Saturday, May 27, 2006

Back to reality and back to sell off mode next week!

Last week the markets had ignored important key inflation facts: high April CPI (0.3) (makes annual 2.3%) and high core PCE deflator of 2.1% - Fed’s favorite indicator of inflation and both were above Fed’s comfort zone of 1.0 – 2.0. The Fed will have to continue tightening and probably will re-ignite the fear of the Fed compromising the growth as the result.

Global expansion is slowing and the liquidity is shrinking: The signs of the return of economic and financial health to Japan are bad news to the speculators who have used cheap Japanese cash to make big profits by buying everything from Icelandic bonds to Indian stocks and commodities. The momentum in many of the world's riskier markets was a result of ever increasing floods of cash -- borrowed at 1% in Japan and multiplied by leverage as speculators turned $1 of capital into $3 or more of borrowed money.

We can afford $70 a barrel; this is what it is now. (How long will it last?) "The pain at the pump translated into a big drop in consumer confidence in May, according to the University of Michigan survey, which turned in a reading of 79.1, the lowest level in seven months." Disposable incomes, the amount Americans have to spend after paying taxes, rose by 0.4 percent in April, but actually fell by 0.1 percent after inflation was taken into account. How much longer can the consumers keep borrowing? Can the economy sustain $80, $90, $100?

Back to reality and back to sell off mode next week!


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