Thoughts on Dollar, S&P, Housing and Emerging Market

Dollar - Since our March 24's post, dollar has only strengthened further post FOMC and CPI. Euro is now trading 4.5% off its March high, now at 1.2876. Usd/jpy is now trading through its 200day moving average resistance of 106.79, now at 107.10. There seems to be across the board deleveraging of USD against Asian currency as well. THB sold off 2.4%, SGD off 1.8% since high in March. However, Gold seems to be holding well at 423.90.

Are we repeating the same USD rally earlier this year and only to see another sell off coming? Is this deleveraging of USD funded trades over for this month? Can we say NFP? Another weak number can no doubt put all this into tailspin again!

Dollar Index March 28 2005


S&P 500 - looks like short term oversold for now. However given 10y note at 4.64%, oil > $50, the rebound of dollar may not be enough to generate flows into this stock market. If our call on shorting this dollar on this rally and high rates + commodity is correct then there is little to generate raging bull in this S&P.

Housing stocks - Can you believe that analysts raised TOL to BUY rating??? They are arguing that the Fed hike is non-effective on dampening demand since real rates are still low, low historical PE multiple, lack of supply.... are they forgetting that these ARM will kill mortgage buyers? Marginal buyers will get squeezed out? I would like to point out that RMS Index looks to retest the support at 700.

Emerging market - Ishares like EEM (Emerging Market) and ILF (Latin America) are down 9% and 11% from their peaks this year... no mercy. According to Emergingportfolio.com, EM funds lost $350m in the week ended March 23. So far there is $2.5bn inflow (versus $2.2bn for the entire 2004). JPM Emerging Bond Index Plus (EMBI+) is now at 374bp over treasury vs the low of 316bp back on March 8, 2005. Note that we didn't have to look far to see wider emerging market credit spread. Last year EMBI+ saw high of 523 and back during LTCM crisis (1998) it was over 1200. So if we get panic deleveraging, EMBI+ has a long way to go and probably their stock markets too.

China anyone?

Nouriel Roubini's March 23 blog gives a good start/recap to the China story.

Interesting - the precise recipe which bought China to its economic growht is causing severe imbalance. My view is that while if China does not do anything, this train will eventually run out of track to move on and crash. However, any change of exchange rate or capital flow mechanism may risk derailing this train rather than just slowing it down. The bad loans problem can only be multiplied by mortgage defaults from housing bubble. While the gravy train is running, money will keep pouring in. If one opens the capital gate (allow free flow of money to determine FX) , FDI can drain just as fast as it came in.

I understand and agree with Nouriel's view of surprised revaluation this year. That is if the global economy does not take a U-turn for the worse. Since China's growth is so dependent on FDI and external growth. A global economy slowdown might buy China more time to preapre the eventual revaluation by adjusting their capital controls.

Have we seen it before

FOMC!!!! How nice that Alan spoke about "Inflation". Ok it was not long along which we toyed with the word "Deflation". All eyes on this CPI tomorrow. If it does not confirm Alan's comment, there should be some serious recovery before Easter holiday. The question should be is Carry trades over or not?

Let's mark these levels:

10y note 4.63%
10-2 yld 82bp
10y swap spread 46bp
EMBI+ 355bp
AUD/JPY 82.19 EUR/USD 1.3078
USD/JPY 105.34 AUD/USD 0.7801
USD/BRL 2.6963
Gold 427
CRB 313
SP500 1172
RMS Index 708
TOL 76.85
C 44.44