Friday, August 17, 2007 0 comments ++[ CLICK TO COMMENT ]++

Random Thoughts for the Day: Friday Aug 17 2007

Well, I guess the wild week ends on a wild note with the Federal Reserve lowering the discount rate. Note that this a weaker tool in the Federal Reserve's arsenal, with a cut in the Federal Funds Rate being the last action that has the biggest impact on the economy and financial assets. Some analysts think the FedRes is not going to cut the Fed Funds Rate. I suspect they are trying to avoid that since that is inflationary.

This move was a surprise to me but it wasn't that out of the norm. The markets recouped some of their losses from yesterday but it wasn't really a strong rally. Most of the markets opened higher and then declined slowly through the day. The key things I observed today are:

  • The Yen carry-trade unwinding still seems to be ongoing. The Yen index weakened a bit today but it gave back hardly any of its gains from yesterday. But the US$ index declined today, and gold was up a little bit (not quite as much as I would have thought given the decline in the US$ and the FedRes lowering the discount rate). I'm sure some hedge funds, not to mention the so-called Japanese Housewives, would have taken massive losses on the Yen carry-trade this week. People will certainly be thinking hard about the carry-trade if things keep going as they have recently. Supposedly, this was the best week for the Yen since 1998.
  • The market rally was weak. Yes, it did go up but it started weakening as the day progressed. Unless some positive economic or corporate news come out, I think the markets will resume their downtrend.
  • Analysts still seem unsure if the Federal Funds Rate will be cut. The big debate seems to be about whether this is to save asset price declines or whether it is to avoid a credit squeeze. If it is the former, the FedRes will likely cut the Fed Funds Rate; but if it's the latter then the verdict is still out.

Needless to say, the next few weeks will be pivotal and we'll know how things play out. But, as investors, we need to anticipate what will happen. That's how we try to make money. I know pure value investors will disagree with that thinking but that's how I act. I am bullish on gold now (read my next blog post).

The way I have my portfolio now, it is almost like a market-neutral fund. It hardly moves much in either direction because it has few holdings and the TSX short counterbalances my (long) MRH. This isn't due to design but that's how it is right now. Given all the uncertainty in the markets, I would like to add more holdings for some diversification (but not diversification for diversification-sake). The problem is that I don't have much free money so I have to save as much as I can every few weeks.


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