Monday, December 29, 2008

The Euro, Oil, Retail bankruptcies, and GMAC

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Oil, energy companies, the precious metals and the mining stocks are doing well in European trading this morning (the U.S. markets are not open yet), in a hint of what should be expected next year. The inflation linked investments are doing well as retailers in Britain seem to be crumbling, along with the UK economy. In the U.S., there is a question of whether GMAC actually qualified to become a bank holding company. The Euro turns 10 on January 1, 2009 and its impressive performance against the U.S. dollar in the last couple of years is likely to continue.

The Euro traded around 1.42 against the U.S. dollar last night in Europe, well off its historical low of 0.82. While it didn't do well in its first couple of years and required global central bank intervention to prop it up, that story has reversed in the last couple of years. Global central bank intervention (which the New York Investing meetup documented starting in August 2008) has been needed to hold it down and the U.S. dollar up. The Euro has so far hit an all time high of 1.6038 last summer, but was trading in the mid 120's only recently. Driving it down has led to falling oil prices (oil is priced in U.S. dollars). In the long run, the currency of the inflation avoidant eurozone is likely to be a better bet than the currency of the 'print as many dollars as possible' U.S. Fed.

Nymex oil was as high as $40.27 in electronic trading overnight (and in an unusual price inversion that has been going on for awhile, lower than the Brent contract which hit $41.35) Tensions in the mid-East were cited as the reason for oil rising today. Reading the commentary, many analysts seem to assume that global tensions are a rare exception and are likely to disappear in the future. Any reasonable historical analysis indicates that this is unlikely. Global financial distress tends to translate into higher levels of conflict because governments shift the blame for their own incompetence to 'outside influences' being responsible. Not only does oil pricing benefit in the long run from this, but so does safe haven gold. Gold was up about $15 in Europe until the time the U.S. markets opened and then it was up only around $8. The drop when U.S. trading begins is a common occurrence that has lasted a long time. It has even been documented in academic studies that concluded it could only be the result of market manipulation.

As the inflation-linked trade was doing well in Europe, the retail trade was sliding further toward oblivion in the UK. Children's clothing chain, Adams, filed for a certain type of bankruptcy protection today. This followed the failure of the 99-year old general retailer Woolworth's, tea and coffee seller Whittard and music chain Zawi - all around the height of the holiday buying season. There are predictions that as many as 15 'major' UK retailers will go under early next year. Don't expect retail will be in much better condition in the U.S., it won't. You can expect a wave of failures on this side of the pond as well.

It is not likely that the Federal Reserve will bail out U.S. retailers (but don't rule out this possibility for any big chains with large credit operations) as it is trying to do with GMAC, the credit arm for General Motors. GMAC is trying to convert to a bank holding company as brokers Morgan Stanley and Goldman Sachs did in the fall. It is not clear it successfully did so however. Conversion to a bank holding company is the latest government scam to allow the Federal Reserve to pump money into a failed company. If the company is not a bank, but has anything to do with the credit markets, then turn it into a bank and give it a government bailout. Currently nothing succeeds like failure in the U.S. -the bigger the failure, the bigger the reward. And this is supposed to fix our economy? Right.

NEXT: A Nasty ETF Surprise

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.