Where’s the Fire Sale?

Posted October 24, 2008

Even though credit markets are showing signs of loosening, the bad economic news around the world is dragging currencies down. The US dollar continued to strengthen against all major currencies except the yen as traders keep looking for safe investments.


The credit markets are showing signs of loosening and the US Dow Jones Industrial Average and the FTSE went up.  The DJIA closed Thursday, 23/October/2008, at 8,691.25 which was a 2.02% increase from the day before.  The FTSE closed at 4,087.83 which represents an increase of 1.16% for Wednesday’s close.  So that’s good news…right?

Actually, the answer depends on where you stand in the rush to salvage something out of the economic decimation that is occurring around the world.  It is like there has been a fire, and now people are sorting through the ashes to see if anything survived intact.  The stock markets that are closing higher are only doing so as investors buy stocks of larger companies they feel represent safe investment havens.  It is odd to think that a stock market closing up can actually represent continued investor fears about the economy, but that is exactly what is happening.

The global economic picture continues to deteriorate which has some of the financial experts in government quite baffled.  When you turn on the television and listen closely to the financial analysts, they are saying the governments did not see this coming and now they don’t really know how to make it go away.  If the experts are confused, how is the average consumer to react?

The apparent uncertainty in the government statements is not doing anything to alleviate the situation. 

The current major concern is over the strength of the emerging currency markets.  Hungary, Iceland, Serbia, Belarus, Pakistan and the Ukraine have requested financial backing from the International Monetary Fund (IMF).  Currently the IMF is not agreeing to anything, but this story is long from over.  The emerging market problems led to a slump in Asian stocks as the crisis spreads far beyond the banking industry.

The dollar basically rose against all other major currencies except the yen because of the activity in the emerging markets.  Investors are continuing to sell off riskier assets and are bringing their funds home to safer territory.  The key words today are “risk aversion” and “funds repatriation”.  The euro closed at $1.2841 against the US dollar.  The British pound weakened to $1.6116; the Canadian dollar weakened to $1.7940; the Australian dollar closed down at $.6544; the New Zealand dollar weakened to $.5806. 

The Japanese yen, on the other hand, strengthened to $.0103 which will severely impact exports.  The result of the global crisis combined with expectations of lower exports is dragging the NEKKEI down.  It closed below 8,000 at 7,950.28 which was 510.7 basis points lower than the day before. 

To give you an idea of the size of the economic problems, consider this number: $10 trillion.  That number represents how much market value has disappeared in the roaring fire called the economic meltdown.  You think one blaze has been extinguished only for a spark to take off somewhere else.  The governments basically thought easing the credit crunch and restoring some confidence in the banking system would at least slow down the market swings and eliminate fears of a long and deep recession.

The prediction now is the recession will last at least 3 quarters into 2009.  The US unemployment rate is rising faster than expected and corporations are continuing the layoff workers.  In fact, the giant investment firm Goldman Sachs announced it is cutting 10% of its workforce.

So the end is not in sight.  The economic crisis is a giant blaze that is consuming economies around the world.  The only spot of good news is there are some real stock bargains available now.  But then if you are like a lot of investors, the blaze has already burned up a lot of the money you might have had to invest.