Value of Dollar drops

Friday, September 21, 2007

ECONOMIC DATA / NEWS

Where was the money going?  Yesterday, bond prices got crushed and stock indexes trickled lower.  With the Fed rate cut we know that money market account rates won’t be getting any higher.  So, where were investors sticking their money?  They were putting it in an investment that is considered to be inflation proof.  An object rather than a concept.  Like back in the 1800’s, investors were scooping up gold as quickly as they could.  However, now they don’t have to go panning for it.  They just pay a hefty premium to hold it.

As we said, money market accounts don’t offer much of a return as it is, and those rates are only going to go down in the short run.  Stocks are less attractive on the growing belief that the economy is going to turn to recession.  And bonds have lost value over the last two days because oil prices have shot to new highs from under $79 to over $84 within a week.  That’s bringing up brand new fears that inflation is going to flare up, especially in light of the fact that the Fed just cut rates, which usually makes the economy more susceptible to inflation.  However, the Fed had no choice.  They have recognized that attempting to avoid a deep recession is much more important than keeping inflation overly tame.  But, all of that said, gold becomes an attractive option, since it holds its value extremely well under any circumstances.  Gold prices hit a 28-year high yesterday at $739 an ounce.  Meanwhile, the dollar hit an all-time low against the euro.  All of these reactions seem irrational and panicky to us, and we don’t expect them to persist for too long.  Just be aware that if oil prices continue to rise or the economy does slowdown, we could see other temporary reactions like the one from yesterday.

And, as if Greenspan hasn’t “helped” enough, he was at it again.  This time he was being interview by Austrian magazine Format.  In his latest flip-flop, he went from taking blame for the house price run-up, and the lax lending guidelines that abounded toward the end of his term as Fed Chairman.  However, in this latest interview, he said that it was a reduction of interest rates around the world that fueled the housing boom.  Then, he went on to say that the Fed tried to stop it by raising interest rates, but they “failed.”  Then, to top things off, he said that he believes home prices will fall much more than they have so far, but said it is too early to know if a recession will ensue.  I’m not sure whether it is intentional or not, but he seems to be making himself less credible by the day.  So far, the stock and bond markets are regaining some of their losses, so his comments haven’t had any negative effects at this point.

TECHNICAL ANALYSIS

A gain of 9bp is a sight for sore eyes, compared to the 62bp downward spiral for the FNMA 30-year 6.0% yesterday.  However, because of the deeper than expected plunge, prices broke through the 200-day moving average, and it has become a resistance once again.  Prices have not been able to crack this level yet, but they have been trying.  After the 200-day moving average, the next resistance is at the gap lower (100.44).  Support from the upward trend line keeps rising, and it is almost at 99.75.

The 50-day moving average was able to withstand the charging 10-year Treasury yield, which finally came to a rest at 4.70%.  It has been pushed down to 4.66% with plenty of potential to fall to 4.60%, although it is unlikely that a move of that size will occur today.

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