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.
Mortgage nationalization:
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.
EUR/USD:
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.
EUR/USD:
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:
Gold: EUR-
Crude: EUR-
EUR/USD price action: EUR-
USD Index: EUR-
S&P 500: EUR-
Dow: 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.
Fundamentals--
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 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.
EUR/USD:
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.
Fundamentals--
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:
EUR
-Trichet speech, Monday 0945 EST -German ZEW and Eurozone ZEW, Tuesday 0500 EST -German and Eurozone PMI, Friday 0330 EST and 0400 EST
USD
-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
USD Index--
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.
Trading--
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.
EUR/USD:
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.
Netherlands meeting:
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.
EUR/USD:
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.
VeriteFX update:
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.
We are now doing real-time market updates on the VeriteFX blog which can also be accessed here: http://twitter.com/VeriteFX
Trading conditions on Thursday will be crazy so be smart with your risk management.
The Forex markets and Wall St. have two major events that bookend the week – first the Obama economic stimulus package and Geithner bank bailout plan take center stage Sunday through Tuesday while the G7 meeting in Rome dominates the end of the week and into early next week.
On Friday the markets got the worst NFP print in 34-years along with the highest unemployment rate in 17-years. The two bright spots in the employment sector were education/healthcare which added 54K jobs and government jobs which went up by 6K. In 2008 the US economy lost over 3.5M jobs and there’s currently 12M total unemployed in the US with 1-in-15 Americans are out of a job and looking for work. We are not in a Great Depression scenario in the employment sector because in 1933 the unemployment rate in America was 25%. The government says unemployment is 7.6%. In my opinion I don’t think the government will show an unemployment number that exceeds 9.7%.
Friday’s NFP was the biggest job loss since a -602K print in 1974. Next month we could exceed that number. I’m not ready to call a bottom in the employment sector. NFP probably doesn’t even count the quarter million or more jobs lost in the financial sector over the recent months of turbulence in the markets. I’m sure there’s a shadow statistician out there that knows the real unemployment rate in America and what it should rise to… my guess is the real unemployment rate is higher than 7.6%.
I read that 14% of small businesses report they will layoff employees over the next three months. I think that number will be higher. I see more layoffs in the future and further contraction in the employment sector. Before we put NFP to rest until next month, I want to post a question emailed to me from a trader from India:
“I wanna thank you for your timely advice about NFP risk, I closed my open shorts n saved huge DD. I have a question mod, when NFP was released so bad, I was thinking that risk aversion will take place and it will hammer the euro but after a brief period of falling euro made a strong recovery following S&P 500. I can’t understand why the equity and euro made such a big up move despite huge job losses. As I m training myself I need to know the reason behind this move which I m not able to comprehend the move.”
I can only give my opinion, so take it for what it’s worth. A few months ago I wrote in one of the updates that when companies go full steam ahead with mass layoffs it could start the turnaround for Wall St. If you run a publically-traded company and you’re in a recession, you lay off employees and your stock rises. It’s just one of those human behavior things that effects price action.
So we get an NFP print of almost -600K and all during last week and the week before we heard story after story of mass layoffs, and Wall St. rallies. It makes perfect sense to me because there are two issues at play here and the first has to do with psychology of the markets. While it’s a tragic situation so many people around the world have lost their jobs, this is what Wall St. wants to see and this is what makes investors bullish.
If you look at the price action of a stock that has been steadily moving to the downside and then the company makes a big announcement about job layoffs, you’ll see the price action of that stock turn higher almost instantly in many cases. With the economy shedding so many millions of jobs I suppose Wall St. has something to be bullish about for the future. It’s a sad reality knowing so many are out of work and that Wall St. somehow capitalizes on this but that’s the brutality of the markets we trade in.
I’ll give the NFP factor a 20% weighting in terms of it having the ability to get the markets moving to the upside on Friday. Logic would tell you a terrible NFP print sends fear and panic through Wall St. and we’d see a sell-off that brings down equities, commodities, and the euro while the dollar and yen gain.
As soon as I saw the number and thought through things for a moment I alerted that trader and others to cover on their euro shorts and not to add any new euro short positions. Through the rest of the day we saw the EUR/USD rise from the 1.2770 level to the 1.2970+ level.
The factor I’m giving an 80% weighting to is exactly what I talked about in Thursday and Friday’s updates… these markets had to break out one way or the other, they were due, they could no longer bounce up and down in the range they’ve traded in. As I mentioned I took some time last week to study the price action and price behavior of the S&P 500 and Dow. My conclusion, as I stated, was that the markets have been in a range too long, they repeatedly tested the bottom too many times the past few weeks, they’ve failed, and a bigger, extended move is now due.
My feeling is the natural order of price action and price behavior called for the move we saw on Friday. What I saw in my quick study of those markets showed they were ready to bust out but what I didn’t know was which way. I had a feeling they needed to go up because the Dow and S&P 500 were in a season of testing the bottom and failing, so the logical move would have to be up if it can’t go down, right? I think if I had a few years worth of historical 30-minute price opens for the S&P 500 I would have been able to know with some certainty which way the move had to go, but it’s all a learning process for me.
At this point I see more potential upside for equities in the weeks to come as long as Dow 8,000 holds, just my opinion. The S&P 500 is down 6% so far in 2009 and both the Dow and S&P 500 have made run after run at breaking support, failing each time and then bouncing back. There’s one last thing I’ll mention, I’m working through a deeper look Forex market price action and price behavior. Last month when the Bank of England dropped their interest rates to 1690’s levels it got me thinking about price action in a different way.
Last month when I saw the BOE drop rates to where they were in 1694, all I could think about was the common phrase “we’ve come full circle”. Right now it’s Sunday, February 8, 2009 and the BOE’s interest rate is where it was on February 8, 1695. I was struck with fascination and curiosity to discover how in the world almost 315-years later this central bank could come full circle on their interest rate. This doesn’t mean that interest rates have truly come full circle, but at least we have a measurable point of reference to work from, which is the first interest rate ever set by the BOE in 1694.
If we put the BOE’s interest rates from 1694 to 2009 on a chart and we used candlesticks to represent each change in rate, we’d have hundreds of vertical lines stacked up next to each other. Each vertical line would represent a change in interest rate which is really just the same as a change in price say if you were comparing it to the EUR/USD.
I’m taking things down a different route to better understand price action, so I’m looking at the change in rate or change in price with a circular view, not a vertical view. A candle chart gives a vertical view and crushes the price information into sticks that stack up next to each other. In reality this could be completely opposite to how price action works and how the rate of price change should be viewed.
I’m looking at price action that just goes round and round in a circle. There is no beginning or end to it, there’s no real top or bottom to any market because price has no stopping point in either direction. A market can take the price of anything as far in either direction as it wants to.
It’s February 2009 and the euro is in the 1.2900’s just like it was in the 1.2900’s a few years ago. Most traders would say it went up and came back down but I’m trying to look at price in a way that shows the EUR/USD just completed a roundtrip around a circle and that they all go in circles. What gives me confidence in this is the fact the same price patterns get repeated over and over again, giving the same exact results every time, 100% of the time.
People will say, “What time did the sun come up this morning?” Or, “What time does the sun go down this evening?” Does the sun really go up and down? Of course not, the earth spins around it at the perfect speed, repeating the same process every 24-hours and 365-days. But the fact the earth spins around the sun to a measurable degree, we can know when to expect to see the sun spin back into view and light the world we live in each day.
The euro’s 30-minute price opens are phenomenal for seeing patterns that develop in order to play retracements in price but I believe we can also take that same price action data to reveal when patterns are forming to show a direction/trend break, with or against whatever the real-time market direction is showing. As I learn more about how and why price changes I think I’m starting to see that even the real-time price action displayed on my trade platform is a snapshot of the past and the future change in price has already formed. Hopefully I’ll have more on this research in the future.
Bear market rally = euro rally?
The euro itself has no real reason to rally but its market correlated variables might and this means they could carry the euro with them. On Friday Wall St. rallied right into the close. The Dow closed up 216, the S&P by 22, and the yield on the 10-year was pushing near the 3.00% level. The Dow closed almost 300-points above the key 8,000 level. Those are all very “bullish” signs for equities, including the euro.
Do we have a 1-day rally or do we have something sustainable? Well in my opinion nothing fundamentally is fixed and the recession is set to deepen, so I’m calling this a bear market rally and not the turning point or end to the financial crisis. I think the market will take another leg down at some point during the summer of fall or both. Whatever billions are pumped into the economy with Obama’s stimulus plans may temporarily inflate things during the spring but from what I see of the plan, there’s nothing in it that provides for a long-term fix.
In my view Wall St.’s bear market rally can sustain over a multi-day period as long as Dow 8,000 holds and Congress gets the stimulus bill passed. Reports of job losses won’t stop Wall St., weak crude hasn’t been much of an issue for the S&P 500 lately, and the market couldn’t break the 7,800 downside level on the Dow or break downside support levels for the S&P 500 futures.
On Monday Geithner is expected to unveil the Treasury’s latest bail out plan to ensure the banking system doesn’t collapse. Nobody really has any idea what’s in Geithner’s plan, it’s all speculation. Geithner’s plan better be light on the government intervention/regulation stuff and it better offer some kind of solution to dealing with the hundreds of billions worth of mortgage-backed securities sitting on the balance sheets of the world’s banking and financial institutions.
A Treasury plan that’s heavy on government regulation and one that gives the impression of nationalization is going to send panic waves through Wall St. and probably the rest of the world’s major equities markets and we’d likely see an end to equities rallies. A plan that provides a credible procedure to handle those securities would be a step in the right direction and could help sustain a bear market rally. If equities continue to rally I would expect the JPY to weaken, which would lead to a rally in the EUR/JPY, the S&P 500 futures, and this would likely carry the EUR/USD up as well.
Bad euro debt—
One issue that keeps the euro at risk is the debt issues facing EU nations like Italy, Greece, and Belgium. A few weeks ago some of the ratings agencies like S&P and Moody’s gave warnings on possible downgrades to sovereign debt in the Eurozone. I don’t see that issue going away even though it’s not being talked about much right now. According to the IMF, Italy’s debt-to-GDP ratio is 104.3%. Italy has the sixth worst debt-to-GDP ratio and the number is so staggering it puts Italian sovereign debt at risk for a downgrade, which puts the euro at risk of a sell-off. Believe it or not, both Germany and France have debt-to-GDP ratios that are in worse shape than America’s.
On its own two feet, I don’t see the euro possessing the ability to move strongly against the dollar. I see too many problems with the Eurozone economy, European sovereign debt, and with their banking system to have a bullish view on the euro. I think if the markets take on more risk, which means pushing the S&P 500 up, then its possible for the euro to sustain an upside move against the dollar. The euro will need the help of equities and commodities to move against the dollar. Rising yields on Treasuries would also help support the euro this week.
EUR/USD:
I’m expecting the markets to normalize a bit this week now that we’ve got ourselves past the ECB interest rate and NFP events. Trading conditions in the Forex market during ECB/NFP weeks are usually the most difficult, so I’m always glad to see the second week of the month as it’s much easier to trade.
Fundamentally we have several key events on the calendar. The two biggest events here at the start of the week are the economic stimulus package and the Geithner bank bailout plan, sponsored by the US taxpayer. I believe the economic stimulus plan will get approved by Congress this week and sent to Obama for his signature. It will be far from a bipartisan plan. Obama will be fortunate to get four or more Republican votes. On Monday Geithner speaks about the bank bailout plan at 1230 EST/1730 GMT.
On Tuesday at 1300 EST/1800 GMT Bernanke will be on Capitol Hill to testify before a congressional committee on how the Fed is doing in the current state of the economic crisis. All global market participants will be watching. It’s been weeks since we last heard from Bernanke and the world markets are anxious to know what’s on his mind. Conditions in the markets have continued to deteriorate since Bernanke last spoke so we can be sure whatever he says is sure to cause a reaction on Wall St. which will cause a reaction with the EUR/USD and other pairs in the currency market.
On Thursday Trichet speaks and of course we have the G7 meetings in Rome starting on Friday and going through the weekend. I’ll cover the G7 later in the week. As far as actual data is concerned, we get trade, retail, GDP, manufacturing, jobs, and growth data for the US and Eurozone throughout the week.
The EUR/USD is vulnerable because there truly are bailout skeptics in all the markets and they have access to liquidity. These market participants are the true bears, they are the ones that hammer the euro, gold, and crude when they rally. They are the ones that time the liquidity in the market to accomplish their goals and they’ll all pile onto the bandwagon that forms when equities, commodities, and currencies all go down together. We see this happen several times a month, so if we go through a bear market rally time, the resulting sell-off should be just as fun.
The market will be tested when we get Retail Sales later this week. I’m anticipating worse than expected numbers. Sales at luxury retailers are now down almost 25%... I could fill a mini novel with staggering news and numbers out of the retail sector. It’s ugly as sin and if the numbers are worse than expected, Wall St. will be tested.
As far as trading goes, I’m not adding new EUR/USD short positions as the market opens. My risk appetite will be more receptive to risk this week now that we’re past the ECB/NFP stuff. My overall trade plan will be to buy the euro on the dips/retracements. Should the EUR/USD make another 300+ point up-move or make a string of consecutive higher opens that form a pattern, I will certainly take a euro short but my trade bias right now at the start of the week is to buy the euro.
The 1.3024 to 1.3068 levels are important testing zones to the upside. Should the euro fail to sustain a break above the 1.3024 level it should easily slide back under the 1.3000 level as that area has been proven to be near-term resistance. A sustained break of resistance zones sitting throughout the 1.3000 level could open the doors to test the 1.3218 to 1.3258 levels on the upside. On the downside the 1.2852 and 1.2764 levels remain key in my view.
All traders should practice smart risk and money management this week as any of the big fundamental and geo-political events carry the strong potential to send the markets on an extended move.
