Tuesday, December 23, 2008
“The trend is your friend” is an important trading guideline.
In 2008 we witnessed some massive bear trends in the equity and crude oil markets as well as many other freely traded commodities and currencies.
Because trends persist for long periods, a position taken with the trend will more likely be successful than one taken randomly or against the trend. Trading with the trend in a bull market means buying on dips; in a bear market, selling on rallies.
This is a good lesson to remember on why markets trend. Are we expecting some big trends in 2009? You bet we are. Look for big trends in gold, the dollar and crude oil in the new year.
By Adam Hewison
Read more under "Lesson for Professional Trader" on right colum of this blog.
Monday, December 22, 2008
Most folks believe gold has performed terribly this year. Gold's "underperformance" is unexpected, considering it normally soars when a big pile of you-know-what hits the fan.
Most folks look at gold in terms of U.S. dollars. But that doesn't give you the whole picture. Today, let's look at gold in terms of how much gasoline, cereal, bread, heating oil, hamburger, coffee, and construction materials it will buy you. Let's look at gold versus the "CRB."
The CRB Index is like the "Dow Industrials" of commodity prices. It's the world's most widely followed gauge of raw materials like oil, copper, and corn. As you can see from today's chart, when you look at gold in terms of things you actually eat, burn as fuel, or live in, gold is soaring. We stand by our claim: The bull market in gold is alive and well...! Brian Hunt's market Notes.
We're devoting an entire week to showing you some amazing gold charts...
You might have watched gold fall from a high around $1,000 to below $725 and wondered what the heck was going on. Gold is known as a "crisis hedge"... an asset that soars when stocks, bonds, and the economy are performing terribly. The confusing thing is, investors have had a lifetime of crisis thrown their way in 2008, but gold has actually declined in price, right?
Actually, wrong. Yes, gold is down more than $170 an ounce from its summer highs. But that's when you measure it in U.S. dollars. Problem is, many folks around the world measure gold in different terms. Take the 300 million Europeans who use the euro as their currency.
Today's chart is the price of gold measured in euros. As you can see, gold is strong in the eyes of a European. Currencies tend to fall when their home economies weaken... when there aren't enough jobs or when folks get into too much debt. This is what's happening in Europe. The bull market in gold is alive and well... Brian Hunt's Market Notes.
The ruble fell to the lowest level against the dollar in almost three years as Russia devalued the currency and tumbling oil prices this year battered its economy. The dollar weakened against the euro before data this week forecast to show U.S. consumer spending and durable goods orders declined.
“When Japan’s trade performance deteriorates, the yen tends to weaken,” said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc., a unit of Canada’s second- largest bank. “Japan’s growth outlook is concerning.”
The yen dropped 1.1 percent to 125.60 per euro at 9:36 a.m. in New York, from 124.22 on Dec. 19, paring its gain this year to 30 percent. The yen depreciated 0.5 percent to 89.74 per dollar from 89.31 and reached 90.23, the weakest level since Dec. 16. The yen may decline to 102 per dollar by the end of 2009, according to Osborne. The dollar weakened 0.6 percent to $1.3994 per euro from $1.3912. It slid to $1.4719 on Dec. 18, the weakest level since Sept. 25.
Bank of Japan Governor Masaaki Shirakawa said today the nation’s exports may decline further because of the yen’s strength this year and the global slowdown. Toyota Motor Corp., the world’s second-largest automaker, said it expects its first operating loss in 71 years because of plunging North American and European car sales and a surging yen.
“ I am surprised the Japanese hasn’t intervened thus far,” said Dennis Gartman, economist and editor of the Gartman Letter in Suffolk, Virginia, in an interview on Bloomberg Radio. “Intervention to weaken your currency can be very effective. There’s a great probability that the yen versus the dollar will trade at 100 to 105 over the course of the next year.”
The most volatile foreign-exchange markets since at least 1992 means currency traders will see the smallest pay cuts as the worst financial crisis since the Great Depression wipes out bonuses on Wall Street.
Sunday, December 21, 2008
3 months chart Dollar Index DX shows a slight dip to 81 while a 4 days chart shows USD strengthen against JPY at 90. If DX continues to fall but with USD rallying against the JPY, we should see a further rise in gold prices, commodities currencies and equities.
Gold is seen trading between US750 to 850 range in last 4 months.
Here's an article related to Carry Trade.
Yen Falls as Carmaker Loans Revive Confidence in Carry Trades By Ron Harui and Stanley White
Dec. 22 (Bloomberg) -- The yen fell against the euro, extending this month’s decline, as U.S. government aid to General Motors Corp. and Chrysler LLC gave investors confidence to boost holdings of higher-yielding assets funded in Japan.
The Japanese currency also dropped versus the dollar on speculation Bank of Japan Governor Masaaki Shirakawa will express concern over the yen’s gains following a record plunge in exports in November. The dollar weakened against the euro before data this week that may show U.S. consumer spending, home sales and durable goods orders fell.
“GM and Chrysler have won a reprieve for the remainder of this year,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “This is pushing the yen a little bit lower.”
The yen dropped 1.3 percent to 125.78 per euro at 1:53 p.m. in Tokyo from 124.22 on Dec. 19, paring its gain this year to 30 percent. The currency declined to 89.99 against the dollar from 89.31 late last week. It reached 90.23, the lowest level since Dec. 16. The dollar weakened to $1.3972 per euro from $1.3912. It slid to an 11-week low of $1.4719 on Dec. 18.
Investors added to so-called carry trades, in which they get funds in a country with low borrowing costs and buy assets in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency market moves erase those profits. Japan’s benchmark interest rate is 0.1 percent, compared with 2.5 percent in the 15-nation euro region, 4.25 percent in Australia and 5 percent in New Zealand.
The yen has appreciated 24 percent against the dollar this year, the most since 1987, as more than $1 trillion of credit- market losses sparked a seizure in money markets and threw the world’s largest economy into a recession.
“The bias is for the dollar to go lower,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “U.S. economic data are likely to confirm just how bad the outlook is.”
The U.S. currency has gained 4.4 percent against the euro this year, 33 percent versus the British pound and 28 percent against the Australian dollar as investors bought the greenback to flee riskier assets and repay dollar-denominated loans from lenders reining in credit.
Friday, December 19, 2008
AUD = 2.46 MYR (11% gain from lowest 2.21 on 21st Nov).
KRW = 2.69 MYR (13% gain from lowest 2.39 on 21st Nov).
Thursday, December 18, 2008
A reflection of risk aversion = cheap valuations of stocks (forced sale/liquidation).
A sure sign of risk aversion = the rush of money to US Treasuries.
A sign of definite risk aversions = the rush of money to USD and JPY.
#1: Markets will only start a genuine recovery when risk aversion subsides
#2: Risk aversion reduction will be immediately reflected in weaker USD and yen.
The fall in USD over the last two days is more due to the zero interest rate regime enacted by Federal Reserve, so that should not be a sign of risk aversion reduction.
The best guide for locating current markets' bottom:
WHEN USD and YEN BOTH STARTS TO FALL IN VALUE in a sustained pattern. It signal a willingness to move exposure into other currencies or assets, be it stock or bonds.
Dali's buying trigger:
Catalyst #1: When yen/usd rate moves back to 94, plonk down 1/3 of your funds
Catalyst #2: When the rate moves to 97, move the second portion
Catalyst #3: When the rate breaks 100, move the rest in
In essence, I think this is what Dali is saying:- both the USD and JPY must weaken (against other related currencies), but JPY must go depreciate more for "carry-trade" to take place.
In other words,
1) money flows out of US market into emerging markets (sell USD to buy emerging markets currencies and assets),
2) JPY to becomes cheap enough for fund-houses to borrow for buying into emerging markets currencies and stocks with better yields).
I have a strong tendency to agree fully with the direction Dali is pointing. I usually observe the Dollar Index but now with the indicated USD/JPY figures offered by Dali, we can now position ourselves better to seize the opportunity.
To all, Merry Christmas...!
Thursday, December 11, 2008
Instead of swapping assets in the banking system, the Fed started buying them. The Fed bought $5 billion of Freddie Mac, Fannie Mae, and Federal Home Loan Bank corporate debt. The New York Fed's website says the purchases are being "financed through the creation of additional bank reserves." The Fed has finally started to create money out of thin air.In other words, to pay for its purchases, the Fed opened new bank accounts for its commercial bank customers, struck a couple of computer keys, and filled the accounts with money. The Fed hopes the banks lend this money out. If they do, it will add credit to the marketplace... That's inflation.The idea behind this new strategy is to help homeowners refinance their debts at lower interest rates. A purchase of $5 billion is a tiny amount for the Fed, but think of it as a test. The Fed wanted to make sure the market wouldn't flip out over this new ultra-inflationary strategy.The market didn't flip out. And the strategy worked. The average rate on a 30-year fixed-rate mortgage fell from 5.97% to 5.53%... the largest weekly drop in 27 years.Now that the Fed sees how successful this strategy was, we can expect the government to continue with it. This is great news if you own investments that respond well to inflation, like gold, silver, and other commodities. First, the public is 100% sold on the idea of imminent deflation. Commodities and gold are selling at bargain prices. In the markets, it pays to bet on the underdog.
Second, there's no political resistance to inflation. The dollar is in its strongest uptrend this decade, and Treasury rates are at all-time lows. There's no reason for the government not to inflate. There's no economic penalty for running an inflationary policy. Plus, the public is demanding stimulus and bailouts right now. They're giving politicians the green light to create money.Finally, over $8 trillion is sitting on the sidelines in money market accounts and short-term Treasuries. Meanwhile, some unknown trillions have disappeared from the world's supply of assets in the credit crunch. When the supply of money and credit expand in relation to the supply of goods and services, you get inflation.The easiest way to bet on inflation is with an exchange-traded fund like GDX. It's an index of the biggest gold-mining stocks. If the stock market rallies at the same time gold rallies – which should happen when inflation hits – GDX will rise like a rocket.
Good investing- Tom Dyson, contributor to Daily Wealth.
In the currency markets, the U.S. dollar fell against most major currencies, but rose against the Japanese yen, as progress toward a $15-billion federal bailout for the nation's auto industry buoyed risk appetite among investors
If USD continues to weaken, gold and crude oil will again rise. Gold typically is seen as a hedge against inflation and may also be a storage of value against deflation. With the current destruction of wealth/value in all paper assets and deflating prices in commodity, gold will be seen as safe haven.. Watch precious metals soar...
If JPY start weakening against major currencies, we will see "carry-trade" funds buying into the equities of emerging markets. Watch all commodity currencies and Australia stocks movement...
Plan your move and you could be rewarded...
Wednesday, December 10, 2008
12 months and 3 months USD Index charts: The dollar index rally past 88 on 20th November but has since dropped to 85 today. Looks like we're going to see USD weakening (against a basket of related currencies strengthening) in next few months.. Let's see how the Ringgit and AUD move in the next few days..
CRB Reuters dropped from a high of 476 on 3rd July to a low of 215 on 10th December. It rose to 221 (1.6%) on 11th December. We will see a rally in Crude Oil..
Has anyone realised that DJIA has managed to climb almost 15% from its lowest in period of six weeks.? I know there is no reason to be rejoicing yet but the worst may be over. Governments all over the globe are intervening financially to ensure that their economies do not come to a standstill.
I am not advocating that you must buy and hold stocks now. I am saying there may be much more bad news to come but the downtrend of the markets may be limited with intervention from all agencies. Just watch how the DJIA reacts to more adverse news and response to more financial aids.
Saturday, December 6, 2008
When will the US and global economy recover from this recession? Many people think it won't be for one or two years. How will you know when the recovery has started?
Step1. This is an obvious one: watch the real estate market. Sub-prime lending is what started this recession, and that same market will start showing when recovery is imminent. Homeowners will see their home values start to go up in annual assessments. As the market stabilizes, less houses will be for sale as foreclosed homes are purchased with conforming loans. Watch for a sharp decrease in "For Sale" signs in your neighborhood.
Step2. Gas prices can be a strong indicator of recovery, but perhaps not in the way you think! Gas prices dropped 40 cents or more in September, and the price will continue to go down as the economy weakens. American's "can't afford" gasoline right now--demand has gone down and price has followed. Watch the news and gas prices. Once prices start to rise again, it is a sign the economy is growing stronger because demand for gas (and money to spend on it!) is growing as well. However, there are a lot of other factors that affect the price--bans on sale of crude oil, offshore drilling, international conflicts, etc. Watch for gas prices to rise not as a result of some external unrelated reason.
Step3. This recession started with the credit industry, so it isn't a surprise that it's an area to watch. Credit has tightened alarmingly in recent months, which mirrors our economic situation. Watch for a loosening of credit availability. Bailouts and improvements in the banking industry will eventually lead to the ability to give out more credit under less strict terms. Watch for the appearance of lower rate, more accessible credit in credit cards, mortgages, automobile, and especially unsecured loans. The easier it is to secure credit, the better the economy is doing because people are spending, spending, spending and that pumps money into the economy.
Step4. The unemployment rate is higher than 6%, and has been on the rise as employers can't afford to hire on more employees. The job market and unemployment are key indicators of economic stability. People with jobs spend money and strengthen the economy. Watch for the unemployment rate to drop instead of rise. Jobs will start to become more available as the economy starts to recovers. If the unemployment rate sharply declines, it is a sure sign that recession is coming to a soon end.
Step5. Finally, watch the global economy as the US will most likely mirror what's happening worldwide. When this all started, the US was hit by recession and the world market soon followed. In that same manner, the global economy will recover faster than America since it wasn't hit as hard as the US itself. So, watch for the market in Europe and Asia to recover and the US will be sure to follow.
"Prosperity has and always will return again" - JD Rockefeller
Friday, December 5, 2008
Good opportunities will come at some point next year and we want to be ready to take a position to make a lot of money at that time.
We may be currently trading a winner in and out on a bear rally in the year ending or on some window dressing activity. I suggest we take profit and put it back in our cash chest. If we must trade, use only 20% of our cash chest. Losing money now is foolish and we'll forgo that opportunity for better rewards next year. This is the season we need to wait for something to come along that we know is right.
In the meantime, educate ourselves about broader market trends and trading patterns so that we will be in a position to gain more the next time real opportunities does come. The fortune that comes to those of us willing to to invest time and effort in will be enormous.
Some financial experts will emerge and tell you that they can make big gains for you right now and yes, even in this market situation. I would be wary of these claims- the market is in terrible shape. The probability of losing is greater by three to one.!
You may have made some money from some dumb luck but without a consistent strategy in investment, you may have or will probably lose it. Honestly, ask yourself this question:- if you want to continue making money, what would be a good way of doing it..
A simple answer - in a market downtrend, preserve your capital in cash and wait. If you have to wait months then wait and do nothing except to observe direction of the market. Only take an investment position that aligned yourself with the broad uptrend of the market. This necessary low risk/high reward position to will put you in best position to make money.
The best way to make money is to be in a position to buy stocks near the start of the next bull market. In this manner you manage your risk to make sure you never have big losses ever again.
Jim Rogers, a former partner of George Soros the most successful hedge funds manager is quoted as saying:
"One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people - not that I'm better than most people - always have to be playing; they always have to be doing something. They make a big play and say, "Boy I am smart, I tripled my money." Then they rush out and have to do something else with that money. They can't just sit there and wait for something new to develop."
Thursday, December 4, 2008
Dedicated to my ex-colleague:
Recently I bumped into an ex-colleague who remarked how his investment in a list of unit trust funds has caused him an unrealised loss of RM100,000 on top of losses suffered at the stock market. Yes I do invest a small sum of money in the unit trust fund and my scrutiny today reveals a depreciation of 38% over a year.
Many people are losing a lot of money in this bear market. This friend is one of the many who is sitting on an enormous loss on his portfolio of stocks & unit trust funds and are confused at what he should do.
He started accumulating stocks and mutual funds units last year on the advice of some financial consultant. He had hope that the advice of "BUY & HOLD" would bear fruit but is now aware of the futility that comes with such, in a down-trodden market.
It's not a small amount. Assuming RM100,000 loss = 38%, he must have invested RM260,000 in unit trust funds alone. I don't know how much he is invested in stocks.
I don't know if it's better to to swap trust fund units to stock shares or vice versa. Or to relocate to better performing sectors, or ultra-depressed equities in the stock markets in the hope of a quicker recovery and jump in their price. In this bear market, all mutual funds prices, virtually every stock in all sectors are in decline.
- What I do know is that monetary loss is part of the game. What I do know is that when he does sell at a loss, he does not have to reinvest immediately for fear of missing out of a rally.
- What I do know is that unrealised loss (paper loss) is same loss as the loss of money in your hand or in your account. The monetary value is the same, in your trust fund, stocks or cash or account.
- What I do know is to be in cash at the moment. I begin selling since mid-May, took profits on some positions and cut losses in some. Since then I did many intraday and contra trades that yielded little. This is a hostile market that respects no fundamental or technical analysis but thrives on volatility.
- Stay away from investing (BUY & HOLD) strategy in this uncertain market. Stay away from the invisible market forces at work at the moment that seek only to confuse you. If you must, trade intraday, contra and cut losses early before it turn huge.
- What I do know is to sit on cash. Cash is going to be the best performer of the year. It's going to allow you to buy stocks, units at the near of a fresh bull market. For now I cannot see anything worth investing or buy & hold.
- Market has fallen so much that it is more difficult for people to sell their stocks and funds now. Market will favour a temporary rebound against the overall trend but it's not going to be the next bull.
- What I do know is I buy to sell. I'm not against the buy and hold strategy which has its place in a uptrend market. Knowing when to sell is the most important discipline in making money in the stock market.
They almost never advise you to take a loss when something goes against you. It is a dis-service to both the investor and themselves. They don't always have a game plan; when to sell if you buy. They are just making naive people lose money. My friend learned this the hard way.
I have no doubt my friend will recoup his losses when the economic and financial situation turns in his favour. After all he paid his dues and learnt the most important discipline in investment and trading.
The price of gold is set to rally to $2,000 per ounce next year as an improvement in the economic outlook causes fear of inflation and currency debasement, Philip Manduca, head of investment from ECU Group, told CNBC.
"Gold will be going through $1,000 very shortly in 2009, and go on to as high as $2,000 by 2010 and I'm very confident of those predictions," Manduca told "Worldwide Exchange."
The economy will show signs of a bounce in the coming months because of the amount of monetary and fiscal stimulus and improving optimism from investors and consumers, Manduca said.
"People just want to believe that it's going to come to an end someday soon, preferably tomorrow," he added.
When the state of the economy appears to have improved, investors will get "very real fears of a combination of currency debasement on the one hand and ... inflation on the other," Manduca said.
Dean Barber, founder & chief investment officer at Barber Financial Group agreed with Manduca's predictions and said the entire commodity space was set to do well next year.
Wednesday, December 3, 2008
"From an economist's standpoint this is probably one of the worst positions to be in. More worrying is that this is today a global phenomenon. From a policy response this is tricky - too much stimulus either fiscal or monetary may lead to inflationary pressures, too little may lead to a recession," Azman who is a member of the recently set up Economic Council said.Malaysia is also facing challenges in general competitiveness, especially because of its long over-dependence on cheap foreign labour.
"This is very dangerous because there will always be some country somewhere that will be cheaper, and once these countries sort out their legal and infrastructure issues, they will be more competitive. We have to be more forceful in changing the drivers to our economy," Azman said.He said Malaysia must adopt a measured approach to increase wages and productivity while keeping a watch on inflation.
He also observed a generally pessimistic sentiment and low consumer confidence and said that widespread belt tightening measures will affect the velocity of money and the domestic economy. In the current weakened global economy Azman believes that the export-based manufacturing and commodity sectors will be most affected, as global demands contract. "This in turn may affect the SMEs that rely on these sectors. At the same time, the property sector, which normally does well when wealth is created (either through earnings or stock market) and was, over the last few years fuelled by foreign buying, will also be affected," he added.
Likewise, consumption of non-necessities such as motor vehicles and some retail goods may also be adversely affected.
Tuesday, December 2, 2008
Monday, December 1, 2008
Gold has fallen 30% in 8 months from a high of USD 1002 to about USD 766 as global slump curtails comm0dity use of metals; basic and precious.
Silver plunged almost 50% in the same period from USD 20 to about USD 9 while platinum dropped 65% from USD 2300 to USD 800.
The Reuters/Jefferies CRB Index of 19 raw materials has dropped 35 percent this year. Commodities often move in the opposite direction of the U.S. currency.
Markets in the Philippines, Taiwan and South Korea also dropped.
Among major regional markets, only Singapore and mainland China rose.
ECM Libra Investment Bank Bhd economist Dr Lai Mun Chow said the currency should reverse its decline against the US dollar in the second half, but until then it was expected to trade between 3.50 and 3.60 against the greenback.
“Based on our forecast, the credit crunch in the United States would come to an end by the middle of next year and the largest economy in the world would gradually recover by then,” he said.
“As foreign funds return to Asia, we would see the substantially undervalued ringgit resuming its upward trend from 3Q09,” Lai said. His end-2009 forecast for the ringgit is 3.25 to 3.27 against the US dollar.
While most analysts expect more rate cuts in the first quarter of 2009 and a weaker ringgit as a result, Lai believed the movement of the overnight policy rate was only material to the local unit if the global foreign exchange market returned to stability.
“If the United States really slips into a very deep recession and the China economy undergoes a hard landing, the Malaysian economy will definitely not be spared the adverse effects,” Lai said.
“In order to support the ringgit, it is crucial that the central bank maintains the growth momentum of the economy and ensure that it would not slip into recession.”
The ringgit closed 0.11% lower against the US dollar at 3.6235 on Friday. Year to date, the currency has fallen 8.53%.