FXIS Market Insights

In This Week's Issue
• Weekly Snapshot
• Weekly Barometers
• Chart Of The Week
• A Pre-nup For Your Stocks
• Recommended Video

Weekly Snapshot
• U.S. real GDP grew at 3.1% in Q4 of 2010, real GDP grew 2.9% in 2010 overall (ESA)
• U.S. consumer sentiment fell to 67.5. The final reading was the lowest since Nov-09 (WSJ)
• S&P lowered its credit rating on Portugal to BBB from A- (Reuters)
• Yield on Portugese 10-year government bond at 7.661% on Thursday (Bloomberg)
• New orders for manufactured durable goods in February 2011 decreased 0.9% to $200bn (ESA)
• Spot gold at record $1447.40/ounce, silver at 31-year peak of $38.13 (Reuters)
• Egypt reopened its stock market after 2 month closure; shares tumbled 10% on first day (AP)
• UK inflation rate rose to 4.4% in February, highest level since October 2008 (Economist)
• Portugal’s prime minister resigned after losing a crucial vote on austerity measures (FT)
• U.S. new home sales fell 16.9% from the revised January level, 28% below Feb-2010 (ESA)
• Sales of previously occupied homes fell 9.6%, median home price hit 9-year low (AP)
• AT&T to buy T-Mobile USA from Deutsche Telekom for $39B in cash and stock (WSJ)

Market Barometers

Chart Of The Week
In February 2011, Mary Meeker, the illustrious star analyst previously at Morgan Stanley, created a fascinating report about the financial situation and outlook of USA Inc.

Among the many illuminating and often depressing charts, we found this one pointing towards a clear culprit for the alarming US Debt.  Entitlement Expenses (Social Security, Medicare/Medicaid, Unemployment and other entitlement programs) make up about 58% of the 2010 Budget.  Considering the staggering growth of entitlements one must wonder how elected officials fail to see the proverbial elephant in the room.

Compare this trend with the ongoing Dollar weakness apparent in a number of symptoms including record prices for precious metals but also the continued rise of foreign currencies against the U.S. Dollar.  Last week, we touched on the Swiss Franc, another currency that silently rose to a new all-time record of 0.8860 against the US Dollar.  To get a sense of how much the Dollar depreciated against the Swiss Franc, please see the chart below.  No direct correlation between these two datasets, they just happen to be inverse trends.  Considering that a number of multi-national pharmaceutical companies are from Switzerland, the curious investor might wonder if the margins of Swiss companies have been affected from the decline of the Dollar. In addition, it would be interesting to see what impact a cut in the largely health-related entitlements would have on their profitability with or without a significant change in the USD/CHF exchange rate.

A Pre-nup For Your Stocks  
This is a slightly older article but still very relevant today. Please consider:  Apprenticed Investor-On Bended Knee.

Professional traders typically have a set of entry and exit points in addition to a number of other trading and risk management rules.  Average investors typically buy and hold, or buy and change their mind but on average, they do not define their entry and exit points.  As Barry Ritholtz suggests, one should look at an investment as if it was a relationship and define under what circumstances that relationship no longer holds value.

That's right, whenever you buy an equity, you enter into a complex relationship -- with the stock, the company, its management, even your fellow shareholders.  What you need is a pre-nuptial agreement with the stock.

What would you include in that pre-nup for your stocks?

Recommended Video  
Interesting concept:  Skyscrapers as bubble indicators.  Enjoy!

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.

While the world’s attention was glued to Japan recently, another low-yielding currency has made a similar record movement against the US Dollar.  The Swiss Franc, also a traditional safe-haven currency, has quietly made its way towards successive new records against the US Dollar. On March 16 (March 17 for Asian markets), the Swissie reached an all-time record of 0.8860 against the greenback.

To put things into perspective and to understand why international investors been debunking the status of the US Dollar as the world’s reserve currency, take a look at this long-term chart below.  In the early 70’s just as the world switched from the untenable Bretton Woods agreement towards freely floating currencies, it cost about 4 Swiss Francs to buy 1 US Dollar. 40 years later, it only costs 0.9 Swiss Francs to buy 1 US Dollar. 

In other words, the greenback is now worth less than a quarter of what it used to be.  This has had severe implications in terms of the purchasing power of US investors.  It also raises the question as to how long the US government can continue to enjoy ultra-low financing costs without further depleting the value of the Dollar.  US companies have recognized this trend for quite some time as they have been shifting more and more of their earnings focus overseas.  By investing in companies with a broad international reach, investors could mitigate some of that loss of purchasing power.  They have also increasingly been looking towards precious metals (Silver just hit another multi-decade record above $38/ounce) and other commodities to balance the same decline.  Both demand-trends appear to be major stimuli for the continued rise in asset prices.  One would hope that the US Dollar has come to a tipping point towards reversing that multi-decade trend.  But aside from the fact that the greenback has been severely oversold, I’m having a tough time finding convincing arguments to stay in (US$) cash.

Weekly Snapshot
• Japan's benchmark Nikkei average fell 6.18% to close at 9,620.49 on Monday (Reuters)
• Japan's Nikkei stock index nose-dived another 10.55% on Tuesday (AP)
• The Federal Reserve maintained its ultra-loose monetary policy on Tuesday (Reuters)
• Japanese stocks regained some losses. The Nikkei bounced back +5.7% on Wednesday (Reuters)
• Euro area annual inflation was 2.4% in February, up from 2.3% in January (Eurostat)
• The U.S. current-account deficit decreased to $113.3Bn, or 3.1% of GDP in Q4 of 2010 (ESA)
• U.S. wholesale prices rise 1.6% due to biggest jump in food costs in more than 36 years (AP)
• Japanese Yen rises to all-time high against the US Dollar on Wednesday (Reuters)
• The Bank of Japan was pumping 3 trn yen ($37.5 billion) into money markets on Friday (AP)
• Swiss Franc rises to all-time high against the US Dollar at 0.8860 on Thursday (AP)
• Yen slides on Friday after G7 nations coordinate intervention in forex market (Reuters)
• The Libyan government announced a cease-fire after UN resolution on no-fly zone (AP)

Market Barometers

Chart Of The Week
Crude Oil prices have been on a bull run ever since the early part of 2009.  The recent political crises in the Middle East only put more pressure on prices.  Libya’s oil production, averaging about 1.3 millions barrels per day, essentially came to a stand-still through the escalation of conflicts.  That put oil prices on a clear path towards levels above $100 per barrel.  After the UN security council issued a resolution for a non-fly zone in Libya, oil prices had a sharp drop on Friday.  For now the price of oil is hovering just above $101 but it remains to be seen if this will keep a lid on prices.

Japan Needs A Break  
As if the human toll and suffering was not tragic enough, Japan also had to endure economic and financial strains unmatched in recent history.  At the beginning of the week, Japanese stocks saw a decline of over 16% within two days. Counter-intuitive to that decline, the Japanese Yen rose to an all-time high against the US Dollar on Wednesday. We examined the initial reaction in the currency markets right after the Japanese Earthquake hit last week.  The rationale for the strength of the Japanese currency was seen in anticipation of massive repatriation of Japanese investment funds from overseas.  On Wednesday,  the US Dollar dropped 300 points within a matter of 15 minutes, only to pull back to where it had started from.  Clearly a speculative attack that prompted a fall below a major technical support level for the US$ versus Yen.   It may have been the ongoing strength or that hard-hitting speculative run on the yen but Japan clearly needed a break.  That break came courtesy of an emergency meeting when the central bankers of the G7 nations agreed on a coordinated intervention in the currency markets.

Currency interventions have a mixed record when it comes to pushing against market forces. As the Financial Times report The G7 and the Yen notes:

The history of currency interventions suggests that solitary action is not enough. In mid-September, for example, when the BoJ went it alone, the sale of ¥2,125bn($26bn) (the biggest-ever one-day intervention) reversed the yen’s appreciation trend only briefly.

Coordinated efforts by numerous central banks have a better chance of being successful in stemming against market forces and slowing down currency trends. However, reversing a trend through interventions even on a scale of some $20 billion may only put a dent in a market that has a combined turnover of several trillion dollars per day (counting all currency transactions). As in past interventions, typically trend-following hedge funds may play the role of the counter-part to Central banks’ efforts.  This week, a long-standing support level at ¥79.75 has been broken.  You have to go back all the way to 1995 when the Yen had its previous record against the US Dollar.  Incidentally, that record occurred a few months after the (in)famous Kobe Earthquake which happened on January 17, 1995.

History may or may not repeat itself.  It looks though as if some large speculators have been placing their bets on an ongoing Yen strength, despite the threat of currency intervention.  For now the Yen strength has been put to a temporary halt.  The week-end may present some additional impetus in the form of official G7 support statements and/or additional efforts by the major central banks.  I sure hope that Japan’s nuclear threat can be contained so that the healing and re-construction efforts can begin in the devastated regions.  Japan really does need a break and so does its capital market.

A Quiet Currency Record  
As the world’s attention was glued to Japan, another low-yielding currency has made a near identical movement against the US Dollar recently.  The Swiss Franc, also a traditional safe-haven currency, has quietly made its way to successive new records against the US Dollar. On March 17, the Swissie reached an all-time record of 0.8860 against the greenback.

USD-CHF Monthly Chart

In view of this, the repatriation of funds as a rationale for the recent Yen strength may be just part of the explanation of the Yen’s appreciation.  The sad events in Japan only accelerated a trend that has already been there for a long time.  It does, however, raise another question: Is the Japanese Yen really that strong or is the US Dollar showing continued signs of losing more of its safe-haven status?

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.

As if the human toll and suffering was not tragic enough, Japan also had to endure economic and financial strains unmatched in recent history.  At the beginning of the week, Japanese stocks saw a decline of over 16% within two days. Counter-intuitive to that decline, the Japanese Yen rose to an all-time high against the US Dollar on Wednesday. We examined the initial reaction in the currency markets right after the Japanese Earthquake hit last week.  The rationale for the strength of the Japanese currency was seen in anticipation of massive repatriation of Japanese investment funds from overseas.  On Wednesday,  the US Dollar dropped 300 points within a matter of 15 minutes, only to pull back to where it had started from.  Clearly a speculative attack that prompted a fall below a major technical support level for the US$ versus Yen.   It may have been the ongoing strength or that hard-hitting speculative run on the yen but Japan clearly needed a break.  That break came courtesy of an emergency meeting when the central bankers of the G7 nations agreed on a coordinated intervention in the currency markets.

Currency interventions have a mixed record when it comes to pushing against market forces. As the Financial Times report The G7 and the Yen notes:

The history of currency interventions suggests that solitary action is not enough. In mid-September, for example, when the BoJ went it alone, the sale of ¥2,125bn($26bn) (the biggest-ever one-day intervention) reversed the yen’s appreciation trend only briefly.

Coordinated efforts by numerous central banks have a better chance of being successful in stemming against market forces and slowing down currency trends. However, reversing a trend through interventions even on a scale of some $20 billion may only put a dent in a market that has a combined turnover of several trillion dollars per day (counting all currency transactions). As in past interventions, typically trend-following hedge funds may play the role of the counter-part to Central banks’ efforts.  This week, a long-standing support level at ¥79.75 has been broken.  You have to go back all the way to 1995 when the Yen had its previous record against the US Dollar.  Incidentally, that record occurred a few months after the (in)famous Kobe Earthquake which happened on January 17, 1995.

History may or may not repeat itself.  It looks though as if some large speculators have been placing their bets on an ongoing Yen strength, despite the threat of currency intervention.  For now the Yen strength has been put to a temporary halt.  The week-end may present some additional impetus in the form of official G7 support statements and/or additional efforts by the major central banks.  I sure hope that Japan’s nuclear threat can be contained so that the healing and re-construction efforts can begin in the devastated regions.  Japan really does need a break and so does its capital market.

Somewhat counter-intuitive considering the vast economic toll caused by the recent earthquake, the Japanese Yen rose to an all-time high against the US Dollar on Wednesday. We examined the initial reaction in the currency markets right after the Japanese Earthquake hit last week.  The rationale for the strength of the Japanese currency was seen in anticipation of massive repatriation of Japanese investment funds from overseas.  Wednesday saw a market movement along similar lines but perhaps from a different motivational point of view.

The US Dollar dropped 300 points within a matter of 15 minutes, only to pull back to where it had started from.

USD-JPY 5 min Chart

The brief market episode which played out during early Asian market hours was not motivated by repatriation of investment funds but rather by speculative objectives.  This is clearly territory of market technicians and chartists. As soon as the previous support at an all-time record of 79.75 was broken, speculators had a brief but violent field day, possibly reversing the trade within the hour.  If you wonder where that massive support line comes from, you have to go back all the way to 1995 when the Yen had its previous record against the US Dollar.  Incidentally, that record occurred a few months after the (in)famous Kobe Earthquake which happened on January 17, 1995.

USD-JPY Monthly Chart

While we cannot draw any conclusions from these two seemingly coincidental occurrences, we can, however, infer that the current level is not likely to remain for a long time.  I am not suggesting that history will repeat itself in the same way as in 1995.  But in my opinion, there is a high probability that an exchange rate around ¥80 to the Dollar won’t stay here for long.  Too many fundamental and technical factors speak against a narrow trading range.  It will be an interesting ride ahead and it might get slightly bumpy.  Considering we are extremely close to the proverbial fork in the road, an option strategy that plays into both possible scenarios might come in handy. 

And as the world’s attention remains glued to Japan, another extremely low-yielding currency has made a near identical movement against the US Dollar.  The Swiss Franc, also a traditional safe-haven currency, has quietly made its way to successive new records against the US Dollar. On March 17, the Swissie reached an all-time record of 0.8860 against the greenback.

USD-CHF Monthly Chart

In view of this, the repatriation trade may have just accelerated a trend that’s already been there for a long time and it raises yet another question: Is the Japanese Yen really that strong or is the US Dollar showing continued signs of losing more of its safe-haven status?

Weekly Snapshot
• Moody's lowered Greece's rating to B1 and said the risk of default is rising (Bloomberg)
• Brent crude oil futures climbed to $118 per barrel on Monday (FT)
• Gold touched a new record of $1,444.95, silver reached a 31-year high of $36.75 (Economist)
• As of Feb-11, 985 Exchange Traded Funds (ETFs) had assets totaling $1.0TN (Statestreet)
• China unexpectedly posted a trade deficit of $7.3 billion in February (AP)
• Moody's Investors Service downgraded Spain's debt rating by one notch to Aa2 (WSJ)
• The Reserve Bank of New Zealand cut interest rates by 0.5% to 2.50% (WSJ)
• The Bank of England kept interest rates at a record low of 0.5% (Reuters)
• The U.S. international trade deficit in January rose 15.1% to $46.3 billion (ESA)
• Forbes 2011 list includes 1,210 billionaires at a combined wealth of $4.5 trillion (Forbes)
• Japanese Yen gained against the US$ and the Euro after earthquake hit Japan (Reuters)
• U.S. index of consumer sentiment fell to 68.2 in March from 77.5 in February (Bloomberg)

Market Barometers

Chart(s) Of The Week
This week marked the second anniversary of the darkest point in recent financial history. On March 6th 2009, the S&P 500 fell to an intra-day low of 666.79.   An eerie number at the time but in hindsight, it marked a turning point and the beginning of an unprecedented bull run returning over 90% to investors if they had bought on March 9th 2009 and held their position until today.  Question is of course, who had the guts to buy stocks on that day.  It always seems so easy watching the markets from the rear-view mirror… 

Source: www.stockcharts.com

Despite this phenomenal rally, some prominent traders, analysts and fund managers have been raising questions as to how genuine the stock market recovery really was considering it has not translated into the real economy by any comparable measure. To get a sense of how stocks could have made such a marvelous recovery, please consider this illuminating chart courtesy of dshort.com.  After so much ammunition (TALF, TARP, QE1, QE2) has been used to prop up asset prices, it also begs the question: What happens when all this ammunition is no longer applied. 

This Just In…Japan’s Earthquake  
The 8.9 magnitude earthquake hitting Japan on Friday sent shockwaves of disbelief around the world.  As Reuters reports:  

The biggest earthquake on record to hit Japan rocked its northeast coast on Friday, triggering a 10-meter tsunami that killed hundreds of people and swept away everything in its path.

Rare events like this one can send massive financial shockwaves too. While the impact on Japanese and global stock markets may not be as imminent, the currency markets witnessed a reaction which may seem counter-intuitive at first.  The Japanese Yen gained against all major currencies when the news of this devastating earthquake hit the wires. 

Why was the Yen rallying on the news? 

Markets assume that vast sums of money may need to be repatriated from foreign assets to pay for damage repairs and re-development costs as a result of this catastrophe. The two charts below show how both the US Dollar and the Euro dropped on Friday during Asian and European market hours.

US$ versus Japanese Yen		Euro versus Japanese Yen

It is still too early to assess the longer term impact on the Japanese economy and its capital markets. In terms of the currency markets, a re-alignment towards the previous trend is often seen once the initial shock is digested.

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
• Silver prices climbed to their highest since early 1980 above $35 an ounce (Reuters)
• U.S. oil futures prices topped $104, highest level since September 2008 (AP)
• U.S. nonfarm payroll employment increased by 192,000 in February (BLS)
• U.S. unemployment rate for February dropped to 8.9% from 9.0% in January (BLS)
• The European Central Bank said on Thursday it could soon raise interest rates (Reuters)
• Saudi Arabia’s main share-price index fell to a 23-month low (Economist)
• China plans to lower its growth targets to 7%, from previous target of 7.5% (WSJ)
• Global food prices rose 2.2% in February from the previous month, according to a U.N. report (WSJ)
• Germany's unemployment rate dropped to 7.3% in February from 7.4% in January (Economy.com)
• Fed survey: Economy expands in all 12 regions, but businesses report need to raise prices (AP)
• Euro area (EA17) seasonally-adjusted unemployment rate was 9.9% in January 2011 (Eurostat)
• Euro area annual inflation estimated at 2.4% in February 2011 (Eurostat)
• Bernanke: rising oil prices will cause only a brief and modest rise in consumer inflation (WSJ)

Market Barometers

Chart Of The Week
The U.S. Treasury published revised figures of the foreign holders of U.S. Treasuries.  Asian banks, in particular China, own more U.S. Treasuries than previously thought.  We previously compared the Fed’s recent Bond purchases as part of the QEII program.  As of this latest data, the Fed is not the largest holder after all.  China now owns $1.160 trillion worth of U.S. Debt.  The U.S. Debt burden is of course a major concern.  Aside from pondering the insanity of buying back your own I.O.U. and thinking that it would solve a more fundamental fiscal problem, it also leads to the question “what happens when QEII ends this summer and when the Fed will no longer purchase these Bonds.”  Is China willing to make up the difference?  At current rates?  

Recommended Read  
Staying with our theme of the U.S. debt burden, please consider Pimco’s investment outlook for March, Two-Bits, Four-Bits, Six-Bits, a Dollar by Bill Gross.  As the largest manager of Bond funds, Pimco has serious concerns about the viability of continued debt financing by the U.S. government, given the ultra-low rates.  As Bill Gross notes:

• A successful handoff from public to private credit creation has yet to be accomplished, and it is that handoff that ultimately will determine the outlook for real growth and stability.
• Because quantitative easing has affected all risk spreads, the withdrawal of nearly $1.5 trillion in annualized check writing may have dramatic consequences.
• Who will buy Treasuries when the Fed doesn’t? The question really is at what yield, and what are the price repercussions if the adjustments are significant.

And The US Dollar?  
The greenback is not holding up too well. Despite massive debt concerns in some European countries, the Euro managed to gain 5% against the US$ since the beginning of the year. In view of the massive U.S. debt burden and the silly debates over just a few billion dollars of deficit reductions, the calls for the demise of the Dollar have been gaining more traction as well. Articles like Sale of the Century and Why Dollar's Reign Is Near An End are a sign of the investor mood these days.  The U.S. Dollar index is at a crucial technical point as well and we should soon find out if the technical support will hold (see chart below). Don’t write off the U.S. Dollar just yet.  But something clearly needs to be done to turn things around and keep the Dollar from loosing more value. 

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.