Euro Update

I can't believe the last post I made was already three months old. It's been 3 "crazierest" months as would come them as it seems like the world economies are imploding while the market participants are as euphoric as ever.

Anyway, here's a quick update on the EUR side:

• Euro pessimism has been lopsided for three more months, and sentiment is still extremely negative and speculator positioning historically short against the EUR as measured for example by the COT. 
• While sentiment has been still extremely negative and traders kept increasing their positioning against this currency, it's a very bullish sign than the EURUSD actually bottomed around the 12th of March (more than a month and a half ago).
• A massive rally in the EURUSD has started a few days ago, and this could mark the beginning of the short covering (aka short squeeze) which in turn could lead to an as impressive rebound in the EUR than the collapse of the previous many months.

Speculator positioning historically short against the EUR as measured for example by the COT

it's a very bullish sign than the EURUSD actually bottomed around the 12th of March

A massive rally in the EURUSD has started a few days ago

This could lead to an as impressive rebound in the EUR than the collapse of the previous many months.

Disclosure: I have a long EUR position at about 1.12 EUR/USD and another one at about 1.06 EUR/USD

Portfolio Update

I have opened a long position on the JPY and a short on the EUR both against the USD. Entry points: EUR/USD @1.3078 and JPY/USD@82.085

Bernanke Announces The Final Round of QE3: This Time, It's Unlimited

The Fed said:

• it will buy $40 billion worth of MBS per month, with no end in sight. 
• they will hold interest rate at zero until mid-2015 — "a considerable time after the economic recovery strengthens"
• it will continue operation twist
• the US has enjoyed broad price stability since mid-1990s

My points:

• The Dow is at it's all time high, the interest rates and treasuries at their all time lows, mortgage rates at their all time lows, most commodities not too far from their highs, and according to official figures, employment has dropped significantly — obviously; this is a lie. Amazingly, Bernanke didn't want to prove the market's expectations wrong, and provided exactly what the consensus wanted.
• The Fed has been forecasting an economic recovery for years, and nothing has happened, yet, they will keep on doing the same thing; over and over again. They again forecast a strong economic recovery to come in the next few months, while it's obvious that the reality is economic contraction and the Greater Depression...
• My personal opinion about Bernanke is that he's the most inept Fed chairman ever, and most probably one of the worst economic forecaster ever. I don't think his brain is wired for the real world, and even though I have the lowest esteem possible for him, Bernanke managed to surprise me by is foolishness and prove me wrong on my forecast — Mea Culpa. I know will consider him an economic and monetary terrorist. 
• Will printing money to buy MBS do anything to help unemployment? Only a madman will find a direct causation between the two, specially since when mortgage rates are at their all time lows.
• Will QE provide a boost to the markets? I don't think it will beyond the first few days after the announcement and the resulting euphoria. Why?
• Fundamentally, the markets are a discounting mechanism. So when the news comes in about the purchase of mortgage for $40 billion a month, this gets almost immediately priced into the market. The market only move by about 2% while integrating this discounting of the QE3.
• The previous QE1 and QE2 seemed to work on the surface because they were announced when the markets had experienced significant declines and sentiment was very low. Currently, we're at the opposite: markets are at euphoria levels and irrational exuberance and confidence at historically high levels. When this happens; there's room for only one way: down.
• The probability that Bernanke has signed his and Obama's political suicide is very high. Hopefully, Obama won't be elected and another inept President will take over and do a favour to the world by removing this economic terrorist from his position.

I'll need some time to rethink and see if my deflationary forecast might be postponed due to this "indefinite" printing of money... 

 Here's the Bloomberg report:

(Bloomberg) 2012-09-13 — The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.

“If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate,” the Federal Open Market Committee said today in a statement at the end of a two-day meeting in Washington.

The FOMC said it would probably hold the federal funds rate near zero “at least through mid-2015.” Since January, the Fed had said the rate was likely to stay low at least through late 2014. The Fed said “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens."

[...] The decision provoked a renewed backlash from Republicans, including Senator Bob Corker of Tennessee, who said Bernanke’s policies damage the Fed’s credibility while doing little to spur the economy.

[...] Growth will improve to as much as 3 percent next year and as much as 3.8 percent in 2014, up from upper estimates of 2.8 percent and 3.5 percent in their previous forecasts. The so- called central tendency forecasts exclude the three highest and three lowest of 19 estimates.

While the U.S. has “enjoyed broad price stability” since the mid-1990s, the employment situation remains a “grave concern,” Bernanke said at a press conference after the statement. “The weak job market should concern every American.” 

The Fed said it will continue its program to swap $667 billion of short-term debt with longer-term securities to lengthen the average maturity of its holdings, an action dubbed Operation Twist. The central bank will also continue reinvesting its portfolio of maturing housing debt into agency mortgage- backed securities.

[...] Republican presidential candidate Mitt Romney has said he wouldn’t reappoint Bernanke when his term ends in January 2014. Glenn Hubbard, the Columbia University Business School dean and Romney adviser, has said additional bond purchases by the Fed would do little to shore up the economy.

Portfolio Update: Closed Long EUR.USD Position

I woke up this morning and didn't feel right about my EURUSD long position. I was worried about an imminent drop in the EUR, and the fall of all risk assets. So I closed my long EUR position at the early morning price (Singapore time) around 1.2530 with a small profit (most profits wiped out as the EURUSD had jumped to as high as 1.27...).

It looks like my gut feeling were right as the EURUSD is now trading at 1.2470. If only I had had this feeling when we were trading at 1.27! :-)

More updates later, I've been quite busy these days, so didn't had a chance to post updates.

Dollar Scarce as Top-Quality Assets Shrink 42%

A few days ago, I wrote a post titled Seeking Dollars Desperately: Massive US Dollar Shortage in Argentina as Peso Inflation Runs 25%-30%. Here's another Dollar Scarce story:

(Bloomberg) May 29, 2012 — The dollar is proving scarce, even after the Federal Reserve flooded the financial system with an extra $2.3 trillion, as the amount of the highest-quality assets available worldwide shrinks. 

From last year’s low on July 27, the greenback has risen against all 16 of its major peers. Intercontinental Exchange Inc.’s Dollar Index surged 12 percent, higher now than when the Fed began creating dollars to buy bonds under its extraordinary stimulus measures at the end of 2008. 

International investors and financial institutions that are required to own only the highest quality assets to meet investment guidelines or new regulations are finding fewer options beyond dollar-denominated assets. [...]  

“The pool of high-rated assets has been shrinking, not just in the euro zone but elsewhere as well,” Ian Stannard, Morgan Stanley’s head of Europe currency strategy, said in a May 22 telephone interview. “With the core of Europe shrinking, and the available assets for reserve purposes shrinking, it makes the euro zone less attractive.” 

Seeking Dollars Desperately: Massive US Dollar Shortage in Argentina as Peso Inflation Runs 25%-30%

My friend blbl has sent me the following link to the Figaro and here is the (rather poor) Google Translate link, a French newspaper.  Here are quotes from the translated link, with improvements I've made:

Greenback withdrawals have been restricted in order to preserve the reserves of the central bank. "Seeking dollars desperately": for months, an obsession of the greenback touches the Argentinians, as the government tightens controls on foreign currency purchases. 

Restrictions applied since October, forcing the Argentines to obtain special permission for each withdrawal of dollars, was added a series of restrictive measures on travel abroad, imports and remittances outside the country. 

The aim is to preserve of central bank reserves (47 billion) under pressure due to the reduction of current account surplus (government expenditure increase by an average of 30% against 26% for recipes) while Argentina still has no access to international credit for refinancing as a result of defaulting on its debt in 2002. For now, these measures were successful in slowing capital flight, increased from $ 8.4 billion in the third quarter 2011 to 1.6 billion in the first quarter of the year. But this at the cost of a dollar surging parallel. The authorities had to call the police to close the illegal exchange bureaus that have exploded in the center of Buenos Aires, and beautiful golden retrievers have been specially trained to "smell" (illegal) greenbacks. 

Inflation between 25% and 30%: The government is trying to change attitudes, while a large part of economic life is pegged to the dollar. The president, Cristina Kirchner , announced that she would change the dollar savings account in pesos, to give the "good example", calling her "friends, business owners and employees" to do the same.  She is not sure that's enough to calm the fears of his countrymen. For the leading economist Rogelio Frigerio, "the problem is not the dollar, but the peso and inflation." The latter, always overshadowed by the authorities, running between 25 and 30% per year for an estimated private practice, no incentive to save in the Argentine national currency. 

While officials of the central bank minimizes the problem of soaring dollar parallel, the haunting of the country is experiencing a new "corralito" blocking of bank accounts and a devaluation, as during the 2001-2002 crisis. Control of sales of foreign currency has also been called "corralito verde" by the Argentines, who took to the streets of Buenos Aires last week by tapping their pans in protest.

At the (inverse) beauty conquest of the ugliest currency, it seems like the USD is failing to get anywhere close to the top. This is another thing that (hyper)-inflationists have missed: many currencies will collapse well before the USD, and these collapse will force people to turn themselves to the least ugly choice, and so far, there isn't anywhere to turn but the USD (and maybe the SGD, but there aren't enough of these). I'm not counting the CHF and JPY as the central bankers of these countries are even more mad than Ben Bernanke, and one way or another, they will collapse before the USD does.

Portfolio Update: Long Again

I've reopened my long EUR.USD, silver, gold positions during the US trading day on Friday, and also went long the WTI. Stops are once again in place, however, I'm still hoping not to be kicked out of my positions by crazy intraday volatility...

Portfolio Update: Stops Hit...

My stops on gold, silver and EUR.USD where all hit in the overnight market where all three assets took a serious hit. My profits dropped from 300% on my position to only 80%. Disappointing.

I'll look into re-entering these positions and also other commodities soon.

Portfolio Update: Buying EURUSD, Gold, Silver

I just opened positions in Gold, Silver, and EURUSD, which, I intend to grow bigger in the next few days/weeks. Stops are in place as with any trade.

Euro Shorts At a New All Time High

Sentiment wise, and position wise, the USD sentiment is a very elevated level, EUR bearishness at a very elevated level. A violent snap back should be expected soon, before the downtrend can resume.

(Bloomberg) May 21, 2012 — The euro has weathered the worst financial crisis since the Great Depression, bailouts of Greece, Ireland and Portugal, and falling interest rates. Now, investors are betting like never before that a Greek exit would be too much to keep the 17-nation currency above its long-term average. 

Hedge funds and other large speculators, which pared trades that would profit from a drop in the euro to the lowest levels since November, rebuilt them to a record high last week, figures released May 18 by the Washington-based Commodity Futures Trading Commission showed. The premium for options that grant the right to sell the euro has more than doubled since March. 

Through most of the financial and political turmoil in Europe, the euro held above the average since its January 1999 start as investors put their faith in German Chancellor Angela Merkel to keep the monetary union in place. While they currently forecast little change in the euro versus the dollar, a majority of the world’s biggest foreign-exchange trading firms surveyed by Bloomberg News say the loss of even a weak member such as Greece would risk more departures and send the currency lower.
“Financial markets’ great fear is that if one country left, it would not necessarily be the last,” Alan Ruskin, the head of Group of 10 foreign-exchange strategy in New York at Deutsche Bank AG, the largest currency dealer as ranked by Euromoney Institutional Investor Plc, said in a May 14 telephone interview. “Removing one country, however weak, would not be a route to a stronger common currency.”

I don't understand the logic (or the lack thereof) of Alan Ruskin, yet another member of the "Super Incompetent Strategist Team", who thinks that removing the weakest links from a chain, makes the chain weaker...

Average Estimate
The average year-end estimate for the euro among the biggest trading firms is $1.28, ranging from as low as $1.15 at UBS AG to as high as $1.44 at HSBC Holdings Plc. Deutsche Bank forecasts a drop to $1.25 next month before rising to $1.30 by the end of December.
The euro is down from this year’s high of $1.3487 on Feb. 24, and has depreciated about 1 percent since March against a basket of nine developed-market peers. It slipped 0.1 percent to $1.2765 as of 4:22 p.m. London time after weakening 1.1 percent in the five days ended May 18 to $1.2780 as post-election attempts to form a ruling coalition in Greece broke down.
“Having the history of an exit would make the market think it can happen again,” Greg Anderson, the North American head of Group-of-10 currency strategy at New York-based Citigroup Inc., the second-largest dealer, said in a May 14 telephone interview. “That would lead to endemic weakness.” 

CoT report, courtesy of ZeroHedge:

Back from China - Portfolio and AAPL update

I got back from China last Sunday, and took some time to do touristy things and relax.

In the meantime, the Euro sunk, and my options hit their stop-order. I don't know where was the Euro trading, but the time of the trade is suggesting somewhere around 1.32$ per Euro.

I don't know where the Euro will go, but the ECB is flooding so much the market, that a potential rationalization could be this flood of Euros coming in the market. Has the Euro topped? and will the USD rally continue? I need to spend more time on this, but I'm currently lacking time.

Finally, today, the S&P was touching the 1,400 mark at the some time where AAPL was reaching $600. How sustainable is this? Not much. As you know if you've been following this blog for a long time, I own Apple shares, and have held them since 2000, where I bought them at the current level of $13. So I'm not playing the perma-bear guy here. The rate of growth and the current valuation of Apple are not sustainable.

Of course, the capitalization weighted S&P and Nasdaq have been largely driven by AAPL which is now such a massive one, easily toping the second largest market cap, Exxon, by about 20%. So when Apple tops, the markets top most probably, and we're not far from that.

Portfolio Update — Shorting AUD/USD and US Equities

I believe the market will somehow correct — mildly at least, maybe something more severe. Consequently, I've opened short positions on junk quality equities (Russell 2000) and, expecting the risk off trade to hit the bubble currencies hard, the AUD/USD (out of the money puts).

Entry points:
AUD/USD = 1.068x
IWM = $79.80

Dollar Rally Ending — Equities Correction Approaching

My friend Tiho over at the Short Side of Long has written some nicely documented posts about the dollar rally ending — temporarily in my opinion — and the equities market toping:

• Stocks: Possibility of a Correction Approaching (part 1 and part 2)
• Currencies: Dollar Rally Ending (part 1 and part 2)

Portfolio Update — Long EUR

I haven't had much time to write in the past couple of days. But here's a quick portfolio update:

• I started buying Euros against SGDs which is trading as a historical high. This I don't really consider as part of my portfolio, since it's my personal bank accounts we're talking about...
• I also open a small speculative position on EUR/USD by buying call options strike 1.28. Let's see this one unwinds. I hope to be able to increase the size if I'm proven right. EUR/USD was trading at 1.2730 when I opened the position a few minutes ago.

Harry S. Dent's January 2012 Market Update

Harry S. Dent published his market forecast for the coming year on January the 11th (available on YouTube).

Summary:

• Time to get out of stocks NOW.
• Austerity is the right policy from his point of view, even if it means short term pain, but can avoid long term insolvency.
• Worldwide slowdown coming
• 4,000,000 foreclosures in the pipeline, which banks have been holding down.
• By the time the Fed reacts with Q3, it will be too late.
• This looks like the final rally. Where do we top is the final question. 1371 is the top of the range they forecast.
• The USD will rally while equities, commodities including gold, and real estate will fall massively.

Euro: Time for a bounce?

The Euro has been declining steadily since the top near 1.50 USD a few months ago. It is now down to 1.30 USD and it looks like sentiment is now very negative — rightly so, but in the markets you have to forecast what will happen next, and nothing goes straight into the whole.

As you know I have been short this bastard-currency since that time, although I've substantially reduced my short exposure now. 

It might be about time to close the remainder and wait for yet another bounce.

The reason why I am hesitating is that the end of the year and the bank holidays that go with it might bring the final collapse of Greece and their exit from the Euro, and other not so great but inevitable outcomes for the Eurozone.... 

 What do you guys think? Anyone dares to share not only an opinion, but also concrete market positions?

European Banks Deleveraging and US Dollar Squeeze Creates Risk-Off Opportunity [Updated]

At one side of the equation is the credit issues and solvency problems of European banks forcing the ECB to lend USD dollars to the Euro-zone banks:

(Bloomberg) — The European Central Bank said it will lend dollars to two euro-area banks tomorrow, a sign they are finding it difficult to borrow the U.S. currency in markets. 

The ECB allotted $575 million in a regular seven-day liquidity-providing operation at a fixed rate of 1.1 percent. It’s the first time since Aug. 17 that a lender requested dollars from the ECB. The spot rate was $1.3625. An ECB spokesman declined to comment on which banks borrowed the funds.

Even if this is done via a swap line with the Fed, it still shows that dollars are still sought after and this should push the USD higher — something hyper-inflationists will still not understand.

And on the other side of the equation, you have the realization from the banks that they need to deleverage and raise cash — if not capital... Well... The realization is only among the smartest banks at the moment. Others will follow, but it will too late.

Here's the news (Bloomberg via ZeroHedge):

*BNP PARIBAS AIMS TO CUT RISK-WEIGHTED ASSETS BY EU70 BLN

*BNP PARIBAS PLANS ADDITIONAL $60 BLN `DELEVERAGE' AT CIB

*BNP CUT $22 BLN OF U.S. DOLLAR CAPITAL-MARKETS ASSETS IN 1H

*BNP AIMS TO REDUCE CIB U.S. DOLLAR BALANCE-SHEET BY $82 BLN

*BNP PARIBAS AIMS TO LIFT CAPITAL RATIO TO 9% BY START OF 2013

These are not trivial amounts. Deleveraging means selling. Selling means lowering prices. The lower the prices, the more others will be forced to follow and sell, and create the vicious selling cycle that can kill any speculator with high leverage — including banks which have a leverage of 30 to 50.

Moreover, this will in the end be deflationary as banks are raising and holding onto cash.

[Update: Here's the quotes from the original Bloomberg report, confirming that lending will be cut and assets sold — both deflationary].

[...] BNP Paribas is taking steps to cut risk-weighted assets by about 70 billion euros ($96 billion) to increase the capital ratio by 1 percentage point under Basel III rules, the Paris- based company said in a presentation on its website today. That will free up about 6 billion euros of capital according to Bloomberg calculations and confirmed by the bank. As part of the effort, the lender is is cutting its corporate- and investment- banking balance sheet by $82 billion.

[...] BNP Paribas’s exposure to the sovereign debt of Greece, Ireland and Portugal is “manageable,” the bank said. In Greece, the company would have a 1.7 billion-euro pretax additional writedown on its sovereign holdings if it took a 55 percent mark-to-market impairment, it said. Any markdown on the Greek sovereign bonds in third-quarter accounts will depend on the implementation of the rescue package agreed to on July 21, which involved a 21 percent writedown on debt maturing by 2020, it said.

French lenders top the list of Greek creditors with $56.7 billion in exposure to private and public debt, according to a June report by the Basel, Switzerland-based Bank for International Settlements. Credit Agricole has an unprofitable Greek subsidiary, Emporiki Bank of Greece SA, while Societe Generale has a controlling stake in Greece’s Geniki Bank SA. BNP Paribas doesn’t have a Greek consumer-banking unit. 

[...] 

BNP Paribas is also aiming for a 9 billion-euro reduction of mortgage lending at its personal-finance division in Spain, the Netherlands, Switzerland, Norway and Hungary, the bank said. The company is seeking to cut lending at the equipment-solutions unit by 3 billion euros as it scales down business in the U.K., Switzerland and Hungary and exits some leasing activities such as real estate, yachts and business jets, it said. [...]

Gold Hammered Again

Yesterday, I mentioned that I started to build my short position on gold. That was when gold was trading at $1,900.

It's now trading at about $1,800. This drop is yet again too fast to be the real one I believe, specially since it's happening in the face of mad action by the Swiss National Bank and falling USD today. Last time, I knew we'd see the highs again. But this time, I'm just making a guess and I might be wrong on this call this time.

The fall of GLD has been so fast and my timing so right, that I am not making good money on the trade, since I structured it in a way that the drop should have been at best mild in the first few days...

Sad but true.

But it's not finished yet, a mild rally in the next few days will make that trade very profitable again.

So now, my only choice is to HOPE that I'll be granted a small rally (joke).
Wait & Pray.

Perspective on the USD: Trying to Make Sense Of the Dollar

This is a long overdue post that I have been planing to write for about two weeks now. I have been mentioning at few occasions my stance on my blog and also on other blogs such as Tiho's or Tony's.

The question that puzzles me is "Why isn't the USD rallying" and also "Why is the Euro levitating?".

About the Euro, I think it can be attributed to the "HOPE strategy" which consists of buying risky assets while hoping/wishing that the central bank will save you. I don't see any other possibility here.

Our Anonymous friend has made a few points on Tiho's post (above), which are valid, but I think there's much more to it.

1. The fact that treasuries have had such a massive rally, with the dollar staying so low is also interesting. Because foreign investors need to buy USD before they can buy US treasuries, right? There has been quite a lot of money pouring into the treasuries, and yet, the USD is at rock bottom.

2. While the equity have been correction — they are still way too high, and there's still too much bullishness in the equities markets in my opinion — commodities have failed to fall meaningfully, some still making all time highs, gold being close to $2,000 and the highly speculative is still at above $42. These show that speculative mania is still unabated.

3. The real estate bubble has popped in Australia, and speculators, commentators, strategists have been in complete denial about this. When the Central Bank is forced to cut interest rates to close to zero to try to save the banks — try to, not manage to — the AUD will collapse (aim at least 30% drop before the bottom, and that's the optimistic forecast. The pessimistic one will be a 50% drop).

4. Finally, people have been piling into the JPY and the CHF, and when the price action reverses — we have extreme bullishness on both of these currencies —these trades will have to be unwound which will create a massive USD rally, which in turn should create a major leg down in risky assets.

The bottom line and short summary here, is that while many think that the fact that the USD has started a rebound is a bullish sign. And you'd have understood that to me, it's actually the exact opposite: the fact that the equity markets have managed to drop significantly without a USD rally is a very bad omen. And the next leg down will probably be occurring with the USD rising while at the same time the RISK OFF trade is on, which will decimate not only equities, but also commodities.

The current set up will be deadly, and will be available somewhere near you, very soon.

Full disclosure: I have been short the EUR/USD since 1.48 and short the AUD/USD since 1.08. I just opened new short positions on the AUD/USD at 1.07 — so as you can see, I put my money where my mouth is.

Gary Shilling on the DailyTicker

Gary Shilling, the author of the Age of Deleveraging was interviewed on DailyTicker. This two segment interview covers:

1. In the first part, the coming banking crisis due to the second major leg down in the price of houses. I am not sure whether the cause and consequences are not inverted here, as I would say that it is the banking crisis that will make the price of houses fall, since banks are unable to lend while consumers behaviour shows the mania is not over yet.
   
2. The second part discusses the opportunities Gary Shilling is seeing: be cautious, as it's very tough, particularly in the long side. He is still bullish on the 30 year Treasury bond, the USD and the CHF.