FXIS Market Insights

In This Week's Issue
• Weekly Snapshot
• Weekly Barometers
• Charts Of The Week
• Recommended Read
• Recommended Video

Weekly Snapshot
• Spot Gold surges to yet another all-time high near $1570 on Friday (FT)
• The US Dollar fell to a new low of 0.8625 against the Swiss Franc (AP)
• Eurozone inflation in April rose to 2.8%, the highest level since October 2008 (Reuters)
• The Chinese yuan has breached 6.5 to the dollar for the first time since 1993 (Reuters)
• Ben Bernanke: rates will stay at 0-0.25% for another "couple of meetings" at least (CNBC)
• BEA advance estimate: US real GDP grew 1.8% in the first quarter of 2011 (ESA)
• S&P cut outlook on Japan to negative from stable, and affirmed its AA- rating (Reuters)
• March new orders for US manufactured goods rose 2.5% to $208.4 billion (ESA) 
• Greece's budget deficit in 2010 significantly larger than expected (WSJ)
• Greek 10-year Bond yields over 16%, 2-year yields above 25% (Bloomberg)
• Home prices in 20 US cities decreased 3.3% from year earlier (Bloomberg)
• The price of spot silver reached a 31 year high of $49.85 on Monday (Bloomberg)

Weekly Barometers

Charts Of The Week
Are you nauseated by this week’s market movements?  Welcome to the club… 

Fed Chairman Ben Bernanke gave the first news conference after the Fed meeting (see video below) which was seen as a non-event by some commentators.  Still, I thought there were some important takeaway’s not so much in terms of what he said but how he said it.  For instance,

The federal reserve believes that a strong and stable dollar is both in American interests and in the interest of the global economy. There are many factors that cause the dollar to move up and down over short periods of time. Over the medium term, where our policy is aimed, we're doing two things. First, we are trying to maintain low and stable inflation by our definition of price stability. By maintaining the purchasing value of the dollar, keeping inflation low, that's obviously good for the dollar. The second thing we're trying to accomplish is to get a stronger recovery and to achieve maximum employment. Again, a strong economy growing with attracting foreign capital is going to be good for the dollar. In our view, if we do what's needed to pursue our dual mandate of price stability and maximum employment, that will also generate fundamentals that will help the dollar in the medium term.

Steve Liesman’s Response: Mr. chairman one can't help but notice it's been unsuccessful so far.

If you felt a lack of confidence in his voice and demeanor, you were in the same camp as market sentiment most immediately apparent in the price of Gold that shot up following the Q&A session.

Gold versus Bernanke

There were also a number of other negative records in US Dollar terms which supported Steve Liesman’s response to Ben Bernanke.  The Dollar dropped close to multi-decade lows against numerous currencies.  Other currencies such as the Singapore Dollar and Swiss Franc let the US Dollar tank to successive new historic lows, continuing the sad trend in recent months. 

USD versus Singapore Dollar

USD versus Swiss Franc

Following the financial crisis, the Fed wanted asset prices to rise and so they did.  Outside of housing, most asset prices have been on the rise since QE1 and QE2 were implemented.  However, there was a cost to it and it has been showing in an ultra weak US Dollar.

US Dollar Index

And lastly, in terms of quantifying US Dollar weakness, our recently mentioned targets of $50 for silver and $1,600 for gold are now clearly up for grabs. Take a look at how silver brings a new meaning to the notion of parabolic rise. This of course raises the question as to how much further the rally can go.  Time for a mini-survey.  When and at what price do you think silver will top?

Spot Silver

Recommended Read 
Amidst all the hoopla about gold, silver and the waning greenback, it’s easy to forget that other regions have their share of economic struggles too.  Not nearly as much talked about these days is the ongoing Greek (fiscal) tragedy showing up in almost unreal bond yields.  Double digit yields which are highest in 2-3 year maturities indicate that the market sees a much greater likelihood of default within the next couple of years.

2-year Greek Bond Yield	3-year Greek Bond Yield

In this context, please consider: The eurozone’s quack solutions will be no cure by Wolfgang Münchau

Recommended Video
Here now is the Q&A session during Ben Bernanke’s news conference.  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.

Due to the short trading week, here is a light version of our market wrap.  Happy Easter!

In This Week's Issue
• Weekly Snapshot
• Weekly Barometers
• Chart Of The Week
• Recommended Read

Weekly Snapshot
• The US dollar index closed the week at 74 its lowest level since August 2008 (AP)
• Spot gold rose to a new high of $1,512, its sixth consecutive week of gains (Reuters)
• Spot silver hit $46.69 an ounce, gaining 8.4% this week (Reuters)
• BP files Billion Dollar lawsuits on one year anniversary of gulf oil disaster (AP)
• Brazil raises benchmark interest rate by 25 basis points, from 11.75 to 12% (FT)
• Thailand lifted interest rates for the sixth time in less than a year (Bloomberg)
• Sweden's central bank raised its key repo rate by 25 basis points to 1.75% (Reuters)
• India's headline inflation leapt to nearly 9%, compared with 8.3% in February (Economist)
• Standard & Poor's cuts long-term outlook for US debt from stable to negative (AP)
• US housing starts were 549,000, up 7.2% from February but down 13.4% from Mar-10 (ESA)
• Euro area annual inflation was 2.7% in March 2011, up from 2.4% in February (Eurostat)
• University of Texas endowment holds $1Bn gold, 5% of its portfolio (Forbes)

Weekly Barometers

Chart Of The Week
Gold and silver prices have been on the run no doubt. But other commodity prices have seen an increase as well and the pace of that increase has been accelerating too.  The Reuters/Jeffries CRB Index, a broad commodity index, is up over 36% in the past 6 months.  While not everyone agrees that easy money policies by the Fed were the catalyst for an increase in asset prices, Michael McDonough does just that.  In a recent Seeking Alpha article, he maintains:

“Commodity prices show a strong correlation with large-scale asset purchases, evidence that contradicts Federal Reserve Bank of San Francisco research published earlier this week that indicated quantitative easing has not caused commodity price increases.”

Granted that correlation is “not” causation, the chart below is a rather tempting example of coming to that conclusion.

Recommended Read
Please consider: Shutdown Deal Is Flimflam and Swindle by David Stockman.  You’re in for a nice piece of straight talk.  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.

In This Week's Issue
• Weekly Snapshot
• Weekly Barometers
• Still No Signs Of Inflation?
• Chart Of The Week
• Recommended Video

Weekly Snapshot
• Gold jumped to a new record of $1488, Silver at $43  on Friday (Bloomberg)
• U.S. consumer prices increased 0.5% in March on a seasonally adjusted basis (BLS)
• U.S. industrial production increased 0.8% in March, 9th straight monthly increase (AP)
• Chinese consumer prices rose 5.4%, Q1 GDP also beat forecasts rising 9.7% (FT)
• China's foreign exchange reserves soared to a record of over $3 trillion (Reuters)
• U.S. producer prices rose 0.7% percent in March, seasonally adjusted (BLS)
• President Obama calls for $4,000 bn in budget cuts over 12 years (FT)
• The yield on two-year Greek bonds hit 18.38 percent on Thursday (Bloomberg)
• Ex-prime minister Gordon Brown admits "big mistake" over banking crisis (BBC)
• U.S. retail sales were up 0.4% from February and up 7.1% from March 2010 (ESA)
• U.S. February 2011 international trade deficit shrank 2.6%, to $45.8 billion (ESA)
• Japan raises level of nuclear crisis to match Chernobyl (Bloomberg)

Weekly Barometers

Still No Signs Of Inflation?
Producer and consumer prices reported small up-ticks while more significant signs of inflationary pressures came from the Far East where Chinese consumer prices rose 5.4%.  Perhaps more significant, albeit not immediately evident, is the hidden inflation through the decline in the value of the U.S. Dollar.  Having witnessed the drastic price increases in gold, silver, oil and other commodities, it is rather puzzling how Fed officials can still maintain the view that inflationary pressures are benign.

In this context, please consider a very concise Review and Outlook on the US Dollar by Axel Merk and Kieran Osborne. Their view of inflation and the prospects for the US Dollar do not mirror the Fed’s optimism.

“Inflation manifests itself through a decline in purchasing power of the dollar, or said another way, weakness in the value of the dollar. Indeed, from the date of Bernanke’s Jackson Hole speech through March 31, 2011, the U.S. dollar declined 8.52%, as measured by the U.S. Dollar Index.”

Chart Of The Week
Gold and silver prices shot up to ever new highs this week.  The recently heard targets of $50 for silver and $1,600 for Gold are now in clear sight.  Bubble territory it would seem and yet, the rally may have just started if you’re in the camp of the gold bugs who predict price rises above $2,000 and higher.  Critics of the gold bulls will point out that gold, being a commodity, does not provide any inherent yield other than price appreciation.  But holders of gold couldn’t care less having enjoyed gains outpacing nearly every other investment in the past few years.

Although gold has a mixed record as an inflation hedge, it is currently the preferred vehicle to insure against a fall-out from Mr. Bernanke’s printing press.  Gold has had a dramatic rise but the precious metal is not at its peak when valued in Australian Dollars.  This gives you a different view of dollar weakness indicating a loss of value in currency as well as in commodity terms. Please consider the chart below to get a sense of what Merk & Osborne meant when they referred to the “decline in purchasing power of the dollar.”

Gold Price in Australian Dollars

Recommended Video
The fact that the majority of fund managers DO NOT outperform the market has been documented numerous times.  Here’s a very simple and yet compelling view as to why average investors should favor low cost index funds over Mutual Funds. Please consider Are Mutual Funds a Scam?

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.

In This Week's Issue
• Weekly Snapshot
• Weekly Barometers
• Macke’s Purple Crayon
• Chart Of The Week
• Things That Make You Go Hmmm…

Weekly Snapshot
• Spot Gold rose to yet another record above $1,474 per ounce (Reuters)
• Spot Silver above $40 per ounce for the first time since 1980 (Reuters)
• WTI Oil futures price above $113, Brent Crude oil above $126 on Friday (AP)
• The Dollar under renewed pressure as U.S. budget deadline looms (WSJ)
• China to let Yuan be traded against a wider variety of currencies (AP)
• Australian dollar above 1.05 highest in 29 years against the U.S. dollar (Reuters)
• European Central Bank raised interest rates by a  quarter point to 1.25% (AP)
• Bank of England kept its benchmark interest rate at a record low of 0.5% (Bloomberg)
• Portugal seeks bailout and becomes 3rd victim of European debt crisis (AP)
• Nasdaq 100 rebalancing will slash Apple's weighting from 20.49% to 12.33% (Reuters)
• Moody's has cut Portugal's long-term government-bond rating to Baa1 from A3 (WSJ)
• China raised rates for the 4th time since October; one-year lending rate at 6.31% (AP)
• China's consumer prices rose 4.9% in February, driven by an 11% jump in food costs (AP)

Weekly Barometers

Macke’s Purple Crayon
Traders aren’t known to be of the quiet introspective kind; there is typically not enough time to be too analytical when the clock is ticking and your positions are exposed to market risk.  Instead, most traders stick to a few rules that are time-tested and work in practice.  To learn a few of these rules including some color recommendations, please consider the often controversial but always entertaining Jeff Macke.

Chart Of The Week
Speaking of purple crayons, this week’s markets caused a much higher than usual consumption of purple crayons, at least in our office. While Mr. Bernanke maintains the view that inflation is under control, commodity prices have been on fire reaching a number of new records (see weekly snapshot above).  In this context, I’d like to add one more rule to Mr. Macke’s purple crayon rules:  Don’t fight the trend!

Whether you believe in technical analysis or not, one of the most effective tools in terms of establishing major trend-lines is indeed the purple crayon (you may of course use a different color or your liking). It has one overarching purpose:  Determine the major price trend and make sure your position is in line with that trend.  Now let’s examine one more chart in addition to Jeff Macke’s examples:  Silver!

As the purple crayon shows, the underlying long-term trend is up.  But we are also using another color (red) to indicate a hot trend.  Silver has indeed been red-hot as it broke through the major trend line on the upside earlier this year.  If you are long silver, congratulations!  How much higher can we go from here?  According to some recent analyst reports, $50 is the next target.  Having said that, you may still want to use one of Jeff Macke’s exit rules and set a stop below the (red) trend line this time.  We probably won’t see a change in the overall trend (purple) in the near-term but if Macke is right in terms of taking some money off the table, you may consider yet another rule: Don’t get married to your position(s). Or, as Jeff Macke puts it:

“Love is for your kids and your dog, not for your investments.”

 

Things That Make You Go Hmmm…
In light of the possible U.S. government shutdown over the debate on the debt ceiling, the inquiring mind is pondering about the Presidential Proclamation of April as the “National Financial Literacy Month.”  As the proclamation notes:

Americans' ability to build a secure future for themselves and their families requires the navigation of an increasingly complex financial system.  As we recover from the worst economic crisis in generations, it is more important than ever to be knowledgeable about the consequences of our financial decisions.  During National Financial Literacy Month, we recommit to improving financial literacy and ensuring all Americans have access to trustworthy financial services and products.

 

Good luck, good investing and hmmm…

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.

In This Week's Issue
• Weekly Snapshot
• Weekly Barometers
• Chart Of The Week
• The Untouchables
• China's Ghost Cities and Malls

Weekly Snapshot
• Nasdaq & ICE launch a bid for NYSE that trumps previous Deutsche Boerse offer (WSJ)
• Ireland's banks need €24 bln ($34 bln) more to withstand future shocks (AP)
• U.S. nonfarm payroll employment increased by 216,000 in March (BLS)
• U.S. unemployment rate was little changed at 8.8% (BLS)
• The price of oil rose past $108 a barrel on Friday, highest since 2008 (AP)
• U.S. corn futures prices soared to their daily limit in Chicago (WSJ)
• Euro area annual inflation is expected to be 2.6% in March 2011 (Eurostat)
• U.S. Stocks saw the best first quarter since 1998 (WSJ)
• Opec set for $1000bn in export revenues if oil prices stay above $100 (FT)
• U.S. home prices fell for the seventh straight month in January (Reuters)
• Saudi Arabia intends to increase the number of oil rigs by 28% to 118 (Reuters)
• U.S. consumer confidence fell to 63.4 in March, from 72.0 in February (WSJ)

Weekly Barometers

Chart(s) Of The Week
Friday’s employment data were encouraging and somewhat in line with the stock market recovery, albeit with a longer than the usual six-month time lag.  Earlier in the week, housing data suggested a slightly darker picture however.  This leaves a lot of questions open particularly when so much stimulus effort by the Fed has been on inflating asset prices.  While asset prices in general have been on the rise, housing is the 400 pound gorilla that no stimulus effort so far has been able to prop up.

 

To get a sense of what more realistic housing prices might look like, please consider the concept of price-to-rent ratios as displayed in the chart below.  A chartist might look at this trend and suggest that prices will revert to the mean over a longer period of time but that prices can also over and under-shoot the trend by a considerable margin (same logic applies to the chart above).

In hindsight, it also shows how insane it was to assume that housing prices must continue to climb when it was so much more expensive to buy than to rent.  Moreover, as the chart below shows, the US housing market was not the “most insane” of all real estate bubbles.

The Untouchables
It would be much more pleasant if this was about the movie “The Untouchables” but sadly, it’s about different kinds of Untouchables, namely Social Security, Medicare, Medicaid and Military Spending a.k.a. entitlements.  This warrants a revisit to our previous commentary on the state of USA Inc. 

With $1.2 trillion under management, PIMCO is one of the biggest players in the investment world.  When its founder Bill Gross speaks, the investment world usually listens.  Granted, one can never completely disregard the fact that a large market player is talking his book, but there seems to be a genuine concern by Mr. Gross that the business of capitalizing ever-increasing amounts of debt is driving this country over the edge.  In his Monthly Investment Outlook he notes:

This country appears to have an off-balance-sheet, unrecorded debt burden of close to 500% of GDP! We are out-Greeking the Greeks, dear reader.

His quote may sound far-fetched at first but it is not inconceivable that the Fed may face much higher borrowing costs if current discussions about the debt ceiling and budget deficits continue to focus on lame budget cuts which amount to no more than a tiny fraction of the current deficit.  Just to remind ourselves, a typically highly publicized debate on cutting say $10bn is only about 0.6% of the current $1.6 trillion deficit - meaningless.  In all this, politicians on both sides of the political spectrum continue to display a frightening lack of numerical proficiency. 

But fear not, the ongoing deficit discussions will eventually focus on the “Untouchables” not by choice but by necessity. Who knows when that tipping point arrives.  For now, let’s look at the 10-year treasury yields of some of the troubled European nations and take this as a reminder that our leaders are playing with fire and with the financial future of this great nation.

10-year Greek Yields		10-year Irish Yields
10-year Portuguese Yields		10-year Spanish Yields

China's Ghost Cities and Malls  
Please consider this fascinating documentary about the Chinese real estate market.

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.