FXIS Market Insights

Weekly Snapshot
• US House passes the package extending the Bush tax cuts (AP)
• US leading indicators jump 1.1% in November, suggest economy will strengthen early in 2011 (AP)
• Moody's slashed Ireland's credit rating by five notches, to Baa1 from Aa2 (Reuters)
• General Electric expects its businesses to show solid earnings growth in 2011 (WSJ)
• US current account deficit increased to $127.2 billion, or 3.5% of GDP in Q3 of 2010 (ESA)
• Fed will maintain the target range for the federal funds rate at 0 to 1/4% (Federal Reserve)
• A federal judge ruled key part of Obama's healthcare overhaul as unconstitutional (WSJ)
• US factory output grew for the fifth straight month increasing 0.4% in November (AP)
• US retail sales in November 2010 were $378.7 billion, an increase of 0.8% from October (ESA)
• China's central bank left rates unchanged despite another jump in consumer inflation (Reuters)
• Chinese consumer prices rose 5.1% in November to a 2-year high, year-over-year growth at 9.6% (AP)

Market Barometers 

Chart Of The Week
The 10-year Treasury peaked at 3.57% this week, the highest since May of this year. This could be the first sign of inflation slowly and finally creeping in on us. Higher rates for savers are still far off though and we sometimes forget what the current rates mean in historic perspective. Take a look at the chart below to get a a sense of what Bill Gross was hinting at when he predicted the end of a 3 decade long bull run in Bonds. 

Recommended Read 
As we are nearing the end of the year, the media tends to lock back at what has been.  Here’s a slightly abstract albeit rational look at a possible world 10 years from now.  Please consider: The shape of the world in 2020 

Recommended Video
Quite different from the doom & gloom that we usually get inundated with, here’s a really upbeat view of the world. Please consider this great video featuring Hans' Rosling’s unique view of the progress during the past 200 years.

 

Good luck and good investing!

Disclaimer
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. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Doug Elmendorf, the director of the Congressional Budget Office, published an interesting assessment of Trends in Federal Tax Revenues and Rates. This is timely information considering the heated debates over a tax compromise that includes extending the Bush-era tax cuts.  The CBO’s report concludes among other things:

Even with the projected substantial increase in revenues, under current law deficits between 2015 and 2020 will range between 2.6 percent and 3.0 percent of GDP. If the Congress extended most or all of the 2001 and 2003 tax cuts and made no other changes to taxes and spending, revenues would be lower and deficits would be significantly larger.

In an ideal world, the leaders of a country would understand the implications of poor financial management the way every business owner does. And perhaps, the long-term solution to fiscal deficits would be a requirement for all elected officials to pass a set of Business Management and Economics classes. Sadly, this seems even more illusive than getting a grip on the ever-growing public debt. 

Maybe we need to take a kid’s financial literacy approach to this tax debate to make our financially illiterate politicians understand the dilemma.  Economics is all about scarcity. As a whole, society has unlimited wants but very limited resources. You can drive home this fundamental principle by taking your children to a toy store and giving them a limited budget and a choice of only one toy they are allowed to buy.  Your kids learn very fast that they can only get a few of their unlimited wants satisfied within clearly set constraints. Clearly set constraints however have not been applied by US administrations for decades and it has only been getting worse culminating in last week’s tax compromise.

Given two choices, cut spending on the one hand while extending the Bush-era tax cuts or continue spending while raising taxes, a reasonable person would understand the constraints and choose one of the two.  Our political leaders however behaved like kids in a toy store while the parents gave them a blank check.  Translate this into the ongoing tax debate where some politicians still believe that more spending and lower taxes can miraculously fix the economic problems.  As the CBO graph below indicates, the optimistic scenario still means that revenues are trailing outlays (I love that word because it somehow makes expenses sound more like a temporary thing) by a considerable margin. In essence, this is more akin to wishful thinking.

If that is the optimistic case, how much more devastating could it get by increasing spending while lowering tax revenues? 

Granted, nobody wants to pay higher taxes and the word austerity is not part of the American dictionary. But as gloomy as it may sound, in order to get US public finances under control, we actually don’t have a choice anymore.  We must cut spending AND increase government revenues.  We’re no longer allowed to go to the toy store and choose one toy. We have to stay home and build our own toys from now on…

Weekly Snapshot
• S&P 500 at its highest level since the week Lehman Brothers collapsed (Reuters)
• US consumer sentiment rose more than expected in early December (Reuters)
• US trade deficit shrank 13.2% from September to October 2010, to -$38.7 billion (ESA)
• China raises bank reserve requirements by 50 basis points - 6th time this year (FT)
• US Treasuries hit by biggest sell-off in two years as capital costs soar (FT)
• The yield on 10-year T-notes jumped from 2.95% to 3.17% on Tuesday (Economist)
• Bank of England kept the base rate at its record low of 0.5% (Reuters)
• Crude oil prices rose above $90, highest level in over 2 years.
• Copper prices surged to an all-time high above $9,000 per ton on Tuesday (FT)
• The U.S. government exits Citigroup stake and earns $12 billion profit (Reuters)
• Moody's cut Hungary's sovereign rating by two notches, just above "junk" grade (Reuters)

Market Barometers

Chart Of The Week
The S&P 500 closed at a new high for the year and reached a level last seen since Lehman Brothers collapsed in 2008.  Are stocks overvalued now or are prices still relatively fair? Please consider this chart courtesy of Doug Short showing the historic data points of cyclical PE ratios.  On the basis of comparing the PE multiples with inflation, the markets are somewhat close to the center. We’re currently 4 1/2 points above the long-term average of 16.4 but still nowhere near the insane valuations of the Tech bubble.

Source:  www.dshort.com

Treasury Notes 
In the spirit of the US administration’s efforts to provide more transparency, you can now get it directly from the horse’s mouth. Please consider Tim Geithner’s new blog Treasury Notes.

Our Money Is Committing Suicide
Putting some humor on a rather serious subject, please consider Jon Stewart’s take on Ben Bernanke’s Quantitative Easing efforts. File this one under “things that make you go hmm”…

Good luck and good trading!

Disclaimer
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. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

This week, Business Insider revealed the key market predictions for 2011 by your favorite investment bank: Goldman Sachs.  Many of their predictions are very bullish and essentially call for a global rally almost across the board. A few notable exceptions are seen with some exchange rates.

With this information on hand, let’s focus on the prospects of Gold and the Australian Dollar.  As we all witnessed, Gold has had an incredible run in the past 10 years. After reaching an all-time high of $1,424 in early November, the precious metal dropped almost $100 but it has since been off to the races again closing the week at $1,414.

Spot Gold – Daily Chart

Goldman’s predictions call for a near 20% increase in Gold towards the end of 2011.  Considering how fast Gold has risen since last summer, this is much less than a remote possibility.

Taking nothing away from this massive bull-run, a huge component of the Gold price increase is the loss of value in the US Dollar.  When you value Gold in other currencies, the price strength is somewhat muted, particularly against high yielding currencies such as the Australian Dollar.

Gold in Australian Dollar – Weekly Chart

The all-time high of gold valued in Aussie Dollars appeared during the darkest days of the financial crisis. Against the strength of the Australian Dollar buoyed by numerous rate increases from the Australian Central Bank, Gold’s ascent has since been hampered. The first attempt at breaking the previous record earlier this year fell short of reaching that target.  However, technical factors as well as the increasingly favorable market sentiment for Gold make a strong case for a second attempt at breaking through the all-time high of A$1,565 from early 2009.

To get there, a few technical hurdles still stand in the way.  The next major resistance levels towards breaking through on the upside are A$1,491 and A$1,538.

Gold in Australian Dollar – Daily Chart

If you believe in Goldman’s prediction of a 20% increase while the Australian Dollar remains relatively flat, Gold valued in Australian Dollars should break the previous record and line up at approximately A$1650 very close to Goldman’s forecast for Spot Gold valued in US$. But is there a chance that Goldman could be wrong and the Aussie Dollar might rise much more than just 3%?

Considering that Australia is one of the world’s top commodity producing countries, its currency is invariably influenced by the demand for commodities.  The demand for raw materials and commodities is bound to accelerate in coming years.  That demand will keep the Aussie Dollar a hot item, perhaps more so than the demand for Gold does.

Looking at recent price history, the Aussie Dollar bears some resemblance with Gold having reached a recent high just above parity with the correction following suit.

Australian $ versus US$ – Daily Chart

It has been off to the races again this week however, falling just short of parity at 0.9925.  In assessing the prospects for the Australian Dollar going forward, we cannot exclude the outlook for the US Dollar from this equation though. At the present moment, a big factor speaking for the Aussie Dollar is the huge interest rate differential of about 4.5% in favor of the Australian currency. Now that QE2 has become a reality, Bond yields are set to rise which should be a benefit for the Greenback while giving less of an incentive to implement a carry trade “down under”.

Question though remains, can the US administration afford to finance their gaping deficits at higher financing costs? The sovereign debt crises in Greece and Ireland have shown how fast the rapidly rising cost of financing can bring government finances to their knees.  My guess is that the Fed, with heavy elbowing from the US administration, will continue to create the illusion that inflation is going to be benign. After all, they have done so for at least a decade now. Rising stock prices aside, the real US economy cannot afford a rate hike in the foreseeable future.  It would be far too high a risk to cause a double-dip recession and the certain end of any hope for re-electing the current administration.  It is far more likely that the Australian Central Bank would stop their rate hike cycle, perhaps even reduce rates by 25-50 basis points sometime next year. 

But my guess is that the Reserve Bank of Australia will continue its course and focus more on domestic inflation rather than showing too much concern for a specific currency level. This is unlike China’s approach which, despite higher interest rates, cannot seem to contain domestic inflation that well. The culprit, the Chinese Yuan, could be an important escape valve keeping domestic prices at reasonable levels but China keeps that valve fairly tight.  By contrast, Australia has been using the currency valve ever since the crisis hit which is part of the reason why the Aussie Dollar is so volatile.

It is plausible that some of the demand for Australian commodity exports will suffer with an ongoing rise in the Australian currency.  However, if Goldman’s bullish global market projections are turning out to be correct, demand for commodities will be even higher and Australian commodity producers should have no problem finding buyers, even at elevated prices.  In this context, the Goldman projections for a mere 3% increase in the Australian Dollar are rather modest. The Aussie Dollar may not be able to keep up with the rise in Gold prices, but taking a historic perspective into consideration, the Australian Dollar is still way “down under” from its peak in the 1970’s.

Disclaimer
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. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Weekly Snapshot
• US unemployment rate edged up to 9.8%, and nonfarm payrolls up by only 39,000 jobs (BLS)
• The Fed released details on the $3.3 trillion it extended during the financial crisis (CNBC)
• The Euro area seasonally-adjusted unemployment rate was 10.1% in October 2010 (Eurostat)
• Australia's economy grew at only 0.2% in Q3 -annualized growth remained flat at 2.7% (WSJ)
• The Euro fell below 1.30 in the wake of investor concerns about Eurozone debt (Reuters)
• US consumer confidence increased further in 54.1, up from 49.9 in October (Conference Board)
• US house prices fell by 0.8% on a seasonally adjusted basis from August to September (FT)
• India's economy grew 8.9% in the quarter ended Sept. 30 (WSJ)
• China is to raise next year's official inflation target and tighten monetary policy (AP)
• Peripheral Eurozone bond yields spiked, as investors fear default of Greece, Ireland and Portugal (AP)
• European Union nations agreed to give Ireland a $89 billion bailout (AP)
• Overall size of Ireland's aid package is €85bn at an average interest rate of 5.8% (Bloomberg)

Market Barometers

Chart Of The Week
A bit of a downer was this week’s US employment report. The unemployment rate rose from 9.6 to 9.8 percent in November; nonfarm payroll employment improved just marginally.  Only 39,000 jobs were added, much less than expected. These numbers clearly pose a problem in terms of the wider economic recovery. But even more concerning is the persistently high number of long-term unemployed which just took a small turn for the worse.

Source:  www.calculatedriskblog.com

Recommended Read
US Markets were up almost three percent this week and the outlook for equities in 2011 has just got a bit boost from a rather optimistic outlook by Goldman Sachs that hit the wires this week.  Nevertheless, the recovery remains jobless thus far and the employment outlook for the next year doesn’t appear to change the job prospects dramatically. In this context, please consider the Investment Outlook for December by Pimco’s Bill Gross.  Instead of spending our way to prosperity he recommends doing things the old fashioned way:

The constructive way is to stop making paper and start making things. Replace subprimes, and yes, Treasury bonds with American cars, steel, iPads, airplanes, corn – whatever the world wants that we can make better and/or cheaper. Learn how to compete again. Investments in infrastructure and 21st century education and research, as opposed to 20th century education are mandatory, as is a withdrawal from resource-draining foreign wars. It will be a tough way back, but it can be done with sacrifice and appropriate public policies that encourage innovation, education and national reconstruction, as opposed to Wall Street finance and Main Street consumption.

Fed Helping Everyone – Courtesy of the US Taxpayer
This week, the Fed disclosed details of some $3.3 trillion in loans made to all the financial institutions and a big list of other firms, including foreign banks, during the financial crisis.  It is clear now that many of these firms would have been toast without the US taxpayer as this interactive graphic by the Wall Street Journal confirms. The Fed did indeed act as lender of last resort and yes, the financial world as we knew it would have probably come to a dramatic halt without the Fed’s support. But considering how many of these near-death institutions have managed to rake in record profits and continue to dish out bonuses as if the crisis never happened, we must question the Fed’s rather generous help in purchasing essentially worthless paper from the institutions that created the mess in the first place.  I can live with the idea that lending facilities for institutions were put in place. But transferring a pile of @#$% from the banks’ balance sheets onto the Fed’s balance sheet should have never been allowed.  In the interest of the US taxpayer, those transactions should be reviewed in detail and Banks should be forced to take the paper back and deal with it themselves.

In this context, please consider the following interview with John Cassidy: Wall Street Banks Are Doing Less and Less Good For Society.

Good luck and good trading!

Disclaimer
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. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Weekly Snapshot
• Irish 10-year yields breached 9% and Portugese yields 7% (Eurointelligence)
• S&P cuts long term credit ratings on four domestic Irish banks (Reuters)
• US new home sales were down 8.1% from September and 28.5% from last year (ESA)
• Industrial new orders for September were down by 3.8% in Euro area (Eurostat)
• US durable goods in October 2010 decreased 3.3 percent, to $196.0 billion (ESA)
• China’s current-account surplus stood at $102.3 billion in the third quarter (Economist)
• Asian stocks decline for third week as tensions rise on Korean Peninsula (Bloomberg)
• US personal income in October 2010 rose 0.5% (ESA)
• US personal savings rate as a percentage of DPI was 5.7% in October (ESA)
• Australia's central sees no further interest-rate increases in the near term (WSJ)
• US real GDP grew at an annual rate of 2.5% in the third quarter of 2010 (ESA)
• Business confidence in Germany this month reached its highest since 1990 (Economist)

Market Barometers

Chart Of The Week
Courtesy of Dshort.com comes a nice chart showing the yields of the main Treasury Bonds since 2007.  Interesting to see the impact of QE1 and and the beginning of QE2 on yields.   

Source:  www.dshort.com

Recommended Read
In the spirit of Thanksgiving please consider this excellent assessment of China’s economic prospects.  In his article Shadow over Asia, Vitaliy Katsenelson outlines a number of reasons why China’s economy might not continue to be as miraculous at it has been so far. If you wondered whether double-digit growth is sustainable, here is a good analogy:

One way to think about the Chinese economy is by comparing it to the bus in the movie Speed with Keanu Reeves and Dennis Hopper. In the movie, a bus was wired with explosives that would blow up if the bus’s speed dropped below 50 miles an hour.

Since China is manufacturer to the world, that manufacturing business comes with a lot of fixed costs. Factories, equipment need financing, and they are mainly financed by debt – another fixed cost. The high level of fixed costs doesn’t afford China an economic slowdown, but when it happens, the consequences will be dire. High fixed costs are great when revenues are rising as income grows at a faster rate than sales. But they are devastating to profitability when sales decline: costs decline at a slower rate than sales and you start losing money, fast.

Well then, if China isn’t going to be the locomotive pulling the world economy out of the mud and Europe pre-occupied with bailing out its problem children who can the global economy count on?  Perhaps the only way out still remains with the unbreakable spirit of the American consumer.  I harbor the hope that we still can. 

Happy Thanksgiving Everyone!

Disclaimer
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. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

This week’s US inflation data were something else.  Core CPI increased only 0.6% on an annual basis, the slowest on record.  These kind of numbers give ample justification for the planned $600 billion treasury purchases by the Fed (QE2). But there is still this nagging question as to what type of inflation numbers we are looking at.  Regular readers of FXIS Market Insights know that your humble commentator is typically more concerned with inflation rather than deflation.  We have discussed our views in numerous articles, most recently in Inflation vs. Deflation, Market Insights 3 April 2010 and How much further for Gold? 

The debate on inflation won’t go away, not with QE2 and not with whatever the Fed will pull out next from its tool box. Speaking of tools, I’d like to refer to an excellent article by John Mauldin: O Deflation, Where is Thy Sting? 

John Mauldin explains his views on inflation and the (lack of) tools in the Fed’s bag of tricks when he surmises:

I wonder if the Fed is not trying to fix a modern 2010 economy with tools made in the ’50s, based on theories based in the writings of a bunch of dead white guys. They were smart guys, I give you that. But times have changed. And our measurement tools seem flawed to me.

Enjoy this very illuminating article and have a wonderful week-end!

Weekly Snapshot
• European Union and IMF meet in Dublin to discuss bail-out talks for Ireland (FT)
• China raises Bank reserve requirements for fifth time this year (FT)
• US Leading Economic Index increased 0.5% in October to 111.3 (Conference Board)
• The Federal Reserve plans to do another round of stress tests on top U.S. banks (WSJ)
• Euro area annual inflation was 1.9% in October, up from 1.8% in September (Eurointelligence)
• GM raises $20.1 billion in one of the largest IPOs (FT)
• Core US inflation slowest on record; CPI increased 0.2% in October (FT)
• China may impose temporary price controls to counter fastest inflation in two years (Bloomberg)
• Greece revises its 2010 projected deficit from 7.8% to 9.4% (Eurointelligence)
• South Korea raises interest rates to 2.5% and considers capital controls (FT)
• US Industrial production was unchanged in October after having fallen 0.2% in September (FRB)
• US Producer Price Index increased 0.4% percent in October, seasonally adjusted (BLS)
• Apple to sell Beatles songs by by adding the Beatles catalog on iTunes (WSJ)
• Britain's stubbornly high consumer inflation rate rose to 3.2% in October (Bloomberg)

Weekly Market Barometers

Chart Of The Week
Considering the recent announcement of another $600bn in quantitative easing and the possibility of more government stimulus in Europe,  who can really remember how it all started? How much money has actually been used in the various bailouts.  Remember TARP?  It all sounds so “yesteryear”.  With billions and trillions floating around, is anyone keeping track of where the money is going?  Thanks to the folks at ProPublica.org you can get a pretty good overview of where the bailout money went:

The Treasury Department is authorized to spend a maximum of $475 billion on the TARP (In July 2010, the financial regulation overhaul reduced TARP’s spending cap to $475 billion from the original $700 billion.) Altogether, accounting for both bailouts, $546 billion has gone out the door—invested, loaned, or paid out—while $221 billion has been returned. The Treasury has been earning a return on most of the money invested or loaned. So far, it has earned $43 billion. When those revenues are taken into account, $282 billion is the net still outstanding as of Nov. 19, 2010.

The chart below and more detailed information is available at: http://bailout.propublica.org/main/summary

Source:  http://bailout.propublica.org/main/summary

Recommended Read
Tired of financial analysts and economic forecasts?  I can’t blame you one bit.  Sometimes it’s all a blur and you don’t know what to do or whom to believe when it comes to investing.  If you are looking for some new and unusual market projections, please consider this highly interesting article by Keith Fitz-Gerald:  In China, Record Hairy Crab Prices Point to Continued Strong Economic Growth Next Year.

Now if you’ll excuse me, I will head over to my favorite Chinese Restaurant. 

Good luck and good investing!

Disclaimer
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. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Weekly Snapshot
• Global Stocks and commodities were taking a nosedive on Chinese inflation data (AP)
• G20 fails to agree on trade and currencies (FT)
• US consumer sentiment index rose to 69.3, the highest level since June (Reuters)
• Euro area GDP up by 0.4%; industrial production down by 0.9% (Eurostat)
• Chinese stocks fell 5.2% on rumours of limiting foreigners' property purchases (AP)
• Google to give all its staff a 10% salary increase and a $1,000 bonus (Economist)
• Irish 10 year yields hit 8.7%; spread with German bonds is now 6.5% (Eurointelligence)
• Commodity exchanges raise margin requirements for silver futures (AP)
• Euro falls Versus most major currencies on European sovereign debt concern (Bloomberg)
• Gold climbed 30% this year, reaching a record of $1424.30 on Tuesday (Bloomberg)
• US trade deficit in September 2010 decreased 5.3% to $44.0 billion (ESA)
• Bond insurer Ambac sues U.S. and says IRS may ruin bankruptcy proceedings (Reuters)
• World Bank Chief calls for the establishment of a gold-backed Bretton Woods II system (AP)

Weekly Market Barometers

Charts Of The Week
The big story this week was about Europe where Ireland's sovereign debt crisis took a turn for the worse.  On Thursday, the Irish/German bond yield spread hit a record high of 665 basis points driving the borrowing cost for Ireland's sovereign debt to extremely difficult levels.  But unbeknownst to most, we might have our own sovereign debt crisis in the making.  Thanks to Barry Ritholz of the Big Picture Blog for figuring this one out.  Please consider: California Muni Bond Fund Shellacking

Is it just a small correction or are we getting a preview of what might hit the entire Bond market?  Bill Gross, the CEO of PIMCO sure knew what his own funds were about to be hit with when he published Run Turkey Run earlier this month.

Source:  www.ritholtz.com

Recommended Read
Please consider The Dollar: Every Man For Himself by Axel Merk.  In his assessment of the prospects for the US Dollar Mr. Merk hits the nail on the head when he writes:

“We believe a key impediment to the U.S. economy is that policy makers are fighting market forces.”

  

Recommended Video 
Much has been said about QE2 and its impact on the Dollar.  Interestingly, Alan Greenspan the former fed chairman declared that the US was pursuing a dollar weakening policy.  The timing of his remarks may have been unfortunate, considering the sensitivity of this issue at the G20 meeting in Korea this week.  However, this does not change the fact that he is right in principle.  Quantitative Easing must be viewed as a deliberate policy to inflate asset prices which in turn dilutes the value of the US Dollar.  Of course, the story doesn’t end here.  Enter Tim Geithner, the current US Treasury secretary who loudly proclaimed:

We will never seek to weaken our currency as a tool to gain a competitive advantage or to grow the economy; it’s not an effective strategy for any country, certainly not for the United States.

Whom can we believe then?  You be the judge…

Click image to view the video

Good luck and good investing!

Disclaimer
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. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Weekly Snapshot 
• US nonfarm payroll employment increased by 151,000 in October (BLS)
• US unemployment rate was unchanged at 9.6% in October (BLS)
• Spot Gold rose to a new all-time high of $1397.80 just shy of $1,400 on Friday (Reuters)
• Spot Silver reached a new 30-year high of $26.89 on Friday (Reuters)
• US stock markets rose to a two-year high after Fed announcement of QE2 (NY Times)
• France's BNP Paribas is the world's No. 1 bank, with assets of $3.2 trillion (Bloomberg)
• The price of sugar hit a 30-year high amid forecasts of a sharply reduced harvest (Economist)
• Bank of England left rates unchanged and refrained from adding to asset purchases (Bloomberg)
• European Central Bank kept its benchmark interest rate unchanged at a record low (Reuters)
• Fed announced plans to buy $600 billion in long-term Treasury bonds by the of Q2 2011 (WSJ)
• India has hiked interest rates for the sixth time this year, in a bid to tackle high inflation (AP)
• Australia raised its benchmark interest rate by a quarter percentage point to 4.75% (Bloomberg)

Weekly Market Barometers

Chart Of The Week
Friday’s employment report was somewhat encouraging showing better than expected jobs numbers. However, the unemployment rate remained at 9.6% and there is a long way ahead to get back to a more robust labor market.  See the chart of the week to find out how far the US labor market has come since 2007.  

Source:  www.calculatedriskblog.com

QE2 Recap 
The much anticipated FOMC statement this week confirmed what many market observers had anticipated: More quantitative easing.  From the FOMC statement released on November 3rd, 2010:

The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.

There you have it then.  Another $600 billion down the hole or will QE2 have some positive consequences?  The market analysts have been pondering this question for quite some time examining the various scenarios.  In our view, the more likely scenarios have already been priced in.  This week’s market reaction has confirmed the overall theme of a loss of purchasing power in US Dollar terms.  See the following charts to get a sense of what may be next. 

US stocks at 2-year highs
Bond bubble resuming its course
Commodities gaining strength
Metals charging higher
Gold profits from Dollar weakness

The Fed wants higher inflation and the ongoing easy money policy i.e. the US printing press might just do that trick.  The markets are currently following suit with rising asset prices across the board.  Sadly, that is happening on the back of a gradually weakening Dollar. 

Recommended Video 
If the charts didn’t make the effects of QE2 clear enough, please consider this concise explanation below.  In no uncertain terms, Axel Merk explains what QE2 means and what we can expect once the Fed’s printing press is running at full speed again. 

Good luck and good investing!

Disclaimer
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. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Weekly Snapshot 
• Real GDP in the US grew at an annual rate of 2.0% in the third quarter of 2010 (ESA)
• US consumer sentiment worse than expected in October, lowest in 11 months (Reuters)
• Euro area seasonally-adjusted unemployment rate was 10.1% in September (Eurostat)
• Britain’s economy grew by 0.8% in Q3, or 2.8% compared with a year earlier (Economist)
• The Euro zone economic sentiment index  rose to a 34-month high in October (Economy.com)
• Unemployment in Germany fell below 3 million in October, for the first time in 18 years (FT)
• Bank of Japan held its key overnight call rate unchanged and cut its growth outlook (Marketwatch)
• US durable goods orders in September 2010 rose 3.3%, to $199.2 billion (ESA)
• Industrial new orders up by 5.3% in Euro area (Eurostat)
• US consumer confidence in October increased to 50.2 up from 48.6 in September (NBER)
• Home price increases slow down in August according to the Case-Shiller Home Price Indices (S&P)
• For the first time ever, inflation-protected Treasury bonds sold with a negative yield (WSJ)
• US existing home sales rose 10% in September; median price fell 2.4% from a year earlier (Bloomberg)
• The G-20 agreed to move towards more market-determined exchange-rate systems (Bloomberg)

Weekly Market Barometers

Chart Of The Week
The US Treasury sold $10 billion of five-year Treasury inflation protected securities (TIPS) at an auction this week with a yield of negative 0.55%.  Granted, these government bonds are indexed to inflation and their par value rises based on the consumer price index.  But with a negative 0.55% yield, it may take a while just to break even.  Based on what happened during this week's auction, many investors must fear a substantial risk of much higher inflation in the next 5 years.  In their view, there is a high probability that these securities will still provide a positive return before they mature in 5 years, despite the current negative yield.

That said, I cannot think of any reason why someone would pay to lend his money even if it were just for a few months - and least of all to lend your hard-earned dollars to the government. 

This one should be filed under:  Things that make you go hmmm...

source: http://research.stlouisfed.org

Recommended Read 
Just in time for Halloween, the Bond guru Bill Gross issued a rather spooky article warning investors that the great three decade long bull market in Bonds is about to end.  Please consider:  Run Turkey, Run

His sentiment is shared by a large number of investors, namely those who lined up this week to pay the US government to take their money (see chart above).  With QE2 looming upon us, one would think that inflation must is coming to a household near you rather soon, if it hasn’t arrived already. 

Some caveats though.  It isn’t the first time that Bill Gross has called the end of the Bond rally before and was mistaken.  You can read up on his two most recent missed calls on Calculated Risk.

Then there’s this perhaps much bigger concern that the US may follow in the footsteps of Japan and endure at least another decade of sub-par growth and deflation. 

Here’s yet another angle:  As long as the government controls the determinants going into the consumer price index, stated inflation will likely be low for an extended period of time.  The real cost of living in US dollar terms however, is not going to stay at present levels much longer.  The effects of that are already apparent in higher commodity prices, stubbornly high gold prices and a loss of real purchasing power in US Dollar terms.  Do you still want to pay for the “privilege” of lending money to the US government?

Recommended Video 
In view of the widely anticipated QE2 which may be confirmed at the next FOMC meeting, here’s a good explanation of what happens when Uncle Ben goes shopping.

 

Good luck and good investing!

Disclaimer
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. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

You may have expected yet another bumper week for the shiny metal. However, this week marked the first time since mid-summer that Gold has run into some head wind. After a massive bull run reaching new all-time nominal records nearly every week, Gold has retraced about 3% this week. Is this the beginning of the end or was it just a minor pause in an otherwise massive long-term up-trend?

While taking nothing away from this amazing bullish move in Gold during the past decade, we have been expressing concerns about a possible bubble and listed a number of caveats about loading up on Gold indiscriminately.  Most notably, the concerns are two-fold: a) Gold is not a traditional investment in that it provides no inherent yield or return other than price appreciation and b) Gold is a commodity nonetheless and as such exposed to significant volatility.  You can review some of our previous comments on Gold at FXIS/Gold.  With regard to external and fundamental factors causing concerns, John Authors of the Financial Times expresses these concerns much more elegantly than I can. Please consider: Remember 1980: all that glisters is not gold.

John Authors makes a sound argument in warning about the speculative element of this ongoing gold run.  Although highly unlikely, one must consider a possibility of a repeat of the implosion in gold prices after the bubble burst in 1980.  At the same time, one cannot ignore the fact that such a repeat would also imply that we are not yet in the final stages of a bubble. Instead, the current bull market might continue to prices above $2,000 comparing the 1980’s peak in today’s in inflation adjusted dollars.  A look at charts may give us a better sense of what some possible scenarios could look like.

A first indication of head-wind can be seen in the swift price decline of Gold mining stocks measured by GDX, an exchange traded fund tracking gold miners. The medium-term uptrend has been reversed this week.

With regard to Gold ETF (GLD) and Gold futures, both have arrived at the lower end of the up-ward trend-line, a test of which may ensue in the coming days.

Taking a slightly long-term view however, it is clear that the current retracement is just that, a pause in the otherwise continued up-trend.

Examining the near term trend in more detail, we have witnessed some profit taking resulting in typical price declines often measured by Fibonacci retracement levels. Plotting these retracements, we can see a possible further decline to about $1250.  Price declines measured with these tools imply a likelihood of prices within 38.20% and 61.80% declines from recent low to recent high.  Therefore, Gold could trade within a range of below $1300 and about $1250 without violating the ongoing longer term trend.

Taking a look at a more neutral Gold price indicator i.e. Gold valued in Euros, the precious metal is also trading at an interesting inflection point.  The near-term Gold trend has actually been bearish since the beginning of this summer.  Gold/Euro has now approached an important technical support area.  Failure of this support would make the case of a test of the 900 area.  That scenario would then be a more realistic test of whether the metal is still going to shine with all its brilliance. 

From a technical perspective then, the long-term bull market in Gold is still alive.  However, there are signs that further profit taking may test the lower boundary of this ongoing mega-trend.  The coming week might shed some more light into the longer-term direction. Meanwhile, short-term traders should be prepared for a bumpy ride ahead.

Disclaimer
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. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.