Tuesday, January 20, 2009

Financial MELTDOWN???

Don't expect the financials to lead us out of this bear market. Most of them will be lucky to survive. Royal Banck of Scotland has dropped 60% recently and many of the foreign banks are down 10% or better in the overseas trade. This means I will have a longer wait to see my commodities trade develop. I expect that this new downward leg for the foreign financials will ignite more talk of deflation and will continue to support the dollar. Gold and the futures are down right now (about midnight central time). Many traders are looking for a rally---I admit I was looking for a bounce last week, but this news takes out that possibility. We could be headed down another 20% in the next four months for the major averages.

If the dollar stays strong--and now it most likely will, the domestic economic numbers are going to come in worse than expected. Will we see an economic honeymoon phase as we change Presidential Administrations tomorrow? Not likely with all of this focus on the banking crisis. Many have said that these issues started with housing and they will only end with a recovery in housing. I would submit that we now have a major crisis of confidence. Not only have many investors lost wealth through legitimate trading----many others have just been screwed out of their money by the likes of Bernie Madoff. It looks like it will take quite some time to restore confidence in our financial system. Making matters worse, we don't know how long our major banks will be able to survive without another infusion from the government.

So how do we trade the new developments? I am not buying the steel stocks in the next few weeks like I had planned. I will look for opportunities, but I will not rush the trades and I see no reason to even think about entering these trades at this point. Are there good shorts within the financial sector? I will look for them but you can be assured that these trades will be crowded. Right now I will look for an opportunity to get short some commercial real estate holders. Yes this trade is already crowded, but if the banking system woes continue---it will pass to the real estate holders for sure.

Is this a buying opportunity for gold? I would be very careful about entering here as you would have to have a long term time table to play in this space at this juncture. Gold has several pressures as the dollar continues to remain strong. We will be riding the "We are better than the rest" attitude for the next few years.

I see where Jim Rogers apparently declared the UK finished. This appears to be a radical comment---but it might now be that far off base. You can expect the Euro Zone to be lowering rates soon.

Will have more tomorrow as things unfold.



Kel said...

The dollar is taking a hit right now due to the collapse of European banks. Interestingly the dollar is up, gold and oil are up, Treasury yields are down, and equities are down across the globe. This is not the usual picture that one would expect with a dollar rise. Dollars are being bought - what is being bought with them and for how long will those purchases be held? I think what we are seeing near term is simply churn in the face of some blow-ups. I wouldn't make decisions long term decisions based on these recent moves. We may well be seeing hedge funds repatriating cash for the purpose of meeting redemptions.