Wednesday, December 28, 2011

December, Wednesday 28, 2011

DOW –139 = 12,151
SPX –15 = 1249
NAS –35 = 2589
10 YR YLD -.10 = 1.91%
OIL –1.75 = 99.59
GOLD –36.00 = 1557.30
SILV –1.58 = 27.25
PLAT –42.00 = 1390.00

The Euro fell to its lowest level against the dollar in nearly a year. Italy held an auction of short-term bonds; it went well, but there is another auction tomorrow. Eurozone banks are reportedly hoarding the cash injected by the European Central Bank, and not lending the money out – for some reason, some investors found this news alarming, even though it is straight out of the Federal Reserve playbook. Oil prices fell after Saudi Arabia said it will offset any loss of oil from a threatened Iranian blockade of a crucial tanker route in the Middle East.The US Navy warned that any disruption of traffic through the vital Strait of Hormuz "will not be tolerated." Pretty much everything was down in the US markets, and the S&P 500 moved back into negative territory for the year.

It’s that time of year where everybody is putting together lists of this that and the other for the old year and the new year. I ran across a good list on the Calculatedrisk blog. It’s a list of the top 10 economic questions for 2012. it’s a good list because it just asks questions and doesn’t give answers.

1) House Prices: How much further will house prices fall on the national repeat sales indexes (Case-Shiller, CoreLogic)? 

2) Residential Investment: Residential investment (RI) made a modest positive contribution to GDP growth in 2011, the first positive contribution since 2005. RI is mostly investment in new single family structures, multifamily structures, home improvement and commissions on existing home sales. Historically RI has been the best leading indicator for the economy, but the growth in RI will probably be modest again in 2012. How much will RI increase in 2012? 

3) Distressed house sales: Foreclosure activity is still very high, although activity slowed in 2011 because of "foreclosure gate" issues. The number of REOs (Real Estate Owned by lenders) also declined in 2011. Will foreclosure activity pick up in 2012? 

4) Economic growth: It appeared GDP growth would increase a little in 2011, but then the economy was hit by a series of shocks including extreme weather (significant snow storms, flooding, hurricane Irene), the oil price increase related to the "Arab Spring", the tsunami in Japan, and the debt ceiling debate in D.C. during late July and early August. Even with all these shocks, 2011 real GDP growth was still positive, but below trend.

Heading into 2012 there are significant downside risks from the European financial crisis and from US fiscal tightening. Will the U.S. economy grow in 2012? Or will there be another recession?

5) Employment: The U.S. economy added about 132 thousands payroll jobs per month in 2011 through November (156 thousand private sector). Although this was an improvement from 2010, this was still weak payroll growth for a recovery. How many payroll jobs will be added in 2012?

6) Unemployment Rate: The unemployment rate is still elevated at 8.6% in November. What will the unemployment rate be in December 2012?

7) State and Local Governments: It is starting to look like there will be less drag in 2012 than in 2011. How much of a drag will state and local budget problems have on 
economic growth and employment? 

8) Europe and the Euro: What will happen in Europe in 2012? How much of a drag will the problems in Europe have on U.S. growth?

9) Inflation: Will the inflation rate rise or fall in 2012?

10) Monetary Policy: Will the Fed introduce QE3? Will the Fed change their communication strategy and include the likely future path of the Fed Funds rate?

For some reason I’ve been getting a few emails concerning gold prices; probably because gold prices have been taking a hit; so maybe we could consider this as Question #11) let me clarify a few points. About two weeks ago, I said, I would expect a downturn in gold, and for short-term trades you might want to get out of long positions, however for longer-term positions, which would be physical possession, I thought the pullback represented a buying opportunity. One thing to consider is the Quantitative Easing that is just now taking place in Europe, this is a strategy straight out of the Federal Reserve Playbook from 2008. What happened back then, well the dollar strengthened. Now, with all the repair efforts underway, I would expect the Euro to start to strengthen and the dollar to pullback – it is not advantageous for the spread between the dollar and the euro to grow too much. Right now the dollar index is at a key level of resistance in the 80-81 range – if there is a breakout above 81.5, then the dollar could go as high as 89 and I would anticipate a further pullback in gold. That hasn’t happened yet, and if it doesn’t happen, then I would expect a pullback in the dollar and a bounce for gold. A key level of support on gold is the 1543 level from late September. Go back and look at your dollar charts and gold charts for 2008 and compare to today. Longer term, I think the Fed policy of negative interest and printing dollars will bear on gold and we should see prices topping $2,000 or possibly higher in 2012, but we could see a sharp decline – I think we’re at an important tipping point right about now. Somebody asked me about the disadvantages of physical gold – the big disadvantage is that you have to hold it securely, and that you can’t just trade it by clicking the mouse on your computer. The advantages are that someone can’t just click a mouse and empty your account, also you can’t just trade it by clicking a mouse on your computer. I’m thinking that over the next couple of years, this advantage will grow in importance.

And that brings us to Question #12) for 2012 – Where will we be a year from now? I’m not necessarily talking about the stock market – rather – where will you be, where will I be? Will we learn from our mistakes? Will we do the things necessary to give us the greatest chance for health, prosperity, and happiness?

“ The percentage of Americans who own their home dropped from a peak of 69.2 percent in late 2004 to a 13-year low of 65.9 percent in the second quarter. It edged up to 66.3 percent in the third quarter of this year. „

( Source: MSNBC )
“ I have lived what now, at 75, is starting to feel like a long life. If anyone asks me what has been the great American story of my lifetime, I have a ready answer. It is the corruption, money-based, that has settled like some all-enveloping excremental mist on the landscape of our hopes, that has permeated every nook of any institution or being that has real influence on the way we live now. Sixty years ago, if you had asked me, on the basis of all that I had been taught, whether I thought this condition of general rot was possible in this country, I would have told you that you were nuts. And I would have been very wrong. What has happened in this country has made a lie of my boyhood. „

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