EUR/USD X-rate is already unbearable and probably forces ECB to lower interest rates and therefore let the inflation to increase. Lowering interest rates in <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Europe will set currencies to balance but let inflation to run reflecting by increase in commodity prices. We are probably going to see oil breaking 100$ soon.

Would you pee in your panties if you would be freezing? Probably not, but FED does.

EURUSD

According to study, the development of house prices can be easily forecasted by observing certain fundamental factors like stock market development, credit base and historical prices.  I have not read the piece but obviously this is based on some statistical evidence from historical price data. But, as we know, future is uncertain and when subjective and objective probabilities are considered, we can not say that history repeats itself.

According to study there is no bubble what so ever. Rapidly risen prices are explained by heightened income level, increasing population, and the fact that, at the same time, lending to households is increased. I am not professional in economics, but how in the earth, increased lending can indicate that there is no bubble in the prices. I think there is a bubble which is due to that particular increase. If you have, for example, valued a stock and come up with result that it is overvalued, does the fact that you can borrow money easier justify the overvaluation? And yes, I am familiar with supply and demand theory. In fact, I do not know is the most important fact mentioned in the study, which is that supply side is restricted due to big constructors who control the supply! This has created the overvaluation in prices – the problem which can be solved only by politicians. The study says it is the sea that is restricting the increase of house base. I wonder is the author familiar with the Vuosaari harbor project.

I wonder if it has something to do with the fact that marginal taxes in Finland are among highest in the world and purchase power is the lowest within the old EU countries, especially what comes to persons with higher education. Second, with our curren educational system, with no incentives what so ever, what can you expect. Is that causality so hard to figure out?

If there still is somebody stupid doing long hours - stop it! (except if you are a blue collar construction worker)

According to Bloomberg, the September put option with a 2,800 strike was the most popular DJ Eurostoxx 50 contract that day.

In U.S. an anonymous trader sold 10K contracts on EVERY S&P/Y "strike" shorts stocks "in the money" effectively selling all his SPY holdings for cash up front without pressuring the market downward. This is an enormous and dangerous stock option activity. If it goes right, the guy makes about $2 Billion. If he's wrong, his out of pocket costs for buying these options will exceed $700 Million! The entity who sold these contracts can only make money if the stock market totally crashes by the third week in September.

Allthough these trades are not naked, but a part of poppably some hedge funds' complex contract structure in oder to cut losses or hegde gains, the market seems to prepare itself to a decline.

The National Association of Realtors lowered its 2007 forecast for new and existing home sales for an eighth time this year. The <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Chicago- based group forecast that new home purchases will total 852,000 this year, down from 1.05 million in 2006.

Toll Brothers Inc., the largest U.S. luxury homebuilder, said that its fiscal third-quarter profit fell 85 percent as it was forced to write down property values. Revenue from traditional home sales declined 21 percent and order cancellations jumped 18 percent.

Homebuilding continued to fall at the start of this quarter. An Aug. 16 Commerce Department report showed housing starts fell 6.1 percent in July to an annual rate of 1.381 million, the lowest level in a decade.

How things are in Finland?

Finnish (or European) housing sector is not in that bad shape as in U.S., not even close, due to better credit quality and tighter credit scrutiny.  However, heightened interest rates should make people to become aware of the true price of their house purchases -roughly, a 30-year mortgage loan doubles the price. Many large loans taken during the time of extraordinary low interest rates have become unjustified in terms personal economical flexibility and borrowers have ended up paying solely interest payments instead of paying the principal. I used the word "should" because the universal truth is that, in average, people are too stupid to act rationally.

Some argue that, in the Helsinki area, the need of apartments is high, and this need keeps prices high. Let's make one thing clear, there is a huge difference between "needs" and demand. If all needs would be fulfilled, everybody would have a mansion next to sea, and that is possible only in communism, although mansion would not be the right word in that case. I remenber one article written about rental levels in Helsinki and how candidates often offer rents above the proposed amount in order to get the apartment. What burned into my memory was some "expert" stating that he is concerned about this kind of development because, in this case, the person who is willing to pay most will get the apartment. Maybe we are not so far away from communism after all. The magic word (in so called market economy) is a purchase power of each individual which together with the personal needs define demand on particular price level. In other words, the law of demand, an inverse relation of quantity demanded and price asked. Should not be so hard to understand the basics. 

Most of the residential apartments in Helsinki yield 4-5 percent excluding capital gains – the level of risk free investments. If I would own a residential apartment, I would highly consider going short with it as there are assets providing better expected return with the same risk level (or same return with lower risk). For most individuals, the house is the biggest investment during the whole life, but when people start considering it as one.

Development of rents:

Development of apartment prices:

What makes this even more interesting is a statement made by Wang Zhaowen, a spokesman for Beijing-based Bank of China, on August 15, 2007. He stated that subprime losses for the six months would be "insignificant'', without giving details. 

In addition to concerns regarding the Chinese disclosing policy, this highlights the complexity of predicting how wide-spread this kind of crisis is. Good example is <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Finland, early 90s, when the total bill was 10-fold compared to what was estimated. The chain reaction is just in the beginning.

Stock price development: Countrywide

Stock price development: Bank of China

Maybe the king idea is to profile as a Finnish service provider as EQ and FIM were recently sold to Iceland. Well, that sounds like a good idea but one could think the money flows there where the risk corrected return is highest regardless the nationality, at least it should do that. Who cares about the Finnish values anyway. 

Taaleritehdas surely gets a decent customer base due to founders' relationships and clients coming from Mandatum with the bankers but future growth will require better than industry average performance and mostly favorable market climate. 

Forecasting <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Forecasting the market has historically been extremely difficult. In fact, I tend to believe that forecasting the major cycle movements is not impossible but when it comes to exact timing of these cycles it seems that listening the "market specialists" and forecasting from your morning coffee is equally useful.

Back to the market

Currently, we are living interesting times as fluctuation in equity market has risen remarkably due to re-pricing of credit products. Followed by the recent subprime issues, recognition of credit risks has started to lower investors' market risk tolerance. The big question which arises from all this is whether these credit problems result in a short-term slowdown or is it triggering a consumer-led recession as Morgan Stanley recently outlined. 

All in all, even though equity indices have recovered partly from recent dive, volatility in equity market looks set to continue. The advent of a massive credit crunch that damages <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />US consumption is at this stage the biggest risk scenario.

Emerging markets are driving global growth

In 2007, about half of global GDP growth will come from emerging markets and US firms that are outperforming earnings estimates are getting much of that growth from abroad. However, a few vulnerabilities are seen already e.g., South Africa is running a current account deficit. 

What happens to global economy if China starts a policy driven slowdown in 2008, and, in general, what is the Party's role in China and have investors discounted country related political risks in full? You don't have to be a genius to predict that, with current growth levels, China is facing some inflation concerns. 

Another interesting market is India and its four-year-long bull run. There have been eight corrections of 5% or more from peak to trough. To pinpoint the high volatility, seven out of the eight corrections and subsequent rallies have been "V" shaped, with the May 2004 drop being the exception. The rise subsequent to the fall has averaged a 36% return, with 20%-plus rallies in six out of eight occasions. So far, these have been just corrections in the bull market.

I am confident that, at some point, we are going to see a currency/financial crisis spreading in emerging markets but predicting the exact timing is utterly hard. I don't want to sound like a doom-day prophet by saying this, and may be I am too early, but certainly, there are some warning signals out there.

Some P/E figures: