Entry April 22, 2008

With oil in a new range this certainly sets the stage for the equity markets to break resistance levels and hold. For certain a double top with a failed momentum top, on a 5 year chart, it would seem to indicate further downward movement on the S&P500 however there appears to be consolidation of around 1250 that can certainly has been acting as support. Inflation is a key factor that will be affecting the markets. Further fundamental support for a break in resistance is the affect inflation has on bonds. If commodities continue to rally along with high energy prices, this inflationary environment will take its tolls on bonds. Confirmation of high oil prices staying within the hundred range along with continued consumption of gas can keep oil prices in this range for awhile. However it is possible a lag affect will certainly come in later and demand may not be enough to add to rising prices. Although I am no energy expert it seems that prices as fundamentally driven on the supply side currently, although there has been some sentiment in the past months strong enough to have pull back in oil prices from demand. My point being is that with oil in such high ranges it makes an inflationary environment which makes equities seemed overpriced. Once you account for inflation Im sure prices levels will warrant further movement up as equities are not that expensive. Adding to the upward movement will be investors leaving the bond market if inflation keeps up. Added fuel can also come form a weaker dollar, where foreign investors or sovereign wealth funds will be bargain buying. What makes this scenario very possible is that we are in current poor market conditions, for a contraian all this evidence certainly must be positive. However, the big question remains... in what time frame? If economic data can continue to surprise, a movement in the equity markets can quite possibly happen by the end of 08, however if this is a legit move is also another question. To the extent that the markets still may feel left over affects from the credit crisis, as some may claim that the credit conditions are improving, but across the board world wide, things will take longer to truly fix itself out.

Entry March 11, 2008

Early morning Fed action is quite justifiable, however one should see this as a preemptive measure to allow for a lower rate cut. However, to the extent that people are pricing this in may be minimal. Though it is good that the Fed is seeing that Fed Cut rates are ineffectual and are exploring other means of monetary policy, it is apparently damaging their reputation. With the Fed's constantly catering to the financial markets, the Fed Reserve charter should be rewritten. However, such economic conditions tied closely with financial conditions do warrant such measures as Congress seems pretty inept with dealing with financial crisis's.

The dollar experienced a significant rally, Which is quite lovely as it fits in nice with the weekly chart of the USD/YEN. I expect it to rally about to 104 before it resumes its short trend. However, I have not double checked with momentum. This will probably mean the dollar might not break resistance of 101.5 on the weekly chart from Jan. 2005 until March 2008. Obviously this will be in Japans best interest for this support level to hold, if the Japanese economy wants to improve recent slowed growth.

More after class...

Entry March 11, 2008

With two months to go before an official recession, there is not much light left at the end of the tunnel.

With the S&P 500 just hovering its 52 two week low of 1270, what i see as oil possibily establishing a new range, a rally in commodity prices fueling global inflation, and weaker economic data continue to poor in. I was a bit too optimistic in revisions in economic data. My previous thesis was premised on a strong job markets. But as the labor markets begin to loosen, especially with the delayed affect of reports, there seems there will not be enough time for a significant recovery. As previous times, any Fed Rate cut will lead to a superficial rally in the Domestic equities, but the overall trend is down. Though trading the overall trend on future indexes should lighten their positions or consider possible hedges.

I read the other day that the bond markets were pricing in a 1% Feds Fund cut. As usual the bond markets are being overly greedy. However, the I believe the Feds will concede 50 basis points minimum and 75 basis points maximum point cut. Now obviously if a 50 Basis point cut surprises markets, there will be very interesting results along with lots of volatility.

If a 50% basis point were to surprise, I would expect to see a neutral day in the first half, and then probably a continued down trend through out the week. (this is discounting any surprise news you will hear such as bailouts or better than expected reports, one has to watch closely to trade the temporary counter trends).

If expectations are in line with the cut at 75 basis points to 100 basis points, one can expect to see a rally in equities for a few days. However, of recent past cuts, rallies have not lasted more than a week before downward trend resumed.

Obviously the bond markets should be moving contrary, to the equities markets however, I have not followed the bond markets as closely as i have in the past. Other news of liquidity relief on the Fed Reserver side and bailout news, and further defaulting of Loans should also be weighed in.

However, I do have to say more about oil. Though I have never been an expert, I think oil has broken into a new range. The previous range which did not last very long at all which spans from October 2007 until Feburary 2008, between 85 and 100 dollars a barrel. Such a rapid shift in ranges is only indicative of the poor economic conditions we are facing right now globally as oil prices is something all nations must face whether 3rd world or top of the world.

Not only does it weigh down GDP of the economy, it supports my hyper inflation idea that the Fed Reserve in part has created from the massive amount of cuts in a short period of time. Looking back at past economic policy during times of crisis one will not find such drastic actions. Although, one can argue e conditions we face hearken back to the days of the 70's or even to the depression. Inflation is also just not stemming from the fed cuts and high oil prices but as well as high commodity prices which is created from as a global problem. Strong demand for commodities can be seen from the appreciation of the Aussie and Kiwi. As Asia continues to expand exports from Australia and New Zealand are going up and GDP growth continue grow higher. Further more, due to global weakness in economies, the inflationary problems cause people to bid up gold, which has seen huge volatility and rallies in the past month. Considering the Aussie is a commodity currency tied with Gold, is another reason why the Aussie will be higher, as long with Gold price.

Included in this commodities rally is oil prices which are tied with the Canadian dollar. Interestingly one can correlate the futures contract on crude to the Canadian dollar contract. The Canadian dollar seems to rally with oil as it enters new ranges. However it tapers off as probably the dollar will respond more to economic news in Canada. Based off sentiment readings, Canada seems to be more worried about economic growth. Since they are tied closely with the US dollar, the Canadian Dollar will stay range bound for awhile.

One can argue all these problems we faced are due to the fact that the United States as trade imbalance for so long. And now, the US economy is in a mode of fixing that problem, while other countries such as the EU will be the ones who face trade imbalance problems as the Euro continues to appreciate and the dollar continues to weaken.

What surprises me further is that the BOJ or the European Central Bank has taken no action to stop the decline of the dollar. In either case, economic conditions are not best for either Japan or Europe either.

For time frame, I expected continued slow growth through the second quarter. Even if things appear to get better in the 3rd quarter such as a tightening of labor market and picked up consumption. It won't be enough to negate the overall poor macro fundamental problems, of housing, credit/liquidity issues( lack of markets), sub-prime continuing in Australia and Great Britain even more so than the US, inflation, high commodity prices etc...

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...