My View-Markets Set To Go Bear

Calling turns in the markets is a notoriously difficult thing to do, but I believe the corner has been turned here and that the bear trend will continue. The sub prime prime related banking write downs are projected to get worse, as is housing in general. Tech had been a bright spot, but the NASDAQ has sold off more then the DOW and S&P indexes due to expected reductions in business expenditures (CapEx) for technologies. Cisco is leading the way here as it frequently does.

You can throw out Q3 GDP. Many economists have noted that real GDP was elevated due to a decades-low inflation reading on the deflator. That reading only came about because higher import prices subtracted from inflation because gasoline fell. Import prices rose over 10% in October according to Friday's Trade balance report while gasoline gained nearly 20 cents/gallon this week. And the NFP is not being taken seriously by some because over 100,000 of the reported 133,000 new jobs came from the birth/death model the BLS uses in October. What worse, is that jobs in the model were derived (meaning estimated, not counted) from the hard-hit banking and construction sectors!

Markets are already jittery about the U.S. consumer. Weekly retail sales looked bad with Wal-mart reporting same store sales up a platry 0.4% (and that was after price reductions). On Tuesday, Capital One boosted its forecast for 2008 credit losses to between $4.9 billion and the mid-$5 billion range after it had projected $4.9 billion of losses on Oct. 18. Tuesday will bring further consumer information. Pending Home Sales will be released at 10.00 EST while Home Depot and industry bell weather Wal-Mart report earnings before Wall Street opens. October retail sales will be reported on Wednesday.

The only possible area of support equity markets may find will be the potential of a fed rate cut. The financial press is reporting a high degree of certainty of fed easing at the December 11th meeting and as of Friday, the Cleveland Fed is reporting the implied probability of holding at that time to be just under 30%. That means 70% of the market sees the fed moving with just under 50% looking for another 25 basis point reduction to 4.25. The market actually sees a higher probability of the fed moving to 3.75 (about 20%) then to 4.00 (about 2%)!

My view is that the fed will not be able (and will not want) to move at the next meeting IF equity markets, oil and the dollar remain at current levels, but I also believe equities have a strong potential to fall and the dollar has a strong potential to rise vs. the high yielders before then. And if the dollar gains, oil will fall.

Still, with the banking crisis projected to worsen the fed is going to be cutting in 2008, but an interesting trend has emerged: After making new post-September 18 highs, the DOW and S&P are now below where they were before that 50 basis point ease and the pace of selling has increased since the October meeting.

When I hear Trichet label recent currency moves "brutal" and Bernanke mention the inflationary pressures related to the weak dollar in Congressional testimony, I have to see the potential for dollar strength. (While it's true the ECB is hawkish, what's the real potential for tightening in the middle of a banking crisis)? And when banks are writing down $billions of losses (with the projections being for the situation to worsen), reductions in CapEx and consumer spending (to say nothing of a continuing housing recession), I have to see the potential for a bear trend in equities and carry trades to continue.

That aligns two major forces with the dollar; Central Bankers and the unwinding carry trades that will accompany an equity sell-off. (Be aware "with the dollar" means vs. the high yielders; the dollar will depreciate vs. the Yen in this scenario).

Also be aware that I am the only person saying the dollar has the potential to gain vs. the high yielders over the next few weeks. It's already happening against the AUD and NZD and I expect to see the same thing happen vs. the Pound and Euro, although I am not ready to short those yet. The dollar gained on the AUD for the week and there's a weekly pinbar on the NZD/USD chart. The Pound only managed 13 pips vs the dollar this week, but the Euro still looks strong.