Navigating Global Capital Markets

Trading FX is right now is like navigating the Amazon River, 'Grey Swans from Extremistan' lurk around every land mass..... As the often quoted John Maynard Keynes once advised, "The market can stay irrational longer than you can stay solvent."

Credit Default Swaps on Irish, Portuguese, Greek, and Spanish Debt continue to widen. Anglo Irish debt was downgraded by Moody's on Monday and now needs another lifeline of 5B Euros.  Yet, the Euro continues to strengthen.  Mr. Bernanke and Mr. Obama must be smoking a fine Cuban cigar at the moment because they are the only 2 policy makers of recent memory to weaken their currency without  significant lip service.  The Japanese MOF should take the lesson...start a trade war with China and watch your currency tank...There is much fear in holding US Dollars at the moment.  Mr. Guido Mantega of Brazil is right, we do have a full fledged currency war of devaluation and the U.S. is winning.

Also of note, Mr. Yu Yongding an advisor to The People's Bank of China spoke in Singapore  of a full fledged dollar crisis, to quote the man, "Such a huge amount of debt is terrible and the situation will be worsening day by day.  I think we are one step nearer to a US Dollar crisis."  Cheers to you too mate.

This morning AUD is off its highs of .9780 levels seen in Tokyo trading overnight and has pulled back toward .9700 levels.The AUD continues to test new highs as it inches towards parrity with the USD and makes new highs against the JPY.  Though, the latter has internal economic issues of its own which continue to put downward pressure on any of the Yen's major pairs.  The appreciation in large is due to sustained demand for Australian base/industrial metals from China and ASEAN countries in general.  Also, Australia maintains the highest nominal interest rates, currently at 4.5%, of any G20 country and thus is perfect for a reverse carry trade involving the USD.  Ironic how times have changed.  I can remember the days when U.S. assets became the beneficiary of an Asia Pacific carry trade.  And then we had a realestate market collapse in correlation with all other asset classes for that matter....Low rates, continued AUD strength!

Meanwhile, the only commodities that want to rally are precious metals...Agri commodities crashed like the titantic yesterday and continue to hit icebergs today.   This is possibly due to the recent sanctions China placed on imported U.S. Chickens.  Chickens love grains as a main source of their diets.  Also, the recent run-up in Agri prices does justify a correction if prices are to move higher in the 4th Quarter.  Natural Gas is trading lower and Oil cannot hold on to any incremental gains.  Though API data from last night was somewhat bullish, and DOE data should help prices firm a bit, but their is no support in sight. Nat Gas is suffering from a lack of supply scarcity.  In fact new inventories appear every day and remain above our famous 5 year average range.  Yet, this makes little sense considering storage capacity and new LNG technologies make storage and shipment of the energy easier and cheaper than ever. I will note that Sugar, Cocoa, and Coffee performed well in yesterdays session largely attributed to you guessed it, dollar weakness.

Bill Gross published a grim outlook in his October outlook letter.  He highlighted Stan Drunkenmiller's retirement as a Harbinger of things to come in the fund management industry.  He argues that the days of double digit returns are over due to a lack of asset inflation, increased regulation, and deregulation.  Indeed these things are all true.  One must take Mr. Gross' comments with a grain of salt as he manages the world's largest bond fund in PIMCO.  His comments do coincide with a 10% workforce reduction at DE Shaw, one the world's largest Hedge Funds with approximately $21 B of assets under management.  HF's are struggling to produce alpha these days.  According to HFN Hedge Fund Aggregate Index funds are up only 0.14% YTD through June 2010.  The FT reports Hedge funds are up 1.45% YTD.  Times are grim when the best managers of money can't make a buck.

It is understandable that there is an underlying current of fear surrounding the developed markets of the world.  Emerging Markets were thrust into the spotlight during the most morbid of days during the credit crisis and have been in the spotlight since.  OECD economies continued to point to Emerging Market Demand and growth as the way of the future and how this shift is a 'structural' one that will change the way the global markets do business.  All I can say is, not so fast jack.  Without demand for emerging market exports from developed economies there will be no new growth.  Unless of course the ubiquitous Emerging Markets can create a sustainably contempory domestic demand system for domestically produced goods.  I doubt Malaysia needs all those those textiles and garments they continue to churn out.

Undoubtedly, big corporates still reside in developed markets.  Inventories have refilled after bone dry levels spawned a rampant increase in production over the last 2 quarters.  Thus, unless OECD demand returns to the global marketplace, emerging markets will not be able to maintain their 'robust' growth systems and will inevitably slow down.  Global 'Austerity' is in order.  We should all trade accordingly.

Patrick M. Ambrus
Contact: analyzecapital@gmail.com

Sources: Financial Times, The Gartman Letter, Bloomberg.com, HFN.com, The Black Swan, PIMCO.com

Turkey a Safer Investment than Greece?- 2/19/10

Paul Murphy posted this ratings update from Standard & Poor's on FT Alphaville this morning. I share his sentiments. How can a country like Turkey that is not part of The EU or EMU have a higher investment grade rating than a country within EMU parameters. A blow to the Euro, damn right. I continue to support long-term dollar strength throughout 2010.


Patrick M. Ambrus
Managing Partner
Analyze Capital LLC
ambrus.anlzgroup@gmail.com

Where's Oil Headed? 10.23.09

Crude oil reached a new high of $82/barrel earlier today. I expect the rally today was related to the Chinese growth story as well as continuous dollar weakness. However, a weak dollar is a reality the U.S. government will have to live with for the time being. China reported GDP growth of 8.9% for the 3rd quarter 2009. This may be a farce but numbers can't be fudged more than +/- 200-250 basis points. Hence, the economy continues to grow rapidly, and thus commodity consumption will continue if not grow. Additionally, stocks of Crude oil failed to meet analyst expectations rising only 1.3M barrels last week. My short-term outlook is a price range of $75-85 barrel if the RSI can sustain its momentum. Currently the RSI is overbought at 74.16 with the previous high at 77.81. Also, CL1 pierced the upper Bollinger band at 20 days, 2 standard deviations. I expect a bounce off to about $78 or so before we see more upside movement. Long-term I am extremely bullish. Prices of crude will rocket to $100 by late January early/February. Next week I will look to enter into long position into the USO when prices retreat.

-Pat

Patrick M. Ambrus
Analyze Capital LLC
ambrus.anlzgroup@gmail.com

SPX Daily Market Comment - 9.24.09

If the SPX is indeed in a bullish trend, the bulls should be looking for/fighting at 1030 levels. Though it seems that momentum will be able to to push prices in to the 1020's. This would be at around a 5% correction. Perhaps these would be levels for appropriate for re-entry if people believe that the SPX has legs up to 1100.

Much of the future price movements are going to heavily depend on expectations and earnings. This weak dollar/long commodity play maybe a bit overdone at these levels. For the bigger bears key support levels will be found at around 1000+ and 950+ if 1000+ is broken.

I will be assessing charts at each of the 3 main key levels for bulls and bears to form a better thesis.

-Alex

PS: congrats on your 1070 call Pat.

"Chinese Credit Growth" - July 2, 2009

"Chinese equities may well be being fueled by excessive domestic credit growth" -Phil Suttle

Here is an interesting quote I took from a market commentary by Phil Suttle head of Global Marco Analysis at the IIF (The International Institute of Finance).

I question the validity for such a line of thought. Recently I have been creating an emerging bank database. Yesterday I covered the top 4-5 largest banks in China ( ICBC, China Construction Bank, China Agricultural Bank, and Bank of China; some of the largest banks in the world as well)

Most of these banks only started publicly being traded Mid 2008, but from what I remember, I believe most of their assets were deposits and that the loan to deposit ratio is relatively small. With much more deposits to loans, "explosive" credit lending may be more sustainable.

Having a discussion with Suttle this morning, he pointed out to me that much of these increases in money supply are from monetary injections, though on a whole deposit still make up a significant amount. High credit growth in China according to a Monetary Authority statement may be "worrisome."

Though one can counter and point out that high credit growth is quite normal in emerging markets. I could attest to this as I experienced such an environment when working in HSBC Vietnam during the summer 2008. There was massive amounts of high inflation (in the high teens and 20's), near currency crises issues (exporter hoarding dollars, lack of dollar liquidity), extreme interest rates(in the high teens), along with explosive credit growth. I would also like to note that there were barriers on foreign banking institutions at the time (e.g. foreign banks were still waiting to be incorporated locally; one can imagine the hypothetical credit growth with foreign banks allowed to incorporate locally).

My point is that high credit growth is a natural phenomenon seen in industrializing nations when there is high exuberance in investment and investment return sentiment. What is truly important is if the Monetary Authorities are aware of the exponential credit growth and reign in expectations and at the same time implement corrective monetary controls to make credit growth sustainable (I was actually quite pleasantly surprised with the Vietnamese Authority's ability to handle their economic situation last summer).

With these points in mind, as I mentioned before, loan to deposit ratios may make the Chinese credit growth more sustainable, and it seems that the Chinese Monetary Authorities are aware of the growing credit situation. Though, these two latter points tend to be contradicting with China's trade policy. Considering 40% of China's GDP is exports, this recession has severely reduced GDP growth as US consumption has dropped significantly (a drop in Chinese exports, an increase in US savings rates, and increase in US domestic retail recently reported). Chinese authorities are stubbornly and quite possibly dangerously suppressing their currency further in order to strain the economy for 8% GDP growth.

Currently, I would say that credit growth is sustainable, though if Chinese Authorities try to keep pushing for higher GDP growth in this recessionary environment, there is a chance they may allow credit growth to get out of control (e.g. more lending for corporates to grow business vs organic growth).

In consideration of China as a whole, outside the highly modernized cities, most of China requires huge infrastructure developments. That the amount of room for pure organic/commercial/extensive growth has HUGE potentials for commercial banking, once the right infrastructure is in place. For the Authorities to allow loan led economic growth would be ridiculous given the amount of room for extensive growth. Excessive credit growth in this view would only be sensible if credit growth was allowed only for infrastructure developments, which in turn would allow for FDI and Business loans to be dispersed into the economy.

Taking a more obtuse view of things, this current world recession is a positive occurrence for emerging markets. Long term prospects of emerging markets have not been blown away by this recession. Currently, developing nations are dealing with their own problems, which makes investing abroad secondary at the moment. This is great for emerging markets, since over the last few years emerging market growth has been explosive. When the United States fell, soon followed the rest of the world. As so, this gives investment exuberance a chance cool down and restart at a more reasonable pace (double digit growth in GDP is not sustainable for prolonged periods as history has shown us; e.g. look at the so called "Japanese miracle," Singapore, Thailand, and more recently Vietnam etc...). This recession allows for less chance of investor expectations being failed which could have lead to capital flights out of the country, severely damaging long term growth (something reminiscent of the Asian currency crisis).

One can view this recession as a period for emerging markets to cool off and take a break before resuming on its path of industrialization. Another implication from this recession is that, since emerging markets are only on a "break", it maybe the emerging markets that lead this way out of the recession followed by their more developed counter parts.

Furthermore, if the Chinese Authorities or other export oriented nations are smart they may try to diversify away from exporting to the US (this move has been seen as China trying to politically push for a new reserve currency: check this article out found by my colleague Pat China and Argentina in currency swap; I will say one thing about a new reserve currency, this maybe impossible for China to get off the dollar even if there was a new reserve currency considering the amount of US debt they hold; further more I'm sure the US would use their political muscle to prevent these scenarios from happening). Ideally, if China can diversify their export partners, this recession may not take such a strong toll on their growth.

An even better idea would be for China to take this "cooling off" period and focus on infrastructure development to foster domestic and intensive growth vs. export oriented growth (look where exported growth led Japan...).

With this being said, at least as of now the credit markets in China may not be as bubbly analyst are speculating. Though the commodity markets may be, but that is a different story...


I actually do not know much about Chinese economic development so hopefully I can take the course at the LSE next year about the "LONG economic history of China." I will certainly be looking forward to that.


-Alex