Posts Tagged ‘Currency’
Sunday, November 9th, 2008
Donald Coxe and his colleagues at BMO Harris provided their post-election views following the Obama victory:
Donald Coxe, Global Portfolio Strategist, BMO Financial Group
- Obama’s victory will lead to a “feel-good” attitude within America at a time when gloom and sourness have become excessive. That favours financial assets generally at a time that fall is moving into winter.
- Obama’s spending plans will be seen as economy-favourable with the nation in recession. Stocks should benefit near-term.
- Obama is fully committed to continuation of all the ethanol subsidies and tariffs that McCain opposed. That is good news for the reeling ethanol stocks that have been buffeted by falling oil prices and still-high corn prices.
- Obama has threatened to impose carbon taxes on coal-fired electrical generating plants.
- None of the candidates promised significant revisions to the extremely favourable royalty structure for mining on federally-owned properties, mostly in the West. That is important for Canadian gold miners operating in Nevada.
- He famously said that on his first day in the White House he would “call up the President of Canada to announce he was tearing up NAFTA.” We believe he won’t do that.
- Worldwide, the election of a new U.S. President with a change agenda will be greeted favourably. This should facilitate America’s dealings with other nations on such hot topics as Russian expansionism and response to Iranian nuclear weapons development.
Andrew Busch, BMO Capital Markets, Global FX Market Strategist
- Expect a U.S. stimulus package of $150 billion to be enacted and checks out the door by March with an impact on consumer spending by late April and May.
- Expect very expensive bond deals issuance to be done over the next three months with those issuing likely to only be high quality to get done and with high spreads to Treasuries. This should mean they get snapped up.
- There is going to be massive government bond issuance in 2009 across the globe to pay for bailouts, stimulus packages, and social spending. This means we should see a further steepening of the yield curve in 2009, but it won’t necessarily point to a big economic recovery like it has in the past.
Jack Ablin, Chief Investment Officer, Harris Private Bank
- Both an Obama victory and a Democrat-controlled Congress are currently factored into markets.
- When looking at Europe vs. U.S. price-to-sales comparisons, one can see the U.S. is beginning to trade like a “nationalized” country.
- Tax rates are expected to increase which will give an edge to municipal bonds.
- A move towards socialized medicine appears to be already discounted. In examining the valuation of U.S. vs. European pharmaceutical stocks, the U.S. valuation already incorporates nationalized health care.
- Large cap is set to outperform as small cap moves back to normal valuation.
Paul Taylor, Chief Investment Officer, BMO Harris Private Banking
- We are a long way away from a sustainable equity market rally. A sustainable equity market rally will only occur when it is clear that the spectre of a protracted, significant U.S. economic recession is not in sight.
- Leading economic indicators signal a meaningful U.S. and global economic recession. This will cause policymakers in Washington to focus attention on the economy as the number one priority.
- Investors should have a defensive strategy, with an overweight in Consumer Staples, Telecom, Utilities and underweight in Energy, Materials and Technology. This will be more appropriate until the spectre of recession is past.
- With Fed Funds at 1.0%, monetary policy will be impotent moving forward.
- A global economic recession is bearish for commodity based currencies (Canadian and Australian dollars) and is bullish for other currencies. The current “crisis of confidence” is bullish for the U.S. dollar due to its position of reserve currency.
Source: PR Newswire
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Tags: Australia, BMO, BMO Capital Markets, Canada, Currency, Dollar, Donald Coxe, Economy, energy, Euro, Fed, Focus, Gold, Markets, Mining, Monetary Policy, Oil Prices, Recession, REW, Russia, spreads
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Wednesday, October 29th, 2008
Once again, volatility favouring the Japanese Yen is having a pronounced effect on what happens in the stock market. There is a well documented history of the relationship that exists between global stock markets and the Yen. There appears to be a well-defined negative correlation between the yen and equity markets. When the yen surges, markets fall, and vice versa.
We have covered this topic on several occasions during this year:
From the Economic Times, The Group of Seven issued warnings on Monday the yen’s wild swings are threatening financial stability, fanning speculation central banks may intervene to halt a rally in the currency driven by a Japanese exodus from emerging markets.
The yen was the only currency mentioned in a brief G7 statement as it rallied to 13-year high against the dollar, not only threatening Japanese exports as the world’s second-largest economy tumbles toward recession amid the worst global financial crisis in 80 years, but leading to a destabilization of currency related transactions that need to be unwound.
As a matter of background building, we provide below a summary of milestones in the yen’s history:
1871 - The yen became Japan’s currency as part of the Meiji Restoration, which marked the start of Japan’s modernization and opening to the rest of the world. Japan adopted the gold standard.
1949 - After World War Two the dollar’s fixed rate is set at 360 yen via the Bretton Woods system, partly to help stabilize prices in the Japanese economy.
1959 - The dollar/yen exchange rate is liberalized and the margin of fluctuation is set at 0.5 percent on either side of its dollar parity.
1963 - The margin of fluctuation is widened to 0.75 percent. 1971 - United States abandons gold standard, bringing an end to the Bretton Woods system of fixed exchange rates and forcing a realignment of world currencies.
December 1971 - Under the Smithsonian Agreement, the dollar/yen exchange rate is set at 308 yen and is allowed to fluctuate in a wider band between 301.07 yen and 314.93 yen.
1973 - Japanese monetary authorities decide to let the yen float freely against the dollar, and the yen appreciates as far as 263 to the dollar.
1978 - The yen pushes through 200 to the dollar for the first time, strengthening as far as 177.
1980 to 1985 - The yen’s appreciation halts and partially reverses despite Japan’s big trade surpluses. Higher interest rates in the United States prompt Japanese investors to put money in dollar assets.
1985 - The Group of Five industrial nations, the predecessor to the G7, sign the Plaza Accord in which they agree the dollar is overvalued and to weaken it. The yen climbs from its pre-accord level of around 240 to 211 in October and 200 in November, a 20 percent rise in just a few months.
1986 - The U.S. currency falls further to around 190 yen in January, 167 yen in April and 153 yen in August.
1987 - In February, six of the G7 nations sign the Louvre Accord, which aims to stabilize currencies and halt the dollar’s broad decline. The dollar still falls from near 153 to 137 in April and 120.80 by the end of the year.
1988 - On January 4, the dollar falls to a post-war low of 120.45 yen in Tokyo trade, a level that holds as the low for more than five years. The Bank of Japan intervenes to buy dollars and sell yen that day on behalf of the Ministry of Finance.
August 17, 1993 - The dollar declines to a new post-war low of 100.40 yen in Tokyo.
June 21, 1994 - The dollar falls through the key 100 yen level and touches a record postwar low of 99.85 yen in New York trade before finishing at 100.30 yen.
April 19, 1995 - The dollar hits a record post-war low at 79.75 yen after U.S.-Japanese trade frictions spark heavy selling. By the end of the year it is near 103.40.
June 17, 1998 - As the dollar shoots above 144 yen, U.S. authorities join the Bank of Japan to buy yen, spending $833 million. By August the dollar rises to near 148 yen, partly due to yen carry trades in which investors borrow yen funds at Japan’s near zero interest rates to buy higher-yielding currencies.
1998 - After the global financial market strains from the near collapse of hedge fund Long-Term Capital Management, carry trades are unwound quickly. In one week alone in October, the dollar tumbles from near 136 yen to a low around 111.50 yen.
1999 - The yen strengthens further despite repeated intervention, reaching 102 in November.
2001 - Following the Sept 11 attacks, Bank of Japan intervenes to sell yen for dollars.
2003 - The MOF begins massive intervention to halt the yen’s rise against the dollar, partly to shield Japanese exporters as the economy remains stuck in its post-bubble slump and deflation. The MOF spends 20.4 trillion yen ($200 billion) over the year, nearly all of it to buy dollars and sell yen.
2004 - The MOF spends 14.8 trillion yen ($145 billion) intervening in the first quarter of the year, including 1.67 trillion yen buying dollars on January 9 alone. But the MOF ceases intervention in March and has never since resumed.
2005 - The yen reaches a high of 101.67 yen in January but then starts to fall, hitting 121.40 in December. Yen carry trades and Japanese investors shifting funds into foreign assets drive the slide.
June 2007 - The dollar hits a 4-1/2-year high of 124.14 yen. July 2007 - The yen’s broad depreciation takes it to a 22-year low on a real effective exchange rate basis. Since January 2005 the yen has lost 25 percent of its value on a REER basis.
August 2007 - Strains in financial markets from the U.S. subprime mortgage crisis spark an unwind of yen carry trades.
The dollar falls from near 120 yen to 111.60 yen. The high-yielding Australian and New Zealand dollars tumble nearly 10 percent.
March 13, 2008 - The yen hits an 12-year high of 99.77.
October 24, 2008 - Yen hits 13-year high of 90.87 versus the dollar, while setting an all-time high against the Australian dollar of 55.11, with the Aussie losing almost a third of its value in just a month on a massive unwind of carry trades.
October 27, 2008 - The yen’s surge to 13-year highs prompts the G7 to issue statement to single out the yen in warning on currency market volatility.
The yen has surged nearly 20 percent so far in October on a trade weighted basis, more than twice as big as any month going back to 1970, including the carry trade collapse in October 1998 and the Plaza Accord to weaken the dollar in 1985.
(Sources: Reuters, Bank of Japan, Bank of England)
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Tags: Australia, Banks, Carry Trade, Commodities, Correlation, Currency, Dollar, Economy, Emerging Markets, ETF, Gold, interest rates, Japan, Markets, Mortgage, Recession, SMI, Value
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Wednesday, May 7th, 2008
May 7, 2008 - Courtesy: Nick Barisheff, The Bullion Buzz Newsletter, Bullion Management Group Inc.
US M3 Money Supply Growth
M3, which is no longer published by the US Federal Reserve, is the broadest measure of money supply. It includes M2, as well as certain accounts held by banks and thrift institutions (including balances in money market mutual funds held by institutional investors). Since March 2006, M3b, a reconstructed version of M3, has grown by nearly $4 trillion, from approximately $10.5 trillion to about $14.2 trillion. To put this in perspective, total M3 in 1971, when the US cut the dollar’s link to gold, was less than $800 billion. The current annualized rate of increase is now about 20%. Since the classical definition of inflation is an increase in money supply that leads to an increase in goods and services, the price increases we are now experiencing are destined to accelerate. Given these inflation realities, portfolios need to be rebalanced to ensure that purchasing power is preserved. As precious metals are proven hedges for inflation, portfolio holdings should be rebalanced to ensure adequate allocations are held.
http://www.nowandfutures.com/key_stats.html
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Tags: Currency, Economy, inflation, M3, M3 Money Supply Growth, precious metals
Posted in Banks, Credit Markets, Economy, Financials, Fixed Income, Gold, Markets, Monetary Policy, inflation | No Comments »
Saturday, April 19th, 2008
April 19, 2008 - Murray Pollitt, President of Pollitt and Co. Inc., provides an excellent account of the history of gold. If you’re wondering about the importance of gold throughout financial history, this piece is a must read. Here is an excerpt:
In normal circumstances a Central Bank can increase money supply in a nanosecond. A supermarket can increase the supply of oranges in a day or two. A mine, steel mill or oil refinery with surplus capacity can increase output in a few weeks. General Motors can increase the supply of Silverado trucks in a few months, and a farmer can increase the supply of wheat in a year. It may take two or three years to build a ship or to expand an industrial facility. But to build a greenfield oil refinery or generating plant, timing is anybody’s guess. Ten years would not surprise. Ditto for a new gold mine.
Click below for the complete story.
Gold 2008, by Murray Pollitt, P. Eng
Thanks Mr. Pollitt.
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Tags: Commodities, Currency, Economy, Gold, Metals
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Tuesday, April 15th, 2008
April 15, 2008 - Courtesy of Prieur du Plessis, Investment Postcards - The video clips below are must-see material recorded during former Fed chairman Paul Volcker’s address of last week to the Economic Club of New York on the credit crises and related matters.
Volcker, who headed up the Fed from 1979 to 1987, said the credit crisis is the “mother of all crises” and the modern financial system has “failed the test of the market-place”.
“The transient causes of extreme leveraging have been exposed by force of circumstance. The nation’s spending and consumption are being brought into line with our capacity to produce,” said Volker.
“The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded Central Banking principles and practices … What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return.”
When asked about the possibility of a dollar crisis, Mr. Volcker retorted, “Dollar crisis … you don’t have to predict it, you’re in it … Let me remind you that the dollar after all is a fiat currency backed only by the word and policies of our government, policies exemplified by an independent Central Bank committed to maintaining price stability.”
Please click the images below for the views of arguably the greatest ever Fed chairman.
Please click on the following links for the rest of Volcker’s speech: Part 2, Part 3, Part 4 and Part 5.
Hat tip: RemiG2006
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Tags: Credit Market, Currency, Economy, Markets
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Sunday, April 13th, 2008
In this week’s Barron’s interview (Jim Rogers, Light-Years Ahead of the Crowd: Interview With James B. Rogers, Private Investor), with Laurence Strauss of Barron’s, Jim Rogers, author of Investment Biker, notable hedge fund manager and former partner of George Soros discusses his point of view on China, commodities, and the US economy. Here are some excerpts: On China:
Why are you so bullish on China?
China is going to be the next great country. The 19th century was the century of the U.K. The 20th century was the century of the U.S. The 21st century is going to be the century of China. Even if I’m wrong, there are 1.5 billion people who speak Chinese every day, so it’s not as if our daughter is learning Danish. Even if she winds up working in a Chinese restaurant, she is going to be the maitre d’ — not the dish washer.
What else intrigues you about China?
China was in decline for 300 years and then around 1978 Deng Xiaoping said, “OK, let’s find something new.” He reintroduced entrepreneurship and capitalism to a country that has had a long, long history of both. In China they save and invest more than 35% of their income; in America we save less than 2%. The Chinese work from dawn to dusk. When they come to work, they don’t say, “How many holidays do I get?” They want to live like we do in America and they are willing to work hard, save and invest for the future.
What about investment opportunities in China?
Perhaps the safest investment is the renminbi, the Chinese currency. I don’t see how the renminbi should not go up against the dollar, anyway, for the next several decades. Commodities, of course, are a great way to invest in China. If you have nickel, they will take you to dinner, pay for dinner and pay you on time. They have to buy commodities. And there are some industries in China that are going to do well, no matter what happens to the world economy — water treatment, for instance. China has a horrible water problem that it is doing something about.
What other industries in China look interesting?
Agriculture. Mao Zedong [who ruled China from 1949 until his death in 1976] totally ruined agriculture. China now is spending huge amounts of money trying to rebuild agriculture. The same goes for power generation. Another growing industry is tourism; the Chinese have not been able to travel for some 300 years, for a variety of reasons. But now the government is making it much easier to get passports, and they are encouraging travel.
On Commodities:
Are we still in the early stages of a bull market for commodities?
I wouldn’t say it’s early; the commodities bull market started in early 1999. There are going to be corrections — and big ones — along the way. That’s true for every bull market.
But nobody has brought on any new supply of anything in the past 25 or 30 years. The last gigantic oil field was discovered in the 1960s. The number of acres devoted to wheat farming has been declining for more than 30 years. Food inventories are the lowest they’ve been in 60 years.
Our colleague Gene Epstein argued in a recent Barron’s cover story that there is a huge speculative element pushing up commodities prices.
But where is the oil coming from that’s going to drive down prices and keep them down? We are going to have corrections, as was the case in 2001 after 9/11. Is there speculation in commodities? Of course. Whenever you have a bull market, it draws money. If the fundamentals are right, investors make money and they want to make more. But people were buying commodities for 20 years in the 1980s and 1990s and nothing happened, because the fundamentals weren’t right yet. Now that the fundamentals are right, more money is going into commodities. It will end in a bubble and hysteria. But in 2018, or whenever this bubble finally starts to peak, if I’m lucky you will call me up and I’ll say it’s time to sell commodities.
On Emerging Markets:
Why have you sold most of your emerging market holdings?
Take Africa as an example. It’s a natural- resource-based economy, so a huge fortune is going to be made there in the next 10 years. Many countries will look a lot better because they do have lots of natural resources.
Having said that, right now there are probably 15,000 MBAs on airplanes flying around the world looking for emerging markets, some of which are now called frontier markets. I’ve been investing in these markets for many years and all of a sudden they have a name. That’s why I have sold all my emerging markets except China and Taiwan.
But I hope I’m smart enough that if and when there is a big correction, I’ll be able to buy back some of those holdings.
We’ve seen the correction in emerging markets…
Finally, a comment on the US economy as a debtor nation…
As recently as 1987 the U.S. was a creditor nation. We are now the largest debtor nation the world has ever seen. We owe trillions. That’s with a “t.” The real problem is that that our foreign debt is increasing at a rate of $1 trillion every 15 months. You can do the arithmetic.
For a complete transcript of this article click this link: http://www.ronpaulforums.com/showthread.php?t=132805
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Tags: Agriculture, China, Commodities, Currency, Emerging Markets, Markets, Metals, US Stocks
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Sunday, March 30th, 2008
March 30, 2008 - On March 12, 2008, Jim Rogers appeared for a live interview on CNBC Europe. If you missed it, just click on the link below.
Just watched it… It is a must watch. In his usual candour, Mr. Rogers tells it like it is. If he woke up in Bernanke’s place, he would quit, and then abolish the Fed for providing t”socialism for the rich.”
His calls - Invest in agricutural commodities (in his opinion, this will be the most profitable trade for the next 2 to 5 years), long the Renminbi, short the investment banks.
http://www.cnbc.com/id/15840232?video=682734828&play=1
Even if you don’t like the guy, its a good interview with one seriously interesting and knowledgeable person.
Thank you Mr. Rogers.
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Tags: Agriculture, Banks, Commodities, Currency, Investment Strategy, Markets
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Thursday, March 27th, 2008
March 27, 2008 - Donald Dony, The Technical Speculator, offers the following explanation of how the strengthening of the yen to a twelve year high against the US dollar has had a profoundly negative effect on global markets, in the past and during the most recent 6-7 months. We would also add that while Mr. Dony does a great job of explaining this concept, he also points out in the present tense that as the cheap money is quickly evaporating, so is the global market.
Our sense is that the yen broke through par, a level (usd/yen<100) that required intervention (which came last week), primarily by the BoJ to maintain it at levels that are more supportive of Japan’s economy. For this reason, it may be that if the yen has reached a turning point, that a new round of carry trade in the yen could provide stimulus and/or support to global markets at these levels. Change that to evaporated, past tense.
Global equity traders had, for many years, a ready source of funds at almost no interest charge. Traders have been shorting the Yen and using the funds to purchase stocks, currencies and high-yielding securities around the world. However, as of mid-2007, that “free bank account” is becoming more and more costly. The Yen carry trade is starting to unwind with very negative results for stocks.
But what is the “Yen carry trade”? Simply put, it is borrowing at very low interest rates in Yen and using the loan to buy higher yielding assets elsewhere. During the past 12 years, the trade has become standard business practice for many institutional investors. Perhaps the most popular form of the strategy exploits the yield gap between U.S. and Japanese fixed income securities. Another plus that came with the Yen/U.S. cross was from the dollar’s rise against the yen. Investors make their profit when they reverse the trade and pay back the Yen loan.
But all of this endless liquidity is quickly coming to an end and with bearish consequences to global equity markets.
Chart 1 illustrates the tight connection of the Japanese currency with global stocks. With every major rise of the Yen throughout 2007, there was a mirrored decline in the Dow Jones World Stock Index. Quite simply, the global equity markets began to fall when the tap was turned off to cheap money. Traders are now forced to buy back massive Yen short positions and sell assets to pay for it.
And what is happening to the Yen?
Chart 2 shows the Japaneses currency is breaking through a decade old resistance levels and surging to new highs. And this trend shows no signs of reversing. The upside target is 120.
Bottom line: The bearish impact of the advancing Yen is clearly apparent on global stock markets. World equities appear to have been propped up largely due to the availability of foreign liquidity. As this “cheap money” is quickly evaporating, so is the global bull market.
Donald W. Dony FCSI, MFTA
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Tags: Carry Trade, Credit Market, Currency, Markets, Technical Analysis
Posted in Markets | 2 Comments »
Tuesday, January 29th, 2008
Jan. 29, 2008 - This is irresistible. During periods where there seems to be such confusion in the market, we could certainly all use a dose of clarity.
Byron Wien, Chief Global Strategist, Pequot Capital, and one of a few prolific market forecasters, shares his 5 ‘Sure Things’ for this turbulent market:
I’m getting older now, so I only invest in sure things. I don’t invest in things that only “might” work out. So let me give you five sure things.
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Gold is going to $1,000 an ounce probably this year. I forecast that it would go to $800 an ounce last year.
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Oil is going to probably $125 a barrel. I forecast that it would go to $80 last year. The dollar is going down for the reasons that I said because large holders of dollars are going to diversify into other assets and other currencies.
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Cotton is going to be the commodity of choice because the world’s standard of living is increasing and the places where it’s increasing fastest are warm and they don’t wear wool, they wear cotton. Cotton is something nobody wants to grow. They want to grow corn instead. So, while the demand for cotton is increasing, the acreage devoted to it is decreasing and that’s all you have to know.
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Finally, I think the Chinese are going to revalue the renminbi (yuan) even more than the seven percent that they did last year.
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As far as stocks are concerned, I think that my investment ideas follow some of my thesis. Our portfolio is very heavily overseas, but we’re in the agricultural area with
Potash Corp (POT) and a lot of energy stocks.
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Large caps such as
Schlumberger (SLB). Smaller caps such as
National Oilwell Varco (NOV) and Ultra Petroleum (UPL). In technology,
Qualcomm (QCOM). Finally, in adult education we think that a lot of people will be laid off and they’ll be trying to improve their skills so we would buy the
Apollo Group (APOL).
Prior to his current position as Chief Investment Strategist at Pequot Capital, Byron Wien was Chief Global Strategist at Morgan Stanley.
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Tags: Agriculture, Canadian Stocks, Commodities, Currency, Economy, Emerging Markets, energy, Gold, India, Investment Strategy, Investment Wisdom, Russia, US Stocks
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Tuesday, January 22nd, 2008
Jan. 22, 2008 - Here are some more clippings about the ‘carry-trade’ at the heart of global market volatility:
Jan. 21 (Bloomberg) — The Australian and New Zealand dollars fell against the yen as concern over a slowing U.S. and global economy spurred a reduction in holdings of higher- yielding assets bought with funds from Japan.
The New Zealand currency traded near the lowest in almost two months versus the yen as a slump in Asian stocks deterred investors from so-called carry trades. Australia’s dollar also declined against the U.S. currency after a government report showed producer prices rose by less than economists estimated, prompting traders to pare bets the central bank will raise interest rates from an 11-year high next month.
Inserted from <http://www.bloomberg.com/apps/news?pid=20601081&sid=ah9E711dlJh4&refer=australia>
Australia’s 11-year high benchmark rate of 6.75 percent and New Zealand’s record 8.25 percent rate drew investors in the past as part of the carry trade strategy. Those rates compare to 0.5 percent in Japan. The risk in the carry trade is that swings in exchange rates erode profits from interest-rate differentials.
The carry trade strategy involves borrowing in countries where interest rates are low, and investing where returns are higher.
Commodities, which make up about 60 percent of Australian exports and 70 percent of New Zealand’s, tumbled since the beginning of last week. Falling global economic growth may reduce demand for commodities these countries export, such as metals.
Inserted from <http://www.bloomberg.com/apps/news?pid=20601081&sid=a3dRGK0srjXo&refer=australia>
Another nervous week as the ‘carry trade’ unwinds. Many equity indices and Yen crosses are poised at key support levels: ‘necklines’ of ‘head-and-shoulders’ patterns or the lower edge of the big trading band of the last year or so. Leading the pack South are GBP/JPY and Sweden’s OMX Index, closely followed by the Dow Jones Industrial Average and FTSE 100. These have already seen weekly closes below these key levels and should, one by one, topple all the other ones over too. An unseemly scramble is likely if not next week then in February; at-the-money implied volatility could soar.
Energy products and most metals eased, many thinking if not talking recession, and Baltic Dry and Capesize Freight Indices have halved since their peak at the end of last year. Even the more pessimistic are saying contraction will be shallow and short and that by Q3 2008 things will be mended and economic growth will pick up. We feel this is way too simplistic and that the unravelling of all the mess in the financial system will probably take the whole of this year (and then some more).
A ‘flight to quality’ has resulted in Treasury yields moving lower, US ones leading the way to multi-month lows with yield curve steepening seeing two-year TNotes at a mere 2.39% (lowest yield since September 2004). Credit spreads against junk bunds are at July’s record highs. The US dollar has been contained in relatively small ranges around last week’s levels although the Swiss franc did dip very briefly to a new record low (1.0838) as did the Czech koruna (17.318). Sterling has regained some of its composure, EUR/GBP down from a record £0.7614, and the Yen had the best all round performance, dipping to 105.92 to the greenback.
Stock indices are all lower, the New Zealand bourse for a staggering twelve consecutive days while Jakarta and Mumbai are down nearly 8% this week alone. US and European indices lost roughly 5%, many now lower than they were at any point in 2007.
Inserted from <http://www.fxstreet.com/technical/market-view/weekly-market-commentary/2008-01-21.html>
The Japanese currency climbed against higher yielding currencies as investors looked for safe havens amid the turbulence in equity markets. The yen carry trade, where the low-yielding currency is sold to purchase riskier, high-yielding assets, proved a popular investment strategy in the first half of 2007 as stable equity market conditions ensured a healthy appetite for risk.
But the deepening financial market gloom since August has seen carry trades scaled back since the beginning of this year.
The real test of carry trade activity is the relationship between the yen and the New Zealand dollar. The yen fell 15 per cent against the Kiwi between January and August last year as the latter’s interest rate hit 8.25 per cent against Japan’s 0.5 per cent. But the Kiwi has since lost nearly all these gains, and was down 4 per cent this week to Y82.05 as the yen continued its rally.
Inserted from <http://www.ft.com/cms/s/0/0600819a-c634-11dc-8378-0000779fd2ac.html>
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Tags: Carry Trade, Currency, Emerging Markets, Investment Strategy, Miscellaneous, Technical Analysis
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Friday, January 18th, 2008
Jan. 18, 2008 - At the beginning of January we featured Ted Seides’ view Junk Bonds and Couterparty Risks, in which he asserts that the risks that remain are significant and concern the outstanding counter-party risks. Barry Ritholtz in his Big Picture blog, re-iterates that this credit mess is far from over, and that counter-party risk remains an unresolved and shrouded facet of the problem that has yet to come to light. He also makes an interesting point about Warren Buffett’s recent choice. This is a must read:
Counter-Party Risk
Barry Ritholtz, January 18, 2008
Get used to hearing that phrase: Counter-Party Risk.
You will be hearing a lot of it in the coming year. Its one of the reasons I disagree with my friend Doug Kass about any bottom in Financials.
Consider this small concern: Given the enormous amount of hedging that was done by Investment Banks (Merrill, Morgan Stanley, JPM, Citi, etc.) if the monoline insurers fail, well, then you are no longer hedged. So while some people are arguing that the write downs are now over, I am not quite so sure.
And that’s before we get to the issues of defaults which have yet to occur. These are problems in the near future, and they are likely to cause an ongoing set of dislocations. Hence, why I expect the financial sector bottom will be a long tedious process.
But I digress. Back to the monolines and counter-party risk.
The AMBACs (ABK), MBIAs (MBI), and FGICs (a GE/Blackrock company) of the world used to have a nice little business going. They wrote insurance on bonds that cities, states and municipalities issued. It was “the vig” on getting a triple AAA rating, and the premium more than paid for itself in reduced borrowing costs. A lovely, low risk business, with little defaults and a steady revenue stream. At one point in time, AMBAC had the highest revenue per employee on the planet.
That situation was obviously intolerable. So they brought in the financial engineers. Hey, we should be issuing insurance on Credit Default Swaps (CDS) — the premiums are much much bigger than boring old munis!
Any time you hear words to that effect, you know you are dealing with an idiot of the highest magnitude. Those are the equivalent to “Give me a match, I want to see if there is any gas in the tank.”
The monolines are not in trouble because Municipalities are defaulting on bond payments. (That’s waaaay in the future). The problem is they wrote insurance — taking in that fat premiums — without properly understanding the risk.
Greater reward requires greater risk. This is such a simple formula, yet I find myself repeating it again and again. How anyone fails to understand it, quite frankly, is beyond my comprehension. These were once great businesses, and now, there is the increasing chance –perhaps likelihood — they will be zeros.
Can you imagine Warren Buffet destroying such a delightfully simple, profitable business? Me neither. That’s why Berkshire is going to own this space in a few short years . . .
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I’ve said it before, and I’ll repeat it again: To err is human, but it requires an MBA to create total clusterfuck . . .
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Disclosure: A relative used to work at AMBAK, and now works at FGIC. We don’t really discuss work, and they were NOT consulted on anything in the commentary.
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Tags: Credit Market, Currency, Economy, Fixed Income
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Wednesday, January 16th, 2008
Jan. 16, 2008 - Back on January 4, 2008, we wrote that “On days the yen falls to the euro [or dollar], stocks almost always rise; when the yen strengthens to the euro [or dollar], stocks fall. Its almost always a short term concern and the volatility it brings with it can be dramatic, but opportunistic.
Well, here we are facing the latter, as recessionary winds are putting pressure on the US dollar. This article provides a very good overview and it may be that some of this weeks heavy selling across the strongest sectors in the market could be attributed to the pressure on Yen/Dollar carry trade. Read on…
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At a time where all the news looks grim - from awful results that forced Citigroup to cut its dividend, to bad US retail sales figures that deepened recession fears, to the ZEW survey showing German business confidence at a 15-year low (and, we might add, Wednesday’s FT report that confidence in the UK property market has hit its lowest level since the housing crash of the early 1990s) - the “potentially scariest news of all” is the resurgence of the yen, according to John Authers in Wednesday’s Short View column.
Some analysts are more sanguine, predicting the yen’s surge will be temporary. But Authers points out the Japanese currency’s jump on Tuesday to less than Y107 to the dollar - for the first time since June 2005 - broke what Nomura called the trend of “reasonably steady weakening against the dollar that had been happening since 1994″.
This is important, in Authers’ view, because the yen has become a gauge for risk aversion in the markets.
When traders feel confident, they borrow in yen to fund investments elsewhere. This yields easy profits unless the yen suddenly appreciates. A rising yen betokens fear.
Hence its close correlation with the equity indices, and with equity volatility. Share prices fall, and volatility rises, when the yen does well
The yen’s rise has “nothing to do with fundamentals”, notes Authers. Indeed, the Bank of Japan on Tuesday reduced its economic assessments of four of its nine regions and admitted the economy was slowing, reducing the chances of a rate rise.
A strong yen is not good news for anyone — including the Japanese, he warns. Falls this year have left the Nikkei 225 stock index in a bear market, down 23.4 per cent from its high of July last year. Fears that the revived yen will damage exporters have contributed to the damage.
Are there any signs of light?, asks Authers.
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Tags: Carry Trade, Currency, Technical Analysis
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Wednesday, January 16th, 2008
Even though it was a foreign term to most investors six months ago, the TED spread (3-month Libor minus 3-month Treasury) has quickly become one of the main indicators investors look to as a gauge of stress in the credit markets. While the indicator rose to historically high levels as 2007 came to a close, since the start of ‘08, the TED spread has been in a rapid descent, indicating that stress in the credit markets is showing signs of improvement. Today the TED spread fell to its lowest level since August 13th.
Three-month LIBOR, which is one component of the TED spread (along with 3-month Treasuries), was also highly elevated as 2007 came to a close, but since then it has also come down sharply. In fact, as of today, 3-month LIBOR closed below the Fed Funds Rate for the first time since June 2003.
Does the rapid decline in the TED Spread and 3-month LIBOR have any impact on the stock market going forward? Since 1985, this marks the 12th occurrence where LIBOR traded below the Fed Funds rate after trading above that level for at least 100 days. Below we highlight the performance of the S&P 500 one and three months following each occurrence. While the S&P 500 outperforms its average performance over the one-month period, over a three-month period, its performance is inline with average, indicating that any major positive impact on stocks is short lived.
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Tags: Currency, Economy, Investment Strategy, Miscellaneous, Technical Analysis, US Stocks
Posted in Uncategorized | 1 Comment »
Saturday, January 12th, 2008
January-12-08, 10:48:59 AM | GreenLight Advisor
Dennis Gartman is selling half of his gold position. His argument is that gold has reached an interim top citing a ‘perfect storm’ of media fanfare, rising Democratic Party leftism, Countrywide’s failure, and deteriorating economics fundamentals, and while he feels that gold will likely be at higher prices next year, it will retrace to around $800 before turning up again. He holds a position in GLD.
Going for the Gold
Wed. Jan. 9 2008 | 7:35 AM[04:58] Copyright CNBC 2008
Insight on gold’s record, with Dennis Gartman, The Gartman Letter founder and CNBC’s Becky Quick
Gartman updates
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Tags: Commodities, Currency, Gold, Miscellaneous, Technical Analysis
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Saturday, January 12th, 2008
January-12-08, 10:17:52 AM | GreenLight Advisor
Dennis Gartman’s “Rules of Trading” are the product of many, many years of on the ground experience and we can learn from them. Here is the complete list that John Mauldin shared in his newsletter some time back:
DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING
1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin. Count on it!
2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.
3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.
4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.
5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.
6. “Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent.” These are Keynes’ words, and illogic does often reign, despite what the academics would have us believe.
7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.
8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.
9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In “good times,” even errors turn to profits; in “bad times,” the most well-researched trade will go awry. This is the nature of trading; accept it and move on.
10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here!
11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, “When they are cryin’, you should be buyin’! And when they are yellin’, you should be sellin’!”
12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.
13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow… usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.
14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year… and our profits grow accordingly.
15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a “secret” to trading (and of life), this is it.
16. All Rules Are Meant To Be Broken…. but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.
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Tags: Agriculture, Canadian Stocks, Commodities, Currency, Investment Strategy, Investment Wisdom, Miscellaneous
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Sunday, January 6th, 2008
Don Coxe recommends being overweight gold, pg 34 in the December 2007 Basic Points.
4. Remain heavily overweight gold—both stocks and the ETF. Gold is almost as good a protection against banking problems as SKF—the UltraShort Financials ETF—a security which may not be a suitable investment in some portfolios.
If you’re looking for effective exposure to gold, look into streetTracks Gold Shares (GLD). Wall Street Journal’s Jan. 5, 2008 article, provides more detail:
The biggest is the streetTracks Gold Shares ETF, sponsored by the World Gold Council, a mining-industry group. Its holdings are valued at more than $16.8 billion, more than the valuation of General Motors Corp.
Each share in GLD is backed by about 1/10 of an ounce of metal held in vaults in London by HSBC Bank USA, a unit of HSBC Holdings PLC. The streetTracks ETF issues more shares as brokers see more demand in the market, and brokers receive shares for the metal they buy and transfer to the fund.
The fund sat on about 628 metric tons of gold last month, according to the World Gold Council, more than the 600 or so metric tons in Chinese central bank reserves and 604 metric tons with the European Central Bank.
In all, the eight ETFs held 834 metric tons of gold through November, according to the World Gold Council.
For Canadians looking for Canadian dollar or US dollar denominated exposure, Millenium Bullion Fund offers open-ended funds for pure bullion play in both currencies.
