Are U.S. paper equity markets facing the beginning of end? Tuesday's break below 118 confirms the view that Japanese yen has turned, meaning last chapter for carry trade has started. Collapse of Chinese markets caused risk management systems sirens to wail. Reducing risk became Tuesday's goal, and selling hit all markets. With yen moving higher and equities moving lower, our carry trade model has turned negative. We wrote in last week's Trading Thoughts that a 300 point slide was likely. We did not expect much of it to happen on one day. Events in the paper equity markets are not a one day correction, but rather the beginning of long slide in U;.S. paper asset markets. Rallies will of course develop, perhaps even on Wednesday, but sell into all rallies.
U.S. dollar is now facing the Year of Demise. Continued unwinding of carry trade will force the dollar to break all support levels. $Gold is falling as funds are forced to reduce positions in all markets. Over bought situation that had developed is now rapidly being corrected. All indicators are moving lower, and an over sold condition will develop by end of week. Investors should use weakness in $Gold in the remainder of this week to add to holdings or create positions.
Investors have become deeply concerned about near certainty that Iran's nuclear weapons making capability will be removed. No longer does "if" seem the appropriate question. U.S. presidential election is about 19 months away. U.S. and Israel will need to deal with Iran prior to that time, or the day after? One side of the political strategy coin calls for the day after scenario. Other side of coin says doing it well before election removes issue as a voter concern. How will financial markets react to bombing of Iranian nuclear facilities? What will be repercussions for oil prices? In a real world with a theocratic dictatorship possessing nuclear weapons and a mountain of speculative hedge fund portfolios being unwound, Gold is a logical and necessary diversifier for portfolios. Investors should use price corrections, as developing this week, to purchase $Gold, perhaps for last time under US$700.
After TXU, could Italy be next transaction for private equity firms? Plenty of potential for infrastructure sales. Coliseum, anyone? CPOs, collateralized pasta obligations, are possible funding vehicles. Wine and cheese tranches might attract attention. Ultimately IPO, initial pasta offering, would be expected to provide a healthy return to speculators providing capital to private equity firms. Unfortunately Italy is not for sale, it is already encumbered by too much debt. Does taking TXU private add economic value? None readily apparent. What will be economic return on that $45 billion? Little wonder $Gold had been moving toward $700 with such paper asset transactions.
GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive a subscription to these publications go to http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html.