Trade Team Update

Well it looks like we've ended the day exactly where we started yesterday... the euro's in the same spot, there's no bailout bill passed, the market's continue to panic and speculate, and the erratic moves continue across the board in all markets.

As far as the bailout plan goes, it appears as if congress has made some progress on the fundamental aspect of the plan but it seems clear the Republicans are not sold will drag this process out.

That may have more to do with the fact Republican voters are pressuring their legislators much more than Democrat voters. This makes sense because of the Republican view on government intervention, but the longer this painful process keeps the markets in limbo, the longer it's going to take to return to order.

There's very little concensus on exactly how the bill will affect the markets, especially the EUR/USD because we don't really know the details of the plan and the argument for it being USD+ or USD- can be made. There just happens to be a much better argument on the USD- side when you take the situation as a whole in light of the U.S. fundamental landscape.

Speaking of fundamentals, the data continues to prove my view that the fundamentals of the USD are getting worse, not better. New Home Sales fell to their worst levels in 17-years. The average new home price fell in August by 11.8% to $263,900. That was the biggest one-month drop on record. The median home price was down 5.5% to $221,900. These kind of numbers are pointing to a possible negative print on the next GDP...

Here's what I would really like to know... with home prices continuing to fall and inventories continuing to rise, how in the world can the Fed and Treasury properly price the mortgage-backed securities they intend on purchasing from the banks?

Under the plan as we know it, the market will not get an opportunity to price the mortgage assets, the Fed will do this and then attempt to sell the assets back to the market for a profit. I believe this plan can be done but what I do not understand is how these assets can be valued when the physical asset that is supposed to give the paper its value is declining every 30-days?

I just don't believe an asset can be price-fixed by the government nor can the asset be properly valued while the product that is giving that asset its worth or lack thereof is unstable and is on a downward trend.

There is no bottom in housing and I see no signs of a bottom. Unless I've missed it or I'm completely off in left field, I just cannot understand how these banks, the government, and potential buyers can value a mortgage security whose worth is based on the health of the housing market and the prices of homes.

And that really gets to the bottom of why I do not believe the plan, as we know it, is actually going to solve any problems in the housing market. It's not going to stop foreclosures, it won't stop home prices from plunging and inventories from staying at elevated levels.

Credit markets are siezed up and there won't be much relief there. Every morning the central banks are injecting liquidity to ease LIBOR and to keep credit flowing. I'm not convinced this bailout will solve those issues either because in my view, it all still goes back to the housing market issue in the U.S.

U.S. and Europe:

At this point I don't believe we'll have the bailout bill passed tomorrow. Just a few moments ago this came over the wires:

Sen. Shelby says that he does not believe there is an agreement, still opposed to the bailout 9/25/2008 5:00:26 PM

The fight will go on as these legislators juggle the political pressures, constituent pressures, and pressures from Wall St. and the other central banks.

Europe needs this bailout just as bad as the U.S. does. A few days ago I told you the big European banks came crawling to Paulson to get a piece of the bailout money. Well, now we find out that European banks are leveraged as much as 50 times.

There is a catastrophic meltdown waiting to happen within the European banking system. I made this call at least three months ago and I'm sticking to it because I do not believe every single overleveraged European bank can escape unharmed.

If Europe doesn't get a piece of this taxpayer money they better have a clever Plan B. Fundamentally, I'm calling the Eurozone in recession. Europe's overall growth situation has been plunging too far to the downside and the challenges moving forward are mounting, especially as the fundamental landscape of the U.S. continues to crumble

The Eurozone has contracted for four straight months now. Compared to the U.S., Europe does not have a total disaster in the housing market, but there are certain sectors within EU countries like Ireland and Spain where the housing bubble has burst and they are suffering many of the same affects seen in the U.S. housing market. It's a very bad situation in certain pockets of Europe but gets little media attention because of the mess across the Atlantic.

Growth, production, and manufacturing are all falling at there fastest levels in Europe in over five years. GDP may print negative for Q3 and Q4. There's growing pressure on Trichet to cut rates immediately. Add in the high probability of a large European bank failure and you have your recipe for why the euro can't gain any real traction against the dollar.

Today's Initial Claims printed well below market expecations and further show the jobs market is in recession and will keep shedding jobs throughout the rest of 2008. I believe we'll end up having twelve straight months of negative growth and the unemployment rate should rise to over 6.2% in the near-term.

If the credit and money markets do not accomodate the business and corporate and manufacturing sectors, companies will be forced to layoff employees in order to fight for their lives.

Employees will be the first to go in order to cut costs and reduce benefits. There may be wage pressure as employees will seek higher wages to pay for elevated food, fuel, mortgage, and general living costs.

If these issues with credit, housing, employment, and the consumer persist even just a few more weeks I think that could spoil this year's holiday spending season. I think we could see anywhere from an 8% to 10% decline in holiday spending in the U.S. A decline of that magnitude would put serious pressure on the economy and the USD.

Bottomline is, there's a lot of really bad crap that could go down between now and the end of the year. This is going to make trading very complicated and stressful. I'm not into the doom and gloom stuff, but these are real issues happening in the U.S. and Europe and I think we need to be aware of what's happening.

EUR/USD:

The only big data we get tomorrow is the Michigan Sentiment which should print USD-. Tomorrow could very well be chaotic. It's the end of the week and the end of the last full week of trading in September. Add the drama with the bailout plan and the panic on Wall St. and we're likely in for more volatility between now and market close.

I think the euro took a hit on some profit taking that started around the 1.4730 level. Gold had a rough day and crude didn't do much to support the euro.

Even though the euro continues to get rejected on the topside, I still do not feel comfortable buying dollars right now and would rather take my risks buying the euro on the dips. If we can stay supported above the 1.4660 level I believe we can make a run to the 1.4850 level. On the downside it's important that the euro maintain support above the 1.4545 level.

Speaking of risks, that's exactly what this market is right now -- a giant risk. Putting a penny into this market under these conditions is basically a gamble... you're playing scratch-off's at the 7-11...

Some traders have been mentally abused by this market. I don't really see conditions getting any better or more normal any time soon. Reason being is because the herd still needs to be thinned.

The global money-markets are highly overleveraged and their equity has run dry and it's time for a worldwide margin call. The traders that are not overleveraged are the ones learning a priceless lesson that will result in good profits once conditions stabilize.

Things will get back to normal. This is not the Great Depression Part II. But I tihnk the markets still need to purge themselves. The unproductive are the ones that get zapped from the market... those banks that were leveraged 40 times and were upside down on their assets couldn't anymore. They were unproductive because their hands were tied, their accounts were tanking, and their ability to produce was taken away from them.

So I think in order for markets to find equilibrium the herd will need to be thinned even further. This afternoon a broker sent an email promoting some thing where you could open a mini account with as little as $25.

There's nothing wrong with a $25 mini account if that's your risk tolerance, but the advertisement looked desperate to me. I'm sure FX brokers would like to fill the herd right about now...

If you're taking the risks of trading this market use smart risk management because things could change at any moment based on a piece of news, a rumor, or an announcement.

I will not buy the USD at all. I'm not ruling out downside testing but if I take a trade, I will buy the euro because I think we can go back up to the 1.4800+ level and it's possible to do it tomorrow as long as market conditions are working as they should.

I will try to post some key levels later. Be smart going into the weekend. If the bailout bill isn't passed on Friday it could be passed over the weekend and cause chaos on Sunday. Something has to get done and has to get done soon.

Expect the unexpected.