FXIS Market Insights

Dull, inanimate, and invoking complete boredom is probably a common first impression of musicians glancing at the average finance journal.  Unless you are deeply immersed in financial markets, papers like the Wall Street Journal or the Financial Times are not your preferred reading material.  Every now and then however, there are moments of glory when music and finance come together in the form of an article that speaks to both left brain and right brain.

One of these moments was the highly anticipated interview of Stephen Fry with Lady Gaga in this week-end’s edition of the Financial Times.  If not for Lady Gaga, do yourself a favor and read it anyway.  Stephen Fry, a “quintessentially English” actor, who also happens to be a fascinating writer well-versed in the subtleties of sarcasm, always leaves an impression and a smile on your face.

You may or may not approve of Lady Gaga’s flamboyant public persona, or of the music that has been described as rather madonna-esque, but the Pop Diva is a force to be reckoned with in the entertainment industry.  Her new album “Born This Way”, which could be downloaded for 99 cents at Amazon this week, brought Amazon’s sever to a stand-still; it is projected to sell a million copies within the first week.  Her last major world tour in 2009 was said to be one of the most successful promotional tours ever and yet, it was one of the least profitable ones too.  In her own words:

I put everything in the show, and I actually went bankrupt after the first extension of The Monster Ball. And it was funny because I didn’t know! And I remember I called everybody and said, “Why is every­one saying I have no money? This is ridiculous, I have five number one singles – and they said, ‘Well, you’re $3m in debt.’”

How could that be possible one might ask.  A major recording artist running out of money, going bankrupt? 

Well, it’s not the first time.  The list of famous musicians that went bankrupt rivals any guest list at a red carpet Hollywood event. But poor money management skills are not limited to musicians only. Famous artists, movie stars, athletes and even some businessmen had to appear in bankruptcy courts. Their money problems were not caused by an inability to make money. They all made plenty of it, often tens of millions each year. Yet, the rules of finance apply to the big stars just as they apply to you and me. The only way to get financially ahead is to spend less than you earn.  “It’s not what you make but what you keep!”

In Lady Gaga’s case, the scary part from a financial perspective is the fact that she was technically bankrupt and “she didn’t know.”  Granted, things get slightly more complicated when you have to manage a larger pile of money and essentially run a multi-million dollar business.  But there is no excuse for  “not knowing” at least a rough ball park figure and to put a stop on spending sprees before it is too late. 

When Lady Gaga says “It’s honestly true that money means nothing to me” take a moment and consider the validity of her statement.  It sounds like the most often quoted lie of successful people.  Money always means something to them or else they would not spend much of their waking hours accumulating more of it.  The value of money just has different meanings to different people.  To someone living on the streets, $5 could mean the difference between having a meal for the day or going to bed hungry. To a young billionaire like Mark Zuckerberg, founder of Facebook, the difference between $5million and $10 million might cause him nothing more than a lame yawn.  No matter who you are, whether you live on the streets or in a $30 million mansion, the rules of personal finance apply.  If you can remember to spend less than you earn, you will get financially ahead!

As for Lady Gaga, she should consider learning the basics of personal finance. She could start by reading Money Music 101. 

Would someone kindly recommend it to her?

In This Week's Issue
• Weekly Snapshot
• Weekly Barometers
• Weekly Chart
• Recommended Read: You can’t prosecute foolishness
• Recommended Video: U.S. Debt Timebomb Ticking

Weekly Snapshot
• The U.S. Dollar fell to a new record low against the Swiss Franc on Friday (Reuters)
• U.S. consumer sentiment increased to 74.3 in May from 69.8 a month earlier (Bloomberg)
• U.S. real GDP increased at an annual rate of 1.8% in the first quarter of 2011 (BEA)
• Greek opposition parties fail to agree on Papandreou's austerity measures (Bloomberg)
• Japan's CPI rose 0.6% from a year earlier-first annual rise in over 2 years (Reuters)
• U.S. corporate profits grew 5.3% in Q1 and are $45bn above their prior peak (Economy.com)
• U.S. personal income increased 0.4%; disposable personal income up 0.3% in April (BEA)
• CFTC charged oil trading firms with attempting to manipulate oil prices in 2008 (AP)
• U.S. durable goods orders in April 2011 decreased 3.6% to $189.9 billion (ESA)
• S&P lowered its credit outlook for Italy from stable to negative (Economist)
• U.S. new home sales up 7.3% from the revised March level but down 23.1% y/y (ESA)
• Credit rating agency Moody's said it might cut its rating on 14 UK banks (Reuters)
• U.S. housing starts were 523,000, 23.9% below the revised April 2010 rate (ESA)

Weekly Barometers

Weekly Chart 
While the world has been focusing on a wide range of economic and political news this week, we saw a rather subtle but nevertheless significant development in the foreign exchange markets.  The U.S. Dollar fell to yet another record low against the Swiss Franc on Friday.  This came as the yield on the 10-year U.S. Treasury Note fell to a six month low of 3.05%.  Whatever your sentiments about inflation may be, Treasuries aren’t pricing in any significant inflation yet and the Dollar continues to suffer.

Our weekly chart shows a comparison between historic 10-year T-Note yields versus the Dollar-Swiss Franc exchange rate.  This looks quite sobering when you consider that the Dollar is now worth about one fifth of what it traded against the Swiss Franc since currencies started to freely float. 

On first glance, one could fall into the correlation=causation trap since the decline in the greenback correlates strongly with the decrease in interest rates during the last three decades. But it’s not all about interest rates.  Japanese interest rates have been at rock bottom for two decades and yet, the Japanese Yen has gained the upper hand versus the Dollar.  Similarly, the Swiss Franc has traditionally been a low yielding currency in terms of deposit rates.  As we speak, the yield on a comparable 10-year Swiss government bond is about 1 percent lower than the U.S. 10-year T-Note.  Could there be another reason for the ongoing decline in the U.S. Dollar? See Video below…

 

Recommended Read
In view of the long holiday week-end, we’ve decided to keep things a bit lighter than usual.  If you like subtle cynicism, more common among British reporters, you will enjoy this week’s recommended read:  You can’t prosecute foolishness.

Recommended Video: U.S. Debt Timebomb Ticking
Discussions about the handling of the rather alarming size of the U.S. debt continue – without much progress so far… 

Some commentators have suggested that we’re not much better than some of the Club-Med countries (Greece, Portugal, Spain, Italy).  Suppose the U.S. Dollar wasn’t the world’s reserve currency (which I’m not debating), how would we be different from other countries who continue to ignore fiscal responsibility?

 

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
• Weekly Chart
• Recommended Read
• Recommended Video: The S&P at 400?

Weekly Snapshot
• China overtook India to become the largest market for gold bars and coins (FT)
• German producer prices rose by a stronger than expected 6.4% y/y in April (Reuters)
• Bank of Japan has kept its key interest rate unchanged at zero to 0.1% (NY Times)
• Greece is unlikely to trim budget deficit to 7.6% of GDP this year (Economist)
• Japan's GDP fell 0.9% in Q1 of 2011, a 3.7% annualized decline (Reuters)
• Dominique Strauss-Kahn has resigned as managing director of the IMF (Bloomberg)
• U.S. existing-home sales eased 0.8% in April; 12.9% below April 2010 (NAR)
• U.S. industrial production was flat in April after having increased 0.7% in March (Fed)
• Euro area external trade surplus was €2.8 bn in March 2011 (Eurostat)
• Euro area annual inflation was 2.8% in April 2011, up from 2.7% in March (Eurostat)
• U.S. reached the legal limits of its $14.3 trillion debt ceiling on Monday (Reuters)
• U.S. housing starts were 523,000, 23.9% below the revised April 2010 rate (ESA)

Weekly Barometers

Weekly Chart 
The U.S. reached the legal limits of its $14.3 trillion debt ceiling on Monday and could go into a technical default in August if politicians won’t raise the debt ceiling (I think we can also discount that any serious budget cuts will be implemented in the near future). Considering this budgeting quagmire, one would have to view the impact on the U.S. Treasury market as fairly negative. Bill Gross, the head of one of the largest Bond managers PIMCO, took that view as PIMCO recently started shorting U.S. Treasuries in the hope of rising interest rates. Yet, the markets haven’t been budging so far. Although pressure on the U.S. administration to reduce their debt burden has been rising, Treasury yields show no signs of an end to the multi-decade trend towards lower rates. The end of the so-called “Debt-Super-Cycle” has been suggested to arrive this summer when the Fed’s QEII program (Quantitative Easing) ends.  However, Treasury yields now look a whole lot more like QEIII is on the horizon.  Is Bill Gross going to be smiling sometime soon or will we become more like Japan?

Recommended Read
Funding long-term liabilities with short-term debt has been the name of the game keeping some financial institutions as well as numerous governments financially above water. How long this will last and how much longer they are allowed to “float” without having to tread any water (in form of higher interest cost) is the million dollar question of course.  In her article “Watch out for tail risks hanging over Treasuries” Gillian Tett discusses some additional issues that could make it more difficult for U.S. coffers to stay above water:

Those 10-year bond rates are still laughably low, meaning financing costs are cheap. But if sentiment ever swings violently, there could be a nasty wake-up call. That is a sobering thought at a time when Washington is also living with a form of political “rollover” risk, namely the danger that Congress keeps staving off any stable, long-term debt deal and resorting to short-term, temporary budget fixes, which like those bonds need to be continually renewed in a peculiarly hand-to-mouth way.

Recommended Video: The S&P at 400? 
Last week, we discussed whether the good old “Sell in May” rule should be considered. Indeed, financial markets are sometimes experiencing a lack of investor interest during the summer months.  Who can blame the punters if they prefer the surfboard over a trading screen…

More importantly, the argument can be made that stock prices may have run a bit ahead of what would normally be considered a healthy rate of appreciation.  Having witnesses this week’s stellar IPO of LinkedIn, whose stock price more than doubled on the first day of public trading, it does indeed bring back memories of the roaring 90’s.  No wonder then, that more critical voices are now being heard now.  None could be more critical than that of stock market historian Russell Napier.  In a recent interview with John Authers, he suggests:

“The real bear market in the S&P has yet to come and could push the US equities index down to 400.”

One might not agree with his target of 400 for the S&P but he does have some convincing arguments to be concerned about risky assets.

 

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
• Weekly Chart(s)
• Sell in May?
• Recommended Video: It’s The Tax Code Stupid

Weekly Snapshot
• U.S. consumer sentiment index rose to 72.4, a three-month high (Bloomberg)
• U.S. consumer prices increased 0.4% in April on a seasonally adjusted basis (BLS)
• Eurozone GDP grew 0.8% in Q1 2011 from the prior period and 2.5% year-on-year (WSJ)
• China raises reserve requirement for its biggest banks to a record 21% (Reuters)
• U.S. Producer Price Index for rose 0.8% in April, seasonally adjusted (BLS)
• U.S. retail sales were $389.4Bn, up 0.5% from March and up 7.6% from April 2010 (ESA)
• China's inflation eased to 5.3% in April from a 32-month high in March of 5.4% (Reuters)
• China's food prices up 11.5%, the 6th straight month of double-digit increases (WSJ)
• U.S. March 2011 international trade deficit grew 6.0%, to $48.2 billion (ESA)
• Standard & Poor's downgraded Greece's credit rating by another two notches (Economist)
• China's trade surplus in April was $11.4B with exports up 29.9% Y/Y (CNBC)
• Apple has overtaken Google as the world's most valuable brand (Bloomberg)

Weekly Barometers

Weekly Chart(s) 
In the wake of the financial crisis, the Fed’s stated goal towards market stability was higher asset prices.  They succeeded in achieving that goal in a number of areas: Equities and commodities were propped up substantially but consumer as well as producer prices have been showing signs of heating up now too.  In fact, the recent increases in consumer and producer price indices were perhaps a little too fast for comfort.  There are those who suggest that the Fed actually missed the target particularly when we consider that one of the biggest objectives was the stabilization of the housing market.  Whether housing was a justifiable target may be questionable but as far as effectiveness is concerned, there are no signs of a U-turn in housing prices just yet. 

With QE2 coming to an end in June, some punters have started to prepare for a scenario of higher rates.  Some of the more prominent Bond funds have even begun shorting Treasuries.  Yet, the yield on the 10-year Treasury Note remained stubbornly low.  What is it then, is inflation passé or are the markets already pricing in another round of quantitative easing?

While pondering on this question and examining this week’s CPI numbers a little closer, I came across some wonderful charts (courtesy of dshort.com) breaking down the consumer price index and adding a little twist to the mix.  For those who are not too familiar with the CPI as an official measure of inflation, here’s a neat primer discussing some of the controversial aspects of the CPI. 

Please consider the following charts with an easy to grasp overview of the CPI components.  For the average consumer, the CPI number is relatively meaningless.  However, what we all feel are price increases at the pump or when pay our monthly bills.  As you may have guessed, some of these components are not adequately reflected in terms of the cost-of-living increases for an average consumer.  To get a better sense of what CPI means to you, examine the price increases for healthcare, energy and education.  Don’t we all wish we had similar wage increases?  

Sell In May? 
“Sell in May, then go away – come back on Saint Leger’s Day ( 2nd Saturday in September)” goes one of the many rules of thumb of traditional stock investors.  As with many rules in the investment world, they work until they don’t. Had you followed the rule last year, it would have saved you a bit of nerves during the summer months.  However, if applied in 2009, you could have missed out on one of the best bull runs ever.  I’d like to invite readers to go back in time to see how often that simple rule could have made you money – or not.

Now that we’re in the middle of May, is this a good time to stay on the sidelines until September?  The market is up about 100% since the darkest days in March of ‘09 and for some its players this is a signal to take some profits.  But rather than exiting the market right away, why not apply some of the basic trading tools we mentioned in the past few weeks instead.  If you were concerned about downside market risk, use a combination of Jeff Mackey’s purple crayons and Barry Ritholtz's lines in the sand to define some exit points.  These lines don’t need to be rigid and they don’t necessarily have to be determined by technical factors alone.  You can simply set some given target prices at which you feel a downside insurance needs to kick in.  These exit points are primarily driven by your investment objectives as well as your risk appetite.

Below are two possible support lines for the S&P 500.  You can set your stop orders right below these exit points and successively move the up higher along the lines (a.k.a. trailing stop orders) to protect your downside risk.  If the market goes higher, no harm done and you can take advantage of the stronger up-trend.  In case the Sell in May rule were to apply, you could use it once the market corrects below these suggested (purple) lines in the sand, just as an example. 

Another alternative would be to use 50-day or 200-day moving averages as guidelines for exit points.  Whichever method you prefer, it boils down to the most important trading rule: Cut your losses short and let your profits rise…

Recommended Video: Its The Tax Code, Stupid
Here’s a bit of a different perspective from the Dos Hombres Nesto & Mackey. 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
• Bang! Bang! Maxwell's Silver Hammer
• Brief Technical Perspective On Silver
• Recommended Video: Lines In The Sand

Weekly Snapshot
• U.S. economy adds 244,000 jobs, unemployment rate ticks up to 9% in April (AP)
• Broad selloff in commodities drives bearish moves in oil and silver ETFs (WSJ) 
• The Bank of England held interest rates at a record low of 0.5% (Reuters)
• ECB left its key refinancing rate at 1.25%, in line with expectations (WSJ)
• Mexico's central bank bought 93.3 tons of gold worth $4.3 billion (Economist)
• Portugal has reached a deal with the EU and IMF for a €78B 3-year bailout (WSJ)
• U.S. becomes net exporter of fuel for the first time in nearly 20 years (FT)
• India raises key lending rate by 50bps to 7.25% to rein in inflation (FT)
• CME announced an 84% increase in silver margin requirements since April 25 (Bloomberg)
• Silver had its biggest one-day drop in three decades on Tuesday (AP)
• Investors reduced some of their exposure to equities move back into cash in April (Reuters)
• U.S. factory orders rise a better-than-expected 3% as business spending picks up (FT)
• Consumer price inflation in developed economies hit 2.7% in March (OECD)
• U.S. forces have killed Osama bin Laden; markets moved only for a few hours (FT)

Weekly Barometers

Bang! Bang! Maxwell's Silver Hammer 
The famous Beatles song came to mind as I reflected on this week's market movements. It was all about commodities in another episode of trader’s nausea but this time, led by some 30% price declines in silver. What lead to the massive selloff will be the topic of endless panel discussions in the days and weeks to come.  Take any one of the possible events below and you could have a good enough reason to produce significant price movements.  The combination of these events however, not necessarily in this order and magnitude of impact, was a perfect recipe for broader turmoil in the commodities markets.

• Bottoming of US Dollar?
• Bin Laden killed by U.S. forces?
• End of Quantitative Easing 2.0 in June?
• George Soros and other hedge funds exiting silver?
• Much  higher margin requirements for silver futures?
• Technical factors, profit taking after parabolic price rises?
• IPO of Glencore, the largest commodity trader - top of the market?

There may be several other factors you can include in this list.  For me, it was a much more benign event that led me to pull the trigger on silver the week before.  As I opened the Financial Times to start my daily morning briefing, a big glossy brochure popped out advertising silver as “the most indispensable and miraculous metal on Earth.” This was yet another one of those gold/silver “experts” who’s ads have been mushrooming in the media.  The brochure featured a shiny embossed replica of a One-Ounce U.S. Silver Eagle along with a quote by an unnamed “leading silver analyst” who called silver:  “The best financial asset you can own.”

Granted, your typical FT reader is usually not of the widow and orphan kind, but still... 

What timing to tout investors towards a none-the-less speculative investment only to see that investment lose 30% of its value in a week.  How much worse it must feel if an average investor, scared by these ads into buying precious metals, losing almost one third of the investment in 5 days.   While we cannot deny the fact that the US Dollar has lost much of its luster, we must question the inherent (investment) value of precious metals as well.  In particular, one should be wary of parabolic price increases as we discussed last week.  To get a different perspective on silver and to appreciate why some exchanges dramatically increased margin requirements in recent weeks, please consider the chart below showing the recent history of actual dollar values of gold and silver futures contracts.  For some of the big names in the trading community, the recent rise was too much, too fast, and so they pulled out. Very curious to find out if more investors will take the foot off the pedal next week…

A Brief Technical Perspective On Silver
Silver was the all the rave it seemed until last week. Technicians however, must have been somewhat concerned about the dramatic price changes which seemed to occur rather fast even for traders of volatility-laden commodities. In a span of just a few days, silver fell through several technical support levels.  On Thursday, it pierced through the closely watched 61.8% Fibonacci retracement area indicating a trend reversal rather than just a pause in the underlying short-term trend.

To get a better sense of the medium-term trend, please consider the weekly chart below.  The sudden rise and fall of silver is more obvious now in the context of the underlying trend channel.  Still bad news if you bought silver anywhere above $40 as it appears more likely that silver will return to the trend channel, possibly reaching an area closer to the $30 range.  Still, the silver bulls may take some comfort from the fact that the major underlying trend remains intact. This breakout may have just been a brief exaggeration in an otherwise upward trending major bull run.  Stay tuned to see how deep the rabbit hole goes. 

Recommended Video: Lines In The Sand 
Please consider some interesting perspectives from Barry Ritholtz.  Given what we saw in commodities markets this week, you may wish to review his “lines in the sand” on an S&P 500 chart.  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.