Bloomberg is reporting that the US dollar fell to a record low against the Euro, which may prompt the Fed to lower interest rates again.

“The dollar will continue to weaken because the rate differentials move against the dollar,” said Marcus Hettinger, a currency strategist at Credit Suisse Group in Zurich. The subprime issue is negative because it increases the probability that the Fed will ease again.”

The U.S. currency dropped to an all-time low of $1.4556 per euro before trading at $1.4547 as of 7:03 a.m. in New York, from $1.4469 late yesterday. The dollar may fall to $1.46 in the coming days, Hettinger said.

Despite the negative news, market cheerleaders in the United States are saying there’s not much to worry about:

The falling dollar isn’t cause for alarm, according to David Rosenberg, chief North American economist at Merrill Lynch & Co. in New York.

“The dollar is no lower today than it was in 1997,” Rosenberg wrote in a Nov. 2 research note. “We don’t remember that being a particular Armageddon-type time period.”

Mr. Rosenberg, would you please share some of that Kool-Aid with the rest of the world? Let’s not forget that back in 1997:

• Oil wasn’t $90 $98 per barrel
• There was no ‘credit crunch’ or ’subprime mess’
• US Financial Firms weren’t struggling and writing off major losses

The dollar will slide further as the prospect of lower Fed rates prompts investors to shift assets into higher-yielding currencies, according to BNP Paribas SA.

“People no longer see the U.S. dollar as a high-yielding currency,” said Sharada Selvanathan, currency strategist in Hong Kong at BNP Paribas, the largest French bank. “They’d rather switch into other currencies where the economic fundamentals are better and where they can also gain higher yield,” such as Australia’s dollar.

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Reuters is reporting that a major brokerage, CIBC World Markets, downgraded Citibank and Bank of America based on concerns regarding their revenue outlooks.

A CIBC World Markets analyst downgraded Citigroup to “sector underperformer,” citing capital concerns for the biggest U.S. bank. The CIBC analyst wrote she expects Citi to be forced to sell assets, raise capital or cut its dividend to improve its capital ratios.

CIBC also downgraded Bank of America (BAC.N), saying it sees a diminished revenue outlook for the bank. In addition, Credit Suisse cut its rating for Citigroup.

“Let’s face it, we got a pretty big downgrade on the banks by CIBC. We know there’s more to come there,” said Tim Smalls, head of U.S. stock trading at brokerage firm Execution LLC in Greenwich, Connecticut.

The problems in the markets are starting to spread, almost like a snowball effect. Was the Fed’s recent rate-cut decision a smart move? The mess in mortgage and credit markets was caused by too much easy money, so the Fed’s solution is to make more easy money?

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Following up with a previous post we made regarding a large stock cashout by Countrywide Financial’s CEO, CNN is reporting that a large pension plan heavily invested in Countrywide Financial has asked the board of directors to oust Chairman and CEO Angelo Mozilo.

The American Federation of State, County and Municipal Employees, which counts 1.4 million members, made the request in a letter sent to the company’s board late Thursday.

The union-affiliated pension plan also asked the company to name two independent directors to the board and replace its executive compensation committee with people who have not played a role in the committee’s actions, the Los Angeles Times reported.

The company has been the target of shareholder lawsuits claiming it has misrepresented its financial condition, and U.S. securities regulators are examining Mozilo’s own sales of the company’s stock.

It will be interesting to watch how this unfolds. How an executive can cash out an enormous amount of stock just a few days before (and even the days during) a flood of negative news about the company and the market they do business in? Considering the situation in the mortgage market and all the negative publicity it’s been receiving in the mainstream media, it’s unlikely that this story will be forgotten anytime soon.

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MSN Money is reporting that investors are paying out to insure against a possible US stock market crash. The spread between the cost of put and call options on the S&P500 has hit its highest level since 2001, indicating that investors are taking precautions against a market decline.

A put gives the purchaser the opportunity to insure against a fall in the market and is the option but not the obligation to sell shares at a specified price and date in the future. A call gives you the right but not the obligation to buy shares, allowing the buyer to position himself in case of a market rise.

It seems that not everyone is drinking the Kool-Aid. When your own money at stake, you have to stop and think for a moment when the markets reach record highs, especially when there’s a lot of talk about economic slowdown and less consumer spending.

William Strazzullo, chief market strategist at BellCurve Trading, said the stock market stood at a crucial juncture with the Dow Jones Industrial Average and the S&P 500 both hitting new highs on Thursday.

“In spite of the talk of recession and less consumer spending, we are back at record highs,” said Mr Strazzullo. “To sit up here is bullish and the clock is ticking for shorts. Either we roll over or set the stage for a bigger push higher.”

Todd Salamone, senior vice-president at Schaeffer’s Investment Research, said: “Everyone is expecting a huge decline.”

But Mr Salamone disputed that a crash was imminent. In 2001, put options became more expensive because the market was already falling, he said, while today, hedge funds were buying large volumes of puts to protect their long positions.

A crash may or may not be imminent, and any single economic factor such as reduced consumer spending is unlikely to make a difference. It’s difficult to predict markets, however those who do stand to make a nice profit.

Investing, Economy, Stock Market | 1 Comment »