Feb 28, 2005
Stocks are left sorting out what is going on in the world and whether we will see stagflation or inflation.
The yen rose in Asia, the biggest fluctuation of any major currency market today, after Japan's government said industrial production grew more than forecast, helping the world's second-largest economy recover from recession.
The biggest increase in production since April and a separate report showing the first gain in retail sales in three months helped the yen rise the most of 16 other most-traded currencies today. The yen is up 4.2 percent against the dollar in the last six months as overseas investors put money into Japanese stocks.The reports ``are further confirmation that the economy has bottomed out and is recovering,'' said Naomi Fink, a currency strategist in Tokyo at BNP Paribas SA
Feb 27, 2005
So why should we pay so much attention to the six leading central bank governors in Asia? Quite simply because if any one of them decided to diversify his country's exchange reserves aggressively out of dollars, the kind of currency market jitters we saw this week would pale into insignificance. Furthermore, if Asian central banks merely decide to follow South Korea in ceasing to buy new US assets, economists estimate that the interest rate on long-dated treasuries could rise by 0.4 to 2 percentage points.
In short, one of the main drivers of monetary conditions in the US is the Asian central banker.
This is the point I was making in my dialogue with Roger. It remains to be seen if the Fed still has the same flexibility to act in a crisis but my guess is that they don't. This will be especially true if the crisis begins in the U.S., limiting the a flight to quality response the U.S. bond market normally sees.
If you just can't read enough about the U.S. dependence of Asian central banks, you can check out the China Stock blog's summary of a Barron's article. The gist of the article is that China's peg is not so bad. One argument they make is that a yuan appreciation is not a given in a free market because all emerging market currencies are undervalued based on purchasing power. I think you could drive a large truck between the yuan's current value and "undervalued based on purchasing power" but a more thorough approach is to compare values across emerging economies. I have not read the Barron's article but the summary was food for thought.
Feb 26, 2005
A South Korean parliamentary committee passed a bill Friday that will allow the nation to use part of its massive foreign reserves for overseas investment.I have only seen this story from one source which I find a bit strange but if true it emphasizes that diversification refers to asset class rather than currency. That is a completely different ballgame from Tuesday's story though I imagine their actions will come somewhere in the middle. Reduced purchases of both U.S. debt and the dollar make sense. This asset diversification is what I referred to last week and will lead to higher U.S. interest rates but possibly a very positive medium-term reaction in other markets.
The move is part of the country's long-term plans to diversify more than $200 billion of foreign reserves, Finance Ministry officials said.
Under the bill endorsed at the National Assembly committee on finance and economy, the government can use 10 percent of its foreign reserves for investment in stocks and real estate in foreign nations.
I also hopped in a thread on Macroblog about whether the adjustments made by foreign central banks will necessarily cause shocks. I tend to think at least some markets will experience sharp movements. U.S. interest rates and the dollar seem like likely candidates. Obviously the CBs will target gradual adjustments but it remains to be seen if markets will go along.
To really gain my confidence I would prefer seeing the market prove it can move up with yields. Might not matter for the short run with all the open gaps in the bond chart below current yields but eventually it seems like a necessity for higher stock prices.
Feb 25, 2005
In light of our rationale, which attempts to explain the great "conundrum," an interested reader might wonder why our durations and overall strategy appear so defensive. After all, if foreign central banks and others continue to absorb 70%+ of the bond market's new supply (900 billion out of an estimated 1.3 trillion in 2004), why wouldn't this "squeezing" out of domestic investors continue unabated, with yields continuing to move lower? The insensitivity to price/yield exhibited by Asian central banks in an effort to cap their own currencies might seem just as illogical 50 basis points lower as it does right now. And if the lack of global aggregate demand reflected in a surfeit of savings is really the primary cause, the malady is not likely to improve for years. Point granted. We might be at the mercy of a bond market tsunami here, whose first wave has struck and is now receding, only to be followed by more of the same in a few short months. This possibility is part of any interest rate guessing game except it is complicated in this new instance by buyers who have non-interest rate concerns. Still, there are limits. Why would a central bank buy 10-year Treasury paper below 4% if it expected 3-month Treasury Bills to be yielding 3 1/2% by the end of the year? It could cap its currency just as easily by going the short maturity route without risking future price losses. And for those institutional foreign bond holders, and the "hedgies" domiciled in the Caymans, there's no doubt too that a higher and higher short rate reduces and in some cases eliminates "carry," leading to collapsed positions and ultimately higher yields further out on the curve.The interesting aspect was his wait and see approach. He knows how it will end but does not see when that end will arrive and is making sure he can out last the central banks. The system does not seem sustainable for long in my view but it is easy to see that surviving to pick up the pieces is a pretty attractive option.
His chart of U.S. debt outstanding against domestic ownership is just plain scary.
The chatter (and prices) in oil and commodities is a touch frothy and I am not sure it can continue much longer. The falling bond yields do not confirm the higher commodity prices so that could be a sign to book some profits. I prefer owning the precious metals over the industrials as they have been left behind a bit.
China will speed up the infrastructure construction of foreign exchange market, increase varieties of transaction in the inter-bank forex market and experiment on US dollar market maker system. It means China is expected to introduce the US dollar market maker system into its foreign exchange management system.It is probably not news because its sounds mostly like a technical change but markets might take notice.
A couple of charts I follow look like they are in a good position to move up here. They are HAE and NEOL. I probably won't be adding any long-term positions though and may stick to day trading for a bit. The market seems to be trading as a unit reacting to bonds and oil and while that goes on the risk seems higher. I usually see things better when I am flatter and market is still figuring out which way the trend will be. Less so for bonds and commodities I think but the dollar rally tonight might mix that up a bit too.
I was surprised by how much the VIX fall off today. The market got a bit ahead of itself this week but I am not sure I would be bailing out of my insurance just yet. Makes me wonder a bit if people have too much premium at risk for the large percentage swings in volatility. I wonder if it is creating overtrading at a good long-term entry level.
Some central bankers in Britain, continental Europe, Australia and New Zealand have said publicly that monetary policy needs to take more account of asset prices and that sometimes interest rates may need to rise by more than if the sole objective were to keep consumer-price inflation within target.The author then gets a bit caustic with the Fed for reluctance to consider the overall liquidity picture and concludes with this.
During the past century, every monetary rule has eventually broken down: the gold standard, the Bretton Woods system of fixed exchange rates, and monetary targeting. Now it seems that strict inflation targeting may not be a panacea either. It would be foolish for the Fed to sign up for crude inflation targeting just as it goes out of fashion.While centering on the need to include asset prices in inflation measures the article falls a bit short by suggesting central banks should consider asset prices in their policy decisions. A better solution is to remove asset prices from central bank control. Robert Shiller discusses the Chilean UF (unit of development) in his book The New Financial Order (Amazon) as an example of an alternative system to limit central bank influence over asset prices. The UF is an inflation indexed unit of account which is repriced daily such that everyone knows the correct price of a UF in Pesos. The UF was created in 1967 and has become widely used for pricing long-term contracts such as housing prices and mortgages while pesos are still used for day-to-day purchases and salaries.
I am getting a bit out of my area of expertise but I am pretty sure the Fed (and probably the world) is running into the problem the Economist describes with asset prices demonstrating large value swings while goods prices remain stable. These swings are making it impossible to effectively manage liquidity in the system. Rather than giving central banks the difficult task of adjust policy to correct asset prices I think it is better to create a mechanism for asset price stability outside of central bank control.
Feb 24, 2005
Second, it may be that the East Asians do not convert their dollars into local currency and suffer high capital losses. China in particular does not fully sterilize and thus is not issuing as much local currency debt to soak up inflowing dollars. Japan doesn't sterilize at all. Both countries could use central bank dollars to loan to private firms looking to make investments in/purchases of oil (still priced in dollars), US corporations, US mineral deposits, US agricultural land, US golf courses, whatever. We already know that all the East Asian banks have accumulated reserves far in excess of what they "need" to defend their currencies. So why not simply keep many of those dollars in dollar form and buy US real assets with them?As always the entire post is worth reading but this paragraph is really the heart of things in my view. It is possible that Asian central banks simply shift out of bonds into other assets. The kicker here is that it is not a solution to interest rates heading up which may still lead to problems even with a strong dollar. But it would certainly play out differently for stocks and possibly real estate.
The market could focus on the extension but that first paragraph is a bit of a disaster. It sets up the stock to break down from an already oversold condition. That situation could get ugly in a hurry and there is still massive exposure to that name in the bond market.
FANNIE MAE, the nation's largest buyer of home mortgages, said on Wednesday that its primary regulator had discovered a host of new potential accounting violations at the company that had raised a fresh set of "safety and soundness concerns."
Fannie Mae also said that regulators had decided to give it a three-month extension, until the end of September, to carry out a plan to raise billions of dollars in capital and reduce its portfolio of mortgage securities.
If FNM does get going on the downside keys to how it plays out will be whether the banks follow it down and whether treasuries can manage a pop on a flight to quality. If you get banks and bonds down the dollar will go too and that is when it is a real problem.
Feb 23, 2005
I don't think this trend is priced into the bond market. Particularly the lag between the bottom of the Core CPI and the PPI seems to imply that things will get worse before they get better.
Rio Tinto on Wednesday became the second big mining group to lock in a 71.5 per cent price increase for iron ore in negotiations with Nippon Steel, Japan's biggest steelmaker.
The move followed an announcement on Tuesday by Brazil's Companhia Vale do Rio Doce, the world's largest iron ore miner, that it had agreed the same price increase with Nippon Steel as well as JFE Holdings and Kobe Steel, also of Japan, for the year beginning this April.
News of the agreements have driven shares in mining companies such as Rio Tinto and BHP Billiton up to record levels. Steel stocks have fallen, however, reflecting worries that the industry will have to absorb the higher costs rather than pass them on to customers in steel price rises.
But steelmakers outside Japan have stressed that the deals struck by Nippon Steel should not be seen as a guide for other iron ore negotiations, as Japan is a relatively small iron ore consumer.
I don't know how serious this may or may not become but as a quick reminder, bear markets don't usually start with crashes. I would think a crash would be no different if it happens this time around. This is not a prediction but ties in with past writings of relying on logic instead of emotion.To which I replied.
Usually sharp selloffs snap back sooner than people expect, think Asian contagion, Russian Ruble & LTCM and 9/11. That may be worth remembering.
None of your snapback examples occurred while the Fed was hiking rates. The best strategy in each of those cases was short until the Fed cuts and then buy.He then responded at the bottom of this post.
"This time it's different" is a difficult argument to make but the current stance of the Fed and increasing reluctance of central banks to finance U.S. borrowing could be a pretty big impediment to following the same course of action.
I don't have a problem with your point so much as your examples.
You may be right. But if there were some sort of horrible event to cause a crash, wouldn't the fed one way or another act? They can add liquidity and jawbone in addition to lowering rates. I would think the fed would do something, again, in the face of a crisis.So I added to my comments as well.
This time around a catastrophe would need a G3 or G10 response. The Fed would have a tough time convincing foreign creditors to continue lending as rates fell. They are having a tough time keeping foreigner lenders (like Korea) in as it is with no crisis and rising rates priced into the forward market.The U.S. has an unprecdented demand for international funding. By committing to borrow so much the U.S. has in effect given up its ability to manage interest rates counter-cyclically. The current worries in the dollar and long-term interest rates in some ways represent the possibility that creditors force U.S. interest rates to be pro-cycle by demanding higher interest rates from the U.S. when its growth prospects look weak.
While the Fed may want to offer stimulous they also need to avoid a dollar collapse. I don't think a simple rate cut would manage it.
The concerns in the market yesterday don't seem like they can be solved by lower U.S. interest rates.
France became the first Group of Seven industrialised country to issue a 50-year bond in modern times, extending the duration in the market from the 30-year segment.
The size of the issue was increased to EUR 6bn from a targeted EUR 3bn-5bn after investors placed orders worth more than EUR 19bn for the bonds, which will mature in April 2055. The strong demand was initially driven by institutional investors including pension and insurance funds, which need longer-dated assets to match their liabilities from an ageing population.
However the BoK said in a statement on Wednesday that it was looking to invest more in non-government bonds and that it would not sell current dollar holdings for other currencies.Korea has been adding to reserves at a pretty fast clip so even by limiting the policy change to new investments it will still have a pretty strong impact.
We already know that Korea has battled mightily against won appreciation over the past two years, with the Bank of Korea's foreign reserves growing 27% since January 2004 and a stunning 62% since January 2003. And yet the won continues to rise. In early April 2003 the dollar bought around 1260 won; now it buys less than 1030 won, a nearly 20% appreciation.How the U.S. funds this years borrowing need is really what is on the table.
Some of the dollar strength this morning is being attributed to the Korean clarification but it seems more likely it is a response to one-sided trading yesterday that set a near-term low.
Commodities are a bit more interesting as these recent rallies have really brought out some table pounders. I would be watching the dollar to see if it makes a quick (5-7 trading days) retest of the Dec lows which could set up a pretty powerful bottoming pattern. That would put the kabosh on commodity trades though it is a few days off and far from a done deal.
I have to wonder if by Thursday we will see some Fed officials trying to clarify Greenspan's remarks on interest rates. A bit tough to take back but I would be surprised if they did not try.
Feb 22, 2005
Stocks certainly have the more room to fall in here if they want to but if its inflation / dollar / commodity prices freaking people out it seems the long bond carries more risk and will lead the way down. Today seems like the kind of day that will leave volatility higher for a few weeks and ditto for correlations. Stocks will trade as an entity while the market sorts out the bigger picture. A jump in volatily could get ugly and end up lasting more than a few weeks given the low starting point.
I have started watching the 10-yr bund / U.S. bond spread as I anticipate that relationship going through some changes.
In a nutshell we have been watching for 6 months as smaller counties diversify away from the dollar while China and Japan try to maintain the status quo. As of Q4 S. Korea was also trying to keep its currency static to the dollar. If the comments today are not retracted and are followed by action then S. Korea becomes the biggest small country to abandon the dollar. That could conceivably speed up the selling or increase the share of the U.S. borrowing needs that must be funded by Japan and China.
It is best to think about what is going on in terms of game theory with China and Japan sitting in separate rooms and deciding if they can still support the dollar while doing so means increasing the risk of loss.
Feb 21, 2005
"The oil exporting countries' central banks ... have been switching out of dollars mainly into euros and Russia also plays an important role in this. That is, I think, at the bottom of the current weakness of the dollar," Soros said.
Soros, dubbed "The Man who broke the Bank of England" for his role as a hedge fund manager in betting the pound would drop in 1992, said he was not predicting further falls in the value of the dollar. But he linked its fate to the price of oil.
"The higher the price of oil the more the dollars there are to be switched to euro (so) the strength of oil will reinforce the weakness of the dollar," he said. "That is only one factor, but I think there is such a relationship."
He also commented on the yield curve.
Soros would not make detailed comments on why long-term borrowing costs have fallen in the face of short-term rate increases, a development U.S. Federal Reserve Chairman Alan Greenspan said on Wednesday he found difficult to explain.
"A flattening of the yield curve is usually an indication of a slowing economy, but here I don't know," Soros said.
In testimony to the parliamentary budget committee, Sadakazu Tanigaki, finance minister, said: "If [nominal] interest rates are pulled up now, even by a little, that will cause real interest rates to climb. The Japanese economy can't tolerate that now." Mr Tanigaki said zero rates, though they had unpleasant side effects, had been "underpinning the economy".
Paul Sheard, economist at Lehman Brothers in Tokyo, said Mr Tanigaki's warning about the dangers of premature tightening was a "polite wake up call" to the BoJ. He said talk of tightening either monetary or fiscal policy at a time when the economy had stalled was wrong-headed.
Speculation that the BoJ is preparing to tighten its quantitative easing policy, introduced in March 2001, has risen following the release of minutes showing that two policy board members in December proposed lowering the bank's liquidity target.
Last week, the BoJ left that target unchanged at Y30,000bn-Y35,000bn (US$286bn- $333bn) but analysts will scrutinise minutes of January's policy board meeting, due to be released on Tuesday, to see whether support for lowering the liquidity target has hardened.
Although the BoJ is committed to keeping zero interest rates in place as long as deflation persists, any lowering of the liquidity target would be interpreted by the markets as an prelude to tightening.
How the BoJ reacts to signs of inflation will hopefully be determined by the response of Japanese consumers to inflation. I expect inflation will stimulate the economy making rate hikes and tighter liquidity possible without causing harm to the recovery. This is not an urgent decision though so current policies should be in place another 3-4 months to see how things develop.
Yen May Fall as Traders Most Bearish in Two Months
Feb. 21 (Bloomberg) -- The yen is likely to fall against the dollar and the euro as currency traders are the most bearish they've been about the Japanese currency this year, according to a Bloomberg survey of strategists, traders and investors.
Forty-seven percent of the 72 participants polled from Sydney to New York on Feb. 18 advised selling the yen against the dollar, up from 40 percent a week earlier and the most since Dec. 12. Forty-two percent said to sell Japan's currency versus the euro, up from 29 percent.
Lets see on Dec 12th the Yen was... drum roll... 104.79. It then took until Feb 7th for the Yen to fall below the 105.15 low from Dec 9th. If they are even more bearish now does that mean the recent low (106.84) will last at least 3 months?
Probably an interesting data point though I would write a different headline.
It is hard to look at the 30-yr chart and take away anything but ambiguity after the action of the last couple months. With the FOMC committed to avoiding deflation at all costs and Greenspan telling the world last week that he did not really agree with long-term interest rates I lean towards higher rates and have tried to trade that way. The chart no longer supports that view. We also experienced a very whippy broadening range in Dec. (the two most recent highlight marks) leaving little room to benefit from betting either way. Some have mentioned that mortgage hedgers were buying into the most recent highs (price highs yield lows) so maybe it is their negative convexity positions that account for the number of reversals.
Posted by Hello
The 5-yr chart shows a much more useful pattern with the yield uptrend looking pretty stable. This reinforces my belief that long rates need to head higher. Trading the 5-yr in here is probably the better option because it allows for tighter stops.
If you read this site a lot you can probably tell that I am a bit obsessed with interest rates. I am mostly interested that a big move may be coming in stocks or bonds because the curve flattening has not coincided with equity weakness. My best guess about the near term is that short yields continue higher and long rates eventually turn to follow within the next 2 months. There is still a strong chance that whatever factors drove long yields to these levels will persist in the near term. Inflation numbers like we had on Friday confirm this view and I would not be too surprised if employment reports begin to show a similar trend towards higher costs. In the short run I think higher rates (and some steepening) will be good for stocks as investors may literally flee the declining bond market to get a piece of corporate profits. Both inflation and higher rates should leave investors with the impression that the economy is stronger than most believe and capable of staying strong even through rate hikes. Over the medium to long term (3-6 months?) stocks will probably come under pressure too as higher rates make bonds more attractive and may uncover some liquidity problems at marginal corporate borrowers.
Oil has a pretty good shot of breaking above $50 next week and if it does a trade through $55 will probably happen within days. That action if it occurs will give a lot of clues to how the markets will react to any impending inflation scare.
Feb 20, 2005
I. On Initiating a PositionThat is trading in a nutshell. I absolutely love the footnoted "substantial dangers". Stanley does one of the best jobs I have seen of discussing trading cliches from the perspective of a trader's day-to-day decisions. He treats his own rules the same way. Rules are easy to learn and easy to apply when trades are completed but their correct place at each moment in time is pretty murky.
Trade in the direction of the major tend, against the minor trend. For example if the major trend is clearly up, trade the market from the long side, or not at all, buying when:
a. the minor trend has turned down, and
b. prices are "digging" into support, and
c. the market has made a 35-50 percent retracement of the previous up leg.
If the major trend is clearly down trade the market from the short side, or not at all, selling when:
a. the minor trend has turned up, and
b. prices have advanced into overhead resistance, and
c. the market has made a 35-50 percent retracement of the previous down leg.
II. On Closing Out a Position
a. At a profit. Liquidate one-third of the position at a logical (chart) price objective into overhead resistance (for a long position) or into underlying support (for a short position).*
b. At a loss. There are, basically, three approaches:
* Following this first liquidation, be alert to reinstate the position, or even 1.5 times the liquidated position, on a subsequent technical correction, as outlined in the above discussion, "On Initiating the Position."
- Enter and arbitrary "money" stop-loss; e.g., 40-50 percent of the margin deposit.
- Enter a chart-point stop-loss; i.e., to close out the position when the major trend reverses against your position - not when the minor trend reverses (that's just the point where you should be initiating the position, not closing it out).
- Maintain the position until you are convinced that you are wrong (the major trend has reversed against you) and then close out on the first technical correction.**
** There are substantial dangers to this particular approach, which will be discussed later in the chapter
I will post a follow up later discussing the current state of interest rates in the context of these rules.
The Professional Commodity Trader by Stanley Kroll is available at Amazon.
Feb 18, 2005
Volumes have been written about the need for trader's to manage their emotions but in the real world that is only half of the battle. All large trading operations utilize a chain of command usually with more experienced traders at the top with fewer positions of their own to manage. These senior traders act more to monitor the positions and state of mind of the people beneath them. This system should in effect backstop any trader's personal tendency to let losses run.
In an interview with China's state-owned Xinhua news agency, Chen Jiulin blamed the slow response from elusive senior officials at the Beijing-based China Aviation Oil Holding for the escalation of the scandal. Such finger-pointing is rare in China, especially given that the Xinhua agency is widely thought to be supportive of state-owned enterprises.
"When we realised on October 3 that we might incur serious losses, we had a loss of just $80m," Mr Chen was quoted by Xinhua as saying. "If we could get approval from the parent company to clear all positions on that day, the total loss would be less than $100m. But most senior executives [of CAOH] were then on holiday."
He said CAO on Oct 9 submitted to CAOH a formal request to liquidate its holdings, at which moment the actual loss was $180m. But the parent company didn't respond until a week later when it held the first meeting to discuss the crisis. (FT $$)
The fact that traders are not normally managing their own capital can also create risk management issues. In the above example it is not clear why a formal request was necessary to close the position but the existence of such a rule makes risk managment difficult because time is such a critical part of loss estimates. In such a situation it seems like a natural stop point has nothing to do with capital availability and needs to occur before the decision gets kicked up the chain of command.
At any rate at some point the loss grows big enough that it becomes more attractive to push it around than to stop the bleeding. That is what is being described above. Jiulin probably could have cut 1/3 or 1/2 of the postion while waiting to here from his bosses. It is the nature of a badly losing position to make its owner believe it will recover. In times like this the market is probably dislocated by the pressure of the position making the recovery all the more likely. Jiulin did not want to stop out at the top of a winning short. On vacation or not his bosses probably did not want to cover either. Now they try to pin the loss on each other. That is how it goes.
That said if it does make $60 it becomes a pretty compelling short for next week with expirey out of the way.
Feb 17, 2005
Feb 15, 2005
I am getting quite a bit more bullish on stocks in here. Partly because of the charts but mostly because of the negative sentiment. The markets have corrected a lot of the damage from January. The Nasdaq which has been underperforming seems to be coloring psychology quite a bit but with the semis looking extremely bullish and the internet stocks looking ready to participate I don't see that index remaining an obstacle for long.
My bullish feelings on stocks leave me a bit mystified about bond yields. I understand the short term dynamic with a strong move higher following the break out of the Q4 range, and as I said last week I would even expect a restest of the new highs. The strength in the commodity sectors and numerous new highs in foreign equity markets just makes a global slowdown seem very unlikely. Without that the Fed will keep going and a 4.40% long bond will look silly. Brad
Also, I apologize for the appearance of the site. Blogger seems to be having some issues so I am having trouble posting and can not get in to take down all the screwed up posts that eventually made it to the site from yesterday. Hopefully I can fix it shortly.
A couple of posts worth checking out are Brad Setser's discussion of why the global imbalances can't last and this article on the slack job market. The latter is so negative it almost feels like a bottom. If inflation does kick up in the next 3 months that may be the case.
Feb 13, 2005
the FT ($$),
After the initial weakness at the
On Sunday, Italian newspapers reported that
Fiat and GM were set to announce a settlement to scrap a disputed put
option that would have allowed Fiat to force GM to buy its
loss-making car unit.
Papers said GM would pay Fiat about
1.5-1.8 billion euros in cash to cancel the put and change the
structure of a joint venture in engines and platforms in Fiat’s
Nobody at Fiat or GM was immediately available to
start of the year, GM appears to be making a base. The next level of
interest looks like the $40 1/2 level.
Posted by Hello
I imagine there is no need to play until it clears resistance and
retests it from above.
Given the impact this story has had on credit spreads the end of the
story could have some broader positive implications. It also looks to
me like Fannie Mae (FNM) could be ready for a short-covering bounce
as it is very oversold and has not managed to get below the $60
level. I don't think it is worth playing as a long but a bounce
towards $66-68 wouldn't surprise me.
Feb 12, 2005
I generally feel that one of the biggest hurdles U.S. investors face is learning about non-U.S. investments. The global markets are not that isolated but for some reason the brokerage industry has not really caught on to that yet. I imagine a big trend over the next 10 years will be the end of home country bias for U.S. investors.
Feb 11, 2005
A few thoughts I have in here:
- The bond market and dollar need to retest their highs while I would not expect commodity markets to challenge their lows.
- I have never really known the Fed to leak a whole lot, but Brad DeLong writes, "The word from inside the Federal Reserve is that Alan Greenspan is *not* optimistic about the dollar and *not* unconcerned about the U.S. budget deficit: that he was trying to express concern without triggering a dollar sell-off: that his words have been misinterpreted by markets as being more optimistic than they were intended to be."
- The strong metal bounce and chorus of strong overseas markets could very quickly swing the pendulum towards inflation fears. With many commodities still nearer multi-year highs than lows there is a very real threat that the U.S will experience cost push inflation inspite of a weak labor market and slack capacity.
- U.S. equities may provide a safe haven from inflation but better real returns will be offered in foreign equity markets.
- Japan looks like it is almost done consolidating its gains from late last year.
Q. MarketWatch: You've suggested that there is a "bubble" in paid search. This suggests that pricing won't be sustainable. Why is it a bubble? And, can you quantify the rise in paid-search prices eBay is paying?I posted some similar thoughts about this as a comment on Bill Cara's blog. I have never purchased an internet ad or keyword so my comments seemed to have been passed over by the main stream media.
A. Bill Cobb: Frankly, we're surprised that keywords have gone as far as they have. Whether it will continue, I don't know. ... We believe we're the largest buyers of keywords in the world. It's our observation that large advertisers, global multinationals are experimenting and not being efficient. Over time they'll get better at this.
Feb 10, 2005
One saving grace in here could be the strength in foreign equity markets. Equity markets in Mexico, Brazil, France, and Taiwan don't seem to be experiencing the deflationary doubts of the U.S. The world never moves in perfect synch but it is something to keep an eye on.
Feb 9, 2005
It is difficult to tell whether the emotional indifference should be considered bullish or bearish.
The long end of the bond market is getting some support from the rally in the short end today.
Feb 8, 2005
I would be very leary of betting against the rally in dollars or bonds. The moves are sharp and probably need to base out for several weeks before turning the other way. Bonds in particular seem like they will target the 4.18 yield lows. Also be aware that bond volatility has increased significantly with this move up.
The dishonesty of the administration about budget deficits has reached levels unheard of. These folks have absolutely no shame. Bush presented today a budget that claims that he will achieve his goal of reducing the deficit by half by 2008 (from a false 2004 baseline of $521 billion rather than the actual 2004 deficit of $412b) and will achieve a deficit of "only" $233b by 2009. Even better news, the administration claims today: the "halving" of the deficit will be reached by 2008, a year earlier than original 2009 target for it.
Who are these accounting scam artists trying to deceive? Do they think everyone in America and around the world is a mathematically challenged total idiot or an accounting moron?
The reality is, that based on realistic scenarios outlined last week by the non-partisan Congressional Budget Office, the deficit by 2009 will be close to $600b (or 4.0% of GDP) rather than falling to $233b; and the deficit will reach over $1,100b (or 5.5% of GDP) by 2015. (continue reading)
While I can't really find any fault with that summary, for trading purposes I would set it aside. The markets clearly like something here about the dollar which is creating some broad knock on effects. While the budget may not justify the move now I bet by the time this move is over we will see some actual good news coming out. It looks like maybe 2 months or longer before the weakening dollar / U.S. debt problems will have a shot at reasserting themselves in markets.
One of the difficulties in trading the U.S. equity markets right now is the lack of passion in participants. Most seem willing to chase whatever move is underway and there is very little commitment by bulls or bears to a longer-term view. This may be due in part to the dollar volatility which makes it very difficult to predict where earnings and equity values will go. At any rate it makes it difficult for the market to create a lasting trend. This is absolutely not so for the dollar, gold, oil and other macro variables. Everyone has an opinion and even the viscious moves we are seeing now do not seem to be causing many side changes. I am pretty sure I spent January a bit caught up in my view too and am going to step back a bit to evaluate things from a longer term perspective.
At any rate, the influence that the sellers have on price should make everyone question exactly what the risk is in the house. Most people equate price volatility with risk but to do so in this case could be pretty deceptive.
In the semi sector PMC Sierra stands out by being in a good position to rally.
Commodities look like they are in for a bit of pain as the dollar and bond rally could lead to a deflation scare. Gold and silver are already in the dumps while other sectors like the oil stocks are making highs. Alcoa (AA) looks like it may have put in a bottom so maybe the markets are just sorting out the commidities a bit. Until the dollar and bonds can make tops the space is probably pretty risky.
Feb 7, 2005
I will probably try to sit on my hands today, make some sales tomorrow afternoon, and then begin running a flatter book. We'll see how it goes.
Feb 6, 2005
Posted by Hello
Normally treasury yields and equity volatilities are inversely correllated and you can even see the inverse correlation happening over short periods during the last year while the trend in both has been lower. I expect that positive relationship between volatilities and yields may last for a while as they are both related to excessive investment in U.S. assets.
The financial times explained the bullish move in bonds (U.K. gilts and global rates) like this:
The lack of good investment alternatives is also creating an excess of money fighting for short term gains in financial markets pressing volitilities towards historic lows. I would guess that trend did not end on Friday but that it may end within the next few months. It is a good explanation of what is going on in the short run but I doubt this situation can persist.
Yet there may be a more elementary explanation for low long-term real interest rates. Just as the price of bananas balances the supply and demand for this fruit, so the rate of interest balances the supply of savings against the demand for funds to invest. Monetary policy is important mainly at the short end and for its effect on inflation. But the important influence at the longer end is the balance of world savings and investment.
Thus, I come to the simple hypothesis that falling real interest rates reflect a growing shortage of attractive investment projects to absorb savings. The world is indeed supposed to be short of capital and we are told that we do not save enough. But what matters in this context is not the developing world projects that might be desirable but the number of projects world-wide that promise a commercial risk-adjusted return.
The reason why so much of the world's savings has gone to the US is surely just because of the dearth of such investment outlets elsewhere. In the 1930s, Lord Keynes feared that the rate of interest could not fall low enough to balance savings and investment at a reasonable level of employment. But up to now, world capital markets have worked well and interest rates have fallen enough to balance savings and investment without generating a depression.
I don't believe there is a shortage of available infrastructure investment that could be made in the developing world. I tend to see policy moves like the G7 decision to forgive developing country debt as indications that the G7 governments "get it" and are forcing liquidity out to the perifery where it can be put to better use.
Feb 4, 2005
The willingness of European companies to accept lower profits in the US over the past three years as the dollar has declined helped prevent inflation rising in the US, Mr Greenspan said. But he held out the prospect that import prices might soon be on the rise. Peter Hooper, chief US economist at Deutsche Bank and a former top official at the Fed, said: "The main implication is that the Fed is not quite so sanguine on inflation pass-through from the dollar as we might have been led to believe."
General Electric (GE) might have a shot at a long side trade here. Has a nice base for a stop.
Also, I chucked some steel stocks off the ship as they have had a good run. Copper stocks are being pulled down by Phelps Dodge (PD) and US Steel (X) has flagging momentum at highs. Those thoughts and today's bond action makes me wonder if they can head higher.
One more thought, if the jobs numbers created a deflation scare wouldn't the Euro appreciate like crazy? Unlike the U.S. and Japan, the ECB has been unwilling to print currency in an effort to spur growth so I am not sure how deflation makes the Euro weaken.
I gave my little tirade about the slack jobs market this AM but this guy really digs into the numbers. And while I am back on the subject, today's labor report seemed pretty much in line with other recent reports so in my view it was really the distortion of expectations that stands out. Maybe we get a reflex action the other way next month with predictions well below the announced number.
While I'm at it does anyone out there really believe that the unemployment rate is improving. I am going to go out on a limb and say that some day economists will look back at this period and realize lots of people could not admit they did not have jobs.
No more bond shorts until we make it back above 4.57 yield.
Here is summary of the overnight chatter causing the move. The GBP strength is being attibuted to a particular difference between British and U.S. opinions over debt forgiveness.
Of China's 8,000-some software services providers, only five have more than 2,000 employees, the firm said in its first 2005 McKinsey Quarterly report.
India, by contrast, has fewer than 3,000 software services companies, McKinsey said. At least 15 of these have more than 2,000 workers, and some--including Infosys Technologies, Tata Consultancy Services and Wipro Technologies--have "garnered international recognition and a global clientele," McKinsey said.
Although revenue from information technology services is rising in China, it is barely half of India's $12.7 billion a year, McKinsey said.
I have mixed feelings about what the impact of outsourcing has really been but given the $9 trillion U.S. GDP the above numbers look a bit insignificant. These numbers exclude subsidiaries but even if that is 90% of the job shift the total impact is only around $190 bln.
Feb 3, 2005
Typically the strong period goes to mid-March. If the markets continue higher I would be looking for signs of distribution. The pullback that started in January had some teeth to it so I don't think the market can hop back off to the races without doing some work below the Dec highs.
Investors poured an estimated $3.6 billion into U.S. and international stock mutual-funds in the week through Feb. 2, the fastest pace since mid-December, data provider TrimTabs Investment Research reported Thursday.
U.S. stock funds realized net inflows of $2.8 billion, compared to outflows of $747 million the prior week.
Meanwhile, investors sent $872 million to international equity funds, following additions of $1.5 billion a week earlier.
Bond funds saw inflows of $653 million, reversing outflows of $302 million the prior week, while hybrid funds -- which buy stocks and bonds -- had inflows of $661 million vs. inflows of $562 million the week before.
Separately, TrimTabs reported that about $500 million was pulled from Exchange Traded Funds that track U.S. stock indexes during the week, compared to an inflow of $2.2 billion the prior week.
Was probably a better trade for the morning but I mentioned these stocks a while back so I am flagging them again.
It is difficult to see how this fits into the global inflation or deflation picture other than to say that certainly the mall shopping portion of the population has money.
I commented on his site that given the tightness of corporate spreads it is difficult for me to see the short supply of 10-year government paper as the cause for low yields on the long-end. I agree with the gist of his post that there is something artificial about the low 10-year yield in the face of rising short rates but I am not sure watching issuance patterns of the U.S. Treasury will help me figure out when the pattern will change.
At the end of 2001, ten year Treasury notes and even longer term Treasury bonds accounted for 40% of the total stock of marketable Treasuries, or $1168 billion of the $2915 billion stock (The relevant data can be found here, and here). At the end of fiscal 2004, the ten-year note and the remaining stock of even longer-term bonds constituted only 31% of the outstanding stock, or $1203 billion of the $3845 billion total.
In other words, the overall stock of Treasuries increased by $931 billion, and the stock of longer term Treasuries (ten years and up) increased by only $35 billion. If the percentage of longer-term Treasuries in the overall debt stock had stayed constant at the 2001 level, the current stock of longer-term treasuries in the market would be closer to $1540 billion than to $1200 billion ...
Increased issuance of inflation-indexed bonds (TIPS) is not the main explanation for the reduction in the supply of longer-term bonds. TIPS increased from 4.6% to 5.7% of the total stock over this period, while the stock of bills and 2-3 year notes rose from a bit over 38% of the stock to a bit over 49% ...
If even a small fraction of the $700 billion in foreign purchases of Treasuries since the end of 2001 (using data through September 2004) went into the ten year note or the long-bond, the stock of long-term Treasuries in American hands has gone down -- even though the overall stock of Treasury notes is way up. Given the overall surge the stock of marketable fixed income debt, there is no doubt that the stock of longer term Treasuries has fallen relative to the overall market for longer term fixed income assets.
Feb 2, 2005
While it I found the article hilarious, you have to wonder a bit about the ability of markets to allocate wealth and reward inovation when you realize that bank customers can't be bothered to create some equilibrium in the highly transparent market for bank deposits.
Hill is intent on putting some fun back into banking. When a Commerce branch opens, a mascot - an out-of-work actor dressed as a giant red C - hands out free pens! And the branches are more Prada than Wal-Mart. While most banks spend about $1 million to open utilitarian branches, Commerce drops more than $3 million outfitting each store in wood paneling, marble floors, and granite counters. Just another part of what Hill likes to call Commerce's "unique brand of WOW!"
Here is what Commerce doesn't do: make you lots of money. While rival banks try to rope in customers with interest rates that are a few basis points higher than those offered by the bank around the corner, Commerce intentionally lowballs its customers. As James Grant of Grant's Interest Rate Observer noted in a critical look at Commerce last week, "in 2004, depositors earned, on average, a grand total of .98 percent." A quick check of the 12-month CD rates at six banks near my office this morning showed that Commerce offered the lowest rate of the group, 2.25 percent. Customers are flocking to Commerce despite the meager rates.
So what's not to like? Plenty, if you're a competitor. Commerce is forcing established banks like Chase and Citigroup, long accustomed to dealing with customers on their terms, to do things like remain open on weekends and invest in branch networks. There's a little jealousy at work here, too. Commerce Bancorp sports a higher price-to-earnings ratio and pays a smaller dividend than most other banks, and its earnings have continued to impress in a period of rising interest rates.
Also interesting in here is that GM apparently likes the idea of a court battle.
The dispute will end up in court or, analysts say, with GM paying for Fiat to forget the "put" deal.Seems to me that a court battle, if it entails legal reserves, might still bring a downgrade.
Fiat investors reacted with disappointment to the passing of the final official period for mediation. With no concrete encouragement from either company, but with endless rumours in the Italian media, investors had been expecting GM to pay a large sum of perhaps $2bn to Fiat. Fiat's shares fell 5.6 per cent yesterday, losing much of their gains from recent weeks. GM's shares were up almost 2 per cent by lunchtime in the US.
Overall I am a bit surprised by the markets negative reaction after the Fed meeting. It could just be a sign that investors are disappointed by Google's (GOOG) inability to spur the entire market. We shall see.
This ties in pretty well with what yesterday's thoughts that the bond market may get a bit of an awakening. Whether that is the case or not, the kind of move I expect should last several weeks so trying to anticipate it makes little sense.
Posted by Hello
Feb 1, 2005
I stand by my post last week on Google's significance to the market.
I am not sure when the bond market will get the message but if traders really are hoping for an end to the rate hikes, tomorrow could get ugly. I see the bullish action in financials and utilities with the intraday bounce in bonds so maybe that is how people are playing.
The strategy of shorting the long end with today's highs as a stop is looking more attractive.
The Fed is going to move 25 bps tomorrow but there are pretty good odds they will make some comment about investor excesses similar to what was said in the December minutes. At 4.60 bond yields are too low for investors to be comfortable with much risk of loss.
Posted by Hello
These three charts are basic strong price patterns with medium term uptrends and short-term bases that are being left behind on improving volume. Sometimes in a pullback like we have been through I end up focusing on all the stocks I used to like that have just gotten cheaper. For longer-term trades with fundamental support that is okay but even then it is probably unnecessary.
For me, I have found that focusing on stocks in strong patterns is better than stocks that are suddenly cheap. This goes against my instinct that a stock that loses 10% today can more easily earn 10% tomorrow when the market bounces. Sometimes they do but more often, I let the old price become a target. It is best just to immediately shift my focus to stocks that are working with nearby support. Bounces and reversals are best left for daytrades.
In an environment like we have just gone through the best stocks are those that have consolidated near highs. They were stronger than the market during the selloff and they will be stronger if a broad rally resumes. Like AUO they need not have been particularly strong during the last rally they only need to have held on to their gains during the selloff.
Lastly, it is a combination of the pattern and the market that create potential. If the market falls strong patterns will usually hit stops too. It never hurts to notice the patterns and be ready but without underlying faith in the market it is best just to stay clear and wait.