Carry Trade Over?
Research for Online Investors

by John Dalt

11/02/09

Nouriel Roubini had an article in the Financial Times yesterday, which may have gotten investors attention.  “Mother of all carry trades faces an inevitable bust”, gives us insight to economic forces at work in the market.  From the beginning of the financial crisis, the U.S. government’s concerted effort has been to throw more money at the problem.  The bureaucrats answer is to pump liquidity into the banks, and lowering interest rates to zero.

With all the extra dollars added to the float by quantitative easing (printing money) and low interest rates, Roubini argues that traders have been borrowing dollars to buy risky global assets that have risen in price due to the excess liquidity and a massive carry trade.  Roubini calculates the true interest rate for holding dollars at a negative 20%!

Like any great ponzi scheme, all ‘carry trades’ must come to an end.  Eventually interest rates rise, the bubble in asset prices will pop, and traders all try to exit at the same time.  The unhappy result is a swing the other way.  When will it happen?  We don’t know, we watch for the inevitable inflation and resulting push to raise interest rates.

CIT filed for bankruptcy over the weekend. Do you feel poorer? CIT received $2.3 billion in TARP funds, courtesy of Red China buying our Treasuries.  CIT expects to exit bankruptcy by the end of the year.  The FDIC closed nine banks at a cost of $2.5 billion. This is the most banks closed in one weekend since the economic crisis began.

The Institute of Supply Management (ISM) released great numbers one-half hour after the market opened this morning.  Their read on the health of the manufacturing sector was the strongest in three years.

Ford Motor Company reported a PROFIT for the third quarter!  They were expected to lose twelve cents a share, and instead reported a profit of twenty-six cents a share, almost a billion dollars.  The New York Times has a nice recap with all the numbers, “Stocks Back after Early Surge.”

The market reacted like gamblers to oxygen being pumped into a casino at three a.m.  Pits were filled with shouts and orders to fill.  Like the aforementioned oxygen, the enthusiasm seemed to evaporate by early afternoon.  At the time, it seemed like a turn in the attitude of the market.

After taking a dip into negative territory, the market rebounded and closed up for the day.  This could be a classic rally that breaks the downtrend we have been in for the last week.  The market was down early, then rallied on volume to close up for the day.

Last Wednesday we told our SwingTrader subscribers that we expected the market to pullback to 1030 to find support.  We have been there and rallied higher to close.  The market had good volume.

This may have marked the bottom of this pullback and the market is ready to rally this week.  Keep in mind, this is dangerous territory.  I believe the pullback was tentativeness in the face of last week’s falling prices.  Once buyers started buying, others came into the market to finish out the day.

If the market falls tomorrow, what is the event that will trigger buyers to desire stocks rather than cold cash?  The Fed meets tomorrow and Wednesday.  All participants will anticipate their statement Wednesday afternoon.

There is not much the Fed can do.  Interest rates are at 0.00 to 0.25 percent, buying of treasuries has ended and mortgage backed securities (MBS) purchases are supposed to end by December.  Interest rates should be looking higher and the dollar should move higher if quantitative easing is ending.

We had problems on the website today with our ‘News Feeds’ page.  ABC News was sending some information that evidently confused our website software.  We apologize for any inconvenience this may have caused you.

“If I did not receive your newsletter today, I should do something? If I did not receive it, I would not be getting the advice contained therein.” —subscriber A.B.

Friday’s letter was intended to raise awareness of potential problem, if you don’t receive MarketToday in the future.  I also mentioned eight different trades our premium subscribers are in, out of, or watching.  I am sorry if I bored anyone with Friday’s letter, but A.B. hits the nail, once your email provider blocks MarketToday, I cannot email you to let you know of a problem.—John Dalt

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L.K. you are very welcome.  The more we learn, the better investors we become.---John Dalt

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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