VeriteFX.com Daily Update Market Update  

Tuesday, February 3^rd 2009

In my view, politics will dominate the global financial markets the rest of this week as current government programs and bailouts continue proving mostly ineffective, leading politicians and central bankers to come up with even bigger and more expensive programs to fix the worldwide recession. As politics have taken a leading role in the markets, we’re going to first look at some important political issues to be mindful of as we navigate our way through the markets…

Economic stimulus package—

On Monday Obama said there are "very modest differences" between the Democrat’s and Republican’s stimulus package and those differences should not delay its passage. The package that passed the House was $819 billion and earned zero Republican votes. The stimulus package the Senate has is now up to $900 billion. I don’t expect to see anything passed by Congress this week. Obama also promised to install a review board to manage the $700 billion TARP program at the same time signaling its probable his administration will need more than the $700 billion already earmarked for TARP.

Iowa Senator Chuck Grassley sent a letter to Microsoft telling them they better layoff foreign workers first or else... this type of protectionist, xenophobic rhetoric is not a place any global economic superpower needs to go right now. Washed-up dinosaurs like Grassley must understand a global economic recession is the type of event that should cause sovereign nations to open their borders and minds to new trade opportunities.

Entrepreneurs and business-minded individuals should have the support of their respective governments to set-up new trading alliances with other businesses in South America, Europe, Asia, and Africa. When we look at the dynamic technological advances that came out of the Great Depression era and dark recession of the early 1980’s it makes no sense why government leaders will make laws that held back technological advancement and international commerce.  

During my recent travels I’ve had the great pleasure of meeting individuals from various ethnic and religious backgrounds. There’s a common theme I’ve discovered – people of the world don’t want the government’s help to fix anything. They have ideas and the passion to figure it out on their own and they want the politicians and central bankers to get out of the way and let progress begin.

I remember about two years ago a trader from South Africa asked me if I believed G20 economies de-coupled from the US economy. My response two years ago was that I did not believe G20 countries de-coupled from the US economy. In fact, quite a few G20 nations will depend on the Fed and Obama administration to fix their economies. What this reality is leading to is a move towards protectionism and urgent calls made by politicians to close the doors to trade and commerce with other sovereign nations. This is all the wrong plan of action.  

Politics are complicating trading and money-flows in and out of the markets. As in any recession/depression/credit-crisis it’s common for these stories of corruption and dishonesty to emerge. Why do you think scam artists like Bernie Madoff and others get caught during a recession? It’s because their access to credit evaporates. If you want to put Ponzi-scheme scam artists out of business, take away their access to credit and Pandora’s Box will magically open…

More political corruption—

Obama’s pick for Health and Human Services secretary, Tom Daschle, also admitted cheating on his taxes just like his comrade at the Treasury, Tim Geithner. For all aspiring tax-evaders, you may have a good opportunity to secure a spot in a future Obama administration. Daschle said he was, “embarrassed and disappointed about forgetting to pay $120,000 in taxes”. Actually, Daschle owed $128,000 in taxes and $12,000 in penalties and interest. How do you forget you owe the IRS over $120K?  

Connecticut Senator Chris Dodd revealed he's refinancing at least two mortgages written by one of the worst subprime offenders, Countrywide Mortgage. Dodd along with other politicians received special home loans through a VIP program at Countrywide, giving them preferential treatment. As the chairman of the Senate Banking Committee and a friend of Countrywide CEO Angelo Mozilo, I have to think taxpayers would find this an outrage but very little media coverage is even given to this latest revelation of government corruption.

Banks mismanage taxpayer money—

Bank of America reportedly spent $10 million on Super Bowl parties and sponsorships. BOA has currently been given $45 billion in US taxpayer money to keep the lights on and we can see how some of that money is being mismanaged. Morgan Stanley, after cutting 5,000 jobs and taking $10 billion in taxpayer money, had a multi-million dollar party where they spent $400 per night per hotel room and hundreds of thousands on food alone.

Are these financial institutions and Wall St. giants really in “survival mode”? No way, not even close. Did BOA have to drop $10 million entertaining at the Super Bowl? Couldn’t that $10 million have been given back to the US taxpayer? Stories like this just prove to me neither Wall St. nor the US government is capable of fixing anything and this whole recession is just another game to play and another open door for banks and politicians to gain more power and money.

Consumer and retail data point to horrific NFP

On Monday Personal Consumption Spending printed at -1.00% for the month of December. That marks six consecutive months of spending declines which is a new record for the economic history books. Personal Income fell for a third straight month after printing at -0.2%. Y/Y consumer spending only rose 3.6% which is the worst annualized increase since 1961. Personal income rose by 3.7% marking the weakest gain in the past six years.

When mass layoffs hit, personal income and spending drops and this translates into an increase in national savings rates. In December American savers pumped up the savings rate to 3.7% of their after-tax incomes. In 2005 the national savings rate hit a low of just 0.3%. Guess which year was the height of the US housing boom? 2005. In 2005 national savings rates were at 70-year lows.

In 2003 I opened up a bank account with ING because they offered a more attractive savings rate than any other bank at the time. I still have that same account today and now I’ve shifted most of my personal funds there. The modest annualized interest rate ING pays me to keep my money with them has beaten the annualized rate of return from the S&P 500 five times out of the last eight years. In 2008 the S&P 500s annualized rate of return was -38.24%.

In more good news, Construction Spending printed at -1.4% showing continued weakness in consumer and commercial real estate. Y/Y construction activity is now at -5.1% as home building has tanked 27.2% and is the lowest decline since construction activity recordkeeping began in 1993.

Jobs—

I’m expecting Friday’s NFP to print at least -523K and to see a further tick up in the Unemployment Rate. This means Americans will increasingly turn to the government for a job. How bad is it and how much are people going to look to the US government for a job? So far 350,000 people have applied for the 4,000 or so job openings made available within the new Obama administration which roughly works out to each person competing against 87 others for the same job. It’s estimated only 10% of the jobs Obama is promising to create or save will be US government jobs.  

According to the Office of Personnel Management, roughly 58% of management and 42% of non-management workers on the federal payroll as of October 2004 are eligible to retire in 2010. With the financial turmoil and dependence on the federal government for jobs I would expect those potential retirees hang on to their jobs.

Top retailer Macy’s reported they are cutting 7,000 jobs, a 4% workforce slash plus they reduced their dividend forecast to just a nickel from the $0.13 cents originally expected. Macy’s CEO explained how he went to each department in the company like marketing and finance to slash jobs. That will be a common move seen in the months to come. Dozens of other top US corporations have reported mass layoffs last week and we’ll get even more layoff reports as Q1 drags on.

EUR/USD:

The EUR/USD and its market correlated variables were mostly dead on Monday as market participants await bigger economic data and news of government bailouts later in the week. Gold, however, did take another beating closing down over $23 on the day. Even though gold continues to sell-off as it rises, it’s one asset class I can be slightly bullish on over the long-term.

The yield on the 10-year came down over 10bps the past 24-hours as we see money flows going back into Treasuries and out of equities. The Dow closed well below the 8,000 level Monday and is certainly poised for more downside testing especially if the fundamentals continue to support this view. The politicians are doing plenty to scare the crap out of Wall St. and should we get more downside shocks this week I can see Wall St. testing support levels and the November lows.

One of our favorite shot-callers, T. Boone Pickens, gave the markets a fresh new crude call today saying the commodity would move up to $65 in just two months time. Unfortunately, T. Boone did not give any update on his oil fund that’s down USD$2 billion. At this point I’m pretty much convinced that I need to lose at least a billion dollars to get some airtime on CNBC and Bloomberg…

I am not very bullish on crude in the short-term. The decrease in demand, the contraction in growth and manufacturing combined with the continued rise in unemployed coupled with a dramatic decrease in consumer spending keeps crude at risk through all of Q2 in my opinion. I would be shocked to see crude near the $70 level by the first week of Q2 2009. Keep betting against T. Boone.  

I saw a great commercial during the Super Bowl that featured one of the boldest and most outlandish marketing stunts I’ve ever seen… the Denny’s restaurant is offering a free Grand Slam Breakfast for 8-hours on Tuesday. If you want to get a free breakfast along with a complimentary case of the runs, you can get it all for free at Denny’s today. Speaking of Super Bowl commercials, I thought this one was the best:

http://cds011.dc1.hwcdn.net/q8d9c7e8/cds/player.htm

The owner of Nashville’s local Kia dealership is running a bold new sales promotion. This weirdo usually puts his kids and surgically-enhanced wife next to farm animals in his commercials but now he’s running a commercial with 40% off the sticker price on a new Kia and all you need is a job and $149 for the down payment.  

These bizarre sales promotions can be a good and bad sign. It’s a good sign that business owners are willing to get creative to sell product, that I like and respect. The bad part is how scary some of the sales are becoming. Businesses are discounting themselves to unsustainable levels. The sales are ridiculously high and the margins are too thin. I mention this to illustrate why I maintain an overall bearish view on US equities as the US economy is still directly tied in to the global economic system. Wall St. = Babylon.

Trading—

On Tuesday the markets will get their test as German Retail Sales and Pending Home Sales data is released. In addition we’ll get vehicle sales figures from the likes of Chrysler, Ford, and GM. Fundamentally I believe we may see a scenario with weaker than expected euro data and Pending Home Sales that prints above the 0.00% level.

For trading the EUR/USD on Tuesday, my trade plan requires I focus on the S&P 500 futures, Dow, S&P 500, and the EUR/JPY as those markets should give better indication of the euro’s direction, especially during the NY session.  

For the next 12-hours especially I’ll be watching the following levels:

Downside: 1.2802 / 1.2776 / 1.2748 / 1.2703

Upside: 1.2832 / 1.2862 / 1.2899 / 1.2918

The EUR/JPY is nearing some important downside levels. The market has shown a bearish appetite towards the yen when the EUR/JPY dips below the 113.00 level. If you trade that volatile pair keep an eye on its price action between the 115 and 112 levels as we may see quite a bit of volatility and sharp price swings within that zone.

Be smart with your risk and money management today as volatility is expected to pick up after the 0530 EST/1030 GMT time frame straight through the NY session.

-David

VeriteFX.com

VeriteFX.com Weekly Market Outlook  

February 1^st to February 6^th 2009

This week’s market environment will present additional challenges for traders, namely an ECB rate decision and Trichet press conference on Thursday and of course the beloved Non-Farm Payrolls and Unemployment Rate event on Friday. It’s not likely the markets will hear much if anything from Trichet prior to Thursday’s ECB event and this will lead to the usual speculation and positioning that goes on prior to major interest rate announcements where there is room for doubt. Expect chaos.  

Over the weekend I saw a lawn sign for a company called Tour of Nashville Foreclosed Homes and I thought that was a really brilliant idea for a company. That’s one thing I can appreciate about America is that spirit to make something out of nothing. In this case we have a real estate agent capitalizing on the fresh crop of foreclosed homes in order to keep his business rolling. God bless him, I hope he does well. I look at the mess in the financial markets the same way as this guy is looking at the mess in the real estate market – there are plenty of money-making opportunities out there when we go about it the smart way.

We’re going to get grim fundamental data this week but let’s keep in mind it’s not the end of the world. For example, Chick-Fil-A (www.chick-fil-a.com), which probably my favorite fast food restaurant, just reported their sales are up 12% and they plan on opening 83 new Chick-Fil-A’s in 2009. A fast food restaurant like Chick-Fil-A does well during a recession because the quality of their food far exceeds that of McDonald’s and Taco Bell for just a little more money.

Chick-Fil-A also offers benefits like putting their employees through 4-years of college. In these dark times of recession a young person may do well choosing a career path with a growing fast food chain like Chick-Fil-A. Other job opportunities that are not recession-proof will continue to evaporate at an alarming right I’m afraid. At any given Chick-Fil-A, especially here in the South, it’s common to see a 72-year old retired homemaker working next a 16-year old high school kid making money to go on a class trip to Europe. It’s an interesting culture.  

Yesterday I was at AutoZone and I asked the dude helping me which team he had for the Super Bowl. He said he didn’t care because his boss was making him work Sunday night and he’d miss the game. My response back to him was, “dude you should be thankful you even have a job right now”. He said nothing back.

Times are tough and will only get worse in my opinion. More job losses are coming, the recession is ready to take the next leg down and global equities markets are on the brink, but as traders in this market we need to stay balanced and focused on the good and the bad to gain a better overall view.

Politics and the markets:

Based on current poling data only 45% of Americans actually think the newest stimulus plan offered by the Obama administration will improve the economy. Obama promised the markets a stimulus package this week. In my opinion there will be no new stimulus package that passes Congress this week. The Republicans have declared war on the Democrats and the fight is on. The political grandstanding will be nasty in the short-term. The political fight over this stimulus package will likely cause more fear and speculation on Wall St.

The Republican’s stimulus plan provides government-backed home loans fixed at a rate of 4.00% for those deemed “credit worthy”. What the Republicans haven’t said are who would qualify for these loans and which type of credit scoring would be considered. If the government uses FICO scoring they can forget about the majority of current homeowners, who are struggling to stay out of foreclosure, from being worthy enough to qualify for these loans.

As much as I can’t stand the Republicans and the Democrats, I can see the Republicans are making fast and strategic moves. They took a beating last November but they are learning quickly and making provisions to battle the Democrats during this next round of the US recession and global economic crisis.

Last week the Republicans appointed Michael Steele as their leader. Steele is the first black man to lead the party and is known as a centrist with the ability to bridge the gap between conservative and liberal. In my view this was a good move.

Steele is a fiery character and a smarter choice then the female version of Georg Bush i.e. Sarah Palin. Steele’s already taken the opportunity to tell Republican leaders on Capitol Hill to “stick to their guns” and vote down Obama’s stimulus plan.

Any plan that involves a balance of tax cuts, reductions in government programs that will not directly impact the US economy, and direct consumer and housing sector stimulus may have the potential to make a positive impact. Any plan that does not make strong provisions against government-backed intervention to bailout publically-traded or privately-held banking/financial institutions is a plan that is destined to ultimately fail. We have thrown over USD$2 trillion at Wall St. in the attempts to supposedly save Main St. and safely guide the world’s economic system through the global recession.

The only thing the $2 trillion worth of freshly printed USD has accomplished is prolonging the global recession and keeping Wall St. from a total implosion. The central banks and governments of the world keep coming up with new plans knowing none of them will work. They realize any government-backed handout gives US and Asian equities markets and the European bourses something to be hopeful for and a reason to throw liquidity into stocks.

Maybe they are buying time or maybe they really believe they can print their way out of this mess. If the central banks and politicians actually believe they can stop the global markets from further destruction by continuing to create debt out of thin air and by flooding the money markets with cheap USD, they are flat wrong.   

What does all this have to do with the EUR/USD? Everything… if the global markets remain in a state of fear and panic it means currencies like the USD and JPY will likely continue to beat up majors like the EUR and GBP. I won’t take the time going through the laundry list of all the possible implications heavy government intervention will have on the EUR/USD but most of the reasons should be fairly obvious.

We’re already seeing civil unrest in Europe and I know it stems from the growing tide of negative sentiment towards every day life and living. The French and Russians are rioting over economic and political issues. In what I consider to be one of the most civilized nations on the globe, Switzerland, there are riots in response to the leaders attending the World Economic Forum. Riots in Europe are not likely going to do much to help support the euro…

This is purely my own speculation but I think one place this could eventually go is toward the formation of a centralized or globalized type of world government system. If the government bailouts continue being ineffective it will open the door towards nationalization in the major world banking systems. When banks become nationalized a shift in wealth control occurs giving politicians more power and leverage.

For example, last Friday UK Prime Minister Gordon Brown said:  “The world must unite to confront the financial crisis; urgent solutions are needed”. Thanks but no thanks, I don’t want the goons running the Fed and Treasury taking orders from the equally brain-dead idiots at the ECB, BOE, BOJ, SNB, and whatever other central bank you care to throw in there.    

In the January 12, 2009 edition of the International Herald Tribune, so-called political genius Henry Kissinger wrote a commentary calling for the formation of the dreaded “New World Order”. You can read his commentary here: http://www.iht.com/articles/2009/01/12/opinion/edkissinger.php

It might not happen during my lifetime but I think Kissinger will likely get his New World Order or One World Government. In the meantime you can expect the politicians and bankers to keep the markets exactly where they want them in order to keep the manipulation going. Fear is a powerful way to control people…

Risk warning:

Especially during this week where we have back-to-back ECB and NFP events, I need to remind traders you’re trading a “market” created by your broker. Your broker, who makes your market, accomplishes this through buying/selling currency contracts on the interbank system, so no matter how you slice it, your tiny retail FX account goes up against:

·         Central banks like the Fed, ECB, BOJ, and BOE

·         The top 450+ global financial and brokerage institutions who bypass the bucket shop retail FX brokers to more directly access the FX market. In addition, they have the combined liquidity of $1 trillion+ to move in and out of the FX markets on a daily basis

·         Some of the most brilliant and sought-after fundamental and technical traders on the planet who have way more liquidity at their disposal than you do (brilliant doesn’t necessarily mean consistently profitable)

·         Fellow retail FX traders who are clueless, chronic over-leveragers that get chased around by the brokers all day long

Those are a few ways we can explain the fact over 90% of all retail FX traders consistently lose money in this game even though they are all using indicators claimed to be “self-fulfilling prophecies”. Trading a price-action based system is about finding repeated patterns that will show you a high probability opportunity to capitalize on fluctuations in price.

On Sunday evening take a few minutes to develop your risk plan for the week based on the overall risk of the market, the fundamental events on the economic calendar, and what your personal risk appetite is knowing this week will bring more volatility and sharp price swings.

VeriteFX.com:

In just a few weeks we’ll be ready to officially launch our new trading community called VeriteFX – www.veritefx.com.

After two years I’ll finally have a world of my own to trade the way I want to and put out the kind of information I believe will best help traders. I don’t want to use this forum to promote anything but I want to take a few lines to explain the point of starting a new community and what our goals are.

All the features are 100% free from any subscription fees. My vision for the community is to make it a place where traders from all walks of life, ethnic and social backgrounds, and levels of experience can come together with the common mindset of wanting to learn how to use the market to make consistent profit.

Our primary focus is on trading. It’s nice that people enjoy reading my market commentary but at the end of the day commentaries don’t put money in our pockets. Our ability to make money is all that matters. It’s not going to make any difference to me if I get 30-seconds on Bloomberg or CNBC; all I want is ROI that beat’s the best Wall St. has to offer. If you decide to join our community, go in knowing we are serious about trading and developing our skills to make consistent profit.

Right now we’re about 90% completed and we’ll begin testing the full functionality of the site this week. One of our Admins is responsible for hitting social networking sites like Facebook and Twitter with our message. If you participate on those sites be sure to find us and help spread the word.

A considerable amount of energy and money have gone into making this community possible and all those that are helping me wouldn’t be involved if they didn’t share the same vision. You can come back here to check for updates on how the site is coming along. If you have any questions you can send me an email or you can call VeriteFX.com at (615) 589-6663. 

ECB rate decision:

February is an exciting month for me as I’ll finally get a much-needed vacation from America, so I’m happy to go to the Netherlands in a few weeks… maybe while I’m in Europe I can join a good riot in France, flip some Peugeots or something.

Seriously though, it will be good spending time in the Europe to see firsthand what kind of economic struggles are facing the EMU. It’ll be especially good talking with Europeans to listen to their views and opinions on economic issues in Europe. I should be back in America by the ECBs next rate decision in March and I’ll have a much better gauge for how the ECB is going to handle rates.

As far as the February decision is concerned, my forecast is for no change in rates. I believe Trichet will hold the ECBs key interest rate at 2.00% and he’ll tell the markets the ECB will take new data released in February into consideration for a possible reduction of rates in March.

If Trichet pulls a surprise move and cuts rates even 25bps on Thursday this will come as such a shock to the global markets I believe the euro could sell-off violently. A surprise rate cut at the last minute would signal some potential new information the ECB is looking at that will negatively impact the Eurozone economy in the short-term. A surprise rate cut would likely cause panic, fear, and speculation with market participants and I think confidence in the euro would erode and market participants would pile into the dollar.  

In Thursday’s EUR/USD update we will cover the ECB rate decision in more detail and look at the possible implications for the euro.

EUR/USD:

I’m entering this week with no bias. I don’t have to be a euro bull or dollar bear as my trading plan calls for finding higher-probability trades based on price action in order to capitalize on fluctuations in price. There are a few key areas I’m focusing on this week in order to help my view on general market direction. Specifically, I’m watching the following closely:

·         USD/Gold correlation

·         Yields and prices on US Treasuries

·         USD Index

·         Crude

At the end of last week we had a situation where gold and the USD both gained simultaneously, a completely disjointed move. That is a rare occurrence and something I will be closely monitoring as we get the new week started. If this trend continues it shows market participants are still stuck in a state of fear and panic as they send money flows into “safe havens”.

Overall the 1.4700 and 1.2800 levels that I’ve been talking about for the past three months are still my most important topside and bottomside levels. For most of the afternoon last Friday the market made repeated runs at 1.2800, briefly breaking, but managing to close right on that level. 

As far as more real-time levels are concerned, on Sunday/Monday we need to keep a close eye on the 1.2764 / 1.2752 / 1.2722 levels on the downside in the event the market wants to test lower. A break below the 1.2700 level would likely open the door to then test: 1.2684 / 1.2658 / 1.2624. The euro remains at risk at the start of the week but I would caution taking any new euro shorts right as the market is opening as that too could present risk.

The economic data on the books for the EUR/USD this week is heavy on manufacturing, consumer, growth, and jobs. Traders also need to beware of surprise comments and rhetoric from central bankers, especially ECB officials. If the S&P 500 and Dow struggle this week and break through support levels we could have a simultaneous situation where the USD Index is breaking through resistance levels if the euro and pound take a beating and the dollar is able to hammer the Swiss franc. Risk aversion based on an equities sell-off would almost likely lead to strong gains by the USD and JPY.

I see the EUR/USD maintaining a rather strong correlation to the S&P 500 futures and gold this week, so I’ll pay close attention to how those correlations are responding and how their price action is affecting moves in the EUR/USD. That’s all I’ve got for now. Check back for more updates as market conditions warrant.

Even though it’s probably not going to happen, I would love to see the Arizona Cardinals brutalize the Pittsburg Steelers in the Super Bowl. No matter what, it should be an interesting game.

-VeriteFX