This does not surprise me at all.  With the Fed’s obvious goal of devaluing the dollar (that is the end game solution to our problem), China is raising the question of the validity of the dollar as the worlds reserve currency.

From FT:

China calls for new reserve currency

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.

Although Mr Zhou did not mention the US dollar, the essay gave a pointed critique of the current dollar-dominated monetary system.

“The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Mr Zhou wrote.

China has little choice but to hold the bulk of its $2,000bn of foreign exchange reserves in US dollars, and this is unlikely to change in the near future.

To replace the current system, Mr Zhou suggested expanding the role of special drawing rights, which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that collapsed in the 1970s.

Today, the value of SDRs is based on a basket of four currencies – the US dollar, yen, euro and sterling – and they are used largely as a unit of account by the IMF and some other international organisations.

China’s proposal would expand the basket of currencies forming the basis of SDR valuation to all major economies and set up a settlement system between SDRs and other currencies so they could be used in international trade and financial transactions.

Countries would entrust a portion of their SDR reserves to the IMF to manage collectively on their behalf and SDRs would gradually replace existing reserve currencies.

Mr Zhou said the proposal would require “extraordinary political vision and courage” and acknowledged a debt to John Maynard Keynes, who made a similar suggestion in the 1940s.

If you didn’t have a chance to watch the interview, you should.  The transcript is available at 60 minutes, for those that prefer to read it.

Part 1 – Bernanke on 60 Minutes

Part 2 – Bernanke on 60 Minutes

Well there you have it, we are really on our way to the ZIRP now.  Not only is the fed pumping money into bank reserves and beginning the quantitative easing that folks have been talking about, we are now 75% closer to free money!

This is the first time that we’ve had a range that I am aware of.  The federal reserve hasn’t specifically stated that they are engaging in qantitative easing yet, but they sure did hint that they are going to do it.  Take a look at this quote:

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.

And then this one… (emphasis mine)

In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

There you have it.  The tools are out of the toolbox per Mr. Bernanke’s speeches a few years ago.  We are going to ZIRP, starting quantitative easing and effectivally commiting to long term lowering interest rates.  Those are some of the specific policies that had been discussed.

Net effect, in my belief the market rises and continues in an Elliot Wave Four up.  This ties into my overall Christmas rally perspective of things.  We’ll see how this all plays out.  Oh yeah, one more thing…

As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.  The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.  Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses.

Basically, we’re happy to provide whatever you need.  The printing presses have been turned on.

Well, the fed is meeting again shortly, and it appears that they are going to hold the fed funds rate at its current levels.  While I’m personally happy they are doing this (I have a floating rate HELOC), I’m not sure  this is the best policy given our current ecnomic difficulties.

I am not a fan of lower interest rates, given our current situation.  It is my opinion, that the fed should take back the last .25% cut, and raise the rate at its next meeting.  After making one adjustment to the rate, they can hold tight for six to nine months to allow economic activity to stablize before moving into a longer tightening cycle.

By raising the fed funds rate by .25% at the next meeting, the federal reserve provides a very, very clear signal that they are serious about inflation and the dollar.  A stronger dollar means lower relative oil prices and that is good for our economy.  It isn’t the end of the oil issues, but it will help to stem the inflationary pressures of rising oil prices and the ecnomoic stress of gas prices on the consumer.

What are your thoughts?

It’s been a while since I posted anything to the site. My life has been extremely busy with family, job and a number of other things. I’ve been very quite on the investing front as a result of this.

We are currently in very difficult times in the markets. They are moving dramatically up or down on a daily basis and the United States is currently in a severe economic downturn. As a result of the limited amount of time I’ve had to focus on things, coupled with the dramatic volatility in the market I haven’t made many trades.

However, that doesn’t mean that I have not been watching what is happening. With the recent collapse of Bear Stearns and the dramatic moves by the Federal Reserve to take debt onto it’s balance sheet and another 75bps cut in the target rate, I am becoming quite concerned that we are on the brink of recession.

Employment is moving in the wrong direction, inflation is moving in the wrong direction and most other economic indicators are showing a severe downturn. While it will take six full months to declare an actual recession, I think it is quite possible that we are in the beginnings of one now.

The continued decline in the dollar vs. other major currencies is also quite troubling. While this decline is favorable to exporting goods, it is wreaking havoc on the dollar’s global authority. The Euro is trading somewhere around $1.57, Gold is north of $1,000 and Oil has pierced $115, inflation is beginning to truly rear it’s ugly head.

Declining currencies, heavy inflation pressures and an overall weakness in the economy are all very troubling. For the stock market it doesn’t bode well for the next few months. We will have a nice jump once things turn around, however until then it will remain very, very choppy.

For me, I’m planning to review a few April or May positions and potentially get back in the game. My travel schedule will be diminished over the next month or two so that allows more time to focus on the economic factors that influence my trading. I will remain cautious.

If you have your own thoughts, please feel free to comment. I would love to discuss them.

This was a crazy week in the stock markets!  We opened the week with the world markets tanking while the U.S. markets were closed for the Martin Luther King holiday.

On Tuesday morning, Big Ben and Co. cut interest rates a record 75 basis points!  The markets opened down dramatically, then bounced back to recover most of the early morning losses. Wednesday and Thursday proved to be up days in the market and Friday again brought us back down a bit.

It has been a rough, wild ride!  Wednesday brought more than 600 points of movement on the DJI(10496.33 -1.55) – UN-FREAKING-REAL! I don’t expect this sort of action to stop anytime soon – so buckle up and enjoy it.

On Wednesday morning, I called a bottom – at least a temporary one.  I firmly believe that we will see the fed cut rates again at their meeting next week and that will continue to buoy the markets for a few more weeks.

We very well may see some additional movement down over the next quarter or so, but I’m still a firm believer that the markets will be up by the end of 2008.  The global economy has some serious issues right now, however I think we are working through them and that we will be able to come out ahead.

The credit markets are beginning to show some easing, and the government is getting ready to throw money into the hands of the public.  While I think the stimulus package, as it stands now, misses the mark – it will help somewhat.

In my opinion, it is a great time to buy! Financial stocks are very attractively priced, and with the recent crash in the NASDAQ(2262.98 -1.58) techs are looking good as well.  This year should prove to be a great one for MSFT(26.36 +0.41) and other tech companies.  We’ll see how it all goes!

Well, good luck!  Make sure all of your analysis is solid before putting on trades in this marketplace.  Vast sums of money can be won, and lost, in a very short time with these big market moves.  Trade smart!

Big Ben and Co. cut the federal funds rate by 75 basis points this morning.  That seemed to help soften the blow to the U.S. markets as they have mostly faded the opening gap.

Right now I have a very, very heavy cash position.  In my long term (read: retirement) accounts, I am still continuing to gobble up great value for the long haul.  However, in all of my short term accounts, I am very heavily set to cash right now.

I’ll be on the lookout for some good positions starting this evening, however, I will likely hold out to see how things settle out a bit.  I’m not a day trader, and don’t enjoy having to open up the intra-day charts while I’ve got a million other things going on!

Anyhow, good luck, trade smart!

Here we go…

Bank of America BAC(14.09 +0.10) might buy Coutrywide CFC(0.00 +0.00) – here is the link to the yahoo finance story.

Big Ben wants to lower rates – here is another link, again yahoo finance

However… American Express is warning that 2008 looks a little bleak – yahoo finance.

What does it all mean!??

Well, I think it means that the mortgage industry, specifically Countrywide is about to get shored up.  This, coupled with Ben’s commentary I think has slowed down the fears that we are doing to fall apart.  With Bank of America thinking about purchasing Countrywide, that speaks to the fact that this might be the worst of the worst as far as subprime and mortgages go.

Anyhow, the American Express comes as no big surprise, the consumer is slowing down a bit, and rightfully so.

Anyhow, now that the markets have closed, I’ll sit down this evening and do some work in the analysis page of thinkorswim, I’ll post a few screen shots and give you my thoughts and plan on the current RUT(653.24 +2.48) position.

Good luck, and trade smart!

Thanks Ben!  So the fed chairmen had a quick chat today.  In his speech he indicated that there are risks to the marketplace and economy, however he said that the fed is prepared to take “substantive additional action.”  I read that as a nice big fat rate cut at the end of this month.

I’m really hoping that this is something along the lines of 50 basis points or more.  It is quite possible that they will only do 25 basis points; however, I think that would be a big, big mistake.  They are still concerned about rising commodity prices and inflation – both perfectly reasonable concerns.

This movement has sent the markets up, at the RUT(653.24 +2.48) has been moving right along with the other major indexes.  It is very, very possible that over the next two days or so I will get a fill on my $0.15 buy back.  If the markets continue to move higher today I will re-evaluate this order.

Given the extreme rate of time decay right now, there may be an opportunity to hedge against market movement in this position as a result of favorable decay.  Basically, this means that each and every day the position it in the market, it loses value.  Given that I am short that means that I am making move each day it sits out there.

Depending on market movements, I’ll open up my trusty tools from thinkorswim and head over to the analyze page.  From there, I’ll put in a little bit of special magic and be able to see the theoretical value  for each day as we move forward.  I’ll put up a little post about it so that you understand a pretty neat way to use these tools.

Anyhow, good luck and trade smart!

Whatever…

Yes, today was a rough, rough day in the markets. No question about it. I’ve got a couple of things to talk about, so lets start with my current position on the Russell 2000- RUT(653.24 +2.48) – and why I’m not worried yet.

The economy is getting softer, that is a fact. The Russell 2000 is a bunch of small companies that are not nearly as globally connected as the big boys in the S&OP 500 or the Dow. When things get soft, the RUT tends to take it in the chin.

If you watch the charts of the SPX, DJI and RUT together you can see that the Russell typically moves a lot faster than the Dow or the S&OP 500 (see above). Over the past couple of months as volatility has jumped, you can also see that the RUT has moved even faster.

So, this morning we get a weak job number and the recession talkers are all ears. The market begins to drop and the RUT really takes it on the chin: recession = weakness in small companies. So, if the recession talks are in the wind, I’d expect the RUT to drop. This is why I’m not worried yet…

Today, the RSI on the RUT hit 23, anything below 30 is typically a signal of an oversold situation. 23 is really a sign that we should get a slight bounce next week. On Thursday the indicator was at 32, quickly working its way down – this drop was big… Watching the normal pattern of the RUT, I completely expect this bounce.

Anyhow, back to the trade. The RUT trade is at 670, about 50 points away from our current point in time. That is another 7% drop or so, I just don’t see it happening – at least not in the next 2 weeks!

So, since I’m still optimistic on my trades, lets talk about my optimism on the economy and why I think it is still good.

First off, the bad…

• Demand is down – homes are declining in value
• Job growth at 1% or less each year
• Interest rates are dropping rapidly

Now lets get to the good…

• After inflation, after tax income is up 2%
• August initial jobs were at -4K, revised +93K
  • This number gets revised every time
  • I’d expect that our current jobs number will come up quite a bit
• The vast majority of the reported job loss is in construction
  • DUH - housing is taking it on the chin, of course construction jobs are down.
• Q4 GDP likely to be 2.5->3% growth
• 5% unemployment rate – not to shabby

So, looking at all of this stuff what is going on? Well, the consumer is a little tight due to the housing market, and the economy is a little soft due to the gasoline(housing) being taken off of the fire. As a result of the softening housing market, a lot of construction workers are looking for jobs and the financial firms are having to write off sub-prime losses. However, the rest of the economy is in pretty good shape…

As the fed works this all out, it is in a really tough spot. Gold and oil are up, along with a bunch of other inflationary pressures. Ben and Co. need to make sure they get this right, the real risk here is … stagflation. Ouch.

If your not familiar with stagflation, basically it is low to no growth with rising inflation – bad news. Here is why this is a catch 22, taken from the wikipedia article on stagflation:

An important monetary mechanism to increase economic growth is by lowering interest rates, which reduces the cost for consumers to buy products on credit and businesses to borrow to expand production. While this can increase economic activity, it can also result in increased inflation. The monetary mechanism to reduce inflation is by raising interest rates, which increases the cost for consumers to buy products on credit and businesses to borrow to expand production. While this can reduce inflation, it can also result in decreased economic activity.

So, lets just hope we don’t end up with this mess.

A key to avoiding this is a strong dollar policy. The problem with that is of course, as interest rates go lower, so does the dollar. As interest rates go up, economic activity slows and the dollar becomes stronger. So, if the fed needs to turbo charge the economy, it needs to drop rates – but by doing so may accelerate inflation to a point of big troubles.

Personally, I agree with former federal reserve bank governor Wayne Angell. The federal reserve and the government need to team up and put together a policy that will lead to a stronger dollar. In my opinion the best way to do this is to lower corporate taxes while dropping interest rates. This gives us the chance to fix the credit crisis while bringing up the dollar by bringing more business to the United States.

I don’t see any other way around it. If President Bush can step up to the plate and put a solid corporate tax policy reform in place, we can pull out of this without any major issues. It would be one of the greatest soft landings in history. Something to applaud.

I don’t think it will actually happen, but I can hope right? I’m sure the folks in the federal reserve and the treasury department are talking about it. I’m confident that they can figure it out.

Stay tuned, it’s going to be a fun ride! Oh yeah, grab my feed!