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.


J. B. Loewen said...

There is much talk here in Canada about the American entrepreneurial spirit. Is the education system still developing that energetic can-do attitude?
Also - would like your views on off shoring and the long term impact on America's economy. said...

Hi Jacoline, all very good and difficult questions. I'm not sure if I am the right person to answer questions on education; since I didn't grow up here, I can only comment based on my experience with our kids. From my perspective, one of the most important elements of the Elementary and Middle Schools my kids attended were music, arts and performing arts programs in terms of fostering a can-do attitude. At an early age, most of these kids were taught to be fearless on stage and to perform, to even have fun while performing (i.e. being in the spotlight and under pressure). In addition to that, fostering creativity was not at all in conflict with traditional academic achievement, on the contrary; it only enhanced acedemic excellence. I firmly believe it's the combination of the no-fear attitude and the creative mind that has always been at the heart of the US can-do spirit. Although there's much talk about education and plenty of money available, it does not go where it should and teachers are still cut in most public schools. Worse even, the programs in arts, music and performing arts are always the first to disappear and so I do fear that a can-do, no-fear attitude may not be fostered nearly as much as it should. Meanwhile, most students focus on Math and Sciences which of course is important. But without the creativity and entrepreurial spirit, there won't be any businesses left to apply math and sciences...

Re: off-shoring and long-term impact, that's a more lengthy discussion, perhaps we can exchange emails on that.