If you were hoping the start of a new month might make trading conditions a little easier and less chaotic, don't get your hopes up too high. I think March may turn out to be the most volatile and chaotic month of the year thus far.
I think we're due for some range breaks, bear market rallies, and surprise geo-political events for all correlated markets. Billions in cash reserves sitting on the sidelines since last year will begin feeding into overall increasing money-flows from global market participants.
I feel like market players want to take on risk... risk has been taken off the table for too long. Knowing the human behavior aspect of the markets, people with money will start to get impatient to see that sidelined cash begin showing a return.
This is an investors market but only to a certain degree. It's definitely a traders market, that aspect will not go away any time in the foreseeable future. But as we draw closer to the end of Q1 and the start of Q2, it is due season for banks and financial institutions to accept the new global market environment, adapt, and begin servicing their client base.
There's a reason dinosaurs don't roam the earth anymore even though they were some of the strongest beasts in the land at one time in history. It's just history though, right? A few of the old dinosaurs in the financial industry won't be around either no matter how much money the Treasury prints to keep them solvent. These are survival of the fittest times, every man for himself. Let those financial institutions cannibalize themselves or become nationalized by government, I don't care.
In terms of actual trading this week, it's a typical start to the month meaning difficult trading conditions thanks to back-to-back ECB interest-rate and NFP events. No matter what, the goal is the same -- end the week flat and in profit.
S&P 500 and EUR/USD:
Roughly two years ago I first started to look at the connection between equities and the EUR/USD. At the time I mainly focused on the Dow, I thought it was the most correlated equities index to the EUR/USD but as I was learning more about the EUR/Equities correlation I discovered the S&P 500 is the key index to watch.
Traders that have been with me for at least the past year already know how I trade using the EUR/Equities correlation but for the benefit of all, I think we need to understand the index in order to best utilize the strong correlation it has to the EUR, USD, and JPY.
S&P 500 breakdown--
Here's a simple breakdown that should explain why I watch the S&P 500 and why it's highly correlated to the EUR/USD and EUR/JPY:
It's the leading gauge of all US equities with a market coverage of 75% of all US stocks
Global market participants give the S&P 500 prime weighting as they construct their investment portfolios and make investment decisions
The S&P 500 index requires public float of no less than 50% giving the index far reaching affects in the institutional and retail side of all markets
Think about it... where are the three main centers of finance and have the greatest concentration of money-flows: United States (USD), Europe (EUR), and Japan (JPY). In my mind, if the S&P 500 is the pillar of the global markets and the top three markets are the US, Europe, and Japan, it's no wonder there's such a strong correlation between the S&P 500 and the EUR/USD, EUR/JPY, and even the GBP/JPY to a degree.
S&P 500 sectors and market weighting--
The ten leading sectors that make up the index are as follows:
Information technology -- 15.27% weighting
Health care -- 14.79% weighting
Energy -- 13.34% weighting
Financials -- 13.29% weighting
Consumer staples -- 12.88% weighting
Industrials -- 11.08% weighting
Consumer discretionary -- 8.40% weighting
Utilities 4.19% weighting
Telecommunications -- 3.83% weighting
Materials -- 2.93% weighting
The three sectors that matter most to us as EUR/USD and EUR/JPY traders are energy, financials, and consumer staples which combined bring almost a 40% overall weighting.
The ten leading companies on the index, broken down by overall index weight, are as follows:
Exxon Mobil -- 5.17% weighting (energy)
Proctor and Gamble -- 2.35% weighting (consumer staples)
GE -- 2.17% weighting (industrials)
AT&T -- 2.14% weighting (telecommunications)
Johnson & Johnson -- 2.11% weighting (health care)
Chevron -- 1.19% weighting (energy)
Microsoft -- 1.89% weighting (information technology)
Wal-Mart -- 1.60% weighting (consumer staples)
Pfizer -- 1.52% weighting (health care)
JP Morgan -- 1.50% weighting (financials)
The top ten companies in the three sectors we as Forex traders should be most concerned with carry a combined overall index weight of 12%. The biggest player on the S&P 500 by far is Exxon Mobil, which is obviously tied directly to crude and we know crude is tied directly to the EUR/USD and EUR/JPY.
Based on those annualized returns, even over a 7-year period it doesn't appear the textbook "buy and hold" strategy makes much sense. Treasuries have outperformed those numbers and typically Treasuries can be a terrible longer-term investment. The interest my bank pays me in my checking account consistently beats the S&P 500. Pretty sad.
Dividends on the S&P 500 are expected to decline 13.3% in 2009 which is the worst since WWII. Smart companies will make large cuts to their 2009 dividends if they want to survive this year. As of the end of February I think the S&P 500 is on pace for a 2009 annualized loss of -38.627%.
I'm not aware of too many traders that use the S&P 500 like we do to trade the EUR/USD but hopefully this make sense why I constantly say there's such strong correlations here and why money-flows in and out of these markets cause fluctuations in price for the euro, dollar, and yen.
That commentary right above about the S&P 500 is more evidence for why I believe in a strong trading community. If it wasn't for a colleague telling me to look at the S&P 500 instead of the Dow I might still be looking at the wrong data... and then where would I be? Probably not as far along...
There's a ton of trading communities out there but this one's different not just because of how we approach the market but mostly because of all the traders that make the community and I think we have some of the very best here.
I gave a target launch date for the new community to go live on 1-March. It's not going to happen. I'm not going to launch it live until I'm happy with the way it looks and before I think it's ready to go. So for now we'll keep the 50 traders that are already in the chat going and hopefully before this Friday we can officially launch. If not this week at the very latest next Sunday/Monday. Being in the Netherlands for a week didn't give me any time to work on the site so I have some catching up to do this week.
The most important thing is making sure our SMS system is working 100%. I don't like SMS as a means of communication to deliver live trade calls but I at least want the SMS to get there as timely as possible. With a free gmail or yahoo email account a trader in almost any part of the world can now get our live trade calls.
My trip to Europe yielded excellent results. Overall, the consensus from Europeans is a dark outlook on the health of the European economy and especially the banking system. One of the darkest secrets being revealed is sub-prime lending practices have taken place in Europe the past 5+ years. European banks are holding toxic sub-prime mortgages just like their American comrades.
Americans taught them sub-prime lending after their friends in Europe saw the profit potential of this new instrument created in the secret laboratories on Wall St. funded by backers in Washington DC.
If US banks can't escape the lethal effects of sub-prime, mortgage-backed securities, no-doc loans, commercial real-estate loans, and commercial MBS's, European banks won't escape the same fate either. Europe and America have the exact same problems but Europe and America can't use the same solutions. There is no Fed/Treasury set-up in Europe. It's like the same cancer requiring two different cures... that's how I see the magnitude of these issues and why it's all weighing heavily on the EUR/USD right now.
Many months ago I mentioned potential issues with old European pensioners. On my trip I found out there are pensioners in Europe right now suffering because their money was tied into highly-leveraged and ultra-risky investment instruments. I mentioned European bank failures... it's happening in Europe right now. Banks are failing and being nationalized.
I talked to a lot of younger Europeans, in their mid-20's, and I heard a common theme which was "I didn't notice anything until just a few weeks ago and now its looking bad..."
The very last European I talked to was somebody who was on her way to America for a month to find a job in her field of expertise. I think she was just out of university and is the most ambitious and determined person I've met in a long time. She knows the economy is screwed but she's going after her dream anyway. You have to respect a person with that kind of enthusiasm. I hope she conquers the world.
She was the exception to my experience... what I was hearing overall is that a lot of the terrible economic and social conditions we've been experiencing in America are just getting started in many parts of Europe and people are beginning to grow fearful.
One difference I noticed was that in Europe, or at least in the Netherlands, people tend to mind their own business unless you feel like revealing something personal and open it up for discussion. In America people are always in other people's business all the time and the gossip is 24/7 and that's why we have all the call-in radio and TV shows, reality shows, advice shows, tabloid shows, network news shows for every political view, etc. I'm convinced America is the gossip-mill capital of the world.
Some of these things like sub-prime, no-doc lending, and foreclosures are not as openly discussed and revealed in Europe nearly to the degree as in America, but the cracks are starting to show and the problems are coming to the surface.
The point is, the economic situation in Europe is looking as bearish as we've been saying and I don't see a turnaround before it gets worse. As I told my friends in Europe, I'm certain the EMU (European Monetary Union) is about to get bigger in the near future. I think in 2009 the Eurozone will take on a new shape and will certainly add a new level of complexity trading the EUR/USD.
On a personal note, I had the most gracious hosts you could ask for, everything was taken care of for me and the whole trip went better than I could have imagined. The hotel accommodations were fantastic and I think those that made it left with some additional profit in their account and a stronger understanding of how to trade these markets for consistent profit.
Bear market rally due in March:
During the month of February the Dow lost a respectable 1,000+ points. The S&P 500 is putting in its worst performance since 1937. The S&P 500 is now down 47% year-over-year. Even Warren Buffet is keeping pace with the S&P's monumental losses. In his annual letter he reported Berkshire being down 44% year-over-year. And in terms of earnings, Buffet's Berkshire Hathaway took a 2008 earnings loss of 96%.
This is purely my opinion -- but I see these markets are perfectly set-up to make a sharp and vicious snap back up. If I'm wrong and we have another massive sell-off all month long, so be it, I'm just an intraday trader. But I would not be short of Wall St. right now if I were trading equities.
It's my opinion that the Dow, S&P 500, and S&P 500 futures have either overshot the downside or are nearing the overshoot point; the exhaustion point. As a Forex trader, the last thing I want to be is caught short on the EUR/USD or EUR/JPY when Wall St. decides enough is enough and we have a violent 320-point bear market rally on the Dow. I believe that moment is now due and could come when least expected.
I believe any solid bear market rally will also overshoot to the upside and once it becomes exhausted we'll see a renewed round of selling on Wall St. These markets are anything but near a bottom and we've not seen an end to the panic and fear in the global financial markets but a relief rally is imminent. Think "short squeeze".
With it being the first week of the new month we have a full economic calendar like always... it doesn't help we also have to contend with a federal budget proposal that would make Chairman Mao smile, a banking system on the brink of nationalization, and rising geo-political tensions in places like the not-real and man-made country known as Afghanistan and on the Gaza Strip.
Here are the key events for the EUR/USD that I'll be focused on:
Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4
Rhetoric out of the EU's summit
Trichet's speech on Tuesday
ECB's rate decision and Trichet press conference
Surprise news affecting the global financial markets
The rest of the stuff is just noise in my opinion and those are the issues I'm most concerned with this week.
My forecast calls for the ECB to cut rates 50bps on Thursday. I can make a much better argument for Trichet being forced to cut rates by at least 50bps on Thursday even if it's against his will. The ECB has no choice but to act more aggressively and show global market participants they are willing to take measures like the Fed and Treasury.
Of course monetary policy won't solve the issues but the ECB needs to play the part and stop spoiling the party. Trichet will see GDP numbers that are comparatively as bad as what Bernanke sees in the US. It's all coming and the faster Trichet accepts reality the faster we can get on with things. Expect another freak show in Frankfurt on Thursday.
In my opinion it's make or break time for the USD Index. There's solid resistance at 88.50 on the upside and solid support at 86.50 on the downside but this range is coming due for a break and I believe we'll see a break sooner rather than later. It could be a break a trader wouldn't want to get caught on the wrong side of.
I'm not making any predictions but if I had to guess, I'd say the USD is due for a season of weakness overall. All we need to do is look at any number of Fed and Treasury data to know those two banks are using monetary policy to rapidly accelerate the depreciation of the US dollar.
When I look at the Fed and Treasury's monetary policy and read between the lines, I see Bernanke and Geithner using monetary policy to prevent deflation and speed up the process of re-inflating the economy. There's a hole at the top of the bubble and the Fed was trying to force air back into the bubble from the bottom which doesn't work. Now, with all of the new monetary programs the Fed and Treasury are re-inflating the bubble through the top and the bottom, hoping this somehow forces the bubble to inflate again.
Wall St. needs inflation to go up again. The USD Index needs to stop moving up and start moving down in order for Wall St. to stop moving down and start moving up. It cannot work any other way. Wall St. cannot gain if the dollar keeps gaining, it's a clear correlation under current market conditions and only works one way.
When the global markets decided they've had enough of the USD and risk aversion is set aside, the USD Index should break the support at the 86.50 level while at the same time equity indexes like the Dow and S&P 500 should be breaking through resistance. The scenario would also include Treasuries turning increasingly bearish, crude gaining, and gold possibly continuing to fall.
So, as I see these markets begin to align, I see the potential for the USD Index to be exhausted or close to being exhausted if it can't break through the 88.50 level. When it can't go up, there's only one other place it will go...
The benchmark 10-year yield has continued to quickly gain support well above the 3.00% level even in the midst of Wall St.'s massive sell-off last week. Is this a good sign or a bad sign? Both. It's a bad sign for the US government that nobody wants to buy their debt but it's a good sign for equities because maybe some of those money-flows that were bound for Treasuries may end up coming to equities should a sustainable rally begin.
I'm bearish on Treasuries. The 10-year's bullish run to the 2.00% level failed miserably several times and the Treasury is printing money so fast and creating so much debt out of thin air so rapidly it's hard to imagine Treasuries somehow turning bullish all of the sudden. Sell it all.
I want to see Treasuries get sold-off so viciously it makes Geithner crack. People like Geithner are the ones responsible for this mess and it's time for these markets to turn the tables on them. Maybe only in a perfect would that ever happen. Get the Xanax ready for Geithner if China decides to use Treasuries as leverage when their economy takes some hits...
Even if the Fed keeps rates at 0.00%, the market will move rates up for them via Treasuries, thank you very much.
The market's not opened yet at the time of this post but I'm expecting chaotic and illogical trading conditions overall. There's just a whole bunch of crap going on and it's making people crazy. Humans control markets and when the humans are crazy the markets are crazy.
As bearish as I am on the euro and the Eurozone economy I can't be any less bearish on the dollar and US economy. The trillions being added to the national deficit is enough to send the US dollar to its death.
The Obama administration wants to spend trillions to socialize the US health care system in the midst of the worst global financial crisis that is already costing several trillion to keep solvent. That makes about as much sense as the trillions spent on the war in Iraq... for what? Bush had his trillion-dollar+ war and now Obama has his own trillion-dollar+ war... same difference in my eyes.
Neither matter is the government's issue. Those two planes that flew into the Twin Towers I think was strictly business between Osama Bin Laden and the Bush family. Connecting the dots between Bin Laden, daddy Bush and his son aren't very hard to do. Most Americans don't have health care, so be it, that's life. Obama see's votes in socialized health care just like Bush saw votes in creating fear and enemy to rally patriotism.
I'm sure Obama and Democratic lobbyists are well connected to the health care industry and there are dozens of backroom deals ready to go down when health care becomes socialized. Politics are such a joke and I think a person has to be insane to pursue power through political office.
As far as trading goes, it's a very difficult time with all of these critical economic and geo-political events weighing on the markets. My trading plan is to use lower-risk entries and be happy taking small profit when the market shows sign of either upside or downside exhaustion. I don't want to get caught shorting the bottom or long at the top, so I'll stick to that plan for now. Very simple.
Smart risk and money management will be essential this week especially the next 72-hours as certain market participants will be positioning themselves for the new month, the end of Q1 soon, the ECB, NFP, you name it... the money-flows in and out of the markets this week should make for some times of strong volatility.
Until the EUR/USD can sustain a downside break of the 1.2500 level, I'm not going to get too excited about any euro downside moves. My trade plan at least at the start of the week calls for buying the euro on the dips. If the markets turn to selling the JPY and the USD Index heads towards a support level break, the EUR/USD would benefit nicely from that type of move.
This is already a mini novel, so I'll close things out here. Do not overleverage and if you don't like the trading conditions, don't trade. Keep it as simple as possible this week, stay flexible and expect more chaos.
Greetings from Oosterbeek... well, we certainly had an interesting start to the week so far. All markets experienced sharp price swings almost as soon as Asia came into the game last night and right through the close of NY. This is why I laugh on days like today when I see the euro run up towards the 1.3000 level. First thing this morning I said I don't care about this euro run, we should see 1.2700 by 1700 EST today. We hit 1.2700 by 1500 EST with even more downside potential on the horizon.
Did we see anything new today? Not really these moves are now commonplace and really have no rhyme or reason but for want of liquidity and levelheaded thinking. For me the best thing about today was not what the market did but what I've been discovering while I'm here in Europe.
Of course I'm here to see friends and traders but I needed to travel here for myself. I needed to see it all for myself, I needed to see if my views and opinions on conditions in the European banking system actually matched reality. I had to see with my own eyes and hear with my own ears what the real economic viability of the EMU is in the midst of the global financial turmoil. I think the EMU is about to get bigger... I don't have time right now to get into the particulars but I'm feeling extremely comfortable with my overall bearish views on the Eurozone and the EUR/USD. As one trader put it best, "the party in Europe is just about to begin". That's really all I needed to hear.
When I get back to America I want to write a post on how this trip to Europe is shaping my views and outlook for the overall state of the markets in the next month and beyond. I will say this, I believe the Forex market, equities, commodities, and bonds are due for a new season; a new turn or direction. I don't mean in terms of trend direction per say but I feel like things are coming that will change the face of the markets as we've known them since October of last year to moment we're in right now. Things are not right.
What happened to Wall St. on Monday? Well Asia had a few ideas that the S&P 500 futures should go up along with Dow futures and all anti-risk correlated markets like the euro, crude, etc. London and NY had different ideas and it was mostly strong money-flows out of the S&P 500, equities couldn't catch a bid followed by heavy selling and then the S&P 500 futures breaking down again in the 780s, falling 40+ points by the close of NY -- it's those types of moves, fueled purely by panic and fear, that cause the sharp price swings which lead to an almost instantaneous bearish JPY turn into a very bullish JPY along with gold, the dollar, Treasuries, and the USD Index.
The USD Index said "no thank you" to the 86.50 level and made nice gains which only helped push the euro lower against the dollar. The stoploss triggering is also part of the equation of course. For those that sent in a few emails today asking why the markets did what they did, that's my opinion.
As I'm writing this part of today's update it's 10-minutes until 1700 EST when we rollover into Asia and now we will wait to see what Tokyo has in mind this evening... a continuation of today's moves made during London and NY? It's possible, don't forget it was the Asian markets who continued Friday's intense upside moves in the EUR/USD, GBP/USD, USD/CHF, JPY crosses and all the others. All traders should beware of stop hunting and stoploss triggering in the markets between 1700 EST and 2000 EST this evening.
Fundamentally we have a number of key events on the calendar for Tuesday. Starting in Europe we'll get French (non) Consumer Spending, German IFO, and Industrial New Orders along with a few other pieces of data that will be crappy. If the more important euro data like German IFO and Industrial New Orders prints stronger to the upside and the JPY happens to be weak at the same time it's possible to see the euro gain on this news. Worse than expected data may be seen out of Europe between 0245 EST and 0900 EST on Tuesday morning...
For the US market we have Consumer Confidence as the key data. There is no consumer, there will be no confidence, end of story. The biggest event of the day is Bernanke's testimony before the Senate Banking Committee in DC. Bernanke will give a report on one of my favorite things... Fed monetary policy. I'm expecting another circus side show act in Washington tomorrow when Republicans get a chance to hammer Bernanke. What can Bernanke say tomorrow that will give the markets any confidence or direction for the future?
Wall St. will likely open with the same level of panic and fear they closed with on Monday. The Dow and S&P 500 were brutalized right into the close. But with Bernanke we need to be listening for any rhetoric, double-speak, slip of the tongue, or odd body language to signal how the market may trade the USD. His report is on monetary policy and as I see it, the Fed's past and current monetary policy has sealed the long-term fate of the USD -- it should be valued on par with Zimbabwe.
We are not in any logical trading or economic conditions so we'll see all of these worthless, over-valued currencies continue to slaughter each other as they all respectively battle it out for last place in the race to the bottom of the pits of hell. No central banker on earth wants a strong currency or can have long-term survivability with an uptrending currency in light of the global economic turmoil.
Neither Bernanke or Trichet can afford a strong currency right now... these guys don't really need buying power, they need some type of debt savior. Anyway, as far as trading and the euro is concerned, my plan is simple -- I'm shorting the EUR/USD and EUR/JPY on the rises unless the markets show me otherwise. I've picked a side, I'll fight with the bears for now and play the downside corrections.
These are the times when strict risk and money management is imperative for all traders. Be aware of what time it is in NY before you take a trade, have a gameplan in case the market moves against your position, and be ready to take a loss and be patient until the market shows you to take the next trade. I expect more of the same on Tuesday.
This will be one of the last updates for the week. I'm getting ready for my trip to Europe and won't have much time for the markets until Sunday. Thursday was wild. Starting in early London and through the mid NY session we saw bear market rallies for the EUR/USD, EUR/JPY, GBP/JPY, crude, S&P 500 futures... everything was bouncing and recovering nicely but Wall St. did not have a bear market rally.
In my opinion that's where everything went wrong... as I said about a dozen times the past 24-hours, these markets were due to bounce and rally, they all did except for the Dow and S&P 500 when Wall St. opened. I think this stopped all markets dead in their tracks and then the process of giving back their gains.
Spot crude went mental... it started the day around $34, surged to $38, dropped back to $34, surged back up to almost $40 and is now ranging around the $39 level. Gold sold-off as risk aversion was set aside in the Forex, commodities, and Treasuries markets on Thursday. The equities futures markets took on risk, driving the S&P 500 futures to the 796 level before falling below 780 in late NY trading.
The EUR/USD recovered about 230-points off its lows but failed fast above the 1.2750 level. In fact the high Thursday was right on the 1.2760 key level where it sold-off and fell 100+ points. Obviously 1.2760 is important to the market and is being protected by the bears for now. Global currency panic:
Even with Wall St. failing again to the downside the JPY remains weak and unable to catch a solid bid. I'm no expert on the yen or the Japanese economy but this could be a sign market participants are finally understanding how abysmal the Japanese economy looks in light of a global recession. If safe-haven money-flows were going into the yen like they do the dollar, at some point people will have to wake up and realize the JPY is just as worthless as the USD will end up being.
I'm not an alarmist but as conditions continue to deteriorate in the global markets, I'm concerned about panic setting in the currency market and a situation unfold where market participants pile into the dollar and slaughter everything else. It would be like the ultimate battle of worsts and pure chaos. This type of situation could play out if the Dow and S&P 500 start making extreme lows or we have a major geo-political event or somebody's sovereign debt is downgraded/defaulted... somebody like Japan, an Eastern European country, the UK, the US, take your pick...
Wall St. is set-up to take another leg down if support fails to hold and the bears take the Dow and S&P 500 to places not seen in a number of years. What cannot be predicted is how our market will repsond and specifically what the EUR/USD will do. That being said, the logical move would be more strengthening of the USD and gold.
As I write this there are 13-minutes to go before Wall St. closes and the Dow is well below it's November 20th closing low of 7,552. The bears that trade on techs could easily use that factor as another reason to sell, likewise it could be a place ot take profit on shorts, which would cause equities to bounce -- that's exactly the type of risks that will be in the markets on Friday... trader beware.
Tomorrow we should expect sharp price swings and times of strong volatility as global market participants square up their books, take profit, take losses, add new positions, etc. The moves made on Wall St. tomorrow will largely affect moves seen in currencies.
I think the trading conditions will most likely be a mess during London and NY on Friday. There is a ton of Eurozone manufacturing and production data which is not expected to print strong. Trichet speaks as London rolls in and there's no telling what Trichet will say tomorrow. He could reference the upcoming rate decision or he could say nothing at all.
There's no EUR/USD bias for Friday, it purely be a traders market in my opinion. At 0830 we get CPI and Core CPI and I expect both to print positive to the upside just like PPI did. If we get a strong CPI print it's possible that might be enough to slow down Wall St's slide and give them something to cheer about.
Everybody on earth is talking about Rick Santelli's revolutionary rhetoric in the bond pits this morning. It's on Youtube and CNBC's website site, I watched it and it's good stuff, check it out.
That's all for now. I may have one or two more updates if market conditions warrant.
I'm looking forward to the day we don't unveil a new government bail out, spending program, or piece of legislation, but saving the homeowner is the government's flavor of the week and on Wednesday Obama gave the markets his plan to save 9-million foreclosures at a cost of $75 billion plus another $200 billion of "just in case" money for Fannie and Freddie.
Wall St. didn't like the plan too much. The Dow managed to close just three points above last November 20th's closing low but it spent a good portion of the day moving towards the intraday low of 7,449 and within striking distance of 5-year lows. The S&P 500 closed in the red while the futures were hammered most of the trade day. Crude stalled out and gold surged with the help of more panic money.
It's estimated at least 28% of all mortgage holders in the US own a home worth less than what they owe. The upside-down crowd is the group of homeowners Obama is targeting. Under the Obama foreclosure plan the banks are offered special incentives to cut the mortgage payments to a level that is no higher than 31% of the homeowner's income. In non smoke-and-mirrors terms, this is called government price fixing.
There's other convoluted aspects to this plan that won't work but this part is the most troubling. How can the government put a value on a home that's in foreclosure when home prices still have to fall at least another 5%? Many homes in foreclosure have been sitting vacant for months, infested with rats and mold, and the banks are supposed to trust the government to fix the price on that home and negotiate a reduction in principle and interest? This sounds like insanity thinking to me.
It shouldn't be any surprise financial stocks fell after Obama released his plan. This is a terrible deal for banks and only really good for homeowners with mortgages held by one of the GSE's. Fannie and Freddie have zero risk here, folks who used their homes like ATM machines will catch a break, and in the end the markets get screwed because this is a form of nationalization I believe will begin catching on like a virus in other sovereign nations.
Bear market rally due:
If Obama, Bernanke, and Geithner will shut up for a few days I would expect to see another bear market rally on Wall St. in the near future. I believe the idiots in DC and people like that Japanese finance minister who was drunk out of his mind at the G7 are the ones causing most of the fear and panic in the global markets.
When the politicians and central bankers go back to doing what they do best like chasing interns and lobbyists, maybe Wall St. will finally calm down and some of the beaten down equities will squeeze the shorts and go back on one of those 350-point bear market rallies we used to see a few months ago.
I think a bear market rally is due on Wall St. and should this occur the EUR/USD, EUR/JPY, crude, and S&P 500 futures would benefit while the USD, JPY, USD Index, and Treasuries would fall. Unless we have mega moves in S&P 500 and Dow futures overnight, those markets should open Thursday back near key support levels.
Obviously if support is tested and continues to hold there's only one other way Wall St. can go. If you're not familiar with bear market rallies, they can be extremely volatile with sharp price swings, extended moves and heavy stoploss triggering. It's not something you want to be on the wrong side of even though they often come back.
Thursday or Friday would be a great time for the bulls to short squeeze the bears. Reason being, the bears have been short and in command of the markets for the past 72-hours. At some point the shorts will want to start covering their positions before the end of the week. That's a perfect opportunity for the bulls to throw liquidity into the market to catch the upside volatility created by short-covering.
So as more shorts cover this would cause the markets to continue to bid up, then stops start getting triggered and as those positions are liquidated it causes further bids to hit the markets meanwhile the bulls are pouring liquidity into the markets and buying into the rises... it can go on for several hours or several days. Eventually the markets overshoot to the upside, run out of momentum, then begin to retrace their gains.
That's the essence of a bear market rally, I think Wall St. is due to see one and this means I adjust my trade plan and risk plan for the rest of the trade week. If it doesn't happen I don't care, I'll keep shorting the euro rises, but I'm ready for it.
Bernanke and FOMC:
Bernanke did a great job talking from both sides of his mouth today -- his message to those who fear a return of inflation: "With global economic activity weak and commodity prices at low levels, we see little risk of unacceptably high inflation in the near term; indeed, we expect inflation to be quite low for some time".
His message to those who don't fear inflation: "At some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to moderate growth in the money supply and begin to raise the federal funds rate, unwind some of its credit-easing programs and allow its balance sheet to shrink".
When Bernanke's dovish and hawkish at the exact same time it doesn't help the markets make sense of anything. In an effort to be more "transparent" the FOMC updated their economic forecasts and the Fed is now predicting the economy will contract between 1.3% and 0.5% this year and grow 2.5% to 3.3% in 2010.
The Fed also said the unemployment rate would likely rise to 8.5% to 8.8% in 2009 before gradually declining over the next two years; consumer prices would likely rise 0.3% to 1% this year; and the economic outlook is considerably worse than in October when the FOMC thought the economy would grow by 1.1% in 2009. Wrong.
My overall view on the euro remains bearish but it's certainly due for a bounce back up after failing to break my 1.2507 key level during the NY session. As the price action in the EUR/USD and all correlated markets continues to evolve the rest of this week my trade plan will allow euro longs when conditions show a higher probability of this being the proper trade. No trader wants to be caught short below 1.2550 should the bear market rally take shape and these beaten down markets go on a run.
Fundamentally we have PPI, Core PPI, Initial Claims, Philly Fed Index, and Crude Inventories. I'm not expecting a negative print on PPI and I think Initial Claims will print lower than last week. Atlanta Fed Lockhart speaks about economic conditions on Thursday at 1315 EST.
At this point Asia is just getting into the game and Tokyo's yet to make its presence felt so I will have more EUR/USD and overall market commentary as conditions warrant. I don't expect too much volatility until after London opens. It could be more on the quietside until NY even.
The S&P 500 futures are trying to recover right now and gold continues to climb back towards resistance levels. Keep your eye on these two during Tokyo if you are trading. There will be euro stops set above the 1.2624 level so it's possible we see the euro move up there to knock out those stops sometime in the next 12-hours.
The Forex market and all markets for that matter took an interesting turn at the start of the week. It was also a historic day as the US taxpayer became officially burdened with the biggest debt-funded spending plan in American history.
Just before signing the spending bill, Obama remarked, "This is the beginning of the end..." Of course he was referring to his stimulus plan and how it was going to fix Wall St. and Main St. but I have a feeling his words will be prophetic for other reasons. It may take ten or more years to all play out but I fear adding several trillion dollars of debt in this kind of way and under these types of conditions will come back to haunt us in the end.
Equities test lows:
As we suspected would be the case this week, the Dow tested it's November 20th closing low of 7,552 and closed exactly on that level. On November 21st the Dow made an intraday low of 7,449 and this level now comes into view over the next 72-hours.
The S&P 500 isn't quite near it's November lows but quickly approaching those levels. The S&P 500 futures have been weak since last Friday and fell all the way into the 780's before recovering late Tuesday. As you know I've been bearish on equities but now I'll look for the bulls to make some sort of stand against the Dow and S&P 500 breaking to new intraday or closing lows.
There is genuine panic on Wall St. and even more so on the European bourses. European equities were hammered on Tuesday as more concern is raised about the health of Europe's banking system. I'm finally starting to feel justified for my negative views on Europe's banking and financial system. It's been at least six months in the making but the negative sentiment on Euro banks is picking up steam and will serve to keep continued downside pressure on Euro stocks and European currencies.
Wall St. will be tested again tomorrow as Obama unveils a new spending package for homeowners in addition to key economic data for housing, production, inflation, growth, the FOMC meeting minutes, and then a speech by Bernanke.
Commodity price action reveals fear in markets:
Gold has gone mental the past 48-hours as market participants gripped by fear and anxiety pile into the commodity. Gold hit 7-month highs and is positioned to continue its extended move towards the $1,000 level. For gold I will be watching two levels: $1,000 and $1,035. Should the market take spot gold above that $1,035 level it could easily soar to places not seen in a number of years.
On Tuesday we had a repeat of the USD/Gold anomaly -- both the dollar and spot gold made simultaneous gains. This is such a rarity and such an impossible correlation it can only signal participants have little faith in seeing normally functioning markets in the near-future. The surge in gold, USD, and the USD Index indicates market participants are concerned about more than the economy and equities.
There is real fear of currency collapses in weaker markets and this too is driving gold prices. Moody's is ready to drop the hatchet on Eastern European banks and this would have a terribly negative affect on bigger players in Germany, Sweden, and France who will suffer losses from ratings and debt downgrades made by the likes of Moody's.
Crude's price action is more inline with the normal USD/Crude correlation and I remain nothing but bearish on crude in the near-term. Fundamentally and economically there's nothing to push crude past $50 any time soon in my opinion. Crude will surge up again one day but we're not ready for that yet. Crude's continued downside weakness will weigh on the S&P 500 futures which will weigh on the EUR/USD. Spot crude led the S&P 500 futures lower, it pushed them below the 800 level and was extremely helpful as a trade indicator on Tuesday.
More bailouts coming:
If you believe the passage of Obama's $1 trillion spending package was the last of the taxpayer funded government bailouts, think again...
Chrysler said it needs another $5 billion in taxpayer funds to keep going. Chrysler's already borrowed $4 billion. Chrysler was insolvent when it borrowed the first $4 billion and it will be insolvent after it borrows the next $5 billion. Either Chrysler or the government needs to stop the company from keeping its employees on an emotional roller coaster... take it to the field, shoot it and lets move on.
GM is in as big a mess as Chrysler and should be merged with Ford to form one automaker where each company keeps its profitable product lines and works towards producing better products that people will actually buy. GM's asking for another $17 billion in taxpayer money to keep the lights on... what a mess... more job cuts will be forthcoming from all three automakers.
And what about the commercial real estate market? We hear very little about this real estate sector but troubles here should begin to emerge sooner rather than later in my view. The post office will probably need a bailout, the states of California and Kansas will need more bailouts, home builders, steel producers, and the service and hospitality industries will all likely need bailouts.
These are the types of reasons why equities can't gain any upside traction and why risk aversion money-flows should continue pushing gold higher and crude lower in the near-term.
Overall I maintain the same bearish view on the euro. As we said, should a sustained break of the 1.2692 level occurr the euro would drop another 100-points from there and we've seen this already play out on Tuesday. Traders who are attempting to buy the euro are making their lives much harder than they need to be. I've had quite a few emails this week already and all I can say is, if you've been adding new positions in the 1.2800's and 1.2700's you're peeing in the wind. I don't see the need for traders to have the stress of euro longs in 300-points of DD under these chaotic conditions.
My trading bias remains to short the euro on the rises. To make it simple, here's why:
EUR/USD price action: EUR-
USD Index: EUR-
S&P 500: EUR-
EUR/USD fundamentals: EUR-
S&P 500 futures: EUR-
European banking and sovereign debt: EUR-
"Gurus" saying to buy the euro: EUR-
Those are just ten fast reasons I can think of to keep me shorting the euro rises. Obviously it can move back to the 1.2850 level and higher should equities recover but risk is clearly on the euro at this stage and I see no point to fight against the trend, the price action, and the market sentiment. My 1.2692 level is key for any potential euro upside recovery. In my view as long as we stay below that level the doors to the 1.2480 level remain open.
On Wednesday the market has to contend with: Housing Starts, Building Permits, Industrial Production, Import Price Index, the FOMC meeting minutes and a speech by Bernanke. Obama will speak tomorrow and unveil his homeowner rescue plan. Overall the data should have limited market interference and I would suspect market participants stay focused on their fears and what's happening with the government, Fed, and market correlated variables.
The 10-year yield has moved back down and is headed for a return to the sub 2.50% level should current conditions persist in the short-term. As far as Wall St. is concerned, I really cannot predict how they will react tomorrow.
The Frankfurt and London sessions will be critical for the EUR/USD as we see how those markets react to more bad news out of the Eurozone and more fears about Euro bank downgrades. As far as trading goes, my bias and plan is clear and I'm sticking with it until the market shows me otherwise.
I expect the price action in all markets to remain choppy with times of sharp price swings when the liquidity picks up during London and NY. These are not "buy-and-hold" conditions by any stretch of the imagination, that is a losing strategy in this game right now and I do not recommend traders hold euro longs above the 1.2760 level into heavy DD, this makes no sense when longs can be taken 200-points lower right now.
The EUR/USD, crude, and the S&P 500 futures are due for a bit of a bounce and upside retracement but I'll use a euro rise to short it again mostly on a scalp and intraday basis. It can go back up as high as it wants to, when it's exhausted and overextended, I'll short it down again.
More updates will be posted later as market conditions warrant.
With about 2-hours to go before Wall St. opens we can see all markets under a considerable amount of pressure early this morning. After the break of the 1.2700 level we've seen the euro drop 100-points and is now moving back towards a test of the 1.2600 level as I write this commentary.
My overall view remains bearish on the euro and my price levels remain the same -- as long as wemaintain a sustained break below the 1.2692 level I see more downside and I'm expecting a sustained downside break of 1.2600 and we should see points lower.
German and Eurozone ZEW printed much better than expected but this is mostly due to speculation Trichet will cut rates by 50bps in a few weeks. The euro gained back zero ground on the back of strong ZEW because what we're seeing right now has zero to do with those numbers, there is panic in these markets today.
The S&P 500 futures are at low levels I've never seen before. They've made a few runs at breaking 800, failing each time but the momentum to go lower is certainly there. Should spot crude decide to take another run at the $32 level or lower we could see some slaughter with the S&P 500 futures. Both of these EUR/USD market correlated variables keep downside pressure on the euro.
Spot gold has gone mental so far today trading at the $963 level. I saw gold blow through resistance at $950 and $955 and yet again we see clear evidence of how panicked and freaked the global financial markets are. Market particpants have little faith in the future right now because in reality conditions continue to deteriorate, this cannot be denied by any.
Trading risk will be extremely high today because it's very likely Wall St. will open with the Dow and S&P trading near dangerous downside levels. Should those November 2008 lows break down and support gives way on the Dow and S&P 500 there's really no predicting what could happen. I imagine we'd see some kind of freefall situation while stops are knocked out and a stoploss run of apocalyptic proportion unfolds in Forex, equities, and commodities. The futures market will go nuts if Wall St. breaks solid support.
Last week I said my gut feeling tells me those November lows will be tested and today could be the day. If not today, in the short-term I believe.
Trade smart today. If your risk appetite is low, sit on the sidelines and pick up the crumbs later on this evening.
With it being dead President's Day and all US markets closed, there's really nothing to recap for Monday. I think the EUR/USD moved in a bottom-to-top range of 100-points or so. But now in early Asia we're finally getting some decent volatility and finally seeing the euro break my downside key levels of 1.2760, 1.2720, and 1.2700.
The EUR/USD spent almost 48-hours stalling out at the 1.2800 level and as I've repeated many times, in the Forex market, the more things stay the same the more they need to change. I maintain the same views with the euro -- should the market sustain a break below the 1.2692 level we could easily see a further correction of at least 100-points.
There are precious stops sitting below the 1.2650 / 1.2620 / 1.2600 levels and as long as this downside momentum can sustain I don't see any reason why the euro cannot continue falling in the short-term.
The return of the markets also brings a return look at a very key piece of fundamental and economic data -- TIC. I believe the TIC data will be closely watched as this information will give us a good indication of foreign demand for Treasuries. Rmember this data is two months and I really have no forecast for this data. It would not surprise me to see TIC print negative again and for the prior reading to be revised lower.
The euro could have an interesting Asian session and all traders should expect volatility and liquidity to pick up after London enters the market and of course when Wall St. returns after the 0930 EST timeframe.
VeriteFX.com Weekly Market Outlook February 15 to February 20 2009
Today marks the start of new chapter in the experiment known as free market capitalism. When Wall St. opens up on Tuesday Obama will have already signed the most retarded government spending program in the history of God, earth, or mankind. For all intents and purposes the federal government has taken a giant leap towards nationalizing the US banking and financial system.
I'm still fairly young but during my brief lifetime I've seen the Chinese rise to become brilliant capitalists and industrialists while the government of my own country has rapidly expanded it's power and control over its citizens. In my opinion things like the Patriot Act and now the $1 trillion spending package have put Americans in the grips of a government now too powerful and hedged to fulfill constitutional authority granted to the people when the government grows too large.
Thomas Jefferson said it best:
"A government big enough to supply you with everything you need is a government big enough to take away everything you have"
George Bush said the American people needed the Patriot Act to protect them but in return we got a piece of irreversible legislation that violates the Bill of Rights and civil liberties granted to all free men in the Constitution. Now we have a trillion-dollar spending package that expands the control of government which we know is incompetent and inefficient at best.
The spending package, which has a sticker price of $787 billion, but will end up totaling $1 trillion is doomed from the start and destined for failure for more than just economic and geo-political reasons. It's a mess no matter how you slice it... it received zero Republican votes in the House and three Republican votes in the Senate.
The final congressional vote happened in the dead of night while half the world was asleep. It's estimated 25% or less of the Democrats who porked up the bill and voted for its passage have any idea what's in the total spending package. The final package was slapped together in less than a week, voted on, passed, and will now be signed into law. What a nightmare this is going to turn out to be...
I get to talk to people from all around the world and I can't think of a single person that's expressed any support for the spending package. My friends and contacts have diverse political and social ideals, so I'm getting a well-rounded view.
I have a message for every single one of you who voted to put Obama in office:
You got no change. You got nothing but more of the same and worse. Bush's stimulus plan was $168 billion and Obama's is $1 trillion, worse. Obama's cabinet appointments have been a disaster and filled with scandal and controversy. Obama's pick for the Treasury is a joke. Geithner is the laughingstock of Wall St. and in the worst economic depression since the Great Depression, why would the president of the United States want a fool running the Treasury?
Even the media is starting to turn on Obama. There's not a single program, earmark, or project in the spending package that fixes the root issues weighing on the economy and the global markets. All the crap in the spending package are pet projects the Democrats have wanted to push through but were unable under the Bush and Republican regime. This is some of the sickest comedy ever.
Global market uncertainty--
The impact this monster's going to have on the Forex markets and all the markets is a total unknown at this stage in the game. That spending package is going to cause such an uproar of speculation and uncertainty in the global financial markets, I believe it's intended effect of fixing the markets will only cause further confusion, fear and panic in the near term.
I think the whole thing is ridiculous. A trillion-dollar spending package that only adds $13 to the average worker's paycheck isn't going to help anything. And how can they cut taxes for 93% of all taxpayers while dropping a nuclear debt bomb on the deficit? This line of thinking is insanity to me.
I watched CSPAN a lot last week. It was painful but I wanted to see the Democratic politicians on Capitol Hill sell the spending package to their comrades and their enemies across the aisle. I watched freaks like Chuck Schumer and Chris Dodd. These men looked liked some kind of Manchurian candidate zombie puppets.
Chris Dodd, from Connecticut, which is one of the richest states in America was whining about bad economic conditions in his state and how the spending package would prevent Connecticut from being swallowed into the earth. Connecticut is the favored state for some of Wall St.'s wealthiest and most successful. There's probably a lot of ex-successful Wall Streeter's in Connecticut now, so maybe Dodd is right about tough economic times up there.
During Dodd's emotionally detached plea to get at least one Republican vote, he said: "People are losing jobs through no fault of their own"
Wrong. Whose fault is it? George Bush? The Fed? The Illuminati? Aliens? Of course it's people's faults for the global financial turmoil. CNBC has a new documentary called House of Cards. In it they interview an immigrant factory worker who was given a sub-prime loan for a $584,000 home in southern California. The man claimed to make $46,800 a year. Now he's in tears trying to figure out what happened to his "American dream".
According to idiots like Chris Dodd, it's not his fault. Wrong again. A family of five with a pretax income under $50,000 a year doesn't belong in a half-million dollar home. He tried to play in a world he didn't belong in and he paid the price. The banker that wrote the loan and put the man in that home is also out of a job because the days of no-doc sub-prime home loans are gone. They all deserve what they got.
This congress will forever be known as the one that socialized and nationalized America. There are a lot of angry people right now over this spending package, especially here in the South. Just as extreme as the spending package is there is extreme thinking on the other side of the spectrum. We'll see a rise in strong anti-government sentiment and fear mongering in the days ahead.
Personally I really don't care about any of this. I don't dwell on it and in the grand scheme of life it's just another stupid idea humans have come up with to fix a mess they created. The people that create the mess are the same ones that control all the power wealth, so they create more power and wealth to fix the mess they created. I just have to laugh at it all and at how dumb people are. This is the insanity of the 21st century mindset I guess. I can't explain it, I try to keep things as simple as possible.
I'm a Forex trader and I love what I do, I'm happy, content, provided for, and I really have nothing to complain about at all. It seems like the whole world has lost its mind. I'm hearing a lot of crazy thinking and outlandish ideas and I just hope people get a hold of themselves and see things as they really are.
How all this affects the market is purely unknown and anybody that thinks they can predict should be looked at with skepticism. It's going to take Wall St. and the global markets more than this week to figure out how this massive spending package and future measures taken by G20 nations will impact all markets. It's going to take a considerable amount of time for these issues to play out.
I look at the passage of this trillion-dollar spending package as the halftime show at the Super Bowl. The halftime show might be fun and entertaining and way to market products to the fans but the halftime show has zero impact on the final score of the game.
This entertaining twist will not determine whose left standing when it's all said and done, the dest settles, and we see survived and who didn't.
This will be an abreviated weekly outlook. I still have a considerable amount of work to do for the new trading community plus I'm preparing materials for my trip to the Netherlands at the end of this week. The other thing is, trying to predict or forecast anything the EUR/USD and its correlated markets will do is mostly a waste of time in my opinion. The market's yet to open and the US market's will remain closed until Tuesday morning. US markets are closed on Monday for dead President's Day which means liquidity levels will be extremely thin Sunday straight through until Wall St. reopens Tuesday at 0930 EST.
The fundamental calendar is stacked this week with key growth, manufacturing, production, employment, and inflation data for both the EUR and USD. These are the events I'll pay most attention to:
-Trichet speech, Monday 0945 EST -German ZEW and Eurozone ZEW, Tuesday 0500 EST -German and Eurozone PMI, Friday 0330 EST and 0400 EST
-TIC Flows, Tuesday 0900 EST -Housing Starts and Building Permits, Wednesday 0830 EST -Industrial Production, Wednesday 0915 EST -Bernanke Speech, Wednesday 1300 EST -FOMC Minutes, Wednesday 1400 EST -PPI and Initial Claims, Thursday 0830 EST -Core CPI and CPI, Friday 0830 EST
In my view the USD Index should be monitored this week especially if the dollar gains on the euro again. I see resistance at the 87/88 level on the USD INX and the likely scenario that would cause an upside break through resistance would be one that involed the EUR/USD falling through the 1.2700 level, equities either testing or falling through support, Treasury yields falling, crude to the downside again, and market sentiment that is more on the panicked side.
Should the market act favorably towards the passage of the spending package, the USD Index could easily fall back below the 86 level and that scenario would have to involve the S&P 500 futures gaining, the JPY weakening, crude and gold gaining, Treasury yields rising, and a surge in buying volume on Wall St., in Tokyo, and on the European bourses.
Over the past few weeks the euro has made run after run at breaking through the 1.2760 level and each attempt has failed. Last week we saw the euro make run after run at breaking the 1.2800 and 1.2850 levels and those attempts failed too. I've cautioned about shorting below the 1.2850 level and I maintain this view at the start of the week until I can see how the market responds after London opens Monday morning.
Liquidity is extremely thin the next 36-hours and this means there's a high probability for sharp price swings and exaggerated price moves especially Sunday evening and throughout Monday. In my opinion, should the 1.2760 level give way it should take the euro for a test of the 1.2720-1.2700 level.
A sustained break of the 1.2692 level could open the door for an extended move of 100+ points lower from there. A solid run at 1.2760 and another failure could easily send the euro back up 150+ points. The EUR/USD will open Sunday in a very precarious spot.
For the EUR/USD on the upside I would suspect resistance to remain at the 1.2990 / 1.3050 / 1.3090 levels for now. Should the market be able to attempt to push through the 1.3090 level it will need the help of the S&P 500 and crude.
My overall bias remains bearish on the euro. I still think the European banking system is a mess. I know I've been talking about problems with Euro banks for at least 7-months or more with little to show for but I believe the issues are so great it's just a matter of time before they can no longer be swept under the rug. Fundamentally I do not expect much good news out of the Eurozone this week. ZEW is forecasted to print better than last month but I don't trust the forecasts. I worse than expected print on ZEW would be another fact that weighs on the euro.
As far as trading goes, I'm keeping it as simple and stress-free as possible. This means using lower-risk entry sizes, being content with making a fast 20-30 points on a trade, and not jumping in the market when price behavior isn't acting properly.
This passage from Ecclesiastes 7:8 best sums up exactly what approach I'll take to trading the market this week... The end of a matter is better than its beginning.
Liquidity in the Forex, equities, and commodities markets were non-existent Thursday as market participants spent the NY session running on pure emotion, and reacting to every piece of news and rumor they could get their hands on. Until the last 60-minutes of Wall St. stocks mostly drifted lower after taking an initial beating onodd retail sales data.
Volume was extremely light, the bears didn't want to sell and the bulls weren't buying either even with the Dow and S&P 500 pushing towards strong support levels. And then all the sudden we get reports from Reuters and the AP about a program within the economic stimulus package designed to drop mortgage rates for homeowners facing foreclosure.
That was it, that was the whole story and what led the Dow to surge 213-points into the close. There's literally no more information on the matter, just that the government will enact a program to drop interest rates on homeowners ready to enter the foreclosure process. They call it a mortgage subsidies program but it's just another form of government price fixing on rates.
And the move we saw the last hour of Wall St. is called a short squeeze. These things happen all the time under the type of market conditions we're in. A mortgage subsidies program to drop interest rates on people that are flat broke anyway didn't put in a bottom and signal the turn around of the entire financial crisis. The bears dominated Wall St. the past 48-hours and the smart money on Wall St. took the late day news as the perfect opportunity to short squeeze the bears. We've seen this play out time at least once every two weeks the past few months and we'll see it again in the future, guaranteed.
Better than expected retail data disappoints--
Retail sales beat all market expectations and printed strong to the upside. I believe it was the first such gain since people ran out of extra cash from Bush's $168 billion economic stimulus a year ago. Why did Wall St. panic and sell-off? Why did the USD and JPY make strong gains and Treasury yields drop? It's simple -- the numbers mean nothing. It doesn't matter that Retail Sales printed with a 1% gain because when I break down the numbers, it's laughable what I'm seeing.
For example, retail sales for automotive parts are up 1.6%. That's looks like a huge gain, right? Not really. People are buying car parts because they're not buying cars. When you break down the psychology behind the numbers it's simple to see why the retail data is a joke. So instead of buying a $25,000 car from GM or Ford, a guy will spend $1,200 to fix the car he's got now. That's a $23,800 difference between buying a car and buying car parts and we're supposed to get excited about this retail data?
All those 80% and 90% off sales also helped window dress Thursday's numbers but this too is no sign of a recovery. 90% off sales are deflationary in nature and a terrible sign for any economy. Don't expect Thursday's retail data to have any lasting impact on Wall St., we'll be on to the next thing today.
Disjointed market correlations signal instability--
On Thursday we saw spot crude take a dive into the $33's before recovering. As crude was tanking the S&P 500 futures headed towards the 800 level while spot gold surged through $950 and the euro bounced around.
In the past, under what I would consider "extreme" market conditions, I rarely saw a case where gold, crude, and the EUR/USD all moved independently of each other. With crude and gold being denominated in the USD, even under stressed market conditions it would be unusual to see gold and the dollar gain and move up in tandem. Obviously thing have changed quite a bit the past 6-months and we trade in a new market environment that is even more like guerrila warfare. Traders are taking enemy fire from all sides and from places we didn't know could impact our market. Today a trader asked me what the point of me even watching those correlation is? He wanted to know why I still watch gold, crude, and equities as trade indicators for the EUR/USD.
This trader has the wrong view. I may not use the price action of gold and crude as I used to when the EUR/USD was on an unstoppable bullish run a year ago but this doesn't mean those correlated variables don't speak volumes about the market's intentions.
Variables like the S&P 500 futures and gold are even more valuable to me now than ever. They continue to serve me well as they reveal:
·The overall risk appetite of the market
·The level of panic, fear, and greed in the markets
·Overall liquidity levels of the markets
·Probabilities for extended price moves
·Probabilities for directional changes
When those correlated markets are disjointed and moving counter to how their correlations work by the universal laws of nature, this is the market's way of giving you a sign. Pay attention.
Fundamentally we have a number of key events on Friday's calendar, especially for the fragile euro. German GDP and French jobs data will dominate the early Frankfurt and London sessions. I have to forecast German GDP prints right at or slightly below expected. I won't take the time here but traders should spend 10-minutes looking at Germany's recent export data and export news and you will see why there's a real problem in Germany, why they're in recession and why GDP puts the EUR/USD at downside risk early this morning. Later at 0500 EST we get Eurozone flash GDP data and I'm also expecting a downside print here. The news for the euro will not likely be good.
Gold has not offered much support to euro as in times past. Spot gold failed at the $950 level but I remain somewhat bullish on this commodity and would expect to see continued buying on the dips.
The other big risk event for Friday is the start of the G7 meetings in Rome. We can expect folks like Trichet and Geithner to take center stage at this event. The markets will get the G7's communique of course but I don't expect it to say anything groundbreaking or shocking. What can the G7 do? If anything it will be the G20 that can bring a wider global effort to solve the global financial crisis.
I have no forecast or bias for the EUR/USD on Friday. It could make it's weekly high or low on Friday, it could range, it could run in circles, I have no idea and I don't care. My trading plan involves playing price action patterns after I see the euro has exhausted itself by moving too far up or down over a set number of 30-minute EUR/USD openings. That's my whole plan, I'm just playing fluctuations in price and not trying to catch a monster move.
A few key levels to watch as these could be price zones where bulls and bears may want to battle it out:
The EUR/USD has continued to show signs of stronger support below that key 1.2850 level I've been talking about for weeks. It's possible the euro's weak fundamentals weigh on it but there are bigger fish to fry, so keep an eye on its market correlated variables. Trading on Friday will carry a high level of risk so I urge all traders to use good risk and money management. Trading on Friday's is not for the tame of heart and not reccomended, if you had a profitable week, enjoy an early weekend.
The circus came to town in DC on Wednesday as eight top Wall St. CEO's put on a show for congress and all of the financial world. The show was not just for Wall St. or global market participants, this was for American taxpayers as well. JP Morgan's Dimon, Morgan Stanley's Mack and the six other CEO's knew their sound bytes would be broadcast over all the network news channels and they'd be cannon fodder for both left and right wing journalists alike.
I was expecting hostility and we got civility. The CEO's put on a good show but what puzzled me was the emphasis they placed on how detrimental their banks and brokerages are to other financial institutions. They took the stance of being justified for taking $200 billion in taxpayer money because if they had not, they would have been unable to service the financial sector. And then they told congress they don't actually need the money. Great, give it back to America please.
Isn't that the exact thing making taxpayer's blood boil? Taxpayers are asking, "why do we have to give the Fed money to give to the banks to bail out their friends?" It's not exactly that simple but that's how the average American taxpayer is thinking right now. Taxpayers burdened with the responsibility of propping up insolvent institutions by pumping liquidity into too-big-to-fail banks like BOA and Citi is just a fancy, bureaucratic form of money laundering. It's a plan that cannot sustain over the long term.
The whole event was a complete waste of time and did nothing to give Wall St. any sense of confidence. Those eight CEO's are not the ones congress should be grilling or leveling charges against. Those eight men did not start the current financial crisis.
Congress should talk to people like former Fed Greenspan. It was Greenspan's Fed that sold congress on the idea of flooding the credit markets with easy money and then giving the consumer sector nearly unlimited access to home loans and home equity lines of credit without even providing documented proof of income.
Most signal the start of the sub-prime market in 1998 with it peaking in 2005. The year 2005 was the pinnacle of the US housing boom and it's been downhill ever since, being exacerbated by the collapse of US home prices and a full blown recession. Lets talk to former AIG CEO Hank Greenberg who helped set the wheels in motion for mortgage-backed securities. Better yet, lets take a Louisville slugger to Greenberg's head because there's no answers up there anyway.
Lets talk to the idiots running Lehman Brothers, Bear Stearns, and Goldman Sachs in the 1990's and early 2000's. One of those idiots was former Goldman Sachs CEO and former Treasury Paulson. I doubt we'll see Paulson on the stand any time soon.
If congress was serious about their witch hunt they'd bring in those that were responsible for sub-prime, MBS's, CDS's, and trillions worth of cheap credit. Some of those politicians blasting Wall St. should remember they gave the Fed and Treasury approval to create the sub-prime market in the first place. Google: Community Reinvestment Act.
Markets in panic mode:
It was another wild day in the markets... spot gold surged to the upside during London and through the first half of the NY session, starting at $911 and making it all the way to $947 before falling back to $939 after NY closed. Spot gold's strong gains were another clear sign of risk aversion and panic in the global markets. Week after week gold has been the only commodity I've been somewhat bullish on. As long as panic reigns, gold should continue to see buying on the dips.
Spot crude was hammered today, falling just shy of the $34 level. After NY closed spot crude was trading in the mid-$35's, sitting near key support levels. The S&P 500 futures had an equally rough day as they went on a free fall towards the key 820 level. Both crude and the futures weighed on the EUR/USD and EUR/JPY for the entire NY session.
The Treasury auctioned a historic $21 billion in 10-year notes at yield of 2.82%. It's my opinion Treasury Geithner was coached to cause panic ahead of the Treasury's record-breaking bond auction. Equities were rallying the few days leading up to this week's Treasury auctions and there's no way the Treasury can have equities rallying and the global markets feeling safe when they have billions worth of the 3-month, 6-month, 3-year, and 10-year bonds to auction. So, a little market manipulation, a little fear, a little panic, and the Treasury accomplishes its goal of sending money flows their way and not towards Wall St. the past 72-hours.
As some of you know I'll be in the Netherlands the week of February 22nd. The first few days of the trip I will be meeting with traders who are flying in from around Europe. I wanted to give an update which will answer a few questions I've received the past few days.
We're meeting outside of Amsterdam at the Bilderberg Hotel and unfortunately at this point I cannot allow any others to join us. Several have asked if the meetings will be recorded. I'm afraid we won't be able to accommodate those requests. There won't be anything on Youtube this time.
The past few weeks things have evolved and my trip to Europe is taking on a different direction. The issues we'll be discussing and working through at our meeting will center around two areas: trading and certain economic and financial matters. The trading portion will involve deconstructing the price action patterns and human behavior element and how those factors control the EUR/USD's fluctuations in price.
The structure of our meeting and caliber of attendees would not translate well to video or audio recording. But if any traders are interested in doing a more traditional style trading seminar later in 2009 I'm certainly open to the idea and would pursue that type of endeavor.
There are several key fundamental events on the calendar tomorrow which should cause market volatility after the 0830 EST timeframe. Here's a look at the EUR/USD's risk events for Thursday:
The markets should get dismal Eurozone industrial data, an Initial Claims print over 598K and likely over 602K, and retail sales data that I'm expecting to print worse than the economists are forecasting. The markets will have to deal with more recessionary data and a gloomy outlook for the US consumer sector. There are almost no bright spots with the consumer. Not even with the luxury retailers who are down over 25%.
Trichet is a real wild card. His behavior has been erratic during these past few weeks of the financial turmoil and there's no telling what he will do or say on Thursday. He freaked out at his last news conference when he was pressed on his comments about March's rate bias. I can only guess that Trichet is stressed about the cracks in the Eurozone and he's under political and social pressure to slice rates and take fast measures to sure up the European economy and banking system.
For at least a week I've cautioned against shorting the euro below the 1.2850 level and I maintain this view until market conditions change and show me otherwise. I should have further market updates as more liquidity enters the market later on, so check back for updates.
Right now there are 30 of us in the new chat testing out all the features of the community and we don't have an official end date to the testing phase. So far the feedback has been tremendous and we're using this opportunity to get a feel for how we want to do things.
I'm spending this week of testing getting comfortable with the new trading environment, the new technology, and the new features at my disposal. The technology we have is superior and the entire trading community self-contained right within the chat environment. Traders who are in there now testing will surely share a good report on their experience so far.