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Nations, better known as the
G-7. As we'll see, the ability to interpret what is being said - as
well as what is not being said - can give traders insight into the
markets.
Many analysts believe that when we look back on the first quarter and
indeed the first half of 2008, it will be understood that the U.S. was
in a recession, but it won't be official until all of the GDP (Gross
Domestic Product) revisions have been made. This is because a
recession is most commonly defined as two consecutive quarters of
declining GDP. If the U.S. economy is in a recession, it is because of
a slump in housing prices and a tightening of credit markets. Some
members of the Fed's rate-setting Open Market Committee said at their
March 18 meeting that they saw the risk of a "prolonged and severe
downturn'' in the U.S. economy, which certainly doesn't bode well for
the immediate future of the greenback. The surprise here is not the
fact that the U.S. economy is in trouble, we can all see that. No, the
surprise is the fact that the Federal Open Market Committee FOMC would
use such clear and honest language, instead of their usual tactic of
verbal hedging and opaque statements. Thank you FOMC for a refreshing
and rare dose of reality. The FOMC isn't alone in making dire
predictions about the U.S. economy. On March 13, General Electric CEO
Jeff Immelt said the company's forecasted annual earnings of $2.42 per
share was "in the bag". Less than a month later, the stock plummeted
on a report that the U.S. economic bellwether missed earnings badly,
and the company lowered its full-year earnings forecast to between
$2.20 to $2.30 per share. GE's market value plunged by $47 billion on
April 11, as the stock lost 13% of its value in response to the news.
It was the worst one day performance for GE shares since the stock
market crash of October 1987. On an earlier conference call, analysts
demanded that Immelt explain why he told retail investors on a March
13 webcast that GE would meet its annual forecast of at least $2.42 a
share. His reply was chilling: "Two days after the webcast, the Bear
Stearns situation took place," Immelt said. "The last two weeks in
March were a different world in financial services."
That is an amazing statement, because if Immelt is to be believed, the
credit problems that markets faced prior to the Bear Stearns debacle
could be dwarfed by what we may face in its aftermath. If Immelt is
correct, it means that after 300 basis points in interest rate cuts
from the Fed and after large and numerous injections of liquidity by
the world's biggest central banks, and after the Fed's financing of
the Bear Stearns bailout, the situation has not improved, it has only
gotten worse. GE missed its forecast for its commercial finance unit,
and this was blamed as the cause for the overall earnings miss.
CEO's and other officials often use current events as an excuse for
poor performance, and it is usually a thin excuse. It's much easier to
blame outside forces than it is to truly take responsibility. The
question is this - was Immelt using Bear Stearns as a crutch to excuse
his own company's poor performance, or is there something really
frightening lurking just below the surface, ready to reveal itself in
the earnings reports of other financial services companies? Only time
will tell if Immelt is telling it like it really is.
On April 12, the Group of Seven Industrialized Nations, or G-7,
amended language in their statement to express concern about the
falling U.S. Dollar. "Since our last meeting, there have been at times
sharp fluctuations in major currencies, and we are concerned about
their possible implications for economic and financial stability," the
statement read in part. This is their way of expressing concern about
the U.S. currency without mentioning it by name.
The USD strengthened a bit in response to the comments, which will
likely serve to create a better entry point from which to short U.S.
Dollars. In fact, the G-7 comments drove the EUR/USD currency pair
straight down to its 20-day exponential moving average. This is a good
example of a fundamental event (the G-7 meeting) as the catalyst for a
technical event (the exchange rate reaching and then reversing on the
moving average). EUR/USD has found support on the 20 day EMA numerous
times in recent weeks.
The G-7 is powerless to stop the fall of the USD, and their comments do
not portend any action on their part. The phrase "empty words" comes
to mind. The G-7 is merely acknowledging what the rest of us can
already see, and the reaction of the dollar is likely to be temporary,
since there are no teeth behind the words. The European Central Bank
has maintained a 4.00% benchmark interest rate, and this has served to
strengthen the Euro vs. the U.S. Dollar, the British Pound, and other
major currencies. If and when the ECB and other major central banks
decide to take action, either by reducing interest rates or by
intervening in the open market to prop up the U.S. Dollar, only then
will these words carry any real weight, and provide more than
temporary relief both to the overheated Euro and the wobbly greenback.
Until then, these words simply create an opportunity to buy Euros at a
cheaper price, or to sell U.S. Dollars at a more expensive price.
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