Friday January 12, 2007 - 12:58:47 GMT
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Black Swan Capital - www.blackswantrading.com
Is it weather or growth?
â˘ Oil dropped $2.14 a barrel, or 4%, to $51.88, its lowest close since May 2005. (WSJ)
â˘ Japan's Finance Minister Koji Omi said the central bank should help sustain the economy's expansion even as it grapples with abnormally low interest rates. (Bloomberg)
â˘ The German economy grew at its fastest pace in six years during 2006. (BBC)
â˘ Key Reports Due (WSJ):
8:30a.m. Dec Retail And Food Sales. Expected: +0.7%. Previous: +1.0%.
8:30a.m. Dec Retail And Food Sales, Ex-Autos. Expected: +0.5%. Previous: +1.1%.
8:30a.m. Dec Import Prices. Expected: +0.7%. Previous: +0.2%.
10:00a.m. Nov Business Inventories. Expected: +0.4%. Previous: +0.4%.
âSo do we learn much of what has been behind all this by pointing to high levels of âliquidityâ? Part of the problem here is in figuring out what we might mean by liquidity â something that Morgan Stanleyâs economists will be contemplating in some detail soon. That is not just an academic exercise. Since âliquidityâ is often put forward as a justification for what look like high prices of many assets, figuring out what that might mean and whether it is coherent is important in figuring out what might happen in financial markets next.
âAt this point I am skeptical that the concept of âliquidityâ has much value as an explanation. First of all, if âliquidityâ is meant to be a measure of the ease and cost with which people can access funds then it is hardly an explanation of the level of yields. In some ways, âliquidityâ is really just a description of the phenomenon to be explained rather than an explanation of it. In fact, invoking âliquidityâ as the cause of low yields sometimes sounds a bit like âexplainingâ global warming in term of temperatures having gone up.â
David Miles, Morgan Stanley
FX Trading â Is it weather or growth?
Now that the âglobal warmingâ crowd has their panties all in a bunch thanks to higher than normal temperatures across the country, at least the âpeak oilâ crowd can take a rest. (Note: It was a little joke. Relax! Weâre sure all your dreams will come true one day.)
And speaking of panties in a bunch, the floor traders at the Nymex must be having a fun week. Crude continues to get hammered lower. With four days of hindsight, we have to put our money on the good old supply and demand thing i.e. higher temperatures means we use less energy, instead of our earlier reasoning that declining liquidity was the cause for the plunge. The price action in the stock market and Japanese yen (carry-trade to be pressured if liquidity was the cause) tell us liquidity hasnât been a problem.
Stocks vs. Crude vs. Japanese yen chart below:
But even though we chalk up the crude swoon to supply and demand dynamics of weather, itâs still odd to have such strong global growth expectations from so many quarters and also have energy prices heading into the toilet. Either growth forecasts are way overdone, or crude prices are way oversold, or more windmills, solar panels, and ugly little hybrid cars have hit the market than we realize.
We found out today U.K. growth is in decent shape, a la the surprise hike from the Bank of England. Mr. Tritchet, although a bit subdued during his post rate announcement press conference today, made it clear euro-zone growth momentum looks good (just donât anyone share that with Franceâtheir a bit touchy on the subject). Australiaâs economy continues to power ahead of expectations. Canadaâs looks decent and its neighbor to the south is surprising a lot of peopleâincluding us. Japan, well, its Japanâenigma cityâwho knows anymore!
We, along with many others, started the year expecting U.S. growth to continue to slowâand possibly quite dramatically. The numbers say that view is wrongâbut crude oil and copper are telling us to wait and see.
One of the things weâre watching, which says a lot about how long weâve been watching this stuff, is Dow Theory. Party hats are on, yet the new high in the Industrials hasnât been confirmed by the move in the Transports.
âThe strength of the dollar depends on the strength of the economyâŚ.if there is going to be a recession, it will be brought on by the decline in collateral values, and the stock market is one of the most important repositories of collateral,â said George Soros.
And from Yogi, âIt ainât over till itâs over.â
Enjoy your weekend!
Jack Crooks, Black Swan Capital
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