The Economy Guy

Stocks, bonds, the Dollar and Gold all moved sideways today.

Oil fell significantly, and more significantly, gasoline fell $0.11 today – a very large drop in price.  The rationale that I saw was that people just aren’t driving as much this summer as last summer, and consumption is down.

In the news today…..

Stock Market Future – as there is little news on Fridays, I thought it would be worthwhile to put all the past month’s news together and hit the highlights in predicting where stock will be going for the rest of the year.

I have been surprised with the robustness of the stock market rally from its lows.  It has been strong – about 40% up – and continuous.  Every time there is a small dip, there is an immediate buying from the sidelines.  Having said that, I continue to hold the view that the rise has been a “Bear Market Rally.”  This means that we are still in a bear market, and the recovery was just a bounce from going down so far and so fast.  Here is what I think will drive the market through the rest of 2009:

1. The Stock Price Recovery assumed we are coming out of the recession – and this has been priced into share prices.  As we go forward in the second half of 2009, we should see poor earnings reports which do not support the current share prices.  This will drive prices back down.
2. Financial Stocks Recovered too, but – you have seen me report lots of future loan losses coming down – like credit card defaults, commercial real estate, continued and increasing home foreclosures, continued decrease in home prices, etc.  As these new losses hit the books of banks, you will see a significant increase in the losses being reported by banks.  This will be a “surprise” to the market, and these shares will collapse again.
3. We will get high volatility again – and high volatility is associated with lower stock prices.

All of this will happen over the next 6 months.

This will happen in the environment of a zero FED Funds Rate, and continued liquidity by the FED into the market.

Last, but now least, please never forget that a “Blue Bird” could fall out of the sky and decimate any market.  These are either man made catastrophes, like wars (think Iran, N. Korea, or?), or natural disasters.  Let’s pray that none of these occur.  In addition, we could see financial surprises.

Bond Market Future – looks very much like there is a struggle between the FED wanting to keep interest rates down, and the market (meaning investors and outside nations) who want to protect their investment by having more interest (= interest rates up).

The fear of investors is highlighted by the current report that the Treasury will be selling $104B worth of new Treasury bills/notes/bonds next week.  This is a new RECORD amount.  The last record was last month, and was $101B.  Before that, the numbers were always in the $30B to $50B range.  China and Japan (our biggest lender nations) are scared by these BIG NUMBERS.  They see inflation coming down the road, and their current Treasury holdings losing value.  So, they are currently selling their bonds and buying gold and other nations’ bonds.  And, they are doing it quietly.

US Dollar Future – looks like the long term trend is a weaker Dollar.  The Dollar is also a battleground between the FED (keep the Dollar strong) and outside nations (get their money out of Dollars by selling them.)

These are titanic battles, and there will be many ups and downs and each side shoot their canons.

US Financial Market Regulations – are being passed right now through Congress.  One of the unforeseen consequences will possibly be that some secondary credit card companies will drop their credit cards.  For example Target has its own card, and has expressed distaste with the new regulations.

LIBOR – is set in London by British Banks, and they are considering letting banks outside of London provide quotes.  This would increase the Libor Interest Rate, and increase the cost of borrowing for Trillions of Dollars of assets worldwide.

Tonight’s Dinner Conversation…..

What’s Happening in Iran?? – here is what I think is happening:

1. Ayatollah Ali Khamenei and President Mahmoud Ahmadinejad represent the existing hardline position, and Ahmadinejad has been declared winner by obtaining over 60% of the vote.
2. The main competitor, Mir Hossein Mousavi, has massive popular support in the cities (not the less literate countryside) and other powerful Iranians.  
3. Mousavi has ordered mass marches in protest to the election.  This resulted in a few people being shot to death by the Revolutionary Guard (under control of Ahmadinejad).
4. Mousavi then ordered mass marches, and prayers for those who died – this happened Thursday this week.

Here is what’s not being well reported today:

1. Mousavi and his powerful supporters (Akbar Hashemi Rafsanjani and Mohammad Khatami) were the ones who organized the original mass marches against the Shah, and ultimately his overthrow.
2. Mousavi did this by mourning the dead marchers, and having “prayer marches” for those who died.  
3. In other words, Mousavi is using the same tactics now that he used to overthrow the Shah.
4. Reported for only a few hours on CNN yesterday, a leader in the Iranian Government’s Security Office for IT (Information Technology) was reported to have been (possibly) killed.  That leader had reported to the world’s news outlets that the software in the IT department had been rigged to count the votes in Ahmadinejad’s favor.  This is how the election result was known just hours after the polls closed.
5. Khamenei, while being the Supreme Leader, bought his seat, and in the grand scheme of Iranian Mullah hierarchy (he is not an Ayotollah), he is not as high as others in Iran.  In other words, his moral position is not secure.

What’s going to happen?

1. Mousavi is playing for all the marbles.  He and his cronies want to take over Iran, and kick out the other guys. This is not a fight for the Presidency, but for control of all Iran.
2. Naturally, the other guys are playing to keep all the marbles. (Khamenei and Ahmadinejad).
3. The other guys hold all the guns.  The Revolutionary Guard was created when the Shah was overthrown because the incoming Mullahs didn’t trust the Iranian Army.  The Revolutionary Guard is the equivalent of the “Brown Shirts” in the early Nazi days.
4. The other guys will probably win the day, but at a very big death toll that has yet to happen.
5. In either case, there won’t be a major change in their desire to have Nuclear Weapons.

Given the background of both sides, I believe that President Obama has chosen a good position of not taking sides.  
 

Here are the last numbers for today:
Dow Jones 30 Industrial – 8540 (down 16 points)
10 Year Treasury Bond – 3.79% (down 0.05%)
Euro – $1.3952
Gold – $936 (up $2)
Oil – $69.55 (down $1.82)
Gasoline $1.92 (down $0.11)