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abob's fundies journal

Some scraps of data from the eurozone this morning support the stronger USD hypothesis:

- The second estimate of euroarea inflation for August was a little lower than expectations at 1.7% (prev 1.8%). Bear in mind the ECB targets an inflation rate of close to, but below 2%. The core inflation number edged higher to 1.5% y/y, but this is still very much in the ECB's comfort zone.

- Germany's ZEW indicator also disappointed the market with a reading of -27.4 (previously -22.2, consensus -20.0). There is a big divergence between expectations reading (-27.4) and the current conditions index (very high at 42.9). The divergence reflects current optimism in the manufacturing sector uncertainty and surrounding the upcoming VAT increase in Germany. (At the same time as the ZEW we also had euroarea industrial production, which rose 1.8% y/y in August, a strong bounceback from the July -0.4% contraction).

In my eyes, the ECB faces considerably uncertainties at present. Reasonably strong growth and an upcoming VAT increase raise the risk of higher future inflation, and the ECB has signalled there is more tightening to come (a 25 bps hike in December is priced in). Beyond this, I think the ECB may shift to a wait-and-see stance, especially if the global economy starts losing steam.
"Always bet on black"
Despite the USD response, I don't see this afternoon's US data as particularly USD-ive. Indeed, the strong TIC data confirms foreigners are more than willing to continue financing the deficit. Being such a volatile number, it's useful to look at the TIC data on 3 month average, and on this basis it offsets previous weakness quite nicely. This data doesn't tend to exert a lasting influence on USD on an intraday basis, but it is provides comfort if you are trading for a stronger USD based on cyclicals (in the knowledge that the structural picture is a little like the Sword of Damocles, forever haunting the longer term picture...the TIC data suggests the sword remains well tethered).

Elsewhere, the PPI number was mixed - the core increase seems USD positive but there was a big auto influence. The IP number was weak, and there is no getting away from that.

---

Market prices don't move in straight lines, and I would expect this retracement in EUR/USD to be relatively short-lived. You can describe it as 'give-back' following the recent USD rally. Either way, I don't think the macro picture has deteriorated sufficiently to warrant a jettisoning of the long USD view, though nervous shorts will have been shaken by the price action.
"Always bet on black"
When Soros speaks, it pays to listen. Here is a recent story from Reuters:

By Eric Burroughs

TOKYO (Reuters) - Billionaire financier George Soros said on Monday the embattled yen could weaken more but authorities wanted to keep that from happening.

"It could weaken, but I think the authorities don't want it to weaken, so there is some pressure to stop it from declining any further," Soros said in an interview with Reuters, without specifying which authorities he was referring to.

After the September gathering of the Group of Seven finance ministers in Singapore, Japanese and European officials made seemingly coordinated remarks that the yen should reflect Japan's recovery from deflation and the end of zero interest rates.



Soros said Japan's near-zero short-term rates accounted for the weak yen which has hit eight-year lows on a trade-weighted basis this month and is near an all-time low of 150.73 to the euro struck in late August.

Soros also said he did not expect the Federal Reserve to cut interest rates any time soon.

Two-year U.S. Treasury yields have surged nearly 30 basis points in the past two weeks as solid economic data and comments from policy-makers have prompted investors to scale back expectations for the Fed to trim rates early next year.

Soros said the Fed has been "very farsighted" in ending its credit tightening campaign to assess the impact of the housing slowdown on the overall economy, but that it was too soon to anticipate the U.S. central bank cutting rates.

"Any expectations of a near-term cut are misplaced," he said.

The financier and philanthropist also told the Foreign Correspondents' Club of Japan that while there was little doubt that there had been a bubble in the U.S. housing market, "the jury is out" on whether it would end in a hard or soft landing.

(Additional reporting by Dan Sloan and Satomi Noguchi)



...It's good to see he still has a view on the markets, even though his energies seem to diverted to other areas. I highly recommend his books on the mkts...truly fascinating (but very deep).
"Always bet on black"
The only currency I like stronger against the dollar is the yen. It looks like all this recent yen weakness is starting to raise question marks at the powers that be:

NEW YORK, Oct 17 (Reuters) - The Bank of Japan plans to beef up monitoring of "carry trades," and is concerned about how hedge funds and other investors are helping push down the yen, the Nihon Keizai newspaper reported.
Japan's leading business daily said in its Wednesday edition that the BOJ was concerned about such trades, in which investors borrow funds cheaply in Japan to invest in higher-yielding assets overseas.

The yen climbed sharply late on Tuesday as New York traders got drift of the article, firming to session highs against the dollar and the euro. The dollar was last trading around 118.55 yen, down 0.4 percent on the day.

The BOJ plans to step up analysis of yen-denominated financing balances and hedge funds' positions, the Nikkei said without citing sources.

(You can get free trial subscription to the Nikkei if you want to read the full story.)
This explains the sudden surge in the yen we had around midnight (UK time). Anyway, I'm not trading but I thought I'd point it out. We must be close to reaching the bottom in the yen.
"Always bet on black"
Today's weak UK retail sales data (-0.4 m/m against expectations for a rise of +0.3%) is an outright sterling negative and provides comforting support for GBP bears, such as myself. Don't get me wrong: I am not forecasting a serious consumer slowdown in the UK. My broad view is more that the pound is too high by historical comparison (given the interest rate differentials and its relative cyclical position). My economic forecast is not of an economic meltdown, but for a gradual slowdown. However, because of GBP's overvaluation, over the medium term I do see potential for a downward drift to dominate.

All things being equal, today's poor retail report could easily have sent cable down 50+ pips and held it there. However, the situation we are in right now needs to be considered, as it helps explain why we are seeing a large retrace: the market accepts we are going to get a rate hike from the BoE in November (this has been well telegraphed), and a little bit of patchy data here and there isn't going to make that much difference to that rate call. (Hah, cable has retraced a further 15 pips as I am writing this!). The question is what happens further out. Right now, the curve is relatively flat, but if soft data holds beyond the rate hike, I believe that has the potential to raise serious questions about a) whether the rate hike was appropriate and b) whether the next move is likley to be a cut.

[Note, whether I believe this will actually happen is not the really point of the exercise. What I do is I try to get a handle on the economy, and on scenario or hypothesis the market has adopted, and then I attempt to judge the possibility for likely variation. Because of this, I often don't follow price, but I often end up doing the total opposite of taking contrary positions in extremes. PS : I don't see a major overbought extreme in sterling but I do see sufficient scope for the market to move to a more GBP negative stance].
"Always bet on black"
More important than UK retail sales, I see Reuters reports of a possible thawing in relations between Kazakhstan and Borat:

Rakhat Aliyev, Kazakh first deputy foreign minister and a powerful son-in-law of President Nursultan Nazarbayev, asked British comedian Sacha Baron Cohen to visit the vast, oil-rich steppe nation and meet normal human beings rather than the larger-than-life lunatics shown by Cohen's TV reporter Borat.

...
In the forthcoming movie, "Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan", Borat depicts Kazakhs as a nation of misogynists, racists and anti-semites whose favourite drink is fermented horse urine.

The Kazakh authorities shut down Cohen's www.borat.kz site, prompting a move to a new homepage, www.borat.tv.
"Always bet on black"
From the mahalanobis blog, a link is provided for a rather interesting job ad:

Financial Services Company- TheLadders Client
<!-- ************************************ --><!-- ************************************ --><!-- JobNumber: 844275 --><!-- CreatedDate: 10/6/2006 12:43:00 PM --><!-- ************************************ --><!-- ************************************ -->Job ID: 625904
Location: El Segundo, CA
Position Type: Full Time
Date Posted: 10/6/2006

Hedge Fund Private Investigator
Hedge Fund Private Investigator We are seeking a select group of candidates driven by a strong work ethic, team orientation, and a desire to succeed to join our growing successful company. The Hedge Fund Private Investigator will conduct both clandestine and covert intelligence operations to track movements of public company executives (e.g., Enron types) to gain deep insight of how their behavior and actions may be affecting the company's Wall Street performance. Job Responsibilities: · Clandestine / covert intelligence research operations · Surveillance Job Requirements: · Any applicable state license(s) to conduct electronic/manned surveillance · Resume of successful case records · Comfort with rigorous travel itineraries · Live near or in Manhattan Beach/El Segundo, CA Compensation: · Ultra competitive If you are qualified the please send your resume in WORD or PDF format.

I have the perfect candidate ... a certain Mr Bud Fox?

http://upload.wikimedia.org/wikipedi...WallStreet.jpg

"Always bet on black"
Quoting abobtrader
The only currency I like stronger against the dollar is the yen. It looks like all this recent yen weakness is starting to raise question marks at the powers that be:

NEW YORK, Oct 17 (Reuters) - The Bank of Japan plans to beef up monitoring of "carry trades," and is concerned about how hedge funds and other investors are helping push down the yen, the Nihon Keizai newspaper reported.
Japan's leading business daily said in its Wednesday edition that the BOJ was concerned about such trades, in which investors borrow funds cheaply in Japan to invest in higher-yielding assets overseas.

The yen climbed sharply late on Tuesday as New York traders got drift of the article, firming to session highs against the dollar and the euro. The dollar was last trading around 118.55 yen, down 0.4 percent on the day.

The BOJ plans to step up analysis of yen-denominated financing balances and hedge funds' positions, the Nikkei said without citing sources.

(You can get free trial subscription to the Nikkei if you want to read the full story.)
This explains the sudden surge in the yen we had around midnight (UK time). Anyway, I'm not trading but I thought I'd point it out. We must be close to reaching the bottom in the yen.
Since when does the BoJ want the Yen stronger? All I've ever seen them do is sell.
same here amigo, but they have been away from the market for a few years now, and since then, the yen has depreciated quite significantly. I still don't buy the idea of intervention from the authorities as the weaker yen is benefitting the economy from an inflationary perspective, while lending continued support to exporters. I was just posting the article to explain the overnight yen appreciation.

Overall, I like the yen on the belief that: short speculative positions are extended, the economy continues to recover, evidence for the carry trade is a little patchy but it does appear that the yen is being used heavily as a financing currency, and the yen is very rich on a trade weighted basis. I wouldn't try to time this trade per se, as the absolute low yield and continued success of the carry strategy is a powerful force and it is difficult to see the trigger for a turnaround (which could be severe when it comes). Because of that I quite like the idea of scaling in to this trade.
"Always bet on black"
The FT last week printed an excellent article on globalisation, titled Profits of Doom, which is free to read (once it falls into the archive it will probably be available to subscribers, so I urge you to read it now). It really is illuminating with respect to the big, broad outlook.

In the piece, Richard Tomkins discusses how globalisation has benefited many groups: the capitalists (capital providers), executives (their pay is going up), workers in developing countries (higher wages). However, one group that has lost out in a big way is the middle segment of home workers (read: the average man on the street), as their wages have become depressed. This is no great surprise, when it is estimated that China, the Soviet bloc, and India are reckoned to have increased the global labour pool from 1.46 bn to 2.93 bn.

The result, in the US, is that profits are at a record high as a percentage of GDP, while labour's share of the GDP pie has declined.

The two take away points are a) profits are taking an increasing share of GDP relative to labour income and b) within labour, income inequality is widening as the top few percent (in terms of skill-sets) are able to demand higher remuneration.

The Wall Street Journal also picks up on this theme on their tv channel, in a piece called Growing Wage Disparity. WSJ's David Wessel talks about how wages of college grads haven't gone up in recent years, while the income of MBA's has. It's all about being the best in your field and reaping the lion's share of the reward. The marginal returns to be being 'that bit better' are higher.

What's more, it looks like this downside of globalisation was largely overlooked by economists, and the risk is that it could create protectionist political ripples in future years as incomes continue to diverge, or at least it could create a push toward policies that aim for a 'fairer' (economists don't like this word) distribution of income.

Anyway, back to the point. Research by economists (see a paper by Dean Maki when he was working for the Fed) in the US show that the top 20% wealthiest consumers account for some 60% of the economies income and consumption (the bottom 20% account for just around 3% of income and consumption). In their 'Plutonomy' idea, analysts at Citigroup discuss how the country's negative saving rate is largely due to dis-saving by this high income group, and that it may not pose such a great threat to the economy: since it is this segment of the population that have seen surges in the value of their balance-sheets (houses and share prices have risen), so it isn't irrational for their saving rates (a cash flow measure) to turn negative. (Meanwhile, the Fed research indicates the saving rates of the poorer segment are positive, and have actually increased.)

This notion would help to explain why the USD may not be so exposed to the negative savings rate/current-account deficit problem as macro data may indicate. I like this Plutonomy thesis, and it is supported by facts, but I think if share prices and house prices take a tumble, so the impact on the USD could be severe. However, share prices are doing the opposite, house prices may stabilise, and the top 20% are already sitting on major capital gains over the past 5 years. Another reason to be USD bullish.
"Always bet on black"
Quoting abobtrader
same here amigo, but they have been away from the market for a few years now, and since then, the yen has depreciated quite significantly. I still don't buy the idea of intervention from the authorities as the weaker yen is benefitting the economy from an inflationary perspective, while lending continued support to exporters. I was just posting the article to explain the overnight yen appreciation.

Overall, I like the yen on the belief that: short speculative positions are extended, the economy continues to recover, evidence for the carry trade is a little patchy but it does appear that the yen is being used heavily as a financing currency, and the yen is very rich on a trade weighted basis. I wouldn't try to time this trade per se, as the absolute low yield and continued success of the carry strategy is a powerful force and it is difficult to see the trigger for a turnaround (which could be severe when it comes). Because of that I quite like the idea of scaling in to this trade.
Last year the carry trade also proved to be very strong in this period, Sep-Dec, with the turn-around at the beggining of December. If I remeber right the reason for carry trade liquidation was the year end and people wanted to balance the books. I'm definetly keeping Dec 1st in mind as a possible top the yen pairs. Untill then I'm quite happy to play the short side in the yen.
Quoting abobtrader
The FT last week printed an excellent article on globalisation, titled Profits of Doom, which is free to read (once it falls into the archive it will probably be available to subscribers, so I urge you to read it now). It really is illuminating with respect to the big, broad outlook.

In the piece, Richard Tomkins discusses how globalisation has benefited many groups: the capitalists (capital providers), executives (their pay is going up), workers in developing countries (higher wages). However, one group that has lost out in a big way is the middle segment of home workers (read: the average man on the street), as their wages have become depressed. This is no great surprise, when it is estimated that China, the Soviet bloc, and India are reckoned to have increased the global labour pool from 1.46 bn to 2.93 bn.

The result, in the US, is that profits are at a record high as a percentage of GDP, while labour's share of the GDP pie has declined.

The two take away points are a) profits are taking an increasing share of GDP relative to labour income and b) within labour, income inequality is widening as the top few percent (in terms of skill-sets) are able to demand higher remuneration.

The Wall Street Journal also picks up on this theme on their tv channel, in a piece called Growing Wage Disparity. WSJ's David Wessel talks about how wages of college grads haven't gone up in recent years, while the income of MBA's has. It's all about being the best in your field and reaping the lion's share of the reward. The marginal returns to be being 'that bit better' are higher.

What's more, it looks like this downside of globalisation was largely overlooked by economists, and the risk is that it could create protectionist political ripples in future years as incomes continue to diverge, or at least it could create a push toward policies that aim for a 'fairer' (economists don't like this word) distribution of income.

Anyway, back to the point. Research by economists (see a paper by Dean Maki when he was working for the Fed) in the US show that the top 20% wealthiest consumers account for some 60% of the economies income and consumption (the bottom 20% account for just around 3% of income and consumption). In their 'Plutonomy' idea, analysts at Citigroup discuss how the country's negative saving rate is largely due to dis-saving by this high income group, and that it may not pose such a great threat to the economy: since it is this segment of the population that have seen surges in the value of their balance-sheets (houses and share prices have risen), so it isn't irrational for their saving rates (a cash flow measure) to turn negative. (Meanwhile, the Fed research indicates the saving rates of the poorer segment are positive, and have actually increased.)

This notion would help to explain why the USD may not be so exposed to the negative savings rate/current-account deficit problem as macro data may indicate. I like this Plutonomy thesis, and it is supported by facts, but I think if share prices and house prices take a tumble, so the impact on the USD could be severe. However, share prices are doing the opposite, house prices may stabilise, and the top 20% are already sitting on major capital gains over the past 5 years. Another reason to be USD bullish.
---
A little follow up to my eariler piece on globalisation and the USD (above).

I the FT Weekend letters section, Will Hutton attacks the piece by Richard Tomkins:

Sir, Richard Tomkins ("Profits of doom", FT magazine, October 14/15) cites Jeff Faux, Richard Freeman and Alan Blinder in his interesting depiction of the emerging new consensus that globalisation is having a malign impact on jobs, incomes and security among the west's middle class.

However, he should have interrogated the numbers offered by Andrew Glyn, whom he also quotes, more closely. Whether on investment, job losses attributable to offshoring, or the impact of trade flows on middle-class incomes, there is little or no statistical evidence to support the extravagant assertions of the economists he quotes.
A few high-profile offshoring moves do not constitute a trend, and a billion illiterate, innumerate peasants are no more a threat to western living standards today than they were 50 years ago. Wage costs are only a small part of comparative advantage.

It is not globalisation that is to blame for the ills Mr Tomkins describes; it's the growing preponderance of a service sector that is relatively unexposed to international competition that explains the growing share of profits of gross domestic product, along, that is, with domestic policies - in particular the collapse in trade unionism, systemic market failures, and the reluctance to pursue redistributive tax policies.

It is not dark-skinned foreigners trying to trade themselves out of poverty who are to blame for our ills. It is ourselves.

Will Hutton

Will Hutton adds some balance to the debate in his letter, but I think his views are way too biased to the left. He is blaming depressed wages purely on domestic factors. While I agree domestic factors have played a role, I also believe there is no escaping the overwhelming impact globalisation is having on the lower rungs of the labour pool in the developed world. Hutton's response makes bones about how the 'middle class' have not been so affected by globalisation, which I think is a valid point (for now), but I think the the impact on the 'average joe' is significant, and so this point can't really be used a valid argument to refute the effects of globalisation. Overall, I respect Will Hutton and take his views on board, but I continue to believe in my original thesis.
"Always bet on black"
Looking at the latest IMM speculative positions (released Friday night), two things stand out:

* Firstly, we can see that speculators last week switched to a pretty large CAD short position (see chart below), taking the net balance to -24,498. This is the shortest position in over a year. The build up of CAD shorts helps explain the sudden downmove in USD/CAD, as positions were squared when the market got caught short. Earlier this month, I said I really liked USD/CAD higher. I continue to like the trade and would look to the recent price action to have restored positioning to a more neutral level.

* Second, the long yen trade continues to remain very extremely by historical comparison (see chart). The position has tapered off a little since last week (an all time record), but it continues to lend support to the idea that the market is long the carry trade. I think the long yen position is already precarious and that an unwinding could be pretty ugly. I continue to like scaling in to this trade (short yen versus EUR and USD), but with a wide tolerance.

(I wish the CFTC released the IMM statistics in a more timely manner. Just by waiting a few days, I think we lose a signifcant informational advantage.)
Attached Images
"Always bet on black"
It may be a case of using statistics for support rather than illumination, but here are Danske's PPP estimates for CAD (overvalued) and JPY (undervalued).

Another lesson from these charts is that deviations from PPP (a long-term fundamental fair value calc) can persist for long periods of time.
Attached Image
"Always bet on black"
Well, that's a nice little bull run in the dollar following the opening of the London session. It brings to mind a quote I recently came across:

Quote
The most frequent bad decision is that they buy something after it has gone up and sell something after it has gone down - David Swensen, manager of Yale University's investments with a 16% average annual gain over 21 years.

While I'm pretty sure Swensen is referring primarily to equities, the approach resonates well with my trading style in fx...although I would go one step further to say that it can often make sense to buy something after it has gone down and sell something after it has gone up. In terms of 'entry', this approach is in opposition to the trend following school of thought.
"Always bet on black"
I continue to like CAD lower. The current USD rally is not being reflected in the loonie, despite weaker oil prices. This resistance could be due to any number of factors (option barriers, changing views on the BoC, real flows etc etc). While I can't be pinpoint the resistance, I think it is weak and expect it to eventually give way. So, even though I see some risk of USD/CAD dropping back to around 1.1250, my general bearish thinking on CAD remains unchanged. As such, I think USD/CAD could be a bargain buy at current levels, and would look for the pair to catch up with the rest of USD strength we are seeing in the market. As a short-term trade I like USD/CAD long with a stop at 1.1190 (current price is 1.1265).

My caveat, and its a big one, is that I'm not very good with short-term trades! (because of this, my position is quite small).
"Always bet on black"
In Euromoney this month, the FX writer discusses the ambiguous relationship between DBFX (retail) and FXCM. What's more enlightening however, is that at the end of the article the author provides an illustration of how the FX market fits together (drawing provided by a London FX banker over a lunch they had). Finally, some clarity:
http://www.euromoney.com/images/502/fx.scrawl.gif
"Always bet on black"
His position would be much more clear if it had been drawn with a green pen.


Lou
Abo

You should re-post your drawing in the Comedy Club Thread. Very funny thanks
Hah, glad you liked the drawing!
"Always bet on black"
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