December 19, 2009

Market Insights - 19 December 2009

Dear Friends & Fellow Investors

Here  is the last issue of Market Insights for 2009.
As always, please email any questions to: . 

Wishing everyone a Merry Christmas and a healthy and prosperous New Year!

In This Week's Issue
▪  Weekly Snapshot
▪  Chart Of The Week
▪  Mini Review Of 2009 
▪  More On The US Dollar 
▪  Bored With Gold

Weekly Snapshot
• US$ at highest level since September, Euro fell below 1.43 on Friday (eSignal)
• German business confidence rose to 94.7 points, the highest level since July-08 (Reuters)
• US Leading Economic Index increased 0.9% to 104.9 in November (Conference Board)
• US consumer price index rose by 0.4% in November (FT)
• Euro area annual inflation increased slightly to 0.5% (Eurostat)
• US current-account deficit increased to $108.0 billion, or 3.0% of GDP (ESA)
• Japan's Tankan survey showed small improvement in business sentiment Q4-09 (
• US Housing starts rose 8.9% from the prior month and fell 12.4% from the prior year, to 574,000 (ESA)
• US Industrial production increased 0.8% in November after having been unchanged in October (NBER)
• CME Group launches Credit Default Swaps and begins clearing trades on the exchange (CME)
• US Producer Price Index for Finished Goods rose 1.8% in November, seasonally adjusted (BLS)
• Industrial production down by 0.6% in euro area (Eurostat)

Chart Of The Week 
Last week, we looked at the disparity in US pay rises and noticed that the average pay increase of federal employees was nearly twice the increment of state/local and private employees since the beginning of the recession.  Here is another way of looking at how government outranks private enterprise these days.  Capitalism seems to have gotten the short end of the straw...

employer costs per hour


Mini Review Of 2009  
The major markets had an incredible rally since the lows in March and the world economy did not fall of the proverbial cliff as some might have feared when the S&P 500 hit 666.79.  But for most of us, 2009 was a challenging year of many ups and downs with the fear of downsizing and higher unemployment looming darkly above everything else.  We will do a more extensive review along with an outlook for 2010 in early January.

In the meantime, let’s re-examine our Predictions for 2009 issued in Mid-January:

• U.S. Housing will hit bottom during summer/fall 2009.
• U.S. 30 year mortgage rates as low as 4.5% - 4.75% sometime in 2009.
• Cont. volatility in energy markets. Oil will eventually trend higher above $50 per barrel at year end.
• Continued volatility in equity markets. S&P will close above 1,000 at year end.
• U.S. budget deficit is a major concern – I predict a deficit of $2 trillion in 2009.
• Onset of a decline in the value of the US Dollar against other major currencies

Although the year has not finished yet, it is probably fair to assume that there won’t be massive changes from current price levels and the majority of the predictions may hit right on target. 

Re: Housing/    This week, Moody's declared that US housing has bottomed but other analysts, including those of Deutsche Bank, predict that house prices may have another 10% to fall.  Based on the Case-Schiller Index, our prediction was quite on target as the Index saw the lowest prices in April and May of this year.   It remains to be seen whether 2010 will see another test of that bottom in house prices.

US Home Prices 

Re: 30 Year Mortgages/   Average 30-year mortgage rates fluctuated slightly above and below the 5% mark for the most part of the year but with a bit of shopping around, one could get really excellent terms in line with the upper band of our prediction.  I personally refinanced a conventional 30 year mortgage under 4.75%.  Something that was not reflected in the low rates was the immense scrutiny and red-tape one had to go through in order to actually get a loan this year.  Even borrowers with excellent credit ratings were seen as potential sub-prime customers as most lenders tightened their mortgage application screws.  Despite the massive bailout money from the tax payers, Banks were not lending, unless the borrowers had substantial down payments and/or above average credit ratings.  Makes me wonder how on earth sub-prime borrowers were ever allowed to purchase homes with no money down...


Re: Oil/  Crude Oil markets were choppy in 2009 but nothing like the volatility we have seen during 2008.  From our initial vantage point back in January, prices dropped to a low of $37.12 but increased steadily from thereon.  Since May, the oil price traded above $50 reaching a high of $82 in October.   Taking into account last year’s price movements, $90 would be about 50% of the price decline from $147 to $35.  While a $25 price of oil is highly unlike even for the die-hard deflationists, one also has to question whether a return to prices above $100 will be sustainable.  In either case, oil should be trading above $50 for quite some time.


Re: Equity Markets/  US stocks had an unprecedented rally ever since the eerie low of 666.79 back in March.  The S&P 500 is up about 65% since then and about 21% since the beginning of the year.  A remarkable performance given this particular time frame.  The fact that this rally bypassed the majority of average investors is not mentioned all too often and whether current valuations are sustainable is yet another question.  But unless something dramatic ensues, the US benchmark should stay above 1000 for the remainder of 2009.  Looking back a bit further, a level of 1,200 is about 50% of the decline from peak to through and that is the major resistance area that needs to be cleared for prices to go higher.  This year’s rally is impressive indeed but the average investor who bought in 2007 has still ways to go before breaking even.


Re: US Budget Deficit/  Depending on the sources, the current budget deficit is expected to be somewhere between $1.5 trillion to $1.8 trillion.  However, the projections from May of this year to reach a deficit of $1.841 trillion are going to be revised upward since the House of Representatives just passed a new $1.1 trillion spending bill and  the US government's debt ceiling may be increased by as much as 16% from its current $12.1 trillion limit.  Sadly, our original prediction will come true as well.

Re: The US Dollar/   The decline of the US Dollar was in the making all throughout 2009.  Just about everyone and their mother was bearish on the Dollar making it a rather crowded place for selling it further. More recently therefore, the US Dollar gained some strength back and appears to be on course to chase back some of the losses incurred during the year.  While the US did not fair too badly against the major currencies after all, emerging markets and commodity driven currencies had bumper years;  the more notable performers were Australian Dollar (+27%), New Zealand Dollars (+23%) and  Brazilian Real (+22%).

FX versus USD  

More On The US Dollar
The US Dollar Index reached 78.14 on Friday, the highest level since early September. 


The US$ Index itself is a good indicator of current overall US Dollar strength/weakness but, as we alluded to last week, it is probably not an ideal way of examining the trend going forward.  To get a better assessment we have to examine each currency pair individually.  For the sake of getting a general picture though, let’s examine some fundamentals anyway.   There are several reasons why continued US$ strength may be the ongoing theme in the coming months: 

• Expectations that the Fed will tighten earlier than expected (see recent PPI and CPI data)
• Better than expected growth in the US and a rebound in global trade 
• US$ is relatively cheap on a purchasing power parity basis 
• Growing concerns about sovereign debt in Europe and Middle East

Assuming the Fed will tighten relatively early and that the US will continue to gain strength, a lot of the funds flowing into relatively risky assets will return home in expectation of future rate hikes.  A logical looser for such a scenario would be “the carry-trade of 2009” the Australian Dollar and, to a lesser extent, other emerging market currencies with current yield advantages over the US$.  

Commodity-rich countries and their currencies may also loose some of their appeal if commodities fall in line with a stronger US$ (assuming that the inverse correlation continues going forward).   As we have seen with Gold, losing some of its shine in recent weeks, this may very well be the case . 

A stronger US$ is also very much desired by export driven countries who don’t have a Dollar peg (i.e. Japan, Brazil, Germany etc.), and who have experienced massive set-backs from a weakening Dollar in addition to the vanishing US consumer demand.  A stronger US$ gives these exporting nations some room to price their goods more competitively.  China, which maintains a fixed exchange rate, does not directly benefit from the outset; however, indirectly it relieves some pressure on the Chinese Central Bank to maintain artificially lower exchange rates. Further, let’s not forget the approximately $2 trillion in currency reserves and the massive amounts of US Debt they are holding.  An increase in the value of the Dollar means that their investments in US assets are regaining in strength as well. 

Another factor benefitting the US Dollar and weighing heavily on the euro were the peripheral downgrades for Greece, Spain and Ireland. Anytime sovereign debt is called into question, take the example of Dubai, a sudden shift into a safe haven currency or commodity occurs.  And, as in the case of last years credit crunch, the de-facto safe haven still appears to be the US Dollar.

An ongoing Dollar rally would also mean that the investor rationale since March is about to change.  Reversals of carry-trades, profit taking and/or reversals of positions in commodities, emerging market stocks as well as US stocks may ensue.  Hence, even in a bullish Dollar scenario, the investment climate remains challenging when trying to achieve a balanced portfolio.  Short of putting all your eggs in one basket (i.e. US Cash or Bonds), a stronger Dollar may bring about some additional portfolio challenges. 

Looking at the other side of the coin now:  Let’s assume that the recent Dollar strength is just a brief episode, a retracement or a pause in the underlying trend.  Several analysts including reporters of the Financial Times commented that the reason for the current US Dollar strength had little to do with the factors noted above.  Instead, the main reason was that investors who had accumulated short positions in the Dollar since the beginning of the year have recently begun to square those position ahead of the year-end.   This means it is just a technical correction in the underlying trend. 

The chart below illustrates how the Euro versus US$ had a retracement since it’s recent peak and it has been approaching the 38.2% Fibonacci retracement area.  To see an actual trend reversal in favor of the Dollar, substantially lower technical levels below 1.38 and just under 1.35 need to be reached.


During this week’s FOMC meeting, the Fed hinted that it might discontinue quantitative easing (QE) earlier than expected.  In view of the recent increase in the producer price index and the fact that inflation is being recognized as a possible side-effect of QE (who would have thought...), one must consider rates creeping up at some point.  The setting of higher benchmark rates by the Fed though bears the risk of a double dip recession, politically an untenable proposition.  Anyone still believing in the independence of the Fed, think again!  Those days are long gone. Today, we have a Fed led by Ben Bernanke who is continuing with the tradition of Alan Greenspan in being much more politically accommodating than Paul Volker ever could have tolerated.   Whether QE will continue or rates may creep up by 25 basis points at some time next year, overall benchmark rates will remain extremely low for the foreseeable future. 

To make one more point absolutely clear, it is our conviction that the Fed will be accommodative irrespective of any inflationary pressures (CPI and PPI numbers have a history of being massaged anyway) until such time that it finds it difficult to finance the $12.1 trillion (and counting) deficit .  From the US government’s perspective, there is no easier way to dilute the debt burden.  Keep rates artificially low and let the public believe that inflation does not exist.  As long as it can find buyers for its IOU’s, the US government will go on with its charade for quite some time.  But the ever mounting debt burden, combined with low interest rates does have this negative effect on the Dollar.  The exchange rate is effectively the economic valve allowing this Ponzi Scheme to function in the first place.  The more pressure (debt) builds up internally, the more the valve has to adjust in order to keep things somewhat in balance.   Consequently, it is hard to imagine a true build up in US Dollar strength without fundamental improvements in the US government’s finances. 

How these scenarios will play is not clear at this point – it’s complicated... 

However, we firmly believe that the US Dollar is still in a cyclical long-term down trend and that the only way to get back to the glory days of a strong Dollar and to maintain its status as a true reserve currency is via sound fiscal and economic policies and via a strong and sustainable economy.   No predictions in terms of prices at this point, but rest assured that 2010 will not be a quiet year.

Bored With Gold
Gold closed the week at 1,112.50 more than $100 below it’s all-time peak of $1,226.40.  The inverse correlation to the US$ worked like a charm and in line with the recent Dollar strength, Gold lost some of its luster.  Similar to the fate of the US$ is the question as to whether Gold’s rally is now over and done.   While you may ponder on this question over the holidays  I would like to end the year on a positive note and recommend a refreshingly simple even humorous way of looking at an investment.

James Altucher, ever so funny, has an intriguing way of assessing investments in gold.  "I'm So Bored of Gold," he notes.   So next time you wonder when it’s time to sell an investment, follow your heart and if you’re bored with the investment, just look for alternatives.  Who knows, it may be the best money making proposition.

Once again, best wishes for the holidays and have a happy and prosperous New Year!

Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance.

December 12, 2009

Market Insights - 12 December 2009

Dear Friends & Fellow Investors

Here is our new issue of market insights.
In case of questions, please email: .  Enjoy reading!

In This Week's Issue
▪  Weekly Snapshot
▪  Chart Of The Week
▪  Recommended Video
▪  More On The US Dollar 
▪  More On US Debt 
▪  The Unemployment Game Show 
▪  Charts & Thoughts

Weekly Snapshot
• US consumer sentiment index rose to 73.4 in early December from 67.4 in November (Marketwatch)
• US House passes $1.1 trillion spending bill; debt ceiling likely to be increased by $1.5 trillion (AP)
• Goldman Sachs said its top 30 executives will receive no cash bonuses for 2009 (WSJ)
• State government total revenues in fiscal 2008 fell 15.8% from 2007 (US Census)
• US Retail sales increased 1.3% last month the largest advance since August (Reuters)
• UK imposing a 50% tax on bonus pools, effective immediately (FT)
• France to follow UK with a supertax on bankers' bonuses (WSJ)
• Mexico buys $1bn insurance policy against falling oil prices (FT)
• US trade deficit in goods and services in October 2009 decreased 7.6% to $32.9 billion (ESA)
• US exports rose 2.6% to $136.8 billion, and imports increased 0.4% to $169.8 billion (ESA)
• S&P cuts Spain's rating outlook from stable to negative (Eurointelligence)
• Greece’s credit rating was downgraded to BBB+, with a negative outlook, by Fitch (Economist)

Chart Of The Week  
US consumer sentiment ticked upwards in early December, perhaps less bad news from the labor markets is one of the triggers for that.   Still a long way to go before getting back to the exuberant days of the 90s.  Reflecting upon this chart, the pessimists would find similarities between today and the early 80s.  Back then, the peak in unemployment only happened three years after the trough in consumer sentiment.  They would also point out that a double-dip recession similar to then is a possibility one should plan for.



Recommended Video
Jim Rogers, the famed commodity trader and hedge fund manager has a cunning way of expressing his opinion on US economic and fiscal policies.  Although he recently changed his positions slightly in favor of the US Dollar, he still holds a rather bearish view in terms of a sustainable US recovery, best expressed when he asked:  “Do you believe what the government says?”

More On The US Dollar
The US Dollar made a decent recover this week, with the US$ Index now trading above the 50 day moving average and closing the week above 76.  From a trading perspective, there is more upside in place, with only minor resistance levels at just under 77.00 and around the 77.50 level. In view of the increased news coverage about the  US Dollar and the US Dollar Index, we thought it would be timely to shed some light on the significance of this index.  USD-2009-1211

The US Dollar Index is not a physical currency or commodity but rather a financial instrument assigning a hypothetical value of the US currency compared to a basket of other currencies.    The six component currencies are Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc all with different percentage weights in the Index.  This Index is only available as a future or option contract and is currently traded on the InterContinental Exchange (not recommended for the average investor).   Although everyone is talking about the US Dollar Index, it is not nearly as commonly known that its significance pales in comparison to the Spot Currency Markets and the currency futures traded on various exchanges.  Spot or Cash Currencies are by far the largest turning over some $3 trillion each day.  Futures Markets are next in line, with the Chicago Mercantile Exchange (CME) at the forefront in terms of trading volume as well as sophistication of financial products.  The CME experienced record trading volumes and notional values for currency products just last Friday, December 4, 2009. 

Trading volume for FX products reached 1,396,035 contracts with a notional value of $184.9 billion. Euro products experienced record volume of 494,444 contracts with a notional value of $91.6 billion.

Looking at the Euro versus US$ future as an example, this contract has a nominal value of 125,000 EUR equivalent to about $183,000 at today’s rates.  During November-09, 5,419,926 contracts were traded on the exchange giving it a notional volume of $989,136,495,000.  Comparing these numbers now to the US$ Index one can clearly see that the US$ Index is not nearly as significant as it is talked about.  Albeit reaching new record levels during November, it only traded about 350,000 contracts at a notional value of about $26 billion, not even 1/300 of the volume of Euro Futures.  At best, one should consider it as a reference value.

US$ Index contracts traded

More On US Debt   
Please consider: Congress Squabbles Over Debt Ceiling 

As the US House of Representatives passed a $1.1 trillion spending bill there is much debate about a need to raise the government's debt ceiling by as much as 16% from its current $12.1 trillion limit.  It was just last week, when we examined the level of US Debt.  With this new information on hand, we need to update the recent chart to reflect the additional debt burden.

 US Total Public Debt

And if you wondered where the US government spends all this money,  take a look at where some of the increase in debt came from: 



The Unemployment Game Show  
As we pointed out a number of times before, a sustainable US recovery can only come from an improvement in employment.  Unless the US can find a quick way to reverse the trend and become an export driven economy, the US consumer must be liquid and willing to do spend spend spend his way to recovery.

An unemployment rate of 10% is bad, but how realistic is that rate?  Here’s an interesting explanation:

Other commentators aren’t all that cute and paint a much bleaker picture of the real employment situation.  Please consider Mike Shedlocks: Fed's Unemployment Projections From Mars

As he points out, the Fed Forecasts of an unemployment rate between 6.1-7.6% by 2012 cannot be realistic:

Using Bernanke's estimate that it takes 100,000 jobs a month to keep up with birthrate and demographics, the economy will have to create 260,000 jobs every month in 2010, 2011, and 2012 to hit an unemployment rate of 6.17% by the end of 2012.  To get to 7.6% by the end of 2012, the economy would have to average 200,000 jobs a month for the next three years.

It is well beyond absurd to expect the economy to average even 200,000 jobs a month, let alone 260,000 jobs a month when neither the housing boom nor the commercial real estate boom could manage those numbers over a sustained period.  In short, the Fed's unemployment projections must be for some other planet or for some other alternate universe somewhere because they do not reflect reality here.

Other economists like Paul Krugman have slightly different approaches but share the same concerns and consider the official forecasts unrealistic.  From his article: Bernanke’s Unfinished Mission

My back of the envelope calculation says that we need to add around 18 million jobs over the next five years, or 300,000 jobs a month. This puts last week’s employment report, which showed job losses of “only” 11,000 in November, in perspective.

If one agrees that a sustainable recovery can only come from a healthy labor market, projections for a growing US economy are not looking nearly as bright as US equities might suggest at the moment. 

Charts & Thoughts
Let’s look at an overall market summary with the help of a few charts.

Gold fell over $100 since the peak of $1226.40 and it is now approaching several key technical areas. 

Gold-2009-1211  Gold-2009-1211-ma  


While the underlying major bullish trend is still in tact, 50 day moving average and Fibonacci retracement levels (61.8%) point towards $1100 as a key support for Gold.  Given the current momentum and daily price volatility, it is not unlikely that this key area will be tested within a few days.  Although not directly correlated, a key component will be the value of the US Dollar.  Stay tuned for more market volatility in this commodity.

Oil was trading sideways for much of October/November only to fall below the 50 day moving average this week.  It briefly traded below $70 on Thursday.  Renewed US Dollar strength in the interim and weaker consumer demand could bring additional price pressure forward.


US Stocks have also been trading sideways now for several weeks.  We are still looking at the same inflection point, the 50% retracement from peak to trough @ about 1120 on the S&P500.  This technical hurdle needs to clear to consider a trade on the upside.


Good luck & good trading!

Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance.

December 05, 2009

Market Insights - 5 December 2009

Dear Friends & Fellow Investors

Here is the latest issue of market insights.  For any questions, please email: .  Enjoy reading!

In This Week's Issue
▪   Weekly Snapshot
▪   Charts Of The Week
▪   Interesting Read 
▪   Job Recovery 
▪   Time For Optimism
▪   The Case For The Dollar

Weekly Snapshot
• US$ Index up about 1.5% on Friday following better than expected employment data (Stockcharts)
• Gold set a new all-time high at $1225 on Thursday before falling to $1,162 on Friday (eSignal)
• US unemployment rate fell to 10.0% percent in November, nonfarm payroll employment was -11,000 (BLS)
• Dubai concerns ease after talks began to restructure $26 billion of debt (Bloomberg)
• Euro zone rates remain at record low of 1%; ECB outlines plan to unwind liquidity support (
• Euro area GDP up by 0.4% and EU27 GDP up by 0.3% (Eurostat)
• Australia's Central Bank raised interest rates again by 0.25% for a third consecutive month (
• 30-year mortgage rates dropped to a record low of 4.71% this week (AP)
• Euro area unemployment rate stable at 9.8% (Eurostat)
• Euro area inflation estimated at 0.6%  (Eurostat)

Charts Of The Week   
As the calendar year draws to a close, let’s take a peek at how things have changed in the last 12 months.  The chart below shows that all major international stock indices performed exceptionally well compared to a year ago.  The big story of course is how much the developing countries outperformed the traditional G7 countries this year, despite seemingly less stimulus efforts and governmental support, particularly in countries like Brazil and India.


Taking into account the drop in the value of the US Dollar, overseas markets when valued in US Dollars had an even more impressive run.  The chart below shows the stock market returns of international indices inclusive of the changes in currency exchange rates.  The biggest winners of the currency appreciation were Australia  and Brazil adding another 42% and 31% respectively to their returns.


Interesting Read 
Please consider this interesting article by Henry Blodget:  The United States of Wusses

As so often, Henry Blodget takes a very basic common sense approach to look at all things financial.  If nothing else, you have got to commend Mr. Blodget for his spot-on lingo.

Job Recovery  
Given the better than expected employment numbers on Friday, investors may get a new sense of optimism along the lines of “the worst is over” now that the employment data suggest an end to the decline in US jobs.

From the Bureau of Labor Statistics (BLS) Employment Report:

The unemployment rate edged down to 10.0 percent in November, and nonfarm payroll employment was essentially unchanged (-11,000). In the prior 3 months, payroll job losses had averaged 135,000 a month. In November, employment fell in construction, manufacturing, and information, while temporary help services and health care added jobs.

While this is good news, the unemployment rate is still at double digits and is the worst we have experienced since the early 80’s.

US unemployment

More importantly, some analysts debate the relevance of the data and point to an alarming development.  According to the BLS, there are a record 5.8 million workers who have been unemployed for more than 26 weeks.   Calculated Risk Blog has a great chart showing how a significantly larger share of the workforce has been unemployed for over 26 weeks.


Time For Optimism 
Please consider a very good article by John Mauldin: Why I am an Optimist

I found this to be an excellent theme considering the state of the markets, the real economy and the presently dominant angst about the Dollar.  As he is making a strong case to be optimistic for the long-term, the following paragraph best reflects the case for a good dose of realism:

All that being said, while I am an optimist, I am a cautious and hopefully realistic optimist. I do not think the stock market compounds at 10% a year from today's valuations. I rather doubt the Fed will figure the exact and perfect path in removing its quantitative easing. I doubt we will pursue a path of rational fiscal discipline in 2010 or sadly even by 2012, although I pray we do. I expect my taxes to be much higher in a few years.

With this in mind and on the back of the market’s positive reaction to the employment numbers, let us examine the US markets and the US Dollar more closely.

The S&P closed the week at 1105.98 continuing an essentially side-ways pattern that started about 3 weeks ago.  Technically, we are at the same inflection point that we discussed two weeks ago.  The major bear market trend line (purple) has been touched and could potentially be broken if the current sentiment and the positive momentum from better employment numbers continues.  The major market trend line as well as the 50% Fibonacci retracement level (blue lines) are critical points for system traders and technical trend followers.  The upward pressure to break out increases with time but we should point out that these inflection points often trigger sell orders for downside protection as well.


The Case For The Dollar 
The US Dollar made a big turn-around as it rallied about 1.5% on Friday and closing the week up 1% .  As more and more people jumped on the band wagon, trashing the  Dollar Index in favor of other currencies this year, and as Gold reached new highs almost daily, it seemed like an opportune time to take some money off the table.  Sure enough, with just a bit of good news Gold fell over 4% on Friday and already some analysts have jumped ship calling for the end of the Dollar carry-trade.  The Dollar's inverse correlation with almost all asset classes in recent months has made investing away from the dollar almost fool-proof.  Buy anything other than US Dollar denominated assets and you are bound to make money in US Dollar terms. 

And yet, with this all around inverse correlation comes increased risk.  Assuming that the inverse correlation remains even partially consistent, it could cause a return to the perceived US Dollar safety, if problems in any of the non-Dollar asset classes were to arise.  For instance, the recent 2% tax Brazil imposed on foreign investments to slow down an overheated economy.  Or take the case of Gold’s massive one-day drop where investors were taking profits and turning them back into US$. Similar scenarios could be envisioned for many other investments in emerging market stocks, emerging market properties (the recent Dubai crisis) or commodities in general.  The higher one asset class rises, the higher the risk for a pull back out of that asset class and back into the US Dollar.

Having said all that, let’s not forget why everyone has been trashing the Dollar since the beginning of this decade (outside of a few episodes that countered the bearish Dollar trend).  Here is one reason:

US Debt

There are many more reasons including the still fragile US recovery. Despite the recent positive jobs data, underlying economic conditions of a largely consumer-driven US economy remain difficult.  Some of the underlying economic challenges include:

• Since Lehman’s fall, the US has lost about 6.2 million jobs
• The unemployment rate is 10% now, versus 6.2% the day before Lehman collapse
• About 25% of all U.S. mortgage holders are under water
• Real gross domestic product is still down 3% since the summer of 2008
• Bank credit has contracted by $500 billion
• Household net worth is down $7 trillion
• The US budget deficit has tripled

With 2009 in hindsight, it really paid off to be an optimist.  As seen above, all major stock markets had strong rallies and so did most other asset classes, except for the US Dollar itself.  However, one should carefully evaluate how the US can position itself long-term.  In terms of the US Dollar, beside the domestic and economic challenges, the US government’s financial condition would seem to be the pre-eminent factor weighing on the Dollar.  As long as the US has to revert to quantitative easing and near zero interest rates, money will flow to asset classes and places with higher returns.

Good luck and good trading!

Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance.

December 01, 2009

Higher Margin Requirements for Leveraged ETFs

New FINRA regulations on leveraged ETFs came into effect today, December 1st, 2009.  Maintenance margin requirements on leveraged ETFs are now 60% on 2x leveraged ETFs (both long/short) and 90% on 3x leveraged ETFs (both long/short).  Please consider these new requirements when assessing transactions in these non-traditional ETFs.

November 28, 2009

Market Insights - 28 November 2009

Dear Friends & Fellow Investors

Due to the US Thanksgiving Holiday, market insights comes in an abbreviated format.  As always,  please email any questions to: .  Enjoy reading!

Weekly Snapshot
• Gold prices reached a new high on at $1,195 on Thursday (eSignal)
• US new home sales in October 2009 increased 6.2% to 430,000 (Bloomberg)
• US durable goods orders in October 2009 decreased 0.6%, to $166.2 billion (ESA)
• Industrial new orders up by 1.5% in the Euro area (Eurostat)
• US Consumer Confidence increased to 49.5, up from 48.7 in October (Conference Board)
• Second estimate for US GDP saw an increased 2.8% in Q3 2009 (ESA)
• Driven by the first-time buyer tax credit, existing-home sales surged 10.1% in October (

Charts Of The Week  
The US Volatility Index a.k.a. the fear index has been on a relatively steady path down back to pre-crisis levels indicating that a recovery has been in the making, at least as far as stocks are concerned.  We recall the insane volatility levels reaching almost 90 in October of last year.  In terms of market jitteriness, we are certainly better off today than a year ago. VIX-2009-1127-W

However, on Thursday world markets rattled again when Dubai World, the state holding company of Dubai, announced that it is seeking a standstill on repayment of part of its debt.  Dubai World said it seeks a six-month delay in paying creditors about $60 billion in debt.  Worries about exposure of mostly European banks triggered a wave of selling across the globe.  Volatility jumped almost 6 points on Friday and financials came under intense pressure closing Friday almost 3% down. Considering the relatively small exposure, the market sell-off is a stark reminder of how frail the recent market recovery really is.



Recommended Video 
Barry Ritzholtz gives an excellent overview of the US property market.

Happy Thanksgiving!

Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance.

November 22, 2009

Market Insights - 22 November 2009

Dear Friends & Fellow Investors

Here is the latest issue of market insights.  For any questions, please email: .  Enjoy reading!

In This Week's Issue
▪   Weekly Snapshot
▪   Chart Of The Week
▪   US Economy Versus US Markets 
▪   More On The Dollar 
▪   More On Currencies
▪   Fed Balance Sheet
▪   A Different Approach To Financial Regulation

Weekly Snapshot
• US house of representatives approved Ron Paul's bill to "audit the Fed" (Marketplace)
• Euro area unemployment up to 9.7% (Eurostat)
• Germany's new finance minister Wolfgang SchĂ€uble warns US on market bubbles (FT)
• Some Treasury bill rates were negative again Friday after falling below zero Thursday (WSJ)
• The euro zone exited recession in the third quarter when its economy grew by 0.4% (Economist)
• US Housing starts declined 10.6% from last month and fell 30.7% from the prior year to 529,000 (ESA)
• OECD doubled its growth forecast for 2010 to 1.9% for 30 leading economies (Economist)
• US Leading Economic Index up 0.3% in October following a 1.0% gain in September (Conference Board)
• Gold reached a new all-time high of $1,152.80 on Wednesday (eSignal)
• US Consumer Prices up 0.3% in October after rising 0.2% in September (Bloomberg)
• US Producer Price Index advanced 0.3% in October (BLS)

Chart Of The Week  
Economic sentiment and leading economic indicators throughout numerous developed countries have been rising in line with the appreciation of most major asset classes.


Data Source:

US Economy Versus US Markets
The US benchmark Index S&P500 reached a new yearly high just above 1,113 early in the week. Despite a drop off on Thursday and Friday, US markets are now up over 20% for the year and over 63% higher than the low in March-09.  The S&P 500 chart has now reached a critical technical inflection point, it’s almost a field day for technical analysts.  The major bear market trend line (purple) is now within arms reach and could potentially be broken if sentiment and momentum continues on a positive note.  At the same time, the market has been approaching the 50% Fibonacci retracement level (blue lines) as marked from the highest to the lowest points in the current bear market.  These points are critical because system traders and technical trend followers are placing their orders around these type of inflection points.  Failure to break above these trend lines typically cause markets to retrace.  A failure to break above this major trend line will trigger sell orders and protective trading strategies.


In addition to the technical signals indicating a hurdle for US stocks, we have to revisit the underlying economic conditions which, despite the recent positive GDP numbers, are showing a much less favorable picture in terms of feeding the projected earnings at which stocks are currently valued at.  By some estimates, the S&P 500 is about 20% above fair value.   Officials are pinning much of their hopes on a recovery in the housing market.  But as last month’s housing starts numbers suggest, it is still an uphill struggle which may get worse when the $8,000 tax credit for new home purchases ends.  As we noted before, a sustainable recovery cannot come from a return to (over) leveraged home purchases.  Instead, the recovery of a consumer-driven economy can only come a from a healthy labor market.  The job picture however, does not give rise to a positive outlook on earnings anytime soon.  Yet, there could be a silver lining in the much debated dollar weakness.  A weaker Dollar bodes well for US exports.  At least in the short to medium term, the US Dollar weakness may be a blessing in disguise.  

More On The Dollar
Please consider the video interview with Mark Dow, hedge fund manager at Pharo Management.

Mark Dow gives a different view on the much debated topic of the falling US Dollar.  While most of the rationale for a weaker Dollar has been focusing on the supply side thus far, he argues that the lack of demand may be the more significant factor determining the price level of the Greenback.  To his point, one should note that there has been a significant shift in attitudes since the beginning of this decade, not just for economic but also for political reasons.  All other things being equal, non-Dollar denominated assets have been increasingly appealing to international investors.  Outside of the flight-to-safety phenomenon which sparked a reprieve for the US Dollar during the financial crisis, the capital flows have been ever more one-sided and out of the US into other jurisdictions.  As the risk appetite increases, this trend will continue.  Contrary to that, there is also an increased risk of yet another bubble as more asset classes are moving in tandem to higher levels.  The potential risk of a double-dip recession and a return to deflationary asset prices may be the impetus for a stronger Dollar yet again.

More On Currencies   
Currencies have been getting a lot more attention from the general public but much of the focus in the press has been on the questionable value of the Chinese Yuan or Renminbi versus the US Dollar.   No matter where the exchange rate of this currency pair may be at, based on the current global economic conditions, each outcome creates various sets of problems for both China as well as the US.  In reality, there is no more or less desirable exchange rate as the economies of the two nations are increasingly inter-twined. 

For a change, we would like to focus on exchange rate of the Chinese Yuan (CNY) versus other currencies.  The chart below shows the exchange rates of the CNY versus the Euro and versus the Australian Dollar.  For comparison, we have also included the CNY versus US$ which is a managed rate and does not freely float. 


Almost in line with the rally in stocks since March of ‘09, the Euro and Australian $ have gained against the CNY by almost 20% and 46% respectively   China is still the largest trading partner of the US; however, as their currency, along with the US$, depreciates against other major currencies, exports to other countries become more attractive through massive price advantages from a weaker CNY.  A new focus on other export markets also makes sense from the Chinese perspective, keeping in mind that the US consumer may no longer be liquid enough to consume.  Massive pricing advantages as a result of favorable exchange rates will allow China to flood Europe and other hard-currency nations with goods from the recent build up in capacity.  It will be interesting to see however, if China can convince consumers of other nations that Chinese goods are more important than the inherent and culturally dominant desire to save rather than to consume.

Fed Balance Sheet  
The US Federal Reserve's balance sheet has grown substantially during the financial crisis. Total assets of the Federal Reserve have increased significantly from $869 billion on August 8, 2007, to well over $2 trillion until today.  As Mark Dow alluded to in the video interview above, the Balance Sheet has been relatively stable and did not increase since the end of 2008.  The chart below is a good visual representation as to why much of the stimulus and efforts by the US government have only limited impact on the real economy.  Supply-side economics may not work in the current scenario.  A focus on the demand side of the equation may produce faster and more sustainable results.

Fed Balance Sheet

A Different Approach To Financial Regulation  
Please consider Peter Smith’s article in the FT:  Australia tightens monitoring of rating agencies

You have to give it to the Australians!  They were the first of the G20 nations to tighten monetary policy and now they have shown a move towards financial regulation which makes a lot of sense, directly targeting ratings agencies in order to prevent irresponsible and obscure financial engineering.  We have expressed our dismay with ratings agencies on numerous occasions.  Conflicts of interest are caused by an inherent flaw in the system:  Ratings agencies are paid by the companies whose debt instruments they are supposed to rate.

From the start of next year, ratings agencies operating in Australia would require a financial services licence. To keep the licence, they would have to manage conflicts of interest, have resources that match the "scale and complexity" of their business, and have risk management systems.  They would need to file annual compliance reports, disclose procedures and methodologies for ratings affected by "material changes" within six months. The watchdog has closed a loophole whereby retail investors were unable to sue a rating agency if it had not given its consent to have its rating used in marketing material.

This is a very good and important step in the right direction towards more effective, not necessarily more complex financial regulation.  It is encouraging to see how fast the Australian regulators reacted and that significant disincentives are placed upon ratings agencies to '”over-rate” financial instruments.  Albeit less complex and not as liquid as US and European financial markets, regulators should look towards the Australian model in making regulation and financial markets more transparent and more effective.

Good luck and good trading!

Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance.

November 15, 2009

Market Insights – 15 November 2009

Dear Friends & Fellow Investors

This week's market insights comes in a short format; due to time constraints I'd like to focus on just a few topics.  For questions, please email: .  Enjoy reading!

Weekly Snapshot
• Bank of China hints at possible revaluation of Renminbi (FT)
• Gold reached a new record high of $1,123.50 on Thursday (
• The US trade deficit in September 2009 increased 18.2%, to $36.5 billion (ESA)
• Bank of England’s projects a robust recovery approaching 4% by the end  2010 (Economist)
• Industrial production up by 0.3% in euro area (Eurostat)
• Euro area GDP up by 0.4% and EU27 GDP up by 0.2% (Eurostat)
• US consumer prices in September eased to a 0.2% gain after jumping 0.4% in August (Bloomberg)
• China’s industrial output grew by 16.1% in October compared with a year earlier (Economist)
• US producer prices fell 0.6% in September after rebounding 1.7% the month before (Bloomberg)

Chart Of The Week  

Having just returned from a week in Europe I was looking forward to catching up on the latest financial news. Plenty of newsworthy developments since the beginning of this month: Gold and other commodities at ever higher levels, a double-digit US unemployment rate at the highest level in nearly 30 decades and continued discussions as to whether general asset prices are approaching bubble levels again.  The most amazing and shocking news came from the beloved banking sector again.  In case you don’t dislike bankers enough yet, read on...

Europeans came together in Berlin to commemorate the 20th anniversary of the fall of the Berlin Wall.  The leaders of major nations united in speeches calling the fall of the Berlin Wall a victory of freedom over oppression.  United in their appraisal of the importance of this event, they called on a renewed spirit of cooperation to tackle the problems of the 21st century.  While such lofty humanitarian and political goals are be highly commendable, it was again a banker topping everyone and everything else stated.  None other than Lloyd Blankfein, the new Superman of finance, would be worthy of the ultimate raison d'ĂȘtre. In an interview with the Times, Mr. Blankfein was quoted as saying: I'm doing 'God's work'.  This is certainly a big step up from our perceived notion of the recently quoted "Government Sachs" alluding to the massive influence that Goldman Sachs may have over politicians in the US and perhaps elsewhere.  I cannot seem to find the right words in expressing utter disgust and shock in the face of such an outrageous statement.  In the style of the popular comedy show Saturday Night Life, all I can think of is: Really!?!

It’s not food, not a drink, not a restaurant and it does not refer to Coco Chanel either.   CoCo’s  a.k.a. Contingent Convertible Bonds are yet again a new financial product (a new financial WMD?) this time dreamed up by Lloyd’s Banking Group.  The idea has been floating around for some time but Lloyd’s Bank has been the first to materialize some £9bn in capital from this new convertible bond.  Convertible Bonds have been around for a long time but this particular type raises some serious questions.   Traditional Convertible Bonds provide an incentive for Bond holders by giving them an upside potential.  If the company is doing well, they can be converted into equity, giving the investor a chance to profit from the stock appreciation.  As such, the investor foregoes a higher interest rate in exchange for taking part in that upside potential. 

CoCo’s by contrast convert into equity when a pre-determined measure of the Bank’s strength is breached.  Until then, the bank would pay a higher dividend from the normal bond yields to compensate the investor for the potentially higher risk. 

Given the recent history of bank failures and stock values that in some cases left equity holders with 10 cents on their invested dollars (or less), one would think that such an endeavour  would be a hard sale.  Yet, investors seemed to take up  the £9bn issue.  

From my perspective, these new instruments are as dangerous as CDO’s and CMO’s (the derivatives that caused the credit crisis).  The flaw in the concept is the notion of incentivizing failure versus success.   The bank issuing this bond can initially raise capital albeit at a higher cost for them.  Once the capital is raised, the incentive for the bank is no longer to do well, but to “fail” because that would trigger the Bond version to Equity, enabling them for forego interest payments.  I see no sense in purchasing these CoCo’s; the odds are clearly in the bank’s favor giving a negative incentive to perform.   I suggest you treat yourself to some hot cocoa instead. 

Recommended Lecture Series   
George Soros gave a series of lectures at the Central European University in Budapest, sharing his views on financial markets from a practical and philosophical perspective. He unveiled the concept of reflexivity as the main cause of what determines market prices.  His explanations are are conceptually abstract and may be difficult to digest.  However, the lectures give a rare insight into the mind of one of the most successful investors and show his desire to do be a recognized as a philantropist rather than a trader.  The entire series is somewhat lengthy but particularly the lecture on financial markets is well worth a view.  Click on the image below to view the series as well as the transcripts.


Good luck & good trading!

Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance.

November 04, 2009

Fed Keeps Rates Near Zero

As expected, today’s FOMC meeting concluded with more of the same: short term rates near zero,  a continuation of quantitative easing policies and providing additional support for US housing markets by purchasing $1.25 trillion in mortgage backed securities and $175 billion of agency debt.

The FOMC Statement below is also available at:

FOMC Statement - Release Date: November 4, 2009

For immediate release
Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

October 31, 2009

Market Insights - 31 October 2009

Dear Friends & Fellow Investors

Here is the latest issue of market insights.  We are taking a break in November but will be back with a new issue by mid-November.  For any questions, please email: .  Enjoy reading!

In This Week's Issue
▪   Weekly Snapshot
▪   Chart Of The Week
▪   Thoughts On The Economy 
▪   Real Estate 101 
▪   More On Property
▪   More Jobs
▪   The Dollar Isn't Doomed
▪   Happy Halloween

Weekly Snapshot
• Average US Retail gas price at $2.70 per gallon, highest in a year (AP)
• Euro area unemployment up to 9.7% (Eurostat)
• US consumer sentiment index for October slipped to 70.6 from 73.5 in September (Reuters)
• US GDP increased at an annual rate of 3.5% in the third quarter of 2009 (ESA)
• Norway first European country to raise interest rates since financial crisis (FT)
• Britain’s economy contracted by 0.4% in the third quarter of 2009 (Economist)
• US New home sales in September 2009 declined 3.6% from August, to 402,000 (ESA)
• US durable goods in September increased 1.0%, to $165.7 billion (ESA)
• A maximum Euro/US$ rate of $1.55 is a critical pain threshold for German exporters (FT Deutschland)
• ING Bank agreed to EU demands to sell its insurance units to secure approval for its bailout (Bloomberg)
• US consumer confidence at 47.7 (1985=100), down from 53.4 in September (Conference Board)
• Home prices rise for the third straight month in August (AP)

Chart Of The Week  
A good overview of consumer confidence in various countries.



Thoughts on the Economy
US Equities rallied on Thursday after the announcement that GDP grew 3.5% in the third quarter.  So much for the worst recession since the Great Depression - or is it?

Friday came around taking back all the gains and more as the market apparently wasn't buying it quite yet.  After the initial cheers on Thursday the mood was dampened by another decrease in consumer sentiment.  But investors also realized that much of the GDP gains came from the cash-for-clunkers program (car buying incentive), the $8,000 tax credit for new home buyers and obviously the bulk of the 12 figure stimulus package to support the financial and banking industry. With this much stimulus pouring into the economy, no surprise that it is showing some upside now.  Remember, this is no longer a free-market economy but much closer to a control economy that has stimulus levers written all over.

While the majority of economists probably agree that the worst is over the debate has now changed to the question of the shape of the recovery.  Is it a V or a U shape? I would leave that debate to the economists and instead examine some of the concepts of the stimulus efforts. 

Let's assume for a moment that everyone agrees on the need for stimulus and let's also assume that the amounts of stimulus are agreed upon.  What remains is simply where to put stimulus to work. In terms of the stimulus efforts by the US government, I have a conceptual problem with the idea that a recovery should be based on housing.  Haven't we learned that the concept of a home as an ATM machine is flawed?  Instead, any sustainable recovery should come from efforts to create more jobs by giving incentives for productive capacity.  Innovation must be a driver and efforts to improve education, specifically in areas of sciences, would make sense.  If the US wants an educated work force, the country must promote educational efforts domestically.  Exporting education, technology and business intelligence overseas or worse even, outsourcing all the above is not the answer. 

In terms of housing, one must understand that, aside from the utility of owning a home for shelter, the house itself (not the land) is actually a depreciating asset, much like a car.  A house is prone to entropy and needs to be maintained; otherwise it falls apart.  Any home owner should know that.  If more people buy depreciating assets, how should that lead to sustainable economic growth? 

Real Estate 101
One may not agree with some of Peter Schiff's political views or some of his controversial predictions but he has a cunning ability to put clarity into some foggy financial concepts. Your realtor friends may hate you after you viewed this, but it's an important reminder of the basic concepts of real estate.  Enjoy!

More On Property  
With Peter Schiff's video in mind, property prices may not be quite as relevant any longer.  But let's examine the chart below anyway and just consider housing prices from a simple perspective of potentially matching inflation.  To assess whether the current home prices are sensible from the perspective of matching inflation, you can use this Inflation Calculator.

US Home Prices

A general price level of 100 in the year 2000 would result in a price of 125.42 in 2009 if accounted for inflation.  On that basis, housing prices are still doing well outperforming inflation by about 20% or about 2.2% annually.  We have not assessed how that compares within a longer historical perspective, but should one not consider that housing prices could potentially fall another 20% to then be in line with inflation?  On that basis, how can lenders including government entities like the Federal Housing Authority fathom that a 3% down payment is sufficient to account for potential downside risk?

More Jobs  
The economic outlook has improved, global stock markets have come back and emerging markets have been leading the way towards a recovery, although the shape of which is still up for grabs.  Any sustainable recovery however, particularly in consumer driven economies like the US, must be on the back of job growth.  As the chart below illustrates, many countries still have a long way to go.


The Euro area (EA16) consists of Belgium, Germany, Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland.  The EU27 includes Belgium (BE), Bulgaria (BG), the Czech Republic (CZ), Denmark (DK), Germany (DE), Estonia (EE), Ireland (IE), Greece (EL), Spain (ES), France (FR), Italy (IT), Cyprus (CY), Latvia (LV), Lithuania (LT), Luxembourg (LU), Hungary (HU), Malta (MT), the Netherlands (NL), Austria (AT), Poland (PL), Portugal (PT), Romania (RO), Slovenia (SI), Slovakia (SK), Finland (FI), Sweden (SE) and the United Kingdom (UK).

The Dollar Isn't Doomed  
Martin Wolf, the chief economics commentator at The Financial Times, has been in the business of assessing global economic trends for several decades and he is one of the most highly respected economic journalists.  It is with a typical sense of British understatement that he assess some of the claims of the Dollar falling to zero.  And yet, as he suggests with a rather assertive "BUT", the Dollar value has been influenced by 1) a reversal of the trend towards the illusive flight to safety and 2) the fact that the US$ is a long-term decline that has begun in 2000 (Ed. Note: some consider the long-term decline to have started in the early 70's when Bretton Woods was abandoned and currency exchange rates were allowed to freely float). 

So the Dollar won't fall to zero, we can all relax now; and yet, as long as the interest rate differential between the US and other countries still ends itself to carry trades, as we discussed at length, the pressure on the US Dollar remains despite temporary respites.  Only when US rates will climb would there be a possibility of big demand pull for the Dollar.  Please consider the full interview with some very insightful views by this highly respected market commentator.

Happy Halloween
Just in time for Halloween, please consider Midnight Candles, a seriously spooky investment outlook by Pimco's Bill Gross.

Happy Halloween!

Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance.

October 28, 2009

New Options to Manage Exposure to Snowfall

The Chicago Mercantile Exchange (CME) announced that it will offer options contracts to manage exposure to snowfall.  The contracts will be available on 7 December ‘09 for the following snowfall locations:

New York LaGuardia Airport
Chicago O'Hare International Airport
Minneapolis/St. Paul Airport
Detroit Metro Airport
New York Central Park
Boston Logan International Airport

This may seem strange  to some but we would consider this a welcome development.  In fact, it has been the CME’s noted strategy to offer more non-financial futures and options contracts. By bringing these derivatives onto the exchange rather than having the contracts written directly by investment banks the investing public should regain some confidence that in the event of another crisis, their contracts and hence their exposure can actually be guaranteed.

Even a decade prior to last year’s credit crisis, companies like Enron were notoriously exposed to off-exchange derivatives by making markets in all sorts of contracts including weather futures.  In the absence of an exchange that can handle the settlement and counter-party risk, investors and institutions entering into these contracts incur much greater risks of default by their underwriters.  There is a downside to bringing this contracts onto the exchange.   Exchange listed contracts have to be standardized and may not be ideally suited for the needs of some investors.  However, with exotic products such as weather futures, one would think that less flexibility as opposed to potential default risk may be the lesser of two evils.

October 24, 2009

Market Insights - 24 October 2009

Dear Friends & Fellow Investors

Here is our new issue of market insights.
In case of questions, please email: .  Enjoy reading!

In This Week's Issue
▪   Weekly Snapshot
▪   Chart Of The Week
▪   A New Bubble? 
▪   More On The US Dollar 
▪   More On Gold 
▪   Qualifications Of A Regulator

Weekly Snapshot
• US existing home sales jumped 9.2% to 5.57 million units in September (
• China was Brazil's largest trading partner in the first nine months of 2009 (
• German business climate index rose to 91.9 in October, a 13-month high (
• US federal-tax receipts down 16.6% since Sep '08; 54.6% decline in corporate tax receipts (Economist)
• China's annual GDP growth at 8.9% percent in the third quarter (Forbes)
• Euro area and EU27 government deficit at 2.0% and 2.3% of GDP respectively (Eurostat)
• US Leading Economic Index up 1% in September, after a 0.4% gain in August (Conference Board)
• U.S. government announced a record $123 billion worth of bond auctions next week (Reuters)
• Oil prices reached $82 on Wednesday, new high for 2009 (eSignal)
• US Housing starts in September rose 0.5%, following a revised 1.0% decline in August (Bloomberg)
• Brazil imposed a 2% tax on foreign purchases of equities and bonds (FT)
• US Producer Price Index declined 0.6% in September (

Chart Of The Week 
Crude oil prices touched $82 earlier this week.  One apparent reason was the continued Dollar weakness.  Something slightly less talked about however, is the huge spike in Chinese oil consumption since the beginning of ‘09.  The increased demand at then depressed oil prices was a significant factor behind the run on oil so far this year.  The three charts below also give a hint of of times ahead when Chinese oil consumption may rival that of Europe and the US.



A New Bubble?
With oil prices at new yearly highs, stock markets back at dangerously high valuations, Gold and other commodities at all-time record levels, some begin to question whether these are signs of yet another bubble.  Please consider:  Recognizing a Bubble – Dynamics of Free Money by Axel Merck.

In his assessment of the economy, Axel Merck outlines some of the options available to the Fed:

• Consumers could try to earn more money (or spend less) to pay off their debt. While some of that will happen, real wages are unlikely to go up on a national level as the unemployment rate continues to rise and consumer spending, the largest driver of economic growth, remains lackluster.

• Consumers could downsize. Indeed that’s the most prudent path as it would allow consumers to build up savings to one day afford a bigger house again. Politically, that’s not an attractive choice as it involves bankruptcies, bank losses etc., not the type of thing to promote if you want to get re-elected. Instead, consumers become slaves of their homes as they receive subsidies: such consumers are unlikely to build up savings, or even a rainy day fund to fix the leaking roof.

• The third option is for the Fed to induce inflation, so that the price level of homes rises, bailing out those with debt. Fed Chair Bernanke has testified that a key reason the U.S. pulled out of the Great Depression was to go off the gold standard “to allow the price level to rise to the pre-1929 level.” Gee – if someone takes away half your net worth (purchasing power), you will have a greater incentive to work, leading to top line economic growth. Those countries that devalued their currencies during the Great Depression recovered faster. Destroying purchasing power isn’t exactly the mandate of the Fed, but in Bernanke’s mind may be effective in promoting employment and economic growth.

This third option is a fairly accurate  description of what we have seen in recent months.  While the inflation argument has not convinced some economists, the recent sell-off in the dollar, combined with the run-up to higher commodity prices shows what the market expects.   No central banker and certainly no politician would ever admit to it,  but higher inflation can also be an antidote towards the massive debt burden faced by the US government (history lesson: Weimar Republic).  As long as central bankers can convince US investors and foreign holders of US debt that inflation is near zero, they can keep their financing cost at a minimum while being able to “water-down” the debt burden over time.

Whether you believe in the next bubble or not, there are some caveats that a recovery may not be as strong and as permanent as some bull market supporters might suggest.  Please consider:  Nouriel's Reasons for an anemic recovery.  Nouriel Roubini believes that the recovery will be anemic at best. In his usual dry and no-nonsense manner,  he gives a very concise outline as to why there is reason to be cautious.

1.  The labor market still bad and worsening
2.  The US consumer is "shopped out" - has to save more and consume less
3.  A glut of capacity in the corporate sector will keep capex spending subdued
4.  The financial system is damaged; credit growth will be limited
5.  Fiscal stimulus will become a drag by 2010
6.  On a global basis, the US will spend less while China, Germany and Japan will not increase private domestic consumption to compensate for the fall in US demand

More On The US Dollar
US Dollar bears controlled the sentiment in Foreign Exchange markets again this week.  Euro, Australian $ and New Zealand $ made new highs for the year.  Aside from being extremely oversold, there was not much standing in the way of the Dollar shorts.  Meanwhile, the US$ Index touched a new low for the year at  74.94. 


As of this week, there were still not too many supporters of the greenback.  If one was to enter a trade simply on a contrarian basis, proper stop levels should be placed to have some down-side insurance.  As several currencies are close to their all-time highs against the US Dollar, market volatility should remain high.   Day-traders beware!

More on Gold  
As the list of US Dollar supporters appears to be fading, Gold seems to be the favored asset to provide some hedge against a possible dilution in the value of the greenback.  Gold reached an all-time high above $1,070 last week and it remained stubbornly high closing this week at $1,055.   One may consider owning gold as an asset in its own right particularly in times of crises.  Some suggest a certain percentage of Gold holdings  simply as an insurance; depending on who you talk to, they suggest anywhere between 5%-20%.    If Gold is then considered an insurance policy, it also means that long-term returns may not be the primary reason to buy Gold.  The often underestimated cost of holding Gold can indeed equal the cost of various insurance programs. Please consider the video below for additional views on Gold.

Meanwhile, the US government shows no signs to counter the trend of debasing its currency but one still needs to be careful in terms of holding gold for the long term and as a pure hedge against inflation.  This is more obvious for holders of currencies other than US Dollars.  The charts below show the Gold price from the perspective of holders of other currencies e.g. Euros and Australian Dollars.

Gold Prices-12 months

When converting the Gold price to these currencies, the rise in the value of Gold is no longer as significant.   The official Gold price rose from $722 to $1,055 in the past 12 months, returning a 46% gain.  However, a holder of Euros had only a 26% gain while a holder of Australian Dollars saw a mere 7% rise in the precious metal during the same period.  The discrepancy has become more obvious since the beginning of this year. 

Gold Prices-ytd

The nominal gold price in US$ terms rose about 20% while the precious metal only increased 12% for Euro holders; but it also never peaked above the previous high in early February.  More significantly though, the Gold price fell 8% in Australian $ terms and it dropped a stunning 26% since the peak in mid-February. 

One could argue that all this is due to the weakness of the US Dollar but that debate may easily turn into a “chicken and egg” discussion.  Ultimately, one needs to decide a) if the assessment by the majority of market participants, i.e. that the US will continue to debase its currency, is correct and b) what possible hedges and investment strategies should be undertaken to support this view.  Gold would be one of those options but as we demonstrated above, currencies might be an equally attractive alternative with the same risk profile albeit at effectively no holding cost.   The decision is perhaps equally vital for US investors as well as holders of US denominated assets.  On a personal level, I would agree with Axel Merck’s dynamics of free money.  I typically favor investments in currencies over Gold or other asset classes because that is where I feel “comfortable with the dynamics”.

Qualifications Of A Regulator
What makes a 29 year old qualified to run the SEC enforcement division’s operations?  Look towards Goldman Sachs for an answer.  Bloomberg reported, Adam Storch was appointed to be the enforcement division’s first chief operating officer. 

Before and during the credit crisis, regulators were considered asleep at the wheel.  Now that yet another ex-Goldman employee is in charge of a crucial position at a government agency, can we have a sense that enforcement of rules would be any better than before?  Age and sufficient hands-on financial markets experience aside, how confident can the public be that Mr. Storch would be unequivocally objective if he was to enforce those rules upon his ex-employers?

And, in case you are still not angry about Banks and Financial Institutions, read this rather interesting Blog from Mike Shedlock and you might on the way...

From Mish’s Global Economic Trend Analysis: Where The Hell Is The Outrage? 


Good luck & good trading!

Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance.