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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Haim R. Branisteanu who wrote (20916)	1/10/2005 3:47:53 PM
From: mishedlo	Read Replies (2) \| Respond to of 116555

Currencies: AUD, GBP, and NZD ?? Valuation and Normalisation Melanie Baker (London) and Sharon Yeshaya (New York) Valuation and ‘normalisation,’ where the market pays much more attention to cyclical factors, would support short AUD, GBP and NZD against a USD and EUR basket in 2005. Valuation and normalization: short AUD, GBP and NZD. As a top trade for 2005, we recommend going short AUD, GBP and NZD against a USD and EUR basket (50% USD/50% EUR) based on our view that AUD, GBP and NZD are overvalued, no longer trading on fundamentals but appreciating largely due to the broader USD decline. They are the only non-US G10 currencies whose economies are running current account (C/A) deficits. Further, their property markets and/or domestic fundamentals suggest that domestic cyclical factors will be currency-negative when structural US concerns abate. Market needs to refocus on bilateral valuations. The recent FX market focus on global imbalances has been USD-centric. In our view, most G10 currencies have traded on the back of USD weakness, not relative valuations. Any of the factors below may refocus attention on bilateral valuations for GBP/USD, AUD/USD and NZD/USD and on downside risks for GBP, NZD and AUD more generally: • A renewed focus on domestic cyclical factors. Cyclical factors favor the trades we highlight above, in our view, but the market is not yet focused on them. What might change this? We suggest the following: 1) the Fed remains on its tightening path, possibly signaling it may hike by as much as 50bp per meeting (likely triggers include stronger US data and upside inflation surprises); 2) consistent and robust US economic data; 3) weaker cyclical data out of the UK, Australia or New Zealand; 4) more dovish signals from the BoE, RBA or RBNZ. • Cooling UK and Australian property markets. Further signs of deterioration in the UK and Australian property markets would likely increase the risk premium on UK and Australian assets as investors worry about the potential for a property crash and how a housing market downturn will impact the economy. Any substantial downturn would likely raise the risk of rate cuts. Five justifications for these trades • Misalignment. GBP, AUD and NZD (particularly GBP and NZD) are among the most overvalued currencies versus the USD on our metrics. The NZD/USD looks even more misaligned than the EUR/USD on our metrics at 25% away from our estimate of fair value (0.56). • Australia, New Zealand and the UK run C/A deficits. Australia, New Zealand and the UK, along with the US, all run C/A deficits, in contrast to most other major industrial economies. Australia runs an even bigger deficit (6.5% in Q3 2004) in percent of GDP terms than the US (5.6%). • Overvalued property markets. Our global economic team believes that housing markets in the UK and Australia are potentially in “bubble territory” (while the US housing market is on “bubble watch”). Using a model for housing across economies, the IMF’s September World Economic Outlook suggested that “house prices in Australia…and the UK exceed their predicted values by 10-20%…suggesting that the sharp increase in prices…cannot be explained by… fundamentals alone. In the case of other countries, including the US, the differences between observed and predicted values are below 10%”. House price inflation in the UK and Australia already appears to be declining. • Fiscal picture a focus in the UK in an election year. The UK continues to run a budget deficit and many doubt whether the chancellor will be able to meet his fiscal rules. With a likely election in May 2005, UK fiscal imbalances may well come into focus – a GBP negative in our view. • Interest rate cycles diverging. The RBA, RBNZ and BoE have paused in their hiking cycles, having been rather pre-emptive. But, we expect monetary policies to diverge in 2005, with the Fed actively tightening while the RBA, RBNZ and BoE remain on hold. Additionally, in the case of New Zealand, there still appears to be a mispricing of the economic growth outlook – while interest rates now price in a probability of easing by the RBNZ in 2005, the currency has held in relatively well. In our view, divergent rate cycles will become more important for currencies as the USD weakness story loses steam and domestic issues move to the fore. Consistency with our forecasts. These trade ideas are broadly consistent with our official team currency forecasts for this year, in particular after, as we envisage, the USD undershoot peaks in Q1. All the considerations above, however, highlight additional downside risks for GBP, AUD, and NZD.

To: Haim R. Branisteanu who wrote (20916)	1/10/2005 4:52:15 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Congress to take up White House pension reform plan Monday, January 10, 2005 6:09:26 PM afxpress.com WASHINGTON (AFX) -- Labor Secretary Elaine Chao said Monday the Bush administration has received commitment from House and Senate leaders to take up pension reform legislation this year. In the House, Rep. John Boehner (R-Ohio) and Rep. Bill Thomas (R-Calif.), chairmen of the House Education and Ways and Means committees, respectively, have said their panels will consider the legislation. Senate Finance Committee Chairman Charles Grassley (R-Ia.), and Senate Health,Education, Labor and Pension Committee Chairman Mike Enzi (R-Wyo.) also said they will examine the issue. The administration unveiled its plan on Monday to shore up funds for the Pension Benefit Guarantee Corporation, which will need Congressional approval.

To: Haim R. Branisteanu who wrote (20916)	1/10/2005 5:13:38 PM
From: mishedlo	Read Replies (2) \| Respond to of 116555

White House unveils plan to shore up pension agency Monday, January 10, 2005 6:33:17 PM afxpress.com WASHINGTON (AFX) - Secretary of Labor Elaine Chao announced Monday the administration's plans to shore up the federal agency responsible for backing private-sector pensions and make more secure the retirement funds of millions of U.S. workers and retirees The administration's proposal calls for reform of funding rules for the Pension Benefit Guarantee Corporation, including a probable increase for employer premiums, more information made available on pension plans for workers, and new flexibility for employers to make contributions to pension plans For companies with healthy pension plans, the administration would index the flat rate premium paid by companies to growth in workers' wages. Currently there is a flat rate premium for companies, which has not been increased since 1991 For companies with financial woes and underfunded pension plans, the proposal would increase the premiums as the company's financial risk increases As of November, 2004, the PBGC recorded a record deficit of $23.3 billion for private single-employer pension plans. Chao said in prepared remarks that "the pension security of 34 million workers and retirees will be more at risk" if the agency is not reformed and funds for the agency were not increased The administration's plan will require congressional approval, and Chao said the White House has received commitment from House and Senate leaders to take up pension reform legislation this year In the House, Rep. John Boehner (R-Ohio) and Rep. Bill Thomas (R-Calif.), chairmen of the House Education and Ways and Means committees, respectively, have said their panels will consider the legislation. Senate Finance Committee Chairman Charles Grassley (R-Ia.), and Senate Health, Education, Labor and Pension Committee Chairman Mike Enzi (R-Wyo.) also said they will examine the issue.