FXIS Market Insights

Here is our latest issue of market insights. Enjoy!

In This Week's Issue
• Weekly Snapshot
• Weekly Barometers
• Weekly Chart
• All That Jitters
• Recommended Read
• FedSpeak Translated Into Plain English

Weekly Snapshot
• U.S. real GDP grew at an annual rate of 1.0% in the second quarter of 2011 (ESA)
• U.S. consumer sentiment fell to 55.7 this month from 63.7 in July (Bloomberg)
• Greek 2-year bond yields at 44%, highest levels since the launch of the Euro (Bloomberg)
• U.S. orders for durable goods in July 2011 increased 4.0% to $201.5 billion (ESA)
• Germany's Ifo business climate index in August dropped to 108.7 from 112.9 in July (AP)
• In June compared with May 2011, Euro area industrial new orders fell by 0.7% (Eurostat)
• Steve Jobs decided to step down as chief executive of Apple (Economist)
• Gold at new all-time record of $1,911.46 before falling $200 in three days (FT)
• Congressional Budget Office sees $1.3 Trillion budget deficit for 2011 (WSJ)
• U.S. home prices fell 5.9% in Q2 from a year earlier, biggest drop since 2009 (Bloomberg)
• Moody's cut its rating on Japan's government debt by one notch to Aa3 (Reuters)
• Head of rating agency Standard & Poor's stepping down, to leave company at year's end (AP)

Weekly Barometers

Weekly Chart 
Many of my generation have idolized Steve Jobs; as someone once put it, he is the only man-crush one should have… Whether you are an Mac or a PC, you cannot deny that this man had the vision and the tenacity to transform entire industries.  In the eyes of some, Jobs is able to walk on water or so it seems for all of those who are engulfed in his Reality Distortion Field.  Although he remains actively involved in the company as chairman of the board, it is unclear to what extent Steve Jobs can continue to influence strategy and be the main visionary of the company.  Sadly, the question is purely a medical one.  As a reminder of how Steve Jobs transformed Apple, numerous industries and the entertainment behavior of at least one generation, please consider the chart below.  

(Click on chart to see larger image)

All That Jitters…
It continues to be all about gold.  But as we examined last week, the move into gold is a “rocky” adventure, at least at these price levels.  After reaching yet another nominal all-time high, gold dropped about $200 in just three days.  Had you been caught in the buying spree, that kind of downside movement wasn’t an easy one to digest.  From our perspective, it looks as though volatility in precious metals as well as other commodities isn’t going to disappear anytime soon.  To get a sense of just how much gold prices have swung, let’s consider a few technical angles for this shiny metal. 

$200 down and over $100 back up in just a week, phew…

A very popular tool is the use of Fibonacci retracement levels (38.2%, 50%, 61.8%) which are often indicative of profit taking or a sort of pause in the underlying trend.  The three-day price drops ended at the 50% retracement level, an almost text-book like move.  As long as these retracement levels hold, technical traders will favor the upside.

Putting things into perspective, you can see how parabolic the price increases have been just this past month. We have seen similar parabolic moves before most recently in silver.  Although prices may remain volatile, the major trend still points upward. Gold prices have a long way to go down before this major trend is in danger of reversing. But rest assured that there is more volatility in store.  The flight to the illusive safety of gold will continue to be choppy.

Recommended Read 
Higher gold prices have been a symptom of a distrust in fiat currencies, namely the Dollar and the Euro. Please consider: Much Ado About Debt: Dollar vs. Euro.  Granted, Axel Merck is talking his book by promoting his own currency fund, it is nevertheless an excellent assessment of US Policy and its impact on the Dollar.

FedSpeak Translated Into Plain English 
Please consider this enlightening interview with Philly Fed President Charles Plosser. Rather than engaging in the art of reading tea leaves, here's a no-nonsense plain English talking Central Banker. Don't we wish we get the same type of concise info from all Economists?

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.

Here is our latest issue of market insights. Enjoy!

In This Week's Issue
• Weekly Snapshot
• Weekly Barometers
• The New Normal
• China’s Redback & Dim Sum Bonds

Weekly Snapshot
• Spot Gold reached yet another all-time above of $1,875 an ounce (Reuters)
• Philadelphia Fed Factory-sector index of general business activity fell to -30.7 in August (WSJ)
• Fitch Ratings kept the U.S. debt rating at AAA and said the outlook was stable (Economist)
• U.S. CPI increased 0.5% in July on a seasonally adjusted basis (BLS)
• U.S. leading economic index increased 0.5% in July to 115.8 (Conference Board)
• Average rate on 30-year fixed mortgage falls to 4.15%, lowest on records since 1971 (AP)
• U.S. benchmark 10-year note yields fell below 2% for the first time on record (AP)
• U.S. industrial production rose 0.9% in July, industries used 77.5% of their capacity (WSJ)
• Eurozone GDP growth fell more than expected to 0.2% on a quarterly basis from 0.8% in Q1 (WSJ)
• Germany's GDP expanded just 0.1% in Q2 from Q1, missing forecasts by 0.5 % (Reuters)
• Fitch Ratings said affirmed the United States' top-notch credit rating at AAA (Reuters)
• ECB spent record $32 billion buying bonds to prop up Italy and Spain (AP)
• Japan's Q2 GDP shrank 1.3% y/y, half the expected decline of 2.6% (Reuters)

Weekly Barometers

The New Normal 
It has been a wild ride this summer.  Don’t we all wish we had followed the old rule “Sell in May, then go away?”  As we’re trying to put these markets swings into context, I can’t help but thinking that the “New Normal” has actually arrived and is now showing its ugly face.  Here are a few snapshots of how the new normal has been ravaging across the financial markets.

Continued Dollar Weakness	Ultra-low Rates
Higher Volatility	Choppy Stock Markets

Then again, beauty is in the eye of the beholder and while most of us may require an extra dose of dramamine, the risk seekers thrive in this market.  A number of hedge funds have been raking in profits trading these wild market swings aggressively.   Day trading however is an activity that, just like the driving stunts on auto commercials, should be left to professionals only. For most of us it felt safer to embark on the ultimate risk management tool: stay on the sidelines and watch, hence the renewed flight toward safety evident in new record highs for gold prices and treasuries.  

Although we have been hearing this for quite some time now, both asset classes are now showing more signs of being in bubble territory.  Whether we are still at the beginning or near the end of a bubble remains the topic of dispute.  Much depends on how fear continues to spread through the financial markets.  To get a sense of what I would consider market distortions, please review the chart below showing the S&P 500 valued in Gold.  In March 2009, the S&P 500 fell to a low of 666.79 which resulted in a value of 0.70 in relation to Gold.  We have fallen far below that level in the past couple of weeks, perhaps a symptom of US$ weakness more than anything else.  After the Federal Reserve’s announcement to keep interest rates at record low levels for at least another 2 years, Dollar depreciation seems inevitable and hardly anyone disputes that the Dollar will continue to decline (which is a problem in itself by the way).  With regard to the chart below in terms of what may be an oversold market condition, it forces me to ponder the following question:  Are we more comfortable putting our faith in a shiny metal or is there more value in letting some of the smartest and brightest (perhaps also greediest) business executives figure out how to allocate capital most efficiently?  Initially, I may be wrong leaning towards the latter but it seems to me that in the long run, companies will be more likely to figure things out and outpace the rush towards Gold.

China’s Redback & Dim Sum Bonds
As a lover of Chinese food, I immediately got excited when the words “dim sum” appeared while browsing through an article in the Economist.  Dim sum in this case however, referred to the financial instruments nicknamed “dim sum bonds” which are securities denominated in the Chinese Yuan, but sold in Hong Kong where dim sum is a local delicacy. 

Finding more evidence of the “New Normal”, we previously examined how Brazil and China started to settle their trade balances directly rather than via the US Dollar.  China has begun to encourage other countries, such as oil-rich Venezuela, to settle their trade balances in Yuan as well.  At the same time, issuance of Chinese Yuan denominated bonds have begun to take shape as well.  Please consider  Redback and forth: The yuan is flowing beyond China’s borders—and back again.  Despite increased efforts by China to slowly transform its currency and financial markets into playing center stage in global finance, the Chinese government remains extremely obscure as to how it intends to achieve this goal. Clearly, not all of their efforts have the intended outcomes as the Economist article concludes:

Foreigners will be keen to acquire yuan, and reluctant to part with it, for as long as they think it is artificially cheap.

Ironically and perhaps a sign of hope for U.S. investors, at the moment, there is still no way around the greenback. The fate of China’s currency as well as its economy remains deeply dependent on the fate of the U.S. economy and the Dollar.  But China’s current dim sum efforts give a tiny preview of things to come.  The stakes are high, the path is unclear, and there are numerous hurdles before China can transform itself into a thriving financial market; they still have years, perhaps decades to go. In the meantime, my my immediate (culinary) future becomes increasingly clearer: Dim Sum this week-end!

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.

Here is our latest issue of market insights. Enjoy!

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

Weekly Snapshot
• U.S. retail sales for July posted their biggest gain since March (Reuters)
• U.S. consumer sentiment at 30-year low of 54.9, worse than forecast of 63.0 (FT)
• Industrial production for June 2011 was down by 0.7% in Euro area (Eurostat)
• U.S. international trade deficit in June 2011 increased 4.4% to $53.1 billion (ESA)
• CME hiked margin requirements for gold futures by 22% from $6,075 to $7,425 (Bloomberg)
• Spot Gold hit a new all-time record high of $1814 on Thursday (Reuters)
• Apple valued at $337bn, beating Exxon's $331bn for highest market cap (AP)
• U.S. Treasury sold $24bn in 10-year T-notes at a yield of 2.14%, lowest rate on record (AP)
• China's trade surplus shot up to $31.5bn in July, the biggest in more than 2 years (FT)
• The Chinese Yuan rose to a new record of 6.4170 to the Dollar vs. 6.4404 (WSJ)
• China inflation rose 6.5% in July, beating forecasts and hitting highest level in 3 years (Bloomberg)
• Fed committed to keeping interest rates at exceptionally low levels through at least mid-2013 (FOMC)

Weekly Barometers

Weekly Chart
They say the grass is always greener at the other side. Then again, looking at some of the images of U.K. riots, U.S. investors have been in a relatively comfortable position merely enduring market gyrations.  After looking at this fascinating chart below, I already felt so much better about the grass in our own economic backyard.  It’s looking so much greener now…

Recommended Read 
After last week's ratings downgrade of U.S. Treasury debt, one could have expected a melt-down in the bond market. Instead, the gyrations occurred in equities while Treasuries saw a rally sending yields on the 10-year T-note as low as 2.1%. The Bond market response was not just giving us a sort of "who cares message" but rather “forget about ratings agencies altogether.”  To explain how this could play out we need to look at the example of Japan which has "been there and done that" according to Peter Tasker.  Please consider How to make monkeys out of rating agencies.

Recommended Video
Has the U.S. Lost its Mojo? Find out here…

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.

Here is our latest issue of market insights. Enjoy!

In This Week's Issue
• Weekly Snapshot
• Weekly Barometers
• Weekly Chart
• Really Banks, Really?
• Recommended Read
• Recommended Video

Weekly Snapshot
• S&P issues unprecedented downgrade of US credit rating from AAA status to AA+ (AP)
• U.S. economy adds 117,000 jobs, unemployment drops to 9.1% (Reuters)
• Yields on U.S. 10-year Treasury Notes fell below 2.5% on Thursday (Bloomberg)
• Spot Gold rallied to a new record high of $1,681.90 on Thursday (Reuters)
• Money market funds in the U.S. saw a $103-billion outflow amid debt drama (LA Times)
• The European Central Bank held interest rates steady at 1.5% (Economy.com)
• Japan sold one trillion yen ($12.5 billion) in efforts to tame currency appreciation (Reuters)
• The Euro area seasonally-adjusted unemployment rate was 9.9% in June 2011 (Eurostat)
• U.S. service firms experienced their weakest growth in 17 months in July (AP)
• Global manufacturing output has dropped back to the level it was at two years ago (Economist)
• Swiss National Bank cut interest rates in a move to cap a soaring Swiss Franc (Reuters)
• Ratings agencies Moody's and Fitch have confirmed the U.S. will keep AAA rating (Reuters)
• U.S. Senate authorized a bill to raise the debt ceiling by $2.4 trillion (AP)

Weekly Barometers

Weekly Chart(s)
Every now and then, the markets leave you speechless.  This was one of those weeks. There was hardly any place to hide except for Treasuries and a rather choppy Gold in an ongoing flight to safety.  So is there really a place to hide? Despite the U.S. credit ratings downgrade by S&P, the markets still believe, at least until market close on Friday, that U.S. Treasuries are the safest bet among increasingly fewer choices.

In terms of equities, a lot of this week’s volatility had to do with technical trading factors. When the S&P500 fell through an important technical support at 1250, a level which everyone seemed to agree upon, sell orders were triggered and the markets headed South all the way to 1163 for the S&P 500. 

 

From our perspective, the stock market sell-off is a concern.  However, the larger issues are looming over the fate of the U.S. status as the largest, safest and most liquid capital markets.  If the value of the Dollar continues to erode, any nominal returns in U.S. stocks will be eroded by returns measured in other currencies or other hard assets such as precious metals.

In the early 70’s it took over 4 Swiss Francs to buy 1 US Dollar.  Today, it takes less than 80 Swiss cents to buy 1 Dollar.  At the same time, the yields on U.S. Treasuries are near historic lows, alarmingly close to the lowest yields we witnessed during the financial crisis.  For now, there is no visible change in trend.  U.S. Treasuries continue to stay within the long-term trend of super-low interest rates while the value of the Dollar against some other hard currencies continues to erode.  It does however beg the question as to how much longer we can play this game of charades i.e. convince the world that this is the safest place to invest and, while incurring yet more debt, offering increasingly lower real returns.  This logic has defied me for some time now; it eventually defied Standard & Poors as well.  Perhaps the historic downgrade from AAA to AA+ is another symptom of what has often been called the “new normal.” Perhaps reason will continue to take an extended holiday and real rates will continue to erode.  A long time ago, someone said: “Hard to see the future is, the dark side clouds everything…”

While we cannot predict the future, we do know that the markets will continue to play out numerous scenarios in an increasingly complex and highly leveraged game of charades.  Buckle up!

Really Banks, Really? 
Speaking of twisted logic...for those who need a reminder that capitalism as we knew it has run its course, please consider:
BNY Mellon to charge on $50m-plus deposits

And in case you're still in the camp of those who don't hate banks enough already, this story will help you change camps.  Having been brought to their knees just a couple of years ago, the banks came begging asking taxpayers for bailout money. Now they are back to record bonuses, fewer of them and too bigger to fail, their CEO's must feel vindicated and rightly so because the general public appears too complacent and lets them get away with murder.  Don't get me wrong, the majority of people who work for banks are decent and hard working.  But the bank as an institution can no longer survive if it continues to slaughter its most important and possibly the only real cash cow: The customer. 

Should we feel sorry for those with cash holdings of over $50M?  Probably not, but this story speaks to the larger trend of banks holding our hard earned cash and instead of paying us a decent return on savings, they continue to find ways to charge fees. Why people aren't in the streets yet and seriously call into question the existence of these greed-driven behemoths beats me.

George Orwell would have been proud of this kind of doublespeak BNY Mellon used in a letter to clients:

The “extraordinary deposits” meant that fees were necessary to safeguard the “quality and strength” of its balance sheet.

Really banks, really?  In Greece, people took to the streets because their retirement age of 55 was at stake.  In this country people have been swallowing up the misdeeds of a few highly paid at the top while continuing to work longer, harder and for lower real wages. What else must people endure before a real run on the banks occurs?

Recommended Read 
The battle over deficits and the debt ceiling is finally over, or is it?  Please consider: Washington’s battle is a diversion

Recommended Video
When talking about US debt and about the future of the risk-free rate, one cannot forget the largest debtor’s biggest creditor: China.  Please consider an insightful interview with Niall Ferguson: Ferguson Says China Saw Currency Risk in U.S. Debt Talks.

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.