It was a shortened week, but this week’s JWP is filled with plenty of good stuff.  The credit markets are in a mess, and it seems that all the investment banks have nothing good to say about each other.  Can’t we all just get along…I mean, it is Thanksgiving?  Oh well…

Energy

The spot price of uranium held steady for the third week in a row.  This is an obvious sign that we are getting slightly closer to an equilibrium price.  TT reports that buyers and hedge funds aren’t as willing to bid up prices and sellers are more willing to come to the bargaining table with lower asking prices.  Bids were due this past Friday for 260k pounds of U3O8 equivalent in the form of UF6.

We also saw reports that China’s demand for uranium will increase 6 times by 2020 to 7000 tonnes.  China expects nuclear energy production to be 40,000 MWe compared to the 9000 MWe they produce today.   Li Junjie, the director of the uranium material department of the State Nuclear Power Agency, also stated that China will eventually be a net importer as future demand will exceed domestic production.

This week in oil, we came very, very close to the psychological $100 /barrel level.  After trading in the $93-94 range on Monday, we saw a strong rally into the night on Tuesday that took us to a record high of $99.29/barrel.  The main reason being the continued slide of the dollar, but there were also some speculators pricing in a draw in supplies.  On Wednesday, we did see a 1.1 million barrel decline in U.S. supplies.  The release of the data had crude pulling back to the $98 handle which means that the price rally on Tuesday evening was not simply attributed to the weak dollar as speculators priced into the markets the draw on stockpiles.

Dear reader, as you know, I really see no difference between $100 and $98 or whatever we happen to be trading at on any given day.  The only importance of the $100 level is that it is holding us from going to $110-120.  It is only a matter of time.

So, this morning I was watching CNBC before I began the day and I saw a very comical discussion.  If you have ever seen a discussion about $100 oil on CNBC, you will know that the host of whatever show you happen to be watching will most likely discount the event as non-inflationary.

On this particular Wed. morning I was watching a dialogue between 3 different analysts, none of whom I remember their names.  Anyways, one of the analysts made the claim that $100 won’t affect our economy or inflation.  Another analyst, with a hint of some intelligence, asked the man if he remembered 1980.  The man’s reply was something like this. “1980!?!?  This is 2007, and times are very different?  Our economy is more versatile and able to absorb $100 oil.”

On that note, I simply turned off the TV in disgust as I often do when watching CNBC.  How is our economy so greatly different in 2007?  Last time I checked, it still takes energy and oil to produce and ship our goods.  Last time I checked the U.S. was importing record levels of oil.  Last time I checked we still run our cars on gasoline, and last time I checked, higher oil prices are EXTREMELY inflationary.  You can always count on good ‘ol CNBC to completely pronounce historical trends dead by a simple argument like the one the above mentioned analyst used.

Anyways, as I write, we are trading in the $96 range as oil continues to pull back.

Moving onto nat gas, the markets were pretty quiet, but like last week, there was a bias to sell as inventories climbed by 4 billion cubic feet.  We are down a couple percent on the week here and currently trading at $7.60, up over 1 ½ percent on the day.

Gas at the pump also rose again.  We are currently looking at a national average of 3.09 /gallon.  We have seen that average rise 18 cents in just two short weeks.  Obviously, gas prices would eventually begin to reflect $100 oil, and we can look for pump prices to continue to trend higher going forward regardless of seasonal trends.

Economy/Equities

Equities were again driven this week by credit concerns and poor economic data.  There were some important statistics released regarding the housing market as well.  As usual, let’s begin this week with some of the economic data and current events of relevance.

On Monday, the National Association of Homebuilders/Wells Fargo Index, which represents the confidence seen from the home builders’ perspective, was released, and it held at a record low for the second strait month.  On Tuesday, we saw housing starts come in at higher levels than the previous month.  This was definitely a surprise to me, but it might just be a result of the huge decline in last month’s data.  Anyways, the news wasn’t rosy for long as housing permits data was released on Wednesday.  Building permits came in at a 14 year low.  As far as the housing market goes, building permits is the most forward looking indicator we have.  It is obvious that we have to rid ourselves of some of this excess liquidity, but homebuilders will do what homebuilders do, and that is build homes.  Either way, we still have a glut of supply on our hands.

On that note, Secretary Treasury Hank Paulson came out with a statement that he expected loan defaults to be significantly higher in 2008 than they were in 2007.  I view this statement in two ways.  The first is that this might be the first true words spoken out of Paulson’s mouth in a long time.  The second is that if the Fed heads and other government officials are lying to us, they are telling us yesterday’s news.  

Keeping the theme of housing going, a report was released showing that home prices fell in 1/3 of U.S. cities.  The report cited tighter lending standards leading to a 14% decline in sales as the main reason.

The economic data was mainly dominated by the housing market this week, but we also saw lack luster numbers from the leading indicators.  The indicators fell by .5% compared to an expected decline of .3%.

The Fed released their Minutes from the past meeting.  I guess I will share with you their ‘wise words’ so we can all look back on this report and laugh at their complete uselessness.  The Fed predicted growth and inflation would slow to an annualized rate of 1.8% and 1.7-1.9% respectively.  

The also stated that the recent 25 bp cut was a safety measure.  Well, if this recent cut was a safety measure, then future rate cuts won’t be necessary right?  We will have to wait and see, but the futures market has priced in a 92% chance of a rate cut in December.  Also, we saw the 10-year Treasury Note fall below 4% today, and the 2-year has fallen below 3%.  I don’t believe in the bond market for one second as an economic or monetary policy indicator.

First of all, anyone buying these garbage bonds is immediately taking an annualized loss of around 10% as a result of inflation, and this market can so easily be abused by the cooperation of the Fed and the U.S. Treasury.  What I mean, is that as the Treasury creates the bonds, the Fed can just print the money and buy them.  Regardless of my opinion, it seems that public opinion seems to think that the miniscule yields are telling us a rate cut is on the way.

I’m not the only one who thinks the bond market is garbage.  How about all of those guys who buy our debt…you know China, Japan, the oil exporting nations, etc?  The recent TIC data showed us that they were once again net sellers this past month.  People please do not understand the importance of this piece of data.  As foreigners continue to be unwilling to finance out debt, U.S. citizens will be left holding the bill.  It won’t be in the form of higher taxes either.  They will use the silent tax of inflation.

Onto a new topic, the bad news from the investment banks and their cohorts continued to roll through the press this week.  It looks like UBS AG, Europe’s largest bank by assets, has been dragged into the muck, and in significant fashion.  Initial reports are saying that they might take a $9 billion loss on their $20 billion CDO portfolio.  

And Goldman Sachs made some interesting headlines this week.  Is appears that one of their hedge funds, Goldman Alpha, may end the year with its assets down $6 billion, or 60%.  They had lost 37% of their assets through Nov. 14…ouch

GS also came out and downgraded Citi from neutral to sell.  The report also stated that GS said Citi might have to write down another $15 billion in bad loans during the next two quarters.  GS also lowered the price targets of Bear Stearns, E+Trade Financial, JPMorgan Chase, Lehman Brothers Holdings, Merrill Lynch and Morgan Stanley.

Moody’s also released a very interesting report this week.  They told us that money market funds might be under some serious pressure.  As with the government, the general media tends to be slightly behind the ball on most of the important stories.

A few weeks back I contacted my older brother with some concerns regarding how he was investing his money.  He is some 95% invested in money market funds.  Now this is a ridiculous thing in my opinion, simply from the view that just as in government bonds, you are already receiving a net real loss on your investments from inflation.  He is an actuary, and you know how those actuaries are.

Anyways, that’s not the reason I talked to him, because he is well aware of my view points.  The reason I called him up is that I had stumbled across some interesting things.  It seems that money market managers had been investing in mortgage backed securities, CDO, and other forms of asset back paper in order to give a higher return than the market rate for MM funds.  I simply wanted to encourage him to look into his MM fund a little more carefully, especially if he was receiving an above market average return.  

The recent Moody’s report is making this notion more public.  You have to understand that MM funds are not guaranteed to go up, in fact they can lose money as well.  Moody’s reported that the top 10 MM funds hold approximately $50 billion in short term debt for SIVs.

We will finish this week’s shortened report on the credit markets with some pleasant news from Freddie Mac.  Did I say pleasant…woops?  Freddie posted a quarterly loss of $2.02 billion ($3.29 /share) and stated that they might cut their dividend by as much as 50%.  I believe it was just last week that I mentioned, given the opportunity, that I wouldn’t want to see what Freddie and Fannie were holding on the books.  Well, we got a glimpse this week, but I imagine it is much worse.  Remember that Freddie and Fannie own or guarantee $11.5 trillion, or 40% of the U.S. housing market, and that’s not the good 40% either.

Let’s talk about the price action in the equities markets this week.  The DOW got slammed for 218 points on Monday after the GS/Citi release.  We traded all over the place on Tuesday, but ended slightly positive on the day, and we have taken another 211 point whack on Wed.  It’s a good thing markets are closed tomorrow, they could use the breather.

Anyways, it looks like we have successfully broken and held below the 200 day MA.  We are now sitting directly on a huge technical support level.  At 12800 we are sitting on the lows reached in Aug.  If we continue this downward trend, I would start looking for numbers in the 11500 range.  I expect the DOW to trade in a range between 12800 and its 200 day MA for a week or so here before it decided where to go next.  Regardless of what happens in the next couple of days, we are at crucial levels.  Make sure your portfolio is well guarded from what might happen.

Currencies/Precious Metals

Similar to last week, the carry traders rallied, while the high yielders stunk.  Unlike last week, was the strong biased to sell dollars.

The A$ mostly traded in the .88 range this week, before falling into the .87 level as I write.  We also saw the NZ$ and the Icelandic Krona hit weekly and monthly lows respectively.  One more note on the A$.  Bloomberg reported that the A$ might take a 2.5-3% hit if the Labor Party wins the upcoming election.  Bloomberg reports that the sell-off would be completely the result of uncertainty.  I’m not sure of this analysis, but I thought I would pass it on to you none the less.  I had come under the impression that the opposing party had many similarities to the current party that holds the office.  We will just have to wait and see.

The Loonie continues to be dismal as it seems to be challenging parity.  The catalyst for the sell offs was the announcement that the BoC might cut interest rates, as well as a C$365 million write down by the National Bank of Canada.  I would be hard pressed to see a rate cut by the BoC.  This may have well been rhetoric to fight the recent strength in the Loonie.  Regardless, the loonie fell to 1.015 on Monday and has been essentially holding those levels for the week.  It currently trades at 1.0134.

The big story in the currency markets this week were the carry traders.  The Yen rallied to 1.0985 on Monday.  It hit the 108 level on Tuesday, and it touched a 2 year high of 108.515 today.

The Swiss Franc might have had an even more impressive week than the Yen.  On Monday, it hit its highest levels against the dollar since 1995, and then on Tuesday, the Franc traded above .90 reaching a record high.

The other big story in the currency markets this week was the Euro.  It hit a record high on Monday of 1.4852 and held near those levels on Tuesday.  It currently trades above Monday’s levels at 1.4858.

The pound wasn’t quite as exciting.  Although it has traded to the upside for the week, it is currently holding the 2.065 after trading all the way below 2.05 on Monday.

In other news in the currency markets, the Gulf states have stepped up the rhetoric regarding their dollar pegs.  It seems that these guys intend to work in unison.  They are discussing whether or not to break the peg, and if they break the peg, what would be the best way to go about it.  I will keep tabs on this story, because it has HUGE implications for the dollar and the dollar weakness this week can be attributed to these discussions.  But this I promise you; it is not a question of ‘will’ they break the peg.  It is a question of ‘when’ will they break the peg.  All in good time dear reader.

Precious metals have again had a volatile week, but we have seen a late week rally that has us currently holding around the $800 level.  We traded as low as $775 /oz, but I’m not convinced the correction is over.  We will have to just wait and see I guess.

Big Finish

It was a short week for the JWP, and that means it is a short week for me.  I will be taking some time the next couple of days to spend with my family and friends.  My intentions are to not look at a financial market for the next 4 days, but I know that that will never happen.  As the old saying goes, the world keeps on spinning…even on Thanksgiving.

I hope that you all have a very wonderful Thanksgiving.  May your turkey be moist and your stuffing plentiful.  Until next time…

Happy investing,

Nick Jones