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AMN Healthcare Services Inc. Message Board

  • commandor58 commandor58 Feb 2, 2013 11:40 AM Flag

    Why the Euro is rallying

    Quite simply, supply and demand. The ECB has not done any QE for 45 weeks and its balance sheet is as low now as it was last Feb of 2012-all limit the supply of Euros. On the other hand, the US, Japan and UK have been increasing the supply of their currencies, so the Euro is relatively more scarce than the other currencies-hence valued higher.

    This presents a quandary for the ECB. Given the continuing QE programs of the other countries, does the ECB chime in "actively" with QE or some other monetary easing program vs the current promise to do so if a country asks for aid, to stem the rise in its currency or do they do nothing (meeting next week 2/7) risking any nascent recovery as an overly strong Euro, which is already hurting exports, hurts exports even more?

    Bottom line, the status quo is not sustainable. Either the ECB "eases" and joins the "beggar thi neighbor" currency depreciation of their trading partners or they will try to force their trading partners to stop/slow their active QE programs. If the ECB "eases" in some way next week, gold and other commodities will go through the roof. If they choose to do nothing, then over the next several weeks/few months macro-econ data out of Europe will be soft or turn lower-setting up a series of negative headlines leading to a panic sell of the Euro into the $-taking stocks and commodities down.

    In recent days, the 3rd largest bank in Italy went under as did the 4th largest bank in the Netherlands along with various strikes and protests-which the market has chosen to ignor. One day the market will care. One day, the market and the subject populations of Europe will "protest" that $1.37 to the Euro is way to high and should be closer to $1.10-$1.20. Other than continuing to accumulate NG positions when those stocks are at the end of their trading ranges, I continue to harvest gains as "bad" news of of Europe looms. The unwind process will take several months.

    As far as NG, currently the "consensus" estimate for inventories at the end of the heating season is around 2000 BCF-way down from last years 2400, but up from the historical average of 1800. So, until production starts showing declines month to month, NG prices will continue to languish in the low to mid $3s. Still, there is alot of research out there that suggest that for the vast majority of NG wells, $4+ is needed to justify drilling. That suggests, over time, prices should grind up to that marginal cost. Given the continuing problems out of the Middle East, NA NG and oil should increase in value as its strategic value increases.

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    • Euro peaked at 1.3711 on 2/1 and has since pulled back to 1.3375 or so-the $ now at a one month high at the 80.35 area as measured by the DXY. These trends should continue-$ higher and Euro lower-as negative headlines will continue out of Europe.

      Beyond problems in Spain, Italy, Cyprus, Ireland-France is going to be the "new" headline worry as their lack of competitiveness, coupled with a strong Euro, is worsening their economic situation. Peugeot is about to go under and, an interesting fun fact, the private sector from 2044-2012 has been flat-all GDP growth was through government spending which will be under increasing pressure the next few years.

      Still, the broader averages are at 5 year highs, even though S&P 500 operating earnings were down y/y for the 3rd Q and the 4th Q. In essence, stocks are up yet earnings are down.

      I continue to raise cash as I expect a "valley of doubt" to take stocks and commodities lower for a period of 2-4 moths before "bargains" can be had. Part of the upside catalyst, after this "valley of doubt" will be the ECB-responding to all the bad news out of Europe-will be to cut interest rates and/or make QE programs active.

      Otherwise, I'm not a buyer of anything, unless it gets stupid cheap, until late in the "valley of doubt". My target for the S&P 500 is 1350.

    • Commander, why are you confident the ECB won't ease?

      • 1 Reply to gulleyj56
      • Inflation is running at 2%+, yet their Fed Funds equivalent is at .75%-it should be higher than inflation. So, real interest rates are already quite negative. However, the ECB does have to do something to "weaken" their currency. If they do ease, commodities especially "money" equivalents like gold, silver and oil should move higher and stocks should enjoy another leg up.

        What it does do though is increase the chances that QE by the Fed and other central banks end quicker as inflation comes back sooner.

        Also, the current "consensus" is that the ECB will do nothing as "they" must not be worried about the strong currency. I think it is a big issue and getting more so as even France's economy is continuing to weaken.

    • It is too early to really know but I think there are some bullish signals for gold. May stick my toe in next week and pick up a few shares of AU. In 2010 Paulson made 5 B betting on gold. Happens to hold quite a few shrs of AU.

 
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