GOIH Market Overview--10-15-07

Our models indicate the market to open lower today based on oil closing above $85 per barrel and the Dollar weakening against the Euro to 142.21 and the Yen 117.84 showing some strength.

We have received several questions regarding the dollar weakening and the effect it will have on the ordinary consumer. We will attempt to answer that question as follows.

There is a delicate balance between the value of a currency and the purchasing power of that currency. The dollar is in an especially good position as the reserve currency of the world, i.e., most major assets are priced in dollars. What this means is the Asian and European countries that import oil and other major commodities must sell their currency and purchase dollars to pay for the imports. Thus this strengthens the dollars relative to the other currencies. However, because the U.S. imports so much more than it exports, the world is flush with dollars, thereby negating the reserve currency benefit the dollar would experience without the trade deficit.

Actually the trade deficit has caused so many dollars to be available for purchase that there is a silent movement to take the dollar off as the reserve currency status and make the euro the reserve currency.

What effect would this have on the economy?

If the euro replaces the dollar as the reserve currency, this means that to pay for its imports the U.S. importers would have to sell dollars and buy euros further weakening the dollar relative to other currencies causing a further spiral in relative value.

Because the largest import into the U.S. is oil, just pricing oil in euros would have a major shock to the consumer as the dollar would fall to 2.0000 to the Euro creating inflation on the imported goods going past 20%. The Fed's hands would be tied and would have to raise interest rates to futilely attempt to tame inflation which it would lose the fight as the costs of the import would continue to rise as the dollar continued to fall.

What would cause the Euro to overtake the Dollar as the reserve currency for the purchase of major resources?

Our economic models predict if the U.S. trade deficit continues to increase flooding the world with dollars that purchase less, the parity point being when the Euro spread relative to the dollar reaches a rate of change greater than the government’s inflation number the run on the dollar will begin and the end will be in sight.

Once the dollar is not longer the reserve currency, the ordinary consumer will be working for peanuts as their wages will not be aboe to afford anything of value.

GOIH Capital Markets: Commodities Bubble Brewing.

After the recent bubble in the housing market, seems like Wall St. is about to create another bubble. This time the bubble is in the commodities markets caused by the falling Dollar relative to the other global currencies.

How far will this bubble run until the bottom is pulled out and there is another crash?


We are designing trading strategies to take advantage of the beginning of this economic opportunity before the herd senses the end.

GOIH Quantative Finance Group---Gold 20 year high.

Gold is at a 20 year as a hedge against inflation after the Fed cut interest rates. Inflation is peaking in the imports to the US.

The Dollar is at a new low against the Euro (142.21).

Expect to see gold continue to increase especially if the Fed lowers interest rates again.

The Dollar will continue to decrease against the Euro.

GOIH Quantitative Finance Group: Is the Sun Setting on the Dollar as the Reserve Currency?

Will the U.S. Dollar continue to be the reserve currency of the world? That is will most of the major commodities be priced in US Dollars forcing a purchasers to sell their currency and purchase Dollars to pay for imports? The Dollar is at an all time low against most of the major currencies especially the Euro currently trading at € 141.11 to the Dollar. Because of the subprime crisis and the credit market freeze up the Fed had to step in and prematurely cut its primary policy tool, the Fed Funds rate by 50 bps. This cut caused downward pressure on the dollar due to interest rate differentials between the Dollar and the other major economies of the world.

Dollar denominated assets immediately declined in value with the interest rate cut, and commodity prices increased thereby causing a forward looking increase in inflation due to the increase in import price primarily in energy and basic metal raw materials.

If the Dollar is no longer the reserve currency of the world, and the Euro ascends to the top, then the US is in real economic trouble. What this will mean is that the US will now have to sell the Dollar and buy the Euro to pay for imports, especially oil. Causing further decrease in the value of the Dollar and increase in the price of imports, causing increase in inflation, causing corporate profits to decrease, causing the equity markets to decrease, causing a recession, causing the Fed to continue to lower interest rated, causing the spiral cycle to run its course.

What is the Defining Act to Cause the World to Refuse the Dollar in International Commerce?

Lack of confidence in the economic fundamentals of the US will be the deciding factor of whether the Dollar loses its influence in the world. The economic fundamentals of the financial sectors relative to the general economy primarily decide the policy initiatives taken by the economic establishment to drive the economy. The last Fed rate cut will have no effect on the average consumer who cannot meet their mortgage payment or to the builder who over built with the expectation that the subprime mortgage would continue.

The largest sector of the economy, home building cannot be exported into a low cost labor market, nor can the supply of homes be exported and profit from the falling Dollar. The domestic demand is insufficient to consume the excess supply existing in the market causing a further price drop to clear the market of the excess inventory, estimated at a 48 month supply.

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.

GOIH Economic Analysis: Global Relative Economic Arbitrage: Yen Carry Trade.

The Japanese carry trade is alive and doing well. We saw the Yen (¥) weaken to 115.14/$ today in active trading. The Dollar was up 0.71 today. The Dow closed up 132.36 to 13,236.13 about 1% in step with the Dollar strengthening against the Yen.

We entered a position of $200 million in USD against the Yen today at 114.63/$. We will keep the trade on until the Yen strengthens against the Dollar, which we do not see anytime soon with the talk of a Fed Funds rate cut.

The relative economic arbitrage is positive in the Yen carry trade. We see other trades where a positive relative arbitrage can be made.

What will be our strategy with the additional capital? We will post our strategies for the investment of the additional capital.