3SOF

Quote from: guitarman on December 14, 2007, 10:24:06 PM
Hi All
Long time no post!
Thought this was refreshing.
Happy Holidays and New Year to everyone.
All the Best
GMan


China and the Arabian Peninsula as Market Stabilizers
December 11, 2007 20:13 GMT
By George Friedman 


The single most interesting thing about today's global economy is what has not occurred. In 1979, oil prices soared to slightly more than $100 a barrel in current dollars, and they are approaching that historic high again. Meanwhile, the subprime meltdown continues to play out. Many financial institutions have been hurt, many individual lives have been shattered and many Wall Street operators once considered brilliant have been declared dunderheads. Despite all the predictions that the current situation is just the tip of the iceberg, however, the crisis is progressing in a fairly orderly fashion. Distinguish here between financial institutions, financial markets and the economy. People in the financial world tend to confuse the three. Some financial institutions are being hurt badly. Those experiencing the pain mistakenly think their suffering reflects the condition of the financial markets and economy. But the financial markets are managing, as is the economy.

What we are seeing is the convergence of two massive forces. Oil prices, along with primary commodity prices in general, have soared. Also, one of the periodic financial bubbles -- the subprime mortgage market -- has burst. Either of these alone should have created global havoc. Neither has. The stock market has not plummeted. The Standard & Poor's 500 fell from a high of about 1,565 in mid-October to a low of 1,400 on Oct. 19. Since then, it has rebounded as high as 1,550. Given the media rhetoric and the heads rolling in the financial sector, we would expect to see devastating numbers. And yet, we are not.

Nor are the numbers devastating in the bond markets. By definition, a liquidity crisis occurs when the money supply is too tight and demand is too great. In other words, a liquidity crisis would be reflected in high interest rates. That hasn't happened. In fact, both short-term and, particularly, long-term interest rates have trended downward over the past weeks. It might be said that interest rates are low, but that lenders won't lend. If so, that is sectoral and short-term at most. Low interest rates and no liquidity is an oxymoron.

This is not the result of actions at the Federal Reserve. The Fed can influence short-term rates, but the longer the yield curve, the longer the payoff date on a loan or bond and the less impact the Fed has. Long-term rates reflect the current availability of money and expectations on interest rates in the future.

In the U.S. stock market -- and world markets, for that matter -- we have seen nothing like the devastation prophesied. As we have said in the past, the subprime crisis compared with the savings and loan crisis, for example, is by itself small potatoes. Sure, those financial houses that stocked up on the securitized mortgage debt are going to be hurt, but that does not translate into a geopolitical event, or even into a recession. Many people are arguing that we are only seeing the tip of the iceberg, and that defaults in other categories of the mortgage market coupled with declining housing markets will set off a devastating chain reaction.

That may well be the case, though something weird is going on here. Given the broad belief that the subprime crisis is only the beginning of a general financial crisis, and that the economy will go into recession, we would have expected major market declines by now. Markets discount in anticipation of events, not after events have happened. Historically, market declines occur about six months before recessions begin. So far, however, the perceived liquidity crisis has not been reflected in higher long-term interest rates, and the perceived recession has not been reflected in a significant decline in the global equity markets.

When we add in surging oil and commodity prices, we would have expected all hell to break loose in these markets. Certainly, the consequences of high commodity prices during the 1970s helped drive up interest rates as money was transferred to Third World countries that were selling commodities. As a result, the cost of money for modernizing aging industrial plants in the United States surged into double digits, while equity markets were unable to serve capital needs and remained flat.

So what is going on?

Part of the answer might well be this: For the past five years or so, China has been throwing around huge amounts of cash. The Chinese made big, big money selling overseas -- more than even the growing Chinese economy could metabolize. That led to massive dollar reserves in China and the need for the Chinese to invest outside their own financial markets. Given that the United States is China's primary consumer and the only economy large and stable enough to absorb its reserves, the Chinese -- state and nonstate entities alike -- regard the U.S. markets as safe-havens for their investments. That is one of the things that have kept interest rates relatively low and the equity markets moving. This process of Asian money flowing into U.S. markets goes back to the early 1980s.

Another part of the answer might lie in the self-stabilizing feature of oil prices, the rise of which should be devastating to U.S. markets at first glance. The size of the price surge and the stability of demand have created dollar reserves in oil-exporting countries far in excess of anything that can be absorbed locally. The United Arab Emirates, for example, has made so much money, particularly in 2007, that it has to invest in overseas markets.

In some sense, it doesn't matter where the money goes. Money, like oil, is fungible, which means that if all the petrodollars went into Europe then other money would flow into the United States as European interest rates fell and European stocks rose. But there are always short-term factors to consider. The Persian Gulf oil producers and the Chinese have one thing in common -- they are linked to the dollar. As the dollar declines, assets in other countries become more expensive, particularly if you regard the dollar's fall as ultimately reversible. Dollars invested in dollar-denominated vehicles make sense. Therefore, we are seeing two massive inflows of dollars to the United States -- one from China and one from the energy industry. China's dollar reserves are derived from sales to the United States, so it is stuck in the dollar zone. Plus, the Chinese have pegged the yuan to the dollar. The energy industry, also part of the dollar zone, needs to find a home for its money -- and the largest, most liquid dollar-denominated market in the world is the United States.

The United States has created an odd dollar zone drawing in China and the Persian Gulf. (Other energy producers such as Russia, Nigeria and Venezuela have no problem using their dollars internally.) Unhinging China from the dollar is impossible; it sells in dollars to the United States, a linkage that gives it a stable platform, even if it pays relatively more for oil. Additionally, the Arabian Peninsula sells oil in dollars, and trying to convert those contracts to euros would be mind-bogglingly difficult. Existing contracts and new contracts managed in multiple currencies -- both spot and forward managed -- would have to be renegotiated. Any business working in multiple currencies faces a challenge, and the bigger the business, the bigger the challenge. The Arabian Peninsula accordingly will not be able to hedge currencies and manage the contracts just by flipping a switch.

This provides an explanation for the resiliency of U.S. markets. Every time the news on the subprime situation sounds so horrendous that it seems the U.S. markets will crash, the opposite occurs. In fact, markets in the United States rose through the early days, then sold off and now have rallied again. Where is the money coming from?

We would argue that the money is coming from the dollar bloc and its huge free cash flow from China, and at the moment, the Arabian Peninsula in particular. This influx usually happens anonymously through ordinary market actions, though occasionally it becomes apparent through large, single transactions that are quite open. Last week, for example, Dubai invested $7 billion in Citigroup, helping to clean up the company's balance sheet and, not incidentally, letting it be known that dollars being accumulated in the Persian Gulf will be used to stabilize U.S. markets.

This is not an act of charity. Dubai and the rest of the Arabian Peninsula, as well as China, are holding huge dollar reserves, and the last thing they want to do is sell those dollars in sufficient quantity to drive the dollar's price even lower. Nor do they want to see a financial crisis in the U.S. markets. Both the Chinese and the Arabs have far too much to lose to want such an outcome. So, in an infinite number of open market transactions, as well as occasionally public investments, they are moving to support the U.S. markets, albeit for their own reasons.

It is the only explanation for what we are seeing. The markets should be selling off like crazy, given the financial problems. They are not. They keep bouncing back, no matter how hard they are driven down. That money is not coming from the financial institutions and hedge funds that got ripped on mortgages. But it is coming from somewhere. We think that somewhere is the land of $90-per-barrel crude and really cheap toys.

Many people will see this as a tilt in global power. When others must invest in the United States, however, they are not the ones with the power; the United States is. To us, it looks far more like the Chinese and Arabs are trapped in a financial system that leaves them few options but to recycle their dollars into the United States. They wind up holding dollars -- or currencies linked to dollars -- and then can speculate by leaving, or they can play it safe by staying. In our view, these two sources of cash are the reason global markets are stable.

Energy prices might fall (indeed, all commodities are inherently cyclic, and oil is no exception), and the amount of free cash flow in the Arabian Peninsula might drop, but there still will be surplus dollars in China as long as it is an export-based economy. Put another way, the international system is producing aggregate return on capital distributed in peculiar ways. Given the size of the U.S. economy and the dynamics of the dollar, much of that money will flow back into the United States. The United States can have its financial crisis. Global forces appear to be stabilizing it.

The Chinese and the Arabs are not in the U.S. markets because they like the United States. They don't. They are locked in. Regardless of the rumors of major shifts, it is hard to see how shifts could occur. It is the irony of the moment that China and the Arabian Peninsula, neither of them particularly fond of the United States, are trapped into stabilizing the United States. And, so far, they are doing a fine job.

George Friedman 

Too Many mistakes in his articl !!
I think he knows nothing about oil producer . He's saying that arabs oil producer  their currencies are linked to the dollar And this is wrong 
there are only two countries out of 6 are linked to Dollar , also he's saying these weird words (The Chinese and the Arabs are not in the U.S. markets because they like the United States. They don't. They are locked in) 
If they'er locked in as he said , then why did Dubai invest $7 billion in Citigroup ?!! why investing in a bad economy ? 
I know very well about the Arabian Gulf producer and they have been  investing in the us markets since1980 and if they decide to sell their investment I'm 100% will drug the market extremly down for months ...

The US. Market still very cheap and many investors are moving to the market . many stocks are 50% below their real value .

We will see new highs for the market , this is what I think for now ..

Good luck

The turmoil in the market indices slowed Thursday. Since the DJIA's fall last Tuesday, the trend of this index has been slightly down; however, the index has vacillated within a narrowing range of support and resistance, now approaching 13,300 and 13,500. The 44- point gain chalked up at the close yesterday is expected to be given back, and the DJIA should move mainly sideways until the current near-term downtrend has bottomed out, which is now expected to happen early next week.

The intermediate-term uptrend continues to develop despite the downward effect of the near-term trend. Uptrends to downtrends turned negative, an occurrence consistent with the rapidly declining near-term trend indicators. The intermediate term indicators, and Trend Ratio (percent of stocks in uptrends) took the shock pretty much in stride, holding steady and consistent with an uptrending support level for the DJIA, now approaching 13,300.

Previously, a 1.5% correction downward in the DJIA was forecasted, but it was not expected to happen in one day. Last Tuesday and Wednesday the market became very volatile, and 2.5% swings, both up and down, occurred very rapidly. Overall the near-term trend decline over three days has been about 250 DJIA points, or 2%, since this near-term downtrend commenced. The near-term trend indicators have retreated substantially from their previously overbought circumstances, and signs are their downward treks are slowing but a couple more days are likely to be required for these indicators to find their bottoms. Thus, it is probable that the DJIA will oscillate up and down between 13,300 and 13,500 as these two support/resistance levels converge and the near-term downtrend runs its course.

Separating the trend signal from the noise created by the trade-term trend has been the name of the game recently. With intraday DJIA swings of 300-400 points, the multi-day trend directions are not only obscured, but they become of lesser moment than the intraday gyrations. Nevertheless, anticipated economic uncertainty is the mood-driving force of buyers and sellers in the stock marketplace, and as long as various measures are interpreted as leading to more uncertainty, the stock market will be volatile. Trend proprietary indicators have proved reliable measures of the trends underlying the noise, and they currently point to an emerging intermediate-term uptrend opposed by a near-term downtrend, which will tend to neutralize each other until the near-term downtrend is spent.

shadowtrader update:
http://www.shadowtrader.net/videos/sunday121607st.html



cheers
Oliver

I guess we can expect another volatile week.

Friday's Market Wrap video from IBD; I hope the link works.

http://www.investors.com/MediaCenter/?MediaID=753&t=V

Quote from: BigSully1 on December 17, 2007, 10:54:01 AM
Friday's Market Wrap video from IBD; I hope the link works.

http://www.investors.com/MediaCenter/?MediaID=753&t=V

Cool link, I like their format.

They said the rally was intact, but in The Big Picture column after today's action, they say "Market Rally Under Pressure"  

Quote from: tokyopua on December 18, 2007, 02:17:38 AM

Quote from: BigSully1 on December 17, 2007, 10:54:01 AM
Friday's Market Wrap video from IBD; I hope the link works.

http://www.investors.com/MediaCenter/?MediaID=753&t=V

Cool link, I like their format.

They said the rally was intact, but in The Big Picture column after today's action, they say "Market Rally Under Pressure" 

Yes, they are also counting yesterdays trade as another distribution day for the indices.
Mondays Market Wrap;

http://www.investors.com/MediaCenter/?MediaID=757&t=V

Things looking better here.

This could be the reversal.

its looking like a double bottom or W formation getting ready for the seosonal Christmas rally

IBD Market Wrap Tuesday;

http://www.investors.com/MediaCenter/?MediaID=764&t=V

Wednesday Market wrap

http://www.investors.com/MediaCenter/?MediaID=768&t=V

Quote from: BigSully1 on December 19, 2007, 11:00:11 PM
Wednesday Market wrap

http://www.investors.com/MediaCenter/?MediaID=768&t=V

These videos are great educational tools, as its often hard to follow IBD theory just from reading their books.  One of the problems for me is the way they use those wierd bars  to show stock price history graphs.  Man, if they just used candlesticks, that would be  .

Quote from: tokyopua on December 20, 2007, 02:46:58 AM

Quote from: BigSully1 on December 19, 2007, 11:00:11 PM
Wednesday Market wrap

http://www.investors.com/MediaCenter/?MediaID=768&t=V

These videos are great educational tools, as its often hard to follow IBD theory just from reading their books.  One of the problems for me is the way they use those wierd bars  to show stock price history graphs.  Man, if they just used candlesticks, that would be  .

Yes, I really like the vids but also wonder why they don't use candlesticks. I think anyone can access the videos without any subscription, at least I don't have to sign in to get them, so I won't post the links anymore. They also just started a new educational video series the other day, but can't find them now.

investors.com

Here's the daily stock analysis on Innerworkings INWK-interesting

http://www.investors.com/MediaCenter/?MediaID=771&t=V

Shadowtrader update:
http://www.shadowtrader.net/videos/sunday122307st.html

final shadowtrader for 2007:
part1:
http://www.shadowtrader.net/videos/sunday123007st_1.html
part2:
http://www.shadowtrader.net/videos/sunday123007st_2.html

all the best for 2008!

Oliver