Entry 2/20/07

I would like to make one interesting comment for today. The environment we are in is very interesting for the dollar. Specifically the USD/JPY. With slow growth and perceived inflation it appears the dollar has been range bound for sometime. On the monthly chart it appears a rally would be in order, based of support levels. However, of the two lower BB (1st and 2nd Deviation) prices have reached outside the 2nd deviation BB. One can argue it is only a temporary whipsaw and is still in an overall downtrend, and considering there was not a full close below the 2nd lower BB, and as the bands continue to expand. I would have to agree that in a macro fundamental sense the dollar is indeed still in a downtrend (persistent financial sector problems). However for the bearish argument to hold there needs to be a significant short term rally at least up to the lower first standard deviation BB. However again, the bulls will argue based of the monthly chart there has never been a full out close when the lower second BB was pierced over the past 11 years. If the bearish argument were to hold, all this sideways trading should lead up to a significant rally followed by a short. Now, the direction of the breakout in my opinion can come either way before a significant rally. On an overall fundamental standpoint, a breakout to the downside to find lower support before rallying makes more sense. But, with recent inflation data, if all other economic/finance conditions remain some what static or are priced in, the breakout can very well be to the upside.

Then there is also the theory of the BOJ/Ministry of Finance of Japan.

The BOJ/Ministry of Finance will maintain the currency pair above 105 to insure somewhat healthy exports. For short term bears this means they will be shorting on every lower high to support of around 105 before, being bullish.

I will omit any consideration to bargain hunters rallying to save the as of yet.
1. Because economic conditions are still quite unclear
2. No clear trend has been established in the short term.

If one is bearish overall for the economy and financial markets for this year, one will expect the dollar to end around the same levels as they are now or lower. But if economic conditions and sentiment can substantiate a short term rally within this overall downward trend. The dollar may end up range bound below the rallied inflection point. But it is in my opinion that the worst of the financial news is to come so the latter scenario is more likely, unless I am over estimating the speed of the currency markets.

Overall I am bearish on the dollar for this year. But may expect a short term rally to 110 to 111 that make occur from improved economic conditions or tied to possible inflationary environment to come from all the recent Fed Rate cuts. This rally may occur possibly start somewhere in the second quarter and go into the 3rd quarter).

The reason why I am not considering the technical bullish argument is because fundamentals do not warrant a rally. If housing, sub prime, credit markets, GDP growth can all bounce at once, to me obviously the bullish argument would be more probable. However this is not the case.

Entry for 2/19/07

What an interesting day today. It seems the bulls take the lead today despite relatively unchanged fundamentals. It seems as the Feds were pounding in bad news into the media in order to adjust sentiment. After a 3 day decline however it is only natural for on the fence bulls to live some confirmation bias and take todays news of the Feds willingness to baby the financial markets some more if conditions warrant it so. Based off recent past monetary policy I don't blame the financial sectors in believing the Feds job now is to protect the financial markets. Some people would attribute this rally to effective monetary policy but id argue its more of a pure speculative sentimental expectation reaction.

Weaker economic conditions should have made people naturally expect WMT to have better than expected earnings report, however the stock being down overall, but is in my opinion to end up higher by the end of this quarter. Either way, bulls can be reading into this news all wrong. Adding to this upward momentum (as using WMT as an indicator).

However, I feel tomorrow will be a big day. Unless today overall ends in a down day. If todays rally sustains to the close of today, I believe this rally won't last into the next day. Firstly, I expect housing starts to continue to disappoint or remain some what static. Obviously a static report will give more way to more bullish sentiment. However, I will not think this to be the case. This will not be the case if one looks to commodities. The extremely volatile commodities have rallied significantly over the past week and will only perpetuate a softer consumer. With weak consumerism and softer labor markets, I don't see housing starts jumping out to surprise anyone. Tied to these recent rallies in commodities will be inflation. As we see oil already back up into the 98's along with the rest commodities, Headline CPI numbers should be higher than expected killing any sentiment for larger FED rate cut reductions. If CPI numbers are not higher, as in if people are focusing on the core number, the CPI #'s are lagged and one will see higher #'s for the next month. However core number should not be considered as more important than headline inflation. It is headline inflation that is currently hurting the consumer (energy and commodities).

Furthermore, with expected supply cuts from OPEC I would not be surprised if oil heads into $100+ a barrel. However this would only be short lived as the consumer would simply not tolerate such high prices and demand side would bring it back down into the 90's range.

Eitherway, Id recommend short positions on US domestic equities since I don't buy into this rally.

Based on what I have written about, it would be natural for me to expect commodities to continue to rally.

With Gold rallying with the argument as people hedging against inflation: It seems that inflation is prevalent across the board from Asia with Japan and China to the US with Australia etc... This rally in gold can be substantiated from the fact that the US keeps cutting rates adding pressure for others central banks like the ECB to follow suite (perceived inflation). However you have countries such as Australia where rate hikes are expected to bail out banks, and Japan where they are worried about choking their growth which does not totally substantiate this gold rally on the inflation arguement. With CPI numbers coming out for the US I expect the numbers to be higher than expected but I don't expect them to be a huge surprise in terms of inflation.

Much of this inflation sentiment can be reversed due to oil. As mentioned before the consumer will not tolerate oil prices in the hundreds for very long. Gold and oil have seemed to correlate well with each other in this new range only to diverge when there was significant poor economic data reported.

If anything one could profit from shorting these two commodities with tight stops as it highly possible for the commodities to continue to rally.

However from my view point these commodities maybe a bit over done.

More demand based commodities should however continue to rally unless we see significant world economic slowdown, Which has not been the case throughout this whole sub prime, credit crisis, and poor financial sector conditions mess (I'm not arguing decoupling, as there every country is affected across the board from these problems, however strong demand is still seen from developing nations along with the nations who are exporting these commodities who are fairing well).

In terms of the USD. More rates are to come irregardless to what you think as financial conditions will not be fixed for a long time. Which means the dollar is in an overall downtrend. However, I feel the dollar is due for a rally as soon as financial conditions stabilize, which may only come about from a significant downturn.

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).

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...

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.

...

Entry for Dec 7, 2007 (Non-farm Payroll report)

*skip to bottom for estimate.

Consensus seems to point to weaker job growth to come, although due to the ADP report, many forecasters who expected low NFP numbers now have revised their numbers up higher. Currently non-farm payroll is only at 80k which means it will not take much to surprise on the upside. Of 81 economists surveyed by Bloomberg, the most optimistic forecast came from Janney Montgomery Scott LLC, whose estimate was right on for the previous month, with a very optimistic forecast which was closest to the real NFP number. The forecast of Janney Montgomery is currently an addition of 195k jobs added for November, while the average forecast of many banks and various forecasters in headlines are around 100-125k. Looking to a chart of monthly releases of ADP with private sector payrolls and total non-farm payrolls there is a general correlation. Although, ADP tends to be an overly bullish indicator as NFP private sector tends to lag the ADP for the majority the chart from 2002 - 2007. Janney Montgomery's 195k and ADP's 189k additions are not wholly accurate but certainly point to a more bullish NFP report. Adding to increase of jobs can be found from the Christmas hiring season. I can agree with that argument since November would be an appropriate time to get temporary employees for the upcoming Christmas break. It is also possible that the thanksgiving break will add to increase of jobs since many people took a few days off. This possibly created demand for the retail side, demand in regards to preparing for the December holidays (soft, hard, big box, restaurants would all benefit). Though, I would exclude any benefits for jobs from travel considering a weak dollar, and one can confirm this with the performance on airline equities of the past month. Also, NFP report is a lagging indicator of GDP, and for the two quarters showed strong GDP growth. Overall I am more bullish on the expected report.

I expected any negative affects for the job market coming from housing, mortagage markets, or the financial sector to reflect in later reports after the holidays (as the holidays will skew numbers to the upside).

If NFP are reported above 125k there will be a possible significant rally with the dollar. If NFP rolls come out around 110k, there will only be a slight rally in the dollar. In regards to the EUR/USD I feel that the NFD would have to beat the ADP report of 189k in order for the pair to make new highs.

*potential risk can come from revisions in the October number since it can affect this months number.

In terms of Fed's decision. It was never in my opinion that the Feds were going to cut 50 basis points. Firstly, another 50 basis cut would not happen since we are in a more inflationary environment as the dollar has still not fully recovered. Such a large cut would only bring about more inflationary pressures. Adding to inflationary pressures, oil is back up trading in the 90's. In times of crisis such as "sub-prime" and the "credit crisis" the best measure is a series of small cuts, as done in the past with other crisis's. As it is necessary to do small cuts to provide much needed liquidity, as opposed to doing large cuts to try and solve the problem all at once inefficiently (as the previous 50 basis point cut by the feds hasn't changed the economy much).

Considering that i feel ADP has over stated reports, NFD would have to be reported below 189k.

Considering that I am bullish, and that I expect a surprise, I believe the report would have to be above the average consensus of 125k.

I think the NFP report will be more towards the higher end considering Janney Montgomery's performance, stronger holiday hiring, and thanksgiving break.

I expect an addition of 175,000 jobs.

-Alexander Lê

I have a theory, only in extremes for higher oil/energy prices will a correlation between oil and gold will matter. In the creation of a new range, as many people are now saying oil is in a new range, in the extremes of new prices or the new beginning, there will be a correlation between oil and gold, the excuse being people are using gold as a hedge to inflation as oil defines its new range and makes higher highs. This may or may not be true, but the fact is, when there is an extreme or a new development of range, the media portrays bullish moves in gold as inflationary hedges in relation to oil. What really matters is that a correlation does exist. As we saw in the summer and a little before gold and oil were loosing its correlation. Gold had already made its highs in the 800's even further back, and any correlation between gold and oil was beginning to be less significant. But now, with oil entering new ranges, a relationship between oil and gold seems to have been revived.
To support this theory, economic conditions would also have to warrant a legitimate correlation. For example, currently the United States as an economic power is experiencing weakness. A weak dollar with a persistent need for Federal Funds rate cuts brings about perceived or apparent inflation. Apparent inflation being inflation that is actually occurring. Either way, if is not apparent or not, it will bring about sentimental fears which would cause a correlation between oil and gold or is what will be driving the prices of these commodities. The relationship being people buying gold as a hedge to whatever kind of inflation is there.
So in summation, in new ranges of oil or energy, you will find a correlation between oil and gold, if supported by economic fundamentals, where price in part, is ultimately driven by sentiment.


Fed Remarks:

Everything the Fed has said is pretty inline with my expectations. As usual the same slightly modified statement was made allowing Feds to remain on the fence to go either on hold or cut, as a protective measure for their reputations. Its kind of ironic how so many managers are always looking for accountability, and ultimately the Feds who are often perceived to be responsible for the performance of the economy, are never clear enough for full consensus on wall street of what the next decision of the Feds. Most interestingly, I believe there to be divergence in the equity index futures markets and the domestic equity markets. Yesterday and today the futures opened with negative fair values, and yesterday saw significant gains, and todays bullish sentiment seems to be showing the same upward price movement. I believe this to indicate that prices will not be able to sustain a break in resistance for a significant time period. Based off past federal funds trends and during times of crisis, more rate cuts will be seen. To support this idea is that the core cpi and ppi are relativity tame. And as i had naturally expected, they mentioned headline inflation stemming from commodity and energy prices during the speech, just to say it did pose "short term" problems, although commodities and energy may be stabilizing, which to me indicates further possible cuts.

"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," Kohn said in remarks to the Council on Foreign Relations in New York.

From what Kohn said,I feel there is room for further rate cuts, in fact I would not expect 75 basis point cuts (as some people are speculating) as the inflationary problems that would cause lots of volatility, which in part, the Feds job is to keep prices stable.

Looking back to times of crisis, 50 basis points were used as pre-emptive measures when the crisis first began, and then followed by a series of 25 basis point cuts as provided when necessary. As poor financial conditions still linger today, a series of smaller 25 basis points "should" follow as to maintain stability. Though not wholly unexpected to see pre-emptive measures since that is what Bernanke has done in the past, but as the effects of a larger cuts back in sept did not prove entirely useful as markets rallied and pullback to similar conditions previous to the cut.

This further supports my idea that the s&p 500 will remain within a range from now until the end of the year, as further cuts are due.