Currency Snapshot
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Economy and the Bailout Plan: Down, but Not Out!
Wed, Oct 1 2008, 08:51 GMT
by Jack Crooks
Yesterday the Dow Jones Industrial Average closed the day down 777 points! Needless to say that’s going to get your attention when you flip on your local news and the anchors are attributing it to a House funding bill, vital in avoiding a financial meltdown, that failed.
Especially when you had no inclination there was a financial crisis to begin with.
Case in point: last night I met up with a college roommate who was back in the States from work he does in Italy, the Czech Republic and the Ukraine. We had dinner with his parents and some of his other friends. I didn’t get to talk about the economy with my old roommate, but his dad (knowing I follow the markets on a daily basis) asked me, “What the heck is going on?”
I kind of laughed at first because it seems to me that the public is being absolutely inundated with this bailout package. My roommate’s father lives and works in the US, but for his own good probably does not turn the TV on all that much.
He then exclaimed to me ...
“I caught a second of the news the other night after work and they were talking about some financial crisis, and I’m thinking to myself ‘What financial crisis? I didn’t know we were in a financial crisis.’”
Interesting.
This guy I was talking to had no idea that the House had spent the last two weeks squabbling over a last ditch effort to “rescue” the economy. Now, don’t get me wrong, after I began getting into the details I learned he was well aware of the root of the financial trouble.
“A bunch of money was lent out to people who couldn’t pay it back and now it’s all coming home to roost,” he said.
Exactly. He knows how economics generally works. And he understands the serious disconnect in lending to subprime (or worse) borrowers and then making leveraged bets on the chances of them being able to consistently and responsibly pay their loans.
The thing is, he’s not one that’s going to be severely impacted by this financial crisis that we’re told will threaten EVERYONE. Sure, the fallout might be noticeable when a wellliked restaurant of his closes down or when his favorite wine boutique goes under because consumers aren’t going out to eat much and are finding cheaper substitutes for their favorite Cabernet at the grocery store.
But as far as I know, he’s not in the market for a new car, and he’s not on the verge of starting up a new business venture ... so he’s not going to need access to such loans. I’d imagine a good portion, if not the majority, of Americans are in a similar situation where they can do without a new car loan and have no immediate, new‐fangled business aspirations.
Sure there are going to be those who have no car, find themselves in dire need of one and won’t be able to get an auto loan. And there are going to be those people whose entrepreneurial beginnings fatally collide with a dysfunctional lending system. And there are even going to be expendable employees who lose their jobs as companies cut costs. And that’s no fun.
But there will also be responsible citizens, with decent savings and good credit, who will be able to secure the necessary money to finance a car purchase. Those same individuals, with legitimately profitable business ideas, will find their way into funds necessary to get their good businesses off the ground.
We’re not in for easy times like we’ve become so accustomed to – that’s for sure. But it’s not the end of the world either. The lending system is going through a cleansing period. After a bubble of easy credit that’s now burst, it’s about time we get some cleansing.
And while the markets are hung‐up and panicking over this failed bailout bill, perhaps it’s not such a disastrous, Armageddon‐like scenario after all. Perhaps a bailout plan will intervene and stop the market’s cleansing process prematurely. What happens then after a new, artificial credit bubble is inflated? When it bursts we could be in for a far worse economic meltdown than the consensus already expects. No?
As I wrap this up, the US dollar is soaring. The reason: the credit crunch has officially gone global and economies are feeling it. The bad news is well into the buck already, though we apparently can’t say the same for Europe, UK, Australia, New Zealand, Canada and Switzerland.
When it comes to the idea of the global economy decoupling from the US economy, I’ve got one word: defenestration. Pretty soon it’ll be a race to see who can scrape themselves up off the concrete first.
Regards,
Black Swan Capital
Published on Wed, Oct 1 2008, 08:51 GMT
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Gotta Love that Buck!
Mon, Sep 29 2008, 15:37 GMT
by Jack Crooks
We should have known. It seems to happen each time we are near some type of extreme in sentiment—we receive very strident email telling us we are wrong.
Lately we have received more and more mail telling us we are absolutely certifiable (and some weren’t near that nice) in believing the dollar will be supported, let alone rally, in this environment. “It just can’t be, goes the lament.” Well, ladies and gentlemen—it can be. And is!
It all comes back to Frederic Bastiat, and his cogent analysis of importance of the things that are not seen in world of economics. Here is the exact quote [our emphasis]:
- “In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause ‐ it is seen. The others unfold in succession ‐ they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference ‐ the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, ‐ at the risk of a small present evil.
Bastiat, That Which is Seen, and That Which is Not Seen, 1850
Does this mean one has to foresee the future to be a good economist or make money in markets? No. It means one must be open to the unseen series that might cause price action to be very different from the consensus. And develop alternative (plausible) scenarios to increase the probability of making money from these unseen actions beneath the surface of the economy.
Our broader underlying theme of dollar bullishness hasn’t changed—our scenario is simple: Deleveraging means money moves to the center (US capital markets). And there is unseen dollar support by big players out there, as it is in no one’s interest for the world’s money i.e. the world reserve currency, to be trashed when confidence in the system is paramount to achieving stability and staving off global depression.
Does price action today mean we are right? Absolutely not! It may be pure luck—which we’ll take over being right any day of the week. But, for now, we stick to the story.
How long can this last? We don’t know. But maybe a lot longer than now believed. And if so, our secondary scenario of the US emerging from this morass before the other key players (primarily in Europe) might represent the longer term fundamental driver for the buck. I know what you’re thinking—you guys are nuts! Well, maybe. Time will tell. It always does.
Regards,
Black Swan Capital
Published on Mon, Sep 29 2008, 15:37 GMT
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A recessionary world isn't good for Comdols…
Fri, Sep 26 2008, 14:18 GMT
by Jack Crooks
Key News
- • Central banks across the world scrambled to meet desperate demand for cash on Friday, with Europe's big three offering billions of one‐week dollars for the first time to break a quarter‐end money market logjam. (Reuters)
- • Ireland, easily the best performing eurozone economy since the birth of the single currency, on Thursday became the first in the 15‐country region to fall into recession. (FT)
- • New Zealand's economy contracted last quarter, confirming the nation is in its first recession in 10 years. (Bloomberg)
- • Singapore will probably slip into a recession this quarter for the first time since 2002. (Bloomberg)
US Economic Events (WSJ):
8:30a.m. 2Q Final GDP: Previous: +3.3%.
8:30a.m. 2Q Revised Corporate Profits: Previous: +1%.
10:00a.m. End-Sep Reuters/U Mich Sentiment Index: Expected: 70. Previous: 63.
Quotable
To‐morrow, and to‐morrow, and to‐morrow, Creeps in this petty pace from day to day, To the last syllable of recorded time; And all our yesterdays have lighted fools The way to dusty death. Out, out, brief candle! Life's but a walking shadow, a poor player, That struts and frets his hour upon the stage, And then is heard no more. It is a tale Told by an idiot, full of sound and fury, Signifying nothing.
Macbeth Act 5, scene 5, 19–28
FX Trading – A recessionary world isn’t good for Comdols
Recession by definition means demand for all kinds of stuff falls. And if demand for stuff falls, the demand by business for raw materials to make said stuff should naturally fall with the standard lag of course. And unless the government is more efficiently able to suspend the link between supply and demand for real stuff (which is part of what they always seem to do by manipulating money and credit and often explicitly attempt using price controls and “regulation”) we believe the price of raw materials i.e. commodities, will fall as more and more countries slide into recession—two noted to be in and one on the way as highlighted above.
Therefore, it seems commodity dollars (comdols) would be vulnerable and decent candidates to ride down in a recessionary world. As evidence for this simple view we provide two charts for some perspective….
Wishing you a well deserved enjoyable weekend.
Regards,
Black Swan Capital
Published on Fri, Sep 26 2008, 14:18 GMT
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How Will the Fear Factor Impact Markets?
Thu, Sep 25 2008, 15:18 GMT
by Jack Crooks
Is it just me or does anyone else think that an impromptu Presidential Address should be designated for declaring war, explaining foreign matters or tending to personal Whitehouse affairs … if you know what I mean?
President Bush’s address to the Nation last night did none of those things, really. Sure, it was a fairly clear and concise synopsis for all those who are wrapped up in the markets on a daily basis and/or already understand what’s going on. Rather, Bush took the air to play ‘bailout salesman’.
For all the people disconnected from the markets, for all the people that don’t really know or haven’t really had a chance to lend any thought to what’s going on and what’s been proposed, President Bush needed to sell them on the idea of a several hundred billion dollar bailout billed to the US taxpayer. His strategy was not all that uncommon as it’s consistently used around election time.
Opportunistic scare tactics is what I’ll call it.
And I’m not talking Democrats or Republicans here, I’m talking Democrats AND Republicans – they’re all guilty. It is the simple idea of using fear and uncertainty to trigger the socialistic instinct of human beings. ‘Please, if something horrible is happening, do anything in your power and even beyond your constitutional jurisdiction to take care of us. Please!’ This is one of the ways government can further blur the line between the public and private sectors.
Consider the USA Patriot Act, written and signed into law after 9/11 with the intent of protecting Americans from the spread of terror. The act is actually a long acronym that stands for:
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism.
Controversy surrounds the Patriot Act, specifically its blatant disregard of several civil liberties (though some see it as an appropriate response in a dangerous world). I am in the blatant disregard camp, but do understand there are extremely valid arguments on the other side.
Now let’s consider this bailout plan proposed by Bush and/ or Paulson. For grins, let’s call it USA Patriot Act II which is aimed at stabilizing the financial system and sparing the economy from its disastrous consequences should no action be taken. Perhaps the acronym would go something like this:
Uniting and Strengthening America by Pick‐pocketing Assets, Twisting Regulations and Imposing on Ordinary Taxpayers
Don’t you think that outlines the recent initiatives rather well?
Now this bailout plan, that President Bush is calling his own, may or may not win the approval of the public. And an overwhelming disapproval maybe shows that taxpayers are sick and tired of footing the bill for reckless government spending. Regardless, it seems some form of bailout plan is going to pass through Congress and be granted to Mr. Paulson and friends. The question is how the markets will behave once this remedy is finally prescribed.
Thus far, with the fear factor firmly in play, currencies don’t seem to want to commit to any particular direction. What’s interesting is the US dollar’s ability to hold up the face of this bailout. The consensus has turned decisively anti‐dollar now that its multi‐month rally has taken a rest.
The way we see it, there’s a pretty good chance the anti‐dollar consensus is in for a rude awakening. That is if reasonable market players see past the scare tactics seeping into the dollar‐view ... something that reasonable people have done lately.
The main theme of money flowing out of emerging and developed markets and back into the US is what’s supporting the buck. It’s a somewhat perverse concept, I will admit. But the fact that we’re told, and the rest of the world is realizing, that the US economy is walking a tight rope with no safety net could very quickly become a major problem outside of US shores and cause foreign economies to tumble. This idea isn’t sitting well with some. Check out our blog entry (Coming Over to the Dollar‐Bullish Camp) for a story on one Asian bond fund diversifying back into US dollars.
In the meantime, risk‐averse currency plays may gain the upper hand ... though an overwhelming advantage is not clear just yet. As I wrap this up most US dollar pairs are range bound in the short‐term and most currencies attempted to strengthen at the expense of the US dollar in the wake of crummy durables goods and jobless claims numbers this morning. But that commotion calmed down rather quickly.
There’s a lot of steam built up in the market. And there’s a good chance a break out of these sideways ranges will open the door to substantial moves, for or against the buck.
Be ready and be quick and be careful when the government tries sticking their hand in your pocket.
Oil vs. US$ Index inverted 240‐min chart:
Of late, the dollar has ebbed and flowed with oil prices. Of course we don’t know who leads and who follows, but the slowdown story seems to be dollar supportive still. This can change at any moment and why any near‐term breakout here might be worth a punt. [US$ index inverted means when the red line in the chart below is going down, the dollar is appreciating. We show the chart in this manner so you can see the visual correlation with crude.]
Regards,
Black Swan Capital
Published on Thu, Sep 25 2008, 15:18 GMT
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A little history: The way our financial system is and has to be …
Wed, Sep 24 2008, 15:24 GMT
by Jack Crooks
Jim Grant said a few months back in one of his Interest Rate Observer bi‐weekly missives: “Humans are simply incapable of handling credit,” or something close to that. We have seen the deleterious impact of easy money before. And no matter the regulatory environment conjured up to keep it from happening again—it will.
In perusing an excellent book titled, The Panic of 1907, penned by Robert Bruner and Sean Carr, I ran across this mini‐postmortem on why it happened:
“The recounting of events of 1907 suggests that the storm gathers as follows. It begins with a highly complex financial system, whose very complexity makes it difficult for anyone to know what might be going wrong; by definition, the multiple parts of the financial system are linked, which means that trouble in one institution, city, or region can travel easily and quickly to others. Buoyant growth in the economy makes the financial system more fragile, in part due to the demand for capital and in part due to the tendency of some institutions to take on more risk than is prudent. Leaders in government and the financial sector implement policies that advertently or inadvertently elevate the exposure to risk of crisis. An economic shock hits the financial system. The mood of the market swings form optimism to pessimism, creating a selfreinforcing downward spiral. Collective action by leaders can arrest the spiral, though the speed and effectiveness with which they act ultimately determines the length and severity of the crisis.”
Does any or all of that sound vaguely familiar? Heck, if you exchange 1907 with 2008, the postmortem on the current crisis is complete!
“The only thing new in the world is the history we don’t know,” said Harry Truman.
And our lack of historical perspective seems a direct function of our hubris. We continue to make the same mistakes with credit (and every other major area of our existence for that matter) as those who have gone before us…again…again…and again. Each generation thinks they know more than the one before.
And once the generation with true enlightenment (which comes from being kicked in the teeth a time or two) is gone—it presents the current generation with all kinds of new opportunities to stumble and create silly things such as VAR and stress‐testing of portfolios in order to rationalize taking on ridiculous levels of risk. And those august experienced businessmen on those highly elevated risk committees’ who should know better focus more in fees than prudence. This won’t change. Ugghhh….
By the way! 1908 proved a tough year. According to Brunt and Carr: “Gross earnings by railroads fell by 6 percent in December [1907], production fell 11 percent from May 1907 to June 1908, wholesale prices fell 5 percent and imports shrank 26 percent. Unemployment rose from 2.8 percent to 8 percent, a dramatic increase in a short space of time.”
Of course the economy did recover. Industrial production rebounded in 1909. The Dow Jones Index actually bottomed in late 1907 despite the severe recession in 1908 i.e. bad news already in the price. Nothing has changed there either. Markets discount. And it’s why we haven’t jumped on the “inevitable dollar ride to banana republic land” just yet.
And one more interesting historical anecdote: To the chagrin of many, the panic of 1907 was the catalyst for the establishment of the Federal Reserve Banking system. Now there’s a glorious legislative achievement if ever there was one.
Regards,
Black Swan Capital
Published on Wed, Sep 24 2008, 15:24 GMT
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Dollar Weakness Inevitable, "They" Say. Hmmm … ?
Tue, Sep 23 2008, 08:15 GMT
by Jack Crooks
It seems the consensus argument is the US dollar MUST go lower given the nationalization of banking institutions and bailouts. But, that hasn’t necessarily been the historical reality. Below is an excerpt from a piece by Stephen Jen & Spyros Andreopoulos of Morgan Stanley:
“Conventional wisdom has it that, as a government fiscalises the contingent liabilities of nationalised banks, the currency of the country in question should depreciate. More generally, banking crises are, very often, accompanied by balance of payments (or currency) crises. The US, being a country with still outsized ‘twin deficits’ (fiscal and external deficits), will likely see the dollar weaken because of the Treasury and the Fed’s decision to effectively nationalise some of the large financial institutions, so the argument goes. An inconvenient fact, however, is that nationalisation of banks, historically, did not tend to lead to further currency weakness. In fact, very often the financial sector and the currency in question reach a trough just as the government takes steps to address the banking crisis. Thus, currency weakness tends to precede, not follow nationalisation.”
Below are some examples cited [our charts added] of banking crisis past and currency impact from Jen and Andreopoulos:
“The S&L Crisis and its bail‐out spanned a protracted period of time. The dollar index did continue to fall from 1986 – the beginning of the S&L Crisis – until 1989 or so. (In 1986, the FSLIC (Federal Savings and Loan Insurance Corporation) – the deposit insurance scheme funded by the thrift industry but guaranteed by the government – first reported being insolvent (incidentally, the main reason why 1986 is remembered as the beginning of the S&L Crisis). The RTC (Resolution Trust Corporation) was established in 1989, and by 2003, the RTC had ‘resolved’ US$394 billion worth of non‐performing assets of US savings and loans. (The total cost of the clean‐up of the US S&L Crisis reached US$153 billion, in ‘current’ terms equivalent to some 2.6% of US GDP in 1991. This translates to US$375 billion in 2008 dollar terms.) The dollar index essentially moved sideways in the early 1990s. The dollar did falter in 1994/95, but that was attributed more to the inflation scare than to the S&L Crisis.”
Published on Tue, Sep 23 2008, 08:15 GMT
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The Price of Gold Toilets is Rising Fast!
Fri, Sep 19 2008, 07:35 GMT
by Jack Crooks
It was probably many months ago that we came across an article about a man from China who’d furnished a castle, or palace or sorts, with items made from solid gold. The article spoke of his acquisition of the gold at low prices, the years it took to transform the gold into common household furnishings and the subsequent melting down and selling of the gold at prices far higher.
During gold’s meteoric rise to above $1,000 an ounce, the only item that he did not consider melting down and selling was what he referred to as the throne – his golden toilet.
After all, who else can claim they had a fully functioning toilet in their home made of solid gold.
But in the last few months the price of gold had been moving lower in a hurry. Until yesterday, when the safe‐haven quality that gold historically boasts came soaring in and swooped up the yellow metal. Prices went flying.
The rush of money into gold was strictly due to the lack of confidence and security in so many other asset classes that are currently going up in smoke. The evidence of credit market chaos intersected in a whirlwind of surging Libor and commercial paper rates, plummeting 3‐month T‐bill rates, widening TED and swap spreads and ongoing counterparty risk.
When all else fails, go to gold, right?
That’s what happened yesterday. And gold is extending and holding on to gains today. This week’s move changes the outlook for the metal quite a bit, as Dennis Gartman admitted in a Bloomberg article this morning. Will this lead the buck to continue correcting? It could, and it probably will justify some more dollar selling. But if you think the US dollar’s rally is over and new lows are only a matter of time, I wouldn’t jump to that conclusion just yet!
Are you hugging your gold toilet in hopes of higher prices? Or are you willing to let it go after this week’s gift to gold bugs?
Regards,
Black Swan Capital
Published on Fri, Sep 19 2008, 07:35 GMT
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Federal Reserve to the Rescue! Or Not?
Wed, Sep 17 2008, 10:02 GMT
by Jack Crooks
Yesterday and this morning the S&P 500 broke down through extremely critical support. But even though the price action practically signaled “lights out” for stocks, the S&P has found a way to rally back and reverse its roughly 30‐point loss from earlier this morning.
Why? Let’s just say there are quite a few investors out their holding their breath and crossing their fingers that the US Federal Reserve will deliver them another gift, handwrapped and with a big pretty bow on top.
In other words, the market is praying for a rate cut as if the Fed hasn’t pumped enough bonus liquidity into the system already. Will they get it? Fed Funds Futures are pointing to a 98% chance of “Yes.”
In our Currency Currents this morning, we explained why we think the answer is a big fat “No.”
Published on Wed, Sep 17 2008, 10:02 GMT
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A lot of commotion, but what's new?
Tue, Sep 16 2008, 08:27 GMT
by Jack Crooks
Lehman Brothers Holdings has declared Chapter 11 Bankruptcy. Any potential bidders have fled the scene and so far the Treasury doesn’t plan on bailing them out.
Bank of America, however, has agreed to acquire Merrill Lynch for $50 billion.
AIG is in rough shape and their fate hangs in the balance as this week opens up.
The Bank of China has decided to cut short‐term rates to encourage liquidity and support economic growth in the face of increased market risk flowing from the US.
The Bank of England and the European Central Bank have pumped additional funding (5 billion pounds and 30 billion euros of loans) into their respective markets in an effort to shore up confidence and avoid panic in the face of the US banking fiasco.
The Bank of Australia joined the money party and unleashed a few billion into their markets, an amount more than they originally estimated would be sufficient in shore up market needs.
The Federal Reserve has widened its lending facilities, offering additional funds and accepting even more types of collateral.
And a group of 10 banks have set up a $70 billion dollar fund to help with liquidity issues in the event of ongoing struggles among major US financial institutions.
How have the currencies behaved?
Well, the US dollar opened up in the Asian session in much the same way it finished out the day on Friday – falling sharply against most all the majors. But that sell‐off didn’t last, and the buck bounced back with a vengeance.
In fact, a massive risk‐aversion flow of capital has benefited the dollar greatly. But besides the US dollar’s big reversal against the likes of the pound, euro and Aussie, the risk aversion is also greatly supportive of the Japanese yen and, to a lesser extent, the Swiss franc.
In spite of all this commotion, our theme of money flowing back into the center is holding firm thus far. Take a look at the price of US 30‐year bonds ...
Money is flooding into this class of investment. And while prices are pulling back from their highs this morning, we’ve already seen a large breakout of the weekly closing high going back to the middle of March. In all likelihood we expect to see this continue.
Perhaps the selling from Friday and into the opening of the Asian session is enough to washout the sellers and send the dollar back higher on a continued flow of risk aversion and deleveraging flushing money into dollar‐denominated assets.
Published on Tue, Sep 16 2008, 08:27 GMT
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Aussie Vulnerable …
Fri, Jul 25 2008, 07:14 GMT
by Jack Crooks
We’ve been doing a lot of analysis on currencies who seem to have blown off too far versus the US dollar. And while Australia isn’t exactly running into the economic headwinds that are starting to blow through the economies in Europe, a chart of the Australian dollar speaks for it, perhaps screaming “Let me down!”
Will the market let the Aussie come down, or keep driving it higher? The fact that the body of the current week’s price bar encompasses the body of the previous three weekly price bars is discouraging for Australian dollar bulls. Might the Australian dollar need to come back down to 9400 or 9000 before taking another shot towards dollar parity? It looks that way.
Regards,
Black Swan Capital
Published on Fri, Jul 25 2008, 07:14 GMT
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Euro, Pound Racing Lower?
Wed, Jul 23 2008, 16:52 GMT
by Jack Crooks
The story so far this week was fired up yesterday via dollar‐positive comments from Treasury Secretary Hank Paulson (same old stuff) and monetary policy comments from Philadelphia Fed President Charles Plosser.
Bottom line: the US dollar zipped higher and is continuing its rocket‐ride today.
As is usually the case with price action that goes against the trend, dollar strength is shaking up other assets – crude oil, gold and the euro are showing the most noticeable reaction.
This wholesale move in favor of the dollar is impacting other currencies too, just not necessarily as much as it’s impacting the euro. Somewhat surprisingly, the British pound is holding up far better than the euro.
A quick look at a chart comparing the two (EURGBP) shows a key break below a narrowing trend that may presage further near‐term euro weakness relative to the pound. This would make sense, because even while the pound is fundamentally vulnerable the euro could give up quite a bit more ground in the near‐term ...
But since this breakout goes against the grain (the longer‐term trend between the two), it may not last too long. It may make sense to play for a downside test of the 7800+/‐ level in the very short‐term, but wait for confirmation before committing too much.
That said, without a convincing break below new support levels, it makes sense to bet on this pair moving back into its sideways range, despite what the dollar does. That means euro firms back up or the pound plays catch‐up to the euro’s weakness.
Regards,
Black Swan Capital
Published on Wed, Jul 23 2008, 16:52 GMT
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Is Aussie going to par? Looking extended!
Fri, Jul 18 2008, 08:23 GMT
by Jack Crooks
There is little doubt about the powerful run in Aussie—for good reason:
1) Strong economic growth, and 2) Highest yield among the major currencies.
Most analysts believe the next stop is par, or 1.000 against the US dollar. Another
panic run out of the dollar likely leads to par. But on technicals alone
(granted not too useful in a fear-driven market) the Aussie looks extended and
due for a breather. Risk/reward!!
Black Swan Capital
Published on Fri, Jul 18 2008, 08:23 GMT
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British Pound: Not So Ugly? Not So Fast …
Wed, Jul 16 2008, 15:13 GMT
by Jack Crooks
A quick look at the British pound versus the US dollar and you’ve got to be thinking the pound looks like a good buy. And maybe, versus the buck, it is.
British pound versus US dollar:
But here’s series of charts that tell us investors are taking into account the miserable UK fundamentals. It’s just that US fundamentals can’t seem to improve at all ...
British pound versus the Australian dollar:
British pound versus the Japanese yen:
British pound versus the euro:
British pound versus the Swiss franc:
Financial markets are getting messy. There may be some British pound trade opportunities to consider.
Regards,
Black Swan Capital
Published on Wed, Jul 16 2008, 15:13 GMT
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The Buck is getting badly beaten!
Wed, Jul 16 2008, 09:16 GMT
by Jack Crooks
Is it a new dollar low? Close, but no cigar yet! The dollar has been hammered lower this morning. But its bouncing higher the Big Boys, Bernanke, Bush and Paulson add to the public commentary this morning. But…
If you notice in the chart below, we have marked the day the dollar bottomed i.e. an all-time low in the US dollar index, in red. It coincided with the day the Fed (and Treasury) stepped in to save investment bank Bear Stearns. The next line on the chart shows the day, yesterday, the Treasury back-stopped Fannie and Freddie (and stepped in to take control of IndyMac). However, there was no bounce in the dollar yesterday.
Multiple Choices:
- A) Lack of credibility now missing in the market when it comes to future Federal bailouts (Bailout Fatigue); it’s lights out for the buck and a spike down to much lower levels is inevitable?
- B) Momentum is down and a test of new lows is in the cards?
- C) Realization the Fed can’t hike rates in this environment and inflation IS accelerating?
- D) An out-of-the box view that Europe will soon be heading down this path (UK already is)—credit markets will soon seize-up as the troubles in the US flow-through and the market realizes the European Central Bank does not have cross-border mechanisms to deal with the problems in any efficient way, as the Fed is doing despite the pain; thus the dollar is near a low and due for a major bounce against the European currencies?
- E) None of the above.
As we complete this piece, the dollar has staged a decent bounce. In fact, the euro even dipped back into negative territory during this bounce. Of course it is still early. And obviously the path of least resistance for the buck is down. But, maybe it is too soon to discount choice D above even though it was a major run-on sentence.
Regards
Black Swan Capital
Published on Wed, Jul 16 2008, 09:16 GMT
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Pound acting well on risk – but will Swiss outshine?
Tue, Jul 15 2008, 08:32 GMT
by Jack Crooks
The ramp-up in credit risk in the market is huge. The pound is acting well today on the back of market risk. But, in the recent past the Swiss franc has been the star currency that has acted very well on risk, for two reasons we think:
- 1) Switzerland still hanging on to some reservoir of safe haven status in times of global trouble (and despite severing its gold link to its currency, it is still has a larger gold backing than any other of the major currencies).
- 2) Swiss likely still benefiting from European carry-trade status – Because of Swiss low interest rates, many actors across Europe funded a lot of risk asset investments and real estate (now becoming a risky asset); as they reduce this leverage and pay back Swiss denominated loans, the Swiss franc benefits accordingly.
Above is a daily chart of the British pound – Swiss franc cross rate. We think the Swiss should outshine the pound on this ramp-up in risk. If it does, we could see a sharp break lower out of this narrowing range.
From Chartpatterns.com:
“Symmetrical triangles can be characterized as areas of indecision. A market pauses and future direction is questioned. Typically, the forces of supply and demand at that moment are considered nearly equal. Attempts to push higher are quickly met by selling, while dips are seen as bargains. Each new lower top and higher bottom becomes more shallow than the last, taking on the shape of a sideways triangle. (It's interesting to note that there is a tendency for volume to diminish during this period.) Eventually, this indecision is met with resolve and usually explodes out of this formation (often on heavy volume.) Research has shown that symmetrical triangles overwhelmingly resolve themselves in the direction of the trend. With this in mind, symmetrical triangles in my opinion, are great patterns to use and should be traded as continuation patterns.”
And as you can see when you step-back to the weekly chart, the trend in the pound – Swiss pair is definitely down…
Regards,
Black Swan Capital
Published on Tue, Jul 15 2008, 08:32 GMT
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Earth to Japanese yen: Come in Japanese yen …
Fri, Jul 11 2008, 13:57 GMT
by Jack Crooks
A subscriber recently emailed us the other day and asked, “What happened to the Japanese yen?”
There was nothing else written in the email except that. And since nothing notable has really happened to the Japanese yen in the last few months, I can only assume he was asking why the Japanese yen disappeared from our radar.
The only comments we could offer him focused on two things:
- 1) Inconsistent spurts of risk‐aversion and risk‐taking plus ...
- 2) The absence of widespread US dollar selling.
The Japanese yen has been tied to the risk environment. And since neither the risk takers nor the risk averse have dominated the market, the Japanese yen has been given little direction.
Additionally, the Japanese yen has been bogged down by a US dollar that’s trying to find its way. Since March 17th, the dollar has actually appreciated and the yen hasn’t been feeling the love.
And even though our editorial has shifted away from the Japanese yen snooze‐fest, we maintain the belief that a massive wave of risk aversion could still very easily descend upon financial markets and prop up the Japanese yen.
The above chart shows USDJPY. Price action appears to show this pair topping out at 10860. A clean break below support at 10500 (red line) could confirm yen strength and open the door to test the next nearest support levels.
And if you haven’t been following the Fannie Mae and Freddie Mac developments, let’s just say things could get awfully ugly; enough even to spark the fearful risk aversion we mentioned earlier. Might be all that’s needed for the break below 10500
Regards,
Black Swan Capital
Published on Fri, Jul 11 2008, 13:57 GMT
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All Eyes on Crude … As Usual
Wed, Jul 9 2008, 13:37 GMT
by Jack Crooks
All those investors on and off Wall Street whose focus is on buying stocks must have sweat through a closet full of shirts by now. The outlook for the stock market is not pretty. And when second quarter earnings season arrives, well, things could get even uglier…they say.
It’s a tough job playing cheerleader for a losing team and waiting for a turnaround, even when Tout TV is on your side. Just ask those die-hard Cubs fans about that if you’re wondering. Unfortunately, it seems to us like it could be a while before this turnaround in stocks materializes.
Some analysts, however, are looking to the VIX – a measure of options volatility on the S&P 500 index. The VIX has become known as a measure of fear and/or uncertainty in the stock market. When the VIX is lower or moving lower, traders’ fears are low or subsiding. But when the VIX is high or rising, well, that’s another story.
Right now the VIX is at moderate levels, but the daily trend is up. The fear is of a slowly and steadily rising VIX that keeps investors uneasy. The cheerleaders are hoping for a sharp spike higher to, say, about 30 +/-, coupled with a sharp spike lower in the S&P 500 index. This would theoretically washout all the negativity and give investors a chance to start fresh and get back on the horse.
This idea is all well and good, but lately the VIX has been closely tied to crude oil prices. And if crude oil prices ease up for a while, as they’ve done this week, then uncertainty (fear) may recede for a little while until earnings seasons gets in full swing.
Bottom line: a spike in crude oil could lead to a sharp spike in the VIX. But if crude oil prices soften and the pressure comes off of stocks for a bit and then earnings season turns out to be a total mess, we probably will see a slowly and steadily rising VIX fuel ongoing fears in the marketplace.
You know the old adage: As oil goes, so goes everything else! Well, maybe it’s not an adage on second thought, but it could be soon.
Regards,
Black Swan Capital
Published on Wed, Jul 9 2008, 13:37 GMT
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A Dang Good Year for AUDCAD … So Far!
Tue, Jul 8 2008, 09:40 GMT
by Jack Crooks
If you bought the Australian dollar and simultaneously sold the Canadian dollar at the beginning of the year and you’re still positioned like that then you’re probably a pretty happy camper. That’s because year-to-date AUDCAD (Australian dollar vs. Canadian dollar) has jumped 1,000 PIPs – or 11.4%. And in the world of forex, that’s a huge move.
And having just tested its highest level in more than three years, we begin to wonder if this pair could be running out of gas. Buy-and-hold strategists will tell you the trend is your friend, so keep buying and holding. But we’ve got a different philosophy that keeps us asking: when is the trend not your friend? And when is the trend going to reverse and take you to the cleaners?
Right now may be one of those times … or it might not. But to us, the one-way climb and the underlying sentiment make this pair vulnerable to downside moves.
Much of our hesitation at these levels is because of our expectations for the US dollar. That’s because the Canadian dollar (a commodity currency) has become less tied to other commodity currencies (e.g. Australian dollar) and somewhat more correlated to the US dollar.
Why? Mostly because Canada’s economy is closely tied to the wallowing US economy. But maybe, just maybe, the dollar has found a bottom for a little while. If so, then maybe the Canadian dollar gets a little boost as well and outperforms fellow commodity currencies and the rest of the major currency pack during a period of dollar appreciation.
Taking the short side of AUDCAD is something to consider. Certainly a decent risk-reward set-up, we think.
Regards,
Black Swan Capital
Published on Tue, Jul 8 2008, 09:40 GMT
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Batten Down the Hatches – It should be a wild one!
Thu, Jul 3 2008, 13:19 GMT
by Jack Crooks
First, the European Central Bank is set to announce their latest interest rate decision very shortly. Second, US Non‐farm payrolls are reported 45 minutes after that.
Expectations:
The ECB hikes by 25 basis points and moves to a more neutral tone with monetary policy.
US Non‐farm Payrolls, in the wake of yesterday’s poor ADP numbers, has the potential to severely disappoint with worse‐than‐expected numbers.
So where does the dollar stand ahead of all this? Not very comfortably at key support:
If today’s tag‐team combination pushes the US dollar index convincingly below the upward‐sloping channel we’ve marked in the chart above … well …. let’s just say recent history hasn’t served the dollar kindly after a break like this.
We’ll learn a lot about dollar sentiment when the dust settles today.
Regards,
Black Swan Capital
Published on Thu, Jul 3 2008, 13:19 GMT
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Aussie: A Short Set−up Developing …
Tue, Jul 1 2008, 07:46 GMT
by Jack Crooks
There are a couple things going on that are impacting the price of the Australian dollar versus the US dollar. Among them: interest rates, economic developments and the global risk-taking environment.
The US Federal Reserve’s Australian counterpart, the Reserve Bank of Australia, has maintained fairly solid footing on interest rates amidst a growing backdrop of economic questions and heated inflation. The Federal Reserve has made little to no headway on this front.
This dynamic is largely why the Aussie is fresh off a multi-decade high versus the buck. But there are two things that could shake-up the Aussie relative strength: a softening economy and growing risk aversion.
Granted, Australia’s economy isn’t in imminent danger of faltering to the extent of the US economy, but a downshift may find its way into the exchange rate. Additionally, the Australian dollar could soften up if risk-taking is wiped off the table for a while. Global stock market declines signal this could happen. US stocks, in particular, are entering the territory that could be officially referred to as “long-term bear market.”
With those risks in mind, the technical picture confirms the potential for at least some short-term exchange rate weakness ...
Today’s price bar not only represents a key-day reversal (signaling a short-term trend change), but should it close below Friday’s open it would indicate a bearish engulfing pattern set-up. And considering it comes on a day that the Aussie set a fresh 25-year high, it could mean extended weakness for the Australian dollar.
Regards,
Black Swan Capital
Published on Tue, Jul 1 2008, 07:46 GMT
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Fed Today, but Keep Your Eye on July 3rd …
Thu, Jun 26 2008, 06:46 GMT
by Jack Crooks
Today is the big day. In a few hours everyone will be tuning in for a first-hand report on the latest Federal Open Market Committee rate decision. All the FOMC meetings seem increasingly important, but it’s those similar to today’s meeting, where officials could POTENTIALLY change policy direction, that really get the market riled up.
The last three FOMC decisions, albeit all decisions to cut rates, actually sent the dollar rallying in the trading sessions that followed. And even though a rate hike today is unlikely, this meeting has the potential to send the dollar rallying again.
It seems that the dollar could only suffer in the wake of today’s meeting, and the several days that follow, if the FOMC statement severely disappoints. (Keep in mind the market has built up its expectations for hawkishness.)
But when all the dust has settled, we think the difference maker is going to be the European Central Bank. The dollar will likely bounce all over the place when the FOMC decision is released today, but not until the ECB’s next rate decision (July 3rd) will the dollar be able to stick to a longer-term direction.
We grabbed the following chart from the European Central Bank website just to give you an idea what they’re dealing with ...
Economic concerns continue to be to the downside for Europe. And the ECB President, Jean-Claude Trichet, continues to reiterate that fact. But in recent comments he also reiterated the ECB’s commitment to stabilizing prices.
Let’s just say this chart, which shows prices well above their average and well above ECB comfort levels, can’t possibly leave a good feeling in Trichet’s stomach.
We’re leaning more towards a dollar-positive outcome this afternoon than dollar-negative. But even if we’re right, there’s still plenty of time for fortune’s to reverse. The big money rides on the ECB.
Regards,
Black Swan Capital
Published on Thu, Jun 26 2008, 06:46 GMT
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Slicing and Dicing Ahead of the Fed …
Tue, Jun 24 2008, 13:50 GMT
by Jack Crooks
Today begins a heavily anticipated FOMC meeting. Yeah, we know all the meetings are hyped-up quite a bit, but this one’s a little different. That’s because the head hauncho, Ben Bernanke, has changed his tone.
Coming off a series of rate cuts that’s taken the Fed Funds rate from 5.25% all the way down to 2%, Bernanke is talking like he’s already prepared to start hiking his benchmark rate right back up. His comments over the last few weeks have been aimed most directly at inflation (rather than the potential for further economic weakness). He’s even made clear remarks about the consequences of a weak U.S. dollar.
Here’s a look at how yield side of the Fed Funds futures has been behaving while Ben is out talking the talk. In a nutshell, it’s telling us the market expects the Fed Funds rate to be at about 2.5% by November ...
The area circled shows a Fed Funds rate spike down towards 1% -- meaning the market expected the Fed to soon bring the Fed Funds rate down to that level. But by the time the following FOMC meeting rolled around the Fed only brought their benchmark rate down to 2%. And since then it’s been jumping.
The spike towards 1% also corresponds to the all-time intraday low for the U.S. dollar index. Since that point we’ve seen quite a shift in dollar sentiment.
Heading towards tomorrow decision, we’re under the impression rhetoric could waver but the Fed Funds rate won’t budge; not even little. The official Fed Funds rate will remain at 2%. Still, we can’t help but notice from the chart how trader’s expectations have changed. But even if we’re accurate and a rate hike is still months away, perhaps this chart is already telling us the worst is over for the buck ... at least for a while.
Regards,
Black Swan Capital
Published on Tue, Jun 24 2008, 13:50 GMT
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EURUSD: Finding a Pattern for Profits
Mon, Jun 23 2008, 09:39 GMT
by Jack Crooks
Lots of times trading will reward you if you find patterns in historical price data and bet on it occurring again. It’s kind of like the whole “History repeats itself!” motto.
Of course, history doesn’t keep on repeating itself, especially in financial markets. But there is another motto to remember: “The trend is your friend!”
Here’s a trend for ya ...
The euro has been on a dramatic run versus the dollar. This chart only goes back to the end of 2006, but the trend has lasted longer than that.
But being at such lofty levels, the $1.60 area to be exact, you start to wonder when a trend is winding down. So far, despite some weakness lately, this one still looks to be intact.
And the recent price action is just repeating price action before it. The first sectioned-off box of weekly price data is characterized by four things:
1)A new high followed by ...
2)A sideways consolidation that ends with ...
3)A big, one-week washout leading up to …
4)A breakout to fresh new highs.
The only thing we’re missing today is number 4). What are you betting on?
Regards,
Black Swan Capital
Published on Mon, Jun 23 2008, 09:39 GMT
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Risk vs. Reward: A Decent Set−up with USDJPY?
Thu, Jun 19 2008, 13:06 GMT
by Jack Crooks
We’re wondering: How credible is the Japanese yen risk-aversion play? Stocks have been less than stellar lately yet the yen has pretty much been sliding against the buck. That’s not exactly how it worked when subprime, credit crunch and writedowns were the new buzz words on Wall Street. But today the yen is giving us a little taste of old – stocks are weaker and the yen is firming up. But then again, today’s yen strength could be mostly technical. The dollar/yen pair is butting its head on overhead resistance. After the run it’s had since the middle of March, a bit of a corrective move (at the very least) seems in order.
And while the yen’s yield differential is not improving amidst an environment focused on inflation, a break above the key USDJPY level could hit the yen hard and quick.
Still, in the short-term, we think playing the short side of USDJPY represents a decent risk-reward set-up.
Published on Thu, Jun 19 2008, 13:06 GMT
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$ Index hitting an oil slick again…
Tue, Jun 17 2008, 07:12 GMT
by Jack Crooks
The US$ index was moving up nicely. But it seems the G-8 didn’t do as much as the market wanted. And what they did say didn’t do anything for oil other than lead to a new all-time record high today.
Of course, higher oil continues to spell trouble for the dollar. Is it back down to the lower end of the channel again for the buck?
Published on Tue, Jun 17 2008, 07:12 GMT
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Teetering…Timber?
Thu, Jun 12 2008, 14:22 GMT
by Jack Crooks
The British pound is precariously perched on near a key Fibonacci retracement level…and testing key chart support between 19400-50. Background fundamentals continue to deteriorate in Britain. And Prime Minister Brown is taking flak from many quarters. A good risk/reward long-term trade…we think so!
Published on Thu, Jun 12 2008, 14:22 GMT
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Yen vs. SPU – Is the game changing? Of is it a divergence setup?
Thu, Jun 12 2008, 07:11 GMT
by Jack Crooks
Give your risk thermometer a good shaking because mine are giving me conflicting readouts. Stocks, the primary measure of risk-taking levels in the financial system, are tumbling. The Japanese yen, now a secondary measure of risk-taking levels in the financial system, is also tumbling. So where’s the conflict, you ask? Normally, these two gauges move inversely to one another – one rises as the other falls and vice versa – based on the risk environment. But right now, they’re moving in roughly the same direction – down. What’s the deal? As we see it, stocks are reacting more appropriately to the concerns still plaguing financial institutions, corporate earnings and the U.S. economy. The Japanese yen, which would normally prosper as aversion to these concerns rises, isn’t so much playing along.
For about a month and a half, stocks and yen have turned over together. For the two years prior these two moved very much the opposite of one another. Might it be time the Japanese yen plays catch up? Sure. But it’s going to need to shake loose of its dollar connection. Right now the dollar connection is the primary driver behind the yen, up and down. And if we HAPPEN to be at a dollar-bottom that lasts a while, the yen may have a tough time wiggling free.
Regards,
Black Swan Capital
Published on Thu, Jun 12 2008, 07:11 GMT
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Go Away in May, Come Back and Sell Today …
Mon, Jun 2 2008, 15:28 GMT
by Jack Crooks
We’re sure you’ve heard this before: “Sell in May and go away!” It’s the media’s cute way of explaining the relatively low interest and falling prices during the summertime. Mostly because they believe anybody who’s anybody is off sunning themselves on the beach or out at a ballgame somewhere.
Well, we’ve got a new little ditty for you: “Go Away in May, Come Back and Sell Today!”
More specifically, we’re talking about the U.S. Dollar versus the Japanese yen – USDJPY. Leading up to May currency traders were supporting this pair – buying dollars and selling yen. And then all through May it was pretty much a snooze-fest. The price of USDJPY to start the month of June is roughly the same as at the start of May.
But now may be the time to come back to this pair and do some selling. Besides bumping its head at key overhead resistance, we’ve noticed a divergence that may be worth paying some attention to …
The RSI, or Relative Strength Index (the blue line at the bottom of the previous chart), is a momentum indicator that measures the size of a security’s gains versus its losses. If the indicator is heading up then the buying of the pair is relatively strong; and vice versa.
In this case, despite the fact that RSI is heading up, it topped-out back at the beginning of May even though USDJPY just touched new high on Friday (circled in the above chart). This divergence catches our eye. It’d be wise to remain open to a trend change.
Regards,
Black Swan Capital
Published on Mon, Jun 2 2008, 15:28 GMT
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The Euro is No Head Case …
Wed, May 28 2008, 07:48 GMT
by Jack Crooks
Pinpointing support and resistance levels in price charts usually isn’t too difficult. It simply involves finding previous points where prices bottomed out or topped out. But the task becomes a bit more difficult when there are no historical prices to target.
Take the current skyrocketing price of crude oil. Almost anyone who follows the markets or drives to work has an idea that crude oil (and all energy prices for that matter) are at levels never seen before. So if you were to use price data alone to find a point where crude oil might top out, it’d be impossible to find a previous high mark to use as a target.
Focusing on the currency markets, as we do, there have been many instances over the last year of the U.S. dollar bear market where currencies paired against the buck have soared to record levels. The euro, having become a virtual dollar alternative, is the obvious example.
The euro has easily surpassed its all-time highs against the greenback since the multi-nation currency’s inception. While the euro has only been around since the early 1990s many analysts turned to the historical prices of the Deutschemark as a euro proxy. But even still, the dollar has sunk to a level against the premier European currency that has never been seen before.
Throughout the euro’s climb, as it navigates through uncharted territory, key psychological levels have become points of resistance. Only these points haven’t slowed the euro all that much. A chart shows a clearer picture:
We could go back through pages and pages of articles to read about expectations for the