Carry Trade Has Created Asset Bubbles

Richard Suttmeier is the Chief Market Strategist at www.ValuEngine.com. ValuEngine is a fundamentally-based quant research firm in Princeton, NJ. ValuEngine covers over 5,000 stocks every day. A variety of newsletters and portfolios containing Suttmeier's detailed research, stock picks, and commentary can be found HERE. Suttmeier's Four in Four video can be watched on the web HERE.

November 18, 2009 – Carry trade has created asset bubbles The Dollar carry trade has created asset bubbles, but Fed Vice-Chair Donald Kohn disagrees. TARP money was given to Problem Banks. Builders remain Pessimistic. The Dow is testing key levels. Fed’s Vice-Chair Donald Kohn sees no asset bubbles – I say, take off the rose colored glasses and get a Seeing Eye dog. Look at the charts for gold, copper and equities, and for the dollar index. For the Dollar Index there is a potential Weekly Key Reversal. The dollar reached a new low for the move on Monday at 74.75. A close this week above last week’s high of 75.88 defines a weekly key reversal. A Weekly Key Reversal followed by two weeks of higher closes confirms a dollar bottom. Charts courtesy of Thomson / Reuters

Don’t listen to Donald Kohn as he wants to induce investors into riskier and longer-term assets in order to lower the cost and increase available capital to households and small businesses. He wants to encourage spending when consumers on Main Street want to reduce debt and increase savings. I agree with Donald Kohn when he says that the labor markets are continuing to weaken, and since that is the case the Recession that began at the end of 2007 has not yet ended. Kohn says that the Fed’s challenge in tackling asset bubble is the timing, and central banks need to spot those threats early. Well Mr. Kohn, the warning bells are ringing this week! TARP Money was given to Problem Banks Remember when the US Treasury was giving TARP money to any bank that asked for it. As this was happening I raised repeated concerns that they were allocating tax payer dollars to banks that would likely fail anyway. We now have two categories of Deadbeat Banks: The 33 banks that reneged on TARP Dividend Payments in May and / or August, and those that have actually failed. Pacific Coast National Bank (PCST) a failure from last Friday was a recipient of $4.1 million in TARP bucks. A week earlier, United Commercial Bank was publicly traded as UCBH Holdings Inc (UCBH) received $298.7 million in TARP money. They paid a $7.5 million dividend in May, but did not make the payment due in August. As TARP money was spread like manure I said that banks overexposed to C&D and CRE loans were not suitable investments for tax payers. I also warned that private banks were not suitable tax payer investments, as a US citizen could not invest in these banks if they wanted to. Builder Confidence Remains Pessimistic The National Association of Home Builders Housing Market Index did not budge in November with a subdued reading of 17. October’s reading was revised to 17 from 18. A neutral reading is 50, so our nation’s home builders remain pessimistic. Builders continue to face the same headwinds – obtaining credit for new home construction and achieving appropriate appraisals. Community banks are reluctant to lend faced with increasing bad C&D and CRE loans. Home appraisals are adversely affected by foreclosure sales and short sales. A third of home builders have indicated that they have lost sales because of home appraisals that were deemed too low. The Dow Industrial Average traded to 10,438 on Tuesday versus Ascending Wedge resistance at 10,458 on the weekly chart. The down trend that goes back to October 2007 is 10,675.

If this trend breaks the carry trade would have successfully ended the multi-year bear market replacing the environment with a random and wide trading range market. That range is 6550 to 11,500. Send me your comments and questions to [email protected]. For more information on our products and services visit www.ValuEngine.com That’s today’s Four in Four. Have a great day.

Check out Forex TV’s Markets Review, which is also available HERE. Richard Suttmeier Chief Market Strategist www.ValuEngine.com (800) 381-5576 As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I have daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters as well as my most up-to-date analysis of world markets. My newest products include a weekly ETF newsletter as well as the ValuTrader Model Portfolio newsletter. I hope that you will go to www.ValuEngine.com and review some of the sample issues of my research. “I Hold No Positions in the Stocks I Cover.”