The Case For Dollar Strength

The Equity Markets are trying to find a base. Agreed. The Dollar is getting bought so that Trade Desks can buy US Treasuries. Agreed. The 10 Year Treasury Note is going higher, the 10 year Yield is hitting all-time lows. Agreed. Trade Desks are not paid to sit in Cash. "Agreed". There could be another Rate Cut coming on the 30th from the Fed. "Agreed". That will flood more Treasury Notes into the Market. "Agreed". Reducing the 10 year Yield. "Agreed". So Trade Desks will have to buy Equities to get a return over 3.4% Treasury Yield. "Agreed". OR, go Long the Higher Yielding Currency Pairs to earn Swap/Overnight Interest….."Ahhhh, Agreed". Aussie, Kiwi, Pound, Euro, they all pay out Interest to hold them Long. Sell the Yen as well then?….."Agreed". The trigger to all of this? The US Equities closing in the positive.

Mostly agreed. Another source points out that the sp500 goes up yields go up, 10 year currently above its 3.6 yield resistance from a week ago, now around 3.8 yield. These same sources are saying that this rally will be short lived, we'll see, if they are correct, then we could see these 3.4% yields soon, and selling the USD/CHF rally isn't out of the question. Gold at $750 without the Euro following these losses also, reason to believe that the Euro holders are selling their gold assets, since even there is a rate cut of .25%, they figure that will be the end of the rate cuts and we could see an inverse relationship of EUR/USD view of the 2007 unless the Eurozone is determined to keep the differentials at the same levels for the foreseeable future. But anything above 1.6 appears out of the question.

This is the part of the above article that was cut-off.



Previous Analysis from January;
Looking for the Technical Confirmation of USD Strength this time around is easier when we follow a pattern. Below covers what we look for in the Daily Charts. It shows what we saw back then, all we are missing in the current set-up is the surge in Volume (Institutional Market Participation) across these Markets. Without the Volume spike on the Daily Chart, and without the Swing Point Candle, it may be that right now is the time that things will follow through. We do however have a Trade Plan, and know what to monitor.

Just take a look at what we had previously, and when you see that set-up on the daily Chart of these major Pairs you will know that very likely the Worm has Turned. As Traders we all follow the law of probability in that what has happened before will be repeated again, that is what Technical analysis is all about. This is what happened back then, just look at the moves;

Posted in FF 01/23/08

"01/23/08 Pivotal Times

The US Session leads into what may be a pivotal time of trade. Equities lower leads to a move to Bonds, that in turn reduces the Yield paid on the Bonds, a reducing Yield creates a question of where else can money be put to appreciate, so a move back to Equities takes place. The Circle usually evolves over a period of 3 months; it started in October of 2007….

Have we found a bottom? The signals will come on the Daily Charts by Volume increases that are far above the norm, on a day that recent lows are tested and fail. A Blow-out Bottom cannot be disguised, it is a signal that the Institutions cannot hide, and gives an idea that the Distribution could be coming to an end. Traders saw it on the Currency Pairs yesterday, it may be forming on the Equities today;

Volume, the purest read on Supply and Demand. Volume and Price Point Reversal, creates a Swing Point. It may be happening right in front of our eyes, lets not fall asleep at the wheel here.

http://www.thelfb.com/wp-content/upl...590_x_471).jpg

The Currency Pairs have given a signal, now for the US Equities…The move lower has come on them, on good Volume, but not Blow-Out Volume.

The Equity Markets are trying to find a base. Agreed. The Dollar is getting bought so that Trade Desks can buy US Treasuries. Agreed. The 10 Year Treasury Note is going higher, the 10 year Yield is hitting all-time lows. Agreed. Trade Desks are not paid to sit in Cash. "Agreed". There could be another Rate Cut coming on the 30th from the Fed. "Agreed". That will flood more Treasury Notes into the Market. "Agreed". Reducing the 10 year Yield. "Agreed". So Trade Desks will have to buy Equities to get a return over 3.4% Treasury Yield. "Agreed". OR, go Long the Higher Yielding Currency Pairs to earn Swap/Overnight Interest….."Ahhhh, Agreed". Aussie, Kiwi, Pound, Euro, they all pay out Interest to hold them Long. Sell the Yen as well then?….."Agreed". The trigger to all of this? The US Equities closing in the positive."


04/26/08: Current Update. The analysis that we had then created over 3000 pips in these four pairs; spiking candles and volume surges on the Daily Charts, watch out for them when looking to buy the USD to hold for more than just a few days of Bounces.

Jack
TheLFB Team

Thought the following WASHINGTON INDEPENDENT article might make for an interesting read at least in the context of the USD discussion and the Blow-Out-Bottom charts of January22/23, 2008 as posted by LFB.

If remembered correctly it seems that the market turns at January 22/23 for US index, bond and currency futures started just about 10 minutes prior to the London open (2:50AM ET January 22) and looked like coordinated clockwork execution, or at the least a lot more than just coincidence.

It was also at about 8 or 8:30 AM ET January 22 that the FED came with the unscheduled inter-meeting Fed Funds and Discount rate cuts of 75bp.

The question of the unusual price turns across the futures complexes at virtually the same time 10 minutes prior to the London open and the FED announcement about 6 hours later was raised.

As someone relatively inexperienced as a trader I was really trying to put some perspective to the price-coincidence I had witnessed, as opposed to promoting some conspiracy theory.

Joseph Trevisani gave what I thought was a very insightful reply; "The problem with such a coincidence is that you can never prove there was no collusion, but I do not believe it."

Here is the article for anyone interested in reading it:

The Plunge Protection Team
By Kevin Phillips
The Washington Independent

Friday 25 April 2008

Some people foolishly think that Washington's recent high-profile effort to steer, subsidize and protect the American financial sector is the beginning of something new - a revolutionary development.

It isn't. Consider that the President's Working Group on Financial Markets - nicknamed "the Plunge Protection Team" by The Washington Post in 1997 quietly observed its 20th birthday on Mar. 18.

"Quietly," in fact, is an understatement. "Semi-secretly" would be more like it. The Working Group, or PPT, is much-pondered but reclusive group that has declined to submit to the federal Freedom of Information Act or to testify in detail before Congress about its activities. This is true even though its current chief, Treasury Secretary Henry M. Paulson Jr. - Federal Reserve Board Chairman Ben Bernanke is another prominent member - made no secret of revving up its operations after he took took over at Treasury in 2006.

The curious reader will wonder: Just what does the PPT do?

Right now, Congress ought to able to pursue this basic question: Is the PPT a kind of committee for the extra-legal coordination, manipulation and subsidization of financial institutions and markets? Has it been stepping in when free-market forces have become too perilous to profits and asset values - in financial crisis years like 1998, 2001 and 2007. Has Washington decided to protect the financial sector more than any other element of the U.S. economy?

Over the last decade or so, the Treasury Dept. and the Fed have both developed something of a scofflaw attitude toward strict interpretation of federal statutes and regulations. For example, both winked in the late 1990s, as federal regulators allowed Citibank to merge with Travelers Insurance, despite contrary law still on the books. Both winked in more recent years, as major banks set up huge multi-billion-dollar structured investment vehicles, or SIVs, to do on an off-the-books basis what they were not allowed under banking law. Now we have the federally funded J.P Morgan Chase takeover of Bear Stearns. The PPT may well have had a quiet role in some of these actions.

For the bigger picture, look back to the stock market crash of 1987 - the sickening Oct. 19 fall when the Dow-Jones Industrial Average lost 508 points or 23.6 percent of its value in a single trading day. Alan Greenspan had just taken over as the Federal Reserve Bank chairman, and some believe that the Fed intervened to support the market the next day - by either buying Standard & Poors futures or telling several collaborative broker-dealers to do so.

Tim Metz, in "Black Monday," contends that "some leaders and market makers at the New York Stock Exchange and Chicago Mercantile Exchange collaborated to save the stock market by rigging stock information and prices." Tony Dye, a British fund manager, made a similar charge of intervention by U.S. authorities. London Sunday Telegraph, Mar. 22, 1998).]] Edward Chancellor, in his 1999 book, "Devil Take the Hindmost," noted that if these interventions occurred, they raised a major issue of "moral hazard."

The likelihood they did occur is increased by the fact that a year after the PPT group's launch, a retiring Fed board member, Robert Heller, wrote a much-discussed article in The Wall Street Journal that in the case of an another emergency like 1987, there might be a better alternative than the Fed's usual remedy - interest rate reduction. "Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, " Heller wrote, "the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole." No public mention was ever made of the Fed or the Working Group embracing the Heller scheme, but that may have happened privately.

Such accusations are a long way from being conclusive. But they do help explain the milieu in which the Working Group, or PPT, was set up by presidential proclamation - Congress had no role - in March 1988. The proclamation authorized the Working Group to "enhance the integrity, efficiency, orderliness and competitiveness of financial markets" - language that may have been intended to provide a broad and loose authorization for intervention in the 1987 mode, should it be required again.

Media discussion of the Working Group, negligible in 1988, rekindled after the tribulations over the Asian and Russian debt and currency crises of 1997 and 1998. Washington's ambitions to manipulate seem to have been on the upswing. In a January 1997 speech in Belgium, Greenspan indicated that the Fed could pursue "direct intervention in market events" - a bold new legal interpretation.

A month later, The Washington Post ran a big article, revealing details never repeated by any other major publication. The article describes how the Working Group had set up a financial "war room;" assembled a global as well as national list of key emergency contacts, and carried out simulated emergency drills.

In the wake of the Sept. 11 terrorist attacks, media attention to possible government market intervention and manipulation refocused again - though less in the United States than in foreign English-speaking media. The London Observer reported, later that September, the Working Group-cum-PTT was "ready to coordinate intervention by the Federal Reserve on an unprecedented scale. The Fed, supported by the banks, will buy equities from mutual funds and other institutional sellers if there is evidence of panic selling in the wake of last week's carnage."

The group was cited again a half-year later. The authoritative Financial Times quoted a Fed official, who declined to be identified, but acknowledged that policy-makers had considered "buying U.S. equities" - not just futures. The Fed, said the official, could "theoretically buy anything to pump money into the system," including "state and local debt, real estate and gold mines, any asset." That sounds much like the same broad conception of empowerment Greenspan had injudiciously taken note of in 1997.

Two months later, the Australian Financial Review weighed in, wondering whether a 234-point intra-day surge on the New York Stock Exchange could be attributed to the PPT: "There is a belief that this team represents a powerful and secretive hand that is ready to act any time the Dow looks ready to tank big time."

After 2001-02, there was little mention of the PPT group for several years. But come 2006, when Paulson decided to renew the Working Group as a major player, the British financial pages, if not the American, renewed their interest. The London Telegraph described the PPT as a "shadowy body with powers to support stock index, currency and credit futures in a crash." It added that the former Clinton aide, George Stephanopoulos, had earlier described the group as having "an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem."

Not all U.S. financial journalists have been baaing sheep, ready to ignore the issue. John Crudele of The New York Post has pursued it in several columns, and others have acknowledged hearing about the buy orders from friends in the S&P trading pits. Another columnist, James Pethokoukis of U.S. News & World Report, described at length how in the final two trading hours on Aug, 16, 2007, the Plunge Protection Team might have encouraged one or two major institutions to buy stock index futures, because a 300-point Dow decline was briskly wiped away. But then he felt obliged to close with a semi-disavowal: "there's never been any official confirmation of this," and that insiders both in Washington and Wall Street "totally dismiss" these reports.

With the recent market panics and surges, the Working Group - if not its deepest secrets - might have again appeared on the front pages. But this did not happen.

However, in March 2008, the Senate Finance Committee's top Democrat, Max Baucus (D-Mont.), and top Republican, Charles Grassley (R-Iowa), were consumed by interest in whether Paulson pressured Bernanke into having the Federal Reserve broker the controversial deal in which J. P. Morgan Chase got $30 billion to help take over Bear Stearns.

Baucus and Grassley asked for all kinds of details. However, they seem not to have asked for information on how closely Paulson and Bernanke had been collaborating since 2006 in their mutual roles on the Plunge Protection Team. and how they interpreted their powers under the 1988 presidential proclamation. This is unfortunate.

Former Fed Chairman Paul Volcker, a well-respected senior statesman, stated his concern bluntly. "To meet the challenge," Volcker said, "the Federal Reserve judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending certain long-embedded central banking principles and practices."

Volcker is regarded as one of the last honest men in U.S. finance. But since 1987, the lawful and implied powers of the Federal Reserve have probably been extended further than the former Fed chairman would like - and, conceivably, further than he knows.

I've checked the LFB.com site and find it extremely VALUABLE! Thanks for your posts.

Thanks for the article Roro-as far as the PPT is concerned, while their exact workings are not all made publically available everyone knows of their existence. The Bear Sterns situation was essentially a PPT action.

If anyone wants to raise the whole "free market" issue and point to the hypocrisy that's all well and good. But was the U.S. financial system supposed to fail (which might have happened if Bear was allowed to collapse) in order to chase some moralistic free-market ideal? Besides, to who's benefit would it have been to allow chaos to reign?

Very interesting regarding the PPT

My point is that everyone tries to make out like there's some deep, dark secret here-but how can there be when everyone knows about it?

NewstraderFX,

To tell the truth I actually did not know much about the President's Working Group Financial Markets.

I learn by recognizing what I don't know and asking questions.

Nonetheless, it was a clockwork price turn across the futures and spot forex markets that looked like more than just a coincidence at the time.

That, I did know.

Maybe if I had been more informed about the role of the PWGFM or had the benefit of Kevin Phillip's article before the event or more trading experience I might have been more adept at recognizing and better prepared to trade under the circumstances.

An experienced and skilled trader more than likely did recognize the signal and more than likely correctly anticipated the window for the timing of the FED announcement.

My point is really just about being informed and learning to connect the dots through observation and participation.

It has nothing to do with the "free market" issue and pointing to the hypocrisy or some moralistic ideal, although the hypocrisy seems fairly self-evident given the circumstances leading up to the credit debacle.

And, when I did raise the question about the clockwork nature of the price turns January 22 for the simple reason that I was trying to learn about some phenomenon I had witnessed and how it might have been related in some way to the FED intervention an insightful answer came from Joseph Trevisani.

If Bear Sterns was PWGFM and given the prevalent fear of panic selling in the equity markets around January 22 it doesn't seem like much of a jump to the possibility that the price turns prior to the London open were a part of the coordinated FED intervention to try to stabilize prices, but undertaken prior to the public announcement.

Roro-you bring up some excellent points-I wouldn't be too worried about the price movements around that time though-likely the situation will not be repeating itself!

As far as Mr. Volker's opinion regarding the Fed's actions in the Bear Sterns situation are concerned-while his actions as Fed Chairman during extremely difficult circumstances are considered exemplary and he is indeed an elder statesman, he hasn't provided alternative measures that he believes the Fed should have taken during the serious crisis that was occurring as Bear was imploding.

What the Fed did with Bear is not without precedent-the Long Term Capital Management situation comes immediately to mind.

NewstraderFX,

It's all really about learning to read, right?

Lol-Can't hurt...

NewtraderFX,

Here's a few thoughts re Wall Street Socialism from Kevin Phillips's BAD MONEY.

``Financial mercantilism'' describes how Washington and Wall Street have collaborated ``to minimize certain unwanted marketplace forces.''



Hence the long, sad history -- from the Latin American debt crisis and the S&L bailout to the subprime mortgage meltdown -- of the U.S. government and Federal Reserve rescuing our failed financial wizards. (Phillips) gives a name for what happens when taxpayers rescue profligate bankers: ``Wall Street Socialism.''



Like a prosecutor, Phillips speaks with a finely honed indignation and calls expert witnesses to challenge the ``myth'' that financial markets are ``a rational and safe underpinning for public well-being and the stewardship of a leading world economic power.''

Link for the full article;

http://www.bloomberg.com/apps/news?p...d=a_SLF9qd.W0E