Accounting Troubles At GM - Panzner Warns Of Derivatives Meltdown - Fed News

Thursday, November 10, 2005

While I hear a lot of talk about the expected year-end rally in shares low volumes and a continuos stream of worrying corporate news after the wave of better earnings reports seem to keep the market under the lid. Rereading my post "October Is A Dangerous Month" I see that the Dow has been trading in the forecasted range of 10,350 to 10,600 with a short slip on the downside. (See also the post "No Matter What Happens, Wall Street Does Not Go Down") A strange market whose seesawing costs a lot in option premiums and does not really inspire new buying in the face of further interest rate hikes to come around the globe. Expect a heavy move once the Dow breaks out of its range.
I currently don't have a preference which side it will be although the rate picture fundamentally favors a down move. There has been no period in history where higher interest rates have not capped off a rising stock market. But the higher rates would have to correspond with tighter money supply and stricter loan standards which is definitely not the case nowadays. As long as there is easy money around the market has fuel to power on.
Reading the online issue of the Wall Street Journal the news that General Motors will have to restate - means: cut - its 2001 earnings by roughly half and sees corrections in the following years I have my doubts about a solid rally. Remember that old proverb that GM is a barometer for the US economy? I do. GM shares fell to the lowest level since 1992.
Don't miss out on the highly recommended editorial "The Coming Disaster In The Derivatives Market" by Michael Panzner at Financial Sense Online. Panzner, author of the equally recommended financial bestseller "Stock Market Jungle" (no, I am not linking to Amazon - go get it at your local bookstore) is a 20-year veteran in the market and I finished reading Stock Market Jungle only last weekend. His editorial takes a unique, entertaining and educative approach to the electronic papers that are promises for the future.
This snippet should whetten your lips for his editorial:
In some ways, a marriage proposal has elements in common with a derivative. In that case, a couple decides in advance to come together on a certain day and exchange vows. They promise to live together as man and wife and assume a host of obligations and responsibilities. Essentially, they agree now to make a deal later.
That sounds unique, entertaining and educative, doesn't it?
Combine Panzner's editorial with the piece of news that "Hedge Funds Avoid SEC Registration Rule" in the WSJ and have a close look at your portfolio. The risk in the future may go by the name of counterparty risk.
Looming Deficit Troubles - But Fed Poole Does Not Worry (???)
Oh, and don't forget the triple deficits of the USA which will publish the trade deficit figure for September and the budget deficit from October today. The consensus expects a new record of $62 (59) billion trade deficit and and a $55 (36) billion budget deficit.
Optimists should lend their ear to Fed St. Louis president William Poole. In a rather surprising speech he contradicted his chairman Alan Greenspan and said the US current account deficit is not sustainable but an adjustment need not be disorderly, so long as the government and central bank deliver good policies, Reuters reported yesterday evening. Well, I would say the sound policies are the problem as I still cannot see any serious measures by the White House being implemented.
The US current account deficit hovers at around 6.5% of GDP, a figure never before recorded by a leading economy. It means that the USA spends 6.5% more than in takes in. Alan Greenspan has been warning all year long that such a rate is unsustainable and may lead to serious disruptions in financial markets. I guess that is the point where the derivatives meltdown envisioned by Panzner could set in.
Fed Has No Target For Rate Hike Process
In the view of all this I begin to rethink my position whether dollar investments will be the ultimate choice in the medium term. Short-term the dollar appears to be solidly underpinned by coming interest rate hikes with no end in sight, I take from yesterday's speech of Fed Cleveland president Sandra Pianalto, reported by Reuters. She said the Fed has set no goal for how high interest rates will go. Unfortunately this speech has not yet been posted to the Fed Cleveland's website. Pianalto will rotate into a voting chair of the FOMC next year.
Two Vacant Seats On The FOMC Plane
Speaking of the FOMC I am also missing a nomination for the place vacated by chairman designate Ben Bernanke and another vacant seat at the most important table of the world. The New York Times ran a story of Reuters last week where White House aide Kevin Warsh and former administration officials Randall Kroszner and Richard Clarida are among those in the running for two open seats on the Fed's Board of Governors, according to sources inside and close to the White House. Can anybody make an authoritative statement about their independence from the Bush administration?

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