December 19, 2009

Market Insights - 19 December 2009

Dear Friends & Fellow Investors

Here  is the last issue of Market Insights for 2009.
As always, please email any questions to: info@fxistrategies.com

Wishing everyone a Merry Christmas and a healthy and prosperous New Year!

In This Week's Issue
▪  Weekly Snapshot
▪  Chart Of The Week
▪  Mini Review Of 2009 
▪  More On The US Dollar 
▪  Bored With Gold

Weekly Snapshot
• US$ at highest level since September, Euro fell below 1.43 on Friday (eSignal)
• German business confidence rose to 94.7 points, the highest level since July-08 (Reuters)
• US Leading Economic Index increased 0.9% to 104.9 in November (Conference Board)
• US consumer price index rose by 0.4% in November (FT)
• Euro area annual inflation increased slightly to 0.5% (Eurostat)
• US current-account deficit increased to $108.0 billion, or 3.0% of GDP (ESA)
• Japan's Tankan survey showed small improvement in business sentiment Q4-09 (Economy.com)
• US Housing starts rose 8.9% from the prior month and fell 12.4% from the prior year, to 574,000 (ESA)
• US Industrial production increased 0.8% in November after having been unchanged in October (NBER)
• CME Group launches Credit Default Swaps and begins clearing trades on the exchange (CME)
• US Producer Price Index for Finished Goods rose 1.8% in November, seasonally adjusted (BLS)
• Industrial production down by 0.6% in euro area (Eurostat)

Chart Of The Week 
Last week, we looked at the disparity in US pay rises and noticed that the average pay increase of federal employees was nearly twice the increment of state/local and private employees since the beginning of the recession.  Here is another way of looking at how government outranks private enterprise these days.  Capitalism seems to have gotten the short end of the straw...

employer costs per hour

Source: http://www.thebusinessinsider.com/clusterstock  

Mini Review Of 2009  
The major markets had an incredible rally since the lows in March and the world economy did not fall of the proverbial cliff as some might have feared when the S&P 500 hit 666.79.  But for most of us, 2009 was a challenging year of many ups and downs with the fear of downsizing and higher unemployment looming darkly above everything else.  We will do a more extensive review along with an outlook for 2010 in early January.

In the meantime, let’s re-examine our Predictions for 2009 issued in Mid-January:

• U.S. Housing will hit bottom during summer/fall 2009.
• U.S. 30 year mortgage rates as low as 4.5% - 4.75% sometime in 2009.
• Cont. volatility in energy markets. Oil will eventually trend higher above $50 per barrel at year end.
• Continued volatility in equity markets. S&P will close above 1,000 at year end.
• U.S. budget deficit is a major concern – I predict a deficit of $2 trillion in 2009.
• Onset of a decline in the value of the US Dollar against other major currencies

Although the year has not finished yet, it is probably fair to assume that there won’t be massive changes from current price levels and the majority of the predictions may hit right on target. 

Re: Housing/    This week, Moody's declared that US housing has bottomed but other analysts, including those of Deutsche Bank, predict that house prices may have another 10% to fall.  Based on the Case-Schiller Index, our prediction was quite on target as the Index saw the lowest prices in April and May of this year.   It remains to be seen whether 2010 will see another test of that bottom in house prices.

US Home Prices 

Re: 30 Year Mortgages/   Average 30-year mortgage rates fluctuated slightly above and below the 5% mark for the most part of the year but with a bit of shopping around, one could get really excellent terms in line with the upper band of our prediction.  I personally refinanced a conventional 30 year mortgage under 4.75%.  Something that was not reflected in the low rates was the immense scrutiny and red-tape one had to go through in order to actually get a loan this year.  Even borrowers with excellent credit ratings were seen as potential sub-prime customers as most lenders tightened their mortgage application screws.  Despite the massive bailout money from the tax payers, Banks were not lending, unless the borrowers had substantial down payments and/or above average credit ratings.  Makes me wonder how on earth sub-prime borrowers were ever allowed to purchase homes with no money down...

30yearmortg

Re: Oil/  Crude Oil markets were choppy in 2009 but nothing like the volatility we have seen during 2008.  From our initial vantage point back in January, prices dropped to a low of $37.12 but increased steadily from thereon.  Since May, the oil price traded above $50 reaching a high of $82 in October.   Taking into account last year’s price movements, $90 would be about 50% of the price decline from $147 to $35.  While a $25 price of oil is highly unlike even for the die-hard deflationists, one also has to question whether a return to prices above $100 will be sustainable.  In either case, oil should be trading above $50 for quite some time.

Crude-2009-1217

Re: Equity Markets/  US stocks had an unprecedented rally ever since the eerie low of 666.79 back in March.  The S&P 500 is up about 65% since then and about 21% since the beginning of the year.  A remarkable performance given this particular time frame.  The fact that this rally bypassed the majority of average investors is not mentioned all too often and whether current valuations are sustainable is yet another question.  But unless something dramatic ensues, the US benchmark should stay above 1000 for the remainder of 2009.  Looking back a bit further, a level of 1,200 is about 50% of the decline from peak to through and that is the major resistance area that needs to be cleared for prices to go higher.  This year’s rally is impressive indeed but the average investor who bought in 2007 has still ways to go before breaking even.

SPX-2009-1219

Re: US Budget Deficit/  Depending on the sources, the current budget deficit is expected to be somewhere between $1.5 trillion to $1.8 trillion.  However, the projections from May of this year to reach a deficit of $1.841 trillion are going to be revised upward since the House of Representatives just passed a new $1.1 trillion spending bill and  the US government's debt ceiling may be increased by as much as 16% from its current $12.1 trillion limit.  Sadly, our original prediction will come true as well.

Re: The US Dollar/   The decline of the US Dollar was in the making all throughout 2009.  Just about everyone and their mother was bearish on the Dollar making it a rather crowded place for selling it further. More recently therefore, the US Dollar gained some strength back and appears to be on course to chase back some of the losses incurred during the year.  While the US did not fair too badly against the major currencies after all, emerging markets and commodity driven currencies had bumper years;  the more notable performers were Australian Dollar (+27%), New Zealand Dollars (+23%) and  Brazilian Real (+22%).

FX versus USD  

More On The US Dollar
The US Dollar Index reached 78.14 on Friday, the highest level since early September. 

USD-2009-1218

The US$ Index itself is a good indicator of current overall US Dollar strength/weakness but, as we alluded to last week, it is probably not an ideal way of examining the trend going forward.  To get a better assessment we have to examine each currency pair individually.  For the sake of getting a general picture though, let’s examine some fundamentals anyway.   There are several reasons why continued US$ strength may be the ongoing theme in the coming months: 

• Expectations that the Fed will tighten earlier than expected (see recent PPI and CPI data)
• Better than expected growth in the US and a rebound in global trade 
• US$ is relatively cheap on a purchasing power parity basis 
• Growing concerns about sovereign debt in Europe and Middle East

Assuming the Fed will tighten relatively early and that the US will continue to gain strength, a lot of the funds flowing into relatively risky assets will return home in expectation of future rate hikes.  A logical looser for such a scenario would be “the carry-trade of 2009” the Australian Dollar and, to a lesser extent, other emerging market currencies with current yield advantages over the US$.  

Commodity-rich countries and their currencies may also loose some of their appeal if commodities fall in line with a stronger US$ (assuming that the inverse correlation continues going forward).   As we have seen with Gold, losing some of its shine in recent weeks, this may very well be the case . 

A stronger US$ is also very much desired by export driven countries who don’t have a Dollar peg (i.e. Japan, Brazil, Germany etc.), and who have experienced massive set-backs from a weakening Dollar in addition to the vanishing US consumer demand.  A stronger US$ gives these exporting nations some room to price their goods more competitively.  China, which maintains a fixed exchange rate, does not directly benefit from the outset; however, indirectly it relieves some pressure on the Chinese Central Bank to maintain artificially lower exchange rates. Further, let’s not forget the approximately $2 trillion in currency reserves and the massive amounts of US Debt they are holding.  An increase in the value of the Dollar means that their investments in US assets are regaining in strength as well. 

Another factor benefitting the US Dollar and weighing heavily on the euro were the peripheral downgrades for Greece, Spain and Ireland. Anytime sovereign debt is called into question, take the example of Dubai, a sudden shift into a safe haven currency or commodity occurs.  And, as in the case of last years credit crunch, the de-facto safe haven still appears to be the US Dollar.

An ongoing Dollar rally would also mean that the investor rationale since March is about to change.  Reversals of carry-trades, profit taking and/or reversals of positions in commodities, emerging market stocks as well as US stocks may ensue.  Hence, even in a bullish Dollar scenario, the investment climate remains challenging when trying to achieve a balanced portfolio.  Short of putting all your eggs in one basket (i.e. US Cash or Bonds), a stronger Dollar may bring about some additional portfolio challenges. 

Looking at the other side of the coin now:  Let’s assume that the recent Dollar strength is just a brief episode, a retracement or a pause in the underlying trend.  Several analysts including reporters of the Financial Times commented that the reason for the current US Dollar strength had little to do with the factors noted above.  Instead, the main reason was that investors who had accumulated short positions in the Dollar since the beginning of the year have recently begun to square those position ahead of the year-end.   This means it is just a technical correction in the underlying trend. 

The chart below illustrates how the Euro versus US$ had a retracement since it’s recent peak and it has been approaching the 38.2% Fibonacci retracement area.  To see an actual trend reversal in favor of the Dollar, substantially lower technical levels below 1.38 and just under 1.35 need to be reached.

EUR2009-1218

During this week’s FOMC meeting, the Fed hinted that it might discontinue quantitative easing (QE) earlier than expected.  In view of the recent increase in the producer price index and the fact that inflation is being recognized as a possible side-effect of QE (who would have thought...), one must consider rates creeping up at some point.  The setting of higher benchmark rates by the Fed though bears the risk of a double dip recession, politically an untenable proposition.  Anyone still believing in the independence of the Fed, think again!  Those days are long gone. Today, we have a Fed led by Ben Bernanke who is continuing with the tradition of Alan Greenspan in being much more politically accommodating than Paul Volker ever could have tolerated.   Whether QE will continue or rates may creep up by 25 basis points at some time next year, overall benchmark rates will remain extremely low for the foreseeable future. 

To make one more point absolutely clear, it is our conviction that the Fed will be accommodative irrespective of any inflationary pressures (CPI and PPI numbers have a history of being massaged anyway) until such time that it finds it difficult to finance the $12.1 trillion (and counting) deficit .  From the US government’s perspective, there is no easier way to dilute the debt burden.  Keep rates artificially low and let the public believe that inflation does not exist.  As long as it can find buyers for its IOU’s, the US government will go on with its charade for quite some time.  But the ever mounting debt burden, combined with low interest rates does have this negative effect on the Dollar.  The exchange rate is effectively the economic valve allowing this Ponzi Scheme to function in the first place.  The more pressure (debt) builds up internally, the more the valve has to adjust in order to keep things somewhat in balance.   Consequently, it is hard to imagine a true build up in US Dollar strength without fundamental improvements in the US government’s finances. 

How these scenarios will play is not clear at this point – it’s complicated... 

However, we firmly believe that the US Dollar is still in a cyclical long-term down trend and that the only way to get back to the glory days of a strong Dollar and to maintain its status as a true reserve currency is via sound fiscal and economic policies and via a strong and sustainable economy.   No predictions in terms of prices at this point, but rest assured that 2010 will not be a quiet year.

Bored With Gold
Gold closed the week at 1,112.50 more than $100 below it’s all-time peak of $1,226.40.  The inverse correlation to the US$ worked like a charm and in line with the recent Dollar strength, Gold lost some of its luster.  Similar to the fate of the US$ is the question as to whether Gold’s rally is now over and done.   While you may ponder on this question over the holidays  I would like to end the year on a positive note and recommend a refreshingly simple even humorous way of looking at an investment.

James Altucher, ever so funny, has an intriguing way of assessing investments in gold.  "I'm So Bored of Gold," he notes.   So next time you wonder when it’s time to sell an investment, follow your heart and if you’re bored with the investment, just look for alternatives.  Who knows, it may be the best money making proposition.

Once again, best wishes for the holidays and have a happy and prosperous New Year!

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.

December 12, 2009

Market Insights - 12 December 2009

Dear Friends & Fellow Investors

Here is our new issue of market insights.
In case of questions, please email: info@fxistrategies.com.  Enjoy reading!

In This Week's Issue
▪  Weekly Snapshot
▪  Chart Of The Week
▪  Recommended Video
▪  More On The US Dollar 
▪  More On US Debt 
▪  The Unemployment Game Show 
▪  Charts & Thoughts

Weekly Snapshot
• US consumer sentiment index rose to 73.4 in early December from 67.4 in November (Marketwatch)
• US House passes $1.1 trillion spending bill; debt ceiling likely to be increased by $1.5 trillion (AP)
• Goldman Sachs said its top 30 executives will receive no cash bonuses for 2009 (WSJ)
• State government total revenues in fiscal 2008 fell 15.8% from 2007 (US Census)
• US Retail sales increased 1.3% last month the largest advance since August (Reuters)
• UK imposing a 50% tax on bonus pools, effective immediately (FT)
• France to follow UK with a supertax on bankers' bonuses (WSJ)
• Mexico buys $1bn insurance policy against falling oil prices (FT)
• US trade deficit in goods and services in October 2009 decreased 7.6% to $32.9 billion (ESA)
• US exports rose 2.6% to $136.8 billion, and imports increased 0.4% to $169.8 billion (ESA)
• S&P cuts Spain's rating outlook from stable to negative (Eurointelligence)
• Greece’s credit rating was downgraded to BBB+, with a negative outlook, by Fitch (Economist)

Chart Of The Week  
US consumer sentiment ticked upwards in early December, perhaps less bad news from the labor markets is one of the triggers for that.   Still a long way to go before getting back to the exuberant days of the 90s.  Reflecting upon this chart, the pessimists would find similarities between today and the early 80s.  Back then, the peak in unemployment only happened three years after the trough in consumer sentiment.  They would also point out that a double-dip recession similar to then is a possibility one should plan for.

ConsumerSentimentDec

Source: http://www.calculatedriskblog.com  

Recommended Video
Jim Rogers, the famed commodity trader and hedge fund manager has a cunning way of expressing his opinion on US economic and fiscal policies.  Although he recently changed his positions slightly in favor of the US Dollar, he still holds a rather bearish view in terms of a sustainable US recovery, best expressed when he asked:  “Do you believe what the government says?”

More On The US Dollar
The US Dollar made a decent recover this week, with the US$ Index now trading above the 50 day moving average and closing the week above 76.  From a trading perspective, there is more upside in place, with only minor resistance levels at just under 77.00 and around the 77.50 level. In view of the increased news coverage about the  US Dollar and the US Dollar Index, we thought it would be timely to shed some light on the significance of this index.  USD-2009-1211

The US Dollar Index is not a physical currency or commodity but rather a financial instrument assigning a hypothetical value of the US currency compared to a basket of other currencies.    The six component currencies are Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc all with different percentage weights in the Index.  This Index is only available as a future or option contract and is currently traded on the InterContinental Exchange (not recommended for the average investor).   Although everyone is talking about the US Dollar Index, it is not nearly as commonly known that its significance pales in comparison to the Spot Currency Markets and the currency futures traded on various exchanges.  Spot or Cash Currencies are by far the largest turning over some $3 trillion each day.  Futures Markets are next in line, with the Chicago Mercantile Exchange (CME) at the forefront in terms of trading volume as well as sophistication of financial products.  The CME experienced record trading volumes and notional values for currency products just last Friday, December 4, 2009. 

Trading volume for FX products reached 1,396,035 contracts with a notional value of $184.9 billion. Euro products experienced record volume of 494,444 contracts with a notional value of $91.6 billion.

Looking at the Euro versus US$ future as an example, this contract has a nominal value of 125,000 EUR equivalent to about $183,000 at today’s rates.  During November-09, 5,419,926 contracts were traded on the exchange giving it a notional volume of $989,136,495,000.  Comparing these numbers now to the US$ Index one can clearly see that the US$ Index is not nearly as significant as it is talked about.  Albeit reaching new record levels during November, it only traded about 350,000 contracts at a notional value of about $26 billion, not even 1/300 of the volume of Euro Futures.  At best, one should consider it as a reference value.

US$ Index contracts traded

More On US Debt   
Please consider: Congress Squabbles Over Debt Ceiling 

As the US House of Representatives passed a $1.1 trillion spending bill there is much debate about a need to raise the government's debt ceiling by as much as 16% from its current $12.1 trillion limit.  It was just last week, when we examined the level of US Debt.  With this new information on hand, we need to update the recent chart to reflect the additional debt burden.

 US Total Public Debt

And if you wondered where the US government spends all this money,  take a look at where some of the increase in debt came from: 

Fed-employment

Source: http://www.usatoday.com/news/washington/2009-12-10-federal-pay-salaries_N.htm

The Unemployment Game Show  
As we pointed out a number of times before, a sustainable US recovery can only come from an improvement in employment.  Unless the US can find a quick way to reverse the trend and become an export driven economy, the US consumer must be liquid and willing to do spend spend spend his way to recovery.

An unemployment rate of 10% is bad, but how realistic is that rate?  Here’s an interesting explanation:

Other commentators aren’t all that cute and paint a much bleaker picture of the real employment situation.  Please consider Mike Shedlocks: Fed's Unemployment Projections From Mars

As he points out, the Fed Forecasts of an unemployment rate between 6.1-7.6% by 2012 cannot be realistic:

Using Bernanke's estimate that it takes 100,000 jobs a month to keep up with birthrate and demographics, the economy will have to create 260,000 jobs every month in 2010, 2011, and 2012 to hit an unemployment rate of 6.17% by the end of 2012.  To get to 7.6% by the end of 2012, the economy would have to average 200,000 jobs a month for the next three years.

It is well beyond absurd to expect the economy to average even 200,000 jobs a month, let alone 260,000 jobs a month when neither the housing boom nor the commercial real estate boom could manage those numbers over a sustained period.  In short, the Fed's unemployment projections must be for some other planet or for some other alternate universe somewhere because they do not reflect reality here.

Other economists like Paul Krugman have slightly different approaches but share the same concerns and consider the official forecasts unrealistic.  From his article: Bernanke’s Unfinished Mission

My back of the envelope calculation says that we need to add around 18 million jobs over the next five years, or 300,000 jobs a month. This puts last week’s employment report, which showed job losses of “only” 11,000 in November, in perspective.

If one agrees that a sustainable recovery can only come from a healthy labor market, projections for a growing US economy are not looking nearly as bright as US equities might suggest at the moment. 

Charts & Thoughts
Let’s look at an overall market summary with the help of a few charts.

Gold fell over $100 since the peak of $1226.40 and it is now approaching several key technical areas. 

Gold-2009-1211  Gold-2009-1211-ma  

Gold-2009-1211-fib 

While the underlying major bullish trend is still in tact, 50 day moving average and Fibonacci retracement levels (61.8%) point towards $1100 as a key support for Gold.  Given the current momentum and daily price volatility, it is not unlikely that this key area will be tested within a few days.  Although not directly correlated, a key component will be the value of the US Dollar.  Stay tuned for more market volatility in this commodity.

Oil was trading sideways for much of October/November only to fall below the 50 day moving average this week.  It briefly traded below $70 on Thursday.  Renewed US Dollar strength in the interim and weaker consumer demand could bring additional price pressure forward.

Oil-2009-1211

US Stocks have also been trading sideways now for several weeks.  We are still looking at the same inflection point, the 50% retracement from peak to trough @ about 1120 on the S&P500.  This technical hurdle needs to clear to consider a trade on the upside.

SPX-2009-1211

Good luck & good trading!

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.

December 05, 2009

Market Insights - 5 December 2009

Dear Friends & Fellow Investors

Here is the latest issue of market insights.  For any questions, please email: info@fxistrategies.com.  Enjoy reading!

In This Week's Issue
▪   Weekly Snapshot
▪   Charts Of The Week
▪   Interesting Read 
▪   Job Recovery 
▪   Time For Optimism
▪   The Case For The Dollar

Weekly Snapshot
• US$ Index up about 1.5% on Friday following better than expected employment data (Stockcharts)
• Gold set a new all-time high at $1225 on Thursday before falling to $1,162 on Friday (eSignal)
• US unemployment rate fell to 10.0% percent in November, nonfarm payroll employment was -11,000 (BLS)
• Dubai concerns ease after talks began to restructure $26 billion of debt (Bloomberg)
• Euro zone rates remain at record low of 1%; ECB outlines plan to unwind liquidity support (Economy.com)
• Euro area GDP up by 0.4% and EU27 GDP up by 0.3% (Eurostat)
• Australia's Central Bank raised interest rates again by 0.25% for a third consecutive month (Economy.com)
• 30-year mortgage rates dropped to a record low of 4.71% this week (AP)
• Euro area unemployment rate stable at 9.8% (Eurostat)
• Euro area inflation estimated at 0.6%  (Eurostat)

Charts Of The Week   
As the calendar year draws to a close, let’s take a peek at how things have changed in the last 12 months.  The chart below shows that all major international stock indices performed exceptionally well compared to a year ago.  The big story of course is how much the developing countries outperformed the traditional G7 countries this year, despite seemingly less stimulus efforts and governmental support, particularly in countries like Brazil and India.

Stocks-2009-1204

Taking into account the drop in the value of the US Dollar, overseas markets when valued in US Dollars had an even more impressive run.  The chart below shows the stock market returns of international indices inclusive of the changes in currency exchange rates.  The biggest winners of the currency appreciation were Australia  and Brazil adding another 42% and 31% respectively to their returns.

Stocks-real-2009-1204 

Interesting Read 
Please consider this interesting article by Henry Blodget:  The United States of Wusses

As so often, Henry Blodget takes a very basic common sense approach to look at all things financial.  If nothing else, you have got to commend Mr. Blodget for his spot-on lingo.

Job Recovery  
Given the better than expected employment numbers on Friday, investors may get a new sense of optimism along the lines of “the worst is over” now that the employment data suggest an end to the decline in US jobs.

From the Bureau of Labor Statistics (BLS) Employment Report:

The unemployment rate edged down to 10.0 percent in November, and nonfarm payroll employment was essentially unchanged (-11,000). In the prior 3 months, payroll job losses had averaged 135,000 a month. In November, employment fell in construction, manufacturing, and information, while temporary help services and health care added jobs.

While this is good news, the unemployment rate is still at double digits and is the worst we have experienced since the early 80’s.

US unemployment

More importantly, some analysts debate the relevance of the data and point to an alarming development.  According to the BLS, there are a record 5.8 million workers who have been unemployed for more than 26 weeks.   Calculated Risk Blog has a great chart showing how a significantly larger share of the workforce has been unemployed for over 26 weeks.

UnemployedOver26WeeksNov

Time For Optimism 
Please consider a very good article by John Mauldin: Why I am an Optimist

I found this to be an excellent theme considering the state of the markets, the real economy and the presently dominant angst about the Dollar.  As he is making a strong case to be optimistic for the long-term, the following paragraph best reflects the case for a good dose of realism:

All that being said, while I am an optimist, I am a cautious and hopefully realistic optimist. I do not think the stock market compounds at 10% a year from today's valuations. I rather doubt the Fed will figure the exact and perfect path in removing its quantitative easing. I doubt we will pursue a path of rational fiscal discipline in 2010 or sadly even by 2012, although I pray we do. I expect my taxes to be much higher in a few years.

With this in mind and on the back of the market’s positive reaction to the employment numbers, let us examine the US markets and the US Dollar more closely.

The S&P closed the week at 1105.98 continuing an essentially side-ways pattern that started about 3 weeks ago.  Technically, we are at the same inflection point that we discussed two weeks ago.  The major bear market trend line (purple) has been touched and could potentially be broken if the current sentiment and the positive momentum from better employment numbers continues.  The major market trend line as well as the 50% Fibonacci retracement level (blue lines) are critical points for system traders and technical trend followers.  The upward pressure to break out increases with time but we should point out that these inflection points often trigger sell orders for downside protection as well.

SPX-2009-1204

The Case For The Dollar 
The US Dollar made a big turn-around as it rallied about 1.5% on Friday and closing the week up 1% .  As more and more people jumped on the band wagon, trashing the  Dollar Index in favor of other currencies this year, and as Gold reached new highs almost daily, it seemed like an opportune time to take some money off the table.  Sure enough, with just a bit of good news Gold fell over 4% on Friday and already some analysts have jumped ship calling for the end of the Dollar carry-trade.  The Dollar's inverse correlation with almost all asset classes in recent months has made investing away from the dollar almost fool-proof.  Buy anything other than US Dollar denominated assets and you are bound to make money in US Dollar terms. 

And yet, with this all around inverse correlation comes increased risk.  Assuming that the inverse correlation remains even partially consistent, it could cause a return to the perceived US Dollar safety, if problems in any of the non-Dollar asset classes were to arise.  For instance, the recent 2% tax Brazil imposed on foreign investments to slow down an overheated economy.  Or take the case of Gold’s massive one-day drop where investors were taking profits and turning them back into US$. Similar scenarios could be envisioned for many other investments in emerging market stocks, emerging market properties (the recent Dubai crisis) or commodities in general.  The higher one asset class rises, the higher the risk for a pull back out of that asset class and back into the US Dollar.

Having said all that, let’s not forget why everyone has been trashing the Dollar since the beginning of this decade (outside of a few episodes that countered the bearish Dollar trend).  Here is one reason:

US Debt

There are many more reasons including the still fragile US recovery. Despite the recent positive jobs data, underlying economic conditions of a largely consumer-driven US economy remain difficult.  Some of the underlying economic challenges include:

• Since Lehman’s fall, the US has lost about 6.2 million jobs
• The unemployment rate is 10% now, versus 6.2% the day before Lehman collapse
• About 25% of all U.S. mortgage holders are under water
• Real gross domestic product is still down 3% since the summer of 2008
• Bank credit has contracted by $500 billion
• Household net worth is down $7 trillion
• The US budget deficit has tripled

With 2009 in hindsight, it really paid off to be an optimist.  As seen above, all major stock markets had strong rallies and so did most other asset classes, except for the US Dollar itself.  However, one should carefully evaluate how the US can position itself long-term.  In terms of the US Dollar, beside the domestic and economic challenges, the US government’s financial condition would seem to be the pre-eminent factor weighing on the Dollar.  As long as the US has to revert to quantitative easing and near zero interest rates, money will flow to asset classes and places with higher returns.

Good luck and good trading!

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.

December 01, 2009

Higher Margin Requirements for Leveraged ETFs

New FINRA regulations on leveraged ETFs came into effect today, December 1st, 2009.  Maintenance margin requirements on leveraged ETFs are now 60% on 2x leveraged ETFs (both long/short) and 90% on 3x leveraged ETFs (both long/short).  Please consider these new requirements when assessing transactions in these non-traditional ETFs.