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!