FXIS Market Insights

In today’s Financial Times column The Long View, John Authers points out a redeeming argument for the carry trade.  A typical carry involves borrowing in one currency, the one with significantly lower borrowing costs, and simultaneously investing the borrowed funds in another currency with higher yields.  The argument for the carry trade holds up well as long as the currencies involved trade within a very narrow band. The most benevolent of these carry trades involved the Australian Dollar and the Japanese Yen.  That trade worked exceptionally well for a good decade until 2008 when investors sought the safe-haven of their own currency and the carry completely fell apart.

Two years later, risk appetite is slowly coming back and there are some good arguments as to why a carry trade between Japanese Yen and Australian Dollar might be worth considering again. 

 

This article was originally published at Seeking Alpha.  Click here to continue reading…

The World Gold Council recently issued its Gold Investment Digest for 2010 which provides, among many other interesting data points, a listing of official gold holdings of various countries. Notable highlight in our chart is the fact that the ETF GLD has been the 6th largest holder of gold at the end of 2010 (in case you were wondering what has been driving the price of gold in recent years).

Gold continues to fascinate although it has been under pressure since the beginning of 2011. The precious metal has gained in investor acceptance and many advisors have been advocating to include a (small) percentage of gold as part of a well-diversified portfolio.  That in turn has led speculators to continue to invest in gold based exchange traded funds such as GLD (chart above). There are other gold funds though all seeking to share the gain on this unprecedented gold bull run.  How much of a speculative element there is remains to be seen but there sure are plenty of funds trying to imitate the precious metal’s return.

 

The growth of the exchange traded funds and their immense appetite for investments in the asset have led to a dramatic shift in demand from industrial and jewelry demand to investment demand. Overall, the demand for gold has declined since 2000 while the supply of gold saw an increase of over 400 metric tons between 2008 and 2009.  From that perspective, the recent pull-back from the record highs since late last year makes fundamental sense.

Source: World Gold Council

We also examined the price of gold versus the Australian Dollar last week.  That trading pair has now been trying to pierce through the lower trendline of this triangle pattern.

In case you are considering such a trade, keep an eye on the developments in the coming week(s) to see whether this turns into an actual sell signal. In terms of the gold price patterns, we have seen an interesting development with the Gold/Silver Ratio.  The ratio which is a straight division of the gold price and the silver price, has seen a dramatic decline in the second half of 2010 when the ratio dropped significantly below its longer-term moving average (red line) which has been around 60.

Intuitively, investors knew that the price of silver appreciated much faster than that of gold.  It does however sink in much more when observing the drop in the ratio on a chart. From a technical perspective, one could now see a retracement of the ratio back to somewhere around 55, perhaps even 60. The Fibonacci retracement levels are in that range as well.

To reflect this scenario, an investor would have to buy gold and sell silver in equal dollar values.  Not an easy and certainly not a risk-free trade to put on.  Having said that, it might be less risky than a straightforward purchase of gold, certainly that of gold futures.  As with anything, do your homework and buyer beware.

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 U.S. grew at an annual rate of 3.2% in the fourth quarter of 2010 (ESA)
• Global stocks plunged the most since November, after protests in Egypt intensified (Bloomberg)
• OIL FUTURES: Nymex vs. Brent Crude spread widens to more than $12 per barrel (Reuters)
• S&P downgraded Japan’s credit-rating to AA- because of high debt concerns (Economist)
• The Dow pushed above 12,000 on January 26th for the first time since June 2008 (Reuters)
• FOMC will maintain its near-zero rate policy and its $600B asset-purchase program (AP)
• U.S. budget deficit to reach $1.48T, or 9.8% of GDP, by the end of the current fiscal year (WSJ)
• First bond issued by the euro zone’s EFSF for €5bn pulled in €44.5bn of orders (Reuters)
• U.S. home prices dropped 4.3% in November from a year earlier (Bloomberg)
• Fourth quarter GDP in the U.K. unexpectedly contracted 0.5% from previous quarter (Economy.com)
• Bank of Japan kept its interest rate unchanged but raised its outlook for economic growth to 3.3% (AP)
• Financial Crisis Inquiry Commission: The 2008 financial crisis was an “avoidable” disaster (FCIC)

Market Barometers 

Chart Of The Week
The World Gold Council recently issued its Gold Investment Digest for 2010 which provides, among many other interesting data points, a listing of official gold holdings of various countries. Notable highlight in our chart is the fact that the ETF GLD has been the 6th largest holder of gold at the end of 2010. Still wondering what has been driving the price of gold in recent years?

Are We Any Wiser Now?
Exactly six months “after” President Obama signed the Dodd–Frank Wall Street Reform and Consumer Protection Act into law, the Financial Crisis Inquiry Commission released its official report on the causes of the financial crisis.  As you would have guessed, the commission was somewhat split along party lines which resulted in two dissenting reports muting some of the commissions findings.  Nevertheless, let’s look at some of the highlights:

• We conclude this financial crisis was avoidable.
• We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets.
• We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.
• We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.
• We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets.
• We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis.
• We conclude over-the-counter derivatives contributed significantly to this crisis.
• We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction.

No real surprises here as far as I am concerned.  What is concerning however, is the fact that this report appears now “after” the Dodd-Frank Act has been signed into law. Statements such as: “the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets” are not exactly encouraging in terms of the broader implications of Dodd-Frank. Worse yet, it gives no confidence that Dodd-Frank can prevent the next crisis or that it will have a less devastating effect on the markets and the economy. Interesting times ahead…

Recommended Read 
Courtesy of the Economist, here’s a bit of a history lesson for currency aficionadoas. Please consider:  The rise and fall of the dollar.

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
• Gold posted a third straight weekly loss, Silver dropped to a seven-week low (Bloomberg)
• Irish Prime Minister has been forced to call an early election on March 11 (FT)
• China's economy grew a faster-than-expected at 10.3% in 2010 (FT)
• German IFO business-climate index rose to a new record of 110.3 (WSJ)
• Larry Page new CEO at Google; Eric Schmidt to chair Google's board (AP)
• The leading economic index for the U.S. increased 1.0% in December to 112.4 (Conference Board)
• Brazil raised its benchmark interest rate by 50 basis points, to 11.25% (Economist)
• China's economic growth accelerated to 9.8% in Q4, beating consensus estimates of 9.6% (Bloomberg)
• Apple CEO Steve Jobs announced an indefinite medical leave from the company (Reuters)
• Worldwide oil consumption in 2011 is projected to rise by 1.6% to 89.1 million barrels per day (IEA)
• Goldman Sachs will only allow non-U.S. investors to participate in a private offering of Facebook shares (WSJ)
• US regulators have missed or postponed several deadlines for writing final versions of Dodd-Frank rules (WSJ)

Market Barometers 

Chart Of The Week
Courtesy of the Atlantic Magazine, please consider this insightful chart of how the recession changed us.

Source: www.theatlantic.com

Is There A Direction For Precious Metals?
The year 2011 hasn't started all that well for precious metals. Bearing the 3rd straight weekly loss in a row, Spot Gold closed the week at $1,343 per ounce. Silver is off almost 12% since it reached a 30-year high during the first week of this year. Taking nothing away from an incredible bull-run during the past decade, investors should keep in mind that precious metals are in essence commodities even though gold and silver are often considered investment assets. As such, an investment in gold or silver provides no inherent yield other than price appreciation. The commodity aspect comes to light now and then when prices are on the run. From the perspective of the average investor therefore, an investment in precious metals is not to be taken lightly, particularly the slightly dubious sounding gold investments touted on TV ads. 

In terms of assessing prices it helps to remember that a fair amount of the recent precious metals price increase was driven by the loss of value (both perceived and actual) in the US Dollar. When you value Gold in other currencies, its price strength is somewhat muted, particularly against high yielding currencies such as the Australian Dollar. From the perspective of the Australian Dollar, Gold had already peaked in early 2009 and has since been in a sideways pattern. If you believe the technicians, we should soon find out where Gold versus Aussie Dollar is leading to as a break-out from this triangle pattern should emerge in the coming months.

Gold valued in Australian Dollar

Musical Chairs 
The curious mind is wondering about some of the recent changes in corporate management – a game of musical chairs or a revolving door?

• Google co-founder Larry Page is replacing Eric Schmidt as CEO; Schmidt will become executive chairman of the board.
• Hewlett-Packard announced that four directors would be leaving its board. New board members are: Meg Withman, former CEO of eBay; Shumeet Banerji, CEO of Booz & Company; Gary Reiner, former CEO of GE and a current special advisor to private equity firm General Atlantic; Patricia Russo, former CEO at Alcatel-Lucent and Dominique Senequier, CEO AXA Private Equity.
• Peter Orszag, the former budget czar under President Obama is now vice-chairman of global banking at Citigroup.
• GE’s CEO Jeff Immelt will chair the President's Council on Jobs and Competitiveness.

And on a sad note, Apple CEO Steve Jobs announced an indefinite medical leave – wishing him all the strength to win the battle against his disease.

Music Sales 
Speaking of music, the Wall Street Journal reported that the recent weekly sales of music albums marks a low point, underscoring waning sales of music…

In the latest sign of waning consumer demand for recorded music, the Billboard 200 album-sales chart just registered a dubious distinction: The No. 1 position was held by an album that sold fewer CDs and downloads than any predecessor since at least 1991, when accurate weekly tallies first became available.

Along with this, I’d like to share a fascinating chart of the media universe, courtesy of Nielsen.

Source: http://blog.nielsen.com

Recommended Video 
It’s all about China these days.  This week’s state visit by the Chinese Premier Hu Jintao in Washington only ads to the plethora of news.  Along with the markedly greater interest and the obvious stronger role China seems to have on the world stage these days, there seems to be an overabundance of China experts as well. Some of the most vocal ones however, are not Chinese.  It is almost a rare event when a slightly more outspoken assessment of China’s economic and political ambitions is actually expressed by a Chinese individual. In a recent FT video, a panel of experts were debating on how China was shaping the world. Steve Tsang, fellow of St Antony's College in Oxford, had a number of interesting things to say, I thought. But were the Western “experts” really listening to what the Chinese China expert had to say?  See for yourself…

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
• U.S. retail sales grew 6.6% in 2010 after falling 6.5 percent in 2009 (ESA)
• China raised its reserve ratio for banks by 50 bps, the 4th time in two months (Bloomberg)
• Ben Bernanke expects the U.S. economy to grow around 3% to 4% this year (AP)
• Germany's economy grew 3.6% in 2010, strongest rate since the country's reunification (WSJ)
• U.S. international trade deficit declined 0.3% in November 2010, to -$38.3 billion (ESA)
• Portugal paid yields of 6.7% on its latest ten-year bond issue (Economist)
• U.S. home foreclosures in 2010 top 1 million for first time (Reuters)
• Germany's GDP expanded 3.6% in 2010 powered by a rebound in investment (FT)
• Bank of China Ltd. is allowing customers to trade the yuan in the U.S.(WSJ)
• China's trade surplus narrowed by 6.4% last year to $183.1 billion (AP)
• China's central bank announced holdings of foreign cash and securities of $2.85T (WSJ)
• South Korea's central bank unexpectedly raised its key interest from 2.5% to 2.75% (AP)
• In 2010, 950 ETFs with assets of about $995Bn—were managed by 33 ETF managers (StateStreet)

Market Barometers 

Chart Of The Week
As the discussions about an adjustment of the U.S. the debt ceiling continue, here’s a nice reminder as to how inconsequential some of the proposed budget measures are.  Granted, the $78bn proposed cuts in defense spending are a first step in the right direction. But in reality, this only amounts to just over 6% of the current deficit.  Somewhat more ludicrous are the proposed $5bn in cuts for public sector pay freezes.  Hello, that’s only 0.41% of the current deficit and leaves me with nothing more than a lame yawn.  Cutting defense spending might help but there are three other elephants in the room that no one is willing to attack: Medicare, Medicaid and Social Security.  Until these three elephants are tackled, it will be just more kicking the can down the road.

Source: www.ft.com/home/us

Recommended Read 
Please consider: Risk trades will test investors through 2011 by Stacy Williams. The author notes a trend of increasing correlations among asset classes ever since the collapse of Lehman Brothers in 2008.

Whereas in normal market conditions the price of any individual asset is driven by a multitude of forces relevant to it, in today’s markets, most assets are being driven predominantly by the same single factor. Through our analysis (conducted in collaboration with the University of Oxford Mathematical Institute) we have been able to isolate this influence – which we call the “global recovery factor” – and directly track its dominance in global markets through our RORO (Risk On – Risk Off) Index.

We have examined this phenomenon of higher correlations among different markets and asset classes before. The findings are aptly summarized in the charts below.

Diversification then is off for now. But what can an investor do short of becoming a trader? Stacy Williams recommends:

First, they can be wary of any diversification they think they have and seek out the pockets that still exist. Second, irrespective of asset class, they can focus their energies on the shifting expectations that drive the global recovery trade. The “global recovery factor” can be traded directly through simple but judicious portfolio construction, and healthy returns are there to be had.

And finally, they should endeavour to track the dominance of this phenomenon. For when it starts to wane, as it surely must eventually, investment opportunities right across the asset classes will abound.

Recommended Video
Simon Johnson, Professor at the MIT Sloan School of Management has an interesting take on why US taxpayers effectively subsidized Goldman Sachs’ investment in Facebook.  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.

Weekly Snapshot
• U.S. unemployment rate fell to 9.4%, nonfarm payroll employment increased by 103,000 (BLS)
• Euro area seasonally-adjusted unemployment rate was 10.1% in November 2010 (Eurostat)
• Brazil's inflation rate at 5.91% in 2010 - highest in 6 years (Bloomberg)
• An index of world food prices reached a record level in December (Economist)
• Brazil's central bank to limit banks' short positions in US$ versus Real (Reuters)
• Irish 10-year yields rose to 9%, Greek 10-year yields to over 12% (Eurointelligence)
• Industrial new orders in Oct-2010 were up by 1.4% in Euro area (Eurostat)
• Euro area annual inflation is expected to be 2.2% in December 2010 (Eurostat)
• US Consumer bankruptcies reached a five-year high in 2010 rising to 1.53M filings (Reuters)
• DST and Goldman invested $500m in Facebook, valuing the company at a whopping $50bn (Economist)
• China is said to buy 6 billion Euros of Spanish debt (Reuters)
• Tim Geithner says U.S. could hit debt limit of $14.3 trillion by March 31 (Reuters)

Market Barometers 

Chart Of The Week
As we start the new year, most investors have been asking for some insights from the crystal ball.  Sadly, I cannot provide that perfect viewpoint from the crystal ball.  However,  I found an amazing long-term chart of the S&P 500 which, in terms of potential market direction, looks quite encouraging for 2011.  Encouraging in a sense that a typical market correction, which is usually driven by the notion of prices reverting to the mean, may not happen until 2012 or perhaps later. Peter Lee’s chart below sets the potential downside at a level of 750-850 in the coming two years.  The upside target is clear as well.  Look for a test of about 1575 on the S&P to get a sense of higher market prices.  As of now, the previous two highs from 2000 and 2007 look an awful lot like a double-top chart pattern.

Source: 2011 Technical Market Outlook, Peter Lee, UBS

Important Reminders 
No resolutions for me this year but I’ve started to post a few important reminders on my office walls; hopefully those reminders will turn into good habits one day.  I also wanted to start the year taking things a little slower than usual.  Having said that, I’d like to share an investment reminder that cannot be repeated enough.  From no other than Burton Malkiel, author of “A Random Walk Down Wall Street” comes this simple but essential market wisdom:

The one thing I know for sure:  The less I pay to the purveyor of the investment service, the more there is going to be for me.

We all would do well remembering this simple piece of advice!

Recommended Video
Here’s the follow up interview on Burton Malkiel’s essential market wisdom.  Let’s make this a healthy and prosperous new year and let’s keep more of our money in our pockets rather than in the pockets of the purveyors of investment services.

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.