VeriteFX on March 6, 2009 2:36 PM | No Comments
I'm much more enthusiastic about this week compared to last... the combination of an ECB rate decision and NFP always complicates trading. On Monday the markets will open having been heavily sold-off the prior 4-weeks. On Friday equities bears covered their short positions, sending the Dow and S&P 500 on surge the last hour of trading. As soon as the profit-taking and short-covering hit, the S&P 500 futures ran up 20-points which pushed the EUR/USD just below the 1.2650 level at the close.
Historical crisis:
This current recession in the US, which is now global, is unlike anything the government or Fed has had to deal with. History is being written on a daily basis. They say history is destined to repeat itself and this is true, but history is in the making as well. This recession combines elements of recessionary years like 1929, 1933, 1980, 1982, and 1857.
One reason why I think this recession is a beast of its own centers around the financial health of Americans. The recessionary years of 1980-1982 resemble this recession in terms of the unemployment situation. By 1982 the US Unemployment Rate was 10.1% but the US Savings Rate was 12.2%.
10% unemployment in a consumer-driven economy is a dire situation but manageable when consumers have some disposable income in the bank and limited household debt. As soon as a bad economic situation looks better those consumers start spending again, they have the money in the bank to be consumers. According to the textbook definition, the current recession began in December 2007. When this recession began the US Savings Rate was under 1.0% which is far from the 12.2% average in 1982. This go around, there is no money in the bank.
The other problem lies within what's called the household debt service ratio. It's basically consumer debt. According to the Fed's statistics on this data, here's what the household debt to personal income ratio looks like from a few selected recession years:
1980 - 10.58%
1982 - 10.61%
1990 - 11.99%
1991 - 11.53%
2008 - 14.08%
There's a big difference between household consumer debt of 10.58% of personal income when the average savings rate is over 12% compared to debt to personal income of 14.08% with almost no savings at all.
That factor alone makes this recession different for consumers, retailers, and all those banks who are creditors to US debtors. The average US savings rate is going up, it's well over 1.0% currently but this is a new phenomenon forced on American consumers against their will. They have no other choice but to stop spending because there isn't much to spend, their credit cards are maxed out, and their personal ATM's (homes) are upside down.
I'm not listening to anybody that believes they can find a bottom to this recession, equities markets, unemployment, housing, you name it. Good luck trying to find a chart from a random prior recession to compare to what's happening in March 2009. Maybe when everybody stops talking about the bottom we'll finally get the bottom.
In my opinion what started in 1856 and erupted in 1857 is what's most comparable to the 2008-2009 recession. The Great Panic of 1857 which led to a steep recession had all the elements of this one... bank failures, extreme global currency price fluctuations, a real-estate boom and bust, devaluation of homes and land, geo-political events like the Mexican-American War and the Crimean War.
The 1857 recession that started in America first spread to Europe, then to South America and Africa, and then Asia caught it last. The global network of economic trade that existed back then collapsed, government debt defaulted, commodities collapsed, and general panic and fear reigned. Sound familiar?
Our recession has all of those elements from 1857 but on a much more intensified scale. The world is much smaller now than it was in 1857. The prior major recessions like those in the 1930's, 1970's, and 1980's didn't combine all the elements we see now and 152 years ago. The situation in 1857 developed into a "war with wealth" and ultimately led to the South succeeding and forming the Confederacy... then it was Civil War and you know the rest of the story...
The third week of March in 2007 I put out a forecast that the US housing market would collapse within 6-months. A current admin in our chat was one of the first to show me interesting information on sub-prime back then right after I started talking about the end of the US housing boom. He knew it was coming, several saw it coming but few wanted to listen.
I think the recovery will begin within a year. The only reason why I believe this is because I just saw something on CNN about how they are going to help Americans survive the recession. CNN aren't the only ones... I think it's safe to say when CNN, Fox, and MSNBC think they have any clue, we've probably hit bottom or we're close to it. Those people must be crazy if they think anybody is actually going to take financial advice from TV news entertainers.
Wall St.:
Last Friday was chaos on Wall St. After the jobs data was released the bottom fell out of equities as the Dow pushed below the 6,500 level while the S&P 500 fell below the 670 level before recovering at the end of the day thanks to profit-taking.
A few days ago equities had a pathetic relief rally but every day the Dow and S&P 500 get further driven into the ground the closer we get to a violent bear market rally. There's no way to predict what triggers those bear rallies and it's impossible to see them coming ahead of time, but when they erupt out of nowhere you don't want to be caught on the wrong side.
Last Friday I took a loss on a euro short mostly because I'm guarding against being caught short on the euro when Wall St. decides to go mental and run up several hundred points. From a pure risk management view, I'd rather short the euro at the end of a bear rally compared to being short when it begins... we've seen a few bear market rallies towards the end of 2008 that send the EUR/USD up in excess of 320-points over a span of just 12-hours. Being caught in a situation like that is terrible on the mind for a trader.
I'll keep taking manageable losses to prevent my account from being caught in a painful situation. A loss like that is very easy to manage compared to being in several hundred points of drawdown and waiting for the market to crash once the bear rally fizzles. The bear market rally that's due may have started on Friday, we don't know. But what we need to now look for is either follow-through or failure on Monday.
The tight EUR/Equities correlation makes it hard for euro bears like myself to trade the euro as it should be traded because the euro can't do anything but go up when equities go up. It doesn't work any other way right now. That being said, I believe the the Dow and S&P 500 ultimately need to go lower, which will drag the euro down with them.
Back on Dec. 16, 1982, at the height of the last major recession, the Dow was at 990.25. When adjusted for inflation, that would put the price-weighted Dow index at 2,120 today. Right now the Dow is several thousand points above that equated level so I'm certainly not ruling out Dow 6,000 or lower before it's all said and done. When you factor inflation, the Dow is currently trading at 1966 levels.
Fear can become a bubble too. What typically follows fear is euphoria. Once perception changes, fear switches to euphoria and markets go on monster rallies. Perception is reality and as soon as a piece of news, data, or geo-political event triggers that mental switch, the fear bubble bursts and Wall St. goes on a violent rally, bringing all other correlated markets up with them. I don't want to look like an idiot being caught on the wrong side of that move so I'll continue to trade accordingly.
Treasuries:
Treasuries will come into view as there are several major auctions, including a 10-year auction that will be watched closely. The 10-year went on a strong bull run last week as equities melted down. The 10-year yield dropped 14bps, the most since last December 19th.
This week $63 billion worth of new US debt will be auctioned. The Treasury auction's a record-breaking $34 billion in 3-year notes 10-March, $18 billion in 10-year notes 11-March and $11 billion in 30-year bonds 12-March. The Treasury is looking to sell at least $2 trillion in debt in a short period of time to fund the federal government's balance sheet and keep the Fed bailouts pumping.
Heavy money-flows back into Treasuries will hurt equities, the euro and should send the dollar higher. What would hurt the USD would be any irregularities during the auctions, a sharp unexpected rise in Treasury yields, or speculation that sovereign wealth and other market players show a growing distaste for Treasuries.
Treasuries are the next bubble that needs to go, but the problem is Geithner needs a strong USD so America can pay their debts back as cheaply as possible and Bernanke needs a weak USD so inflation jump starts equities. This is a very difficult situation for all parties concerned...
Hillary Clinton has been on a world-wide tour begging sovereign wealth to keep buying US debt. It should be no wonder Clinton's first trip last month was to China. The Chinese have Geithner and the Treasury bent over a barrel right now, so does Japan. But, there's a whole lot more room around that barrel... it's not in China's interest to cause panic in Treasuries because that would weaken the dollar, which would weaken their debt-holdings position against the US. I think the Chinese are too smart for that, there are other ways.
With the Secretary of State wrongly claiming America's democracy is older than Europe's and telling the Russians she hopes they don't "overcharge the US" after screwing-up a translation on a gift, I hope all sovereign wealth stops buying US debt. It's disrespectful to say such stupid things. I'm not sure how America will gain any respect that was lost during the Bush regime with comments like that.
Keep an eye on Treasuries this week.
EUR/USD:
First of all, don't forget that NY is now 4-hours behind London and 5-hours behind Frankfurt. I think Europe has their time change soon but between then and now remember that new time difference.
Last Friday's job data printed at their lowest levels in 35-years. We don't need to get into all the specifics, it was ugly and it will stay ugly. I believe unemployment will at least go to the 9% level.
One piece of data I like to watch is what's referred to as under utilization. It's a different way to look at and measure unemployment. Right now the under utilization rate is 14.8% compared to the unemployment rate of 8.1%. The under utilization rate factors in people that gave up looking for a job, have a part-time job but want to quit, discouraged workers, part-timers who want to be full-timers but can't find the work, etc. It's a wide-ranging piece of data and I believe it shows the unemployment rate has room to rise to possibly 9.8% in the near-term.
I read a story about a school in Ohio getting over 700 job applications for a janitorial job that paid $15 an hour. Unemployment will get worse...
My forecast for the euro this week -- it'll do whatever equities do unless the strong EUR/Equities correlation decides to become unhitched and change this week. Unless we have a change in the tight price action correlation between the EUR/USD and the S&P 500 futures, the euro will go up and down with that index.
I talked to one very smart trader who's been shorting the euro and the S&P 500 futures simultaneously, making a nice profit. It's pretty much that simple if you can catch the right direction of the market at the right time.
Every trade day last week saw heavy volume selling on the S&P 500 futures. Can it repeat this week? Of course, but as with the Forex market, the longer things stay the same, the more they have to change.
Gold made strong gains on Friday after failing to break below the $900 level earlier in the week. One great sign I've noticed here recently is gold and the dollar have stopped rising in tandem. That's a sign some of the general panic is going away. If the EUR/Gold correlation goes back to normal we should then expect to see the euro and equities rise as the dollar and yen falls.
Crude appears to have put in a bottom at the $32 level. The next round of GDP data could send crude lower but overall this commodity looks able to sustain some upside gains in the near-term. This is also a great sign for equities and the euro. With some upside momentum pushing crude now is a great time for OPEC to make further production cuts and for some of those pipeline attacks to flare up again. Surely OPEC needs crude above $50 for budget reasons.
Fundamentally there is an enormous amount of key Eurozone and German growth, manufacturing, trade, consumer, industrial, and jobs data. For the US we have Retail Sales, Initial Claims, Trade Balance, and Michigan Sentiment. The beginning of the week is dominated with euro data while the end of the week is for the dollar.
Bernanke speaks:
10-March at 0830 EST
Trichet speaks:
12-March at 0730 EST
I'm nothing but bearish on the euro overall, that has not changed but as we've already discussed, until the strong EUR/Equities correlation breaks, I don't see how the EUR/USD can sustain the type of sell-off it deserves for fundamental reasons.
One of the interesting things about trading the EUR/USD is, I can make the case for both currencies to be sold-off but they are paired together like two brain-dead Siamese twins and currently under the spell of Wall St. Until that changes we're stuck with a EUR/USD that will continue making erratic price moves in the short-term.
I would expect the JPY continues to weaken in the short-term, especially if equities rally. A sustained crude rally should pressure bears on Wall St. to sell and may give the bulls a boost. A fundamental case for a weak JPY can easily be made.
I will be interested to see how the Trade Balance and Import Price Index prints. I don't ever see the Trade Balance turning net positive for the US and the USD. America doesn't really make anything any longer and according to China's latest import/export data, they are still outpacing America. Chinese imports in to the US are down but not nearly to the degree US exports to other nations are down, or German exports for that matter.
As far as trading goes I will continue to short the euro on the rises and rallies but I will be very cautious against getting caught short on the euro should a bear market rally break out this week. I don't trust the dollar, euro, Trichet, S&P 500, Bernanke, crude... I trust nothing at the moment.
One last thing... if I'm quieter than normal in the chat this week it just means I'm focusing on the markets and looking for trades or trading. The second week of the month is what I like best in terms of trading conditions, hopefully the volatility is there.
Finally, for all those wondering where some of AIG's $173 billion worth of taxpayer money is going, I have a partial list:
* Goldman Sachs
* Merrill Lynch
* Morgan Stanley
* Wachovia
* Bank of America
* Suntrust Bank
* Deutsche Bank
* Royal Bank of Scotland
* Barclays
* Lloyds Banking Group
* HSBC
* Societe Generale
* Calyon
* Rabobank
That's if for now. EUR/USD key levels will be posted after London opens on Monday. Be smart with your risk and money management this week.
-David
bxAv110
bxAv110
bxAv110
I'm much more enthusiastic about this week compared to last... the combination of an ECB rate decision and NFP always complicates trading. On Monday the markets will open having been heavily sold-off the prior 4-weeks. On Friday equities bears covered their short positions, sending the Dow and S&P 500 on surge the last hour of trading. As soon as the profit-taking and short-covering hit, the S&P 500 futures ran up 20-points which pushed the EUR/USD just below the 1.2650 level at the close.
Historical crisis:
This current recession in the US, which is now global, is unlike anything the government or Fed has had to deal with. History is being written on a daily basis. They say history is destined to repeat itself and this is true, but history is in the making as well. This recession combines elements of recessionary years like 1929, 1933, 1980, 1982, and 1857.
One reason why I think this recession is a beast of its own centers around the financial health of Americans. The recessionary years of 1980-1982 resemble this recession in terms of the unemployment situation. By 1982 the US Unemployment Rate was 10.1% but the US Savings Rate was 12.2%.
10% unemployment in a consumer-driven economy is a dire situation but manageable when consumers have some disposable income in the bank and limited household debt. As soon as a bad economic situation looks better those consumers start spending again, they have the money in the bank to be consumers. According to the textbook definition, the current recession began in December 2007. When this recession began the US Savings Rate was under 1.0% which is far from the 12.2% average in 1982. This go around, there is no money in the bank.
The other problem lies within what's called the household debt service ratio. It's basically consumer debt. According to the Fed's statistics on this data, here's what the household debt to personal income ratio looks like from a few selected recession years:
1980 - 10.58%
1982 - 10.61%
1990 - 11.99%
1991 - 11.53%
2008 - 14.08%
There's a big difference between household consumer debt of 10.58% of personal income when the average savings rate is over 12% compared to debt to personal income of 14.08% with almost no savings at all.
That factor alone makes this recession different for consumers, retailers, and all those banks who are creditors to US debtors. The average US savings rate is going up, it's well over 1.0% currently but this is a new phenomenon forced on American consumers against their will. They have no other choice but to stop spending because there isn't much to spend, their credit cards are maxed out, and their personal ATM's (homes) are upside down.
I'm not listening to anybody that believes they can find a bottom to this recession, equities markets, unemployment, housing, you name it. Good luck trying to find a chart from a random prior recession to compare to what's happening in March 2009. Maybe when everybody stops talking about the bottom we'll finally get the bottom.
In my opinion what started in 1856 and erupted in 1857 is what's most comparable to the 2008-2009 recession. The Great Panic of 1857 which led to a steep recession had all the elements of this one... bank failures, extreme global currency price fluctuations, a real-estate boom and bust, devaluation of homes and land, geo-political events like the Mexican-American War and the Crimean War.
The 1857 recession that started in America first spread to Europe, then to South America and Africa, and then Asia caught it last. The global network of economic trade that existed back then collapsed, government debt defaulted, commodities collapsed, and general panic and fear reigned. Sound familiar?
Our recession has all of those elements from 1857 but on a much more intensified scale. The world is much smaller now than it was in 1857. The prior major recessions like those in the 1930's, 1970's, and 1980's didn't combine all the elements we see now and 152 years ago. The situation in 1857 developed into a "war with wealth" and ultimately led to the South succeeding and forming the Confederacy... then it was Civil War and you know the rest of the story...
The third week of March in 2007 I put out a forecast that the US housing market would collapse within 6-months. A current admin in our chat was one of the first to show me interesting information on sub-prime back then right after I started talking about the end of the US housing boom. He knew it was coming, several saw it coming but few wanted to listen.
I think the recovery will begin within a year. The only reason why I believe this is because I just saw something on CNN about how they are going to help Americans survive the recession. CNN aren't the only ones... I think it's safe to say when CNN, Fox, and MSNBC think they have any clue, we've probably hit bottom or we're close to it. Those people must be crazy if they think anybody is actually going to take financial advice from TV news entertainers.
Wall St.:
Last Friday was chaos on Wall St. After the jobs data was released the bottom fell out of equities as the Dow pushed below the 6,500 level while the S&P 500 fell below the 670 level before recovering at the end of the day thanks to profit-taking.
A few days ago equities had a pathetic relief rally but every day the Dow and S&P 500 get further driven into the ground the closer we get to a violent bear market rally. There's no way to predict what triggers those bear rallies and it's impossible to see them coming ahead of time, but when they erupt out of nowhere you don't want to be caught on the wrong side.
Last Friday I took a loss on a euro short mostly because I'm guarding against being caught short on the euro when Wall St. decides to go mental and run up several hundred points. From a pure risk management view, I'd rather short the euro at the end of a bear rally compared to being short when it begins... we've seen a few bear market rallies towards the end of 2008 that send the EUR/USD up in excess of 320-points over a span of just 12-hours. Being caught in a situation like that is terrible on the mind for a trader.
I'll keep taking manageable losses to prevent my account from being caught in a painful situation. A loss like that is very easy to manage compared to being in several hundred points of drawdown and waiting for the market to crash once the bear rally fizzles. The bear market rally that's due may have started on Friday, we don't know. But what we need to now look for is either follow-through or failure on Monday.
The tight EUR/Equities correlation makes it hard for euro bears like myself to trade the euro as it should be traded because the euro can't do anything but go up when equities go up. It doesn't work any other way right now. That being said, I believe the the Dow and S&P 500 ultimately need to go lower, which will drag the euro down with them.
Back on Dec. 16, 1982, at the height of the last major recession, the Dow was at 990.25. When adjusted for inflation, that would put the price-weighted Dow index at 2,120 today. Right now the Dow is several thousand points above that equated level so I'm certainly not ruling out Dow 6,000 or lower before it's all said and done. When you factor inflation, the Dow is currently trading at 1966 levels.
Fear can become a bubble too. What typically follows fear is euphoria. Once perception changes, fear switches to euphoria and markets go on monster rallies. Perception is reality and as soon as a piece of news, data, or geo-political event triggers that mental switch, the fear bubble bursts and Wall St. goes on a violent rally, bringing all other correlated markets up with them. I don't want to look like an idiot being caught on the wrong side of that move so I'll continue to trade accordingly.
Treasuries:
Treasuries will come into view as there are several major auctions, including a 10-year auction that will be watched closely. The 10-year went on a strong bull run last week as equities melted down. The 10-year yield dropped 14bps, the most since last December 19th.
This week $63 billion worth of new US debt will be auctioned. The Treasury auction's a record-breaking $34 billion in 3-year notes 10-March, $18 billion in 10-year notes 11-March and $11 billion in 30-year bonds 12-March. The Treasury is looking to sell at least $2 trillion in debt in a short period of time to fund the federal government's balance sheet and keep the Fed bailouts pumping.
Heavy money-flows back into Treasuries will hurt equities, the euro and should send the dollar higher. What would hurt the USD would be any irregularities during the auctions, a sharp unexpected rise in Treasury yields, or speculation that sovereign wealth and other market players show a growing distaste for Treasuries.
Treasuries are the next bubble that needs to go, but the problem is Geithner needs a strong USD so America can pay their debts back as cheaply as possible and Bernanke needs a weak USD so inflation jump starts equities. This is a very difficult situation for all parties concerned...
Hillary Clinton has been on a world-wide tour begging sovereign wealth to keep buying US debt. It should be no wonder Clinton's first trip last month was to China. The Chinese have Geithner and the Treasury bent over a barrel right now, so does Japan. But, there's a whole lot more room around that barrel... it's not in China's interest to cause panic in Treasuries because that would weaken the dollar, which would weaken their debt-holdings position against the US. I think the Chinese are too smart for that, there are other ways.
With the Secretary of State wrongly claiming America's democracy is older than Europe's and telling the Russians she hopes they don't "overcharge the US" after screwing-up a translation on a gift, I hope all sovereign wealth stops buying US debt. It's disrespectful to say such stupid things. I'm not sure how America will gain any respect that was lost during the Bush regime with comments like that.
Keep an eye on Treasuries this week.
EUR/USD:
First of all, don't forget that NY is now 4-hours behind London and 5-hours behind Frankfurt. I think Europe has their time change soon but between then and now remember that new time difference.
Last Friday's job data printed at their lowest levels in 35-years. We don't need to get into all the specifics, it was ugly and it will stay ugly. I believe unemployment will at least go to the 9% level.
One piece of data I like to watch is what's referred to as under utilization. It's a different way to look at and measure unemployment. Right now the under utilization rate is 14.8% compared to the unemployment rate of 8.1%. The under utilization rate factors in people that gave up looking for a job, have a part-time job but want to quit, discouraged workers, part-timers who want to be full-timers but can't find the work, etc. It's a wide-ranging piece of data and I believe it shows the unemployment rate has room to rise to possibly 9.8% in the near-term.
I read a story about a school in Ohio getting over 700 job applications for a janitorial job that paid $15 an hour. Unemployment will get worse...
My forecast for the euro this week -- it'll do whatever equities do unless the strong EUR/Equities correlation decides to become unhitched and change this week. Unless we have a change in the tight price action correlation between the EUR/USD and the S&P 500 futures, the euro will go up and down with that index.
I talked to one very smart trader who's been shorting the euro and the S&P 500 futures simultaneously, making a nice profit. It's pretty much that simple if you can catch the right direction of the market at the right time.
Every trade day last week saw heavy volume selling on the S&P 500 futures. Can it repeat this week? Of course, but as with the Forex market, the longer things stay the same, the more they have to change.
Gold made strong gains on Friday after failing to break below the $900 level earlier in the week. One great sign I've noticed here recently is gold and the dollar have stopped rising in tandem. That's a sign some of the general panic is going away. If the EUR/Gold correlation goes back to normal we should then expect to see the euro and equities rise as the dollar and yen falls.
Crude appears to have put in a bottom at the $32 level. The next round of GDP data could send crude lower but overall this commodity looks able to sustain some upside gains in the near-term. This is also a great sign for equities and the euro. With some upside momentum pushing crude now is a great time for OPEC to make further production cuts and for some of those pipeline attacks to flare up again. Surely OPEC needs crude above $50 for budget reasons.
Fundamentally there is an enormous amount of key Eurozone and German growth, manufacturing, trade, consumer, industrial, and jobs data. For the US we have Retail Sales, Initial Claims, Trade Balance, and Michigan Sentiment. The beginning of the week is dominated with euro data while the end of the week is for the dollar.
Bernanke speaks:
10-March at 0830 EST
Trichet speaks:
12-March at 0730 EST
I'm nothing but bearish on the euro overall, that has not changed but as we've already discussed, until the strong EUR/Equities correlation breaks, I don't see how the EUR/USD can sustain the type of sell-off it deserves for fundamental reasons.
One of the interesting things about trading the EUR/USD is, I can make the case for both currencies to be sold-off but they are paired together like two brain-dead Siamese twins and currently under the spell of Wall St. Until that changes we're stuck with a EUR/USD that will continue making erratic price moves in the short-term.
I would expect the JPY continues to weaken in the short-term, especially if equities rally. A sustained crude rally should pressure bears on Wall St. to sell and may give the bulls a boost. A fundamental case for a weak JPY can easily be made.
I will be interested to see how the Trade Balance and Import Price Index prints. I don't ever see the Trade Balance turning net positive for the US and the USD. America doesn't really make anything any longer and according to China's latest import/export data, they are still outpacing America. Chinese imports in to the US are down but not nearly to the degree US exports to other nations are down, or German exports for that matter.
As far as trading goes I will continue to short the euro on the rises and rallies but I will be very cautious against getting caught short on the euro should a bear market rally break out this week. I don't trust the dollar, euro, Trichet, S&P 500, Bernanke, crude... I trust nothing at the moment.
One last thing... if I'm quieter than normal in the chat this week it just means I'm focusing on the markets and looking for trades or trading. The second week of the month is what I like best in terms of trading conditions, hopefully the volatility is there.
Finally, for all those wondering where some of AIG's $173 billion worth of taxpayer money is going, I have a partial list:
* Goldman Sachs
* Merrill Lynch
* Morgan Stanley
* Wachovia
* Bank of America
* Suntrust Bank
* Deutsche Bank
* Royal Bank of Scotland
* Barclays
* Lloyds Banking Group
* HSBC
* Societe Generale
* Calyon
* Rabobank
That's if for now. EUR/USD key levels will be posted after London opens on Monday. Be smart with your risk and money management this week.
-David
