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Sunday, December 20, 2009

As Goes Goldman Sachs So Goes The Market - PART II

Attached is a link to Mish Shedlock's latest blog at Global Economic Trend Analysis. In it Mish discusses Germany being what was the last bastion of fiscal rectitude in the Euro region planning to significantly increase it's fiscal budget for 2010 resulting in a more than doubling of it's borrowing from 37 to 87B euros.

It is this excert from the article that is most interesting:

"Who Coulda Thunk?

Just a few days ago someone was buying UUP dollar calls (UUP is a long USD ETF). There were 340,000 calls traded vs. 183 puts. Coincidence?

What Happened Since





  • Additional downgrades of Greece by Moody’s
  • Action by the ECB on covered bonds
  • German budget deficit about to balloon

There is a very big difference between a concentrated bet by one or two players and the masses speculating in calls. That trade smacked of someone knowing something (or thinking they did, and in this case correctly)."



courtesy www.globaleconomicanalysis.blogspot.com


Let's recap what I said in my original As Goes Goldman Sachs So Goes The Market post on November 16.


"The blood sucking vampire squids of the financial system generally have a good idea as to where the markets are heading. Even when they are wrong however they can still rely on the good grace of the US Treasury & Federal Reserve to bail them out as was the case in the disgraceful way the AIG bailout was handled.





Observant readers will notice that Goldman Sachs has a rather significant net short exposure to CurrencyShares Euro Trust. This is essentially a short Euro/Long Dollar trade."



Since that post UUP is up 3.8% (9.4% in AUD terms) so I guess Goldman Sachs knew where the market was heading again despite the incessant bearishness towards the USD at the time (which still remains by and large), just as they did when they were shorting the subprime mortgage backed securities they were selling to their clients in 2007.


Traders could do worse than to follow the "if you can't beat em join em" edict.








Thursday, December 17, 2009

More evidence to support a strong USD

The attached article from http://www.zerohedge.com/article/apocalypse-not-dollar is a highly tehnical one but I highly recommend reading it.

Essentially the argument the article presents is that their are a whole host of countries in far worse financial condition even than the United States which lends weight to a potential rebound in the USD.

The markets have an excellent ability of doing what everyone expects it not to do. Right now there remains a fair degree of pessimism towards the US Dollar.

In the long run all paper currencies fail and the financial system we have today will like all paper money systems throughout history. The reason being that paper money is nothing more than a promise to repay, the only problem being that the only method of repaying is to print more money (or get banks to create it through new loans).

My positive view on the USD is a 1-2 year view. I think you can do very well out of this trade (please read my previous blogs for my view on the best way to trade this) however in the long run you want to be out of all paper currencies and into hard assets such as precious metals and mining and agricultural commodities, real estate etc. I would however would be cautious in buying these types of assets right now due to the extreme levels of optimism towards them.

Tuesday, December 1, 2009

END THE FED & related US Dollar discussions

An excellent article from Mish Shedlock completely breaking apart Ben Bernanke's recent Op-Ed in the Washington Post. See the full blog here.

In the same blog Mish links a Youtube video showing how comprehensively wrong Ben Bernanke has been right back to 2005. Why do people still listen to this muppet!! See the video here.

The Fed has to end now, since 1913, the year the US Federal Reserve was enacted the US Dollar has depreciated 98% (against the value of gold). The free market is more than capable (and probably far more efficient) at setting the appropriate interest rate for a given risk than any centrally planned monetary authority privately owned by the same Wall Street banks that benefit from this theft of middle class wealth by stealth.

SO WHY BE BULLISH ON THE USD???

Those who have followed my previous blog posts may wonder why I could possibly be bullish on the US Dollar against the backdrop of a completely malfunctioning Federal Reserve and not to mention political system at the mercy of the Military-Industrial Complex. It is an irony that as the majority of the world's debt is denominated in US Dollars it is the removal from the monetary supply of this debt through an increased deleveraging of the private sector due to high unemployment that causes a reduction in the total USD money supply and relative USD strength against other commodities, currency and financial markets. Now this on its own would not support the case for USD strength as it is important to note what you are comparing the USD to ie USD strength against gold, the Euro or what?

USD v Gold

Gold throughout history has been considered a store of value through its scarcity and relatively finite supply. Now the gold supply is not completely constant as new discoveries will increase the gold supply and industrial use will deplete supplies but for the sake of this argument we can assume that the supply is somewhat constant or at the very least far less volatile than any fiat currency such as the USD. What will change the USD gold price over a long period of time is the increase/decrease in the total supply of US dollars in circulation and to a lesser extent the change in popularity of the gold and USD in the eyes of the investor public.


Source - Steve Keen's Debtwatch http://www.debtdeflation.com/blogs/

In the above chart you can see that US Debt to GDP has reached a staggering 250%. This is extreme and began to turn down when the GFC hit before it began to march upwards again as the US Government stepped in with massive stimulus packages and the US Federal Reserve flooded the financial system with liquidity. This has lead to a rally in global equity and commodity markets including gold. On current forecasts the US Debt to GDP is forecast to hit 300% in 2010 and thats assuming the economy is growing! Obviously if GDP begins to decline again that ratio may be even higher. In my opinion we are close to the end in this government stimulus funded "recovery" that is not really a recovery unless you are a Wall Street banker on record bonuses rather than an unemployed middle class person on Struggle Street!

In my opinion the Fed Reserve & Government will not be given a second chance on increasing federal debt at already extreme levels when they see the fairly muted effects of the original stimulus in its inability to stop private sector deleveraging and actually encourage credit creation. The Fed Reserve has already announced their intention to remove $1.5 Trillion in emergency liquidity by March 2010. This I feel will be a nail in the coffin as the investor public re-shifts its focus back to the systematic private sector deleveraging that began in 2008 and will expand to US municipality bond defaults, large coporate debt/commercial property/residential property defaults and so on and so forth. The government will not be able to offset this rampant deleveraging a second time after the first effort will be shown to have had no effect.

Bringing it back to gold it is my opinion that a precipitous decline in the total USD money supply versus a relatively static supply of gold that will lead to a reduction in the value of gold priced in US dollars. Further to that the widespread mania around gold where Central Banks are announcing large purchases of it, people are calling for the Death of the US Dollar it appears to be a very crowded bullish gold trade at the moment in USD terms. I can't pick the exact timing as to when things will turn but I don't think it is too far away. In the longer term all fiat currencies die as people stop accepting a currency backed by nothing more than a promise but I think we have deflation first through credit deleveraging before we get to that. It already began in 2008, I am only arguing for a continuation of that.

N.B this is not an argument against the holding of gold. I think everyone should own some physical gold as some protection. Who knows these maniacs may never turn of the printing press and completely destroy any remnants of value in the USD. It is merely an argument for USD strength in the near term (ie the next 6-12 months, anything further than that is a complete uneducated guess).

USD v AUD

I am an Australian based investor so what was important to me in forming a view on the USD was how did I think it would compare to my home currency. I encourage those in other non-US countries to conduct their own research as this is purely an AUD perspective.

Source - Steve Keen's Debtwatch - http://www.debtdeflation.com/blogs/

As you can see from the above chart both Australia and USA have had massive expansions in debt over the last half a century, far in excess even of the Great Depression and the Depression of the 1890s. The question is as deleveraging gathers pace to what extent will there be a destruction of the respective money supplies of both the USD & AUD. The above chart courtesy of Dr Steve Keen's Debtwatch blog suggests that the US has a much higher base of debt from which to contract and hence will result in a more extreme contraction in money supply relative to AUD contraction and thus in theory this (assuming all other variables remain constant, which they of course won't and I will discuss some below) will cause a rise in the value of USD relative to the AUD.

The Carry Trade

Lending further to this argument of USD/AUD strength/weakness is the carry trade. This is where an investor borrows in a low yielding currency such as the USD or YEN and invests in a higher yielding currency such as the AUD or NZD. As the investor borrows USD's this increases the total supply of USD money and hence lowering its relative value to AUD and other currencies. Those of you who don't believe in this phenomenon may wish to look at the performance of the AUD/USD over the last 6-8 mths following the beginning of the equities market rally in March to now. As you will see it has mapped a very similar path to the performance of the S&P 500 & the ASX 200. Please follow the link to Google Finance here. When this "mother of all carry trades" as Nouriel Roubini calls it turns there is going to be a correction in equity markets an rally in USD to dwarf that of what we saw in 2008.

Comments/criticisms more than welcome.





Tuesday, November 24, 2009

Fraudulent BLS Statistics

An excellent post here from my favourite blogger Mish Shedlock referencing an article from the New York times of the Labour Department having overstated jobs created this year by a colossal 800,000.

For those that want the full NY Times article they can read it here.

Mish Shedlock and David Rosenberg have been bleating on about this for months and I totally agree with them. That is that the Births/Deaths adjustment is useless. How it can say that more jobs were created from new businesses created through the GFC than lost through business that disappear is beyond me.

Of course the talking heads on Mainstream Media will explain this away as a non-issue and keep cheerleading this100% government stimulus/media manipulated pseudo recovery.

I don't know when the market will crash or even if it will but gradually the curtain is being lifted as to the monumental fraud that is being perpetuated across many fronts.

Hey even man made climate change data is being manipulated! Take a look here.


Thursday, November 19, 2009

Pleading for sanity

Here is an interesting article from Mish Shedlock of www.globaleconomicanalysis.com on the parlous state of the US housing market.

Credit is contracting faster than Helicopter Ben can print it, now if the banks just marked to market perhaps we will see some temporary sanity prevail & maybe just maybe the S&P 500 will no longer be priced on 100x earnings and with the destruction in the USD money supply as a result of this credit contraction perhaps we may even see a reversal of fortunes there.

Wednesday, November 18, 2009

Bob Prechter of Elliot Wave Bullish on US Dollar

http://www.elliottwave.com/freeupdates/archives/2009/11/17/U.S.-Dollar--Flies--A-Blip-or-Start-of-Something-Big.aspx

Bob Prechter's market timing has been pretty good in the past. He called the market bottom in March and called for a multi-month rally to a target of DOW 10,000. Well we are now around that point.

Offsetting the predicted weakness in the DOW and other major equity market & commodity indexes is an expected appreciation in the USD.

Those of you who missed my earlier post on my personal views on the US Dollar can find out more here


Tuesday, November 17, 2009

Hugh Hendry questions Market Rally & Dollar weakness

Very interesting update from Hugh Hendry of Eclectica Asset Management questioning the validity of the 8 month long rally in global stock markets and equivalent weakness in the USD.

Hugh is one of my favourite market commentators and hedge fund managers.

Those interested can read the article from Eclectica Asset Management's website here.

Here is a recent CNBC video backing up the views Hugh expresses in his recent market update.

Monday, November 16, 2009

As Goes Goldman Sachs So Goes The Market








Greetings fellow heretics

I have just finished reading a very interesting article from one of my favourite sites, Zero Hedge(www.zerohedge.com), about Goldman Sach's trading positions. Attached above from that article is a very interesting look at the largest negative exposures Goldman Sachs has on its trading books. Essentially Goldman Sachs stands to make money if the prices of the above securities go down.

The blood sucking vampire squids of the financial system generally have a good idea as to where the markets are heading. Even when they are wrong however they can still rely on the good grace of the US Treasury & Federal Reserve to bail them out as was the case in the disgraceful way the AIG bailout was handled.

Those who read my previous blog on my views on the US Dollar (those who haven't can find out more here) will take some confidence in the knowledge that Goldman Sachs may be putting their money where my mouth is! Observant readers will notice that Goldman Sachs has a rather significant net short exposure to CurrencyShares Euro Trust. This is essentially a short Euro/Long Dollar trade.

One could do a lot worse than to follow those that do "God's work".

Good luck with your trading!



The Financial Markets Heretic


Thursday, November 12, 2009

Trading Tips

Greetings fellow heretics

Welcome to the first blog of The Financial Markets Heretic.

Essentially this site will give trading tips that go contrary to the propaganda you hear on Mainstream Financial Media. Some of the things I will mention would be treated as outright heresy on the popular financial news networks but I aim to give you an alternative to the same mundane "buy and hold" mantra they preach. These tips will be across all asset classes and many different global markets, basically wherever I see an opportunity that is being overlooked.

N.B THIS IS NOT FINANCIAL ADVICE!!!

This blog is merely a view of the markets and suggested ways to profit from the herd like behaviour of other market participants. I suggest you run my ideas past your Financial Adviser (who will probably disagree with me!!) before acting on any suggestions I make.

My trading strategy is very simple, do the opposite to what you hear suggested on TV or in the newspapers! Global markets exhibit lemming-like qualities. In March of this year nobody wanted to own stocks, in fact Jake Bernstein's Trader's Sentiment Index for the S&P 500 (find out more as to how this Index works here) got to a historic low of 3%. What this is saying in simplistic terms is that only 3% of traders were positive on the market and a whopping 97% were bearish! This was a classic buying opportunity missed by the large majority of traders.

Well we all know what has happened since then, the S&P 500 is up 63% from its lows. Of course now they will have you believe that the economy is recovering, the worst is behind us. Trading Sentiment on the S&P 500 is now over 90% bullish! So there are very few people traders expecting the market to go down.

US Dollar

Essentially the US dollar has been moving in the opposite direction of global stock markets. All the talk you hear at the moment in mainstream media is how all the money printing of the US Federal Reserve will lead to inflation. Major oil producers are having secret meetings to end the use of the US Dollar for pricing of oil. China and India is buying gold and selling US Treasuries. At the moment it appears according to these views nothing to stop the imminent slide into a currency collapse causing hyperinflation.

Of course, this is not the first time we have heard these calls of dollar death. Take a look at this article, beautifully timed for a turnaround in the USD.

This article was written on March 14 2008. On this day USD$1 would buy you EUR0.6383.

For a while there the writer may have been getting impatient as the USD treaded water for a few months before reaching an ultimate low on July 11 around EUR 0.6290. Alas from there something very odd happened. From July 11 2008 to November 21 2008 the USD rallied 27%, completely contrary to the doomsday views on the dollar at the time.

Fast forward to today and as mentioned above there is once again extreme bearishness on the USD. Trading sentiment is at an extreme level of bearishness around 8% (it did get as low as 3% a week ago). Does this sound similar to my example of the S&P 500 in March of this year?

I think there is a good opportunity for patient investors to make a good return here in USD. For conservative US investors I would just hold my money in a safe bank or short term US Treasury Bills as I feel the equity market will sell off as the USD rallies. Personally I am an Australian based investor so I have invested part of my trading position in a USD currency deposit with my International Shares broker and have also bought some UUP (Powershares DB US Dollar Index Bullish). UUP aims to track the performance of the Deutsche Bank US Dollar Index so if the US Dollar goes up against a basket of the major global currencies UUP's unit price will also go up.

In my opinion the USD will continue to move in the opposite direction to the S&P 500. For those willing to take a bit more risk you may wish to take a look at SH (PROShares Short S&P 500). This security aims to generate a return opposite to that of the S&P 500 eg if the S&P500 is up 1% SH should go down 1%. It doesn't move exactly like that but it is pretty close.

To compare the above historical example of the USD those who bought SH on the same day (March 14 2008) at $69.13 would have made a return of 40% through to November 21 2008.

Given the level of extreme bearishness on the USD and converse bullishness on the S&P500 I think now is a good time to enter into the above suggested trades.

Good luck with your trading!



The Financial Markets Heretic