Tuesday, January 29, 2008

Entry for Jan 29 2008

With perceived rate cuts tomorrow, much volatility is occuring in the FOREX markets. With tomorrow rate cuts the yen will appreciate more vs the dollar. Since the Japanese economy is perceived to be slowing down many investors flooded and possibly will continue to bid up other currencies such as the Aussie, the Kiwi, and Euro. Also, it is very possible that due to a perceived bottoming in the US equity markets that a better expected 4th quarter will cause investors to flood back to the US as it would be a great buying opportunity if indeed a bottoming occurred. This would be great for US equity or currency investors who bullish on the dollar.

Indication of an improved US economic conditions can be seen in the US durable good orders. As this also ties in to why the dollar is trading higher today. With a better possible outlook for the us economy and with mixed signals and possible slow growth in Japan the dollar is trading around 107.09 right now.

With such a high percentage or rate cuts priced in, the yen should appreciate more tomorrow. I do not believe the Feds will cut another 50 basis points. If they did,they would be losing face, their reputations are at stake. Who is leading who? Are the Feds doing their job maintaining stable prices and full employment, or are they there to cater to the financial market needs every time they are in trouble. Sooner or later the Feds are gonna realize the markets are crying wolf, as better economic reports come in.

Either way, I currently have an open short position on the USD/JPY pair expecting any cut will cause the dollar to weaken against major currency pairs in general. Although, I have a limit order just above support around 105.3, as i expect support to hold since the US economy is not as horrible off as perceived as indicated by the US durable good orders today.

One possible trade I am considering after this current trade is a long position on the USD/JPY. If 4th quarter results do surprise, I see a good buying opportunity for the dollar. Obviously I will have to get in before, so i will wait and watch news and politics for the next few days...

With this in mind a rate cut is will be expected, I feel that a 25 BP cut is what they should do. But, with recent actions of monetary policy it wouldn't be surprising if another 50 BP cut is decided upon. The Fed's hope of spurring spending is something that will happen, but with a lagged effect. If the feds keep cutting this will possibly lead into a hyper inflation environment with a bubblish bull market phase. Without letting the effects of the 3/4 of a point cut set in, along without letting the financial markets work out the problems, the feds would be crazy to cut more than 50 BP. Obvious speculators in equities would love to see another massive cut, but this is something that is not fundamentally warranted, but desired partly out of greed.

In reference to a time frame:
I will be more bullish for the end of the first quarter through the second quarter as of now. Obviously, I will update/maintain my position as more economic data and financial news come in. Although I am bullish, it is somewhat artificial since it is going to take along time before financial, housing, sub prime, or credit problems improve, as i must ultimately admit they will affect performance of the economy, but perhaps as not as bad as we all believe since people tend to get in herd mentality and get sucked into the bearish news the media focuses on and live confirmation bias.

So to make clear, I believe that US equities will perform well towards the end of the first quarter into the second, with low interest rates, and a better perceived economy, with possible lagged effects being felt from lower rate cuts (I would discount any tax rebate plans as they will have a limited multiplier effect, since most people would use the money to pay down debt or save in this bearish environment, and plus it would only be a quick fix, for a longer term solution investment must be stimulated to create jobs, labor market being key for consumption).

Monday, January 28, 2008

Entry for 1/28/06

It seems as the rest of the world got cold feet the Fed got scared. At least everyone wasn't afraid in the FOMC, everyone but one person. In part, whether explicitly said or not, in order to aide the financial markets the Fed cut radically 3/4 of a basis point. And to no avail the markets continue to slide downward. Although today there seems to be a slight pause in the downward fall. It seems the Fed will never be able to satiate the wall street cats. Give them 3/4 quarters of a point cut, and they already are pricing in another half basis point cut. I wouldn't be surprised if the Feds toss in another 25 points to appease the masses. Though, do not be surprised if the Feds hold. The reason why the Feds might hold is due the fact that they would run of ammo to fight real problems. If you keep cutting rates, when a potentially bigger problem arises, how will you fix it? Bring the Feds Fund rate all the way to zero? Even though wall street would like to see a negative fed funds rate, that will never happen. I am just waiting for inflation to rear its ugly head, catching everyone by surprise, which presents a great shorting opportunity when those cpi and ppi numbers come around. Despite the continuing contracting housing market, bearish sentiment around the world from fears of slowed growth, even a technician can tell you that the fundamentals aren't there to support any upward movements. One of the main reasons why in the past I was so bullish also was due to the labor market. With weaker numbers coming in, I wouldn't expect any significant improvement as the rest of the world, just not the United States, is being affected by slowed growth in the US. Furthermore oil is heading up today despite all the bearish news! This does not bode to well for up coming inflation numbers as I expect the headline inflation to be a major component that people have been tending to ignore. In the end the world still has to eat food and drive cars...

Thursday, January 17, 2008

Return from 1 month in Vietnam

After a long winter break, and missing much of the action in the States, I have now returned...

As schools is back into full swing, when I get a chance I will write a full review on conditions in Vietnam and where it may be heading...

As for domestic news, as my micro theory teacher professes, "We are on the cusps of recession,"

I would like to point out the key word "cusps," For sometime now we have been slowly edging close and closer to "recession." Although I have been a big proponent for the resilience of the US economy and the vigilance of the Feds, I have become more bearish upon my return to the States. The problem is stemming to of a more global issue that will weigh everyone down as the affects are seen across the board (Asian European emerging markets etc...) The vigilance of the fed seems to have deteriorated into old men worrying about the reputations more than the actual economy, although not to minimize the difficulty of their decsions they must make. It would seem superficial political factors are affecting monetary policy, if not affecting giving the Fed's some excuse to act in a more nonchalant manor. But, if anything, this would be the most critical time for the Feds in their decisions that may set the tone for the rest of the year. Any economic plan offered by some politician whether it be rebates or tax cuts is ridiculous as by the time they are instated to presidency this perceived recession to come will have passed already. Most interestingly the bond markets experienced a substantial rally in my absence, with the ten year being around 4.12 when i left to it currently being around 3.71. Perhaps again we are seeing exuberance in the bond markets as many people are pricing in a 50 basis point cut. I would like to remind everyone that yes it maybe possible that inflation maybe decelerating as indicated by the cpi and ppi, but wholly not benign. As shown with the first 50 basis point, solved no problems, with the feds constantly pumping liquidity into the market, I feel another 25 basis point cut will suffice, as the financial and economic problems the US markets and economies are facing are long term. 25 basis point cut allows enough liquidity in the short term for problems to continue to sort themselves out while keeping inflation in check. 50 basis point cut may lead to superficial bullishness in the markets which will lead to unwanted volatility, in prices. Stability being one of the key factors the Fed's must maintain. Although in this volatile environment, predicting what the Fed will do is harder due to political external influences with sentiment being the Fed is now "focused on growth." I expect a 25 basis point cut, but will not be surprised if the Feds opt for a 50 basis point cut, as a show of "being there" for the markets (since markets may cause further problems for the economy).

On a technical stand point, support lines are being broken through on many equity indexes, with many indicators point towards a bearish outlook into the first quarter.
I expected bearish performance to continue all the way through the first quarter. Support at 1374 as been priced and closed under at 1373, which indicates the next level of long term support at 1222-1236. Currently we are around the same levels of the second quarter of last year. On a technical standpoint, shorting S&P500 futures contract would be beneficial as technicals point to further downward movement.

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