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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Financial Markets and Economic Themes Remain The Same for 2008

Stock-Markets / Financial Markets Jan 08, 2008 - 02:23 PM GMT

By: Bill_Bryan

Stock-Markets Best Financial Markets Analysis ArticleAlthough our public writings were scant throughout the '07 calendar, we did indeed manage to maintain an active pulse on events, whereby many of our early prognostications ultimately materialized when the final bell tolled.

With that said, let's move forward with a few thoughts and observations on what may possibly lie ahead in the forthcoming '08 campaign:

US Markets

The DOW; COMP and S&P 500 finished the year with marginal gains across the board, while the BKX (Banking Index) and SOX (Semiconductor Index) lagged, turning in disappointing performances. Moving forward, although the markets are off to a tumultuous start to say the least, where both traders and investors appear to be sitting on "pins-and-needles", we suspect that '08 will mimic that of '07 and will furnish another lackluster affair to the tune of + - 5-7%. Having said that, we'll more than likely witness several bouts of extreme volatility (Fits & Starts) along the way, whereby Stock and Sector selection will remain paramount in one's success/failure when all is said and done. Thus, a "market of stocks" as opposed to a "stock market".

US Housing

Self explanatory. Foreclosures & Inventories remain at record levels and we suspect that both will continue to grow in the months ahead. While the mainstream media, both television and print continue to harp on the Subprime issue (which is relevant) in a maneuver to divert the masses attention and prevent potential widespread panic from setting in from the potentially much larger problematic $600+ Trillion "Derivative" debacle/unwinding, such is merely a "Tic" on an Elephants ankle in the grand scheme of things. As for the recently created/incorporated Mortgage Rescue Plan via "Rate Freeze", it appears too little to late, unfortunately.


Nothing much has changed on this front as the US Fed and global Central Banks continue to monetize at alarming levels from the 15% range in the US, 20+% in Asia and as high as 45+% in Russia. As a result, global currencies continue their debasement process, some more rapidly than others. Furthermore, while the central banks continue to proclaim modest "Core" (excluding Food & Energy) inflation levels, we digress, suspecting that the reported 2.5% US inflation rate is currently running in the double-digit range, as well as rampant global inflationary pressures.

Banking/Financial Structure

Since the revelations in August/07 and more specifically, the run on England's Northern Rock, the floodgates have seemingly opened whereby numerous Financial Institutions have suddenly "got religion" and stepped-up to confess their sins, resulting in massive write downs. Whether it be C; MER; BSC; ETFC just to name a few, it's become apparent that the once viewed assets sitting in "Off Book" Level III have now morphed into liabilities garnering zero bids and gridlock. Thus, the very real possibility of rendering some of the world's largest financial institutions Insolvent whereby their "Off Book" liabilities exceed their current capital structure. What triggered such an about face of transparency? Was it the SEC's elimination of the Reg SHO GF Clause 17 CFR 203(b)(3)(i); the implementation of MiFID; FASB 157; Basel II and/or the implementation of DVP (Delivery VS Payment)? Nonetheless, the Fed and ECB have responded with fresh doses of Temporary actions via the Repo markets to the tune of $ 1446.25 BN and $1 + Trillion respectively since July in an attempt to provide seemingly necessary liquidity throughout the financial structure.

Furthermore, the often mentioned “Super SIV Fund" now appears to have fizzled and died on the vine, as the Treasury Secretary was unable to procure the necessary funds for such after numerous attempts. In any event, it "appears", and we believe it to be so, that what we're witnessing is non other than the unwinding of the estimated $ 600+ Trillion (some estimates are as high as $1.4 Quad) in global derivatives, the very same instruments that the Oracle of Omaha (Mr. Buffet) dubbed yesteryear as the "financial WMD's". If such is the case, and we emphasize "IF", then we have "Only just begun" and remain in the early innings of this ballgame, where the potential for this brush fire to spread its wings globally remains a viable consideration. Finally, at present, the only thing that seems safe and secure with regards to the US financial spectrum is, Wall St. 's $50 BN in bonuses for '07.


WTIC recently tagged Par ($100) for the first time in history. While debate between "peak oil" theorists and those opposed to such notion rages on, crude oil remains in a secular bull and we're content with our longstanding positions and participating in the multi-year northbound move into greener pastures via high yielding Oil/Gas MLP's and Canadian Oil/Gas Royalty Trusts, which have served us well for the past years and expect such to continue to do so in the future. We've referenced in the past that $125 oil was forthcoming in due time and perhaps such figure will emerge in '08. Stay tuned. Nonetheless, the days of $40-$50 crude are a memory from our perch and yes, should the world fall into a global recession or worse, we suspect that crude prices may be impacted, yet, not to the extreme some may project.


The US Dollar remained under pressure throughout '07 undertaking a 12% hair-cut. While it was no surprise that WHEN, not IF, the 80 level was breached on the $USD Index, which did occur, that such development would send a sell signal to the world. Furthermore, we witnessed several countries "un-peg" their local currencies to the $USD, thereby exasperating the southbound trend of the past six (6) years, where the purchasing power of the $USD has evaporated greater than 36%. Although domestic policy makers continue to "jawbone" a strong currency policy, actions speak louder than words, hence, the steady drift lower. Additionally, with the amount of Debt weighing on the shoulders of the US, whether it be Account Deficits; Personal/Consumer or National, one has but three (3) alternatives to deal with such position:

I) Retire/Pay it off; II) Default and/or III) Inflate the Debt away via the intentional/willful debasing of the currency ( a la sacrificial Lamb) . It's fairly obvious that the powers that be have chosen door number III in the "Monty Hall" sweepstakes. Moving ahead, although the $USD is oversold from a technical perspective and is well overdue for an upside reaction (bounce), with the Fed embarking on a rate cutting endeavor once again, the currency just can't seem to find its legs and produce some upside mojo. Should such event occur, we would think that the 80-82 level on the index would serve as strong gale winds of resistance. Lastly, with the Fed and global Central Bankers in "Helicopter/Stroke of the Keyboard" mode, we remain of the belief that inflationary pressures will persist. And should things within the global financial structure worsen, one cannot rule out the possibility of a hyper inflationary scenario. As we've noted in the past, the words FED/Central Banks and Inflation are synonymous with one another. A question that we've posed/pondered for some four (4) years now is, "Will the $USD lose its status as the world reserve currency"? We may just be witnessing such in the process.


The yellow metal continues to glitter and '07 was no different, as Gold returned to its investors a healthy 31% gain and remains in its secular bull trend. After a long, drawn out consolidation that began in May '06, gold broke-out topside and has since tagged all-time (closing) highs confirming its Phase II position. Early last year, we referenced that once Gold was able to surpass its May '06 peak and "stick" for two (2) days, such development would, in our eyes, confirm/trigger that the metal would now be entering Phase II of its now seven (7) year march to higher ground. While many have attempted to "time" gold's moves in the past and react to the short-term winds blowing the twigs and branches of the trees, we have and continue to set our sights on the "Forrest", adding to our longstanding (Summer '03) physical and shares positions on pullbacks. We've noted that $ 1500 is our minimum target within due time and we patiently await its arrival. On a final note, both the public (majority of) and Wall St. have yet to participate in a meaningful way, and when they do, and they will at some point, it will be at much loftier levels, and we suspect that it will resemble something similar to the tech, dot.bomb craze of yesteryear, at which point, we'll have confirmation that Phase III has arrived.


Silver put in a decent '07 providing mid-teens returns to its investors after a scorching 43% in '06. While many may have been somewhat disappointed in the metals performance, including ourselves, Silver nonetheless remains in its secular bull trend. We have referenced in past the Gold/Silver ratio, where we have been of the presumption that such ratio should/would tighten/lower, however, that scenario has yet to play itself out. With that said, perhaps '08 will turn the tide and Silver will play "catch-up" to Gold and thus re balance the ratio? Only in time will we know. Regardless, when, and we believe it's a question of When not If, Silver clears the $16 level and can "stick" for two (2) days, such development would indicate to us that Silver has now entered Phase II of its secular bull run into greener pastures. Our referenced target for Silver remains in the $40-$50 area. How long it takes to accomplish such fete is of no concern, yet, similar to Gold, we have and will continue to utilize pullbacks to add to both our physical and shares positions.


While we read many thoughts and predictions with respect to the word Recession, not least the mainstream media, we're going to cut to the chase and deliver it short and perhaps not so sweet. The US is and has been in recession for several quarters now despite what the reported numbers out of DC may or may not suggest. They are misleading and suspect at best. Much like Wall St. in transitioning from Bull and Bear markets and vice verse, policy makers operate in a very similar fashion and that is, that Jane and John Q public are LAST to know, late to the party. By the time such developments are disclosed and admittedly so, we're in full blown mode. Essentially, they'll take you to the dance but, you're looking for a ride when the lights are turned out.

Not much has changed from our perch in the past twelve (12) months with the exception that, today's climate appears to have just as many uncertainties and potential storm clouds hovering above as did a year ago. While we'll leave the predictions for others of where the major indices will finish when the final curtain is drawn at years end, we'll continue to stick to what has been working for us quite well. Most importantly, maintain our patience with the secular bull trend in PM's, while seeking low risk/high return opportunities without exposing oneself to inordinate undue risk, i.e. preservation and growth of capital. Thus, our theme remains the same. Don't fix what isn't broken. We'd like to leave you with a quote from a trader that we respect, and although our styles may vary, we believe these words ring true:

"Most people only want to hear what they want to hear, while few will act on what they see ". - Kevin Haggerty

Best wishes for a Happy, Healthy and Prosperous New Year!!

By Bill Bryan

    The sole purpose of MarkePulses is to share Objective , Unbiased economic and market commentary based on Macro and Technical analysis.

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    Members have access to our thoughts and analysis in the Daily Pulse segment of the site, where you'll find daily Pre and Post Market Commentary, Market Statistics, our Model Portfolio, as well as our current Watch-List. In addition, the Newsletter portion of the site publishes our monthly newsletter, The Pulse , where our efforts are concentrated on the "Big Picture". Whether an investor or active trader, experienced or novice, we seek to deliver an informational and educational forum that provides some value in the rapidly everchanging financial markets.

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