GOIH Capital Markets: Market Overview--08-29-07

We see the market opening higher after the sell off on Tues. Our indicators and algorithms see strength in the Dow and the NASDAQ. We are monitoring the QQQQ, DIA and SPY.


The Yen Trading Dynamics:

We reported here on Monday that we thought the Japanese government would intervene to weaken the Yen against the dollar and that is just what has happened. As we prepare this report the Yen has weaken to 114.89/$ from 113.63/$ on Tues. We monitor the trading in the global currencies and it is obvious to our research staff that the Yen is financing the US stock market: the Yen weakens the market strengthens, the Yen stronger, the market lower.


Sectorized Recession:

Our financial economics research division sees a recession in the housing and consumer retail sectors. The overall economy has not entered into a general recession, but the warning signs are present. Employment is reported to be strong; however, consumer purchasing power has not increased due to the structure of the employment base.


New Job Creation:

Most of the new job creation has been in low wage sectors with a very small percentage of the wealth allocated to extremely high income producers in the financial services industry. The multiplier effect of the housing employment structure trickles down across all consumer sectors. A slow down in consumer consumption leads to a slow down in business capital expenditures which will lead to a general recession.

Federal Reserve Actions:

Volatility returned to the market on Tuesday after the release of the FOMC minutes indicating fear has returned and the future is uncertain for the financial markets. Our analysis and research indicates that even with a cut in the Fed Funds rate, the result will be minimal on the economy due to the structure of the global linked production infrastructure and the movement of capital.

Japan and China have the most Dollar reserves in the global capital markets due to the trade deficits run by the US via the import of Japanese and Chinese goods. Japan is a high-end product exporter where China is a low-end product exporter. The Dollars are recycled back by investment in the equity market and the treasury debt securities purchase which has a direct effect on interest rates in the markets.

If either Japan or China decreased their purchase of Treasury debt, the supply would exceed demand and interest rates would have to be raised to sell the amount necessary to finance the budget deficit. The rise in interest rates would decrease demand across the economy independent of a Fed action.

A cut in the Fed Funds rate will have little if any effect on secondary market liquidity. The secondary market is necessary for bank and mortgage lenders to move the new originated loan off their balance sheet freeing up the capital to be recycled to make new loans. The cut in interest rates will not affect the supply and demand for the instruments the loans and mortgages converted into causing a continued jam in the distribution system.

It is being reported that many of the subprime mortgages were bought by foreign banks and hedge funds in the last cycle who have now realized losses on their portfolios. It is unlikely the same buyers will get burned again; causing a decrease in demand for the debt instruments causing large banks to hold the paper on their balance sheets further clogging the distribution pipeline.


GOIH Strategies:

Our strategy is for short term trading profits in the current environment. Volatility is increasing causing a dislocation of capital into sectors as a defensive measure.

We feel the consumer discretionary sectors will remain weak as well as weakness in the housing sectors. We see the Yen continuing to weaken against the Dollar which will help Japanese exporters. An ETF with exposure to Japanese exporters for a focused approach to the Asian market for speculators in foreign currency plays.

We see weakness in the financial services sectors until the consumer returns to the consumption levels before the housing bust. Less consumer consumption indicates less business investment implying less capital raising and less underwriting for the large banks and brokers. Entry points for short term trading opportunities.