What if the Fed Cut Doesn't Help?

With news Tuesday morning that the Fed is cutting the Fed Funds rate by three-quarters of a percent, it’s official: Things are worse than they seem with the economy.

The Fed, pushed by shattered worldwide investor psychology, is pulling out all stops to shore up confidence. Treasury chief Hank Paulson went so far as to call this latest cut a confidence builder.

Trouble, as has been pointed out here previously, is the “what if they give a party and nobody comes” syndrome. In this case, what if they do a big-bath cut and it doesn’t help?

They got the answer pretty fast: The consumer is doing horribly. The value of their homes, especially in the most inflated parts of this country, has deflated. The availability of credit via their homes or other sources has deflated. The value of their 401ks and IRAs has deflated.

As a result, their confidence has been crushed, and it’s unclear how many rate cuts it will take to reverse the trend. The trouble, away from Wall Street, is really quite simple: America has been living out of its means, fueled by a Fed that made credit so cheap that it appeared, at one point, you were getting paid to take the cash. With today’s cut, the Fed Funds rate will fall to 3.50%; last time it was that low was August 9, 2005, when the market was higher than it is today. By contrast, it sank to 1% on June 25, 2003. Mortgage rates, meanwhile, for 30-year loans are averaging 6.33%, still well above their boom levels; ditto for the prime rate.

Here’s the problem: Even if rates once again fall to boom-era levels, credit standards have tightened to the point that even a little bit of sugar won’t help the medicine go down. And don’t go thinking everybody will refinance as mortgage rates slide. Unfortunately, their homes may not appraise out. Batten down the hatches: Ain’t over yet for the bad news — or the Fed.

The beat goes on…

KLCI Weekly Outlook

The index is now just above 1,435, its critical support. A break below that level would be bearish for the index.


Immediate outlook:

The Kuala Lumpur Composite Index (KLCI) plunged last week following dismal performances of regional bourses as well as Wall Street. The index lost 77pts or 5% week-on-week. We did mention earlier that the index was overbought last Monday and that a pullback was likely. But after Wednesday’s sharp selloff, its daily chart showed a reversal pattern called island reversal. It looks like the KLCI may have peaked at 1,524.69 in the immediate term.

The immediate outlook
is fragile as the index is sitting just above the trend line support at
1,435. A break below the 1,435 support line is likely to induce sellers
to sell further. The selling pressure could send the index back down to test its 100-SMA at 1,375. While the index could hold this level and rebound from here, we rate the odds low due to the dead cross on its MACD and falling RSI.


Medium-term outlook (2-6 months):

The
long-term trend is still up but in the short term, the outlook has
taken a turn for the worse with the island reversal. The odds of the
index hitting our target level of 1,601-1,630 in 1H08 would be greatly
reduced should the index fall below its 100-day SMA.

The
possible bearish divergence on both MACD and RSI also adds to the
negative feel for the index. A confirmed dead cross on the MACD would
also suggest that this uptrend is over. Hence, investors need to keep a
close eye on the 1,435 and 1,375 support levels as well as the weekly
MACD.
Fibonacci retracement levels for the index are 1,377 (38.2%), 1,333 (50%) and 1,287
(61.8%).

Powered by ScribeFire.

Market Technical Reading : Losing 1,400 Could See Stronger Follow-Through Selling …

- Though the KLCI registered a strong “hammer” candle yesterday, it is still trading in a volatile environment.

- It needs a strong rebound above 1,492 and 1,500 to return the market confidence after recent shocks.

- Given another nasty drop in overnight US market, we see a higher chance on a steeper fall today.

- If the KLCI losses the 1,400 psychological level and the 1,395 support, follow-through selling could be stronger than before.

Another Positive Down The Drain

The HK market was supposed to be on the receiving end of a the "through-train" program which would have allowed individuals from the mainland to trade in all HK listed securities. The proposal back in
August caused a dramatic revaluation in the HK market. However, owing to the corrective phase in Shanghai and Shenzhen, apparently the long-awaited through-train scheme will not start for at least two years.

The program for individual mainland investors to put money directly into Hong Kong stocks has been held up because the mainland authorities want more time to make sure everything is running smoothly in the new system before opening it up to the public. Also, the authorities feel there is no need to rush the launch of the through- train program since mainland investors can already use the QDII program to invest their money overseas. BS, the reason why the program was delayed was due to the significant pullback in China stock markets. If the Shanghai and Shenzhen markets had continued to surged, believe you me, the "through-train" program would have been accelerated to allow liquidity to pour out of the system.

When news of the program first surfaced in August, the market became flush with excitement, thinking a torrent of money might start flowing into Hong Kong almost immediately. Now, we will see the same air being sucked out of the system in HK. Downgrade on HK immediately. The sentiment has turned.

Rogers Predicts U.S. Recession, Worst `in a While'

By Saijel Kishan and Mark Barton

Jan. 7 (Bloomberg) -- The U.S. economy is heading for a recession that may be the worst ``in a while'' and investors should sell the dollar as global currencies weaken, investor Jim Rogers said. ``It's going to be one of the worst recessions we've had in a while because we had so many excesses going into it,'' Rogers, chairman of New York-based Rogers Holdings, said in a Bloomberg Television interview today from Singapore. ``It's going to be bad for all of us as currencies come under more and more stress and we have more inflation in the world.''

The U.S. and U.K. governments have been ``lying'' about inflation, Rogers said, adding that he's sold their respective currencies.

The dollar dropped for a second straight year in 2007, falling 8.3 percent on a trade-weighted basis as the collapse of the U.S. subprime-mortgage market prompted the Federal Reserve to cut interest rates three times. Rising energy and food prices have pushed up inflation in Europe.

``I hope by the end of this year all of my assets will be out of the U.S. dollar,'' Rogers said. ``The dollar is a currency that's terribly flawed and it's going to be under duress for many years to come.''

Rogers said in a Nov. 15 interview that investors should sell the dollar and that he expects to be rid of all his U.S. currency assets this year.

He reiterated today that he's also buying the Chinese yuan and the Swiss franc as other currencies weaken.

Bernanke Hints at Another Rate Cut

Fed Chairman Ben Bernanke said Thursday evening economic data to be released over coming week may determine whether or not the Fed cuts interest rates at its upcoming FOMC policy meeting on Dec. 11. Asking how the economic picture has changed since the committee's last meeting, Bernanke noted the labor market has remained solid, while home construction and sales have continued to be weak. Data received over the past month on consumer spending, "have been on the soft side. The Committee will have considerable additional information on consumer purchases and sentiment to digest before its next meeting," adding, "the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead."

Echoing the view of Fed Vice Chairman Donald Kohn a day earlier, Bernanke noted the FOMC's outlook "has also been importantly affected over the past month by renewed turbulence in financial markets, which has partially reversed the improvement that occurred in September and October." Kohn's remarks Wednesday were a sharp departure from those of other Fed officials who had until now downplayed the chances of another rate cut. The change in tone rekindled investor hopes for interest rate cuts, sending equity markets to huge one-day gains.

Current developments, Bernanke said, have "the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors." Economic forecasting, Bernanke said, has become more difficult in the face of current market stresses. "Needless to say, the Federal Reserve is following the evolution of financial conditions carefully, with particular attention to the question of how strains in financial markets might affect the broader economy,"

Rate Cut a 'Close Call'; GDP Growth Shrouded in Uncertainty - Fed Minutes

Minutes from last month's FOMC meeting released Tuesday indicate the Fed's decision to cut interest rates by 0.25% to 4.5% was a "close call." Ultimately, though, "most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this
meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity." The minutes did note that the loosening "could readily be reversed" should circumstances warrant.

The dissenting vote of Fed governor Thomas Hoenig, the minutes explained, was because he "saw the risks to both economic growth and inflation to be elevated and preferred to wait, watch, and be ready to act depending on how events developed."

The Fed sounded an encouraging note on consumer spending: "Available data suggested that consumer spending had been well maintained over the past several months and that spillovers from the strains in the housing market had apparently been quite limited to date." Some members noted, however, that consumer confidence indexes have recently declined, and "anecdotal reports" suggested a softening in retail sales in some areas.

Newly enhanced Fed forecasts, which now go out to 2010, indicated the Fed was more sure-footed in its inflation outlook than in its view of economic growth: Fed officials said growth would slow to 1.8%-2.5% in 2008, down from about 2.45% in 2007. The Fed sees 2.6% growth in 2009-10. Core inflation as measured by the PCE index is seen as remaining staedy at 1.7-1.9% over the period. However, the minutes noted, "most participants judged that the uncertainty attending their October projections for real (gross domestic product) growth was above typical levels seen in the past. In contrast, the uncertainty attached to participants' inflation projections was generally viewed as being broadly in line with past experience."

Equity markets continued down following the release; Treasury markets were higher.

Why The Fed Should Not Cut Interest Rates

As many of you know, the Federal Reserve may very well slash interest rates this week. With a weak dollar and oil nearing $100/bbl, many economic policy critics including Jim Rogers have said Bernanke should not be slashing the federal funds rate.

According to Rogers, it makes absolutely no sense for the Fed to lower the interest rate. With a rate cut, the dollar would tank even more and oil could easily top $100/bbl and inflation could potentially get out of control. Rogers also has argued that the United States may very well already be in recession. He said the housing and auto industries are already in conditions worse then a typical recession. Even big Dow Components such as Caterpillar (CAT), have said business hasn’t been this bad in fifty years.

Rogers also claims that while a lower dollar does mean higher exports and probably a cut in the trade deficit short term, it would hurt us in the mid/long term. Historically no country has ever been successful mid/long term devaluing their currency. There is nothing wrong with keeping interest rates steady, even if it means driving the United States into recession (assuming we aren’t already in one). It’s a normal part of the business cycle.

If you keep trying to bandage short term fixes, there will be many more negative long term effects. He also referred to Fort Knox, saying there gold would only be able to prop up the currency for maybe two days and our Treasury Reserve of 60 billion dollars would last about five seconds.

Who knows what will happen in the long term, but if we keep going down this road we will undoubtedly have high oil prices, a terrible currency, a potential run on the dollar, and even
hyperinflation. By not lowering interest rates and giving into short term greed, we help reduce the risk of high interest rates further down
the road.

Cutting Rates Further Will Only Lead to Disaster

Who wants to be in the shoes of the Federal Open Market Committee [FOMC] on Wednesday? Escalating market pressure for a rate cut collide with a horrible inflation outlook as exploding oil prices start pushing commodities higher. Will there be enough hawks defending at least stable rates, or will the doves led by Nanny Benny cave in to panicking markets and do the worst of all by cutting rates further?

Chances are the FOMC will do nothing in a situation that would require a rate hike if fighting inflation is still a predominant concern which can be doubted in the face of the housing and mortgage bust.

Alan Greenspan once called gold a very reliable inflation indicator. A study that proves gold's high correlation with inflation can be found here. As the oldest currency in the world has jumped to $795 in Asian trading on Monday, it appears the world is headed for markedly higher prices soon. Oil's ascent above $93 is poised to add to the spin of the inflation spiral that can be seen so clearly in basically all commodities. Been to your baker lately?

Americans are destined to get the worst of it all, thanks to a Federal Reserve dollar plunging to record lows against the Euro on a daily basis.

Rollercoasting financial markets still indicate that the credit crunch - what happened to the "savings glut" of 2005? - is only worsening as banks hold back their funds in fear that their interbank counterparties go bust overnight. All attempts to prop up markets with SIVs should be seen as what they are: Vain efforts to pump up unsupportable prices. Where do all these billions come from? Certainly not out of the vaults of rich investors but created with Ben Bernanke's electronic printing press. Banks trying to play in the darkroom to hide the disaster run the risk of getting rimmed.

Cutting rates can be a very deceiving medicine that may work well in the short term. It will lessen the burden of debtors whose adjustable mortgages are set for a hike this fall. But it will not change the fundamentals that have been created by a 7-year streak of reckless deficit policies accompanied by a crumbling US infrastructure and major political and economic shifts around the globe.

The whole mess was created by too much credit. Extending it further will be monetary suicide resulting in sky high inflation.

October Mayhem: Why a Global Selloff May Be Imminent?

With markets wobbling since last Friday, we wanted to put current events into past perspectives.Things are not as “different” as some people wish that they were.

Perhaps for too long, The Economic Clock™ has been showing danger signals. In an absolute sense, we have erred: the US and European markets have continued performing. But, in a relative sense, we also have suggested that The Economic Time has remained superior to these two developed economies for the likes of China, (and thus Hong Kong) and India, who have outperformed the G-2 massively.

Chaos, and thus market crashes, are by definition unpredictable. Even behavioral finance cannot explain why chaos arises; this school can only identify what “the herd” does when chaos hits.

1. Portfolio insurance, or “pass the hot potato”?

However, the marvelous Financial Times (FT) of the past few days raises an interesting point: in 1987, as now, portfolio insurance has exacerbated risk, instead of limiting it, as such instruments are supposed to do. Here are some key points on portfolio insurance:

· Its goal is to protect investors from downside losses. More appropriately, however, Gillian Tett of the FT has dubbed such insurance a “risk transfer gospel”.

· How: futures contracts are bought as insurance against falling equities prices.

· Why it has backfired: “But the strategy broke down because it relied on adding more protection as the market declined. This only aggravated the market’s fall, as would-be insurers all tried to short the market at once.” So, everyone headed for the exit at the same time: everyone sold stocks and bought futures.

· This time around, such insurance has mushroomed – and the risk has been spread across markets. This is not only because markets are becoming more accessible, but also because investors – corporate and individuals alike – have increased their leverage massively. This has at least two consequences:

o Risks more spread out. For instance, in the first half of this year, the equity derivatives market grew by 39%, to USD 10 trillion. This is because “Investors can now boost their exposures to equities and try to protect their portfolios against sharp losses through the use of futures, options and a plethora of equity derivatives such as total–return swaps and options on volatility.” (FT, 19th October 2007), and

o Size ballooned. Add to this mushrooming of “insurance” the observation that the lack of communication during the 1987 crash spawned electronic trading. The results: the average daily trading volume on the New York Stock Exchange [NYSE] has risen about ten – fold since 1987, to 1.8 billion shares; meanwhile, the combined market capitalization of shares listed on the NYSE has grown fourteen–fold, reaching US$28,000 billion.

· The result this summer. With ever–more derivatives issued, and with ever–more trading done, the subprime mess of the past summer has boiled down to a game of “pass the potato”. The degree of risk “out there” cannot be measured any more, recent bail out packages suggested, by U.S. Treasury Secretary Hank Paulson of all people!

2. Why October?

Churchill taught that the further back you can look, the further forward you can peer. So for those of us who like past dates, here is a short jaunt down “October crash lane” (FT, 13th – 14th October 2007):

· 28 - 29/10/29: the Dow Jones Industrial Average [DJIA] fell 25% over these two days – and that heralded the global Great Depression.

· “Black Monday”, 19/10/87: the DJIA fell by 23% in one day.

· 27/10/97: the worst day of the Asian crisis forced the New York Stock Exchange to shut down early in reaction to the weight of selling.

According to the FT of 19th October 2007, there are two reasons why investor vulnerability rises in October:

o Closing out. Meanwhile, October is when most American mutual funds close-out their fiscal years. They do this in order to send “…investors a notices of their capital gains or losses before the personal tax year closes at the end of December.” This “tax adjustment” gets nasty if investors have to realize losses on their investments, and

o Forward focus. October is reporting season for most companies – in which they provide their outlook for the coming year. Thus, investors start focusing on the coming year’s outlook. With The Economic Time worsening in the G-3, companies will be gloomier about their profits prospects – and this continues souring investor sentiment.

3. Why this October?

We already discussed this earlier on. Here is an update in which we also refer to the FT’s John Authers “Long View” of 13th – 14th October 2007:

· Auspicious October. As we suggested just now: October is when risks “bunch” – especially in the “07” years;

· Stock bunching. Market advances increasingly have focused on pushing individual stocks – which act as the “mule” pulling the market;

· Sector bunching. Investors have been chasing particular sectors – thus increasing their vulnerability to a sudden sell–off;

· Asia–bunching. The abnormally strong rises in China and thus in Hong Kong over the past weeks are food for thought. While we, too, believe theChina story, the market run – up has been exceptional;

· Decliners > advancers. In the major indices, there are more stocks falling than there are rising, and thus

· “Put” option emphasis. Increasingly, people are buying “portfolio insurance” by acquiring the right to sell stock at a pre-agreed price. This suggests that “the herd” senses market declines.

Tan Sri Dato' Seri (Dr) Lim Goh Tong dies at 90

Founder and honorary life president of Genting Group, Tan Sri Dato' Seri (Dr) Lim Goh Tong has passed away at 11.20am on 23 October 2007 (Tuesday) morning. He is survived by wife Puan Sri Lee Kim Hua, and their 6 children and 19 grandchildren. According to Forbes Asia Magazine, Lim is Malaysia's third richest man with assets worth US$4.3billion (RM14.6bilion).

Expect the unexpected

Next week's trading will be very tricky. The biggest fear is that the Shanghai & Hong Kong stock markets may decide to take a break. After Wall Street and Bombay's recent sharp fall, that's the last thing we need. Scary thought but hopefully it is just that.

Chart of the Day

Despite a host of concerns (i.e. weak housing market, subprime crisis, geopolitical issues, etc.), the stock market has remained within a general uptrend. For some perspective, today's chart illustrates the Nasdaq Composite since 2004. As the chart shows, the Nasdaq is up over 37% since bottoming in June of 2006 and is trading at levels not seen since early 2001. However, as today's chart illustrates the Nasdaq is currently testing resistance (see red line) of its three-year uptrend.

Oil Poised for Quarterly Drop as Price Gap to Gasoline Widens

Oct. 8 (Bloomberg) -- The widening gap between crude oil and the relatively low price of gasoline is signaling the first quarterly decline in oil prices in a year.

While oil has fallen in the fourth quarter during 13 of the past 20 years because of the transition from peak summer demand, the pressure for another drop in the months ahead is the most intense since 2004 and may defer any rebound to record crude prices until the first half of 2008.

Citigroup Inc., Deutsche Bank AG and HSBC Holdings Plc anticipate oil will slide from last month's record $83.90 a barrel as gasoline sales weaken to the lowest level this year and
a slowing U.S. economy curbs demand. Profits from making fuels are so low that refiners have 12.5 percent of capacity off line, the second-highest rate of the past two decades for this time of year, data from the U.S. Department of Energy show.

``Refinery profit margins are being squeezed at a time when significant maintenance is scheduled,'' said Tim Evans, an energy analyst with Citigroup Global Markets Inc. in New York. ``The combination of these factors should send crude oil lower.''

Oil traders and analysts have never been more pessimistic, with 75 percent of respondents anticipating prices will fall, according to a weekly survey by Bloomberg News that started in
April 2004.

Crude may end the year below $70 a barrel, compared with $81.66 at the end of the third quarter, forecasts Adam Sieminski, the global oil analyst at Deutsche Bank in New York. If he's right, a $1 million investment in crude oil futures in New York would more than double to $2.3 million, assuming speculators used the exchange's minimum deposit to conduct the transaction.

Lower Fuel Demand

``The most important development of the last six weeks has been that there's been no growth in demand for petroleum products,'' Sieminski said. ``High gasoline prices weren't enough to curb demand. The combination of the threat of layoffs and higher mortgages might finally be doing the job.''

Not everyone forecasts that oil will move lower by the end of the year. Goldman Sachs Group Inc. is the most bullish commodities trading firm on oil, forecasting on Sept. 17 that crude will end the year at $85 a barrel, with a ``high risk'' of a jump above $90, according to a report from analysts including Jeffrey Currie in London. Its two current trading recommendations on oil are both money-losers. One of them was to buy the gasoline refining margin, which has lost more than half its value since then, Goldman's research shows.

U.S. fuel consumption during the four weeks ending Sept. 28 averaged 20.45 million barrels a day, down 0.3 percent from the same period a year earlier, according to the Energy Department.

`First Time'

``We've seen with gasoline that month-on-month demand is lower for the first time in the U.S. in years,'' said Hakan Kocayusufpasaoglu, director of commodity derivatives at Credit Suisse in London.

Gasoline futures on the New York Mercantile Exchange declined 11 percent to $1.9959 a gallon in the last five months, while crude oil has increased 26 percent to $79.94 a barrel during the same period.

``We're at a turning point for prices and margins,'' said Lynn Westfall, San Antonio-based chief economist for Tesoro Corp., the second-biggest refiner in California. ``It's hard to imagine $80 oil being sustainable based on supply.'

The profit from turning three barrels of crude oil into two barrels of gasoline and one of heating oil fell to $5.7406 on Oct. 2, the lowest in 11 months. It surged to $30.479 on May 17, the highest since at least 1989, based on futures prices in New York.

Refinery Usage

U.S. oil refineries are running at 87.5 percent of capacity, according to the U.S. Energy Department. The only time rates were lower for this time of year was in 2005, when Hurricanes Katrina and Rita slammed the Gulf Coast. Crude-oil demand is falling this month because refiners have scheduled maintenance during a lull in fuel sales.

``You're looking at a situation where refinery maintenance will cut back on demand, product demand seasonally has been falling and the threat of hurricanes'' is easing, said Harry
Tchilinguirian, a senior oil market analyst for BNP Paribas in London. ``Last year there was an end-of-season correction'' after it became obvious the hurricane season was not severe.

The Atlantic hurricane season lasts from June through November. So far this year, no hurricanes have damaged U.S. Gulf Coast refineries and oil rigs.

Rising Supply

U.S. crude-oil supplies rose 1.14 million barrels to 321.8 million barrels in the week ended Sept. 28, an Energy Department report showed. The gain left stockpiles 9.3 percent higher than the five-year average for the week.

Crude-oil inventories may also rise because of increased production by the Organization of Petroleum Exporting Countries. The group, which is responsible for about 40 percent of global
output, agreed last month to increase output by 500,000 barrels a day starting Nov. 1.

OPEC pumped 30.3 million barrels a day in August, or more than 33 percent of world crude supplies, according to Bloomberg data.

``The next move will be south toward the low $70s and high $60s before the end of the year, primarily as more bad news comes from the U.S. economy,'' said Pierre Martin, a Frankfurt-based manager of a $565 million commodity fund at DWS Investment GmbH, a unit of Deutsche Bank AG.