Fears of Prematurely Removing Stimulus Trumped by Dubai Debacle
Look for things to get worse before they get better. Earlier forecasts for the Federal Reserve to begin reversing course and raising rates by first quarter surely must now be dismissed and recalculated. Even GSA’s earlier forecast for the first rate hike to occur by mid 2010 may prove overly optimistic as well. Recent remarks by Fed officials point to 2012 as the most likely period for the first reversal of policy. Similar comments came from the ECB officials pointing to 2011 as the most likely earliest point in time to begin the removal of excess liquidity in the system.
The upside, we can expect to enjoy generationally low interest rates for the next year or more. One downside, Central Banks don’t keep rates this depressed because domestic economic conditions are experiencing boom times. So, expectations of any imminent pronounced improvement may prove elusive and wishful thinking. However, with borrowing costs at extremely attractive levels and the velocity of credit improving, GSA anticipates an uneven staggered recovery slowly gaining momentum throughout 2010. Further, we hold to our original position of this being an initially jobless recovery which should restrain economic momentum at a minimum until the first quarter of 2010.
The announcement last week of a possible financial collapse in Dubai takes front and center. Memories of the Bear Stearns collapse and of being the first domino to tip come front and center. Is Dubai the first domino, will Greece be next? Is Hungary close by? Or is this an isolated event with Dubai to be rescued by Abu Dhabi? We’ll watch closely over the next few days for the signal and act accordingly and swiftly. What can’t be overlooked as a potential major threat for derailing this nascent recovery would the withdrawal of stimulus too soon. Misjudging the strength and breadth of the recovery could trigger a double dip that could costs millions more jobs and trillions more in debt. Chairman Bernanke, being a historian and expert on the last major depression is keenly aware and has warned both Congress and the Senate of these perils.
For now two things are certain. The direction of the market come next week will primarily be driven by progress made in Dubai. The quicker Abu Dhabi (the rich uncle) comes to the rescue of Dubai (the spoiled trust fund nephew) the quicker we can refocus on the forces driving this market (liquidity) and the path of least resistance. Expectations are for a quick resolution of the Dubai debt issue, which would present investors, still sitting with cash on the sidelines with an attractive entry point after Friday’s selloff. Should Abu Dhabi decide to extract a pound of flesh and the negotiations be protracted, sellers may gain the upper hand while the deal making drags on. We’ll watch closely for any signals for our next move.
Friday's rush to safety put pressure on everything tradeable, ex the US greenback. The market, after opening underwater and being pressured early, rallied nicely and took back some of the high ground before closing down 150+ on the Dow. Investors looking to gain exposure to the precious metals, can use Friday's weakness to purchase Silver Wheaton Corp-SLW. Silver Wheaton purchases stakes in mines from other miners. When new production comes fully online next year, Silver Wheaton production should make it one of the top silver producers. Expectations are for both revenues and earnings to nearly double over next two years. For Silver Wheaton, the need for further price appreciation in Silver itself is not even necessary, though anticipated. So, with Silver Wheaton sitting under $16 and earnings and revenues about to ramp up, this may still prove an attractive stocking stuffer.
As always, do your own due diligence and consult your investment advisor before making any investment decisions.
In a note of full disclosure, I may own or may purchase for myself and clients Silver Wheaton.
The upside, we can expect to enjoy generationally low interest rates for the next year or more. One downside, Central Banks don’t keep rates this depressed because domestic economic conditions are experiencing boom times. So, expectations of any imminent pronounced improvement may prove elusive and wishful thinking. However, with borrowing costs at extremely attractive levels and the velocity of credit improving, GSA anticipates an uneven staggered recovery slowly gaining momentum throughout 2010. Further, we hold to our original position of this being an initially jobless recovery which should restrain economic momentum at a minimum until the first quarter of 2010.
The announcement last week of a possible financial collapse in Dubai takes front and center. Memories of the Bear Stearns collapse and of being the first domino to tip come front and center. Is Dubai the first domino, will Greece be next? Is Hungary close by? Or is this an isolated event with Dubai to be rescued by Abu Dhabi? We’ll watch closely over the next few days for the signal and act accordingly and swiftly. What can’t be overlooked as a potential major threat for derailing this nascent recovery would the withdrawal of stimulus too soon. Misjudging the strength and breadth of the recovery could trigger a double dip that could costs millions more jobs and trillions more in debt. Chairman Bernanke, being a historian and expert on the last major depression is keenly aware and has warned both Congress and the Senate of these perils.
For now two things are certain. The direction of the market come next week will primarily be driven by progress made in Dubai. The quicker Abu Dhabi (the rich uncle) comes to the rescue of Dubai (the spoiled trust fund nephew) the quicker we can refocus on the forces driving this market (liquidity) and the path of least resistance. Expectations are for a quick resolution of the Dubai debt issue, which would present investors, still sitting with cash on the sidelines with an attractive entry point after Friday’s selloff. Should Abu Dhabi decide to extract a pound of flesh and the negotiations be protracted, sellers may gain the upper hand while the deal making drags on. We’ll watch closely for any signals for our next move.
Friday's rush to safety put pressure on everything tradeable, ex the US greenback. The market, after opening underwater and being pressured early, rallied nicely and took back some of the high ground before closing down 150+ on the Dow. Investors looking to gain exposure to the precious metals, can use Friday's weakness to purchase Silver Wheaton Corp-SLW. Silver Wheaton purchases stakes in mines from other miners. When new production comes fully online next year, Silver Wheaton production should make it one of the top silver producers. Expectations are for both revenues and earnings to nearly double over next two years. For Silver Wheaton, the need for further price appreciation in Silver itself is not even necessary, though anticipated. So, with Silver Wheaton sitting under $16 and earnings and revenues about to ramp up, this may still prove an attractive stocking stuffer.
As always, do your own due diligence and consult your investment advisor before making any investment decisions.
In a note of full disclosure, I may own or may purchase for myself and clients Silver Wheaton.
posted by James | 1:28 PM
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