The phrase ‘The proof is in the pudding” is a shortened version of “the proof of the pudding is in the eating”. This phrase comes from an old parable where we are taught that the real proof is in the test. Last week I stepped out on a limb and stated that there was no real job growth that the non-farm payroll numbers were reflecting second jobs more than new jobs and more employment. I had a number of comments on this matter, many complimentary but there were some that weren’t confident in my analysis. To those who were not confident and to those who want a second serving, open up here comes the pudding.
First of all price, how can you argue with that. The dollar hit record or multiple year lows against the euro, the pound, the aussie, and the loonie (by lows I mean as compared to these currencies no forum posts pointing out the obvious record highs on some of these pairs, it was the dollar weakness or lows that caused it). If the economy were strengthening, GDP were truly rising, and new jobs were everywhere, would the dollar continue its collapse?
Second, Ben Bernanke backed me up yesterday, giving clear indications of economic slowing and probability of further more “severe” problems in the housing and credit markets’ already poor situation.
Not enough?
Third, and the one none can argue with, the actual data. Last week the non-farm payrolls report surprised everyone. Septembers new jobs were 110k new jobs, October was expected to be 82k but the report came in at 166k, 84k more jobs than was expected. The Burea of Labor and Statistics October report for multiple job holders over the age of 16 came in at 7852k (that is right a ‘k’ meaning thousands) which is up 231k from September (0.2% higher).
Now for some simple subtraction 166k new jobs minus 231k more people with multiple jobs equals -65k jobs or in other words, less total people are employed and more people are picking up second jobs. You may be thinking ah-ha I caught you Blake, they said that unemployment didn’t go up, true the percentage didn’t but the number of employed individuals went down 250K people in October. This is off 11k, but notice I said there were 250k less employed not 250 more filing for unemployment, that is a different number. Unemployment filings went up in October by 38k, not enough to change the 4.7 rate to 4.8.
Mmmm, tastes like pudding.
Friday, November 09, 2007
Suspended Account - I think not
If you have tried to stop here this week you may have been redirected saying the blog was suspended. Well, "they" can NEVER SILENCE THE TRUTH!!!
Oh wait, it was just a java script in the pivot point that was crashing. So no more pivot point calculator here and things should be fine again. I am writing a post similar to last week today so if you can suffer through a long post then come back later on.
Oh wait, before I stop for the moment, let me point something out to the nay say-ers. Remember the Gbp/Chf trade??? You may have forgot, it has been a month now. On October 4th I said that no comment was not a good thing out of England and it would hurt the pound and I liked the Swiss Franc as a counter part. A number of people questioned my logic and sanity in chats, emails, and phone calls. Well, this is
just another one of those I was right situations isn't it? He He and Ha Ha, laugh my way to the bank.
Now were are we? At a support level. If we see consolidation or a bounce, get out. If we see a break of the 2.35 level hang on for a couple of more days to see where it goes. It took a month but for 500 pips, that is alright.
Oh wait, it was just a java script in the pivot point that was crashing. So no more pivot point calculator here and things should be fine again. I am writing a post similar to last week today so if you can suffer through a long post then come back later on.
Oh wait, before I stop for the moment, let me point something out to the nay say-ers. Remember the Gbp/Chf trade??? You may have forgot, it has been a month now. On October 4th I said that no comment was not a good thing out of England and it would hurt the pound and I liked the Swiss Franc as a counter part. A number of people questioned my logic and sanity in chats, emails, and phone calls. Well, this is
just another one of those I was right situations isn't it? He He and Ha Ha, laugh my way to the bank.Now were are we? At a support level. If we see consolidation or a bounce, get out. If we see a break of the 2.35 level hang on for a couple of more days to see where it goes. It took a month but for 500 pips, that is alright.
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.
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.
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.
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)
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.
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.
Thursday, October 25, 2007
When is the end of this scalp trade?
Watch for the down trend to end? Simple enough right? Wrong? Which down trend? The fib fan line? The longer term trend line? 
Here are the lines I am watching right now.
A continuation here is expected but a strong support lies at .9630. A sold resistance sits near .9700 and the longer term resistance stands at .9800. Keeping with the terminology here, put your trade to rest at support where it lies. Sit tight at the intermediate resistance and stand and run away if we break above the .9800 from along term point of view (or stand firm at .9800 for another selling opportunity, whatever you like best there).
This is a fun little exercise of analyzing a short term trade. The way I look at trading in general is this... it took me as much money in spread and even more time, focus and energy to trade this scalp as it did the trade I shorted at 1.0000 a few weeks ago. So for my time, focus and energy, and really for my money, I'll go with the long term trade. Some of these will line up in the future as this has but I won't be discussing them nearly as much.
Here are the lines I am watching right now.A continuation here is expected but a strong support lies at .9630. A sold resistance sits near .9700 and the longer term resistance stands at .9800. Keeping with the terminology here, put your trade to rest at support where it lies. Sit tight at the intermediate resistance and stand and run away if we break above the .9800 from along term point of view (or stand firm at .9800 for another selling opportunity, whatever you like best there).
This is a fun little exercise of analyzing a short term trade. The way I look at trading in general is this... it took me as much money in spread and even more time, focus and energy to trade this scalp as it did the trade I shorted at 1.0000 a few weeks ago. So for my time, focus and energy, and really for my money, I'll go with the long term trade. Some of these will line up in the future as this has but I won't be discussing them nearly as much.
Rocky VI - "Never Say Brain Damage"
He's down..no he's up... he's down. The Usd has taken it's lumps over the past weeks and like a tough hardened boxer...he doesn't know when to stay down. And you thought I would say something about it being strong and never ending spirit...no just too many hits to the head to know better. So the USD/CAD has been down and up and down and up again over the past 3 days. A break and close above the .9670 mark would make me think a move back to .9710 would be very likely. Another bounce and I think we could see the break below .9620 which has acted as support at least 4 times already.
Wednesday, October 24, 2007
What did I tell you?
It is question day here at Random Acts. I feel like I am giving out all the generic chastisements. First what do you want and now what did I tell you? So what did I tell you? I told you to sell the Usd/Cad about 4 1/2 hours ago at a price near .9720 for a scalp trade. The price is now at .9688. If you listened and followed the trade you have two choices. 
One get out near .9680 for a quick 40 pip trade or if it moves through .9670 hold on to it for a move down toward .9615-ish by sometime tonight or early morning tomorrow. It could happen quicker but it is hard to predict both price and time of day.
In essence I am watching for the cross below the fib fan for a continuation and a move down to a collision of longer term trend lines and older fib fan lines as the next target. If it bounces here, I would consider an exit of the scalp trade.
Longer term traders following the previous posts, disregard this post. This is a scalp trade. Don't confuse the two.
One get out near .9680 for a quick 40 pip trade or if it moves through .9670 hold on to it for a move down toward .9615-ish by sometime tonight or early morning tomorrow. It could happen quicker but it is hard to predict both price and time of day.In essence I am watching for the cross below the fib fan for a continuation and a move down to a collision of longer term trend lines and older fib fan lines as the next target. If it bounces here, I would consider an exit of the scalp trade.
Longer term traders following the previous posts, disregard this post. This is a scalp trade. Don't confuse the two.
What do you want?
So here is the question of the day, I would like responses in the comments, as many as you would like to place is fine, anonymous or otherwise. What would you like to see here. I am going to continue to add my trades and my analysis, but what is it that interests you as a individuals and as a group?
Are you interested in the in depth fundamental pontifications like the deciphering of the BoE? Pure technical trades? Scalp-ish trades ?( I usually won't post too much that way but sell the USD/CAD today off the .9720 level). Longer term trades like I usually look at?(5 weeks on the 2 trades we are in for a lovely profit right now). Wise cracks with pertinent commentary? (I like doing that but some don't like reading it)
What do you want? Post it the comments please.
and Thank You
Are you interested in the in depth fundamental pontifications like the deciphering of the BoE? Pure technical trades? Scalp-ish trades ?( I usually won't post too much that way but sell the USD/CAD today off the .9720 level). Longer term trades like I usually look at?(5 weeks on the 2 trades we are in for a lovely profit right now). Wise cracks with pertinent commentary? (I like doing that but some don't like reading it)
What do you want? Post it the comments please.
and Thank You
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 http://www.bankofengland.co.uk/ 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.~
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.
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.
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.
Thursday, October 04, 2007
NO COMMENT!!!
OK, think this through with me. When is the last time on television or radio or in the newspaper, any where for that matter, you heard the phrase "No Comment". Now, when is the last time you hear the phrase "No Comment" and that was a good thing? Let's imagine..."You just won the Superbowl, what are you going to do now...(reply) No Comment"..."Oooohhh, how cute, congratulations on the birth of your new baby...(reply) No Comment"...Doctor Rosen Rosen invented a cure for cancer and won the nobel peace prize and as he goes up to the podium he modestly says, "No Comment."...
None of that makes sense. The term "No Comment" is primarily reserved for the accused, politicians, and attorneys (just typing that makes me realize those three groups share a similar lack of scruples) or someone that is hiding terrible news.
This morning at 7am Eastern, the Bank of England left rates unchanged and said, "NO COMMENT". What is the likelihood that it was No Comment because they didn't want the world to know that it was a unanimous vote to leave rates unchanged, they didn't want to tell the world how great the British economy is doing or they had no concerns of the credit crunch and housing market? Could it be they left a no comment because they are concerned about how bad the news is and how much it would shock their currency if they exposed the whole truth of their decisions (minutes will be released on October 17th). I am betting on the second and I am a little surprised that the world market didn't read between the lines on this one. Lots of bad news and a weakening pound but No Comment must have been because they were tired and didn't want to say anything today.
Looking at the previous blog on why I thought the pound should weaken and why we should have heard dovish comments out of the Bank of England, I began my search for the right pair to trade and I found it in a peculiar place. I found it on the Gbp/Chf. This is not necessarily because I think this will be the most profitable trade, more that it is one of the easiest pairs to analyze and control risk.
In the chart you can see a nice down trend over the past couple of months with an approach and likely bounce off of resistance.
Risk can be controlled with a 200 pips stop and a potential reward of nearly 500 pips if not more. As time goes on and if the lower trend line is reached, the lower trend line could be as low as 2.32 for a 750 pip move.
The problem with this trade is that the CHF is a weak currency. The benefit is, if I am right about the GBP, the minutes will reveal the dovish sentiment and further unwind "carry trade" pairs including the GBP/CHF pair.
None of that makes sense. The term "No Comment" is primarily reserved for the accused, politicians, and attorneys (just typing that makes me realize those three groups share a similar lack of scruples) or someone that is hiding terrible news.
This morning at 7am Eastern, the Bank of England left rates unchanged and said, "NO COMMENT". What is the likelihood that it was No Comment because they didn't want the world to know that it was a unanimous vote to leave rates unchanged, they didn't want to tell the world how great the British economy is doing or they had no concerns of the credit crunch and housing market? Could it be they left a no comment because they are concerned about how bad the news is and how much it would shock their currency if they exposed the whole truth of their decisions (minutes will be released on October 17th). I am betting on the second and I am a little surprised that the world market didn't read between the lines on this one. Lots of bad news and a weakening pound but No Comment must have been because they were tired and didn't want to say anything today.
Looking at the previous blog on why I thought the pound should weaken and why we should have heard dovish comments out of the Bank of England, I began my search for the right pair to trade and I found it in a peculiar place. I found it on the Gbp/Chf. This is not necessarily because I think this will be the most profitable trade, more that it is one of the easiest pairs to analyze and control risk.
In the chart you can see a nice down trend over the past couple of months with an approach and likely bounce off of resistance.Risk can be controlled with a 200 pips stop and a potential reward of nearly 500 pips if not more. As time goes on and if the lower trend line is reached, the lower trend line could be as low as 2.32 for a 750 pip move.
The problem with this trade is that the CHF is a weak currency. The benefit is, if I am right about the GBP, the minutes will reveal the dovish sentiment and further unwind "carry trade" pairs including the GBP/CHF pair.
Tuesday, October 02, 2007
Falling Ethanol, Diverging Oil, and the pound getting pounded...Maybe?
I am going to make this a brief analysis and looking at 3 correlations occurring right now. Starting with Ethanol, 
Ethanol is a corn based fuel that acts as a direct substitute for oil based products. Looking at the December 2007 CBOT Ethanol Futures, there are two things to note. First note, a high point in March/April time frame and second, a consistent downtrend to today.
If the demand is decreasing for the primary substitute for oil, this causes me to believe the demand in general has been falling recently for oil. What has oil been doing in the time from March until now? Climbing, surprisingly enough.
Oil has climbed up and hit record highs over the past couple of weeks. If you look at the price at the pump, at least here, retail gas has not increased while oil has climbed up approximately
26% or climbed from $65 to $82.50 a barrel. Retail prices should have increased by about the same or higher. Why hasn't it? No increased demand while price is rising. This is a divergence in the inter-market analysis.
As seen in this image, both the CCI and the RSI (differing times) are diverging from the price. In most cases the price snaps back in line with the indicator, if this is one of those times, I would expect oil to fall.
The pound has not really benefited as of late on such a significant move on oil. Why? Possibly the concern of the housing market, slowing global economy, maybe the fact that the price is going up but demand is not means less purchases from British Petroleum.
Now what does that have to do with anything going on right now? This week we are going to hear the Bank of England rate decision. If I my assumption of slowing demand and increasing price is correct, the lower than expected trade balance we saw 3 weeks ago from Britain would be correct. If the GDP is slow, PPI has been low and housing is still struggling than the economy is not growing enough to be concerned about inflation. Sound familiar? It should, this is not far off from what the FOMC was looking at, slowing economy, inflation not as much of a concern as housing and BLAMMO, a rate cut.
I don't expect a rate cut from the B of E, but I wouldn't be surprised if they became very dovish in the comments which could weaken the pair near a resistance level. Look for a short oportunity, not necessarily against the USD but maybe against the AUD or the EUR or the CAD or anything that has shown recent strength. You have between now and Wednesday night (US Wednesday Night) to find a good risk position......or what about an option on the BPX?
How did you know?
I received an email this morning asking how I knew not to chase the USD/CAD and that it would retrace early in the week to test 1.00. Simple, buy good hardware.
Remember the 1.00 is a strong psychological barrier and likely will hold. At this point simply watch for it to stop going up, look for a peak with low risk and trade.
Thursday, September 27, 2007
$40 billion for swimming lessons
I compared the move by the fed to dump $40 BILLION into the market to add liquidity like having 3 drowning people in shark infested water. The housing market, the economy and the dollar are all drowning simultaneously, offering $40 BILLION in essence has the housing market and the economy trying to climb on top of the dollar to keep from drowning. Not only does this force the dollar to drown quicker but the life saving benefit is so temporary only offering maybe one or two more breaths for the two at the expense of the third. In the end, if nothing or no one can save the three of them, they will all suffer a similar watery, shark bate-y death.
You would think for $40 billion you could buy some pretty sweet swim lessons. Watch the fed with the $40 billion in swim lessons below.
"So, how do you like my swimming?"
You would think for $40 billion you could buy some pretty sweet swim lessons. Watch the fed with the $40 billion in swim lessons below.
"So, how do you like my swimming?"
Torn
I am very torn on this trade. We discussed the USD/CAD from the view that it could be in a bear flag but I expected a bigger move to the top side. Well it broke out of the bear flag we were watching and bounced off the 1.0000 level, proving a worthy foe to my bearish stance. Now that it has bounced, what do I really expect? A retest, maybe. A break down, probable. A bullish run, not likely but possible.
The interesting thing about this trade is that even though the price has dropped nearly 40 pips from yesterday, our put doesn't really cost us anymore than what we were looking at. So there is the dilemma. 
Do I take a short position now or wait for a bounce higher. I favor a bounce higher, this bear flag confirmation with a bounce off of the 1.000 level is exactly why I don't like trading break outs. I like selling resistances. The put would allow me to just buy the put, take the same basic trade, allow it to run for nearly 8 weeks with no more worry than a 150 pip stop max. That is very promising but now I have to wait until the morning to buy my put.
Do I take a short position now or wait for a bounce higher. I favor a bounce higher, this bear flag confirmation with a bounce off of the 1.000 level is exactly why I don't like trading break outs. I like selling resistances. The put would allow me to just buy the put, take the same basic trade, allow it to run for nearly 8 weeks with no more worry than a 150 pip stop max. That is very promising but now I have to wait until the morning to buy my put.Fundamentally, New Homes came in worse than expected and the Fed dumped 40 billion on the market, both should have trounced the dollar, but instead the dollar held it's fleeting foothold. Tomorrow GDP for the CAD comes out, I wouldn't be surprised by a better than expected GDP and a worse than expected on the CPI from the USD both potential catalysts to break this pair out for another run, to be seen in the morning. If you are going to trade the put you will have to be right at your computer when the market opens, if you are trading the spot, watch for a retest near 1.0060ish.
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