Posted: Tue Jan 15, 2008 3:08 am Post subject: Re: Trader's Corner 2008
Why stagflation? Because the current informal Bretton Woods II agreement between OPEC and non-OPEC oil producers as well as Asian manufacturers whereby they export BOTH goods AND capital to developed markets - allowing them to run current account deficits - does not allow any one central bank to unilaterally take measures to bring down domestic inflation without a serious recession.
In otherwords based on a trade weighted basis other foreign currencies are not being allowed to strengthen against, say, a strong US dollar, so in order to correct trade and fiscal imbalances the US is forced to devalue its dollar against other currencies that are being kept artificially weak by active central bank intervention.
This is inflationary because in order to keep their currencies export competitive these countries are sterilizing their export receipts by taking US dollars - and euros - temporarily out of circulation by buying them in the foreign exchange markets and selling their own domestic currency in return. Those balances then show-up as both excess money supply growth in their domestic economy - fuelling local asset price inflation - as well in the global economy as those US dollars (and euros) are then re-invested into international capital markets.
This excessive money supply growth has not only allowed for a cheap credit binge in developed markets - especially in, but limited to, Anglo-Saxen countries - but has also fuellled inflation in developing countries (the exporters of energy, metals and commodities specifically). That drives up the costs of production in those countries in local currency terms and reduces the margins on exports. They must replace margins with volume to keep export earnings constant. And on it goes. So it really is a global race to the bottom.
The foreign exchange effect is therefore mostly apparent in currency crosses of freely exchangeable currencies like USD, EUR, CHF, GBP, CAD, AUD, etc. Whereas it is less notable amoung currencies that are either pegged to the US dollar or are not freely convertable. Hence why we have seen such a huge move of the US dollar against the euro and less of a correction between the US dollar and the Chinese renminbi.
Resources like oil & gas, metals and ag commodities that are denominated in US dollars in international markets benefit in nominal prices as the US dollar sinks, but also get a pick-up in price from the demand stemming from those faster growing economies of the oil producers and Asian manufacturers. This is, of course, a net wealth transfer from importing countries to exporting countries.
But this arrangement also makes de-coupling from a US recession very hard to engineer. That and the credit crunch are part of the reason why growth in the EU and the UK are slowing down in tandem with events in the United States, and why I believe that slowdown in headline growth will hit Asia next. Part of the reason why I also believe all assets are over-valued as they are all related to one another, and their spectacular rise in value over the past 5-6 years has all been linked to cheap, easy, abundant credit that has been generated by the informal Bretton Woods II agreement not to mention the infamous yen carry trade.
Politics - especially in an election year in the USA - can only exacerbate the problem as more public money (financed by debt) is thrown at the symptoms of that credit binge - mainly the housing correction and credit crisis. Its all inflationary, but unlikely to solve the underlying global imbalances, so hence stagflationary.
The USA is having a Japan Moment TM where not even a zero interest rate policy (ZIRP) can stop over-priced assets from falling in real value as debt levels exceed the ability to service that debt. But it can ignite inflation. However, it is not just a US problem, but a global one. We all eat from the same rice bowl! ; - ) _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Tue Jan 15, 2008 10:01 am Post subject: Re: Trader's Corner 2008
RE the poll.
No one has picked metals, yet. Supposedly because of the US lead recession and global slowdown. No faith in the Chindia growth story?
But why did then no one pick bonds when central banks like the Fed are expected to slash rates? To 2.5% by year-end in the case of the Fed. Both a safe-haven play and capital appreciation if you are a US based investor and do not have currency risk.
I personally picked emerging markets as a flight out of US-denominated assets, but to be fair I see that mainly in H1'08, and that trend may have run its course by year-end. Alternatively I like US exporters with a significant amount of their sales outside of the USA. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Tue Jan 15, 2008 2:16 pm Post subject: Re: Trader's Corner 2008
No bonds because I am far too much of a risk lover Plus inflation.
Emerging markets...not for me, as I think they are expensive and growth expectations will fall short if the US recession hits global growth.
The subprime/credit problem is just beginning; house prices in the US and in many other OECD countries are just about to accelerate their downward trend. This will obviously feed back into the credit problem. I am getting more and more pessimistic. If I was not making lots of money shorting the markets, I would be depressed!
Posted: Wed Jan 16, 2008 2:43 am Post subject: Re: Trader's Corner 2008
Quote:
mkwin wrote:
No bonds because I am far too much of a risk lover Plus inflation.
Emerging markets...not for me, as I think they are expensive and growth expectations will fall short if the US recession hits global growth.
The subprime/credit problem is just beginning; house prices in the US and in many other OECD countries are just about to accelerate their downward trend. This will obviously feed back into the credit problem. I am getting more and more pessimistic. If I was not making lots of money shorting the markets, I would be depressed!
Market down yesterday and overnight again. Do not be surprised if the Fed makes a between meeting cut in rates. At least 50 bps, but some are even talking 0.75%.
Call me premature, but Citi Group is starting to look very attractive. A good global brand. Income outside the USA. New management. And most of the value created over the past 5-years wiped-out, so you can bet they will be focussed going forward. I would look to add a small position near $22-23 a share which is the low since 2002. Why not? When it bounces it will be 10% in one day!
Who do you use for spread betting? I am new to it, but a friend of mine does it all the time? Just curious. Any caveats?
RE bonds. Bunds still look attractive. No USD exposure and the likely ECB cut later in the year is not priced into the market, yet, because Trichet is still talking hawkish on inflation.
Quote:
Inflation news unlikely to gate crash bond party
The environment continues to be bond friendly, as equities came under severe pressure against the background Citigroup’s results and announcements as well as US macro data, particularly retail sales. In spite of the concerns for the wider economy, the libor rates continue to edge lower in Eurozone without the aid of the dovish central bank. Another gauge of financial market health, the ECB 28 day $10bn auction saw fewer bidders than December operation, but amount demanded was slightly higher than 21 December offering.
A spate of inflation data will be released today, but the outcome will have reduced significance given the Fed’s greater growth concerns and well flagged 50bp cut at the end of the month. Among other releases, the US inflation outcome is probably the most market sensitive. The headline is expected to fall to 4.1%YoY from 4.3%YoY in December. The core figure should edge 0.1% higher to 2.4%YoY. Eurozone inflation is expected to remain steady on an annual basis at 3.1% and 1.9% in the headline and core readings, respectively. Ahead of this number, there had been some downside risks but yesterday’s greater than French CPI figures have offset this. Final German figures are out in a moment. The Eurozone inflation outcome is unlikely to prevent the ECB’s Trichet and Stark from sounding hawkish today. Other macro news includes US IP, NAHB housing market index and TICS flow data, whereby the latter data for November is likely to reflect the reduction in Treasury demand from Asia in particular.
Other news to note will be more US earnings news, including JP Morgan and Wells Fargo. In addition, the Fed Beige Book will give some detailed insight into the health of the US economy currently and going forward.
Technicals
Another bond market rally yesterday is pushing the 10Y Bund yield closer to 4%. Despite the market rally, momentum indicators (such as the RSI) do not indicate that the market is in overbought territory. The bullish market mood suggests the Bund contract will finish the week well above 115.31, which would result in a break of the 2-year trendline in the weekly chart
I would have prefered that the technical analyst had used a 21-mos. M/A which is a Fibinoci number, but same difference for the purposes of this argument. The long-term trend is violated and we should see first a return to the 0.236 retracement (there now) and then to the deeper 0.382 retracement (the next target).
Low 770
High 1577
0.236R = 1387
0.382R = 1269
That 20-moving average roughly corresponds to the Gann Line Fan drawn off the lows of 770 that has also been broken. That 45 degree angle separates an expanding rally from a correction lower. Sorry about the quality and sizing of the chart. Linky
{edited your last image out of a double quote to minimize distortion of make up of page - Bas / Ended up putting it in a link after all, because it didn't help much - Bas } _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Thu Jan 17, 2008 7:01 pm Post subject: Re: Trader's Corner 2008
The ghost of Jesse Livermore speaks to me!
cube's prediction: Stock market collapse
Guys I'm convinced now. The Dow Jones has hit a "double top".
The first peak was in July 2007. The market then dropped and the feds rushed in to cut interest rates. The market then went up and hit a 2nd peak in Oct 2007 but has fallen since then, despite the frantic efforts of the feds.
The US stock market is a sinking ship.
Somebody please pull this thread up by the end of the year in December to see if I'm right.
EDIT: MrBill
Quote:
Basically what I have been saying since mid-July. The high tide mark was Q2'07 earnings and it has been a sell on rallies ever since. The Bull Trap rally was only compliments of the Fed slashing rates in August and again in November or we would already be plumbing 1250 on the S&P 500. We'll get there sooner or later with or without the Fed's help! ; - )
Posted: Thu Jan 17, 2008 10:47 pm Post subject: Re: Trader's Corner 2008
Jealous of not trading, Cube....
and tired of sitting on the sidelines so I sold the CEF.A today for a 15% gain, and then doubled up on the BCE I previously bought.
Hopefully this one doesn't bite me on the ass. Rumour has it that Merrill Lynch may bail on their share of BCE. Of course like the idiot I often am I found this out after 4 pm.
Anyways, would really like to buy back the CEF when it comes back down a bit.
The day trading thing suits me fine. Unfortunately I've done almost none of it for the past 12 months. 4 purchases and two sales as a matter of fact.
Now sitting on near 50% canadian cash.
PS Mr Bill, I liked the 'trust me, I'm a banker' line in your photo.
Posted: Fri Jan 18, 2008 2:33 am Post subject: Re: Trader's Corner 2008
Quote:
{edited your last image out of a double quote to minimize distortion of make up of page - Bas / Ended up putting it in a link after all, because it didn't help much - Bas }
Bas, I am using photobucket to post images, but I am having trouble sizing them? What is your secret? Thanks. MrBill. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Joined: Mar 26, 2005 Posts: 3780 Location: over here
Posted: Fri Jan 18, 2008 2:37 am Post subject: Re: Trader's Corner 2008
I use this easy to use program called irfanview, it's free _________________ "The best thing about the future is that it comes only one day at a time."
Posted: Fri Jan 18, 2008 3:00 am Post subject: Re: Trader's Corner 2008
Homesteader wrote:
So what are the underlying causes of the USD drop like a hot rock vs. the yen?
Well, as I have often said, EURJPY is a handy proxy for global risk taking. It is part of the yen carry trade. When markets are in a free fall those that have borrowed in yen to buy risky assets then close those trades and repay their yen loans.
Step one is to borrow yen. Then you sell yen. Making it weaker. And you buy currency B (USD, EUR, AUD, etc.). This makes the yen weaker. But when the trade unwinds this reverses. Sell USD, EUR, AUD, etc. and buy JPY. This makes the yen strengthen. This is what we are seeing now.
But actually the greenback is gaining traction now against the euro because the ECB is sending up trial baloons about a softening in monetary policy from their previously hawkish stance. There is still likely a rate hike in the pipeline, but they are also getting nervous about a weaker economy in Europe as well.
The ECB only has an inflation mandate, so they are not concerned about growth per se, but they are also not immune from political pressure to address the euro's strength that is hurting exports. The slowing global economy just exacerbates that export weakness.
From a technical point of view I would see EURJPY retracing back to 149.25 - the previous low - if not deeper. However, complicating this view is that Japan will also likely slip into its fourth recession over the past 15-years, so the BOJ is unlikely to start hiking rates. This means that the yen will still remain an attractive funding currrency with interest rates of just slightly over 0.50%.
As for the US dollar it is really that a drastically decelerating economy lowers the attractiveness of holding USD denominated assets given the US' twin deficits. However, again that is partially offset by the slowing down in the UK and EU. I would expect Asia to follow later in the second half of 2008. It is going to be an ugly year! ; - )
UPDATE: RE yen comments by Sakakibara
Quote:
The yen may rise to 95 to the dollar by the end of the year as the U.S. economy slows and the Bank of Japan refrains from intervening, said Eisuke Sakakibara, former top currency official at the Ministry of Finance.
``The weak yen bubble will collapse between summer and the end of the year because subprime problems will cause the U.S. economy to slump,'' Sakakibara, currently a professor at Tokyo's Waseda University, told a seminar in Tokyo. He said the yen may also climb to 130 yen per euro.
The yen advanced to 157.09 per euro at 10:36 a.m. in London, from 157.72 late in New York yesterday, when it reached 156.29, the strongest since Sept. 10. Japan's currency was at 107.52 per dollar compared with 107.64.
Sakakibara said in an interview in October that the dollar may plunge in 2008, which may prompt a joint intervention by Japan, U.S. and Europe. He said today that the central bank is unlikely to intervene even as the yen approaches 100 to the dollar because the U.S. government is opposed to interfering with currency markets.
A narrowing interest rate advantage for U.S. assets will increase pressure on the yen to strengthen, Sakakibara said. The yield premium investors earn on two-year Treasuries over similar-maturity Japanese bonds fell to 1.86 percentage points on Jan. 15, the least since April 2004.
Source: Jan. 17 (Bloomberg) _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Mon Jan 21, 2008 2:22 am Post subject: Re: Trader's Corner 2008
Quote:
Despite mounting macroeconomic pessimism oil demand remains healthy, led by Non-OECD countries and the existence of severe supply-side constraints will prove a strong enough force to maintain upwards pressure on prices as the year progresses. In particular the growth potential of Non-OPEC regions appears very limited, primarily due to accelerating decline rates at ageing oil fields, with net production additions from the regions likely to be minimal next year. The tightening in balances implies a further rise in the call on OPEC liquids in 2008, which given the recent shift in OPEC’s behaviour towards a more cautious output policy will create a source of upside risks to prices.
Source: Bache Commodities, Jan. 18 _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Joined: Mar 26, 2005 Posts: 3780 Location: over here
Posted: Mon Jan 21, 2008 2:58 am Post subject: Re: Trader's Corner 2008
MrBill wrote:
Quote:
Despite mounting macroeconomic pessimism oil demand remains healthy, led by Non-OECD countries and the existence of severe supply-side constraints will prove a strong enough force to maintain upwards pressure on prices as the year progresses. In particular the growth potential of Non-OPEC regions appears very limited, primarily due to accelerating decline rates at ageing oil fields, with net production additions from the regions likely to be minimal next year. The tightening in balances implies a further rise in the call on OPEC liquids in 2008, which given the recent shift in OPEC’s behaviour towards a more cautious output policy will create a source of upside risks to prices.
Source: Bache Commodities, Jan. 18
speaking of which, do we see oil decline further the coming months? (I was guessing myself it would bottom out at 70 at the end of march end then start it's summer march up again) _________________ "The best thing about the future is that it comes only one day at a time."
Posted: Mon Jan 21, 2008 3:47 am Post subject: Re: Trader's Corner 2008
Bas wrote:
Quote:
speaking of which, do we see oil decline further the coming months? (I was guessing myself it would bottom out at 70 at the end of march end then start it's summer march up again)
Bas, you were too quick for me. I wasn't finished with today's post before the phones started ringing and I had to get back to work! ; - )
Fundamentally, a US lead global slowdown should lead to lower oil prices. But OPEC is showing real discipline, so they may slow supply to match demand and net-net prices will remain firm.
Technically, we have only seen one small (0.236R) retracement since the lows of $49.80 in 2007. Therefore, a larger (0.382R) correction would be something like $80-81. I think that is within this year's trading range for sure.
The US dollar is $1.4500 against the euro again. That cross should re-test the $1.4040 area again after failing to reach $1.5000 ($1.4966 high). A stronger US dollar on weaker growth prospects in Europe as well as less aggressive rate tightening stance at the ECB should help moderate commodity price inflation from a weaker US dollar.
However, much will depend on the policy approach of the Fed to a weakening US economy. If they ease too much it could put the US dollar on the skids again and re-ignite inflationary pressures. Then we might see $1.5000-1.6000 against the euro and higher crude prices to reflect that currency weakness.
If you look at crude in euros then it is a more modest 61-62 euros. If the US dollar were still strong against the euro - 0.8240 high - like it was then the price of crude would be closer to $50 instead of the current $90. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Joined: Mar 26, 2005 Posts: 3780 Location: over here
Posted: Mon Jan 21, 2008 4:10 am Post subject: Re: Trader's Corner 2008
thanks for putting that in perspective; when is the fed cutting, I mean meeting again? And what do you think of the "traditional" rally ahead of the summer driving/flying season? Isn't there a big selffulfilling expectation in the market that that will happen again this year? Anyway, I'll be on the sidelines waiting to see how low (or not) it will go over the next 8 weeks or so. _________________ "The best thing about the future is that it comes only one day at a time."
Posted: Mon Jan 21, 2008 4:26 am Post subject: Re: Trader's Corner 2008
Bas wrote:
thanks for putting that in perspective; when is the fed cutting, I mean meeting again? And what do you think of the "traditional" rally ahead of the summer driving/flying season? Isn't there a big selffulfilling expectation in the market that that will happen again this year? Anyway, I'll be on the sidelines waiting to see how low (or not) it will go over the next 8 weeks or so.
I think the FOMC is January 29th and the expectation is that they will deliver a rate cut between 50 & 75 bps for a 3.50-3.75% Fed funds target. I was half expecting them to surprise us with a between meeting rate cut last week after CPI came out quite benign given the market was really struggling. However, perhaps that may have made Ben & Co. look too desperate?
The summer rally is generally lead by gasoline demand. As refining margins improve then it pulls crude prices up with them. Crack spreads are currently $10 per barrel and widen out to $15 in springtime in the run-up to the summer driving season. Then they fall back to $10 per barrel during the summer months and into the fall. Last spring they widened out substantially to above $20 a barrel and that was partially responsible for last year's run up in crude prices. However, they reached their zenith only late in the year by which time crack spreads had already narrowed in. So it is not a linear relationship.
Much will depend on global tensions and the fear premium associated with potential supply disruptions. Those are not easy to predict, so the economic slowdown is probably the biggest driver of spreads at the moment.
Quote:
Africa in 2008: the return of political risk
The ongoing political crises in Kenya and Pakistan have re-awakened investors to the security risk associated with elections in countries with fledgling political institutions. The fragility of these institutions across Africa is likely to be highlighted more closely in 08 by a number of key political risk events, not least from elections. These include the outcome of events in Kenya, results of the presidential election commission findings in Nigeria due by end Feb, Zimbabwean presidential elections in Mar, Angola’s first election for decades in Sep, proposed elections in Cote d’Ivoire, presidential selection in Mauritius and Ghana’s elections in Dec. We should also not forget the ongoing issue of the leadership struggle within the ANC ahead of South African elections in 09. With risk appetite globally expected to decline in 08, political risk is likely to increase the return investors demand on African assets.
Source: ResearchStrategy@Standardbank.com _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
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Plus inflation.
