The tug of war between the gold and crude oil!

The rise in crude prices halted after four days of continuous surge owing to the forecast that fourth quarter contraction of the U.S economy was steeper than expected. The estimate points out that gross domestic product fell at an annual rate of 6.2%, the worst since 1982.

As the dollar showed an improvement, oil took a beating and so too the appeal of commodities as an alternative investment. The drop in crude prices happened despite the OPEC’s decision to curtail production in a bid to boost up the crude prices. It seems that the demand-supply theory doesn’t work very well here in deciding the crude prices and the data on the economic growth especially that of the U.S has a bearing on it.

In the New York Mercantile Exchange, the April delivery crude oil futures fell 46 cents or roughly 1per cent to $ 44.76 a barrel. This has to be viewed from the context that the price of crude has dropped to a whopping 70 per cent from its July 11, 2008 peak of $147.27 a barrel.

Gold loses its sheen

The past week saw the gold shed some of its sheen with 6% drop in its value, mainly because of the appreciation of dollar which rose to the highest in almost three years against six major currencies. But analysts point out that the gold bull run is far from over and it is mainly due to worries that paper currencies are being debased, especially given the tight economic situation and liquidity being pumped in to the financial system.

The demand for gold stems from the jewellery business and some of the Asian countries, especially India being the major consumer. It is hoped that the price of gold will stabilize during the second half of the next year.

It is the turn of auto industry to fall!

Falling in line with the banks after the sub-prime fiasco and the insurance giant AIG, is the auto major General Motors, which is struggling and planning to file a bankruptcy. Competing with the General Motors in the financial bungling is the Chrysler and Ford Motor, although the cash position of the Ford is far better than the GM.

When the economy is unrestrained, it is a common practice to allow the markets to determine the fate of the private companies but the present situation is entirely different and needs special attention. Ms. Dana Perino, the US President’s spokesperson was of the opinion that there were plans to use other options including the use of Troubled Assets Relief Program (TARP). The US president George W. Bush may allow the US treasury to channelize the money to Detroit from the $700 billion earmarked for the bailout, announced earlier for lifting the ailing financial institutions.

Chrysler is in need of $7 billion from government as loans while General Motors requires a whopping $18 as loan to survive the worst ever recession in the auto industry since 26 years. The failure of the US bailout of the auto majors is seen as a backward step for the distressed US economy and the lay offs from auto industry would add to the already burgeoning unemployment rate, which is increasing alarmingly as the day progresses. The new president elect Mr. Barack Obama will have a daunting task before him when he assumes office.

Slump in auto industry and its effect on crude

The collapse of the $14 billion bailout package to rescue the failing US auto industry triggered the fall of crude prices to approximately $45 in the e Trading on Friday; this happened at a time when the OPEC countries are pressing for a cut in the production of crude to shore up oil prices.

Will the Obama magic work for the financial recovery?

Mr. Barack Obama has made history and made changes in the occupant of the white house by his passion for “change.” The election to the office of the president of Obama is partly attributed to dismal policy adopted by the incumbent, George Bush.

The president elect has vowed to push an economic stimulus package through the Congress immediately when he takes over the office in January, 2009. At his first news conference in Chicago after the announcement of the results he said, “This morning we woke up to more sobering news about the state of our economy.”

One of the major tasks that require the urgent attention of the new president is the high unemployment rate which hovers around 6.5 per cent, the highest in the last 14 years. He was having consultations with the billionaire investor Warren Buffet, CEO of Google, Eric Schmidt, former Federal Reserve chairman, Paul Volcker but desisted from arriving at any major decision at that time.

On the tax front, Mr. Obama said he and his advisers would continue “to take a look at the data and see what’s taking place in the economy as a whole” and planned to announce a tax cut which would benefit 95 percent of the Americans. Another industry that cries for Mr.Obama’s attention is the automobile sector and small businesses, assistance for the state and local governments.

The average American has his heart filled up with hopes that the new president elect can do something to lift the sagging economy and in turn can improve the living conditions. But the million dollar question is “How long will it take to improve the liquidity flow and reduce the unemployment rate?” Let us hope that happens soon.

Slowdown or recession?

"The US is plunging into a nasty recession with a lot of suffering to come even if policy makers succeed in unfreezing the credit markets” quipped Mr. Paul Krugman, winner of the 2008 Nobel Prize for economics and Professor of Princeton University and New York Times columnist in an interview. He referred the situation as “baked in” and continued to add that there was a lot of downward momentum and put the unemployment rate at 7per cent, the highest figure in the past five years. The chances of the US economy falling into recession intensified with the report that retail sales had fallen for the three straight months.

What is the difference between recession and slowdown?

Many people mistake economic slowdown for recession. However, textbooks define recession as a period of two consecutive quarters of negative economic growth as measured by a country’s GDP and is expected to last anywhere between six and eighteen months. Economic slowdown on the other hand is just a slower growth in economic activities. The impact of economic slowdown may affect particular sectors whereas recession will have a wide ranging impact on most of the industries.

What is the source of concern?

It all started with sub-prime crisis in the US and the reasons for the crisis are now known to everyone. It has resulted in fall in real estate prices across US as home loans were foreclosed and the starting price of many of the properties started with an asking price of $1.99. Many important things that followed suit included the fall of Lehman brothers and with a concomitant fall in the value of Dow Jones and NASDAQ to 29 per cent till this day.

I live outside the US and am I safe?

The international economy has become like a single family because of globalization and the interdependent nature of each sector. That is the reason why when US sneezes, the rest of the nations suffer from cold. It may sound like a joke but it is true because the US is the single largest producer of natural resources. Whenever the crude skyrockets, the impact will be felt more by the Asian tigers like China and India. So, it is not a question where do you live but you are affected by the slowdown in one way or other.

Be prepared for that and fasten your seat belt.

At last, the Wall Street bailout materialized!

The bill passed by the Congress on Friday to bail out the ailing financial institutions at a cost of $700 billion has given the much needed relief to one and all and will help to reduce the panic in the global stock markets. It is expected when the government steps into the blood bath, the bleeding in the market will hopefully stop.

But wait… Don’t jump in happiness and there is a lot to do to lift the ailing US economy and in turn the global economy. What can you expect from the passage of the bill?

Stock Markets

A cooling in the nerves of the stock market is expected in the days to come along with the return in the confidence of the investors. The markets are expected to be less volatile but with the cooling global economy and lower profits for the American multinational companies will have a negative impact on the growth of stock markets.

Banks

The banks are safe. The bill makes it clear that depositors need not worry about their hard earned money because the amount of deposits covered by the FDIC is increased from $100,000 to $250,000 and there is no need to get scared even if the banks fail. The recession is already on and the economic downturn will add oil to the already burning fire.

Unemployment

A latest estimate says that the job cut is 159,000 in the month of September and is the worst in the last five years. The picture in the coming months is not rosy either and more job cuts are expected forcing the customers to be spendthrift, deepening the gloom. The major sector that contributes to the US growth, the auto industry is deep in trouble and its sales in September touched the lowest point in the last 15 years.

Tax relief?

The ordinary US citizen can expect a lesser tax relief than expected because of the bailout package. But there is good news in that the tax won’t be raised because the sale of the troubled securities would yield dividends to finance the extra burden. The loans advanced by the banks to consumers will become scarce, let it be for car, home, credit card purchase or vacations.

But homeowners have the option to renegotiate their loans with the bank but time only will judge how effective these measures are?

Blood bath in the Wall Street…

The Wall Street melt down came as a bolt from the blue to not only all stock market investors but also for the global economy as well. With the 158 years old Lehman Brothers' announcement that it was filing for bankruptcy under the chapter 11 because of the failure of the rescue efforts and acquiring of the Merrill Lynch for $50 million by the Bank of America in an all stock transactions on the same day and the bailing out of American International Group (AIG) by the US fed, the stage was set for a greater show down.

The melt down in the Wall Street has triggered global chain reactions plunging the stock market to the never seen depths. Added to the hysteria were the rising mortgage defaults and plummeting market values in US.

The US mortgage giant Bear Stearns set the stage for the fall out whose sub-prime crisis are only well known. Following suite with the Bear Stearns, problems started with Freddie Mac and Fannie Mae. The Fed has to intervene wit h a massive $200 billion to shore up these institutions.

Picking up momentum in Chinese stocks?

The melt down was a good news for the long term investors of the Chinese stock market suggesting that they see a value for the stocks whose value has gone down by almost two thirds in the last 11 months. The investors with patience have started making investments albeit in small quantities while the short term investors in panic started off loading their worth in a jiffy.

The biggest Shanghai composite index has taken a beating of nearly 66 per cent since the last October. The foreign institutional investors appear to raising their holdings in the wake current low valuations.

Not all can buy stocks at the exact bottom levels but it would be prudent in adding stocks to your portfolio in batches near the bottom levels.

The Indian stock market reacted sharply and the sensitive index, the sensex plunged 470 points or 3.35 per cent on the same day. Some blue chip companies touched their 52 week low on that day showing the magnificence of the impact.

What are the lessons to be learned from the fiasco of the Lehman Brothers and the likes for the Indian stock market and the real estate business?

If ordinary borrowers of home loans can able to trigger housing loan collapse in the US, what could be the impact of rising interest rate for home loans in India and it is the simple word “Caution ” in the air. With the Indian housing market has been showing signs of slowdown and the property prices correcting, alarm bells started ringing for the borrowers as well as for the bankers and banks will become more cautious in lending credit.

NYMEX crude drops...

Here is the good news to one and all as the crude started sliding, despite a hurricane heading towards some of the off shore oil installations in the united States. The Hurricane Gustav poised to enter the Gulf of Mexico, threatening the crude to move as much as 3 per cent over the week earlier.

The NYMEX settled down 13 cents to stabilize at $ 115.46 a barrel mainly due to a strong US dollar but earlier the week saw the crude to shoot as much as $118.76.

The US stock market is anxious about how the Hurricane Gustav will move in the days to come and the holiday to stock market on Monday due to Labor Day will add fire to the anxiety. A clear picture will emerge only after 4-5 days to assess the possible damage that may be caused by the hurricane.

The US energy companies are already on the alert mode and shut down productions and evacuated personnel to avoid further damage to the properties. The US government is ready to release its stock pile in the event of shortfall in the production of crude.

Bad news for UK economy?

The British economy is set to be performing in a poor manner and arguably it could be the worst in the last 60 years period and certainly is not sweet news to any British. The assessment follows a warning from Bank of England policy maker Mr. Darling and by the end of this year, almost 2 million people could become unemployed; the catch point of the problem is that the slowdown will be more profound and longer lasting than it was already assessed.

Asian stocks gain

Snapping the four weeks loosing streak, Asian stocks started looking up again after the news about strong US economy. Shares of Motor companies like Toyota Motor Corp, Honda Motor Co., fared better. To cap it, Cnooc, China’s largest oil explorer gained a lofty 13 percent this week. To keep pace with it was another Chinese entity, called Sinofert Holdings ltd surged 23 per cent, making the shareholders very happy.