Saturday, April 28, 2007

Thought For the Weekend: The Back Burner

For me, at least, the dismal 1st quarter GDP (remember the consensus forecasts late last year saying we'd be seeing another 3%+ GDP year this year?) at 1.3% is a reminder that a number of weighty issues have been thrust to the back burner as the Dow surges higher into unchartered territory and the S&P moves ever closer to its all time high.

What are some of the issues on the back burner? Subprime and Alt-a for starters. If you go to the news section of Google and search for either "subprime", or "Alt-a" a plethora of stories come up. No link fests from me, but this story about comments Dick Syron made Friday is eye catching: Subprime crisis expected to worsen. If you are apt to do some good old fashioned "dot connecting", which actually many don't seem to do, the comments from Syron are eye catching because if subprime hasn't yet hit bottom, you can bet that GDP hasn't bottomed yet either since Q1 is reflective of only the start of the snowballing mortgage and housing woes.

But for now, no worries that GDP is meeting the low end forecasts accompanied by faster inflation (un pc side note: that combo of weak GDP and faster inflation reminds me of one and only blind date I went on when I was 20. The young lady and her friend met me and between them their must of been about 600 pounds of blind date horror). As I wondered on Friday whether it would be a half hour of brooding for the market and then higher, or some real worry through the day; it really ended up being about a half hour of brooding and then enough punch added to the bottom of the bowl from the consumer data at 10 to at least get the Dow and the Nasdaq to forge higher.

Lately, the Japanese Yen has languished, in particular against the Euro, but even against the dollar. The carry trade is back on with a vengeance. Yeah, you remember that carry trade thing dont you? It seems to be all but forgotten in most circles as the Yen as sunk back to close to the 120 level. So carry trade is on the back burner, but a thoughtful reader and investor from France has put this great "rainbow chart" together. It's a reminder of the pain that can come back and severely test traders souls should the yen re-strengthen. The basic phenomenon is as funds and even institutions liquidate their carry trades and buy back Yen, money comes pouring out of many assets including U.S. stocks. Yes, we've been to the gates of hell and back, according to that chart and if markets behave the way they normally do, no doubt we'll be dancing with the devil again at some point in the not too distant future (can you say "retest"? - thought ya could). It's a bad thing to fight the tape (unless you have money to burn) so these have been good times to build further wealth with well tended to bullish investments. But be careful. That rainbow chart is a stark reminder of just how quickly a seemingly forgotten back burner situation can suddenly seize the spotlight and rapidy erase gains.

I'm off to Cape May, NJ for a quick trip. See You all on Monday.

No comments: