In December, the Fed's target interest rate still stood at 4.25%. The graph below plots the expected average value for the fed funds rate for February or March as implied by the closing values of the February or March fed funds futures contract as of each day over the last month. At the start of January, traders were anticipating that we'd see a 25-basis-point cut by the end of the month, or an expected funds rate of 4%. There was a gradual process over the month of revising these expectations down as the month progressed. By January 13, the betting was starting to anticipate a 75-basis-point cut, and by January 22, the market was anticipating close to 3% by month's end, as was indeed announced today.


My research paper presented evidence that a move like this would begin to affect mortgage rates as soon as it becomes anticipated by markets. The graph below replicates the calculations from Figure 7 of my paper (which looked at the summer of 2006) for the new numbers for January 2008. The green line indicates how the 30-year mortgage rate would have been expected to move along with changing anticipations of the February and March fed funds rates based on the parameter values that I estimated in that paper using 1988-2006 data. The blue line records the actual change. My model would have predicted a cumulative decline in mortgage rates of 66 basis points during the month of January, virtually identical to what we observed.


My research paper went on to demonstrate that although interest rates respond immediately to the anticipation of any change from the Fed, it takes a considerable amount of time for this to show up in something like new home sales, due to the substantial time lags involved for most people's home-purchasing decisions. The graph below gives my estimate of the average time delay between a change in the mortgage rate and a subsequent change in the number of new home sales. According to the historical correlations, we would expect the biggest effects of the January interest rate cuts to show up in home sales this April.


But of course, this is just focusing on one determinant of home sales (the interest rate), and there are a number of other factors that have been playing a bigger role over the last year. Tightening lending standards rather than the interest rate have in my opinion been the biggest explanation for why home sales continued to deteriorate after January 2007 and for the acceleration of that trend following the credit problems in August.


One indicator of the role of the credit crunch in the housing market is the fact that, although we have seen the interest rate on conventional 30-year mortgages decline dramatically over the last six months, the rate on jumbo loans (those too big to qualify for securitization by Fannie or Freddie) remains well above where it stood a year ago.



The effect of rising unemployment and expectations of falling house prices on housing demand is another big and potentially very important unknown.

Still, it is hard to imagine that the latest actions by the Fed would fail to have a stimulatory effect. We've already seen a big surge in mortgage applications, though this is much more in evidence for the Mortgage Bankers Association index of refinancing applications


than in their Purchase Index:


My bottom line: the Fed's moves this month have to help relative to where we would have been without them, but it will take some time to see by how much. If indeed a recession began in December (and I repeat that no one knows for sure whether or not it did), things are going to get worse before they get better.

Instant global notoriety seems a far cry from Kerviel's picturesque hometown of Pont l'Abbé, a hamlet of 8,000 with a 14th century castle and church on the Atlantic Coast of Brittany. Like many Bretons, he sailed. His father was a teacher; his mother ran a hair salon in town. Jérôme left after high school for degrees in finance in Nantes and Lyons and landed his first job out of school at the Société Générale in Paris in August 2000, a month before he graduated. He maintained links with his hometown, even running as a bit-parter on a municipal government list the year after he'd moved to the capital. "He was a composed young man, quiet, reflective. A little reserved," the mayor of Pont l'Abbé, Thierry Mavic, told the local newspaper, Le Télégramme. "This news stuns me, really very much." Indeed, Kerviel's neighbors in the affluent Parisian suburb of Neuilly-sur-Seine, near his bank in the office tower quarter of La Défense, barely seem to have noticed him before the TV crews came calling. Hardly a screenwriter's dream profile for the billion-euro man the head of the French central bank calls "a genius of fraud."

Kerviel made less than 100,000 euros ($147,000) a year, bonuses included--junior wages for a trader. But bank officials say he gained intimate knowledge of trading controls in his entry-level position in an office that monitored trades, before becoming a trader himself in 2004. Over a period of months, he was able to gamble tens of billions of euros of SocGen's money hedging on European equity market indices. Today, he reportedly could face five to 15 years in prison.

But the sheer magnitude of the losses Kerviel is said to have caused the SocGen have primarily been met with disbelief. And the reactions from the SocGen and Banque de France haven't helped. "His motivations are completely incomprehensible. It doesn't seem he profited from this gigantic fraud. Not directly, we're sure. But we'll need deeper investigation to see whether or not he profited indirectly," said SocGen CEO Daniel Bouton. Another bank boss said it was impossible he'd worked with accomplices.

From analyst pundits to the man on the street and even bank colleagues quoted anonymously, a surprising degree of the chatter has taken Kerviel's defense--implying that a man acting alone couldn't rack up such losses, or that the magnitude of loss attributed to Kerviel is merely a cover-up for sub-prime related losses greater than the two billion euros the SocGen also announced. On Friday, Bouton was on the defensive. "Let's think! We would have transferred into a new hole losses coming from another hole? That doesn't hold up, not technically, not accounting wise," he told Le Figaro's Web site Friday. Others held that even if Kerviel did treat his trader's desktop like a video poker machine, the bank is at fault for weak security controls. "How could a bank of this caliber, vaunted for its market experience, come upon this sort of misfortune? Why did it take so long for it to discover the extent of the damage?" railed French economic daily, La Tribune. The bank took out full-page apology ads in Friday's French papers.

Another conspiracy theory making the rounds originated from an unnamed American source, quoted widely, who claims that Fed chief Ben Bernanke's massive rate cut earlier this week was a direct reaction to SocGen's sell-off of Kerviel's positions. Bouton called that accusation "absurd." "The Asian markets set the pace Monday. Everyone can calculate our contribution to the markets over the past days." Indeed, even on news of the biggest loss by a rogue trader in history, with the news making headlines through an entire market day, France's own CAC40 closed up 6 percent on Thursday. Privately, one French finance official tells NEWSWEEK she "burst out laughing" when she first heard the rate-cut theory. "That story seems completely crazy to me," she says.

One French Facebooker calls Kerviel "Le Lee Harvey Oswald Français." "Scapegoat" is another top traded comment. One Facebook virtual group orders "Tar and Feathers for Jérôme Kerviel," but another declares "Jérôme Kerviel Should Be Offered the Nobel Prize in Economics." One group wants to "Save" him, one says "Bravo Jérôme," and still another curiously wants to make him the manager of Southampton Football Club. The group called "If 5 billion Persons Join This Group and Give 1 Euro, We Can Save Jérôme Kerviel's Career" had 364 members as of Saturday. And a long way to go.

© 2008 Newsweek, Inc.

Asia started the rout Monday. It cascaded into Europe, then leapfrogged over the U.S. (where markets were closed Monday for Monday's Martin Luther King Jr. holiday) only to gain new steam yesterday in Asia and then Europe again.

Then came New York's turn. "The world has been reacting to us, and now we're reacting to it," said Steven Grasso of brokerage firm Stuart Frankel, working the floor of the New York Stock Exchange yesterday morning shortly after the open. "We're factoring in a recession."

The depth of the selloff meant that even the Federal Reserve's surprise interest-rate cut yesterday morning wasn't entirely a surprise. "Too little, too late," Mr. Grasso said. "They've got to do more than what the market has already factored in."

As European markets opened sharply lower, Francois Banneville of Société Générale was on the Eurostar train from Paris to London. When he reached his office, the German DAX index was down about 4%. "Everybody was looking really dumbstruck."

But by 11 a.m., the roller coaster started uphill again: Across Europe, stocks moved into positive territory as investors hunted bargains or started betting that interest-rate cuts were on the way.

"Quite early in the day, the market started to assume significant rate cuts," said Mr. Banneville.

Around that time in the U.K., Mr. Henry, the photo-equipment executive, was watching with "trepidation" where the Dow Jones Industrial Average would open. When he saw the Fed rate cut, he said, he worried that it could be taken two ways: The Fed had everything figured out, or it was panicking.

Mr. Henry said he decided the central bank had it worked out, and the market did likewise. Stocks jumped across Europe.

The Fed's cut was good news for Mikhail Derkavski of hedge fund Compass Asset Management Ltd. He was changing out of his suit and into a pair of jeans at his home in Almaty, Kazakhstan, when he heard about the interest-rate cut.

"I have been calling everyone saying, 'Guess what? The Fed has finally moved,' " he said.

Yesterday morning, he and colleagues had bought back many of the shares that they had "shorted," or borrowed and sold in anticipation that they could profit from their price declines. His reasoning: The dramatic falls in recent days would push central banks into action.

But those immediate market gains were short-lived.

In the U.S., Monday's holiday left traders prepping for a hectic Tuesday: Their world had changed significantly since leaving the office Friday. Prior to the Fed cut, futures prices suggested the Dow industrials would open with a plunge of greater than 500 points.

Around 8 a.m. in New York, Todd Leone, a stock trader for Cowen & Co., was assembling what he calls a "game plan," talking to clients to gauge the depth of their worry. "Hopefully, you don't get hurt too much today," he said.

He was also hoping for a rate cut. "I'd like to see that," he said. "That's what [Alan] Greenspan would do," he said, referring to the former Fed chairman.

Twenty minutes later, the Fed announced it had obliged with its three-quarter-percentage-point rate reduction.

"Here we go," Mr. Leone said, as the market opened, settling into his chair. His immense phone listed major clients on buttons and lights. If they were nervous, the phone would start lighting up right about then.

Several minutes into the trading day, the Dow industrials had tumbled more than 300 points. But, so far, few were calling.

Mr. Leone had bought shares of drug maker Schering-Plough Corp., the sort of stock that tends to outperform during tougher economic times. But otherwise, "I don't have a lot of customer orders right now," Mr. Leone said.

Within a half-hour, the market was staging its comeback. By 10:30 a.m., the Dow was down by less than 200 points, and customers were lighting up the Cowen switchboards to make trades.

The mood on the Cowen trading floor was taut. John O'Donoghue, Cowen's head of equities, clapped his hands as he walked by the traders, in an effort to build adrenaline among colleagues. "Come on, come on," he yelled to no one in particular as he returned to his seat, pounding a fist on his desk.

By the end of the day, the Dow industrials had regained much of its earlier loss, but not all of it. The industrials ended down 128.11 points, or about 1%.

The remarkable turn of events in the U.S. yesterday has roots in Asia's declines in recent trading sessions. In China in particular, a sustained reversal of the stock market there could cast a particularly long shadow over global economic sentiment.

In Shanghai yesterday, as a light snow dusted the streets of China's wealthiest city, a somber tone descended on the small brokerage houses that have become popular public gathering spots in recent years.

On a typical day, locals gather to smoke, drink tea and even play mahjong, the Chinese dominos-style game, while cheering prices upward. But as the market sank, brokerage firms filled to standing-room-only by midafternoon, and there was little of the past camaraderie. Instead of exchanging investment ideas and cigarettes, most investors stood alone, staring at price boards ticking off deep losses.

"How couldn't I feel anxious?" said Shi Yinghua, standing in a Shanghai Securities Co. outlet. Another woman said she spent the lunch hour quarreling with her husband about their portfolio.

In China, all eyes are on the investing public, which was responsible for opening a whopping 35 million new trading accounts in the first 11 months of last year. Their buying power in recent years pushed the Shanghai index up 97% last year, to levels widely viewed as a bubble.

Now, a market downturn could hurt the spending power of consumers in the world's most populous nation. It has already generated anger directed at China's government.

Many investors in China have never experienced a sustained market downturn. Interviews with dozens of investors suggested some are losing confidence that Communist Party leaders will prevent a major fall in stock and property markets. Some voiced expectations that the government needs to step in.

Nervously waiting her turn at a trading terminal in an overcrowded outlet of Aijian Securities Co. in Shanghai, a woman who said her name is Ms. Zhang lamented putting all her "sweat and blood money" in the market. But she knows who to blame, she said. "The government just didn't take care of individuals," she said. "I feel very lost, totally confused."

China's market has actually been struggling since October. Nevertheless, the market pullback yesterday leaves the benchmark Shanghai index ahead 351% since mid-2005.

In yesterday's raucous Asian markets, India perhaps best illustrated the panic that some analysts said has set in among Asia's individual investors. Immediately when trading in Mumbai began, an automatic hour-long break in activity was triggered when a key index fell 10%. After trading resumed, the benchmark Sensex plunged 13% at one point, before finishing the session down about 5%. Japan's Nikkei 225 lost 5.7% and fell to its lowest level since September 2005.

In Japan, investors such as Yoshio Nakamura, a 65-year-old former railway company employee, blamed the U.S. for the rout. "America is the culprit," said Mr. Nakamura as he watched prices fall on a screen just a few blocks from the Tokyo Stock Exchange.

"If the U.S. problems didn't exist, Japan's stock market wouldn't be down this much."

--Miho Inada in Tokyo, Jackie Range in New Delhi and Bai Lin and Ellen Zhu in Shanghai contributed to this article.

Our Take on the Fed Cut (By Kathy Lien, Chief Strategist):

The Federal Reserves refuses to sit back and watch the Dow plunge another 300 to 500 points. Before the equity market open, the US central bank slashed interest rates by 75bp to 3.50 percent, helping Dow futures rebound from being down 500 points before the announcement to down 300 points at 8:35am ET. US Treasury Secretary Paulson also pledged to push forward a stimulus plan that would offer a swift, robust and temporary fix for an immediate impact on the economy. This one two punch is certainly a step in the right direction and puts the Fed from behind the curve to ahead of it.

With commodity prices falling, the time was right for the Fed to put a down payment on future monetary policy and let the markets know that they are serious about preventing further losses in the financial markets. This is the least they could have done to avert a recession and we still expect another 25 to 50bp on January 30th because 75bp is just not enough. It failed to push Dow futures back into positive territory - we may only get a dead cat bounce in stocks which necessitates further easing.

The Fed's primary concern was increasing downside risks to growth, a deepening of the housing contraction and softening labor markets. The announcement has driven the US dollar lower against every major currency with the exception of the Japanese Yen. Significant rebounds have been seen in all of the carry trades. Further easing equals further dollar weakness.

FOMC Policy Statement

"The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth...broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets...Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks." – January 22, 2008

On Jan. 9, thousands of Chinese investors jumped into the bullion market when the country's first gold-futures contract launched. Futures are agreements to buy or sell something at an agreed-upon price in the future, and are traditionally the domain of the pros, not individuals. So far, it's been a bumpy road: The most active June contract soared 6.3% on its debut day, then tumbled 3.7% on Day 2.

A slew of other new investments like these are planned in markets from Dubai to Mumbai. In India, the top lender, State Bank of India, plans this year to launch an exchange-traded fund that focuses on gold -- enabling investors to trade gold much like a regular stock. The World Gold Council, a London-based gold-mining industry group, says it is seeking to roll out its first gold ETF in Dubai this year, pending regulatory approval.

Last August, the Osaka Securities Exchange in Japan rolled out a gold-linked bond aimed at smaller investors. And in the past few days, Hong Kong Exchanges & Clearing Ltd. said it plans to list gold-related investment products and ETFs on the Hong Kong Stock Exchange.

Another sign of the shifting power centers in world gold markets: Last year, China became the world's No. 1 producer of gold, pushing South Africa into second place for the first time in more than a century, according to GFMS Ltd., a precious-metals consulting firm in London.

The democratization of gold speculation outside traditional Western financial centers has the potential to magnify the already strong appeal of gold as a hedge against global recession, inflation or just general uncertainty.

Investors world-wide shifted billions of dollars into new gold investments last year, fueling a 31% increase in the price of bullion on the Comex division of the New York Mercantile Exchange, the world's most important gold market. The anticipation that greater Chinese participation could be bullish for the market over the long term helped keep Comex gold above the psychological hurdle of $900 earlier in the week.

Uncertainty over future U.S. interest-rate cuts, among other factors, has since pulled the Comex benchmark back to $880.80.

Individuals in India and other Asian countries have stockpiled gold jewelry and bars. In China -- a nation with a rich history of economic upheaval -- gold has long been a particularly popular savings tool. Various colorful frauds have flourished, too. In January, a man named Ka Yulong, who ran a gold-trading firm in Western China's Gansu province, was sentenced to 15 years for swindling investors by selling them gold-plated silver bullion.

Last August, a swindler in Hebei province was convicted of scamming an investor out of $21,000 by spreading gold dust on stones that he pretended were samples from his mine.

In one of the largest recent scandals, a Shanghai trading firm, Liantai Gold Products Co., managed to find a way to trade gold-futures contracts overseas -- circumventing Chinese law -- only to lose millions of dollars of its clients' money in the process. Liantai's total trading volume once reached a remarkable 11.9 billion yuan ($1.64 billion), according to court documents. The case is pending.

Until recently, most buying and selling of gold in China required lugging the metal between brokers and haggling over prices. As recently as a decade or so ago, when Chinese tourists were first permitted to travel to Hong Kong in significant numbers, they often descended first on gold shops in the former British colony to stock up.

Only in 2002 did investors in China get the ability to trade physical gold on the Shanghai Gold Exchange, though individuals couldn't invest in actual bullion until 2005. Even then, the opening was limited.

Today, however, some of the new products emerging in China and elsewhere can be traded over the Internet like stocks.

Frenzy in Shanghai

The Shanghai Futures Exchange has warned that the product is primarily meant for big trading firms or gold consumers and producers, such as the nation's expanding gold-mining and electronics industries. Yuan Lianbo, who heads the gold-trading desk at Shandong Gold Group, one of the country's biggest gold miners, said his company has already started trading the Shanghai futures contract to hedge its price risks.

Just before trading began, the exchange tried to limit speculation by individuals by more than tripling the size of a single futures contract to one kilogram of gold from 300 grams. It also increased the amount of margin, or collateral, that investors must post, to 9% from 7% of the value of the contract.

Still, while those moves lifted the minimum investment to about $2,700, analysts say gold futures are still affordable to many Chinese investors.

Among those clients signing up to trade the gold contract through brokerage China International Futures Co., "about 90% are individual investors, most of whom were moving assets from stocks after turning bearish on the stock markets," said Lei Hongjun, deputy manager of the firm's Ningbo branch. China's stock market shot up 97% in 2007, but recently has tumbled 13% from its peak hit in October.

Of course, the new ability to trade gold in China won't automatically result in higher prices, analysts say. But the new contract's movement will give the rest of the world a better idea of China's appetite for gold, which will be a key factor for gold prices.

Since 2003, Western investors have poured billions of dollars into a related investment, the gold exchange-traded fund. Gold ETFs are pegged to the price of gold, but trade like stocks.

The most active gold ETF, a Big Board-listed fund called streetTracks Gold Shares, now holds more of the precious metal than the European Central Bank or China's central bank. (ETF shares typically represent a chunk of physical gold.)

Similar funds have been launched in Australia, the United Kingdom, the U.S., South Africa, Mexico, Singapore and various European countries.

Cultural Attraction

Gold, often in the form of jewelry, holds a special place in many Asian and Middle Eastern investors' portfolios. Increased wealth in these regions means more people can afford to buy on impulse.

Chinese officials have suggested their country's growing demand for commodities is a reason that its three commodity-futures exchanges should play a greater role in global pricing. Sun Zhaoxue, chairman of China Gold Association, was quoted on the Shanghai Futures Exchange's Web site as saying the new gold contract will "improve China's influence on the global metals market and pave the way for China to set the prices in the market."

Already, a copper-cathode contract traded at the Shanghai Futures Exchange since 1999 rivals the importance of the main copper benchmark on the 130-year-old London Metal Exchange. However, commodity benchmarks are tough to create from scratch, when most global investors have the option of using the heavily traded New York and London commodity markets.

--Bai Lin in Shanghai contributed to this article.

Write to Carolyn Cui at carolyn.cui@wsj.com and James T. Areddy at james.areddy@wsj.com

Secara teknis, kenaikan yang terjadi dari level terendah 107.20 ke 114.65 (745 point) merupakan wave 1 of 5, dan penurunan dari 114.65 ke 107.90 diindikasikan merupakan wave 2 of 5. Potensi USD/JPY melanjutkan kenaikan sangat terbuka karena sekarang ini sedang berada di wave 3 of 5.

Seperti diketahui, wave 3 merupakan wave terpanjang dalam teori Elliot Wave. Sehingga apabila USD/JPY benar-benar berada dalam wave 3 of 5, kenaikan yang terjadi akan merupakan rally panjang dengan target di 122 area (2x745 point + 107.85).

Setelah selesainya wave 3 of 5, akan diikuti dengan wave 4 of 5 yaitu wave koreksi dengan target 115-116 area. Dan selanjutnya, akan berada di wave 5 of 5 dengan target di atas 124 area. (Lihat chart).

Dari prediksi di atas dapat disimpulkan bahwa selama level 107.90 dan 107.20 masih bisa bertahan, USD/JPY berpotensi untuk kembali dalam Bullish Trend.

Just my view :)

Last year, gold saw its seventh straight year of positive returns and best performance since 1979, when the Shah of Iran was overthrown, oil surged to record highs and U.S. inflation surpassed 13%. The average closing spot gold price of $695.85 in 2007 was the highest ever, trouncing the 1980 average price of $614.50.



Much of the same drivers exist today as the dollar continues to fall against major currencies, geo-political tensions are growing and crude oil is breaking all-time highs.

On Wednesday, the euro rose 0.8% to an intraday high of $1.4702, extending last year's 10% climb, while oil surpassed $100 per barrel, up $4.02, after amassing a gain of 58% in 2007. Spot gold rose of $23.40, finishing at $856.70 bid.

“A massive surge in crude oil to its own record of $100 a barrel and a markedly softer U.S. dollar on the heels of the ISM data for last month's industrial activity contributed to the metal's successful attempt at planting the flag on this market's Mt. Everest,” said Nadler.

The Institute for Supply Management (ISM) said today its manufacturing index registered 47.7 last month, down nearly 3 percentage points from the 50.8 recorded in November. A reading above 50 indicates growth, while below 50 spells contraction.

In other news, the Commerce Department reported that spending on construction projects rose by 0.1% in November, but Nadler said “no market was going to ignore triple-digit oil and weak industrial activity.”

Oil prices jumped sharply Wednesday on supply concerns sparked by renewed violence in Nigeria and on expectations U.S. crude inventories may have fallen for a seventh straight week.



The Niger Delta Vigilante Movement staged an assault on the Nigerian oil industry centre of Port Harcourt Tuesday, leaving 13 people dead, and renewing fears that Nigerian supplies could face further disruption in coming months.

The EIA's inventory report due out tomorrow is expected to show gains in gasoline supplies and refinery activity, but a decline in crude supplies. According to analysts polled by Dow Jones Newswires, data is expected to show crude stockpiles fell last week to 1.8 million barrels.

And in geo-political news, Pakistan pushed back until Feb. 18 elections that may have returned the nuclear-armed country to democracy after eight years of military rule. This follows the assassination of opposition candidate Benazir Bhutto on Dec. 27.

Moore expects gold will remain “well supported” next year with little improvement in the geo-political picture, and with the credit market still finely balanced.

Nadler said the move today suggests that funds may have made additional moves into gold “with Pakistan's situation remaining on edge and global investors obviously still nervous about financial markets.”

In the longer term, Kitco’s predictions indicate a likely gold price channel of $640 to $940 in 2008, with the average price possibly near $730 per ounce - 5% higher than last year’s record-breaking average.

Schmidt indicated that $1,400 gold could be possible on the horizon, due to the bursting mortgage market bubble and the ensuing crisis in the banking and finance sector.

Mark O’Byrne, director of Gold & Silver Investments Ltd., forecasts gold will reach the psychological level of $1,000 per ounce in 2008, could rally as high as $1,400 and will likely finish 2008 above $1,000 per ounce.

“While this may seem like a large move it would only be a less than 25% increase in price,” said O’Byrne. “Given the current macroeconomic and geopolitical climate this seems more than likely.”

In the latest edition of the Gold Monitor, Martin Murenbeeld, Chief Economist of Dundee Group of Companies, calculated a probability-weighted average gold price of $860.50 for 2008 – derived from a forecast that extends out six quarters through 2009-Q2.

“The U.S. dollar must decline further, of that there is little doubt,” he simply said.

Gold futures for February delivery surged $22.10 to close at $857 an ounce on the New York Mercantile Exchange. It hit an intraday high of $864.90 an ounce, the highest for a most-active contract since Jan. 21, 1980, the day futures touched a record $873.

Crude for February delivery rallied $3.64, or 3.8%, to close at $99.62 a barrel on the New York Mercantile Exchange, after hitting $100 a barrel in early afternoon trading.

Source : www.ResourceInvestor.com