US Employment Remains Moribund

The US employment report for December caught us and the market off guard by printing a sharp -85k decline on the month. Consensus was for a flat read, so the ensuing US dollar weakness was not surprising. The guts of the report are nothing to write home about and do not suggest much in the way of optimism for the US employment picture. While the unemployment rate did remain unchanged at 10.0%, this was only possible because of a decline in the labor force. The all-encompassing unemployment rate (which includes discouraged folks and those working part-time for economic reasons) actually inched up to 17.3% from 17.2% prior. The other data point that stuck out like a sore thumb was the change in household employment which came in at a dreadful -589K, the worst since September. This metric tends to turn positive in a consistent fashion around turning points, so the sharp drop is cause for concern. The "blame it on the weather" crowd was out in full force, casting doubt on the sharp headline decline. While they are correct that the subtraction to jobs from folks who were unemployed due to weather was about 100K larger than usual, one must also keep in mind other statistical massaging the BLS has done throughout 2009. One of the areas of interest is the birth/death additions that have assumed business growth in the face of collapsing commercial real estate and deplorable capital expenditure data. Splitting hairs aside, the December report does not offer up much confidence in terms of any significant rebound in the US jobs market. What is more likely is a similar path as was taken in the post-2000 recession when the words "jobless recovery" entered the lexicon. This time, however, the path back to so-called full employment is likely to be even more drawn out. Indeed, conservative estimates suggest that we will not see the December 2007 employment levels until well into 2015. That is not to say that the economy won't grow during this time, but grow and grow marginally are two very different things.

The Dollar in 2010

I thought it would be fitting to follow up my last post (Forex in 2009: A Year in Review), with one that looked forward. And what better way to do that then by squarely examining the US Dollar, which is still the undisputed heavyweight champion of forex markets, and from which most other forex trends can be ascertained and comprehended.December (I know I said I wouldn’t look backwards, but come on, a little context is necessary here…) was the best month for the Dollar in 2009. From December 1 to December 31, it rose 4.7% against the Euro and 7% against the Yen, as part of an overall 4.8% appreciation against a basket of the world’s six other major currencies. “The dollar rally which has taken place in December is significant in that it has brought an end to the powerful downtrend which had been in place since March following the Fed’s decision to begin quantitative easing,” summarizes one analyst. As a result of the Dollar’s strong turnaround in December (and the forgotten fact that it actually appreciated in the beginning of last year), the broadly weighted Dollar Index finished 2009 down a modest 4%.Analysts summarized this turnaround using a few main paradigms. The first was that logic had returned to the forex markets, such that the negative correlation between equities (which serve as a broad proxy for risk sensitivity) and the Dollar had broken down [See earlier post: “Logic” Returns to the Forex Markets, Benefiting the Dollar]. As a result, good economic news was once again good for the Dollar. The second interpretation was a direct contradiction of the first, and argued that the Dubai debt bomb, coupled with credit scares in Europe, had in fact increased risk aversion, and reinforced the notion that the Dollar is still a safe haven [Edward Hugh mentioned this in my interview of him]. The third theory represents a slight twist on the first one- that concern over Fed interest rate hikes will shift interest rate differentials and cause the Dollar carry trade to break down. Technical analysts, meanwhile, argue that the Dollar had been oversold, and that the year-end rally was merely a product of the closing of short positions and profit-taking.The key to predicting how the Dollar will perform in 2009, then, largely rests in correctly discerning which paradigm currently underlies the forex markets. Let’s begin by comparing the first possibility – that good economic news will be good for the Dollar – to its antithesis – that the Dollar remains the safe havens. I think two WSJ headlines can shed some light on which interpretation is more accurate: Dollar Rises On Lower Demand For Riskier Assets and Dollar Slumps As Investors Snap Up Risky Assets. In other words, the market logic is that the Dollar is still a safe-haven currency, to the chagrin of market fundamentalists.
While there are certainly “naysayer” analysts that think the US stocks will soon outpace their counterparts abroad (namely in emerging markets), such a view can best be ascribed to the minority. The majority, then, believes that good economic news (from the US, or anywhere else from that matter) is a sign that risk-taking is relatively less risky, and will lead to capital flight from the US. In short, “It’s too early to dismiss the negative correlation between equities markets and the dollar, i.e., when risk appetite declines, that still seems to favor the dollar even though we’ve seen a slight decoupling from that in early December.”With regard to the notion that the Dollar is being driven by expectations that the Fed will tighten monetary policy at some point in 2010, that seems to have some traction. The markets have priced in a 60% possibility of a Fed rate hike by June, and a majority of economists (9 out of 15 surveyed) think that the Federal Funds rate will be higher at the end of the year. This optimism is a product of the last month, which saw strong improvements in non-farm payrolls, housing sales, durable goods orders, ISM supply index, and more. Some of these indicators are now at their highest levels since 2006; “That speaks better about the health of the U.S. economy and that could help move up the timetable for the Fed to boost interest rates,” goes the accompanying logic.That investors believe the Fed will hike interest rates and that it will be good for the Dollar is not so much in dispute. Whether investors are right about rate hikes, on the other hand, is less certain. To be sure, momentum is growing in the US as the economy shifts from recession to growth. While current data is unambiguous in this regard, the future is less certain. A vocal minority of analysts argues that the apparent stabilization is largely due to government incentives. When these expire, then, the result could be a double dip in housing prices, and a second act in the economic downturn.
The result, of course, would be a delay and/or slowing in the pace of Fed rate hikes. Some economists predict that that Fed will indeed hike rates in 2010, but only incrementally. Others have argued that it won’t be until 2012 that the Fed lifts its benchmark FFR from the current level of approximately 0%. Instead, the Fed will first move to withdraw some of the liquidity that it unleashed over the last two years, of which an estimated $1.1 Trillion still remains “in play.” Such would be directed primarily at heading off inflation, and wouldn’t do much for the Dollar.
Regardless, the implication is clear: “The fate of the dollar is in the hands of Ben Bernanke. If he begins the exit process and starts to raise interest rates, the dollar will perform okay this year.” If he stalls, and investors accept that they may have gotten ahead of themselves, well, 2010 – especially the second half – could be a sorry year for the Dollar.

City Council tweets help open government

Some Burlington city councilors are using technology to open up public meetings to a broader audience, a positive development for a city starved for evidence of more openness within city government.At least three councilors -- Ed Adrian, D-Ward 1, Karen Paul, I-Ward 6, and Nancy Kaplan, D-Ward 4 -- have been sending short text messages live from recent City Council and committee meetings via the online social networking service Twitter. The "tweets" are available to anyone with an Internet connection and a free Twitter account by becoming a "follower" of a particular councilor.Critics say sending text messages during meetings is a distraction for city councilors who should be focused on the business at hand. Photographers then television crews, too, were called a distraction when they began covering government meetings.
No one is saying councilors should become full-time reporters, but working to keep constituents informed and engaged should be one of the key items in any elected representative's job description. In this regard, think of tweeting meeting updates as another way to reduce the barriers to participating in local government.Twitter updates can be especially useful for people who are away from their televisions or computers because the messages can pop up on many cell phones. A real-time report on what is happening in city meetings can be an invaluable tool in keeping residents informed, especially of unexpected or eagerly anticipated developments.
Twitter has its limitations. The messages coming out of the meetings are short -- limited to 140 characters and spaces -- and you often have to read a series of tweets to understand the subject and context. And the tweets are no substitute for actually attending a meeting, or even reading a news story or other fuller accounts of the proceedings after the fact.Think of Twitter as an addition to, rather than a replacement for, media that have been around a little longer serving a different purpose.Offering yet another option that allows busy city residents to keep up with what's happening in City Hall is a welcome advancement toward a more open and accountable government.

Technology makes BCS tickets a click away

In the old days - as recently as a few years ago - he would have had to call brokers and take a chance that the tickets were not worthless scraps of paper. Now, he just ordered through RazorGator.com to get the inventory he needed for resales through his company,Pennsylvania-based Premier Luxury Rentals."You can do a higher volume because you really get an opportunity to see what's really out there in real time, and it reduces the possibilities of fraud," McNeil said. "Before, when you deal with a ticket broker, you really didn't know who his contact was and you really had to rely on his word."Technology has indeed changed the world of tickets, from high rollers such as the clients of McNeil's company - which arranges getaways, private jets and chartered yachts - to a family just looking for a trip to a big game. Tickets can be purchased as gametime approaches with the convenience of a mouse click.Patrick Debusk, a 44-year-old oil refinery contractor from Houston, is one fan who used StubHub.com to buy a pair of tickets for the BCS championship between top-ranked Alabama and No. 2 Texas. He'll be traveling to Pasadena, Calif., on Thursday with his wife Marty, a 1993 graduate of the University of Texas School of Law, and sitting about nine rows up along the 40-yard line.Debusk paid way over the $275 list price for his two seats. He also used StubHub to purchase tickets for the 2005 World Series between the Houston Astros and Chicago White Sox and the 2004 Super Bowl between New England and Carolina at Houston's Reliant Stadium.Quite different from an experience at Boston's Fenway Park about seven years ago, when he thought he was getting good seats through a reliable broker and wound up sitting behind the Pesky Pole in right field. Now he knows the exact location and receives his tickets by e-mail or Federal Express - unless he prefers that they be left for him at the stadium."If you want to go to the game and you're willing to pay, they're going to come through with a good seat, and the tickets will be easy to get," he said.FanSnap.com, a search engine that pulls together information from dozens of online ticket sellers, said there were 3,000 BCS tickets available at the start of the week, with prices starting at about $600, the average at $1,000 and some seats going for $2,200, spokesman Christian Anderson said.StubHub's average sale price for the game has been $943, up from $684 for last year's game between Florida and Oklahoma in Miami, according to spokeswoman Joellen Ferrer said. By Tuesday it was the company's fifth-highest-grossing event behind World Series Games 6 and 2 last year, last year's Super Bowl and the 2009 World Series opener.But in a recessionary time, there's a limit to what fans will pay. Just ask the Yankees and Mets fans who couldn't resell their seats for close to list at New York's pricey new ballparks last year. The infamous Legends seats, sold by the Yankees to season ticket holders at $500 to $2,500 per game, often could be had on the days of games at 50 percent discounts or higher. Many of the seats near the field sat empty - or were given away by the Yankees - while the upper deck was packed every night.Jason Berger, chief executive officer of AllShows.com and a past president of the National Association Of Ticket Brokers, said his company had sold more New York baseball tickets in 2009 than the previous year but that the dollar volume was down."There was just such an oversaturation of product on the market. There was just so much competition," he said. "Since they increased the price of tickets almost 200 percent on some of the locations, there was no ability for people to resell their tickets."Team executives have been nervously watching the rate of season ticket renewals. The Mets, coming off a terrible first season at Citi Field, extended their deadline for decisions. For many teams, buyers of season plans no longer can be assured of selling excess seats at a profit."In the ticket market, like any other, the market prices are the function of the balance of buyers and sellers, and we're at historic levels of sellers," said Michael Janes, the chief executive officer of FanSnap and formerly chief marketing officer of StubHub.Still, there don't seem to be any brakes for big events. StubHub's average sale price for the Rose Bowl between Oregon and Ohio State was $374, followed by the Orange Bowl at $176, Fiesta Bowl at $163, and Sugar Bowl at $156.RazorGator, the BCS's official resale company, has sold at least 78 percent more tickets for this year's game than last year's championship."The BCS ticket prices went way up when the teams were announced," RazorGator CEO Brendan Ross said, who believes fans' confidence in the resale system has made the market much stronger.For the Super Bowl in Miami on Feb. 7, resale tickets start with an $1,100 asking price and currently average $3,000, Anderson said. StubHub's average sale price for last year's Super Bowl between Arizona and Pittsburgh in Tampa, Fla., was $2,403.McNeil is looking to purchase 100 Super Bowl tickets. He will package them with three nights hotel, air transportation and ground transportation, pricing the ducats at $4,000 per seat."Last year, we saw a decline in prices for both the NFL playoffs and college bowl games, due largely to consumer price sensitivity with the recession. This year, we are seeing increased demand across the board," StubHub's Ferrer said. "A year ago, many fans attending events skewed toward the lower price points; this time around, we are seeing the full spectrum of tickets being purchased."And the business figures to grow.Forrester, a research firm that following the ticket industry, forecasts the U.S. secondary market for sports and concerts on the Web will grow 12 percent annually and reach $4.5 billion in 2012. Berger, of AllShows.com, thinks social networks will add a new, even faster dimension to the business.

Forex in 2009: A Year in Review

In some ways, 2009 was a wild year in forex markets. Compared to 2008, however, it was relatively tame. And that is all I have to say about forex in 2009.Ah, if only it were that simple…The year began as a continuation of 2008. Global capital markets were still in the throes of the credit crisis, and risk aversion was in vogue. Investors continued to remove funds en masse from virtually every economy – with an emphasis on emerging markets – and parked the proceeds in the US. More specifically, they put the proceeds in US Treasury securities. US corporate bonds and equities declined, as did interest rates, to such an extent that short-term rates briefly dipped below zero.As this trend gathered momentum, the Dollar continued its rally against virtually every currency, with the notable exceptions of the Swiss Franc and Japanese Yen. For reasons related both to the unwinding of the Japanese Yen carry trade and the bizarre perception that Japan was also a safe haven against the storm of the financial recession, despite the fact that its economy contracted by the largest amount of perhaps any economy due to its reliance on exports. Against other currencies, the Dollar was nothing short of brilliant, surging 30% against many emerging market currencies, and 50% against the Korean Won, from trough to peak. Some analysts predicted that it was only a matter of time before the Dollar reached parity with the Euro.But it wasn’t to be, as the Dollar never topped $1.25 against its chief rival. The markets pulled an abrupt about-face in March, and began a rally that would last 8 months (and might still be in progress, depending on who you talk to). The S&P 500 rose by more than 50%, impressive, but still paling in comparison to emerging market equity prices. As investors grew more and more comfortable with risk, they reversed the flow of funds, and bond spreads between the US and the rest of the world gradually declined. More importantly, so did volatility. For the forex markets, that meant a rapid appreciation in every single currency against the Dollar.Around the same time, the Swiss National Bank (SNB) intervened for the first time (it would intervene again in June) in forex markets, ostensibly to guard against deflation. As a result, the Swiss Franc has largely been exempted from the forex rally which sent the Euro up 15%, the Brazilian Real up 35%, and the Australian and Canadian Dollars back towards parity with the the US Dollar.After a modest rally, the British Pound stabilized around pre-bubble levels, due to concerns about the UK’s quantitative easing program (i.e. wholesale money printing), and consequent impact on inflation and the British national debt. Similar concerns have plagued the US Dollar, but interestingly have spared the Euro and Canadian Dollar, despite the fact that their respective Central Banks’ response to the credit crisis have largely mirrored that of the Fed. As a result, the Pound was quickly segregated with the Dollar as a fellow “sick” currency.By the summer, currencies and asset prices had risen by such an extent that investors began to fear the formation of bubbles. Governments and Central Banks, meanwhile, grew concerned about the potential impact of expensive currencies on their nascent economic recoveries. A handful of Central Banks – many in Asia – intervened successfully to thwart the appreciation of their respective currencies, while Brazil resorted to taxes to try to stem the appreciation of the Real. The Bank of Canada threatened intervention, while the Bank of Japan was more ambiguous; investors ultimately shrugged off both, and the Japanese Yen touched an all-time high against the Dollar in November.Towards the end of the year, the rally began to lose steam as investors began to fret that they had gotten ahead of themselves. In addition, the prospect of interest rate hikes was moved to the fore, thanks to early action by the Bank of Australia. While it’s clear that the Fed won’t be moving to tighten monetary policy anytime soon, investors have been forced to re-evaluate their short-Dollar carry trade positions within this context.Meanwhile, a handful of credit market scares, first involving Dubai, and later, a handful of EU member countries, reminded investors that the recovery was both fragile and unequal. As a result of the renewed focus on fundamentals, commodity currencies and currencies backed by strong economic growth projections, continued to appreciate. The Dollar, despite comparatively weak fundamentals, also appreciated, due to its safe-haven appeal and perceptions that the Fed would be among the earliest Central Banks in the industrialized world to hike rates. Ironically, forex markets ended the year ironically just as they began (though for different reasons), with the Dollar in the ascendancy.

Pause in Rate Hikes Threatens AUD

In October, the Reserve Bank of Australia (RBA) became the first industrialized Central Bank to raise interest rates. It followed this up with two additional hikes in November and December, bringing its benchmark rate to the current level of 3.75%, by far the highest among major currencies.This series of rate hikes caught (forex) markets completely off guard, and investors moved quickly to price the changes into securities and exchange rates. The Australian Dollar initially spiked more than 7% following the first rate hike, bringing its total appreciation in 2009 to 32%- enough to earn it the distinction as the second-best performing currency, after the Brazilian Real. Beginning in November, however, concerns began to build that perhaps traders had gotten ahead of themselves, and the AUD has been in freefall since then.Investors now fear that the RBA may have acted too hastily in hiking rates so soon and so fast. By its own admission, the RBA raised rates only after much deliberation: “The rate adjustment ‘would not be intended to slow demand compared with the current forecast path, but aimed simply at keeping the stance of policy appropriate for improving economic conditions,’ ” according to its own minutes. Since the recession was ultimately so mild (some would say ‘non-existent’) in Australia, however, the RBA ultimately decided that (pre-emptive) rate hikes were in order.Now, interest rates are back in the “normal range,” according to a deputy governor from the RBA. In other words, the current rate is perceived as neither promoting nor hindering aggregate demand, which means it may not need to be tweaked much more in the near-term. In addition, there is growing concern that further rate hikes could trigger a cycle of deleveraging, because of the high debt burdens that plague Australian households and businesses. Household debt already exceeds 100% of GDP, which is even higher than in the US.Besides, financial institutions are raising their own lending rates by wider margins than the benchmark rate hikes, so there is less impetus for the RBA to act further. Investors appear to have come to terms with this, as futures markets now reflect a 45% probability of another interest rate hike at the next RBA meeting, in February. This is down from 67% only last week.If you’re wondering whether the RBA could be influenced by the lofty Australian Dollar when conducting monetary policy, it’s conceivable but not probable. It has already acknowledged that the carry trade is generally “back in vogue” and specifically targeting its very own Aussie, but that “As on earlier occasions, the economy has proven to be resilient to these [forex] swings.” If it turns out that the markets truly overestimated the pace of recovery (and by extension, interest rate hikes) in Australia, then the RBA won’t even have to worry about whether the economy can withstand further appreciation, since the AUD would probably remain fixed at current levels.