Entry March 11, 2008

With two months to go before an official recession, there is not much light left at the end of the tunnel.

With the S&P 500 just hovering its 52 two week low of 1270, what i see as oil possibily establishing a new range, a rally in commodity prices fueling global inflation, and weaker economic data continue to poor in. I was a bit too optimistic in revisions in economic data. My previous thesis was premised on a strong job markets. But as the labor markets begin to loosen, especially with the delayed affect of reports, there seems there will not be enough time for a significant recovery. As previous times, any Fed Rate cut will lead to a superficial rally in the Domestic equities, but the overall trend is down. Though trading the overall trend on future indexes should lighten their positions or consider possible hedges.

I read the other day that the bond markets were pricing in a 1% Feds Fund cut. As usual the bond markets are being overly greedy. However, the I believe the Feds will concede 50 basis points minimum and 75 basis points maximum point cut. Now obviously if a 50 Basis point cut surprises markets, there will be very interesting results along with lots of volatility.

If a 50% basis point were to surprise, I would expect to see a neutral day in the first half, and then probably a continued down trend through out the week. (this is discounting any surprise news you will hear such as bailouts or better than expected reports, one has to watch closely to trade the temporary counter trends).

If expectations are in line with the cut at 75 basis points to 100 basis points, one can expect to see a rally in equities for a few days. However, of recent past cuts, rallies have not lasted more than a week before downward trend resumed.

Obviously the bond markets should be moving contrary, to the equities markets however, I have not followed the bond markets as closely as i have in the past. Other news of liquidity relief on the Fed Reserver side and bailout news, and further defaulting of Loans should also be weighed in.

However, I do have to say more about oil. Though I have never been an expert, I think oil has broken into a new range. The previous range which did not last very long at all which spans from October 2007 until Feburary 2008, between 85 and 100 dollars a barrel. Such a rapid shift in ranges is only indicative of the poor economic conditions we are facing right now globally as oil prices is something all nations must face whether 3rd world or top of the world.

Not only does it weigh down GDP of the economy, it supports my hyper inflation idea that the Fed Reserve in part has created from the massive amount of cuts in a short period of time. Looking back at past economic policy during times of crisis one will not find such drastic actions. Although, one can argue e conditions we face hearken back to the days of the 70's or even to the depression. Inflation is also just not stemming from the fed cuts and high oil prices but as well as high commodity prices which is created from as a global problem. Strong demand for commodities can be seen from the appreciation of the Aussie and Kiwi. As Asia continues to expand exports from Australia and New Zealand are going up and GDP growth continue grow higher. Further more, due to global weakness in economies, the inflationary problems cause people to bid up gold, which has seen huge volatility and rallies in the past month. Considering the Aussie is a commodity currency tied with Gold, is another reason why the Aussie will be higher, as long with Gold price.

Included in this commodities rally is oil prices which are tied with the Canadian dollar. Interestingly one can correlate the futures contract on crude to the Canadian dollar contract. The Canadian dollar seems to rally with oil as it enters new ranges. However it tapers off as probably the dollar will respond more to economic news in Canada. Based off sentiment readings, Canada seems to be more worried about economic growth. Since they are tied closely with the US dollar, the Canadian Dollar will stay range bound for awhile.

One can argue all these problems we faced are due to the fact that the United States as trade imbalance for so long. And now, the US economy is in a mode of fixing that problem, while other countries such as the EU will be the ones who face trade imbalance problems as the Euro continues to appreciate and the dollar continues to weaken.

What surprises me further is that the BOJ or the European Central Bank has taken no action to stop the decline of the dollar. In either case, economic conditions are not best for either Japan or Europe either.

For time frame, I expected continued slow growth through the second quarter. Even if things appear to get better in the 3rd quarter such as a tightening of labor market and picked up consumption. It won't be enough to negate the overall poor macro fundamental problems, of housing, credit/liquidity issues( lack of markets), sub-prime continuing in Australia and Great Britain even more so than the US, inflation, high commodity prices etc...