Thursday, August 23, 2012

Reloading €-shorts

Yesterday's FOMC minutes revealed that the Fed is much more dovish and ready to do more monetary stimulus if the economic situation would not improve. The logic behind QE (quantitative easing) is that Federal Reserve buys government debt or other assets from financial institutions hence bringing some fresh dollars to the market (again weakening the dollar since there are more dollars on the market now). This also sparks a rally in commodities and equities since the money can be invested with a higher return.

All this means that US dollars would be sold on the Forex market and other currencies would be bought against the dollar, causing a rally in all USD pairs.

So far so good, but.. There are some things to consider before we go all-in with our EUR/USD or any other currency bet. Some of the following arguments are non-specific to the euro.

1) The euro is not cured and the outlook looks grim
As I'm writing this we just got fresh PMI data from Europe which still points to contraction (under 50 = contraction, even though it was better than expected causing a stop flush) in Germany, France and the eurozone as a whole. It's a matter of time until we see negative GDP growth numbers, possibly in Q3 and onwards.


Contraction leads possibly to lower interest rates by the ECB (wow, it's still not 0!) which leads to weaker euro.

Also it's not a sin to discuss the debt crisis and the possibility of bond buying by the ECB. How is it different from Fed's QE again? ECB creating (read: printing) money and buying sovereign debt with it - why should its effect on the EUR/USD be much different from FOMC announcement (in the opposite direction of course).

Also don't underestimate the power of Europe's slow decision making. Even though the long term path of the euro is becoming clearer which is positive and the ECB is buying time for politicians we are far from a solution (a fiscal union?).

As history has shown things must go worse before they get better in Europe.

Also a food for thought - look at the historic EUR/USD chart and together with that look at the interest rate history in the world. You will notice that the ECB sparked the 2011 rally in euro by raising interest rates compared to all other central banks. Also take a look at the earlier PMI chart. You will notice that fall of euro from 1.6 to 1.25 was caused by recession in Europe (everyone diving into US treasuries). 2010 fall was caused by the beginning of debt crisis. 2011 rally was caused by raising interest rates and something called repatriation of euro (European banks selling foreign assets and buying euros). Currently Europe is in the midst of a recession, debt crisis might escalate and banks have solved most of their equity problems - how can anyone see euro going higher from here?

Chart forEUR/USD (EURUSD=X)


2) How much of this has been already priced in?
The street is expecting the companies of S&P500 to earn over 100 dollars per share as a whole so the P/E level of the market would be around 14 which doesn't sound too expensive. Some good calculations from this blog HERE provide some more data.



This Fact sheet provides a good overview of recent earnings and trends. While earnings have exceeded expectations for some time now Q2 2012 undershot the revenue projections in case of 58% of companies. What worries me is that under-performing sectors are among others consumer discretionary, industrials and materials. Consumer staples and information technology are barely in line. 

So I would speculate that earnings will fall sharply after further reduction in revenues (don't forget that part of the earnings growth is due to cost cutting). 

3) What would a negative shock do?
Slowing in China, war in Iran, US fiscal cliff, Greece exiting from eurozone or other major shock event (most of the are not unexpected) might possibly shake equity markets across the world causing investors to seek protection in US bonds causing upward pressure in USD. What are the odds?

Honestly, I don't see a medium-term bull case for EUR/USD and that's why I'm going short here with a target under 1.20. My stop-loss is currently above 1.26 after which I will re-evaluate situation and re-enter my short.

Tuesday, June 26, 2012

Euro-vision - some progress at last!


While Sweden has won the Eurovision song contest this year the winner of Eurozone or the winner of European Union in general remains to be seen. While all this political and populist discussion on whether we should bail out Greece or whether UK should remain in EU is taking place for a second year now jobs are lost and the people of Europe are suffering from worse economic conditions. It's no wonder that UK opposes all measures regarding their banks or Finns are getting tired of paying the bills of overspending Southeners - that's how it should be in an institution without vision that is focusing on details.

Imagine a company that has all the traditional departments like marketing, production, accounting etc. Imagine that all these departments are working for themselves. Production is keeping the costs low, marketing is advertising the product as the best there ever is etc. It doesn't take a genius to figure out that without common understanding of what kind of products we are selling and how to market these products best we can achieve some kind of goals.

Imagine a field of football players where there are only rules but no common goal! Everybody knows that the ball can't be touched by hands but some think that the ball needs to be kicked into the goal and some are convinced that all they need to do is dribble.

Now imagine Europe where everybody is fighting for themselves to look good for their supporters (voters). Imagine Europe where there is no common understanding where Europe is or should be heading. Imagine Europe where everyone's role in fixing things is up to their understanding of doing things together. Wow, that's what's happening now in Europe!

Europe needs a common vision and goals, Europe needs an understanding why we are doing the things we are doing. Right now countries have been rushing to join the EU just to get access to a huge market while they should have joined since they shared the same understanding of integration process.

You can't keep rescuing countries like Greece or Spain when you don't know why we need to do that. We can't have a banking union unless we understand that it is in our common interest. Maybe some principal arguments were dismissed long time ago if understanding as such existed.

That's why applaud to Herman Van Rompuy's proposal of a vision for Europe which can be accessed HERE. Even though it is not perfect and some countries (read: Germany) already oppose it, it is ├╝ber-necessary to agree on a common vision.

Earlier thoughts on this HERE

Thursday, June 21, 2012

Technical analysis is not a surgical process

Again and again I see people confusing technical analysis with rocket science or a surgery. Technical analysis is not an exact science like mathematics. There are no right or wrong places on the chart where the chart will turn. The price isn't moving cause it is supposed to. The price is moved by a great number of investors and traders doing their daily business.

So why on earth do we see people analyzing the charts and saying things like "the price turned because it hit the 43 EMA (exponential moving average)" or whatever the number is? The idea behind technical analysis is to spot trends and possible support and resistance levels. Moving averages (MA) are and will be a tool to predict trends, they spot possible changes in momentum (when short term MA approaches long term MA then the price is slowing down (either selling or buying pressure is decreasing)).

Use common sense, don't overdo it, you will be trapped by the scientist's fallacy.

Thursday, May 31, 2012

Ireland votes, some serious arguments by Irish


Ireland being the only country to carry out a referendum on EU fiscal treaty will vote today and the Irish are likely to support the treaty. The treaty would regulate fiscal spending and make it tougher for governments to borrow their way out of reforms all across Europe. A "No" vote would make the country ineligible for possible financing aid in the future if ran into trouble.

It is in fact true that Brussels could veto a future budget if the country were planning to overspend. This has given some "hefty" arguments to the opposition of the treaty (below you'll find some examples). Fresh comments from Irish people have been delivered by Financial Times:
- “I voted no because I don’t want to be governed by a Nazi state,” said one No voter, who would not give his name.
- Marie, a middle aged woman, said she voted No to be “on the safe side”. “It’s a very complicated treaty but I think it was safer to vote no,” she said.
- Another woman said she voted No because of the huge debts Ireland had to pay.

As you can see the opposition has done a great job by washing the brains of some voters since arguments above don't actually say anything about the treaty or the problems Ireland is facing.

Tuesday, May 22, 2012

You sneaky bastards - well played, Morgan Stanley!

Reuters article reports that just prior to Facebook IPO the underwriter on the deal Morgan Stanley delivered some negative news to their major clients by cutting revenue forecast for Facebook. Well played, I have to say! How convenient that their revenue projections were updated just prior to IPO.. If the word would have gotten out earlier the valuation which was labeled to the IPO with the help of Morgan Stanley of course the IPO would have failed miserably and the opening price wouldn't have said 43 USD per share. MS had a comfortable cushion towards 38 level where they began buying the stock. I bet MS has reduced a big portion of the stock they acquired on Friday causing the price go down further.

So the true market value of Facebook remains to be seen after MS has finished playing their games. Since most of the small shareholders have been screwed by these games I say once more, well played, Morgan Stanley! You just poured another drop to the "We-are-the-99%-cup".

Chart forFacebook, Inc. (FB)

Thursday, May 10, 2012

The project of Europe - negative outcome the only outcome?

All major financial newspapers, TV channels and other media are speculating over the future of Europe with many experts claiming that there is no other way for Europe to go than to go bust and break up. Their reasoning is too often the notion that no currency union in history has survived without a common treasury. Even though this is not actually true (just take a look at the Indian rupee or the South African rand both of which have formed about 40 years ago). But the most important thing we can learn from history is that we cannot learn from it. Historic events are too often looked at as black-and-white situations where there is a simple model of a game with few participants with a very predictable outcome.

It is not the Nazi gathering in 1930-s, this is the Golden Dawn party gathering in Greece. Anyone knows who designed the party flag?

Populist parties like the Golden Dawn in Greece or the National Front in France are becoming popular since European economy is not doing great and the differences between countries are huge. Voters are hoping that new parties will reject tough austerity measures and everything will be solved. Everyone will have jobs, the pay is good and the overall quality of live will improve.

I do agree that Europe needs a plan for promoting growth all around Europe and Germany needs to be the one relaxing their obsessive fright of inflation. Some kind of economic stimulus is needed and I would strongly argue that issuing eurobonds for major investment projects will suit just fine for that purpose. But Germany is also right in their arguing that a large part of growth promotion can be done without spending a cent - through reforms in labor markets for example.

Greece's plan for their people is to reject austerity measures, possibly give up euro (making it possible to print as much money as they need) and close part of their market for industry protection. This will send the Greeks back to 1940 in my opinion.

The first effect of this policy change is a quick jump in inflation. Since no sane foreign investor will support Greece's astronomic budget deficits they have to print all the money themselves which leads to massive devaluation of their currency. This means that all imports will cost Greeks more. Greece will lose a huge amount of foreign investments which will result in - yes, you guessed it - fewer jobs. Multiply fewer jobs by massive inflation and add some rejection by Europe into the mix and you have a perfect recipe for a disaster. Is that what the voters of Greece are voting for?

Greece will probably have new elections in June with leftist parties taking most of the votes possibly allowing them to form a ruling coalition. Whatever happens the Eurozone is unfortunately the one who benefits. Europe's politicians are famous for making their decisions when they are urgently needed. Greece's exit from the euro would create just such an opportunity. Whatever big decisions are made then, Europe and the euro will come out stronger out of all this.

The project of Europe is a game where you lose when you exit the game. Every player will benefit from playing in the end. It is just a matter of following the rules. And why did former Greek politicians think that it is a good idea to be constantly increasing their debt? The Greek voters aren't getting anything new, they are voting for the same populist bulls**t that brought them into this mess. You can't spend more than you earn, this is the main  principle.

Wednesday, April 25, 2012

Why I think the euro will go down - starting TODAY

Today is an important day for equity, currency and commodity markets since the Fed will announce their rate decision at 16.30 GMT. Even though the rate will definitely not be changed today the markets will be closely watching whether Fed has anything else in mind to prop up the economy. Talk of another possible round of quantitative easing has caused a great deal of celebration on the equity markets and a huge sell-off in dollar futures. When equity markets have also been supported by good earnings the sell-off in dollar looks to be related to expectations. Just take a look at the following chart displaying the movement of dollar futures.


Now I'm not saying that the US and their loose monetary policy should reward a strong dollar, I'm saying that compared to the euro for example US data has not been bad. Just take a look at EUR vs USD on the following chart. 


And this all on the background of Eurozone's worsening debt crisis. Europe is probably already in a recession, UK's numbers this morning confirmed that. German manufacturing and services data are implying that. The yields on Spanish and Italian bonds are rising once more, now France and other core countries might follow. Most of the LTRO money (in Southern Europe all of it) supplied by the ECB has already been spent on those bonds. Europe has to cut interest rates or possibly come up with another growth promoting measure, loose monetary policy will help here. So the question would be - why the strength in euro vs dollar?

Here is my interpretation of the situation:
  • Expectations for another round of QE by Fed causing speculation of a weaker dollar
  • Reduction of US nominated assets by European banks hence the demand for euro
  • ...
  • And that's about it

I wouldn't bet on Fed doing another round of QE in an election year before things would look really bad. And by bad I mean the S&P500 at 1200 (currently trading near 1375), consumer confidence dropping fast, low inflation and possible recession looming. The Fed already commented in the beginning of year that they expect job market to weaken due to cyclical trends. Also, stronger dollar would ease gas prices and food prices which would help Obama in his campaign. 

All in all I expect that euro will enter a bear trend after the Fed's announcement today and trade down to about 1.26 in coming months. I'm short euro. 

Thursday, April 19, 2012

The best performing stock market in the world is..

The Cambodian Stock Exchange of course which started its first trading day in history with a decent 47% increase. The first (and only) company listed on the exchange is the government owned Phnom Penh Water Supply Authority.


Will we have Cambodian teachers soon leaving schools to become professional investors as it happened in China? We'll see, but Myanmar is next to follow to open their stock exchange. I welcome the trend since Asia is open for business!

Swaps - what a short memory we have

The Commodity Futures Trading Commission in the US has just increased the amount of swaps a company can sell by 80 times. Yes, that's right! The same instruments that led us here in the first place have been re-regulated. But let's start from the beginning.

Swap is a financial instrument which allows two counter-parties to exchange the conditions or cash flows of a financial instrument they both own with each other. So for instance if I took a loan that had a fixed interest rate and you took a loan that had an interest rate dependent on the market rate we could exchange the terms of our contract. As long as the market rate would stay lower than the fixed rate I would receive the difference between two interest rates from you and vice versa (I would get the interest cheaper since we swapped the terms of our loan contracts). But enough of the science. 

One of the big problems that made things worse during the financial crisis was the selling of credit default swaps (CDS) by vast and uncontrolled quantities. By selling a CDS you undertake the risk that the underlying credit will default. So if the underlying credit actually would default the one who sold the CDS would pay to the buyer. So it's kind of like insurance. So by not knowing how much CDS-s had been sold on the market nobody had any idea of the leverage that the market had hence also now knowing the risks involved. 

After the markets crashed and the world was about to end the US introduced new financial regulation called Dodd-Frank regulation that was intended to not make the same mistakes again. It was proposed that a single company could not sell more than 100 million USD worth of swaps. After two years of lobbying this was raised to 8 billion per company. There you go - we are back where we started considering that there are currently 119 companies eligible for that amount.

File:Notional swaps chart.png

The problem here is that any time that the finance industry creates a new kind of exotic instrument that can be sold and made money off of the regulators are unaware of the risks involved. Regulation is usually introduced after things go bad. And after it is introduced the regulators are lobbied and paid off so that regulation wouldn't actually change anything. The world goes on. 

Tuesday, April 10, 2012

Killer trading system


You think that stock market movements are difficult to predict? Not according to some traders and companies providing trade calls. For example take a look at the following tweet from Twitter tweeted by Trade Manager (@fxtradersystem) Twitter post: "MAs for NZD/USD on m15: A=0.8211,B=0.8211: a possible short entry is expected after 1 d 1 h 30 m". Let me translate: "Moving averages for New Zealand dollar vs US dollar currently have values 0.8211 and 0.8211: a possible short entry is expected after 1 d 1 h 30 m".

Sorry but this is just hilarious! Most active and profitable traders know that it takes a lot of time to find good setups that realize with high probability. The right set of conditions might occur only for a second when the trade needs to be done. And it is not even possible to say (and should it be said at all?) whether these conditions will be fulfilled within the next 5 minutes or not. And in the previous tweet we have a trade call recommending to short NZD in 1 day 1 hour and 30 minutes. That's why I find these "predictions" hilarious. If somebody actually finds any value in these predictions then please let me know!

Instead of taking these calls seriously I would recommend flipping a coin - you would have the same odds of making a successful trade. There's an idea - flipping a coin and announcing trade calls based on the outcome.

By the way, Twitter is full of calls like this, search any of the currencies and you will fiind a similar tweet.

Or maybe I'm the one who's been living in a closet, enlighten me please!

Thursday, February 16, 2012

Apple of my eye


Think couple of months back when Apple was on the verge of several downgrades with analysts saying that Apple is losing its touch. This was all after disappointing Q3 results. Last time I recommended Apple it was trading near 370. As I speculated then a lot of customers delayed their purchase of iPhones due to the new model that was released in Q4. Not to mention Christmas that has always been good for Apple. Surprise-surprise - Apple delivered big time and announced their biggest earnings in history surpassing all expectations.

Since this is all known and it is easy to be smart backwards I will focus on something different in this post - the role of expectations.

When awaiting Q3 results investors expected Apple to deliver according to previous growth trend. They didn't take into account the importance of the new model 4S before Christmas. When awaiting for Q4 results are expectations were down due to disappointing Q3 results so expectations were greatly surpassed. Here's a food for your thought: what kind of results do you expect Apple will deliver for their Q1 this year? Here's another question - what kind of results is being expected by the market?

I have always been a fan of buying shares of companies that nobody expects nothing of. I have unfortunately done my worst trading with companies that everybody expects a lot of. Apple for me will position in the latter category if their share price stays the same prior to Q1 earnings. Everybody expect Apple to deliver equivalently supreme results in the current quarter. While I'm certain that Apple will be a great investment for the next two years I'm also speculating that we have gotten a bit ahead of ourselves and bought the share price up too quickly.