another volatile week

Well we saw volatile markets over the past week. In that sense not much has changed. Basically we have the Presidents Working Group on Financial Markets, also know as the Plunge Protection Team was alert and managed the markets well. However there is still little liquidity around. So the FED had to agree this week to bend key banking regulations to help out Citigroup and Bank of America in order to give both banks the possibility to lend more money to their brokerage affiliates. Of course at least one of the banks mentioned that it is just a technicality.
The FED (and the ECB) were still active providing liquidity. To do so they accepted a broad range of collateral including home mortgages and related assets (could be of toxic waste category). Banks were happy with the possibility to use their mortgage and related assets as collateral.
The missing liquidity and the stricter lending rules of the banks were the trigger to some problems in the commercial paper market. Several companies did have troubles to get the money to repay some of the matured commercial papers as they were not able to roll over the program. There are several investors still waiting to get the cash back from matured commercial papers. It seems that it is very important to chose very well with whom or which company one does hold its cash position.
Regarding liquidity I expect that systematic liquidity problems will get much worse as the effect of the still unrecognized problems on a variety of carefully structured securities (derivatives) will certainly have an impact. Although the FED will provide as much liquidity as needed and there well be trillions in electronic cash a US banking crisis cannot be excluded. We have seen it in the case of Countrywide where clients rushed to withdraw cash once they were aware of certain problems. This of course can happen on a wider scale.
So be careful, these problems are not yet solved and anything can happen. It is certainly healthy not to believe the nice statistics delivered from government agencies. So if some TV people are chanting the good news of this or that excellent or better than expected statistical number, don't take it seriously. First of all it is their job to find only positive sides and secondly I have never really heart any in dept analysis of these numbers provided through the popular US economic news channels. (In order to have accurate numbers, subscribe to http://www.shadowstats.com/)

What do I expect for the stock market. Well I expect further sell pressure due to margin calls, fund closure, redemption's (must have a lot towards end of 3rd quarter) and the general negative sentiment. Looking at negative sentiment, it starts to become interesting from a contrarian point of view. PE ratios have come down and some stocks are now at prices that are at least much fairer than some weeks ago. It might well be that we test again the low from last week (maybe towards end of 3rd quarter into October) but as mentioned already several times, I do expect markets to be positive year on year at the end of 2007. The Plunge Protection Team will do everything to make this happen.
One thing we have to take into consideration. We might see stock markets increase considerably. However we have already today and did have for some time, a very high inflation. That means having an inflation of above 10% (M3 growth of above 13% according to http://www.shadowstats.com/ ) and having a stock market making new highs of let's say 7% per year, one is still loosing. As I do expect inflation to go up a lot more and as I do not exclude the possibility for hyperinflation, we might see DJI at 50,000 some time in the not so far future. However that will not mean anything because certainly accumulated inflation will have been above this.
Talking about stock markets, the stock I like are basically those that are related to commodities. The refineries like Tesoro and Valero have very attractive PE ratios. Oil & Gas stock have had a strong correction already before last Thursday. Basically the correction was due to taking profit as these stocks have gone up above market average. I believe they are attractive to buy again. Furthermore it seems that certain Emerging Markets are more interesting than established markets.

Fixed Income
There was still high demand for Treasury papers although a lot less than previous week. Investors still do like safe investments. However we saw movements that seem as some of those who just a week ago have unwound the carry trade, are back, borrowing YEN and CHF. As I do expect the USD to go down considerably against all important currencies, I do not like very much investments in USD and therefore I do not like investments in Treasury. The yield from the treasury on one side far from covering inflation and on the other side having a paper denominated in a currency that goes down does not make much sense. It can, once the USD falls fast, very well be that foreigners do sell USD denominated investments and they certainly will sell Treasury papers as well. That means we should see substantial higher yields, maybe sometime in 12-18 months.

Gold/Silver
Both did much better this week. Here we feel the negative impact from the Plunge Protection Team's market intervention. However both are up on the week. Maybe after the option expiry day next week we will see the higher prices I have been expecting for some time. At least in the past (exception last year) the months from September until February have been positive months for precious metals. Physical demand is still high and going up. Some of the banks (FED agents) have reduced short positions considerably and the upside pressure es very strong. It is really a surprise how easily the market absorbs bigger sales from the Central Banks. In the past prices would have fallen considerably.
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Oil
Oil price has been volatile. As we most probably are at the plateau of the Peak where production more or less covers the offer, we will see considerable fluctuations for some time. Whenever there is a problem on the production side (streak, hurricane, and so on), we will see prices hike up. Anyway the general trend is up. There is simply no alternative to oil around. Even if they find from time to time an Elephant oil field, it is simply not enough to replace what is extracted every day. Do find out more about Peak Oil, check my peak oil blog http://themusingsoffritz-peakoil.blogspot.com/

Well that is it for now. I do not yet know if I will post on a weekly basis. My idea was to have a monthly post. However with so much going on I might make the updates more often

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Although I have recommended both on several posts now, I do not have an agreement with them. However the information is really excellent and I do truly believe that it is of your benefit to subscribe. The subscription I believe is for each USD 150 p.a. or close to that. This is really not expensive for all the information one receives