Asian Shift: Sept 29 2010

Markets have been quiet half past Asian equity open. FX are being quiet and the same in energy and gold... Its kinda like the "calm" before the STORM.

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

Quick Skelton FX update: Sept 29, 2010

I wrote from last week that I expected the dollar weakness to carry into this week. The rate of change should not be surprising but always feels like its faster than expected. Though currently  We are seeing decreased volume in early trading. We are getting price squeezes on the 60 min charts with the correlated majors (CAD, CHF, EUR, GBP). The daily charts on the EUR and GBP and CHF are all screaming overbought vs. the dollar. I wonder if this price pop will lead to further weakness or we will finally get the results we are seeking.

Weekly Charts:

Arguably the CAD has been range bound with a narrowing range since mid may to the end of sept.

The weekly on the GBP and EUR show room for the upside as well

I feel the CHF weekly is more ripe for shorting whereas the GBP and EUR have more room to move further up. This would be a good position to leverage given the weekly technicals.

The JPY is showing that mid 82 as a very feasible support level but beyond those levels scaling in longs would be optimal into the Q4.

TAKE AWAY:

I think our dollar strength call may have been a bit premature given the nature of the longer term charts. Considering this is more of a sentiment/fundamental driven market at the moment, using the longer charts may have been more fruitful. I think it would be optimal to increase the hedges going into next week.


-Alexander T. Lê

Skeleton Shift into US open update: Sept 28, 2010

FX and Equities:

5:00am Big jump on the major pairs vs the dollar, this temporary weakness caused European equities to trade higher bar the cac40.

The EUR did jump up 80 pips on the hourly chart but still trading below 1.35 resistance.

The USD/CHF still range bound from .982 to .986

the USD/CAD followed the EUR/USD after its big rally and sold off slightly from 1.036 to 1.03 currently back on the uptick of 1.03161

the USD/JPY still range bound from 84.1 an 84.3 currently trading on its lower BB bands at 84.09.

The pound made a higher high on its hourly chart (unlike the EUR which failed at resistance) but is currently on the down tick down to 1.5864 from 1.589



TAKE AWAY:

The dollar strength we saw at the end of Asian Trading and the start of EURO equity opens is now mixed. On the whole the dollar strength picture is still in tact and as the US opens we may see continued strength. This down tick is a good opportunity to scale in if you are dollar bull in the coming days/weeks.

The brief dollar weakness is showing up in equity strength, though if I am correct continued dollar strength will lead to a down day for US equities.


-Alexander T Lê

Skeleton Shift Update: Sept 28, 2010

3:00 a.m.

Equities:

It seems that after getting a belly full of lunch either the Asian traders got sick and bearish or European bearish news started to filter in. Asian equities started to tank once the wires were hot around 5am UK time. European equities opened with bearish sentiment from downgrades of Irish debt. Banking banking banking again the media wants to keep on highlighting. All European indicies are currently down over 1% with Asian Equities slightly down.

Fx:

Instantly with 12am US EST the EUR/USd sold off hard, with the pound right behind. In fact all major pairs correlated to this dollar strength mainly: AUD, CAD, EUR, and GBP. The only pairs lagging this move are the JPY and CHF (core positions). Both the JPY and CHF have been range bound with since Sunday’s 5pm US EST open. Times like this are golden opportunities to scale in.

The strongest leader in the dollar reversal has been the CAD its bottom with its bottom forming with yestedays US equity open. As my partner Pat mentioned to me, for sure with the UK open we are seeing markets move in our favor. With the US open we will see continued momentum of dollar strength and equity weakness.

M&A:

3Q busiest for M&A according to Bloomberg. Corporate Cash stands at 3T dollars with the tech sector with 200B of the chucnk between, China Mobile, CSCO, MSFT, and ORCL.

Media likes to spin this M&A activity as a view of confidence for future investment. I don’t completely disagree, but I get the feeling that these cash cows have more money than they know what to do with. Its much easier to grow through acquisition than innovate and generate organic growth; especially when your 10x the size of an elephant. Helping these big cash cows are low borrowing cost and higher productivity from cut backs. Of the industries/sectors to help float the SPX with strong cash and earnings: energy, chemicals, telecom, materials, and pharma. These industries will see strong activity in M&A into 2011.

News:

HSBC’s management shuffle shall prove to be interesting as another Ibanker takes the reigns of the largest bank in Europe. No longer are incomes generating positions favored alone, income generators with risk background seems to be the right mix. Many challenges lay ahead and it will be interesting to see where Gulliver takes HSBC. Bloomberg cites that 56% of HSBC’s revenues came from western nations with only 36% coming from Asia last year. Using the Asia will be key for HSBC’s growth engine, and may be its saving grace. Though, getting ahead of its main competitor in Asia (Standard Charter Plc), will very challenging. Given Gulliver’s treasury/risk/IB background, is he really prepared to take on Asia? Considering that capital markets are not fully developed in Asia, focusing on Corporate/Global Banking will be key to getting ahead in untapped markets. Surely there are growing IB opportunities in HK, Japan, Australia, and maybe Singapore, but the rest of Asia is still far behind.

Gulliver states, “You should not expect a significant change,” … “It’s important to take away from this that the processes that Mike has started and Stephen has started I will continue.”

Well, Mr. Gulliver, as they say “easier said than done.” Let’s see where this story goes…


Michelin & Cie plans to raise 1.2 billion Euros. According to Bloomberg, the capita will be used for expansion into emerging markets. With continued industrialization in Asia, start watching those rubber prices. Expect more money to flow to ANRPCs (Association of Natural Rubber Producing Countries – Cambodia, China, India, Indonesia, Malaysia, Papua New Guinea, Philippines, Singapore, Sri Lanka, Thailand and Vietnam). Leading indicators; investment in automakers abroad, chemical industrial development etc…

Takefuji Corp Japan’s third largest lender is filing for bankruptcy protection today. To me this just speaks of institutional sclerosis and much financial reform needed in Japan. I guess the recent financial crises was not enough for an Olsonian Shock as Japan for the most part was insulated. Though, it seems now that American banks are not the only ones who need to clean up their loan portfolios.

Ningbo Port Co., dropped 3.2 since its IPO on concerns of slowed export growth. The figure given is that export growth will slow by 15% on weak consumer demand from the US and Europe into next year. I will have to say that any slowed consumption growth will be lagged in nature and probably be hangover from 2010. I question a continued weak consumer as I expect job’s number to start firming up into 2011.

PSA Peugeot Citroen breaks into the electric car market. Is green really the next asset boom? This also comes with news from Germany employing penalty taxes on nuclear energy and ramping up investment on renewable energy.

MGM Resorts China Ltd, files for Hong Kong Stock Exchange Listing.


- Alexander T Lê



Resources:
HSBC
http://www.bloomberg.com/news/2010-09-27/hsbc-turns-to-former-boxer-risk-manager-gulliver-amid-succession-struggle.html

Michelin Capital Raising:
http://www.bloomberg.com/news/2010-09-28/michelin-starts-1-6-billion-stock-sale-to-investors-at-45-euros-per-share.html

Takefuji Bankruptcies:
http://www.bloomberg.com/news/2010-09-27/takefuji-said-to-file-for-bankruptcy-today-amid-rising-interest-refunds.html

Ningbo slow trade:
http://www.bloomberg.com/news/2010-09-28/ningbo-port-falls-on-shanghai-debut-after-1-1-billion-initial-share-sale.html

Peugeot entering green car space:
http://www.bloomberg.com/news/2010-09-27/peugeot-s-varin-pitches-diesel-electric-car-in-race-to-catch-toyota-prius.html

Nuclear Tax in Germany:
http://www.triplepundit.com/2010/09/merkel’s-german-energy-plan-mixes-old-and-new-with-amped-renewable-goals/

Headwinds of Change

Unpredictable Market Forces at Work



After a positive week for U.S. equities, market action lacks directional impetus. What will drive equity markets higher? It is clear to us window dressing season is in full effect. Many fund managers and Institutional Investors continue to pile into crowded, growth-oriented, and alpha-seeking equity trades. In addition, many prominent investment bankers sitting in the position of 'Head of Global Equities', at their respective shops, continue to preach 1300 on the SPX by year end. Is this feasible? Sure, but it is not likely.

Much of the current rally in the SPX from August lows of 1015 has been due to a weaker USD across the board. One can argue the impact of illustrious economic data releases on price swings until blue in the face. Yet, since the fear of debt contagion in the Euro-zone abated panic and worry shifted back on the country with the world's largest Gross Domestic Product. Since then, the EUR, CHF, JPY, and AUD have all made substantial advances against the 'Greendback'.


Down Under



Australia continues to benefit from their trade relationships with Asia in that exports of commodities have led to sustainable growth down under. The economy picked up last month creating 29,000 new jobs predominantly in construction and industrial sectors. As long as Chinese demand for iron ore, copper, and aluminum remains consistent, thE AUD Will continue to appreciate against all major pairs.


Efficiency



The 'Swissy' benefits predominantly from the risk-on/risk-off trade. The linguistically diverse country maintains a current account surplus of 8.9% of GDP, inflation hovers around 1% while unemployment is below a comfortable 4%, and 2011 GDP growth forecasts 2% growth. If one wants safety what is not to like? In addition FX traders seem poised to test the patience of the SNB again. Recall when the SNB stepped in with 'unilateral intervention' and sold Swiss Francs to keep the rate above 1.30 EUR/CHF. Will they sell Francs and buy Dollars? No, the Japanese already failed in this endeavor.


Tradition



The Japanese economy, like the U.S., is struggling to maintain growth. Deflation wanes in the balance and export demand is tailing off in large due to a strong currency and shrinking profit margins at the likes of Sony, Toyota, Bridgestone, and Kobe Steel. With a dire economic situation the MOF stubbornly talks up the JPY and the need for intervention. Though, by 'unilaterally intervening' in the FX markets already traders know the MOF has a gun. The question is how many bullets are in the gun, and does the Ministry possess the courage required to fire a full clip? Time will tell on the latter. I doubt we have seen the last of 'unilateral intervention'. Speculators who place bets in JPY strength will not learn until the MOF reverts back to 2004 tactics and dilutes the market with over $1 Trillion of Yen. Whether or not Kan's $55 B stimulus package helps weaken the JPY remains to be seen.

Lastly, I would like to touch on the political issues underpinning the currency. Since Ichiro Ozowa was ousted in his most recent attempt to gain power, Naoto Kan appeased the former's supporters with currency intervention. I trust the exporters mentioned above took note of this and will put pressure on Kan's administration to intervene again. Many have made it resolutely clear; 'we want USD/JPY rate at 95'. If Kan wants to keep his job longer than his predecessors he will intervene again and again until the Yen stops strengthening.


The Little King of Everything



Alas we have but one more pair to discuss, you guessed it, EUR/USD. As mentioned by Dennis Gartman this morning, 'This was the level from which the EUR plunged earlier this year... it marks almost perfectly the 50% retraetment of the EUR's collapse from the highs of 1.5200 last December to the lows of 1.1900 this spring.' 1.3500 will serve as a hard line of resistance over the next trading session. This morning around 10:00 the pair jumped above this level on a large candle to the upside. However, the pair rocketed back down to the 1.3450 levels within the next hour.

Also, ECB buying of sovereign debt is slowing. Last week the ECB bought only 134 M EUR of bonds in comparison to 323 M EUR the week prior. Maybe the ECB feels confident the liquidity in the sovereign debt market is here to stay, only until it dries up again. Another important point to note; many Germans are becoming unhappy with the 'Christian-liberal Coalition', noted in the latest edition of the economist. Any political instability surrounding the Euro-zone's growth engine may cause uncertainty in the single currency. However, I should note that this is pure speculation on my part.

Undoubtedly, the EUR/USD pair is driven by none other than the U.S. FED action. Various traders, analysts, and media alike expect a second round of 'Quantitative Easing' in which the FED once again opens up its balance sheet to buy U.S. Government Debt. Rumors suggest debt purchases of $1-2 Trillion of longer-term U.S. Treasuries. This is nonsense. If the FED wanted to create artificial inflation they already would have done as much. Especially considering the mid-term elections put a choke-hold on any further monetary policy action. I suspect, as a rumor from the WSJ this afternoon put it, 'Rather than announcing massive bond purchases with a finite end, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds.' Cheers. This ought to give the Bond market rally a bit more time run and allow equities to cool after a monster September.


Impetus for Change

Now let us examine a few possible harbinger's for a trend reversal in Dollar weakness. On Friday October first Global PMI data will release staring with CHina and ending with U.S. ISM. Last month trader's took China's moderate August reading of 51.7, up .5% from the month prior, as a reason to buy equities. The SPX rallied nearly 3% and closed up more than 30 points on the session. What would have happened if Chinese PMI came in around say 48 or 47? Equities would be in for a sharp and painful sell-off methinks. Hence, the fear of a global slowdown in consumption/demand would shift to the far east and away from the U.S. Perhaps poor EU PMI might just do the trick if the Chinese index posts 'robust' gains. Either way, I expect this data release to be a harbinger of asset allocation in the coming month.


Trade

We are gearing up for a switch in sentiment with a 'Strong Dollar Story' leading the charge. Specifically we like the the dollar against the CHF, CAD, and JPY. In addition, we see energy as the place to be in the coming months as seasonality changes. Be cautious though, this type of trading environment is dangerous.


Patrick M. Ambrus
Contact: analyzecapital@gmail.com


Sources: The Economist, The Gartman Letter, Financial Times, FT Alphaville, WSJ.com, bloomberg.com

Skeleton Shift Update/Recap: Sept 27, 2010

FX:

Start of the shift we see continued slight dollar weakness across major pairs (excluding the CHF). Currently I expect minimal weakness to continue into todays US equities trading day. Daily charts on the GBP and EUR starting to look topsy in the coming days, this may indicate the start of the dollar strength we've been expecting. Already the CHF is taking the lead from friday's close with continued dollar strength opposite to all the majors. Currently, the latest hour (4:00am EST) we are seeing some firming of the dollar, our hope is that this leads to range bound trading; currently all pairs are in range bound range via the ADX expect the JPY.

Risks to the GBP: current political uncertainty

Risks to the EUR uncertainty on the banking sector

Risk to the dollar: sentiment revolving around floating the yuan

The US may not be the only ones who will be contemplating more stimulus with recent uncertainty in Europe and the Japanese government considering stimulus through taxes (vs. through JGB).

Equities:

Asia closed higher up for the Asia Pacific region (ASP). The Asia momentum carried through to European trading and European equities are trading up currently. My thoughts are that US equities have plenty upside to go. Resistance is below 1200 and strong closes above may fuel the SPX to 1300. If that is the case dollar weakness will remain as long as US equities continue to rally. However, I think prices will top out below 1200 and we will get a dollar correction to the upside (currency are currently leading this trend). Amazingly the S&P managed 9% in Sept despite that historically Sept is a poor month for trading.


M&A:

Unilever and Alberto Culver, Potash and Sinochem, Wall Mart and Massmart, Santander and M&T Bank Corps, China's Bright Foods and United Biscuits.

The Netherland/UK, US, Canada, China, South Africa, Spain. It seems that the M&A, P/E, LBO recovery will be led by big multi nationals. With western corporations hurting from scaling back from the financial crises, foreign corporations are lush with cash from strong emerging market growth. Once the western countries economies show a few straight quarters of strong econ data with improved credit markets with strong consumer demand, this may help spark the M&A recovery.


Debt Markets:

Dubai reached agreements on debt restructuring. Its up coming debt offering will seek to raise $1B this week. S.M.B.R.A.M (Sheikh Mohammed Bin Rashid Al Maktoum), may say Dubai is back on track, but I would like to see how these projects get dispersed in the context of a slowly recoviering world economy. High energy prices may soften the blog but roughly 95% of Dubai's GDP is non-oil based and relies heavily on trade, tourism manufacturing and transport.

Housing prices will surely have negative effects on investor sentiment for the region. The 41,000 new houses to be added to the current housing supply will only keep prices lower.

Dubai as a financial hub imho is very feasiable with a strong world economic recovery, as long as Dubai leverages its advantage in Islamic banking and finances.

Ireland's 5 year plan: a five year plan, a historical facet of economic policy around the world. Cutting Ireland's public deficit is surely on track if one excludes the Anglo Irish Bank bailout. The deficit currently at 11% of GDP down from 14% may seem impressive for such a short period, but under EU account rules the Anglo Irish bank bailout will push the public deficit to roughly about 25% of GDP. Even though if investors follow the underlying deficit, there is still much uncertainty around the banking sector in general. Whose to say that there won't be more bailouts needed, and when will the government get paid back. All of these points to negative sentiment for the EUR.

Speaking of Pay backs AIG is preparing to return the tarp money taken from the US government. Exit stratgies and discussions are still in play

HSBC's Chairman Stephen Green steps down and the succession skips over HSBC's CEO Michael Geoghegan and goes to Douglas Flint. Geoghegan has decided to step down and the new CEO role goes to Stuart Gulliver. Challenges ahead for HSBC maintaining a Universal Banking model and continuing the Asian Platform Green and Geohegan has created.




---

Alexander T. Lê


Sources:

http://uk.reuters.com/article/idUKTRE68M1F520100923
http://www.reuters.com/article/idUSTOE68Q02A20100927
http://financialadvice.co.uk/news/bankaccounts/90057-hsbc-chief-executive-set-to-move-on.html
http://online.wsj.com/article/SB10001424052748704082104575516672792665424.html?mod=googlenews_wsj
http://www.reuters.com/article/idUSTOE68Q02A20100927