Hello and here is your newsletter for w/c 12th January 2008.

“Unemployment is a weapon of mass destruction.”  Dennis Kucinich

Even as stock markets around the world rallied to new highs last week and tried to look on the bright side in the middle of last week they all subsequently declined following the truly dire unemployment figures released on Friday – so much for the US economy decoupling from the global economy!  In fact the number of jobs lost last year was the most since 1945 – the second part of the Rogoff and Reinhert analysis coming through much sooner and at a higher rate – 7.2% and likely to rise even further.   Indeed job losses are rising daily elsewhere as companies either close or restructure.  German unemployment edged up to 7.6%, the first increase after almost 4 years of declines.  Spain has hit 11.3% and Canada to 6.6%, the highest in two years.

Meanwhile central banks are continuing to react in the only way they know – ie by cutting rates.  Indonesia down 50 basis points to 8.75%, South Korea, Taiwan and the UK trimmed yet another 50 off their targets to record lows at 2.50% for Korea and 1.50% for the UK – the lowest since the Bank of England was established back in 1694.

On the other hand other markets actually did quite well and appear to be contradicting the overall economic trend.   Our friend crude oil soared from a low of 32.40 on December 18th to a high of 50.47 last Tuesday – a gain of 62.75%, in just 3 weeks.  By Friday, just three days later it was back down to 39.38, a decline of almost 22%.  This, according to some market commentators who maintain that any price move above 20% is tantamount to a bull or bear market, means that crude oil has been in 2 bear markets and one bull market in less than one month!   Much more likely it has been reacting to the situation in the Middle East.  However, in the short term oil will go lower as demand continues to decrease but it will become more expensive.  Indeed bidding for oil storage is up, especially if you can make 20 – 25% (or more) in a few months.  At least 25 supertankers have been leased to store oil and I’ve read that at least a further 10 are being sought..   Plus of course we have the “China is Consuming the World” theory” – see below for details.

Other commodities are also rallying despite the global doom and gloom.  This extract from the Times Online  “The Dragon is Blowing Commodity Bubbles: by Leo Lewis” explains this phenomenon and serves both as an opportunity for short term traders but also as a warning for longer term investors as I do not believe the commodity supercycle is quite ready for liftoff.

“Yesterday, after three consecutive sessions of hot-blooded, limit-hitting exuberance, trading in Shanghai rubber futures was suspended and given the chance to simmer down. Dealers simply shrugged and made a feverish lunge for Tokyo rubber futures instead.

It was not supposed to be like this. Everyone has seen the doom-laden pictures by now – the trade fleets at anchor, the silent pit-heads and the stone-cold blast furnaces – but risk capital seems to have spotted something more enticing: six vast holes in the ground and the contents of a Chinese fridge.

Accordingly, dozens of other bullish little oddities have begun surfacing in what were supposed to be dread-infested markets. In Seoul, shares in the country’s two largest fisheries lurched around 8 per cent higher yesterday, because a woman died of bird flu in Beijing and a panicky cull of poultry may be in the offing.

In Kuala Lumpur, plantation owners are celebrating a flying start to the New Year after the prospect of widespread frying drove an extended rally in palm oil. South American soy bean farmers are expecting weekly orders to double from normal levels. Energy traders in Singapore are beginning to mutter quietly about a solid floor on crude oil prices.

Playing in the background to all of this is a seductive, hypnotising ode: The hunger pangs of the Dragon.

As tunes go, this is a siren-call with monstrously good form. Few bubble-inflating puffs of broker-patter have moved so many markets by so much and in such a short space of time as the great “China eats the world” theory. Three years ago, when this argument was in its most impressive stage of ascendancy, it could be attached to nearly every call. Given all the capital which, at the time, needed somewhere to go, the line was guaranteed an attentive audience. The following sentence could be adapted for purpose: “Quake with fear, because the Chinese are drinking/eating/building/burning/stir-frying/smelting ever more copper/concrete/indium/phosphorus/condominiums/steel/pork/milk/corn – and will continue to do so for five years/a decade/fifty years/until the world runs out completely.”

Endless charts could be produced showing Chinese hard and soft commodity consumption doubling over the previous decade and China’s relative proportion of total global consumption soaring with it. Beijing itself was talking with bullet-proof confidence about the millions of people it had lifted from poverty, and it was hard not to be convinced that the charts would simply continue northwards.

That view took a bit of a breather as the global economy drooped, but now, far, far sooner than expected, the “China eats the world” theory has returned to markets and begun playing its old mind tricks once again.

There is a subtle difference this time, though: in a year where nothing can be reasonably expected to boom the appetite argument rests on the sense that Beijing is exploiting both its relatively low debt position and the immense recent plunges in commodity prices to cheaply stockpile resources for the future – a move that analysts agree makes eminent good sense both for China, and for any big companies out there with enough cash to take similar advantage from the situation. For a nation that has pinned its hopes for economic stimulus on multi-billion dollar infrastructure projects, the state has a clear interest in securing the raw materials at their current knock-down prices. The Chinese leadership has also made little secret of its concerns about preserving social stability as the mighty manufacturing growth engine sputters. If the opportunity is there, state purchases of grains, metals, energy and anything else with inherent price volatility are a natural buffer for a state to establish against future public unrest.

To help things along, China’s actual intentions remain tantalisingly vague. Energy analysts in London believe that China is currently looking to fill six newly-built strategic petroleum reserves dotted around the country with a view to securing a stockpile of some 250 million barrels of crude. Agricultural commodity traders believe that the state is looking to replenish its grain and soybean reserves – depleted after years of draw-down, while metal traders have heard that China is planning secure stocks of a variety of minerals from aluminium and copper to nickel and zinc.

Unfortunately, all the recent price spikes based on this have the clammy feel of a sucker’s rally. Compared with its former gluttony, the Dragon is scarcely more than peckish: look behind the China voracity theory this time, and it is riddled with flaws. Those crude oil storage facilities may indeed be deep and empty, but even if you assume that the job of filling them adds 100,000 barrels to overall daily Chinese imports of 8 million barrels, the practical impact on global demand is negligible. It is certainly no counterweight to a global plunge in demand measured in the tens of millions of barrels.

Similarly with metals, no amount of state buying – even in the form of offering liquidity to local smelters – is going to compensate for the sort of drop-off in industrial production and manufacturing experienced over the last couple of months. Even the promise of massive infrastructure projects implied by Beijing’s $580 billion stimulus package will affect only about 16 per cent of the economy, and a state think tank said yesterday that the country’s fixed-asset investment would decelerate in 2009 despite all those new spending plans.

Even the more literal image of China eating the world may fade for at least another year or two until the factories start whirring again. The prices of edible oils and other foods are now performing strongly ahead of the Lunar New Year holidays, but it takes a considerable leap of faith to imagine that Chinese demand for meat, dairy products and cooking oils will be back at global larder-sapping levels come mid-February. “

Trading Tip:  When trading commodities, especially oil and gold one of the most important points to understand is the issue known as “contango” and its counterparty “backwardation”.  If we look at contango first we can see that a dollar denominated gold futures contract will almost always be priced at a different level to the spot market price of gold in dollars. This difference has nothing to do with the way the markets work, but simply reflects the different costs of borrowing dollars and gold from the date of buying to the date of the settlement of the futures contract.  In simple terms, if gold is cheaper to borrow than US dollars, which is generally the case, then the spot market price will be below the futures price. This difference between the two, is referred to as a contango, which will gradually unwind as the contract reaches expiry. The opposite of  contango is “backwardation” which occurs when the spot market price is above the futures price.  So while this is all very interesting, what is the significance to us as traders? In simple terms gold traders use this information to identify turning points in market conditions.

Gold has recently entered  backwardation for the first time since 1999 which is unusual, since gold (unlike other commodities) rarely enters this condition.  In general this only occurs when the markets fear a collapse in the US currency, and/or the market is concerned about counterparties making good on their promise to deliver gold..  Either way the price of gold is likely to increase based on this hypothesis.  The main difference with gold, as opposed to other commodities, is that a period of backwardation is rare, and therefore should be taken seriously in trading in the gold futures market. Whilst nothing can ever be guaranteed to work 100% of the time in trading, this is certainly one of those indicators that professional traders will watch with due care and attention!

You will be able to read more about gold and gold trading on my new site due for launch later this week.

Good luck and good trading.

Regards.

Hello and welcome to your newsletter for w/c 19th January 2009

“Ego: The Fallacy whereby a goose thinks he’s a swan”

Not only did attendees at last week’s World Economic Forum in Davos have to endure abuse and ingratitude from an eclectic mix of politicians and commentators, including Vladimir Putin and Chinese premier Wen Jiabao they also had to suffer the added insult of there being insufficient stocks of the Chateau Petrus 71 – a major oversight on the part of the Sommelier!    A regular reader of this newsletter has kindly sent me a link to an article in the International Herald Tribune which asks the question of whether we would be in this mess if women had been running Wall Street!

Meanwhile in the real world equity indices continued to hover nervously on key support levels.  In the Far East and Pacific Rim, the Australian All Ordinaries bottomed at 3300 on January 23 – a retest of the 3201 level of November 21 and even though it rallied back towards 3500 a look at the chart does not given us any cause for optimism as moving averages are pointing towards further bearish moves.  There are also some key figures out this week in Australia.  On Tuesday we have the trade balance figures, Cash Rate and RBA Rate Statement, all numbers which can dramatically move the markets.  This is followed by Building Approvals and Retail Sales on Wednesday.  Finally on Friday we have the Bank of Australia monetary policy statement, which is eagerly awaited by traders and investors as it is the principle way in which the RBA communicates with the markets and often provides clues as to future monetary policy and broad economic outlook.

Although the Hang Seng was closed for most of last week for Chinese New Year it rallied on Thursday to 13,560 but again it is too soon to judge whether this is likely to continue in the short term.

Japan’s Nikkei bottomed out on 26th January at 7671, a retest of its October and November lows of 6995 and 7406 respectively.  By Thursday, it too was up to 8305 before settling back to close just below 8000.   Japanese data has been truly dire: unemployment has soared suddenly to 4.4% (the highest since December 2005), Industrial Production has dropped 20.6%,  Vehicle Production -25.2% and Household Spending shrinking 4.6% year on year – By the end of Q4 2008 the Nikkei had lost 39% of its value and returned to levels not seen since 1982.  Although bearish momentum has eased since the drop from the October 2008 9600 level we can expect some nervous and erratic testing of the 8000 mark and we may even see a fall down as far as 7000.

In Europe, the 23rd January was the most significant date for the Netherlands AEX, German Dax and FTSE 100.  AEX bottomed at 227.53, Dax at 4067 and FTSE at 4046.  While all three indices bounced off these lows momentum did not extend beyond Thursday and by Friday they had all started to retreat.   This is hardly surprising given the slew of dreadful data coming through on a daily basis.  Eurozone unemployment is now up at 8% with more layoffs being announced across all industries.  Economic data out later this week include manufacturing PMI (Purchasing Managers’ Index) for various European counties, German December Retail Sales, UK Construction PMI and January Services PMI will all add to the bearish tone for these indices.  In the UK we can also expect interest rates to be cut by 50 basis points to 1%.

Interest rate cuts continued last week: 50 basis points in the Phillipines to 5%, 75 in Poland to 4.25%, 75 from Israel to a record low of 1%, and 150 from New Zealand to a record low of 3.5%.    In the forex market we now have the almost inexorable move towards zero by all the central banks of the G7 as ZIRP is no longer the sole preserve of the Bank of Japan.   US rates are 0.25%, UK will move to 1% later this week and the ECB moving to 2% by next month the question is now what rates of interest must be paid by different debtors for different maturities.   You will often hear mention of the “yield curve” which is used by market analysts and investors to analyze both current and future market conditions as it can be an indicator of future interest rates and whether an economy is expanding or contracting.

The yield curve is a graph that plots the relationship between yields to maturity and time to maturity for a group of bonds.  Although virtually any group of bonds or other fixed rate securities that come from the same asset class and share the same credit quality can be plotted on a yield curve, the term is usually taken to refer to US Treasuries.   It is the slope of the yield curve which can provide us with the information we are looking for.  There are typically three types of slope:  normal, flat and inverted.

A normal yield or “positive yield curve” is one where longer term bonds pay more than shorter ones thereby giving the curve an upward slope.  The market takes the view that investors should expect more compensation for greater risk and for investing for a longer time.  A normal yield curve tells us that investors believe the Federal Reserve may have to raise interest rates in the future because the economy is expanding and therefore can precede an economic upturn.

A flat curve is one where there is little difference between short term and long term rates for bonds of the same credit quality.  In other words the investor does not gain any extra benefit from holding the longer term security.  For example a flat yield curve on a US Treasury would be one in which the yield on a two year bond is 5% and the yield on a 30 year is 5.1%.  A flat yield curve is taken as an indicator that the Fed is going to be cutting rates in order to stimulate growth because of an economic slowdown.

An inverted yield curve is the rarest of the three and is considered to be a predictor of economic recession.  Partial inversion can occur when only some of the short term Treasuries (five to 10 years) have higher yields than the 30 year Treasuries.  An inverted yield curve is sometimes referred to as a “negative yield curve”.  Historically inversions of the yield curve have preceded many US recessions.  An inverse yield curve predicts lower interest rates in the future as longer term bonds are being demanded, sending the yields down.  Therefore an inverted yield curve is often a sign that the economy is in, or is headed for, a recession.   With hindsight our current problems can actually be traced back to December 2007!  However, as  has been mentioned in previous newsletters not only are we facing a global slowdown/recession/depression but we still have a massive banking crisis which shows little or no sign of wanting to go away.

The latest thinking on the banking crisis is the creation by governments, central bankers and/or regulators of a “bad” or “zombie” bank to house all the toxic debt.  But as Bill Bonner has pointed out why stop at a “bad bank”, why not create a “super baaaddd bank” where all our mistakes could be uploaded – writers their bad novels, businessmen their mistakes and people their bad marriages.    Humour aside the one major flaw in this argument is that it lets the bankers off the hook.  If the cost of any mistake is reduced people will simply keep making them in the future.

As a backdrop to falling indices and continued banking problems both gold and silver rallied strongly last week, with gold breaking through $900 and still very bullish.  However, the rise in the price of gold did not coincide with a fall in the US dollar.  Indeed this inverse correlation has temporarily been suspended.  As gold has risen in the value the euro has fallen and the dollar strengthened.  Such a divergence is usually short term and in the question is not if and when the negative correlation returns but whether it is gold or the dollar that will decline.

Trading Tip:  One of the most popular aphorisms in trading and investing is “let the trend be your friend”.   However, what the experts fail to tell you that identifying, let alone trading with a trend is one of the most difficult aspects of trading and investing.  With hindsight it is always easy to spot the trend on a chart and calculate just how much we would have made had we opened our position at the right time and right price.   However, there is a way in which it is possible to try and find the beginning (and end) of a major trend and that is by understanding and using the Commitment of Traders data or COT report.  My own site http://www.cot-report.com is currently being upgraded and is to be re-launched with new content and charts to try and help traders and investors find these elusive turning points.

Most traders and investors are completely baffled by COT data, not least because it can be interpreted in a number of different ways.  The two biggest groups of players are the Commercials and Non Commercials (sometimes called Large Traders or Speculators).  There is a third group, small speculators who tend to get ignored because a) they are usually wrong and b) their positions are too small to be of any significance.  Understanding how these two groups operate and relate is the key to a successful interpretation of the numbers.   The site should be ready by the end of this week.

In the meantime for those of you trading currency, gold, silver and oil there are now daily posts for these on a number of sites:  http://www.currency-trading-forex.com  http://www.euro-vs-dollar.com, http://www.euro-to-dollar.com,http://www.pounds-to-dollars.com, http://usd-to-cad.com, http://euros-to-pounds.com, http://www.prices-oil.org, http://www.spot-gold-price.org/ and http://www.spot-silver.com

Good luck and good trading.

Regards.

Hello and welcome to your newsletter for w/c 2nd February 2009

“Ego: The Fallacy whereby a goose thinks he’s a swan”

Not only did attendees at last week’s World Economic Forum in Davos have to endure abuse and ingratitude from an eclectic mix of politicians and commentators, including Vladimir Putin and Chinese premier Wen Jiabao they also had to suffer the added insult of there being insufficient stocks of the Chateau Petrus 71 – a major oversight on the part of the Sommelier!    A regular reader of this newsletter has kindly sent me a link to an article in the International Herald Tribune which asks the question of whether we would be in this mess if women had been running Wall Street!

Meanwhile in the real world equity indices continued to hover nervously on key support levels.  In the Far East and Pacific Rim, the Australian All Ordinaries bottomed at 3300 on January 23 – a retest of the 3201 level of November 21 and even though it rallied back towards 3500 a look at the chart does not given us any cause for optimism as moving averages are pointing towards further bearish moves.  There are also some key figures out this week in Australia.  On Tuesday we have the trade balance figures, Cash Rate and RBA Rate Statement, all numbers which can dramatically move the markets.  This is followed by Building Approvals and Retail Sales on Wednesday.  Finally on Friday we have the Bank of Australia monetary policy statement, which is eagerly awaited by traders and investors as it is the principle way in which the RBA communicates with the markets and often provides clues as to future monetary policy and broad economic outlook.

Although the Hang Seng was closed for most of last week for Chinese New Year it rallied on Thursday to 13,560 but again it is too soon to judge whether this is likely to continue in the short term.

Japan’s Nikkei bottomed out on 26th January at 7671, a retest of its October and November lows of 6995 and 7406 respectively.  By Thursday, it too was up to 8305 before settling back to close just below 8000.   Japanese data has been truly dire: unemployment has soared suddenly to 4.4% (the highest since December 2005), Industrial Production has dropped 20.6%,  Vehicle Production -25.2% and Household Spending shrinking 4.6% year on year – By the end of Q4 2008 the Nikkei had lost 39% of its value and returned to levels not seen since 1982.  Although bearish momentum has eased since the drop from the October 2008 9600 level we can expect some nervous and erratic testing of the 8000 mark and we may even see a fall down as far as 7000.

In Europe, the 23rd January was the most significant date for the Netherlands AEX, German Dax and FTSE 100.  AEX bottomed at 227.53, Dax at 4067 and FTSE at 4046.  While all three indices bounced off these lows momentum did not extend beyond Thursday and by Friday they had all started to retreat.   This is hardly surprising given the slew of dreadful data coming through on a daily basis.  Eurozone unemployment is now up at 8% with more layoffs being announced across all industries.  Economic data out later this week include manufacturing PMI (Purchasing Managers’ Index) for various European counties, German December Retail Sales, UK Construction PMI and January Services PMI will all add to the bearish tone for these indices.  In the UK we can also expect interest rates to be cut by 50 basis points to 1%.

Interest rate cuts continued last week: 50 basis points in the Phillipines to 5%, 75 in Poland to 4.25%, 75 from Israel to a record low of 1%, and 150 from New Zealand to a record low of 3.5%.    In the forex market we now have the almost inexorable move towards zero by all the central banks of the G7 as ZIRP is no longer the sole preserve of the Bank of Japan.   US rates are 0.25%, UK will move to 1% later this week and the ECB moving to 2% by next month the question is now what rates of interest must be paid by different debtors for different maturities.   You will often hear mention of the “yield curve” which is used by market analysts and investors to analyze both current and future market conditions as it can be an indicator of future interest rates and whether an economy is expanding or contracting.

The yield curve is a graph that plots the relationship between yields to maturity and time to maturity for a group of bonds.  Although virtually any group of bonds or other fixed rate securities that come from the same asset class and share the same credit quality can be plotted on a yield curve, the term is usually taken to refer to US Treasuries.   It is the slope of the yield curve which can provide us with the information we are looking for.  There are typically three types of slope:  normal, flat and inverted.

A normal yield or “positive yield curve” is one where longer term bonds pay more than shorter ones thereby giving the curve an upward slope.  The market takes the view that investors should expect more compensation for greater risk and for investing for a longer time.  A normal yield curve tells us that investors believe the Federal Reserve may have to raise interest rates in the future because the economy is expanding and therefore can precede an economic upturn.

A flat curve is one where there is little difference between short term and long term rates for bonds of the same credit quality.  In other words the investor does not gain any extra benefit from holding the longer term security.  For example a flat yield curve on a US Treasury would be one in which the yield on a two year bond is 5% and the yield on a 30 year is 5.1%.  A flat yield curve is taken as an indicator that the Fed is going to be cutting rates in order to stimulate growth because of an economic slowdown.

An inverted yield curve is the rarest of the three and is considered to be a predictor of economic recession.  Partial inversion can occur when only some of the short term Treasuries (five to 10 years) have higher yields than the 30 year Treasuries.  An inverted yield curve is sometimes referred to as a “negative yield curve”.  Historically inversions of the yield curve have preceded many US recessions.  An inverse yield curve predicts lower interest rates in the future as longer term bonds are being demanded, sending the yields down.  Therefore an inverted yield curve is often a sign that the economy is in, or is headed for, a recession.   With hindsight our current problems can actually be traced back to December 2007!  However, as  has been mentioned in previous newsletters not only are we facing a global slowdown/recession/depression but we still have a massive banking crisis which shows little or no sign of wanting to go away.

The latest thinking on the banking crisis is the creation by governments, central bankers and/or regulators of a “bad” or “zombie” bank to house all the toxic debt.  But as Bill Bonner has pointed out why stop at a “bad bank”, why not create a “super baaaddd bank” where all our mistakes could be uploaded – writers their bad novels, businessmen their mistakes and people their bad marriages.    Humour aside the one major flaw in this argument is that it lets the bankers off the hook.  If the cost of any mistake is reduced people will simply keep making them in the future.

As a backdrop to falling indices and continued banking problems both gold and silver rallied strongly last week, with gold breaking through $900 and still very bullish.  However, the rise in the price of gold did not coincide with a fall in the US dollar.  Indeed this inverse correlation has temporarily been suspended.  As gold has risen in the value the euro has fallen and the dollar strengthened.  Such a divergence is usually short term and in the question is not if and when the negative correlation returns but whether it is gold or the dollar that will decline.

Trading Tip:  One of the most popular aphorisms in trading and investing is “let the trend be your friend”.   However, what the experts fail to tell you that identifying, let alone trading with a trend is one of the most difficult aspects of trading and investing.  With hindsight it is always easy to spot the trend on a chart and calculate just how much we would have made had we opened our position at the right time and right price.   However, there is a way in which it is possible to try and find the beginning (and end) of a major trend and that is by understanding and using the Commitment of Traders data or COT report.  My own site http://www.cot-report.com is currently being upgraded and is to be re-launched with new content and charts to try and help traders and investors find these elusive turning points.

Most traders and investors are completely baffled by COT data, not least because it can be interpreted in a number of different ways.  The two biggest groups of players are the Commercials and Non Commercials (sometimes called Large Traders or Speculators).  There is a third group, small speculators who tend to get ignored because a) they are usually wrong and b) their positions are too small to be of any significance.  Understanding how these two groups operate and relate is the key to a successful interpretation of the numbers.   The site should be ready by the end of this week.

In the meantime for those of you trading currency, gold, silver and oil there are now daily posts for these on a number of sites:  http://www.currency-trading-forex.com  http://www.euro-vs-dollar.com, http://www.euro-to-dollar.com,http://www.pounds-to-dollars.com, http://usd-to-cad.com, http://euros-to-pounds.com, http://www.prices-oil.org, http://www.spot-gold-price.org/ and http://www.spot-silver.com

Good luck and good trading.

Regards.