Global Markets on the Run

We are only now beginning to feel the massive impact of the sub-prime mortgage collapse. Like most investors, my first instinct is to run and hide. But after taking a second calmer look, this economy may provide hidden opportunities for those creative few who are willing to take advantage of continued instability in the financial marketplace.

There is no question that low interest rates and cheap mortgages opened the door for many who otherwise may not have been able to own a home. Many (including yours truly) were lured by the "siren call" of the lowest rates since the end of World War II. When banks offer "free money," only a fool would say no. But as we all know, there is no "free lunch!"

The wide dissemination of cheap mortgages has resulted in a distortion of the financial markets. Most analysts now agree, that before the economy can stabilize, unproductive equity must be squeezed from the real estate sector. Unless and until this happens, even with subsequent rate cuts by the Fed, the economy runs the risk of a downturn leading to a possible recessionary trough. Evidence of this stall already can be seen in the month-on-month declining demand for durable goods at both the consumer and factory levels.

In my view, we are not so much in a credit crunch as we are in a liquidity crisis. Consequently, unless the Treasury wants to embark on money printing escapade, without regard for the inflationary result, the best source of additional productive liquidity to grow the economy must come from the real estate sector. While the acquisition of real estate may generate personal "paper wealth," it does not create the jobs or productivity this economy so desperately needs.

I view the current wild swings in the stock market as an opportunity to trade. These moves create intermediate term trends that we can take advantage of in the currency, precious metals and stock index markets. In my opinion, the dollar will continue to weaken in conjunction with the underlying fundamentals of the economy. On this basis, I believe that we will ultimately see a higher Euro, Yen and Canadian, along with a significant firming of the precious metals (gold, silver, platinum). Conventional wisdom dictates that market uncertainty always precipitates a "flight to quality."

Experienced traders and hedge fund managers are predicting $1000 gold. From my perspective, escalating prices of oil and other commodities, makes the likelihood of this projection even more plausible. I also think, that the foreign currency and metals markets may gain additional momentum if the Fed again cuts interest rates as an interim solution to the current sub-prime credit crisis.

As expected, the stock market put up a "Santa Claus" rally (shoppers love discounts, especially around the holidays). But I the looming spectre of negative market fundamentals and recent downgrade by of several major Wall Street players (including Goldman-Sachs) could trigger a deep stock market retreat. It is also likely that the weakening housing market will continue exert a lingering drag on overall consumer confidence. Consequently, I would not be surprised to see a deeper market sell-off after the first of the year.

With the prospect of this continuing uncertainty, it appears that the markets will continue in a dynamic flux over the next several months. While this tumultuous market environment does entail substantial risk, it also presents significant trading opportunities. If you can embrace the risk and are willing to diversify your portfolio, then we may be able to find a trade mix that works for you.

To get a fuller picture of what I am doing for my clients, visit our website at: www.globewestfinancial.com.