GLOBAL ECONOMICS AND POLITICS
Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.
Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.
Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.
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What is the outlook for NYMEX natural gas prices (nearest futures continuation)? Even though current natural gas oversupply is substantial and will remain so for at least a few more months, the long run bear trend probably ended with the 1/23/12 low around 223. Admittedly, warmer than normal weather for the balance of this winter may inspire an attack on or even a slight breach of the January bottom. However, production cutbacks and higher demand gradually will erode much of the mountainous oversupply and help to ignite a rally.
Suppose announced production cuts motivated by prices crashing under 275 or so do not substantially materialize. Then first quarter 2012 lows may be challenged in late August/calendar September 2012. Regulatory issues, fuel switching, economic growth, anticipated drilling rates, weather issues, oil price levels, long run gas export potential, and alternative “investment” in commodities complicate predictions and boost the likelihood of violent price swings.
Prices should oscillate within a broad range for quite some time. With support at 200/225, where is resistance? Look at 320/335, then 360/370 and 405/415. Above that loom 460 and 500/520. A band from around 200/225 to 500/520 admittedly seems very wide. Yet although 2012 is not 2009/10, recall that prices blasted much higher in a bull campaign lasting only four months, from 9/4/09’s 241 to 1/7/10’s 611. A foray up to the middle section of the broad range, 360 to 415, over the next several months is likely.
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Natural Gas- There Has Been and Will Be Blood (1-31-12)
Relationships of assorted debt instruments to the widely-watched United States Treasury 10 year note offer insight on the American economy’s health. They also offer some guidance regarding stock marketplace signposts such as the S+P 500. Several years of easy money policies and massive deficit spending by the United States and its allies indeed have helped to inflame and propel an American recovery and stock marketplace rally. Because the S+P 500 at around 1300 is nearly double its March 2009 abyss, has the economic crisis that emerged in 2007 almost disappeared, and is a new golden age of prosperity eagerly beckoning? Probably not. These interest rate comparisons confirm that only a fair economic recovery has emerged during the ongoing worldwide economic crisis. These yield relationships also suggest that the S+P 500 faces very strong resistance at its 2011 highs (around 1345/1371), as well as around its May 2008 final top at 1440.
The Federal Reserve’s abiding battle and repeated sweet promises to keep government interest rates resting comfortably near the floor aim to inspire not merely consumer spending and business investment, but also incremental buying in stocks. If, for example, a government two year note pays next-to-nothing in interest, where should we put our money? Stock dividend yields may appear alluring (especially if viewers decide equity prices will not slump much if at all). The fervent search for acceptable returns by many marketplace players sometimes sweeps into other arenas such as corporate notes and bonds, real estate, and alternative “investments” such as commodities. Marketplace voyeurs should ask whether the current quests for “yield” bears at least a passing resemblance to the later scenes of 2006-07 during the gorgeous Goldilocks Era.
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Spreading It Around- Some US 10 Year Treasury Relationships (1-24-12)
Though global marketplaces and their problems intertwine, let’s concentrate on recent European debt developments and related statements alongside a review of several European interest rate spread relationships. This inquiry underlines that the heated efforts by European (and American and other) economic (political) generals have yielded only partial progress in vanquishing the challenges of the worldwide international crisis. So the worldwide international economic crisis probably will march onward for quite some time. And there is more than a little chance that it will worsen.
A review of yield spreads between the 10 year government debt of Germany and the key Eurozone nations of Spain and Italy over the past year or so underlines the gradually growing sovereign debt and banking stresses on Europe (and therefore on other territories and marketplaces). In addition, these widening European spread trends, especially when reviewed in the context of stock marketplace, currency, and commodity ones, point out the limited (merely partial) successes of efforts to solve the European sovereign debt and banking crisis in particular (and the worldwide economic disaster in general). These spreads warn of dangers to European (and global) economic growth.
Compare the timing of the German 10 year’s high on 4/11/11 at 3.51pc with the April 2011 lows in the German 10 year’s spread against Spanish, Italian, and Hungarian government debt. Keep in mind the pattern of higher lows in the Spanish/German and Italian/German spreads since mid-April 2011. For this mid-April 2011 timing perspective and its aftermath, remember the S+P 500’s high around then (on 5/12/11 at 1371) and that in the broad Goldman Sachs Commodity Index (4/11/11 and 5/2/11 at 762).
Euro FX weakness also reflects the Eurozone (European) crisis. Note the rough parallel since spring 2011 between the declining Euro currency (peak versus the US dollar 5/4/11 at 1.4940) and the gradual widening of the Spanish/German and Italian/German 10 year government spreads.
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European Debt Dangers- Selling Solutions, Buying Time…Yielding Results (1-17-12)
As the fifth largest economy in the world and as a major center of international finance, the United Kingdom is not alone. It remains entwined with the long-running worldwide economic crisis. Although challenges to the British economy intertwine with those confronting the Eurozone, they do not duplicate these. England’s financial problems are not as severe as Greece’s, but they are not minor; England’s present situation and near term prospects do not look as strong as Germany’s. The British Pound will continue to depreciate over the next few months. This decline parallels that of the Euro FX. Bearish trends in the Pound, like those in the Euro currency, portend or confirm weakness in worldwide equities and commodities.
The Euro area currently is almost 16.4pc of the broad real trade-weighted dollar (“TWD”). It was 18.6pc in 2001. The Pound is a comparatively modest part of the TWD. The United Kingdom in 2012 (and 2011) is about 3.5 percent of the broad real TWD (compare 2001’s 5.6pc). Currency trading generals nevertheless closely monitor the cross rate between the US Dollar and the British Pound.
The Pound arguably has been in a major bear pattern for some time. The crucial plateau during the worldwide financial crisis period was attained 11/9/07 around 2.116. Although marketplace history is not marketplace destiny, keep in mind the popular chant, “weak US dollar equals strong US stocks, strong US dollar equals weak US stocks”. This British Pound top versus the dollar occurred about a month after the S+P 500’s major high on 10/11/07 at 1576. Important resistance for Sterling is about 1.665 (see the 4/28/11 high, adjacent in time to the S+P 500 pinnacle at 1371 on 5/2/11 and the Euro FX’s 1.494 5/4/11 summit versus the dollar). Also note around 1.700 (see the 8/5/09 level; compare the later timing of the Euro FX high at 11/25/09 at 1.514). The 10/28/11 top was about 1.615.
The Pound versus dollar cross rate settled around 1.543 at the end of last week, close to the 1.538 low of 10/6/11. The October 2011 level is beneath 1.563 (a fifty percent rally from the all-time low close on 2/26/85). The 1.500 level (about a ten percent drop from the 4/28/11 top) probably will be tested and broken. Though it is distant from today’s price, the key bottom around 1.430 (see the 5/20/10 low) eventually will be neared and perhaps challenged. Noteworthy additional Pound support is around 1.350 to 1.380. The 1/23/09 intraday low was about 1.350, the 3/9/09 close about 1.376 (Euro FX final cross rate low versus the greenback was 3/4/09 at 1.246). Recall the major low in the S+P 500 on 3/6/09 at 667. A 20pc fall from 1.665 is 1.332.
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United Kingdom- Getting Pounded (1-10-12)
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