Introduction
The latest word on the Street is that the subprime contagion is merely the latest iteration of permabear babble, and that everything is fine, nothing to see here, let's move along now. Color me cynical. This is the second news cycle in which the subprime contagion has sent shivers up and down every spine on the Street (the first one being the string of bankruptcies beginning with New Century). Bear Stearns has apparently delayed reporting for its two hedge funds until July 16. The last report from Bear was a downward revision from -6.75% loss at the end of March, which they then revised to -18% on April 15.
Sincerely,
Alex Forshaw, Editor
The Waiting Game
The Apple-AT&T iPhone launch gave the market something more bullish than subprime mortgages to think about (at least until AT&T bungled the launch over the weekend), but that doesn't mean the problem will merely go away. Liquidity is still drying up. Blackstone is trading at about $29 a share (down from $37/share at the close of its IPO nine days ago). At least one other private equity firm has scrapped a planned IPO. Blackstone could not have chosen a better time to pick a top in the credit market. Every Blackstone IPO dollar that didn't end up in the savings accounts of Blackstone management (if such a thing exists) will be extremely useful in shoring up Blackstone's massive pile of debt.
Because Asian trade surpluses are heavily dependent on consumer spending increases, Asian economies (and by extension the world economy) tend to catch a cold when the American economy sneezes. We view a slowdown in American consumer spending as inevitable. We are not jumping on board the Soros/ Gross “Dow 5000” bandwagon, but we see no reason whatsoever to invest in equities right now.
Speaking of challenges on the markets' horizon, American business has been salivating at the prospect of a Hillary Clinton candidacy. Of the major Democratic contenders, Hillary Clinton is seen as the most centrist and the closest to business; and if Hillary ever wandered off the reservation, like, say, calling for universal healthcare – again – the business community already shattered her once on that issue, and given her stratospheric negatives, it would probably be even easier the second time around. The eventual Republican nominee would stand a good chance of defeating her in any case, considering that approximately half of all voters, including 58 percent of men, say that they “will not consider” voting for Hillary.
Hillary's radioactive negatives have weighed heavily on the minds of Democrats. So heavily, in fact, that the Kenyan/ Hawaiian/ Indonesian/ Chicagoan/ whatever-an upstart senator from Illinois gave her a bloody nose in the fundraising fight – for the second quarter in a row.
The commonly reported numbers do not do justice to how badly Hillary is losing the fight for the hearts and minds of Democratic wallets. In terms of money that can be spent on the primary, Hillary raised $21 million. That is nothing to sneeze at (especially if you are an aspiring Republican presidential candidate), but Obama raised over $31 million in primary funds. In other words, he outraised Hillary by 50 percent in nomination money. He has also amassed an army of approximately 260,000 donors in the first six months of the year. Hillary Clinton will probably come in at about half that number. By comparison with the 2003-04 battle for the Democratic nomination, Howard Dean amassed a total of 280,000 online donors for the entire year.
Equities owners should ponder the increasing likelihood of an Obama nomination, and prepare to adjust their portfolio holdings accordingly. Pharmaceuticals, healthcare-related stocks, and auto stocks will not get much love from a President Obama. (I say “President” because, barring a dramatic turnabout in Iraq, the Republicans would be in for a very rough 2008 general election against Obama. Hillary's negatives would more than make up for the beating the GOP brand has taken over the past four years; Obama is a different story, and an Obama nomination would ensure that Democrats retain if not expand their current majorities in Congress, in addition to winning the presidency.)
In the nearer term, we have become slightly more bullish on the yen. There is a consensus among intellectually honest Japanese industry that rate increases are necessary. Unfortunately, they don't call all the shots, and the Japanese political class is allergic to any notion of short-term pain, which the necessary rate hikes would most definitely entail. Whichever side has more heft with the Bank of Japan will determine whether the yen begins to rebound or not. Closely watch the remarks of Japanese politicians and manufacturing barons after the Bank of Japan's first rate hike, which will probably occur in August.
We remain highly bullish on the Euro, simply because many central banks are still in the process of diversification away from the dollar, and the Euro, (along with the CAD, GBP, gold, and Swiss franc to a lesser extent) are the obvious alternatives.
The Bottom Line
USD: As predicted in last week’s report, the dollar dropped considerably against all major currencies due to weak fundamental and technical data. In terms of pairs, the Euro is likely to rise against the dollar this week due to discussions of a possible rate increase to 4.25% by the EU in august. In addition, with strong fundamental data expected to be release for the European pairs, it is not in fact weak U.S data that will drive the dollar down, rather strong European data.
Euro: The Euro will look to gain massive ground against the dollar this week due to interest rate hike speculation. Traders are also expecting strong Euro fundamental data along with hopes for hawkish statements by ECB President Trichet. In terms of trading, it would be extremely safe to go long on the EUR/USD pair the whole week.
Pound: Since the rate hike by the BOE, the GBP/USD pair is now trading above 2.0. With most of the market long on the pair, look for profit takers to begin closing their positions resulting in a big drop down. However, the pair will remain fairly stable the entire week, and should stay within a good range, ideal for scalp traders.
Canadian Dollar: No outlook or trading for this week
Yen: No outlook or trading for this week
Australian Dollar: News traders should look to capitalize on the retail sales figure to be released on Monday. Expect to see a solid gain of +0.6%, which would be 0.1% less than last month’s figure. This can be due to rising gas prices resulted in less spending. Look for a bullish AUD/USD if the indicator is released higher than expected.
Overall Outlook for the Week:
USD: Bearish
EUR: Bullish
GBP: Bullish
AUD: Bullish (Monday only)
--Alex Forshaw & Sumant Yerramilly,
http://www.bestwaytoinvest.com
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