Friday, November 02, 2007

What really happened with nonfarm payroll?

This is a longer post but it needs to be said.

I have heard a lot of people questioning why the dollar weakened when the nonfarm payroll jobs data was so strong and such a positive surprise. You may find an article by John about the nonfarm payroll last month, interesting as well. In John's article the basic conclusion was the number is not just the number, we need to dive a little deeper.

To do this let me point out a couple of specific announcements from this week that tell a very interesting story.
First ADP gave a glimpse of up and coming nonfarm payroll with expected 60k actual a whopping 106k
Second annualized GDP q/q with expected at 3.1 and actual coming in at 3.8, healthy growth and a surprise.
Third nonfarm payroll expected 82k new jobs, actual 166k.

That is the positive I want to focus on. The neutral is unemployment rate, expected 4.7 and actual 4.7

With all of this good news, why did the dollar weaken and what is really happening with the economy. Keep all the above in mind and remember what you already know.

In case you don't know what you already know, let me remind you. You know that the economy appears to be slowing (in spite of the above information), you know that the housing market is collapsing and you know that there is a significant credit crunch. You may be thinking, "yeah and..." Well let me give you a couple of additional numbers also from this week.

Fourth, Interest rate decision cut to 4.5 as expected (sign of slowing econo-credi-housing industry needing a boost)
Fifth, Personal spending expected 0.4% actual 0.3%.
Sixth, Average Hourly Earnings expected 0.3% actual 0.2%

OK, so with what you already knew, we added 3 positive surprises, 1 neutral, and 3 negative surprises. Those all should cancel out and we should be able to just go with what we know right? Maybe.

Let me paint a picture: Bob Jones is an average guy with an average job that last year decided to buy an above average cost house (market conditions last year) with a below average (subprime) loan just like the average Joe.

He has one of these ALT A subprime loans. This loan not only doesn't require any principle paid but has a variable minimum payment very similar to a credit card payment. His intent, like the average Joe, is to make the minimum payment and invest the rest. Like an average Joe, this didn't actually happen (see articles with titles like, "Falling into the Real Estate Trap", "I'll Invest the Payment I Would Have Made and Other Lies We Tell Ourselves", and "Real Estate's Sucker Bets").

Bob buys his $300,000 house with a monthly minimum payment of $700. The payment on a normal amortizing loan would have been $1700 and the interest on this payment would have accounted for $1300 of that payment in the first year. During the first year Bob only makes the minimum payment, makes no extra payment and invests no money. The amount of accrued interest equates to $7200 for the year and is added, compounding each day, to his $300,000 principle balance.

Because of the credit crunch, Bob's minimum payment jumps to $1400 (still no principle payment) and he decides the payment is getting too rich for his blood. The housing market around the United States has corrected/dropped 15% on average (some places less some places much much more) making the market value for his house $255k. He owes 307,200. What are his choices? Under new bankruptcy laws he can't just walk away from his negative equity. He could sell it for a loss and negotiate payments on the $52,200 or he can try to continue to make the payments. What to do what to do? I know, get a second job.

Bob goes and finds a second job. What are second jobs usually? Usually a second job is a job that is not in a "professional field" that is why they call it a second job. Second jobs usually pay less than principle jobs. Where do you find a second job easily? The service industry (retail, sales, construction, food, grocery, etc). Which sector contributed most to this month's nonfarm payroll? Service...hmmm...a connection?

So more people get second jobs, more service jobs are created, we see that in the numbers. Do we see more spendable income? No, less consumer spending, where is the money going, to pay for our over leverage debt ridden society. Average hourly rate goes down, due to second jobs (primary job pays $20 an hour second job pays $10 for 20 hours a week, average hourly? $16.66, lower average hourly rate). Production goes up (GDP) because everyone has second jobs and are working more. This is not good job growth, it is not good GDP growth because all of the growth and improvement is being spent on keeping the econo-credi-housing industry's head above water via paying our outlandish credit payments on the exorbitant debt.

Did I miss anything? I don't think I did. Basically, as a society we are scrambling not to lose our homes that are upside down because we would rather do that than pay for something we don't own and yet 1 out of 65 homes in Nevada are in forclosure (3% of all homes in Las Vegas are in foreclosure) so we still aren't doing that well at it.

Conclusion, the jobs data was great data if you understand it wasn't positive for the economy, in fact it was similar to a drowning man's head coming above water for the third time(maybe only the second time).

The moral of the story, stay out of debt and sell the US dollar.

Wednesday, October 31, 2007

Scared out of the USD/CAD trade?

I told you I tightened my stop and my limit and today I was limited out of my trade at .9450 for a total gain of 551 pips. The pip value had an average value of about $1.02 so we gained 563.70 minus a little interest of $13.70 so we netted $550 and the trade lasted 27 days (sold the pair on October 4th at 7:24am). So here is the big question. Were you patient enough to trade this trade? Were you willing to risk $80-$100 to make $550 and sit on the trade for 3 almost 4 weeks? Were your stops too tight and you got stopped out. Did you get bored and walk away from the trade early? Did I get out too soon? Do I like using question marks? Well do I???????????

Happy Halloween everyone.

Tuesday, October 30, 2007

On a related note.

Usd/Cad up against support now as we see oil possibly rolling over. Remember that a sell off in oil will jointly hurt the USD and the CAD. Why you may ask? Canada exports a lot of oil, falling oil prices will reduce the amount of oil being purchased, therefore less demand for Canadian dollars as the prices fall. Oh but wait, oil is denominated in the USD, the oil standard currency. So if less oil is being purchased or even shorted, the dollar will feel this as well. What does this mean? Who will take the bigger hit? The CAD should take the bigger hit but the pair should become more volatile if there is more profit taking. CAD due to falling oil prices, USD due to falling demand of the currency that dominated or denominates oil prices. Higher volatility with oil prices, higher volatility with FOMC talks tomorrow. Watch for the pull back.

Oil also has a lovely divergence formed today. I believe this last push was likely an over extension of the oil prices, making me believe oil should pull back near $90 a barrel over the next day or so if not $87.5o. I could be wrong and oil could find support, kill the chance for a bearish divergence to play out and move to $95 but.....I am not holding my breath. If oil drops, expect that GBP/CHF trade to play out. I think we could see this pair finally move with the pressure it is under, it has to break sometime.

Usd/Cad resistance levels?

I had a question of where I see resistance for potential sell or add points for the USD/CAD as the negative news from the FOMC tomorrow may see some volatility but no real trend reversal. Here is what I see.

Short term resistance at or near .9700
Next level resistance at or near .9810ish
Most significant level of resistance 1.0000

These are not guaranteed but I certainly feel that the trend, the fundamentals and the monetary policy of rate cutting will keep the downward pressure on the USD/CAD.

I also like the idea of playing the CAD/JPY long as the USD/JPY is having trouble going beyond the 114 mark. If the USD can maintain strength and support versus the JPY and the CAD is stronger than the USD, I like the CAD/JPY long positions (include the AUD/JPY with similar analysis of the AUD to the USD to the JPY)

Monday, October 29, 2007

I didn't like that picture

So here is a new picture that goes in to my profile. We took it a few weeks ago with family pictures up the canyon by the river with all the amazing fall colors (though you can't see that in this picture.
I am tightening my stop and my limit on the USD/CAD. Stop now at .9620 and limit now at .9450, I may change this to .9500 to book these profits. As I said before, I am expecting some volatility over the next couple of days.

Great move by the CAD and upcoming Fed Announcment

The USD/CAD pushed to record lows again today. I hope some, if not all of you are still in the trade. The money I manage is still enjoying a great run on this pair and will account for nearly a 10% move on the entire balance for the month. I'm good with that.

Now the concerns, the Fed announces rate decisions this week and my anticipation is obviously a rate cut, me and the rest of the bond commnunity. If you want a glipse of what is coming based on the bond trader's perspective (which I might add is very effective), check the CBOT for the 30 day fed funds rate.

07Oct 95.2550 4 3/4%
07Nov 95.4900 4 1/2%
07Dec 95.6100 4 3/8%
08Jan 95.6650 4 3/8%
08Feb 95.7900 4 3/16%
08Mar 95.8350 4 3/16%
08Apr 95.8950 4 1/8%
08May 95.9600 4 %

The Fed cuts rates in 1/4% or 25 basis point increments. With that in mind the expected rate should be near 4 1/4% by first quarter next year. We are not dealing with just one rate cut but many.

This should all mean weaker dollar but I am expecting some volatile times over the next 2 weeks, possibly volatile like August and September again.

Two choices: Keep your stops really loose so you can ride out the storm and stick with the bigger trend or tighten your stops, get stopped out of your trades and wait for the wind to stop blowing. If you are more agressive, there could be a lot of scalp/intraday trades with the potential volatility.

Side note, GBP/CHF is still channeling in the same rough range.