Snippets of the day - Mon 31 Mar 09

The market yesterday saw:

- Pres Obama's warning that GM and Chrysler will have only another 60 days to prove they can be viable or face the possibility of restructuring via bankruptcy protection send stocks lower - with the Dow ending 3.2% lower

- Chrysler is made to pursue a shotgun marriage to Fiat within 30 days with the latter taking no more than a 30% equity stake in Chrysler

- Currency moves were somehow muted during the NY session after higher yielding currencies made losses of over 1% during the asian trading hours

- Even though the EZ Mar Industrial and Consumer Sentiment deteriorated sharply, marking an all time low in the EU Commission Data, and Hungary's sovereign rating was downgraded, the EURUSD recovered in the NY trading session and traded above the support of 1.31

- Needless to say, the EURUSD saw good bids today and now trades above 1.3250. One way street up

- Today, we had Japan's unemployment rate that came in worse than expected at 4.4% vs estimates of 4.2%. USDJPY too, moved one way street up, trading at least 150 pips at print

The case for USD support

In the days after the Fed announced QE more than a week ago, we saw obvious USD weakening.
Against the major currencies like the EUR, GBP and AUD the USD lost up 600 pts at its height, helped by rallying stocks. These sure make very good trading opportunities.

However, from here, I feel the trend for dollar weakening is perhaps less clear.

I'd not bet against the USD on a long term basis without looking out for clear signs what policymakers around the world will do next.

Recent strong selling of the GBP and EUR highlights the market's unwillingness to hold on to these currencies. The UK is in the midst of QE as well, and the EUR is still waiting for a breakthrough, or an implosion.

Note that Chancellor Merkel rejects the idea of a US-style stimulus package due to a huge national debt size, so I don't expect the EZ to go down this road to boost the economy. Their options are getting limited.

The idea of the Fed's QE is that as treasuries are bought from private hands namely agent banks, the economy enjoys more cash floating around, and thus forcing down the value of the USD.

However, what is observed from the TARP experience is that, money being pumped into banks stays just within the banks. Less than the desired amount is being pushed out into the rest of the economy on fear of corporate and consumer defaults.

QE this time around might suffer the same fate. As it is unclear how much money is being dumped into the system, so is USD weakness.

Furthermore, the case for USD support is that it is still, one of the safest if not the safest on a relative basis.

If true weakening of the USD were anything to go, my guess is it'll probably near the bottom of the recession when things are looking up again, and when banks will lend more freely, and when money velocity starts to head up.

Let's hope that comes sooner than later.

Against all odds

I just back from the short cruise trip today.

The tv in the room actually has got Bloomberg. I think its from the M'sian network.

The funny thing is... I found this channel more 'entertaining' than HBO or cartoon network that were on other channels.

I need a sense of humour.

The casino in the ship was sizeable.

And so were the losses of the poor folks that bought into the dream of striking it rich in there. I really do think that the dream of making your riches in the casino is bullcrap.

I stared at the way people are losing tons money while getting their heads soaked in adrenaline.

I think this is how casino visitors think -

- you start by winning some
- then thinking you could win more, you don't take your profits
- then you start to lose a little, and you get even more stuck to your seat because you think your luck is still good and you can win it back
- then you lose more.... and more and more... and you start thinking to yourself 'darn, should have taken the profits in the first ten mins I was here'
- before you know it, you lost more than you planned for

Poor folks.

The idea of winning big betting against the house in games like Blackjack, Big-Small (or 'Dai-Sai') or Baccarat is a big big fallacy.

The odds are never in the favour of the gambler. Games like that are games of randomness. And every new game is probability being set to the house's advantage again.

Because he is betting against randomness, there's no way the gambler can come out on top even if he is skillful, and especially so in the long run.

So I think a gambler will stand a better chance of winning money playing against other players like himself, who are susceptible to human personality traits like greed and fear.

Like poker.

Or if he takes only ten min casino trips.

Out on a boat

Hi friends, I'd be away until Fri where I'll be on a cruise.

Till then, good trading.

Jeremy

BlackRock and PIMCO joins in Toxic Assets Plan

Hours after the Toxic Assets Plan is announced, BlackRock, the largest traded fund manage in the US came out to say they will take part in the plan.

PIMCO, another huge fund manager too, indicated a willingness to join in.

Even without discussing further details with the government, the honchos of these companies came out to commit themselves tell you something.

They seem to have a sense of national responsibility vested on them.

The market likes the news too. BlackRock is trading higher by just under 9% and the Dow, punches above 320 pts.

Anyway, its good for the rest of us.

'Save America, save the world'.

The Hoo Haa surrounding Geithner's Toxic Assets Plan

What a boost.

The Dow is up 300 pts at print. The S&P500 is up about 4%.

And it looks like the market likes what they are hearing from Geithner on his Toxic Assets Plan that is aimed at removing bad assets from banks' balance sheets so that they will start lending again.

The plan that may cost up to USD 1 trn is actually not as complicated as it seems.

For friends who don't have the time to read up too much detail on the plan, allow me to attempt to break it down for your understanding.

1. the plan has two parts - one part deals with traditional loans (corporate and consumer loans etc) that are expected to be decline in performance due to the poorer economy and the other part, which was the bain of the whole crisis, deals with securities backed by mortgages, commercial real estate etc.

2. on the part on traditional loans - the Federal Deposit Insurance Corporation or FDIC for short will provide half the capital to private investors who want to purchase these loan assets, with the rest coming from their own coffers of course. The FDIC will also guarantee financing for the investor, if he wants to obtain it, up to 6 times the capital they have put in - this is in effect, a form of leverage.

(as these assets are more transparent, investors like pension funds and insurance companies are encouraged to take part)

3. on the part on securities backed by mortgages and commercial real estate - as many as 5 private asset managers will be given the mandate to raise private capital to buy these assets from the banks.

(I read in the FT it might take up to May '09 for choosing the asset managers so this might take more time to pan out.)

The Treasury will then match the private funds dollar for dollar and too, guarantee financing in the form of debt of up to 100% (notice this as compared to the above is substantially less leverage).

The benefits of the plan that are much touted are as below:
1. Banks' bad assets will be removed
2. The risks are now shared between private investors and the taxpayer instead of just the taxpayer
3. Efficient pricing on the assets comes as private investors are invited to price and bid for the assets - the banks benefit as well

Still confusing? I thought of an analogy for it.

Its like investing in horses, and using money from your super-rich grandfather who would love to see you own a horse farm.

Say you use your own money to invest in ponies, hoping they'd grow into strong horses and make you a return.

Then your grand-dad comes along and offers you cheap loans to buy more ponies and tells you to buy ponies from some farms that he controls.

So the ideal scenario some time down the road is that, your ponies grow up big and strong and you make money, and also you get to pay off your debts to your grandad.

It's supposed to be a win-win situation.

My GBPUSD forecast

First and foremost I want to apologize for the ugly and untidy looking charts I've pasted in my blog so far.

I'm not a naturally artistic person so I can't spruce up the charts well.

And I also can't explain concepts well using graphics and words that are slapped on them. But I guess, I might get better doing a little more of this.

Anyway this post is about a potential trade on the GBPUSD.

As we know the UK and the US are in official Quant Easing. And because the market hadn't expect the Fed to make this move last Wednesday, the market had a huge reaction and brought up the GBPUSD to break the 4 months old downward channel resistance line - see chart below.

I feel this is an over-reaction by the market (as it always does) and the pair would not have legs to carry on much further.

For a re-cap, the Bank of England announced a GBP 75 bn package whereas the US put up a USD 300 bn package of their own. A big difference eh?

Firstly, QE is not equal in the US and the UK. There was an Financial Times article Friday that says that for the US to implement a proportionally equivalent QE package, it will cost up to USD 900 bn! - GBP 75 bn is worth a fifth of the gilts market.

Further, Friday's Commodity Futures Trading Commission (CFTC) open positions report revealed that there was a net long position in the USD still, compared with the other majors. If I remember correctly, the shorts on GBP was quite substantial - now this also emphasizes the market's downward view on the sterling.

Besides, UK unemployment rate is declining drastically and home prices are still very weak. I don't see a good fundamental reason to long GBP.

Back to the chart above, the 3.5 months support turned resistance line will be a tough nut to crack. Hence, Friday's (20 Mar 09) close of 1.4444 sits just on the resistance line.

Perhaps, more upside momentum (MACD entering into +ve territory) might punch the pair high towards the 50% or even 61.8% retracement levels - see chart below.

As the GBPUSD is a notably high volatility pair, my call for the next 2 weeks (till 6 Apr) is to sell at closer to the 61.8% retracement.

My call: sell from 1.4850 - 1.4980

Stop loss: 1.5080

Take profit: 1.4080 (23.6% retracement)

ECB under pressure

With the Rambo move by the Fed to implement Quant Easing or QE, the ECB suddenly finds itself under pressure to do the same as well.

Major economies like the US and the UK are doing what they can to inject cash into money supply so as to reflate the economies and get money flowing around again.

If proven effective, the worry of deflation will be far from their minds as the excess money will find their way into the prices of goods and services.

However the ECB is standing still for the moment. The eurozone will be in danger of deflation if the they continue to take no steps to release more liquidity in a more direct way.

In a worse case scenario, prices of goods and services will come down, pulling salaries down as well. Asset prices will also fall, endangering overall economic growth in the Eurozone.

In this sense, the Eurozone appears to be behind the curve.

That saying, it is rather difficult for the EZ to do the above-mentioned for its economy. In my team meeting on Friday, my manager mentioned a couple of problems the ECB will have are pricing the many EZ nations' sovereign debt for purchase and that it does not have a central treasury like the US or UK.

On top of that, the ECB has some way to go in terms of cutting its key rate. It stands at 1.5% now. So QE, if it ever happens, will be further down the road.

Yesterday, some ECB members like Weber too, hinted at further easing. The market is pricing in a 50 bps cut at the Apr meeting.

So it'll be interesting to see if the market continues to buy more of EUR now because of the interest rate differential, or still keep to the safe haven allure of the USD albeit the fallout from QE.

USD Quantitative Easing

The market basically had a surprise when the Fed announced following its meeting that it will implement QE officially on Wednesday.

Besides using USD 300 bn to buy long term (LT) treasuries, the Fed will commit USD 700 bn more to purchase agency debt and other forms of Asset Backed Securities so as to bring down interest rates further and inject liquidity into the economy.

To do this, the Fed has to print more USD and bring it into the money supply, effectively depreciating the USD.

The results are telling, immediately the announcement, LT yields fell as investors bought treasuries in droves.

On Thursday, 30 yr mortgage rates dipped below 5%, a multi-year low.

And we in Singapore are complaining that home prices including (HDB 2.5%) interest are expensive? The median price of homes in the US is in dollar terms, the same as us ~ over 200 k.

The main impact on forex is that the USD was sold sharply as investors escaped the USD into other currencies.

EURUSD hit a high of 1.3738 for the week and the SGD followed EUR strength as usual, bringing the USDSGD pair to 1.5053 at the week's low.

GBPUSD topped close to 1.46.

On my last few postings, the EURUSD and GBPUSD had been flirting with only 1.30 and 1.40 respectively.

What a difference a week makes.

AIG's USD 165m bonus to be paid out

I like the way one of the interviewees replied when asked what did he think of AIG paying its traders and others USD 165m in bonus - he said 'off with their heads!'.

Like the St Regis fiasco that happened some time back, AIG again, stirred up furore by spending money and rewarding its executives using American taxpayers' money even though bad business decisions by these same people brought the financial giant to its knees.

The CEO calls this 'talent retention'.

Like there're plenty of competitors elsewhere they can run to?

Personally I think this is distasteful. Certainly not in a time like this should their executives be rewarded.

They took excessive risks on behalf of the company to multiply their bonuses but because their bets failed, the company became insolvent and they, get by with their already livable basic salaries.

I am a believer of capitalism, but also fair and just compensation.

Even Pres Obama almost choked on his words with anger when asked about this.

Best.

Snippets of the day Tue 17 Mar 09

-Positive day overall for trading on NY trade on Tue

-Positive for securitization market, Nissan’s USD 1.3bn TALF eligible auto ABS deal was 4-5 times oversubscribed

- Feb housing starts posted surprise 22.2% jump to 583k units vs 477k in Jan
o From extreme levels however, so take this with a pinch of salt

-Dow higher by 2.5%

-IMF revises down global growth to –0.6% from –0.5% for ’09. US to shrink –2.6%, EZ by 3.2% and Japan –5%

-FX had been rangey

-USDJPY stayed within 98 handle

-German ZEW Investor Index higher than expected
o ECB: ‘first signs of hope seen’

-EURUSD finally pushed higher to close above 1.30
o Positive short term technical indicators for the pair as follows:
§ Chaikin money flow index in +ve territory
§ MACD (short dated) touches +ve territory as well

-Spore Feb NODX fell 23.7% more or less in line with expectations, however USDSGD fell to close under 1.53 in NY trade following EUR strength

On the FOMC meeting on Wed 18 Feb 09

In the run up to the last 3 FOMC meetings, the USD was generally sold as investors pre-empted a decision by the Feb to officially move into QE or Quantitative Easing through the outright purchase of Treasuries to put cash directly into the economy.

That would release a large supply of USD into the market, thus pushing down the price of the USD.

Of course, QE did not materialise. Hence, in the following 2-3 days after the FOMC meetings, the USD had been promptly bought up again as the market sought safe haven protection.

How about the FOMC meeting ending tommorrow?

I think the same might happen because I personally believe that the Fed would as much as possible implement QE as the last resort.

Given that the US government's unconventional solutions are reaping results to some extent, leading to lower credit yields spreads and all time low 30 yr mortgage rates, there's no real need right now to implement QE.

I expect to see USD support in the near term. Especially so when huge questions marks still hang over the US automakers and banks' toxic assets.

And until at least we are sure we can see a bottom in the economy.

Snippets of the day - Mon 16 Mar 09

During the NY trading session last night, we saw continued poor economic data in the manufacturing space.

US Feb Industrial Production fell lower than expected while the March Empire Fed State Mfg Index fell to its all time low. The Dow, though closed just 7 pts lower as the market has already discounted such poor economic data results.

News that will actually move the markets these days are extraordinary news e.g. auto-makers, AIG bailouts, level of credit card defaults, CMBS related losses because the stock markets have already priced in an extreme scenario.

With regards to forex, we saw yesterday that the US TICs data showed a surprise reversal in capital flows in the US in Jan 09. There had been an outflow of USD 43 bn from the US vs a USD 34.7bn inflow in Dec 08.

For the first time in 6 months, foreigners actually sold US corporates and Americans bought foreign bonds.

Indeed, private investors sold more T-bills than they bought, ending months of USD repatriation.

The safe haven demand for the USD had been curtailed as investors have started to seek riskier assets elsewhere. Recent price movement of the USD also showed the Dollar Index failing to make new highs.

The USD will face further weakening if the above mentioned outflows continue to persist going forward.

Watch this space.

Taking stock

Though I had spent the last two weeks in Reservist, I hadn't been totally out of touch with the markets. I had my little handphone that could access Reuters via GPRS and the occasional sneaking into the camp's Recreation Room (meant for instructors) for net surfing.

Did I mention - I was trained in Reconnaissance, and I was just applying the principles of being stealthy.

Also, I managed to meet a client for dinner on one of the nights and my colleague told me the FX markets had been in a range. I noticed.

Even though the stock markets crashed and bounced up, FX surprisingly traded more cooly. The major piece of news in my mind is that the big US banks like BOA, Citi reported that the first 2 months in 2009 were profitable, reflecting that the financial sector still functions. That helped stocks (Dow) to rebound back into the 7,000 region.

But, I doubt we will see a recovery in the stock markets now. We'll have to pay attention to what the government will do to the banks' commercial real estate and sub prime assets going forward. As long as these toxic assets are around, the banks are still being prevented from lubricating the US economy.

I also noticed that GBPUSD had been pressing downwards a little more now, pushing rather strongly into sub 1.4 territory. Looks like the markets are already pricing in the effects of Quantitative Easing on part of the UK government's effort to pump up the money supply.

I'd be looking for areas of strengths to sell the pair.

Take note that the GBP has already lost close to 30% against the safer haven of the CHF this year. This would tell you how much investors want to flee from the currency.

EURUSD ended the week close to the 1.3000 mark. I guess EUR buying on part of corporations to repatriate profits drove the move.

Sell on strength.

Back from National Service

Did not enjoy NS much. Never was excited about NS, doubt I'd ever be.

Here's why:
1) seeing how inefficiently taxpayers' money is spent in the army can be quite depressing
2) due to bad logistics/ admin/ planning/ troubleshooting, I spent too much time waiting for the training or the next event to take place - or maybe I'm just not that patient
3) damn mosquitoes

But still, being me, I put in pretty good effort into the reservist training and with the rest of the guys' great effort, the unit scored the best evaluation grade.

Can't wait to get back to work.