Thursday, October 30, 2008

U.S. Dollar


In September, employers took 2,269 mass layoff actions, seasonally
adjusted, as measured by new filings for unemployment insurance bene-
fits during the month, the Bureau of Labor Statistics of the U.S.
Department of Labor reported today. Each action involved at least 50
persons from a single employer; the number of workers involved totaled
235,681, on a seasonally adjusted basis. The number of mass layoff
events this September increased by 497 from the prior month, while the
number of associated initial claims rose by 61,726. Layoff events
reached their highest level since September 2001, a month that experi-
enced substantial layoff activity due to the September 11 attacks. Mass
layoff initial claims reached their highest level since September 2005,
which was a month with high layoff activity due to Hurricane Katrina.
The effects of Hurricanes Gustav and Ike contributed to the higher
September 2008 layoff activity. In September, 603 mass layoff events
were reported in the manufacturing sector, seasonally adjusted, result-
ing in 81,414 initial claims. Over the month, mass layoff events in
manufacturing increased by 4 and initial claims increased by 9,170.
(See table 1.)

From January through September 2008, the total number of events
(seasonally adjusted), at 14,811, and initial claims (seasonally
adjusted), at 1,510,446, were the highest for the January-September
period since 2003 and 2002, respectively.

The national unemployment rate was 6.1 percent in September, sea-
sonally adjusted, unchanged from the prior month and up from 4.7 per-
cent a year earlier. In September, total nonfarm payroll employment
decreased by 159,000 over the month and by 519,000 from a year earlier.

Table A. Industries with the largest number of mass layoff initial claims in
September 2008

This shows the number of unemployment claims in September for each industry and then it shows the worst September for the industry, the year it happened and the total number of claims in the worst year. Notice that most industries aren't even close to their worst month. The single exception is Professional Employer Organizations. In English this means Wall Street. It also means the rest of the economy hasn't been impacted by mass layoffs... yet.

The unemployment rate in the US is 6.1%. Look a little deeper into the data and you'll find that the unemployment rate in the financial services industry is only 4.2%. Financial services is also a smaller part of the over-all economy. One way to think about it is that for every one person who is unemployed on Wall Street there are twenty two 'real' unemployed people. 22:1 is another reason people are upset with Wall Street.

How much worse can unemployment get? Today American Express Co. announced it will cut 7,000 jobs, or nearly 10% of its work force, as part of a cost-cutting effort as the credit-card company girds for further weakening of economic conditions throughout the world. American Express will not be the only company to announce lay offs. In the coming weeks, this will be a repeated story as companies try to lean themselves out for potentially tough times ahead. As companies merge, the announced cuts in the workforce are usually ignored in the excitement of the new news, but mergers in the current economic environment will effect thousands of employees. How many workers will lose their jobs if General Motors and Chrysler strike a deal? The effects also trickle down the line to suppliers as the newly formed company will try to streamline costs and survive what will be tough times.

A story discussed almost half of Nevada homeowners with a mortgage owe more to the bank than their homes are worth. 50% is an amazing number! If you add in the homeowners like them in California, Arizona, Florida, Georgia and Michigan, together they account for nearly 60 percent of all homeowners who are "underwater" on their mortgages. The fact that these states account for so much is not surprising, because some of them experienced the greatest growth in the housing market the last 10 years. Nationwide, almost one out of every five homeowners with a mortgage owes more to their lender than their properties are worth. The new data underscore the staggering scope of the U.S. housing recession, but also the challenges that government officials face in designing a massive new program to help homeowners avoid foreclosure, with layoffs soaring and the economy sinking.

Nationally, home prices are already down about 20 percent from their peak in mid-2006. By the time the housing market hits bottom, prices may be down 40 percent from the top, leaving 40 percent of homeowners underwater, according to Nouriel Roubini, economics professor at New York University. "There is a huge incentive to walk away from your mortgage," said Roubini, who has attracted attention for his gloomy -- and accurate -- predictions of the U.S. financial market meltdown. He gave no forecast for when the real estate market would bottom out.

It is important to watch the news for the types of assistance the government is going to come up with in the coming weeks. Congress is not going to wait for the new administration in 2009, they are set to attempt to tackle the problem in the lame duck session now. There are two sides to the help that will be coming. How much will it help to stop the decline in housing prices, and what the cost will be. If it is a band-aide on the bullet hole, things will get worse. In this case not only will we take on additional debt in the newest stimulus, it might not be effective in attaining its desired result, putting a halt to the falling home prices.

As we take on more debt as a country, and if this debt becomes irresponsible or ineffective in attaining its desired result, it will be important to watch its effect on the U.S. Dollar. The chart below shows the U.S. Dollar Index in both a daily and weekly view.

U.S. Dollar Index Weekly (click to enlarge)

U.S. Dollar Index Daily (click to enlarge)

Commodities are important groups to follow when there are any significant moves in the U.S. Dollar. Below is a chart comparing the U.S.Dollar, in the top pane, to Light Sweet Crude and Metals in the bottom two panes. Each chart is market with the red 55 day exponential moving average.

U.S. Dollar vs. Oil & Metals (click to enlarge)

This chart clearly shows as the U.S.Dollar became a beneficiary of the flight to quality in uncertain times, the negative effect on commodities has been significant. Commodities are experiencing the double effect of the strong dollar and the view that demand is going to be less going forward. Supply and Demand aside, the fluctuations in the Dollar will provide significant opportunities in the commodity area. Jim Rogers has come up with and index that tracks commodities and it is further broken down into sub-sectors. RJI is the international commodity index, RJA tracks agriculture, RJN tracks energy, and RJZ tracks metals. While these tracking stocks are lower in price, they have significant percentage moves.

Another way to speculate and profit from the movement in the U.S.Dollar is by investing in either UUP Powershares U.S. Dollar bullish Fund, or in UDN Powershares U.S.Dollar Bearish Fund.

UUP Powershares U.S.Dollar Bullish Fund (click to enlarge)

UDN Powershares U.S.Dollar Bearish Fund (click to enlarge)

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