12.19.06
Posted in Uncategorized, Currency Markets at 10:03 am by kanundrum
It seems that everywhere I look these days there is a new story about the falling or collapsing dollar and usually by the time a story hits the print media the action is over. The genius of the free markets is that they tend to correct imbalances; the tragedy is that they do it with the compassion of a lion chasing a wounded wildebeest. We still have two major imbalances that the US dollar can lend a hand in balancing, they are: the trade imbalance and the Federal deficit. I am not uncovering new ground here so further explanation is not needed, suffice it to say that there are still imbalances , therefore there is still the need for balancing.
What is missed in all the talk about the falling dollar is the structural changes going on in the world which will lead to opportunities in the foreign exchange market. The first is going to be front and center this week as the NYSE and Euronext attempt to merge, the second is an ongoing saga involving a slow but steady migration away from the dollar.
Let’s start with market globalization. This week the NYSE and Euronext put there merger to vote and the popular thesis is that this will herald in the age of global markets. The hole in this thesis is that markets are already global and integrated through a web of back office operations that keep the whole thing afloat. The globalization of markets NYSE/Euronext and NASDAQ/LSE is better described as a fact finally hitting the print media; the action is already over. What these mergers (and others to come) will do is make it easier for Mom and Pop Global to invest anywhere in the world. Essentially it has opened a new retail market and will make the institutional market more efficient. As it becomes easier and more efficient to invest globally, the net effect will be increased foreign exchange
Next we shall move to that pesky move away from the dollar. It has already begun to happen with both China and OPEC moving away from dollar holdings. Again I am not uncovering new territory. As the world slowly migrates away from the dollar two things are likely to occur: the amount of foreign exchange trading will increase dramatically, and the US will have to get used having a currency that resembles the British Pound.
The opportunity lies in the volume of FX traded. As Mom and Pop Global invest internationally and as the migration away from the dollar continues, the mechanics of the FX markets require an increase in the volume of foreign exchange. Fittingly, this market was one of the first to go electronic and the mechanism is in place to handle the increased flow. This type of process takes a long time and begins slowly. As the volume reaches a crescendo and the dollar loses importance we will begin to see more news stories about this phenomena. Ultimately the dollar will have a big crack and all the stories will reference this ongoing trend that we all should have seen coming. I want to be very clear that I am not talking about doom and gloom for any country, in particular the US. As a model, the US can look at Great Britain and see that the Sterling’s loss of importance was not a catastrophic event.
So now what are we left with? We are left with a fully integrated global marketplace where foreign exchange volume is enormous. We will know when we get there when the headlines read “Dollar Who? Foreign Exchange Markets Are King!” This is where we will see another structural change.
As the FX market grows and we reach full globalization the reserve currency of the world will fluctuate between several entities, most likely the Yuan, Euro, and Dollar. And as each currency becomes less important we will be on the road to a global central bank and a global currency. A global central bank may be a long way off and many may scoff at any type of global cooperation, but there was a time that a unified Europe was nothing but a punch line.
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12.11.06
Posted in Uncategorized at 8:38 am by kanundrum
There will be a lot of talk this week about China, the Yuan, and should the trading band be widened. It seems that the plan now is to convince the Chinese to stop saving and start buying “stuff” from us. Actually, it probably the best idea we have come up with yet. The Chinese are in the driver’s seat, as we all know we need them to finance our debt and send us cheap products to keep inflation in check. All the talk about trade sanctions and protectionism is just that, talk.
Interestingly, last night the PBoC confirmed that they are setting up a currency management office (for more see www.tradethenews.com/top-stories.php ). This appears to be a first step toward a floating Yuan. The proof of that is simply in the confirmation that a new government agency has been formed. If the Chinese were content to keep the Yuan band status quo they would not need a whole new agency. So by the mere fact they have set one up seems to indicate that a wider band and ultimately a completely free floating Yuan is on the way. This whole process coincides nicely with the 2008 Olympics. My feeling is that by the time the Olympics roll around the Chinese want o have the “currency issue” behind them and welcome the world to their country.
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11.13.06
Posted in Uncategorized at 8:31 am by kanundrum
Our friend Copper has turned down decidedly and it could offer a few clues. The talk around the copper mine is that there is over supply; a slower housing and auto sector seems to be eroding demand and increasing warehouse stocks. Since I regard copper as the world’s best economist, this recent downturn suggests that the global economy and US economy will slow further.
Here is where we begin to walk a very fine line. How slow will we go?? Nobody knows, but what I do know is this…a lot of fund managers are sitting on profits in a very difficult year. They do not know how slow we will go, but they do know that if they blow their profits in the next few weeks then they will not get their bonus. In turn causing their personal economy to slow greatly! I would not be surprised to see some profit taking into year end.
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10.25.06
Posted in Uncategorized at 5:53 pm by kanundrum
The Fed is meeting today and is going to announce its decision on interest rates at 2:15. I write that as fact because I can’t find it anywhere!!! None of the major news outlets even have it on their front page!!!! Perhaps it is a forgone conclusion that the Fed is not going to raise and tell us that further moves are dependent on data. But nobody seems to care, that is exactly when the markets run into trouble. This is purely a gut play with no fundament or technical backup, except to say that we have come a long way and we now are complacent, that’s when Mother market likes to let you know who is really the boss.
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10.20.06
Posted in Uncategorized, Energy Markets at 9:57 am by kanundrum
OPEC calls an emergency meeting to bail themselves out!! (Note the heavy sarcasm…) What a great world that allows you to cut the supply of your product after the price has tripled. Could you imagine Apple tripling the price of the Ipod and then cutting supplies? That would sure give Washington something else to talk about.
The whole point of the sarcasm and where I think OPEC has lost its collective mind is that they have just signaled their intent to keep oil prices above $60 a barrel. At this price they basically are putting themselves out of business. Alternative energy has just begun to take hold and I think the members of OPEC may have missed that. At $60 a barrel almost any alternative energy makes economic sense without government subsidies.
There is something else that they may be missing – just a few short months back the world was talking about a shortage of oil. All the fields were running dry and OPEC members could not pump any more oil even if they wanted too. This mentality is what led to the recent high prices; but now we know that OPEC can pump more-at least 1.2 million barrels more. This should keep the oil bears well fed and make for some pretty choppy trading in the oil markets.
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10.16.06
Posted in Uncategorized at 6:53 pm by kanundrum
I could not have been more wrong about a global sell-off caused by a liquidity squeeze initiated by a sell-off in the metals –WOW that is a mouthful!!!! For a bit the metals looked weak, but they have since rallied and our friend copper is hinting at higher prices. Now is the time to follow Mother Market and let her lead us to profits….
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10.03.06
Posted in Uncategorized at 9:20 am by kanundrum
Our “bff” Copper has turned down this morning with all the other metals and the cause cited is weaker oil. I suppose I can buy the correlation argument, but the “cause” of weaker oil and weaker copper is weaker economies. The Euro zone appears to be slowing a little more than expected and the US economy is anybody’s guess right now. However there are a few other structural dynamics occurring.
Liquidity: Japan reported today that its monetary base was down 21.2%, the 7th straight drop (for details see www.tradethenews.com). What this means in layman’s terms is, just like in May, Japan has been draining liquidity from its economy. The net result is the cheap money that fueled the global expansion continues to disappear. Why is this significant? Primarily because there has been record highs in the Euro/Japan cross rate based on the infamous carry trade. Since the trade is “crowded” it could be more difficult and precarious trying to unwind that trade as the interest rate differential disappears. This in turn could result in a global liquidity based sell-off just like in May.
Risk Management: This one is the most obvious structural change that has occurred. Since the implosion of Amaranth you can be sure that every risk manager in the world has tightened the reins. The result again is less money sloshing around in the speculative arena.
Market Position: Finally, the rally in the global markets has given many players some nice profits in a tough year. These players are going to need a darn good reason not to take profits and an even better reason to add new positions at these levels.
So what does this all mean? The weakness in copper is telling us that the global economic expansion is slowing and possibly stopping. The depth and length of the slowdown has yet to be determined, but all the signs are there that it is time to take profits on longs and get short.
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10.02.06
Posted in Uncategorized, Metals at 7:20 pm by kanundrum
A whole gaggle of data just came out on the US economy and again it will serve to confuse investors. Home sales better than expected? Didn’t Barron’s have a huge article on how the housing sector could suck wind? How could they get it so wrong? They also wrote an article a few weeks back about the homebuilding stocks being a good value play. They seem to be as confused as most market participants.
The one market that is not confused is copper. Our friend copper, the world’s best economist, is continuing to trend higher. As I mentioned last week this is the market I will be watching as an early indicator of the global economic climate. For now it appears that the global economic climate is strong and a continuation of the trend in copper would cause me to lean toward my bullish economic hypothesis
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09.27.06
Posted in Uncategorized at 6:43 pm by kanundrum
It appears we are looking at a good old fashioned stand-off in the global financial markets. Actually it is really between the US bond players and the equity players, and the extent of any slowdown is the root of the dispute. The sides are this—bond market believes a hard landing is due, equity market is betting on a soft landing.
At this point it is anyone’s guess as to the extent of any slowdown, but what almost every market appears to be betting on is a slowdown. A quick rundown of the players illustrates this point: Oil - well off its high with little new supply (if any); clearly this suggests demand has decreased. Bonds - screaming higher, with many players betting on a rate decrease. Silver and Gold – both off their highs, as market participants cite weaker demand.
Now let’s talk about the dollar. Our friend the greenback has been meandering in a belladonic haze since its April/May sell-off. This clearly reflects the uncertainty the global markets have over the state of the US economy and any global slowdown.
Finally there is one market that I have yet to address – Copper, the world’s best economist. While the metal has also been wandering since June, there have been signs of life for the copper bulls recently. Even the weak durables goods orders today have not seemed to tarnish the bulls’ enthusiasm. To be sure, we are not in another full fledged bull market yet, but this is the market I will be watching for clues to the markets’ perception of the global economy.
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Posted in Uncategorized at 6:23 pm by kanundrum
I have been out of the public writing game for a bit, primarily due to compliance. It is all sorted out now, so without further adieu I shall write away!!!
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