Wednesday, October 17, 2007

Deciphering the Bank of England

The Bank of England released the minutes I have been waiting for. What could all of this mean? If you want to read it yourself, go to the Bank of England site at and then click on minutes. Or you can read this highly informative and even higherly (new word) biased view of the minutes.

Information item #1: The Bank of England (BoE) voted 8 to 1 to leave rates alone. If you were to read this, your first thought may be to assume that this is very bullish for the GBP for the fact they were so united (there is always one rebel mixing things up). But to know why they voted to leave it the same is even more important.

Information item #2: The BoE said, "The preparation of the November Inflation Report and its projections would give the Committee more opportunity both to assess the impact of market turbulence and other developments in order to reach a more considered judgement and to explain its policy stance." -Translation: We need more information so we can make an informed decision. In fact in the minutes they specifically said they wanted more time and information before they take a rate cut. No discussion of leaving it long term, no discussion of raising rates, just timing a cut.

Information item #3: CPI has now reported in under 2% for 3 months now. This is not growth, this is slowing to a point that is teetering on recessionary if the CPI can bleed into GDP.

Information item #4: The BoE said, "It was possible that a cut in rates this month could be misinterpreted as a signal that monetary policy was focused on supporting the financial system and not on meeting the inflation target." - Translation: We wanted to cut rates because we thought it would be a good thing but we were afraid that it cause a misdirected focus on the balancing act we have to follow as the BoE, hence the "No Comment" two weeks ago.

Information item #5: The BoE said, "A reduction in Bank Rate this month was not widely expected. There was a danger that such action would be misinterpreted as a signal that the outlook for growth and inflation had shifted decisively to the downside." -Translation: The market didn't expect it and this would have been a huge shock, so we didn't do it. Note, the outlook for growth and inflation has shifted decisively to the downside.

Information item #6: Oil record highs, from August 1, crude oil has risen 13%. The GBP/USD is no higher today than it was on August 1. If 10% of what drives this economy growing at 13% can't help the GBP what can. Dive a little deeper, if you assume that oil prices account for 10% of GDP for the GBP and oil prices have risen from 40% since January 1, near $55 at the beginning of the year to $87 a barrel, then there should be a similar move in the GBP. Just in the past 2 months the 13% would equate to 1.3% growth of GDP based on oil alone. GDP for the entire quarter reported in September was 0.8% and expected to come in at .7% for the October quarter over quarter report. Take out oil growth and what do we have? 90% of the GDP is shrinking or decreasing by roughly .5%. Two quarters of negative GDP is considered a recession.

On the surface it appears there is growth and concern about inflation. Diving deeper, adjusting for climbing oil prices, the British economy may be in a hidden recession. What do I expect...weakening pound. This is why I still would expect a GBP/AUD short to play out if time right, a EUR/GBP long trade if timed right, and the GBP/CHF trade as referenced earlier in this blog to play out.

~~note: anything underlined in this blog is a hyperlink to view more information.~

Tuesday, October 16, 2007

Leverage and Margin Examples

My friend posted a great video on explaining leverage and margin and common pitfalls. Here is the link to view the video.

So when you are thinking of Leverage And Margin Examples or of my friend John, just remember this handy acronym---LAME

You are my hero John.

~~~It appears that many of you felt my playful jab at my friend was an indication of the video. The video is very informative and not really lame, it was a joke, I was laughing anyway. I don't know if John was, maybe I was the only one... oh well live and learn and learn some more. Go watch the video by clicking the underlined link above.

Big winner and another chance?

A few weeks ago, I published a trade with both the spot market and the CDD ISE options looking for a bounce off of the 1.00 mark for the USD/CAD. If you would have bought the 100 November puts as described in the post, your position would have moved from 1.35 to 2.45. You would have had a maximum risk if $135 per contract and based on your risk you would be up $110 or 81% return on your maximum risk. Not too shabby. The spot market, if sold at 1.00 would be up $220 with variable risk available based on where a trader determined was the appropriate stop loss. Does this sound like you? "I frequently am right about direction but get stopped out of my trades." If so, lean to the options, if you are frequently right and don't get stopped out, go with the spot. If you are frequently wrong and always get stopped out, please send check to Blake Young's Tahiti trip fund, this way at least one of us will get benefit from your money.

I hear it frequently, if you set your stops too tight, start looking at these options, if you are giving yourself enough room in your trades, the spot usually makes them most sense and money.

Today, what are we looking at? The USD/CAD has pulled back to a short term resistance level. The pair has not moved a lot when it probably should have. So here is the trade and the fundatechnimentals behind it. Oil- record highs, should benefit the CAD. No rate change from the BoC, this is better than the FOMC cutting rates, should benefit the CAD. TIC data for the US not only didn't show the expected $60 Billion of foreign investments coming in to the US but showed a withdraw or fleeing of $69 Billion in foreign monies, bad for the US dollar.

No significant move from the pair, this could be a chance to sell will minimal risk or buy in to the CDD put. I like the December 97.50 put for $1.35 or $135 per contract. Fixed risk lots of potential 8 weeks of time to play with. The USD/CAD would probably need a little wider stop on this one 99.15 or even back above the $1.00 mark. Pick your poison.