Saturday, March 13, 2010

Update 3/13

Copper continues to be rangebound; on one hand is a rising stock market with the potential for growth in construction; the weakening USD also helps keep the price up. But the fundamentals are simply brutal and will be for some time. The world's largest consumer, China, is sitting on millions of tons of the stuff and is sharply scaling back lending; there is some talk of a housing bubble. Here in the US we have millions of unsold existing homes and the foreclosure rate shows no sign of abating. Worse, the Fed is halting the purchases of MBS, which should result in the rising of interest rates.. and a corresponding drop in existing housing prices. Therefore, I maintain the "sell" orders; I'll simply wait until copper makes a meaningful move.

I will also be giving the order to "sell" a British Pound contract as I expect the GBP to tank this year. I will "sell" at $1.4850 (Friday's close was at 1.5172). These contracts are 62,500 sterling, so a move of one cent means $625. I'll keep a five cent stop loss on this one. Her Majesty's financial situation is brutal; many have opined that the sterling will reach parity with the Euro (currently at $1.37) this year. Overall, the Brits are in pretty much the same shape as the Greeks.

The census this year will provide a large number of jobs up thru October or so; this will help with the unemployment rate and so my prediction of 11% isn't going to happen; it may even dip into the mid 9's.. good news actually. But behind it all is US Gov't spending, printing, and borrowing.. and these are things that cannot continue on the scale that they are now. The printing of money will at some point have an effect; this year I believe we'll see $3.00 at the gas pump; this makes nearly everything more expensive to produce and transport, a body blow to the US economy. A weakening USD should (in theory) have the effect of raising interest rates on mortgages as well.. (and this is in addition to the ending of Fed MBS purchases). The current 5.25% mortgage note will be a thing of the past; by year's end we'll see it at 7.00%, and for those of you who have mortgages know, this makes for a nice hike in the monthly payment.

If there is to be another financial crisis (and I think it's simply a matter of time) there will be two warning signs:

* $4.00/gal gasoline for an extended period of time
* Double digit rates on the 10 year US Gov't bond
(mortgage rates follow the 10yr bond)

When either of these conditions become reality, look out.

Meanwhile my poster child for socialist ineptitude, Greece, is actually doing OK.. the Gov't has announced some budget/wage cuts, and Greek unions on cue organized strikes and protests, which turned violent yesterday. But the Greek Gov't is standing fast, and may make it thru the end of the year with the help of some of their friends. But we need to realize the scale of the problems and just how bad they'll get. DeutcheBank completed an in-depth study this week and the results are ugly: "They feel that the Greek economy could contract by 4% in 2010 and the total downward adjustment to GDP over the austerity programme is likely to be around 7.5%. Now they also feel that unemployment which is currently 10% will rise to around 20% as this adjustment takes place" This is where Spain is today.. 20% unemployment. This is Depression level misery. My fear here is that one day, a politician will take the podium and say "lets just go bankrupt.. how much worse could it get ?" to the cheers of the mob. Here is Notay's full article on this:

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