October 2007

Who ever said DaBoyz don't have a sense of humor? Even those of us who were on the wrong side of the trade got a good laugh yesterday when Citi shares went bonkers on word that the subprime mortgage debacle and a few related problems had cost the banking colossus nearly $6 billion in the last quarter. The news was out before the bell, allowing DaBoyz to do what they do best: i.e., plunder and sodomize panicky traders in the first few minutes of the day, before the victims knew what hit 'em. The pros deftly pulled their bids as Citi began to trade, causing the stock to plunge 80 cents as market orders that had accumulated overnight were matched to a relative handful of buy orders well below Friday's settlement price. At that point, DaBoyz were just getting their beaks wet. The instant the selling dried up they sprang a new trap, this time on the bears. With selling exhausted, shorts began to cover, only to discover there were no offers other than a sprinkling of limit orders that had gone unfilled on the way down. This precipitated a short-squeeze so vicious that Citi was actually up 25 cents on the day before the session was barely ten minutes old. Spin This, Pal... Now, this was a quite impressive trick: running a stock sharply higher on news of a $6 billion quarterly loss. There was no way the announcement could have been interpreted positively, either. Citi's profits will be down an estimated 60% from a year earlier, with write downs of $1.4 billion for LBO-type activity, $1.3 billion for mortgage-backed securities, $600 for credit-trading losses and $2.6 billion for consumer credit losses and future reserves. With all those bad numbers, it's plain to see that it could only have

The silence that has greeted the dollar's collapse is eerie. You don't have to be an old-timer to remember when such an event would have been news. Not any more, though. Maybe it's because no one really understands what a falling dollar means, other than that a hotel breakfast of juice, toast and eggs now costs upwards of fifty dollars in London and Paris. (Click on chart to enlarge) Conventional wisdom holds that a weak dollar contributes to inflation, but we believe this quaint notion is about to get turned on its head. That's because we only confront inflation when we buy things. However, push the price of those things high enough, and who will be able to afford them? Take that $50 breakfast at the Ritz. If the place has been crowded lately, you can bet it's not with American tourists or even expense-account travelers, since most of them will have long since discovered Frommer's Guide and buffet breakfasts, or opted for cheaper getaways in the Caribbean. So, if the price of an omelet reaches $100 at the Ritz, will that be 'inflationary' for Americans? In theory, yes; in practice, no. Not Good for Benz And that doesn't bode well for European car manufacturers such as BMW, Mercedes, Volkswagen and Volvo. For, let them dare raise their prices to fully reflect the dollar's decline vs. the euro, and exports will dry up quickly. Does that mean Americans would see the price of Fords and Chevys rise commensurately? Don't bet on it, not with Toyota and Honda more eager than ever to seize market share. So where looms the prospective inflation in a falling dollar? The answer is, nowhere. With real wages falling, just as they've been doing for decades, and household borrowing power plummeting along with the steep decline in