Well, I talked about this "rally in risk currencies" in my previous post here on 11/26. I particularly warned about "behind-the-scenes machinations" that would provide a liquidity boost to the global financial system. The signs were quite conspicuous, as European financial system was seen as "freezing" because of lack of interbank lending. Something had to be done by someone and it was our own Fed, which came to the rescue.
At around 8am EST, Fed announced "currency swap" provision with EU banking system. This was obviously to stop the potential "bank run" that was threatening the global financial system. Along with the US Fed, other central banks--BOJ, SNB, ECB, PBOC--around the world acted in a coordinated fashion to provide liquidity to the ailing European banks. Today, around 5:30am, when the news about China's PBOC's decision to ease the reserve requirements for the banks floated on my screen, I realized that there is something "cooking" among the central bankers around the world.
The trigger had been pulled! Like I said in my previous post, there were many traders who were not ready for this, yet they had their fingers on "Sell US dollar" button. So, EURO, AUD, NOK, GBP...every one of these beaten down currencies rallied instantly. It was one of those "black swan" rallies that drives the price changes beyond "3-sigma" around the moving averages.
Let's look at some of the profit-making trades based on the recommendations I had made in the previous post...
Although, I was quite positive about the EUR/USD rally from $1.325, I wasn't enthusiastic about the "EUR long" trade, as I find it hard to digest euro's inherent problems. It did spike up to $1.353. My recommendations: "go long the AUD, GBP and NOK against the USD." So, if you had, say, one "standard lot" a position of 100,000 units of each of those aforementioned currencies against the USD (at 50:1 leverage, you need $6,000 to do these trades)then, following the "entry" and "exit" at the following price points would have resulted in following profits:
AUD/USD: Buy 100,000 AUD at $0.9800 and Sell at $1.02 (it rallied to $1.035), 400- pip profit translates into a USD profit of $$4,000 (1 pip = $10/100K position)
GBP/USD: Buy 100,000 GBP at $1.55 and Sell at $.15750 (rallied to $1.578), 350-pip profit translates into a USD profit of $3,500.
USD/NOK: Sell USD 100,000 (that is buying NOK) at 5.85 (it was at 5.90 in the beginning of the week and today USD fell to 5.73) and buy USD back at 5.75 for a 1000-pip profit, which translates to approximately $1,700 (ipip = $1.7/100k).
So, for a $6,000 investment, this week, on this move in risk currencies, one could have made $9,200! That is 153% profit in 3 days.
Obviously, these profits are not always easily "baggable" in times of tremendous volatility, especially, the one's we witnessed today. As the market goes in trader's favor, the first instinct is always to quickly take profits, leaving much of the rally go complete waste. This is the reason why I did not take the "peak of the rally" prices as my exit points; I was a bit conservative here.
Trades work that way. One cannot be too greedy, because these rallies do fade after the inevitable exhaustion point is reached. Big currency investors buy or sell only to a certain point, and they still maintain a good inventory of the currencies not in favor at any given moment, for example, USD at the moment. However, I still think this rally in risk assets will continue, simply because, now, the central banks around the world want to avoid another "global slow down" due to the problems in european sovereign debt market. That said, this move from the central bankers is an indication that the banking problems in the EU is quite severe. Moreover, this "liquidity" action is to help alleviate interbank lending problems and that does not necessarily address the "solvency" issues of debt-ridden EU countries. If the yields of Italian and Spanish bonds continue to rise in the coming days, this rally will be a very short-lived one.
So, be careful out there.
Wednesday, November 30, 2011
Saturday, November 26, 2011
FX Markets: Time to get back on "Risk" Currencies?
European situation just got worse last week. Chancellor Merkel's reluctance to embrace euro-bonds caused further flight away from risky assets into safe haven assets. USD has been the biggest beneficiary of this latest risk aversion in the markets.
Euro/dollar is hanging by the thread; it is about to break below $1.32. FX pundits see Euro capitulation and a retest of 2011 low of $1.28. Lack of consensus among EU leaders in terms of providing further liquidity to troubled nations--Italy, Spain, Portugal, Greece--may expedite this precipitous fall.
While I don't want to be heroic here and put a "long" position on euro/dollar, I think, it is unlikely that euro will see further decline and may in fact, bounce back violnetly. My rationale behind that thesis:
1. There are too many "euro shorts" with a finger on the "buy" button, if "behind-the-scenes machinations" lead to a substantial liquidity provision to this rapidly worsening debt markets in Europe.
2. USD is only a safe haven currency in times of crisis, and fundamentally is not that strong.
3. There are many central banks, China including, who in the recent past made strategic decision to diversify away from USD into euro, as Fed's QE 2 flooded the banks with dollars. These central bankers will be keen on protecting their investments, as opposed to going back to the USD, which is fundamentally on a long-term decline due to worsening fiscal situation in the US.
4. At least in the near-term, the EU leaders will not allow the disintegration of the EMU and the common currency. Collapse of euro-zone could have a cataclysmic effect on global economy and financial markets. So, even though, most analysts feel that EMU will see some kind of re-structuring, there will be every effort to delay this inevitable event, and let the markets digest this eventuality in an orderly fashion.
So, I think Euro will bounce back to $1.36 in the first week of December. But, I am more interested in other currencies that are being clobbered along with the euro. I would prefer the following trades if the "bloodbath" continues next week:
Buy AUD/USD right around $0.9650 - despite China slowing down, commodities such as gold and silver will find buyers and Australia will benefit from that
GBP/USD has declined quickly to $1.54 level from a very recent high of $1.61. UK is implementing it's own version of QE, however, they are also one step ahead of the US in terms of dealing with their fiscal situation through austerities. I would buy it between $1.52 - $1.54 and ride it all the way to $1.60.
I have had reasonable success trading another "risk currency"--Norwegian Krone (USD/NOK pair). In recent days, NOK has declined by nearly 4,000 pips to 1USD = 5.93 krone. I will be perfectly fine to short the pair (forecasting a rally in NOK) around this level all the way to NOK6.00. I would do it in small increments (few short positions foe every 150pip appreciation in the USD) and put a stop-loss at 1USD = NOK6.0200.
I think the Chinese, the US Fed and Germany & France will step in to prevent a massive shock to global markets and specifically, prevent upheaval in the FX markets. It could happen in a week or two and then the "risk-on" trade will flourish until the year end.
Of course, all forecasts are mere predictions based on "knowable" variables while "black Swans" lurk in the shadow. That's something I have clearly understood ever since I humbly accepted Nassim Taleb as my Guru. Nevertheless, it is too early for the world leaders to accept defeat in the hands of the gigantic "debt beast" that is gradually swallowing profligate nations. The destruction will come in massive scale, but in the meantime, there are opportunities to execute profitable trades, as the waves of optimism and pessimism persist in the FX markets.
Euro/dollar is hanging by the thread; it is about to break below $1.32. FX pundits see Euro capitulation and a retest of 2011 low of $1.28. Lack of consensus among EU leaders in terms of providing further liquidity to troubled nations--Italy, Spain, Portugal, Greece--may expedite this precipitous fall.
While I don't want to be heroic here and put a "long" position on euro/dollar, I think, it is unlikely that euro will see further decline and may in fact, bounce back violnetly. My rationale behind that thesis:
1. There are too many "euro shorts" with a finger on the "buy" button, if "behind-the-scenes machinations" lead to a substantial liquidity provision to this rapidly worsening debt markets in Europe.
2. USD is only a safe haven currency in times of crisis, and fundamentally is not that strong.
3. There are many central banks, China including, who in the recent past made strategic decision to diversify away from USD into euro, as Fed's QE 2 flooded the banks with dollars. These central bankers will be keen on protecting their investments, as opposed to going back to the USD, which is fundamentally on a long-term decline due to worsening fiscal situation in the US.
4. At least in the near-term, the EU leaders will not allow the disintegration of the EMU and the common currency. Collapse of euro-zone could have a cataclysmic effect on global economy and financial markets. So, even though, most analysts feel that EMU will see some kind of re-structuring, there will be every effort to delay this inevitable event, and let the markets digest this eventuality in an orderly fashion.
So, I think Euro will bounce back to $1.36 in the first week of December. But, I am more interested in other currencies that are being clobbered along with the euro. I would prefer the following trades if the "bloodbath" continues next week:
Buy AUD/USD right around $0.9650 - despite China slowing down, commodities such as gold and silver will find buyers and Australia will benefit from that
GBP/USD has declined quickly to $1.54 level from a very recent high of $1.61. UK is implementing it's own version of QE, however, they are also one step ahead of the US in terms of dealing with their fiscal situation through austerities. I would buy it between $1.52 - $1.54 and ride it all the way to $1.60.
I have had reasonable success trading another "risk currency"--Norwegian Krone (USD/NOK pair). In recent days, NOK has declined by nearly 4,000 pips to 1USD = 5.93 krone. I will be perfectly fine to short the pair (forecasting a rally in NOK) around this level all the way to NOK6.00. I would do it in small increments (few short positions foe every 150pip appreciation in the USD) and put a stop-loss at 1USD = NOK6.0200.
I think the Chinese, the US Fed and Germany & France will step in to prevent a massive shock to global markets and specifically, prevent upheaval in the FX markets. It could happen in a week or two and then the "risk-on" trade will flourish until the year end.
Of course, all forecasts are mere predictions based on "knowable" variables while "black Swans" lurk in the shadow. That's something I have clearly understood ever since I humbly accepted Nassim Taleb as my Guru. Nevertheless, it is too early for the world leaders to accept defeat in the hands of the gigantic "debt beast" that is gradually swallowing profligate nations. The destruction will come in massive scale, but in the meantime, there are opportunities to execute profitable trades, as the waves of optimism and pessimism persist in the FX markets.
"Complexities of Change" A short tale
Saturday mornings are relatively laidback for me. I spend lot of time reading things that really keep me relaxed. Today, I got this email from a dear friend of mine with an attachment--"Tales for Change" by Margaret Parkin. And, as soon as I read this really short tale on "complexities of Change" (author narrates this story originally in another book called, "Tales for Coaching"), I decided to immortalize it by posting it on this blog. Here goes the tale and commentary, verbatim, by the author:
...tale of two caterpillars who, whilst sitting together on a cabbage leaf, suddenly hear a swishing noise, and look up to see a beautiful butterfly flying overhead. The first caterpillar looks at the other, shakes his head and says, 'You'll never get me up in one of those things.
Author, further comments:
This tale is a powerful tool for illustrating the complexities of change--the resistance to the idea of transition, the ability to see oneself in another dimension and the inevitability of change are all contained within the metaphor.
...tale of two caterpillars who, whilst sitting together on a cabbage leaf, suddenly hear a swishing noise, and look up to see a beautiful butterfly flying overhead. The first caterpillar looks at the other, shakes his head and says, 'You'll never get me up in one of those things.
Author, further comments:
This tale is a powerful tool for illustrating the complexities of change--the resistance to the idea of transition, the ability to see oneself in another dimension and the inevitability of change are all contained within the metaphor.
Sunday, October 16, 2011
Occupy Wall Street: Creating Anarchy or Purposeful Protest?
I have now spent most of the last two decades of my life in the United States. And, I have seen few instances of public angst, be it against the war in Iraq, globalization, or environmentalists against the oil companies or for that matter, “tea party” against “expansionary” federal government. But never before have I seen such an outpouring of anger toward the elites of Wall Street. What is happening?
I think there is a genuine anger towards the big banks and their Washington power brokers. I don’t know whether it is all justified. However, those who take this lightly and ridicule (some mainstream media persons have sounded arrogant and elitist when addressing the concerns of these protesters) the whole movement as some passing phenomenon could be in for a surprise.
Whether or not Wall Street was singularly responsible for the current economic malaise is irrelevant now. It is a fact that banks made huge bets in the housing mortgage sector, endlessly securitizing, in search of non-existent yields (risk-adjusted return, I mean), disregarding every risk metric in the book. Of course, banks were not solely responsible for it; nonetheless, being the foundations and pillars of capitalist economic system, responsible behavior was expected of them. This is what I call the capitalist dharma. Leaders of these institutions should have displayed solid integrity and morals, devoid of rabid greed for profits (more securitization, more CDOs meant higher profits and the only way to compete was to be in the game and find every loophole in the regulatory system to increase profit). The fact that they settled for lesser standards is at the root of what ails the general economy today. When the lifeline of an economy—credit and liquidity—is choked, aggregate demand nosedives, companies’ layoff workers, and production activities dwindle and we get hit with a recession. Unfortunately, this is not one of those run-of-the-mill recessions; it’s a massive credit-related depression, the likes of which one experiences once in a long time. Who is responsible for this credit crisis?
I am sure most of these protesters blame the banks and I get a feeling that most would agree with that perception. While a huge section of the population suffer from this continued economic downturn, top bankers and top executives from other big corporations seem to be earning in millions; somehow, that dichotomy doesn’t sit well with those who have a hard time putting meal on the table for their families. It is futile to argue that these bonuses were part of the contract, or this is how the free market system operates (highest talents get highest rewards), or for that matter, this is how America got rich, and so on, do not fly in the face of suffering, inflicted on the masses since the economy started bleeding jobs in millions. And, it is also true that these executives are receiving big bonuses for the big profits they have generated and mostly these profits are an outcome of massive cost cutting and layoffs. So the saying goes, “privatize the profits, socialize the losses”, while millions lose livelihood, few earn millions because they let go millions? It simply doesn’t feel like justice.
It is one thing, if these executives earn their well-deserved salaries for their continued shepherding of their firms during these difficult times, but it is another if they are paid in millions for downsizing and therefore, better bottom line at the expense of ordinary employees; contracts or no contracts. Well, one may argue that that’s what companies do in recessions; but, is this an ordinary recession? If so, how is it that profits are so good and bonuses are so good? So, this recession induced by the “too big to fail” is only for those “too small to succeed” types? One cannot dismiss and just label this line of argument as “populist” socialist argument or some other “class warfare” argument; it simply feels like adharmic (unjust). When the rich and powerful start understanding the pain and suffering of the small guy, then we don’t have to hide behind the free market ethos to defend these excesses by the few. I am sure these top executives deserve bigger rewards for the kind of hard work they have done or the kind of responsibilities they shoulder, yet it serves the society better if they can feel the pulse of the majority and lower their expectations, be content with lower rewards and be more magnanimous. More than rights, it is about duties; doing the right thing for the good of the society.
I feel that we wouldn’t see unrests in societies like ours, if those who have plenty are little more understanding of those who find it so hard to rise above subsistence living despite their hard work. It is a known thing that rich don’t become rich purely because they are hard working and talented; Somewhere this society as a whole creates that opportunity for those few who were lucky enough to rise above the competition. We, as a society, suffer from survivorship bias, and tend to focus on the success stories too much; we then go on to create heroes out of these figures forever lauding their unique traits. What we ignore is the fact that thousands who fail despite having the same traits and qualities; why? Because of bad timing or ill luck or that proverbial “not being at the right place at the right time.”
So, those who make it big should be humble enough to recognize how fortunate they were; that awareness will make them stay more in-tune with the feelings of millions who hit the brick wall no matter what they try to do. It is certainly true that this world is lopsided when it comes to the distribution of material success and failure figures. There are few rich nations and many poor; there are few CEOs and most are ordinary employees; there are few rich and most are materially poor. It’s the 80/20 rule. And, the few who are lucky to be at the top get there because of confluence of factors and not just their talents and hard work. What they don’t realize is that no one remains at the top forever. Everything is cyclical in nature. Rich and strong nations become poor and weak and vice versa. It’s only a matter of time. Some timeframes are much longer than others, and that gives us this illusion of permanence of a state or condition. There are countless cases of demise of rich families and the wretched conditions of their offspring. This is no fiction.
Well, I digress. Coming back to the subject matter, we know that perception is reality. While most Wall Street workers are like most of us, working hard to earn a living, there is no denying that some at the top were responsible (Joe Cassano of AIG, Dick Fuld of Lehman are certainly up there in this list) in perpetuating this crisis to this extent. Washington was equally complicit in this. And, people have come to this conclusion that their lives have been destroyed by those few who pull the levers of power in Wall Street and Washington. Once that notion takes a life of its own, as it has shown in the past few days, it becomes a force of change.
This is what I think is going on. The joblessness and the lack of hope among multitudes will seek a symbol of power to rile up against. Disappointment, anger and lack of positive policies to alleviate the misery will help build this movement. Is this the sign of our times? Could this be the great “purging” moment in the history of developed economies? I hope this movement forces the leaders—both political and business—to rethink their behavior. A middle ground has to be reached where solid regulatory framework checks rampant greed while facilitating healthy competition; a fair tax system that brings higher revenues from the very rich in the land (this is not class warfare!); spending restraint on the part of government; reform of Medicare and social security program, should be at the forefront of national discussion. Once again, these politicians have to stop being ideologues and come to the middle. If they fail to do so, this protest will morph into more violent and ugly. When people start losing hope, especially in great numbers, that’s a recipe for a revolution. Capitalism doesn’t need a revolution. It will destroy it or at least, will inflict great damage to our balanced system and just institutions. Political leaders have committed great follies throughout history by their unwillingness to be flexible and listen to those who opposed their ideological positions. Many disastrous wars were fought because some rigid political leader did not have the intellectual honesty to seek the truth.
I hope our leaders learn from history and don’t dismiss this “Occupy Wall Street” as some frivolous protest with a short life span. It could end that way; on the other hand, this could turn into a real unrest, and grow into a force capable of destabilizing our capitalist system. And, that’s not just bad for this nation, but it’s bad for the entire world. Anarchy of global proportions will lead to violence and destruction. This may sound alarmist, but it is a pleading voice (pleading the political leaders and the business leaders to shove their ideologies and listen to those who have been hurt by their decisions) of a concerned citizen whose only motive is to see a stronger benevolent capitalist system and a stronger nation.
I think there is a genuine anger towards the big banks and their Washington power brokers. I don’t know whether it is all justified. However, those who take this lightly and ridicule (some mainstream media persons have sounded arrogant and elitist when addressing the concerns of these protesters) the whole movement as some passing phenomenon could be in for a surprise.
Whether or not Wall Street was singularly responsible for the current economic malaise is irrelevant now. It is a fact that banks made huge bets in the housing mortgage sector, endlessly securitizing, in search of non-existent yields (risk-adjusted return, I mean), disregarding every risk metric in the book. Of course, banks were not solely responsible for it; nonetheless, being the foundations and pillars of capitalist economic system, responsible behavior was expected of them. This is what I call the capitalist dharma. Leaders of these institutions should have displayed solid integrity and morals, devoid of rabid greed for profits (more securitization, more CDOs meant higher profits and the only way to compete was to be in the game and find every loophole in the regulatory system to increase profit). The fact that they settled for lesser standards is at the root of what ails the general economy today. When the lifeline of an economy—credit and liquidity—is choked, aggregate demand nosedives, companies’ layoff workers, and production activities dwindle and we get hit with a recession. Unfortunately, this is not one of those run-of-the-mill recessions; it’s a massive credit-related depression, the likes of which one experiences once in a long time. Who is responsible for this credit crisis?
I am sure most of these protesters blame the banks and I get a feeling that most would agree with that perception. While a huge section of the population suffer from this continued economic downturn, top bankers and top executives from other big corporations seem to be earning in millions; somehow, that dichotomy doesn’t sit well with those who have a hard time putting meal on the table for their families. It is futile to argue that these bonuses were part of the contract, or this is how the free market system operates (highest talents get highest rewards), or for that matter, this is how America got rich, and so on, do not fly in the face of suffering, inflicted on the masses since the economy started bleeding jobs in millions. And, it is also true that these executives are receiving big bonuses for the big profits they have generated and mostly these profits are an outcome of massive cost cutting and layoffs. So the saying goes, “privatize the profits, socialize the losses”, while millions lose livelihood, few earn millions because they let go millions? It simply doesn’t feel like justice.
It is one thing, if these executives earn their well-deserved salaries for their continued shepherding of their firms during these difficult times, but it is another if they are paid in millions for downsizing and therefore, better bottom line at the expense of ordinary employees; contracts or no contracts. Well, one may argue that that’s what companies do in recessions; but, is this an ordinary recession? If so, how is it that profits are so good and bonuses are so good? So, this recession induced by the “too big to fail” is only for those “too small to succeed” types? One cannot dismiss and just label this line of argument as “populist” socialist argument or some other “class warfare” argument; it simply feels like adharmic (unjust). When the rich and powerful start understanding the pain and suffering of the small guy, then we don’t have to hide behind the free market ethos to defend these excesses by the few. I am sure these top executives deserve bigger rewards for the kind of hard work they have done or the kind of responsibilities they shoulder, yet it serves the society better if they can feel the pulse of the majority and lower their expectations, be content with lower rewards and be more magnanimous. More than rights, it is about duties; doing the right thing for the good of the society.
I feel that we wouldn’t see unrests in societies like ours, if those who have plenty are little more understanding of those who find it so hard to rise above subsistence living despite their hard work. It is a known thing that rich don’t become rich purely because they are hard working and talented; Somewhere this society as a whole creates that opportunity for those few who were lucky enough to rise above the competition. We, as a society, suffer from survivorship bias, and tend to focus on the success stories too much; we then go on to create heroes out of these figures forever lauding their unique traits. What we ignore is the fact that thousands who fail despite having the same traits and qualities; why? Because of bad timing or ill luck or that proverbial “not being at the right place at the right time.”
So, those who make it big should be humble enough to recognize how fortunate they were; that awareness will make them stay more in-tune with the feelings of millions who hit the brick wall no matter what they try to do. It is certainly true that this world is lopsided when it comes to the distribution of material success and failure figures. There are few rich nations and many poor; there are few CEOs and most are ordinary employees; there are few rich and most are materially poor. It’s the 80/20 rule. And, the few who are lucky to be at the top get there because of confluence of factors and not just their talents and hard work. What they don’t realize is that no one remains at the top forever. Everything is cyclical in nature. Rich and strong nations become poor and weak and vice versa. It’s only a matter of time. Some timeframes are much longer than others, and that gives us this illusion of permanence of a state or condition. There are countless cases of demise of rich families and the wretched conditions of their offspring. This is no fiction.
Well, I digress. Coming back to the subject matter, we know that perception is reality. While most Wall Street workers are like most of us, working hard to earn a living, there is no denying that some at the top were responsible (Joe Cassano of AIG, Dick Fuld of Lehman are certainly up there in this list) in perpetuating this crisis to this extent. Washington was equally complicit in this. And, people have come to this conclusion that their lives have been destroyed by those few who pull the levers of power in Wall Street and Washington. Once that notion takes a life of its own, as it has shown in the past few days, it becomes a force of change.
This is what I think is going on. The joblessness and the lack of hope among multitudes will seek a symbol of power to rile up against. Disappointment, anger and lack of positive policies to alleviate the misery will help build this movement. Is this the sign of our times? Could this be the great “purging” moment in the history of developed economies? I hope this movement forces the leaders—both political and business—to rethink their behavior. A middle ground has to be reached where solid regulatory framework checks rampant greed while facilitating healthy competition; a fair tax system that brings higher revenues from the very rich in the land (this is not class warfare!); spending restraint on the part of government; reform of Medicare and social security program, should be at the forefront of national discussion. Once again, these politicians have to stop being ideologues and come to the middle. If they fail to do so, this protest will morph into more violent and ugly. When people start losing hope, especially in great numbers, that’s a recipe for a revolution. Capitalism doesn’t need a revolution. It will destroy it or at least, will inflict great damage to our balanced system and just institutions. Political leaders have committed great follies throughout history by their unwillingness to be flexible and listen to those who opposed their ideological positions. Many disastrous wars were fought because some rigid political leader did not have the intellectual honesty to seek the truth.
I hope our leaders learn from history and don’t dismiss this “Occupy Wall Street” as some frivolous protest with a short life span. It could end that way; on the other hand, this could turn into a real unrest, and grow into a force capable of destabilizing our capitalist system. And, that’s not just bad for this nation, but it’s bad for the entire world. Anarchy of global proportions will lead to violence and destruction. This may sound alarmist, but it is a pleading voice (pleading the political leaders and the business leaders to shove their ideologies and listen to those who have been hurt by their decisions) of a concerned citizen whose only motive is to see a stronger benevolent capitalist system and a stronger nation.
Wednesday, October 5, 2011
Steve Jobs, the Whole World will Miss You!
A true pillar of capitalism, a symbol of all that was good in the world of creativity.
Apple CEO, the legendary tech visionary, Steve Jobs passed away today. Despite the fact that the whole world was aware of his battle against pancreatic cancer, the news has shocked the business world. He was only 56! I don't own a single Apple product, yet I feel sad and am in a state of mourning. A true genius, Steve was a role model for all those who aspired to reach the pinnacle of technological creativity.
Here is my tribute to Steve (sent to Apple at rememberingsteve@apple.com):
The whole wide world will miss you, Steve! May your soul rest in peace.
Apple CEO, the legendary tech visionary, Steve Jobs passed away today. Despite the fact that the whole world was aware of his battle against pancreatic cancer, the news has shocked the business world. He was only 56! I don't own a single Apple product, yet I feel sad and am in a state of mourning. A true genius, Steve was a role model for all those who aspired to reach the pinnacle of technological creativity.
Here is my tribute to Steve (sent to Apple at rememberingsteve@apple.com):
There have been only few in this world who have cast such powerful spell on the entire globe by the sheer virtue of their superior knowledge about what works and what takes a life of its own...Steve Jobs, you are one of those rarest gems! I hope Apple would build a robotic "helper" for the masses and honor you by calling it "iSteve." That would be the highest tribute to your genius.
The whole wide world will miss you, Steve! May your soul rest in peace.
Tuesday, October 4, 2011
Nassim Taleb and Future of Finance MBA
I am a big fan of this man, Nicholas Nassim Taleb. Ever since I read his bestseller, "Fooled by Randomness" and subsequent masterpiece, "The Black Swan" I have paid great attention to whatever this man says about the markets. One big reason for my admiration, is the way he dismisses the so-called Wall Street "experts" and the quants and PhDs who apply "deep work in mathematics" to claim mastery over the gyrations seen in the financial markets across various asset classes (obviously not all; Taleb has his favorites). Highly irreverent, Taleb takes on the likes of Myron Scholes and Robert Merton (creators of Black-Scholes option pricing model)for relying on elegant mathematical models to predict the direction of asset prices. These two Nobel Laureates were part of Wall Street "dream team" under John Meriwether, founder of a hedge fund, Long Term Capital Management, which blew up spectacularly during the 1998 Russian Rouble crisis.
Why do I bring up Taleb, now? I happened to read an interesting article written in January 2009 in Portfolio.com; it's about the "battle of minds", the back-and-forth between Taleb and Merton. Here is the link to that article - "Taleb Vs Merton Cont." What got my attention was the way the writer concluded his article. Here is what he says:
Taleb has scant respect for those who continue to rely on Gaussian model in finance. He has derided the experts, who kept denying the possibility of housing crash and subsequent 'credit crisis', as their models kept belying the probability of a crash due to a historic wave of defaults in the subprime mortgage world. He blames this on the hapless products of business & economics schools who possess a very poor understanding of "Black Swan" events in the financial markets, and yet go on to become economists/financial analysts/business managers of institutions that manage large amounts of money; make bets without a clear understanding of tail risks. Taleb feels that business schools continue to teach finance using the same, failed financial theories such as, Black-Scholes option model, Portfolio theory, efficient market hypothesis...and hence, the future of capital management is as bleak as today. What essentially Taleb is saying, is that, the current practices simply do not prepare a money manager/asset allocator, to anticipate "tail events" and protect his portfolio. Therefore, those who entrust their hard-earned money with these managers, hoping for a healthy retirement fund, will continue to suffer, if these tail events become more frequent.
Taleb has a point. However, it is so difficult to change the status quo. Use of Gaussian model is firmly rooted in financial analysis. We use it all the time and feel good about our "risk-return" models, Sharpe ratios for risk-adjusted returns, Value at Risk (VaR), option prices based on historic volatility (and the simple assumption that price change is continuous, especially at a time when gap-ups and gap-downs are so common), efficient frontiers for polrtfolio selection etc.
Can Taleb provide a new model? I hope he works with the right people within the academia to bring about some much needed change. For a man who mocked at the Nobel committee for getting into " the habit of handing out Nobel prizes to those who "bring rigor" to the process with pseudoscience and phony mathematics" it is time to be an agent of change. The pillars of capitalism, including the financial institutions, are weakening considerably, as this snowball is only seem to be gathering momentum now; the European debt crisis is a case in point. The global financial crisis has shaken the very foundations of our system. Phony and greedy people at the top of fabled institutions, the arrogance of Ivy league finance professionals who seem to possess very little understanding of realities of this giant organic system called the "global financial markets" and the rigid academic establishment, which encourages only those who conform to the existing norms, are all the reasons why we need people like Taleb to continue to question the establishment; and, no doubt, his inimitable style gets attention.
Why do I bring up Taleb, now? I happened to read an interesting article written in January 2009 in Portfolio.com; it's about the "battle of minds", the back-and-forth between Taleb and Merton. Here is the link to that article - "Taleb Vs Merton Cont." What got my attention was the way the writer concluded his article. Here is what he says:
...The interesting thing for me about this particular academic feud, however, is that for all its viciousness, the stakes really aren't low at all. Taleb is working towards nothing less than the outright dismantling of Black-Scholes, portfolio theory, and the enormous financial edifices which have been built upon them; if he's successful, essentially all the quants on Wall Street would be out of a job...
Taleb has scant respect for those who continue to rely on Gaussian model in finance. He has derided the experts, who kept denying the possibility of housing crash and subsequent 'credit crisis', as their models kept belying the probability of a crash due to a historic wave of defaults in the subprime mortgage world. He blames this on the hapless products of business & economics schools who possess a very poor understanding of "Black Swan" events in the financial markets, and yet go on to become economists/financial analysts/business managers of institutions that manage large amounts of money; make bets without a clear understanding of tail risks. Taleb feels that business schools continue to teach finance using the same, failed financial theories such as, Black-Scholes option model, Portfolio theory, efficient market hypothesis...and hence, the future of capital management is as bleak as today. What essentially Taleb is saying, is that, the current practices simply do not prepare a money manager/asset allocator, to anticipate "tail events" and protect his portfolio. Therefore, those who entrust their hard-earned money with these managers, hoping for a healthy retirement fund, will continue to suffer, if these tail events become more frequent.
Taleb has a point. However, it is so difficult to change the status quo. Use of Gaussian model is firmly rooted in financial analysis. We use it all the time and feel good about our "risk-return" models, Sharpe ratios for risk-adjusted returns, Value at Risk (VaR), option prices based on historic volatility (and the simple assumption that price change is continuous, especially at a time when gap-ups and gap-downs are so common), efficient frontiers for polrtfolio selection etc.
Can Taleb provide a new model? I hope he works with the right people within the academia to bring about some much needed change. For a man who mocked at the Nobel committee for getting into " the habit of handing out Nobel prizes to those who "bring rigor" to the process with pseudoscience and phony mathematics" it is time to be an agent of change. The pillars of capitalism, including the financial institutions, are weakening considerably, as this snowball is only seem to be gathering momentum now; the European debt crisis is a case in point. The global financial crisis has shaken the very foundations of our system. Phony and greedy people at the top of fabled institutions, the arrogance of Ivy league finance professionals who seem to possess very little understanding of realities of this giant organic system called the "global financial markets" and the rigid academic establishment, which encourages only those who conform to the existing norms, are all the reasons why we need people like Taleb to continue to question the establishment; and, no doubt, his inimitable style gets attention.
Sunday, September 25, 2011
US Dollar on the move
As I ended my last blog on Wednesday (20th September), I was anticipating a higher move for USD across all major currencies. "Operation Twist" did not go down well with the markets. My take is, the Fed decision to sell the Short-term treasuries for LT bonds was already baked into the cake, much before it went official; instead, market was spooked by Fed's "significant risks" comment when characterizing the current state of our economy. Indeed, risks to the global economy are clearly high and slowdown in China and India, the engines of global growth, is a clear testament to the fact that things are not getting better.
So, backing USD to go higher was logical. Everytime risk sentiment takes a back seat, the major players in the financial markets start deleveraging. That's what happened. Although, I failed to short EURO (I recommended shorting Euro before Fed announcement but I never did go short, as it never hit my target of $1.38)it is worth noting that EURO lost more than 300 pips with great velocity and there just wasn't time to react. Also, the Australian Dollar (AUD) lost almost 500 pips.
Now, the question is, will the USD continue to go higher? I doubt it. Many funds and financial institutions are selling risky assets (gold and silver lost big, as margin hikes were put in place) and they are buying dollars to invest in US bonds ("go with the Fed" trade) and thus park their capital in safe assets. I think this "risk-averse" sentiment will dominate until EU takes some concrete steps in resolving Greece "default" situation and restores faith in the European banking system. Behind the scenes, I am sure, EU leaders and the major banks in Europe, are pursuading the Chinese, Japanese and all those countries with hefty foreign reserves, to invest in those banks that have significant exposure to troubled sovereign bonds. In its recent issue, The Economist, quoted that the major European banks, 38 of them, may need an infusion of $200 billion, to protect them from any possibility of Greek default. I just don't think, a mere capital infusion to "fill the hole" left by loss from sovereign debt portfolio, would do the trick; in fact, the psychological dent from a Greek default could be devastating and will ripple through the global financial system. It will be interesting to see how the world leaders manage this situation without precipitating a global crisis in confidence.
Having said all that, a mere wave of hand by Bernanke signaling another round of QE, in view of the continued crisis in the EU, would drive the risk assets again. The suddenn surge in USD buying will reverse in no time. Traders are ever on their toes, waiting for some sign of major rescue act on the part of US/EU/Asian authorities. When that happens, USD sellers will be back in full force.
These are extraordinary times in the Forex land. Those who don't follow the markets, tick by tick, can be wiped out in no time; stop-losses may help, but daily whipsaws can defeat a well-crafted trading strategy.
Be safe out there.
So, backing USD to go higher was logical. Everytime risk sentiment takes a back seat, the major players in the financial markets start deleveraging. That's what happened. Although, I failed to short EURO (I recommended shorting Euro before Fed announcement but I never did go short, as it never hit my target of $1.38)it is worth noting that EURO lost more than 300 pips with great velocity and there just wasn't time to react. Also, the Australian Dollar (AUD) lost almost 500 pips.
Now, the question is, will the USD continue to go higher? I doubt it. Many funds and financial institutions are selling risky assets (gold and silver lost big, as margin hikes were put in place) and they are buying dollars to invest in US bonds ("go with the Fed" trade) and thus park their capital in safe assets. I think this "risk-averse" sentiment will dominate until EU takes some concrete steps in resolving Greece "default" situation and restores faith in the European banking system. Behind the scenes, I am sure, EU leaders and the major banks in Europe, are pursuading the Chinese, Japanese and all those countries with hefty foreign reserves, to invest in those banks that have significant exposure to troubled sovereign bonds. In its recent issue, The Economist, quoted that the major European banks, 38 of them, may need an infusion of $200 billion, to protect them from any possibility of Greek default. I just don't think, a mere capital infusion to "fill the hole" left by loss from sovereign debt portfolio, would do the trick; in fact, the psychological dent from a Greek default could be devastating and will ripple through the global financial system. It will be interesting to see how the world leaders manage this situation without precipitating a global crisis in confidence.
Having said all that, a mere wave of hand by Bernanke signaling another round of QE, in view of the continued crisis in the EU, would drive the risk assets again. The suddenn surge in USD buying will reverse in no time. Traders are ever on their toes, waiting for some sign of major rescue act on the part of US/EU/Asian authorities. When that happens, USD sellers will be back in full force.
These are extraordinary times in the Forex land. Those who don't follow the markets, tick by tick, can be wiped out in no time; stop-losses may help, but daily whipsaws can defeat a well-crafted trading strategy.
Be safe out there.
Wednesday, September 21, 2011
Day of "Operation Twist"
It is 11:30Am on this Wednesday and markets are in "wait and see" mode. Of course, end of FOMC meeting at 2:15 entails the announcement of details of the much anticipated "Operation twist." As I understand it, this is not about new liquidity infusion and instead more of re-arrangement of the Fed balance sheet; they are expected to sell the short-term securities and buy the long-term bonds and in the process flatten the yield curve further.
Different pundits see different things happening. Some ask, "how low the 10yr yield can go?" Obviously, they are questioning the wisdom of Bernanke&co in lowering the yields in anticipation of home buyers coming back into the market, with much lower interest rates! Well, does another 25 to 50 basis point move lower matter to those who are already sinking under debt load? Moreover, in this environment one can hardly muster up his/her animal spirits and get confident about housing prices going higher anytime soon. The world is experiencing that "thousand year flood" and nature will have to take its course. Blaming Obama or for that matter all these policies is not going to do much. Simple truth is, those who were close to the beach when this tsunami struck, will face the consequences. Some policies can help to alleviate the pain for a few, but most will look back at this point in history as a "cathartic" moment. Obviously, weak and the poor suffer the most (you can include the middle class in that category now); rich can see through this phase albeit, they will suffer too.
My source of frustration is: this man-made tsunami had at least few architects behind it--leaders, policy makers, institutions etc.--and my question is, have they been made accountable for their roles while we continue to witness the piling up of human carcass, (metaphorically speaking!)? Our justice system's reach is not that far; so, we just have to wait and see whether nature delivers its Karmic justice and punishes those who built their wealth on the foundation of human misery.
That's why I don't understand all these "twists and turns" by the policy makers. They think it helps; I believe in Bernanke's good intentions. But, humans have done their job; they screwed it up. Now, nature has to cleanse the system. It is similar to what Joseph Schumpeter talked about--"gales of creative destruction." Capitalism, needs to purge itself and go through a transformation. The cronies and the corrupt have too much power for a human system to deliver justice. The justice has to come from nature and those gales of creative destruction will drive the rotten and the incompetent out; just be patient.
Back to the markets; I have no idea how markets will react. So, I have come out of my FX positions. BOE is embarking on its own QE, so GBP may stay weak; Euro still faces PIIGS issues and weak Euro economy, so EUR may continue to languish; commodity weakness affects both AUD and CAD. So, if there is no more QE from the Fed, USD may surprisingly move higher.
So, I may just short EURO if there is a spike above 1.38.
Different pundits see different things happening. Some ask, "how low the 10yr yield can go?" Obviously, they are questioning the wisdom of Bernanke&co in lowering the yields in anticipation of home buyers coming back into the market, with much lower interest rates! Well, does another 25 to 50 basis point move lower matter to those who are already sinking under debt load? Moreover, in this environment one can hardly muster up his/her animal spirits and get confident about housing prices going higher anytime soon. The world is experiencing that "thousand year flood" and nature will have to take its course. Blaming Obama or for that matter all these policies is not going to do much. Simple truth is, those who were close to the beach when this tsunami struck, will face the consequences. Some policies can help to alleviate the pain for a few, but most will look back at this point in history as a "cathartic" moment. Obviously, weak and the poor suffer the most (you can include the middle class in that category now); rich can see through this phase albeit, they will suffer too.
My source of frustration is: this man-made tsunami had at least few architects behind it--leaders, policy makers, institutions etc.--and my question is, have they been made accountable for their roles while we continue to witness the piling up of human carcass, (metaphorically speaking!)? Our justice system's reach is not that far; so, we just have to wait and see whether nature delivers its Karmic justice and punishes those who built their wealth on the foundation of human misery.
That's why I don't understand all these "twists and turns" by the policy makers. They think it helps; I believe in Bernanke's good intentions. But, humans have done their job; they screwed it up. Now, nature has to cleanse the system. It is similar to what Joseph Schumpeter talked about--"gales of creative destruction." Capitalism, needs to purge itself and go through a transformation. The cronies and the corrupt have too much power for a human system to deliver justice. The justice has to come from nature and those gales of creative destruction will drive the rotten and the incompetent out; just be patient.
Back to the markets; I have no idea how markets will react. So, I have come out of my FX positions. BOE is embarking on its own QE, so GBP may stay weak; Euro still faces PIIGS issues and weak Euro economy, so EUR may continue to languish; commodity weakness affects both AUD and CAD. So, if there is no more QE from the Fed, USD may surprisingly move higher.
So, I may just short EURO if there is a spike above 1.38.
Thursday, August 25, 2011
USD/JPY Call Playing Out
Well, two blogs ago, I had a post on going LONG on USD/JPY pair. BOJ has been trying to stem the Yen appreciation for a while now. It seems like it is finally able to move the YEN lower. Those who went LONG at 76.60 have seen an 80pip move since yesterday.
In the current market, correlations between asset classes, currency & economic outlook and many other variables, are breaking down quite frequently. JPY is usually a safe haven play and today depite all the rumors (10AM)about German debt downgrade, JPY is weakening. Gold is weak too; of course, gold is getting hammered because the 27% margin raise by CME.
Once again, this is a market for those who have nimble moves...moves that are in-tune with the headlines of the moment.
In the current market, correlations between asset classes, currency & economic outlook and many other variables, are breaking down quite frequently. JPY is usually a safe haven play and today depite all the rumors (10AM)about German debt downgrade, JPY is weakening. Gold is weak too; of course, gold is getting hammered because the 27% margin raise by CME.
Once again, this is a market for those who have nimble moves...moves that are in-tune with the headlines of the moment.
Wednesday, August 17, 2011
Swiss Franc Weakens As Predicted
On August 9th, the day US Federal Reserve decided to keep the short-term rates at the current low rate (ZIRP - Zero interest rate policy)until mid-2013, the market had a violnet reaction for a very brief period. The markets did not see the extension of easy monetary policy in that announcement, as it was expecting a new round of QE. When there was no hint of that, the market ignored the historic announcement of ZIRP with a "time-bound" element to it. For few minutes the market was extremely negative and that's when the EUR/CHF LONG opportunity presented itself. The pair reached its low of 1.0088! But, in my blog on that very same day (prior to the FED announcement) I had predicted the "imminent" SNB intervention and subsequent weakening of the CHF from 1.05 to 1.15. After a brief violence to the downside, the markets violently reversed and finished 400+ DOW points higher for the day! Safe-haven currencies got hammered, "Risk-on" trade was in full force until the end of the US session.
What I want to convey today is that, the prediction came true. EUR/CHF pair hit 1.15 yesterday. So, those who managed to stick with the call made 1000 pips in a matter of 4 days! An amazing move and opportunity to make money. Even an investment of $2,000, which gives a leverage of taking a $100,000 position (considering margin requirements, for this pair, it could have been slightly higher), and in this case EUR 100,000 would have resulted in a profit of approximately $13,500! That's almost 600% profit in 4 days!
These are extraordinary times in the financial markets and especially, the currency markets are witnessing historic fluctuations on day-to-day basis. Traders have to display a high level of agility in terms of moving with the headlines. Moreover, it's about anticipation of new information from various sources, and in this case, I was very much tuned to what was going on with SNB, as CHF got stronger across the board. I relaized that there are serious consequences to Swiss economy and its export sector, if the Swiss currency continued to get the push due to European and US problems. Swiss authorities had to send a market signal to stem the tide. It happened, as anticipated.
Market presents these opportunities and a trader has to be always ready to grab them. It's a combination of mental focus, market knowledge, agility with which the trades are made, acute awareness of risk tolerance and respect for the market wisdom. Market is always right; trader can only hop between probabilities. Trader should know how to mentally assign a probability to a trade going in his direction based on funadmentals prevailing at the time, market mood, techincal indicators and potential new information that could alter the trade dynamics. If things go against despite all calculations and analysis, then it is imperative that trader sticks to her risk parameters and gets out of that trade. Once again, MARKET IS ALWAYS RIGHT!
What I want to convey today is that, the prediction came true. EUR/CHF pair hit 1.15 yesterday. So, those who managed to stick with the call made 1000 pips in a matter of 4 days! An amazing move and opportunity to make money. Even an investment of $2,000, which gives a leverage of taking a $100,000 position (considering margin requirements, for this pair, it could have been slightly higher), and in this case EUR 100,000 would have resulted in a profit of approximately $13,500! That's almost 600% profit in 4 days!
These are extraordinary times in the financial markets and especially, the currency markets are witnessing historic fluctuations on day-to-day basis. Traders have to display a high level of agility in terms of moving with the headlines. Moreover, it's about anticipation of new information from various sources, and in this case, I was very much tuned to what was going on with SNB, as CHF got stronger across the board. I relaized that there are serious consequences to Swiss economy and its export sector, if the Swiss currency continued to get the push due to European and US problems. Swiss authorities had to send a market signal to stem the tide. It happened, as anticipated.
Market presents these opportunities and a trader has to be always ready to grab them. It's a combination of mental focus, market knowledge, agility with which the trades are made, acute awareness of risk tolerance and respect for the market wisdom. Market is always right; trader can only hop between probabilities. Trader should know how to mentally assign a probability to a trade going in his direction based on funadmentals prevailing at the time, market mood, techincal indicators and potential new information that could alter the trade dynamics. If things go against despite all calculations and analysis, then it is imperative that trader sticks to her risk parameters and gets out of that trade. Once again, MARKET IS ALWAYS RIGHT!
Thursday, August 11, 2011
Japanese Yen
I am once again intensely observing the currency markets. My blog, two days ago (8/9/2011), was about the high probability of intervention by the SNB (Swiss central bank) in the currency markets and possible appreciation of USD and EURO against the CHF (Swiss franc).That seems to be playing out today. After a brief period of "panic-driven" slaughter of all those who were SHORT against this safe haven currency (I was short too!), right after the FED rate decision (at 2:15 PM on Tuesday), during which the CHF made a historic run against the EUR to 1.00889 and I think close to 0.70 against the USD, SNB stepped in, on Wednesday, as I predicted, and has since then released several statements about how it is going to stem the appreciation of CHF in order to keep its export sector competitive. And, today, as I write here, the CHF is up more than 800 pips from its recent lows and 400 pips from the recommendation I made. News about SNB contemplating pegging the CHF to EURO is driving the current EUR and USD rally agaimst CHF.
Today, I am looking at USD/JPY pair. JPY is below 77 and that's not sitting down well with the major exporters in Japan. Just recently, at this level, BOJ had intervened, and for a short period of time JPY did depreciate; however, that was short-lived. The global economic slowdown and the European debt issues took center stage and since then JPY has rallied again. There is definitely lot of pressure on BOJ to do something about the the strength of JPY against the USD. So, I think, there will be some sort of action by the BOJ to devalue the currency.
So, here is my trade: Go LONG the USD/JPY right away; right now, the pair is at 76.60 - 76.80 area. Put a STOP LOSS at 75.50 and you could stay on this trade and take profits at 80.0.
This has a high probability of success. The reason I say that is, the safe haven JPY has not further rallied beyond 76 even under these extremely stressfull global market conditions and despite US debt downgrade by the S&P. That shows that the traders who are LONG on JPY against the USD are not inclined to add to their existing positions and any BOJ intervention will precipitate a "fast and furious" unwind of this crowded trade.
Good luck!
Today, I am looking at USD/JPY pair. JPY is below 77 and that's not sitting down well with the major exporters in Japan. Just recently, at this level, BOJ had intervened, and for a short period of time JPY did depreciate; however, that was short-lived. The global economic slowdown and the European debt issues took center stage and since then JPY has rallied again. There is definitely lot of pressure on BOJ to do something about the the strength of JPY against the USD. So, I think, there will be some sort of action by the BOJ to devalue the currency.
So, here is my trade: Go LONG the USD/JPY right away; right now, the pair is at 76.60 - 76.80 area. Put a STOP LOSS at 75.50 and you could stay on this trade and take profits at 80.0.
This has a high probability of success. The reason I say that is, the safe haven JPY has not further rallied beyond 76 even under these extremely stressfull global market conditions and despite US debt downgrade by the S&P. That shows that the traders who are LONG on JPY against the USD are not inclined to add to their existing positions and any BOJ intervention will precipitate a "fast and furious" unwind of this crowded trade.
Good luck!
Tuesday, August 9, 2011
Market Turmoil Creates Great FX Trades
Looking at the recent history of market interventions, I am almost certain that one is due sometime this week, even as early as tomorrow, if not today. The Fed meeting today will be a really important one. There are calls for concerted global intervention and that will come to fruition.
What does that mean in the FX market? Go LONG the EURO against CHF (EUR/CHF pair) if you can take a position above 1.05 (and up to 1.065) there is an excellent probability of profiting from this trade; but do it with confidence. Put a STOP LOSS at 1.04 just in case the market violently whipsaws. My market intuitioin tells me that this time the intervention on the part of global central banks will take the EUR/CHF pair all the way back to 1.15. SNB is too eager to stem the Swiss Franc appreciation while ECB and the rest may just do enough to "temporarily" prevent the EURO crisis.
I also think that Australian Dollar (AUD) will bounce from its yesterday's low as soon as oil stops going down. Establish a LONG position in AUD/USD pair above 1.00 and this will go back to 1.08 very soon. But please do have a stop loss at 0.99 because, if it does go below that the fall further down will be precipitous!
Good Luck!
What does that mean in the FX market? Go LONG the EURO against CHF (EUR/CHF pair) if you can take a position above 1.05 (and up to 1.065) there is an excellent probability of profiting from this trade; but do it with confidence. Put a STOP LOSS at 1.04 just in case the market violently whipsaws. My market intuitioin tells me that this time the intervention on the part of global central banks will take the EUR/CHF pair all the way back to 1.15. SNB is too eager to stem the Swiss Franc appreciation while ECB and the rest may just do enough to "temporarily" prevent the EURO crisis.
I also think that Australian Dollar (AUD) will bounce from its yesterday's low as soon as oil stops going down. Establish a LONG position in AUD/USD pair above 1.00 and this will go back to 1.08 very soon. But please do have a stop loss at 0.99 because, if it does go below that the fall further down will be precipitous!
Good Luck!
Monday, August 8, 2011
Dow Down 600 points! What's the reason?
S&P credit rating agency downgraded the long-term US debt by a notch just after the market closed last friday. As expected, the markets started tumbling even before the regular session started, as indicated by the Dow futures, which was down 260 points, pre-market. As the PM session took hold, Dow had a precipitous fall from down 300 to down 600 points. It was reminiscent of May 6, 2010, "flash crash."
But, oddly, the US dollar and the US treasuries were doing well! In fact, while traders sought the safe haven currencies like Swiss Franc (CHF) and Japanese Yen (JPY) across the board, USD did well against, AUD, CAD and EURO. So were the Treauries; the 10-yr yield slipped further down by 21 basis points to 2.339%. This is completely in contradiction to what should have happened after a downgrade of the Government debt. A downgrade entails higher interest rates, as investors demand higher returns commensurate with higher risk of owning a debt instrument whose potential for default is higher than before.
The reason for continued buying of US treasuries offers a great lesson for traders. While S&P downgrade spooked the markets, the fleeing investors/money mangers had to find a safe parking for billions of dollars. And, despite all the debt-related issues, US debt is still perceived to be the safest instrument out there. Until that perception is shattered, the money will still run to Uncle Sam.
Gold jumped by $65/oz today to $1700/oz. another safe haven play. EUR/CHF hit a low of 1.0615. Japanese Yen continues to appreciate against the USD despite a 200% debt-to-GDP ratio. This is all confusing, as many things look highly contradictory. But, what one must understand, at least in the short-term, is that, a trader would do well to run to gold, US treasuries, CHF, Yen, whenever there is a clear "risk-aversion" in the markets. Either you stay out of the markets or hedge your positions with the above instruments to avoid complete decimation of your account. And, "elevator down" events in the markets can turn out to be highly irrational, gripped by intense fear, a stampede of sorts, that can kill the faint hearted. Today, just like Thursday (8/4), was one of those days.
I think, more than the US downgrade, it was the Euro-zone debt issues, and the global economic slowdown--a potential "double dip"--primarily driving the markets today. In the absence of Fed's largesse through QE, and the inability of ECB to provide a "backstop" (they lack funds to stem the debt-deterioration in major economies like Italy and Spain), markets are bound to suffer further.
So, my conclusion is, QE 3 is very much on the horizon. The great market bear, Marc Faber, made a very sarcastic (I think it was sarcastic)comment last week: "Next week we will see whether Ben Bernanke is a true money printer or just an amateur." I have to concur with Marc. I think, if the market continues its slide, then QE 3 is very much the next monetary policy move from the US Federal Reserve. That means, gold will be heading toward $2,000/oz+. Equities will make a turnaround; treasuries will head down; so will the US dollar. So, brace for further loss of our buying power. Find a way to protect your dollar-based assets. It's a grave situation and sooner you plan to protect your assets, better you will be.
Good luck!
But, oddly, the US dollar and the US treasuries were doing well! In fact, while traders sought the safe haven currencies like Swiss Franc (CHF) and Japanese Yen (JPY) across the board, USD did well against, AUD, CAD and EURO. So were the Treauries; the 10-yr yield slipped further down by 21 basis points to 2.339%. This is completely in contradiction to what should have happened after a downgrade of the Government debt. A downgrade entails higher interest rates, as investors demand higher returns commensurate with higher risk of owning a debt instrument whose potential for default is higher than before.
The reason for continued buying of US treasuries offers a great lesson for traders. While S&P downgrade spooked the markets, the fleeing investors/money mangers had to find a safe parking for billions of dollars. And, despite all the debt-related issues, US debt is still perceived to be the safest instrument out there. Until that perception is shattered, the money will still run to Uncle Sam.
Gold jumped by $65/oz today to $1700/oz. another safe haven play. EUR/CHF hit a low of 1.0615. Japanese Yen continues to appreciate against the USD despite a 200% debt-to-GDP ratio. This is all confusing, as many things look highly contradictory. But, what one must understand, at least in the short-term, is that, a trader would do well to run to gold, US treasuries, CHF, Yen, whenever there is a clear "risk-aversion" in the markets. Either you stay out of the markets or hedge your positions with the above instruments to avoid complete decimation of your account. And, "elevator down" events in the markets can turn out to be highly irrational, gripped by intense fear, a stampede of sorts, that can kill the faint hearted. Today, just like Thursday (8/4), was one of those days.
I think, more than the US downgrade, it was the Euro-zone debt issues, and the global economic slowdown--a potential "double dip"--primarily driving the markets today. In the absence of Fed's largesse through QE, and the inability of ECB to provide a "backstop" (they lack funds to stem the debt-deterioration in major economies like Italy and Spain), markets are bound to suffer further.
So, my conclusion is, QE 3 is very much on the horizon. The great market bear, Marc Faber, made a very sarcastic (I think it was sarcastic)comment last week: "Next week we will see whether Ben Bernanke is a true money printer or just an amateur." I have to concur with Marc. I think, if the market continues its slide, then QE 3 is very much the next monetary policy move from the US Federal Reserve. That means, gold will be heading toward $2,000/oz+. Equities will make a turnaround; treasuries will head down; so will the US dollar. So, brace for further loss of our buying power. Find a way to protect your dollar-based assets. It's a grave situation and sooner you plan to protect your assets, better you will be.
Good luck!
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