great story in the post below, the most interesting thing that happened was in a bar one night. We were having beers in this little place when three young guys came in. One, who we learned was only 18, sat down at the piano and started playing boogie-woogie on a level that I have never heard. Apparently he is one of the 3 best piano players in all of Germany, and he stops by the local there to get some free beers and pizza for him and his buddies. It was truly amazing.

All in all, I'm glad to be back. While I was gone, I had a flurry of activity on my blog. I registered something like 35 visits an hour for a 24 hour period. I have no idea why and now I will never know because it was too far back to look into the visit log. Could it have something to do with the Iran story? I really don't know. Triple digits in a day sure does feel good though for a tiny little blogger like myself.

Thanks for all the welcome-backs.

Back From Frankfurt

I just got back from Frankfurt after attending our annual trade fair there. More about Frankfurt later, but I want to share a story I heard in my booth....

A clearly Arab gentleman entered our booth and was interested in a certain product. He had a cross-bandage on the bridge of his nose and his hand was wrapped in a bandage that disappeared into his coat sleve. He was from Saudi-Arabia so I'm assuming he was a Sunni Muslim. Further evidence of that is that he had a striking resemblence to a young Saddam Hussein and the classic Sunni mustache. More evidence is in the story.

After he asked about our product, a gentleman from Cyprus came in and asked him if he was the one that got mugged on the train platform. He said he was, and then started to explain. The story went something like this...

There were three of them: one man and two women. They did the only jam-and-pick scam where they use the opportunity of people being crowded in an area to pick pockets. The guy took my wallet and I noticed right away so I grabbed him and told him to give it back. Then he head-butted me which is how I got the bandage on my nose. I hit him with my free hand and that is when he pulled the knife out and stabbed me in the left hand that I was holding him with, but I didn't let go. I'm from Baghdad, so this was really no big deal for me. It took the police a half an hour to get there, but I just kept hanging on. It turns out the guy who mugged me was an Algerian with no papers. Imagine that, he goes for another Arab.

At this point the Cypran and myself are just staring at the guy with our mouths agape. I'm not sure what to say so I offer him a coffee or a coke. He says, "no thanks" and then he asks me if I'm an American. I reply that I am and he says with a big smile, "Yeah, they are the ones who trained me." Then he walked out.

That was the best story I've heard in a while.

Possible Pause

This is my busy season. By Tuesday I'll be on my way to Frankfurt for a very large trade faire which is the most important event for our company. I won't be back until the 16th of Feburary, and unless some unforseen opportunity arises, I'll be cut of from the internet, and blogging, for the duration.

In the meantime, perhaps those of you who commented on the last post could read the following two pieces and consider this blog post an open thread until I return (and beyond if you want!).

First is a very good short history of the CIA engineered coup in Iran. Read it.

Then, Chalmers Johnson has a preview of his new book up at Tom Dispatch. I'm not saying I agree with everything he says, but it certainly is thought provoking, and hopfully discussion provoking as well.

Enjoy, and wish me luck at the show!