Predatory and Parasitic Trading

Nice daily summary Cheetah, good to see Im thinking along the same lines as you

I too didnt take the 'pegging the CHF to the EUR' too seriously, guess we were wrong. Their repo and libor rate cut could also be slowing the inflows into the CHF.

Looks like their was some unwinding from shorts on the bearish unemployment news in the AUD .Forexlive also reported bids by china right after the news. A quite Euro session plus the carry trade factor resulted in the AUD and NZD rallying. Those chinese do know how to set up the crowd, while they wait to buy at the bottom

JPY, report of large option at 76.00 keeping the pair up, plus speculators trying to get a free ride from possible BoJ intervention providing plenty of bids for the JPY.

Jonas, Thanks. As I said before, it takes work, and some thought, but it is well worth it. At the moment, I spend about 3-5 hours per day reading, processing, and occasionally, trading. And, how could I forget posting in my journal

I don't think I really explained myself clearly in my last reply to you. I must admit that I was rushing.

When I was talking about playing your game, I was referring to the time horizon that you want to trade. Some people are swing and/or position traders. It is my desire to be a short-term trader, mostly. However, I want to be in position to recognize a prize kill. I will occasionally try to turn a 30-40 pip trade into a 600-pip trade. In order to do so, I have to understand the market environment in which I am trading.

One of the things that stood out to me in Reminiscences of a Stock Operator was when the protagonist stated,"They say you never grow poor taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market. Where I should have made twenty thousand dollars I made two thousand."

Here is a related, and more recognizable passage, "It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right on exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine—that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found that it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money."

Let me get to your analysis: I can't say whether your AUD analysis is right, but I like the way that you are thinking and approaching finding answers.

I think you are right on with your JPY analysis.

I must admit that I still don't have an explanation for the rally in AUD and NZD, but I am not sure that it was because people were initiating carry trades. It could be. However, this just doesn't seem like the right environment, especially given the importance of unemployment numbers.

Carry trades should be based upon interest rate differentials, as well as, a belief in the economic prospects of the high interest rate country. I suppose that I am at odds with most estimations of the midterm growth of the Australian economy.

The AUD unemployment numbers weren't that far off of the expectations. I know that 5% was a key barrier, but I am still baffled by the strengthening of the AUD and NZD on Thursday.

Let's keep exchanging ideas.

As I was beginning to prepare for the Retail Sales numbers, the first thing that I did was pull up charts of A/U, E/U, G/U, U/CAD,and U/CHF to see if the market was driven by dollar strength or weakness. It turns the movements were mixed, which confirmed to me that we would need to see a stronger derivation from the expectation to produce a market moving event. The numbers were right in line with expectations.

I was not eager to enter the markets today because we have a number of factors at play, which made it difficult to make an informed decision to enter a trade. How much profit taking would we see before the weekend? Are we in a low liquidity space because it's vacation season? When I first started trading, the senior member of the J16 thread were always quick to point out that August can be a trying month to trade, especially on Fridays because of liquidity issues. How many players are out of the market because of the uncertainty.

I've noticed some surprisingly volatile movements this week.

So today, I really didn't spend too much time thinking about what moved the market today. I just chalked it up to an August Friday.

However, I do want to bring a few issues into focus:



China

Why has the Yuan rising so fast against the dollar? It might reflect a shift in Chinese priorities: “The overall sentiment in China may be shifting towards the following: it’s a lesser evil to accept faster currency gains – and therefore weaker exports and weaker growth of the economy – than to bear the risk of continued fast accumulation of Treasuries and European government debt.” (LINK)

Besides countering inflation and accelerating China’s shift to domestic growth (as opposed to investment and export), a stronger yuan may also signal a willingness to help shore up slumping confidence in the global economy by buying goods from Europe and the US.

Wage increases and a stronger social safety net are also elements of a drive to boost consumption, laid out in a five- year plan running through 2015. (LINK).


AUD

As I have suggested for the past week, I am not bullish on the Australian economy, but i could be wrong. Even though the unemployment numbers came out higher than expected 5.1% looks much better than the numbers coming out of the UK and US.

JPY

The threat of intervention and risk aversion have contributed to JPY trading within a range the last few days.

As expected, the Japanese have cut their GDP forecast for the year, after the disruptions caused by the earthquake.



EUR

How effective will the ban on short selling be? Here are some thoughts from one newspaper report: "Overnight the biggest news was clearly the ban on all short selling of financial stocks in the next 15 days in France, Italy, Belgium and Spain. Again very predictable and in line with historic policy responses. Whether this works or not is hard to say, but back in May 2008 (18th) Germany introduced a ban on naked short-selling. As seen below the result was not exactly impressive. This ban is obviously slightly different as it's on all short-selling, but taking away liquidity from the short-side of the market only makes the moves more excessive. (Less liquidity means more discontinuous pricing)." (LINK)

Not sure how this ban will ultimately affect the currency markets, but it is a band-aid, and will not lead to a brighter outlook for the Euro.

Here's how one market commentator put it: "The policy tool box for now only contains interventions, short-bans and trying to talk some sense into the market. Hardly the menu you want to be served but never the less the fact."




USD

I really have to get a better handle on the bond markets. What's driving all of the interest in US Treasury bills even though the 3-month yield is down to .01%? Here's an interesting take from the Financial Times: "From an investment perspective, these returns may seem crazy; but they are still attractive to cash managers because T-bills are liquid – and, most crucially, seem less risky than uninsured bank deposits. Or, put another way, faced with a choice between betting on the safety of the US government, or its banks, cash-rich large companies and asset managers are choosing the former. It is an entirely rational choice. But it is also a powerful reminder of how profoundly distorted the US financial system remains. And that is not a comforting thought; least of all in a rollercoaster week." (LINK)

From the Wall Street Journal: "Economist Nouriel Roubini says the risk of a global recession is greater than 50%, and the next two to three months will reveal the economy's direction."

I guess I need to start planning: where will money flow when this happens? Where will money flee? If you realized that Chinese infrastructure investment was going to have a tremendous impact on AUD because of the copper market, you might have gotten in early on the AUD/USD rise from .60 to 1.10. In other words, it's worth playing out the scenarios.

Here's a link to the Nouriel Roubini interview.


Here are some thoughts to ponder as we move toward Bernanke's speech on August 26 at Jackson Hole: "When it comes to what the Fed Chair might say at Jackson Hole, we suspect the market is under‐pricing the risk that he reminds us of all the tools the Fed has its disposal. Everything from putting an outright ceiling on interest rates, accepting corporate bonds as collateral and buying foreign sovereign bonds outright (directly weakening the USD). Even a hint that the FOMC might at some point consider these measures is likely to drive USDCAD weakness (CAD strength) into September."


CHF

It doesn't look like a peg is a realistic option because it would "open the SNB to unlimited reserve accumulation and FX intervention in order to hold its interest rate steady. In addition it would essentially give up control of its monetary policy and begin importing ECB policy."


Now I am off to start reading up on the Bond markets.

Now that I have written a few of these, I think I am starting to figure how how I want to structure them.

Missed Trades:

The first thing that I want to do is go over the trades that I missed that I should not have missed. Had I done my research, played out the scenarios, kept my eyes and ears opened, processed the implications earlier, and/or recognized the opportunity, these are the trades I would have taken last week:


1) ECB Buys Italian and Spanish bonds. Admittedly my attention was squarely focused on the S & P downgrade of the US at the time. However, a deeper problem was that I do not have as good a grasp of the importance of the bond market as I need. I have been doing some work to rectify this over the weekend. For those of you that are similarly interested, here's a LINKhttp://www.bondsquawk.com/bond-school/ to a great website to get started with the basics.

This is why it is important to get market experience, how else was I supposed to know that it is an unusual step for central banks to buy bonds? Now I understand how significant it was for the ECB to do so.

One takeaway from last week is that if you understand how the equity markets, the bond markets, commodities markets, and the currency markets interact, it will make you a much better currency trader. The Laidi book that I recommended in my first post is a good introduction.

2) The SNB threatens to intervene, to peg the CHF to the EUR, to charge a 1% tax, increase liquidity, etc. After the massive flood of funds into CHF in the early part of the week, it was quite obvious that the SNB was desperate. I got too singularly focused. I was waiting for an actual intervention, when I really should have been looking for the point in which the banks and hedge funds got spooked. I was too singular in my focus on the central bank.

At the time I did not have my charts open. Once I read the news, if I had my charts open at the time, I would have seen how significant this was. I can't tell if it was the threat of the tax, the peg to the Euro, the increase of liquidity, or something else. I might have been trying to understand the impact of each piece individually, and missed the big picture: the SNB was willing to throw out any idea that had the potential to move the market.

The SNB and the speculators were playing a game of cat and mouse. I got to focused on watching the cat (SNB), and missed my chance to catch the mouse (speculators).

Another thing that I have to guard against is making sure that I don't get too focused on the Announcements. Rumors and threats can be important market movers, and you have get a feel for how the market is interpreting them. I did not do so, and missed at least 100 pips.


Risk Appetite or Risk Aversion?:


Will this week be a risk aversion or risk appetite week? Medium and Long-term, I think risk aversion is in the air. However, the short and medium term might mean increased risk appetite for the commodity currencies, especially AUD.

Certainly, the US and Eurozone will be a main focus. Both face the same two fundamental problems: too much debt, and too little political will to make the tough decisions to solve the debt problem.

The US debt ceiling "solution" should be bearish for the US. It doesn't do anything to provide financial stimulus, and it did not really do anything to address the deficit. The future-oriented spending cuts are subject to the actions and agendas of future congresses.


Here's an interesting note from Ashraf Laidi on the state of the US economy:

"The more important economic news, from our perspective, was the fall in the UMich consumer sentiment survey to 54.9 from 63.7 (exp 62.0) -- the lowest since May 1980. The survey took place BEFORE the US was downgraded and stocks swooned but amidst the doom and gloom of the debt ceiling debate.

We don't think markets fully appreciated the potential ramifications of such a low number, perhaps due to summer doldrums or its late-week release. This is historically a telltale indicator of consumer spending and the economic outlook. It's also among the best early warning signs of trouble. We aren't overly alarmed because its only one number but unless its revised significantly higher and we start to see improvement in August, this is the first evidence of a potential double dip. Whenever the survey has been this low in the past, the US has been in a recession."


Europe faces a very tough question, too: Do you break up the Eurozone or work toward a closer fiscal union?

All parties involved recognize that saving the Euro will require a much bigger rescue fund than the zone members and their citizens are probably prepared to accept.

One of the most overlooked aspect of this situation is that many of the new changes have not been put to a public vote by the citizens. Could unrest be in the future?

In September, the 17 Eurozone countries are going to have parliamentary votes to ratify the changes in the powers of the bailout fund. Resistance is high in France and Germany. This will be at the center of the Eurozone's politics for the next few months.

The insufficient size of the fund should continue to garner attention.

Furthermore, the ECB's decision to buy government bonds will probably also cause political tension. It is estimated the the ECB will need to continue to buy Italian and Spanish bonds to hold the hedge funds, and me, in check. It's going to be interesting to see how this plays out.

Lastly, what are the implications for Greece if other countries need help? In other words, has Greece been promised it's last bit of help?

There are a number of reports due out this week. I am not sure how market moving they will be because there is widespread consensus that we are seeing a slowdown in Europe, Japan, and the US.

In this climate, for the US and the Eurozone, political policymaking is just as important as the fundamentals.

What are the implications of this for trading E/U? I am not sure, but could it continue to trade within the current range, and become very sensitive to news-related sentiment? In essence the range would be defined by bad US news until bad Eurozone data replaces it.

What about, what one commentator called "the risk markets"--Stocks, commodities, JPY-crosses, CHF-crosses and commodity currencies?

Since I only trade currencies, I will focus on them. Given their decent economic outlooks we should see rebounds in the AUD, CAD, and NZD. Late last week, I was having trouble explaining Thursday's rise in the NZD and AUD. It could be that these currencies are moving back to risk appetite, and that we are seeing a resumption of carry trades. Jonas thinks so, and he might be right. The US rate pledge, coupled with a sluggish US economy makes Australia and Canada look like good alternatives.


Weekly Events:

Here are the announcements that will attract my attention at this week:


1) JPY- Japan GDP- Gross Domestic Product, the main measure of economic activity and growth, Sun., Aug. 14, 7:50 pm, ET.
Consensus: -2.6%

2) GBP- U.K. CPI- Consumer Price Index, the main measure of inflation preferred by the Bank of England, Tues., Aug. 16, 4:30 am, ET.


Consensus: -0.1%

3) EUR- Euro-zone GDP- Gross Domestic Product, the main measure of economic activity and growth, Tues., Aug. 16, 5:00 am, ET.


Consensus:

4) French President Sarkozy and German Chancellor meet to discuss Eurozone governance on Tues, Aug, 16.

5) USD- U.S. Housing Starts, a leading indicator of housing market activity measuring construction of new residential properties, Tues., Aug. 16, 8:30 am, ET.
Consensus: 608K



6) USD- U.S. Industrial Production, the main gauge of industrial activity measuring the output of factories, mines and utilities, Tues., Aug. 16, 9:15 am, ET. 


Consensus: 0.5%

7) GBP- Bank of England Monetary Policy Committee Meeting Minutes, a comprehensive report of the central bank’s meeting that could provide an outlook on the economy, interest rates and future monetary policy, Wed., Aug. 17, 4:30 am, ET. 



8) USD- U.S. CPI- Consumer Price Index, the main measure of inflation, Thurs., Aug. 18, 8:30 am, ET. 

Consumer prices in the United States are forecast to rise by 0.2% m/m in July compared with the 0.2% m/m drop in June. Such increase would, more than likely, not be enough to change the Fed’s mind and its promise to keep rates “exceptionally low through 2013”.
Consensus: 3.3%

9) USD- U.S. Existing Home Sales, the main gauge of the condition of the U.S. housing market measuring the number of closed sales of previously constructed homes, condominiums and co-ops, Thurs., Aug. 18, 10:00 am, ET.


Consensus: 3.5%

10) CAD- Canada CPI- Consumer Price Index, the main measure of inflation, Fri., Aug. 19, 7:00 am, ET. 

The Canadian economy could see consumer prices rising by 0.2% m/m in July, compared with the 0.7% m/m decline in June.
Consensus: 2.8%

It could also be the a combination of Chinese and Middle Eastern central banks and/or sovereign wealth funds diversifying away from the dollar at what they consider attractive levels. There were some reports of the Chinese buying AUDUSD last week on forexlive (off the lows, of course), the rest of it just my personal speculation.

What moved the markets today?

CHF


If you read my weekly focus there is one glaring omission: a discussion of the Swissy. It was a major oversight. Over the last few days, I was definitely aware of the SNB's desperation, but I let it slip out of my focus. I suppose that I was satisfied that the market had moved over 900 pips, but that did not mean the the SNB was. Rather than spending the weekend studying the SNB, and looking closely at the implications of the strong swissy, I moved on. And, it cost me.

A few days ago, I read that a Big Mac costs $17.00 in Switzerland, and that cars were lined up at the borders to go to Germany to purchase groceries. The Swiss currency is 41 percent overvalued against the euro, according to an index developed by the Organization for Economic Cooperation and Development (OECD) that uses relative costs of goods and services. It’s also the most overvalued currency against the dollar, at 48 percent.

Over the weekend, I did not do look closely enough at the SNB's response to the 900 pip move. Now that I think about, I did not hear any sighs of relief. You will probably see this again, when I discuss my missed trades.

The Swissy fell on word that there is serious discussions about setting a "target" for the currency's relationship to the Euro. News reports suggest that a plan could be unveiled on Wednesday. Expectations are that 1.1000 will be targeted on the low end.

SNB policy makers are reluctant to start purchasing to intervene after intervention attempts in the 15 months through mid-June 2010 sparked a record loss of $21 billion last year. So, they are looking at alternatives.

To be honest, if you continue to read my journal, you will probably read more criticism of my efforts than you will read about the great trades that I took. I am brutally honest with myself. What can I say? Don't get me wrong, I am not overly self-critical, and I possess a healthy ego. I just believe that to get to where I want to be, I have to "own my shit."


EUR:

The euro rose on news that the ECB spent 22 billion buying Italian and Spanish bonds. This move was seen as a positive sign that the ECB is willing to take every step to insure the strength of the currency.

As one newspaper report put it, "But more important for the markets will be signals from the ECB that it will continue to use its financial firepower to back stop these credit markets. The markets want the ECB to morph into a Fed/ BOE who is willing to extend the size of its balance sheet in the name of financial market stability. So far the ECB has been unwilling to do this, instead concentrating on its mandate to provide price stability. If we see inflation pressures start to abate then the ECB may escalate its role in stabilising Europe's battered sovereign debt markets." (LINK)

The EUR also might have moved based upon speculation that a major announcement will emerge from the meeting between Merkel and Sarkozy tomorrow. However, German Finance Minister Schaeuble had this to say about the possibility of eurobonds, "I'm ruling out euro bonds as long as member states pursue their own financial policies and we need differing interest rates (on government bonds) as a way to provide incentives and the possibility of sanctions, in order to force fiscal solidity."

On a medium-term basis, here's an interesting thought about the ban on short selling: "The positive affect will be short lived for the equities. Short-bans do not work: British stocks plummeted 41 percent after a short selling ban was instituted in 2008, and the US financial stocks plummeted after an introduction of ban on shorts during the same timeframe. The following short ban may have positive manifestation on the Euro for a short period, yet on a longer term timeframe if pressures resume on the financial sector of the Euro-zone further weakness in the currency pair may be felt."

This is something to which I will begin to give some attention the week before the ban ends, or when I perceive that the market is pricing it in.


JPY:

The positive news is that the Japanese economy did not contract as much as expected. The negative news is that Japan faces deflation and is already back in a recession with two consecutive quarters of negative GDP highlighting the fragile economy.

The threat of intervention continues to keep the currency from pressing towards the downside.


USD:

News reports suggest that negative data from the Empire Manufacturing survey caused the dollar to fall. I am not convinced. It probably has more to do with the return of risk appetite.


AUD:

The AUD rose as risk appetite rose today. However, we might see the AUD fall if negative, fundamental data this week forces us to really consider that we might be entering an extended global slowdown.


China:

Last week we saw the Chinese increase the pace of it's appreciation against the dollar. Earlier I speculated that this could be a sign that China was willing to lead in the advent of another global downturn by importing goods from Europe and the US.

However, could this just be Chinese gamesmanship before the highly anticipated visit of US Vice President Joe Biden on August 17?

Since the beginning of the year China has pursued a stable, consistent 4.5% annualized pace of appreciation of its currency against the dollar. The US Treasury has repeatedly called for the Chinese to increase their appreciation. This move might be an attempt to evade a discussion of the trading imbalance between the two powers.

If the spread was not 80 pips, I might consider trading this pair.

I haven't posted in awhile because I've been in Los Angeles visiting my family. I had intended to watch the markets, but since I could not give them the level of attention that is necessary I decided that it was better to “be out of the market wishing I was in, rather than in the market, but wishing I was out.”

Besides, I have too much respect for the big boys on the other side of my trades to think that I can compete with them without being fully confident in my reading of the market.


Missed Trades:

Since I was not actively involved in the markets last week, I didn't 'miss" any trades. However, I'd like to review some of the things that caught my eye.

At the beginning of last week many analysts were predicting that all of the disruptions caused by the US downgrade, and the global slowdown had already been priced in, and the markets were returning to risk appetite.

Certainly, Bernanke's announcements that the US rates would be held down for the next two years sparked a bit of a rally. However, it did not last long as equity markets tumbled by the end of last week.

We are in a good environment for predatory and parasitic trading. As one bank report put it, "Event risks remain high, though, and policy responses are likely to remain an important market driver. If the European debt crisis has taught us anything, it is that markets will have to move very close to the edge for politicians to react. This means that the path towards a long-term solution is likely to continue to be characterized by recurring periods of market stress – and in turn recurring downwards."

Both the US and Eurozone seem to be unwilling and incapable of moving with enough speed and power to relieve the markets.

Hence, there should be some great trading opportunities via the US dollar.



Risk Aversion or Risk Appetite?:

Short term it looks like the market will move between the two.

Medium term I am pretty bearish on the dollar, especially in relation to the commodity currencies--NZD, AUD, and CAD. Some analysts are predicting at least 4% increases in these currencies versus the dollar.

There are a number of reasons to be bearish:

Large current account deficit
Low interest rates
Slow growth
High unemployment
Potential for another credit downgrade
Accelerated reserve diversification out of the dollar
Significant political risks--Democrats and Republicans


Perhaps, if we enter into a recession, or if the European Debt Crisis worsens, we might see the US dollar rally.

Lots of interesting developments in the Eurozone last week.

Concerns that the eurozone’s largest economy, Germany, is slowing at a time when the continent can least afford it, lead to one selloff last week.

The markets had priced in a strong plan from Merkel and Sarkozy, but both rejected Eurobonds. However, many analysts have already concluded that eurobonds will be essential to the success of the euro long term.


One of the more interesting ideas to come out of the Sarkozy/Merkel meeting was the proposed financial transaction tax that will be unveiled in September. Both were probably playing to domestic crowds with that suggestion. It is a terrible idea. However, if enacted, I will be prepared to trade it.

I don't think the tax has a shot at getting authorized by all of the member states. There are many problems with such taxes:

"Some assert that contrary to the policy aim of reducing volatility, the outcome is more likely to be enhanced volatility at lower volumes of business which Europe doesn’t need.

With such lower volumes go added liquidity risk premiums and hence higher borrowing costs which Europe also doesn’t need.

With lower volumes go impaired bank funding costs, lower bank revenues and potentially intensified systemic risk. Isn’t Europe already facing deep structural challenges in this regard?

The argument that only a few major centres that dominate world trading need to implement such a tax is folly on two counts. For one, Europe doesn’t have them all and getting the others (NY, Tokyo etc) to go along is highly unlikely. For another, Canada offers an example of how one financial centre’s trading dominance (Montreal) can largely migrate elsewhere (Toronto) when circumstances warrant such that one cannot take for granted the role of a current major financial centre."

In the near term, the condition of the European banking sectors will be watched closely as US banks are investigating their interconnectedness with European institutions.

In reality, rumors of an impending bank collapse can significantly impact the markets. If so, EUR/CHF will be pushed toward parity again.


The Swissy seems to have settled into a range. Should the bond markets become disruptive we should see the Swissy strengthen. However, it is interesting to note that as European equity markets fell almost 5% late last week, the Swiss currency remained stable.

The threat of intervention continues to remain high in Japan, especially now that the Finance Minister appears to be a candidate to replace the current Prime Minister Kan, who is expected to resign. The finance minister's candidacy probably increases the likelihood that Japan will act quite aggressively to stem the appreciation of the JPY.

I haven't written much about cable because the UK's problems are as bad as the US problems-- weakness in the financial services industry, high unemployment, a weak real estate market, and little fiscal restraint.

I heard one commentator state that the swift shifting between risk on, risk off, risk on, etc is just another way of saying, "range." I think this refers to both G/U and E/U. However, event risks should provide some great trading opportunities.


Events and Expectations:


1) Canadian Retail Sales, Tuesday, 8:30 am. Retail spending in Canada is projected to increase another 0.5% in June after climbing 0.1% in the previous month, and the ongoing expansion in household consumption could spur a bullish reaction in the Canadian dollar as growth prospects improve.
Consensus: 0.6%. The number came in at 0.7%

2) U.S. New Home Sales: Tuesday, 10:00 am. New-home sales dropped unexpectedly in June to 312,000 from 315,000 in May. Analysts expected the figure to rise to 320,000. However, prices have come up amid short supply of new houses, increasing home values and indicating a start of stability in the housing market. Consensus: sales are predicted to tick up to 316K.

3) US Durable Goods Orders: Wednesday, 12:30. New orders for durable U.S.
goods rose by 1.9%. A big drop was originally reported. A similar rise of 2.2% is expected. Core orders, which are no less important, rose by 0.4% and are expected to reverse these gains.

4) New Zealand Retail Sales, Wednesday, 8:45 pm. Last month’s number came in at 0.9%. New Zealand retail sales expanded for the first time in three quarters, since the earthquake inChristchurch increasing by 0.9% in the first quarter of 2011 after contracting 0.4% in the last quarter of 2010. The main reasons for this increase are improved job market conditions and consumer spending.
Consensus: 0.6%

5) US Unemployment Claims: Thursday, 12:30. Jobless claims edged up to 408,000 last week crossing the 400,000 line and exceeding predictions for 402,000 new claims. The uncertainty in the market induces employers to layoff more workers which further aggravates job market conditions.
Consensus: a small drop to 402K is likely now.

6) U.K. Revised GDP: Friday, 8:30 am. The British economy expanded 0.5% in the first quarter of 2011 - in line with expectations - although the retail sector is still weak, indicating interest rates would not go up for in the foreseen future. The second quarter already saw a slowdown, according to the first release.
Consensus: 0.2%

7) US Preliminary GDP: Friday, 12:30. U.S. Gross domestic product increased by only 0.4% in the first quarter of 2011 well below the 3.1% growth in the last quarter of 2010 and the original publications. Also the first release of GDP for Q2 was disappointing at an annual pace of 1.3%. This reading indicates that the US economy is proceeding sluggishly amid a slowdown in consumption.
Consensus: growth of only 1.1% in Q1

8) Ben Bernanke speaks: Friday, 14:00. Ben Bernanke is now in a tenuous position following the last FOMC vote, where 3 out of 10 members opposed his liberal monetary policy of maintaining the extra-low rate until mid-2013. He will probably talk about the reason behind this resolution and the possible scenario of QE3. As a threat of deflation was officially the reason for QE2, the chances of QE3 are low as prices are on the rise. But if Bernanke looks to help the stock markets, QE3 is definitely on the agenda.

I haven't posted much this week because there really hasn't been much that's held my attention.

I suppose there were a few Bernanke Jackson Hole speech rumors that might have contributed to market movement, but I was compelled me to get off of the sidelines.

Like many of the Big Boys, I am waiting to hear what Bernanke has to say. There might be a few trading options if he clearly rejects QE3.

We will see what happens at 10:00 am.

Thank you for your posts,
& Enjoy your insights.
Please Keep up your good work.
Regards Davros

I made 15%, on a 45-pip EU short a few minutes after the text of the Bernanke speech became public. However, if you look at the chart, I should have made 40-50%.

Had I played it right, I would have been able to take home in one day, what many people dream about for the year. I am not saying this to brag, because the reality is that I missed the big, two-part trade.

However, there is one thing that I hope that I get from my own journal ( I hope you get it, too): you do not have to be in the market all the time to make big money. This was the only trade I took this week.

Once the text of Bernanke's speech became public at 10 am EST, it was clear that he was not going to push for QE3. In many ways, his speech should not have been market moving. To be honest, it was not. We saw a strong push down initially, but almost an hour later, E/U was where it was when Bernanke began his speech. Once I made money on the initial push down, my excitement got the best of me, and I was not ready to take the fade trade To be honest, that is the most disheartening because I really should have been angling for that play.

Instead of a 45-pip gain, I really should have made over 120 pips playing the initial drop, and the fade back to 1.4450.

While planning for this trade, one of the things that I forgot to account for was that the speech was close to the end of the European session for the week. Certainly, many had been planning to use this moment to initiate some profit taking. I think had I factored this in, I would have been better prepared.

Oh well, now I know better. The market had been preparing for this trade all week, and we were not disappointed.

For those of you that are familiar with Redsword11's teachings regarding price structure, this looks like pretty good price structure to me.

I know that I should not be mad at such a great day, but I missed the prized, two-part kill.

Don't beat yourself up too much. FIFTEEN percent is great. You should instead be congratulating yourself for not losing. Why so? Well, liquidity is very low during news announcements like this (ever trade FOMC?) and traders both long and short get whip-lashed by sudden spikes, reversals and wide spreads. Trading does tend to be a little easier if one has taken the time to prepare and pen out a plan, but even the best of the best get taken to the woodshed from time to time.

Fifteen percent. Congratulations!

Bug, you are right. Thanks for putting the situation in perspective.

Last week was not very active for me, but it was a good week.

MISSED TRADES: Although I placed a very profitable EU short trade right after the text of Bernanke's speech was released, as bug pointed out (without saying so), I really should have taken the fade trade rather than the initial move. The possibility of being whipsawed was too great. Besides, my plan really indicated that the news would not be market moving. That's why the fade trade really should have been my play.

RISK OFF OR RISK ON: This is actually a very difficult question for day trading, because it shifts quite quickly. As a predator, these shifts provide some great opportunities, but they also require you to be on top of your analysis. I know that I have missed trading opportunities because I had not gotten around to the analysis of the various possibilities, but that's okay.

However, in the next few weeks, you might hear me discuss position trading a bit more because it's easier to plan for. And less time consuming.

One of the realities when trying to define risk on and risk off in this market is that many of the countries that are defined as "risky" have better economic fundamentals than the US at the moment.

With very low interest rates as the cause of much of the current financial situation, lower interest rates will not solve the economic problems. However, they will provide great trading opportunities.

Consumer and government debt ratios are too high. The large debt burdens in the US and Europe are going to impact growth for the next few years. We are probably heading into a self sustaining cycle: large debt leads to slow growth, and slow growth makes it hard to decrease the debt.

What we've seen take place over the last few years is that private debt has been transferred to the public sector. As unemployment remains high, and this fact sinks in, will we see greater political instability and public unrest? (LINK)


The three takeaway points from Bernanke's speech:

1) The best means to address the structural issues that are impeding a stronger economic recovery in the U.S. (the housing market and long-term unemployment) are outside the realm of the Fed.

2) The U.S. has to address its long term fiscal difficulties.

3) Policymakers need to prove more near-term fiscal stimulus.

It's obvious that Bernanke is frustrated with the White House and Congress. His position that the US congress and president have to work to address uncertainly was quite clear. But, the unstated reality that the US government has recently been a major cause of uncertainty was equally clear.

Bernanke's statement that the Fed “is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability,” says that we should not expect the Fed to do more than agreeing to keep rates real low in the absence of a major economic downturn. Now it is up to the President and Congress. This was a reality check. The Fed can't do its job, and the government's too.

The nonpartisan Congressional Budget Office projected that high unemployment will accompany large deficits for much of the decade.

The unemployment rate, now 9.1%, will decline to a still-high 8.5% by the end of next year and will remain above 8% until 2014. Full employment won't arrive until 2017. "A great deal of the pain of this economic downturn still lies ahead of us," CBO Director Douglas Elmendorf said.(LINK)


On the Euro front, will the debates over collateral undermine the Greek debt plan?

There have been reports about the debate in Germany over the debt issues. One influential group made its perspective known. The German exporters' association on Monday called on the government to do whatever it takes to protect the euro, saying the U.S.'s credit downgrade has heightened fears that the debt crisis could hit any government. "All alternatives to eurobonds will cost us even more money in the end," the influential business lobby said. (LINK)

When will the debt crisis in Europe end? Here's a good analysis: "Bond buying by the European Central Bank is a stop-gap measure and one that makes the ECB the de facto price setter for government bonds. Until Europe can acknowledge that many of the sovereign debts cannot be repaid in full and assure the soundness of the banks when that happens, the crisis will continue." (LINK)

This issue might also heat up when Germany's constitutional court rules on the legality of the bailouts on September 7. Many people have assumed that it is a foregone conclusion that the court will rule in favor of the bailouts. We shouldn't be so sure. This might be a major market mover next week. (LINK)

Reflecting the contentious debates in Germany, Bundesbank and the German President slammed the purchase of Italian and Spanish bonds last week. "President Wulff said Germany’s public debt has reached 83pc of GDP and asked who will 'rescue the rescuers?' as the dominoes keep falling. 'We Germans mustn’t allow an inflated sense of the strength of the rescuers to take hold,' he said." (LINK) Next week should be interesting.

It looks like Japan will get a new Prime Minister this week. I will be looking for reports that address the new Prime Minister's monetary policy.


EVENTS:


1. USD- U.S. Personal Income: Monday 8:30 am ET. A measurement of the income received and purchases made by consumers, released along with the Personal Consumption and Expenditures Price Index. The Fed’s preferred inflation gauge, the core PCE Index which excludes food and energy costs, is expected to show inflationary pressures rising by 0.2% m/m in July, compared with 0.1% m/m in the previous month.
Consensus: 0.3%

2. CAD- Canadian GDP: Wednesday, 8:30 am ET. Canada’s gross domestic product slid unexpectedly by 0.3% in May, following wildfires damaging mining gas and oil sectors. This may also reflect upon the 2nd quarter. This pessimistic condition will not give room for rate hikes in the near future.
Consensus: 0.3%

3. USD - U.S. ISM Manufacturing Index: Thursday, 10 am ET. a leading indicator of industrial activity, where a reading above or below 50 is the dividing line between economic expansion and contraction.
Consensus: 48.5


4. USD - U.S. Non-Farm Payrolls: Friday, 8:30 am ET. Another weak and disappointing Non-Farm Payrolls report could become the catalyst that could move the Fed closer to QE3 in an effort to speed up the “frustratingly slow” pace of recovery at the expense of the U.S. dollar.
Consensus: 90K.

That's exactly the reason why I've started focusing on liquidity and trying to catch swings instead of large trends. EURUSD, for example, has tended to move in a box with no liquidity on either side. So it just jumps from low to high and high to low. Whiplash!


I recently browsed through the ECB's montly statistical bulletin and the situation is the same in Europe, Japan and the US. They all differ in their relative debt burdens (some have more personal debt, some more public debt) but in the end they're all the same which makes for a very bad environment for growth.

Deleveraging is by definition deflationary, but I have a feeling that the US Fed could be going down the same road they did in the 70s (I think Alan Meltzer does a good job at explaining this in his podcasts with Russ Roberts at EconTalk). I don't know about the ECB, though. Although the media (especially US media) likes to talk about the ECB printing money there is little to no proof of that (see chart below); I think the talking heads get so ahead of themselves that they don't even look at the data - they just assume things. Also, the ECB has a single mandate - inflation. This allows them to focus on the intermediate term policy unlike the Fed which is focused on micromanaging everything from employment, the equity markets, inflation rates and GDP (there's no proof that a central bank can focus on so many things at once and being good at it).
http://www.merkfunds.com/images/2011...nk-balance.png

Thank you for posting the WSJ story on eurobonds. With most of my time spent on research these last two weeks I have missed quite a few of these important news pieces.

I haven't posted the last few weeks, but I have still been engaged in the markets.

I decided to take a step back to assess my goal. Being profitable is not my goal. My goal is to be a millionaire.

To be honest, I don't think that the path I was on will get me there. I was able to make some dollars, but I was looking at the trees, and not paying enough attention to the forest. Don't get me wrong, trading news and expectations can be profitable, but I am not sure that it will get me to my goal.

Hence, I came to the conclusion that I am going to put my emphasis on position trading, as opposed to trading news and expectations.

Accepting this conclusion has been difficult for me because I don't believe this is an environment that is conducive to holding positions for years. Here are the questions I have been grappling with: do I adopt a method to trade the current market, or do I prepare myself for the bull market that might take 3 years to re-ignite?

The obvious answer is that I should do both. However, trying to trade current market conditions has some huge, potential dangers: 1) I could blowout my account; 2) I could develop bad habits; 3) I could lose confidence in my ability to read the market; 4) I could struggle, get frustrated, and quit; 5) I could become successful trading the ranging market, and become so distracted that I become content to be profitable, and miss my opportunity to become wealthy.

If my strategy is to trade like the Big Boys, what should I do when so many of them are sitting on the sidelines?

As I pondered these questions, I went back and re-read parts of my trading bible, Reminiscences of a Stock Operator. Here are some passages that really stood out to me:

"What beat me was not having brains enough to stick to my own game—that is, to play the market only when I was satisfied that precedents favored my play."

"I traded out of season all the time, because when I couldn’t play according to my system, which was based on study and experience, I went in and gambled."

"I think it was a long step forward in my trading education when I realized at least that when Old Patridge kept on telling the other customers, 'Well, you know this is a bull market!' he really meant to tell them that the big money was not in the individual fluctuations but in the main movements—that is, not in reading the tape but in sizing up the entire market and its trend."

"But I can tell you after the market began to go my way I felt for the first time in my life that I had allies—the strongest and truest in the world: underlying conditions. They were helping me with all their might. Perhaps they were a trifle slow at times in bringing up the reserves, but they were dependable, provided I did not get too impatient."

I have decided that it is best for me to begin to prepare to trade the upcoming bull market, as well as the events that have the potential to "shock" the markets into 500+ pip movements. Some recent examples include the BOJ intervention, the CHF peg to the EUR, the US downgrade, and the Japanese earthquake.

Let me say a bit about how I see the global economy right now.

Most of the major currencies have a negative profile. Here's how a report from Scotia Bank characterized them:

"USD – fiscal problems, loose monetary policy, desire for debasement & sentiment.

EUR – sovereign crisis, fragile union, growth prospects & sentiment.

CAD – ties to US economy, dropping oil prices, BoC on hold, risk aversion.

GBP – low growth, loose monetary policy, strict austerity.

CHF – strength of currency pushes SNB to 1.20 EURCHF floor.

JPY – official intervention, weak medium term fundamentals, loose monetary policy."

Last week's Weekly CFTC Sentiment Report highlights the difficulty of navigating the current, currency landscape. The four currencies in which most investors are net long in relation to the USD are the strongest safe havens (JPY and CHF), and the most volatile commodity currencies (AUD and NZD). This is an "odd combination considering their roles at either end of the risk spectrum."


Many of the western governments are implementing fiscal policies to reduce spending, and many corporations are sitting on the sidelines even though they have huge cash reserves. If governments and businesses are cutting spending, who is going to act to reign in high unemployment? Low GDP growth and high unemployment in Europe and the US are probably going to stiffle economic growth for years.

Governments are acting slowly to introduce new fiscal policies, which means that there is increased pressure on central banks to implement monetary policies to stimulate investment.

Politicians are playing an important role in the unsettling economic environment. As the recent S & P downgrades of the US and Italy have noted, political instability and inaction are a major threat to the global economy. Politicians tend to only make difficult economic decisions when inaction has immediate negative consequences. It is also important to note that it is politicians desire to take credit for strong economic growth that allows bubbles to form, which in turn provides trades with opportunities to generate wealth.

As Pimco's Mohamed El-Erian recently noted, "Global markets again find themselves in the uncomfortable back seat of a car driven erratically by policymakers...[If politicians] resume their dithering and bickering, it is just a matter of time until America's unemployment crisis worsens further, Europe tips into severe recession and greater financial instability and, as a result, millions more suffer around the world." (LINK)

UNITED STATES

Because of the lack of political will in the US, we should not expect effective expansionary fiscal policy to stimulate the economy, which means that Fed monetary policy will be left to try to solve this problem.

It looks as if Bernanke is going to push for Operation Twist, which will change the composition of its treasury holdings towards securities with longer duration with the aim of pushing down longer-term yields, so that bond holders will be incentivized to make other investments.

Pimco's Bill Gross had some interesting thoughts on Operation Twist: “The front end of the curve has for all intents and purposes become inert and worst of all flat as opposed to steeply positive. Two-year yields are the same as overnight fund rates allowing for no incremental gain – a return that leveraged banks and lending institutions have based their income and expense budgets on. A bank can no longer borrow short and lend two
years longer at a profit…By flooring maturities out to two years then, and perhaps longer as a result of maturity extension policies envisioned in a forthcoming Operation Twist later this month, the Fed may in effect lower the cost of capital, but destroy leverage and credit creation in the process. The
further out the Fed moves the zero bound towards a system-wide average maturity of seven to eight years the more credit destruction occurs, to a US financial system that includes thousands of billions of dollars of repo and short-term financed-based lending that has provided the basis for financial institution prosperity.”

The FT article that Bill Gross wrote is no longer available, but here is an interesting article about Gross' analysis (LINK). For me, this is the key interpretive passage: "What Gross is arguing that the banking system will not begin lending in an aggressive way with the yield curve as flat as it is, and if the flatness of the yield curve extends out to seven and eight years, very little lending will take place at all. Taking on riskier loans just does not pay in such an environment and the mis-matching of maturities produces only a minimal spread. In order to achieve competitive returns on equity, given these spreads, financial institutions would have to take on massive amounts of leverage -- something that the banks themselves don’t want to do right now and something that the regulators would not allow them to do.

Mr. Gross closes by saying that Mr. Bernanke needs to be careful keeping interest rates so low and trying to “twist” the yield curve to reduce longer-term yields to the levels now seen in the short-term end of the market. The fear is that Bernanke may produce, not a “take-off,” but a crash."

EUROZONE

One of the threats in Europe is the risk of a banking collapse. The recent decision to make dollars available to European banks makes this increasingly unlikely. The markets currently seem most concerned about the French banks, in part due to their high exposure to Greek debt. A Lehman Brother-style default is highly unlikely but a government takeover might occur down the road.

Unemployment in the eurozone is around 10%, and closer to 20% in Spain. Most of the PIIGS have little room to stimulate their economies because they are implementing fiscal tightening policies.


Will the European Monetary union (EMU) survive? Will Greece be kicked out? These questions are driving political debates within member nations, but are highly unlikely.

A country can voluntarily negotiate to exit the EMU, but cannot be expelled. In addition, any country that chooses to leave the EMU would also be forced to leave the EU. This means that it is more likely that we see closer fiscal ties among the member nations as the ultimate outcome.

Would Germany leave the EMU? Highly unlikely. The impact on its export sector would make this option excruciatingly painful for Germans. If Germany leaves the EMU and EU, they will lose all intra Europe trade advantages. A stronger Deutsche Mark and the loss of EU trade would cripple the German export sector. Long term this would cause more economic hardship for Germany than providing support to the PIIGS.

UBS estimates that if Germany were to leave the EMU, the cost would be
around EUR6,000 to EUR8,000 for every German adult and child in the first year,and a range of EUR3,500 to EUR4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over EUR1,000 per person, in a single hit.

Hence, it is highly likely that we see a slow move towards a quasi-fiscal union. This process will be delayed by national interests or the need to get consent from the European Parliaments, but will also be sped up by threats to EU economy. Each time a crisis hits the solution has been to move a little bit closer. As I mentioned earlier, politicians will only move when they are forced to do so.

Here are some potential threats in Europe worth watching:

1) Can the Greek government avoid an October debt default? To do so, it must deliver quickly on three commitments made to the "troika" (ECB, EU and IMF) that is withholding the next bailout payment: 1) another round of fiscal austerity, 2) a realistic privatization program, and 3) sufficient burden sharing by private creditors (or what is known as PSI, private sector involvement).

2) EFSF ratification. Slovakia has already indicated that the country will not vote on the EFSF before early-2012. Furthermore, there are indications that Austria will also delay the process – maybe until October. In accordance with paragraph 17.8 of the EFSF’s articles of incorporation, changes like that being contemplated require unanimous consent of the shareholders and hence
each of the member states must approve what is being asked of them. Will one of the 17 balk?

3) The banking sector. The coordinated effort of central banks to make sure that USD are available to European banks reveals that there are major problems. The end result of lending to the ECB will be to postpone the problem. The problem is not liquidity, it is insolvency and the use of too much leverage by banks and governments. This action only buys time. And maybe time is what they need to figure out how to go about orderly defaults, which banks and institutions to save and which to let go, which investors will lose (LINK).

4) Italy is too big to bail out. "If investors absolutely refuse to buy Italian government debt, that debt would need to be restructured. This would entail significant losses for investors, including some of Europe’s largest banks, who own it. In a worst-case scenario, another global financial crisis could
ensue. In that event, the global economy would plunge back
into recession." (LINK)

CHINA

Inflationary pressure has started to ease and it looks like China has avoided a boom/bust cycle. China's GDP forecasts for H2 is lower because of the weaker global economy, which creates a weaker outlook for exports.

CANADA

The Canadian economy could be the first to stumble into an official recession. It contracted in Q2 (-0.4%). It is reasonable to expect more contraction this quarter.


POTENTIAL TRADES:

Having said that I think there are three currencies that could provide some great 2000-4000+ pip movements in the near future.

1) Japan is clearly looking for ways to weaken their economy. As we see a long term shift to risk appetite we could see USD/JPY move from 77 to 115.

2) The AUD has grown 48 percent versus the U.S. dollar since the end of 2008. Generally speaking: the economy is in very good shape. The unemployment rate recently ticked back up to 5.3%, but that is far better than the 9-20% rates throughout Europe and the US.

The Australian dollar’s core fundamentals remain strong – positive interest differentials; a strong banking system with a diminishing reliance on offshore funding; a trade surplus; and ongoing interest in AUD assets from foreign central banks and sovereign wealth funds.

The strong AUD and interest-rate level are acting as a drag on domestic activity and sentiment, except in the booming mining sector.

Will we see the RBA begin to cut rates? If so, we could see AUD decline significantly due to the high levels of risk aversion, and an unwinding of carry trades. If so, we will be able to structure some great trades.

3) Much like Australia, there has been remarkably little evidence to date of global tensions being transmitted through to the New Zealand economy.

There’s evidence that the domestic economy is cooling a bit, but the inflationary outlook might lead to tightening.

The RBNZ has recently confirmed its tightening bias, so we should expect to see rate hikes shortly. Some commentators are predicting a hike of THREE percentage points within the next two years.




This post isn't meant to be a downer, I am actually quite excited about what I am expecting to take place in the next 3-5 years, the real question is whether I will be patient enough to be in position to profit when the bull starts to charge upward.

If you read my last post, you probably wouldn't have thought that I would enter 3 trades two days later: Operation Twist "shocked" the markets into risk aversion.

I know that my last post was long, but perhaps it should have been longer. I am still trading, but I am focused on significant risk-off shocks. As a trader, I am much more comfortable taking low-frequency, high-probabilistic, high-leverage trades.

Some may wonder why a trade that was designed to promote economic growth was negatively received by the market. The key was a change in language. Previously, the Fed had talked about “downside risk.” When it introduced Operation Twist it referenced “significant downside risk.” It is amazing how one word can be worth billions of dollars.

I took three USD-based trades. If you've read Ashraf Laidi's book, you probably know the three currencies that I shorted. I am not trying to be a jerk, but it's a really helpful book that I hope you read. If you are having trouble finding it in bookstores, you might be able to find a copy of it through a google search

Many markets watchers are trying to make sense of Bernanke's next moves. One recent profile suggests that "Bernanke has made clear his mindset about post-bubble economics: Keep experimenting as long as the economy is stumbling and inflation is muted." Hence, in the next few months and years, we might see an active Fed.

If so, this might lead to a number of trading opportunities given how closely the Fed is watched. The next few Fed meetings might ignite investment. However, it is as likely that Fed intervention will remind people of the deteriorating economic environment.

One of the key aspects of Operation Twist is that it does not alter the Fed balance sheet. They are not creating more money, they are just moving it around.

This is a key point given the contentious debates taking place over spending in the US Congress. The US is moving into a presidential election cycle, which will have a tremendous impact on monetary and fiscal policy in the next year.

For example, the top four leaders of the Republican opposition sent a letter to Bernanke before the last Fed meeting, which stated: "We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery." This letter is scary because the idea of eroding the US dollar is widely seen as an important step to getting the economy moving. Additionally, the reference to increasing consumer borrowing is troubling because consumer spending drives the US economy.

The thrust of the Republican message is: don't do anything that will stimulate the economy. Hence, over the next few months we should expect the US Congress to block EVERYTHING that stimulates economic growth in the US. HERE is a link to the Republicans' letter if you'd like to read it.

One of the leading challengers to President Obama recently said Bernanke would be committing a “treasonous” act if he tried to boost the economy with a new round of quantitative easing. (LINK)

One of the other things that the Fed announced with Operation Twist is that it will buy mortgage-backed securities. This action is designed to drive down the costs of mortgages. Clearly, the Fed sees housing as a major drain on the US economy. However, these actions probably won't have much impact, as banks remain reluctant to offer credit to anyone, but the most credit-worthy borrowers. Furthermore, banks are requiring 20% down payments. As a point of reference, five years ago most Americans that purchased homes did not put any money down. Lastly, as many as 40% of homeowners in the United States owe more on their homes than they are worth. Hence, they cannot refinance to take advantage of the lower interest rates.

In the aftermath of the financial slowdown in 2008, as part of his stimulus package, President Obama gave an $8,000 tax credit to first-time homeowners. This was perhaps his most stimulating action. Now, given the republican opposition in congress, similar actions will not be enacted.

The Eurozone continues to be at the center of the global slowdown. The sovereign debt crisis, as well as, concerns about the banking sector are major market focal points.

The Eurozone would be probably be on much better footing, if the policymakers would lead. However, given the high public dissatisfaction with the potential bailouts, the politicians continue to let market fears drive the process.

The changes that were passed to expand the EFSF on July 22, face several votes this week. It is estimated that it might take several of the EU countries another 2-3 months to pass it. This illustrates how long it takes the EU to respond to pressing issues.

The stronger EU nations are advocating structural reform and austerity measures for the PIIGS. These are important, but the market needs quicker, bigger, and more decisive actions before many of the Multinational corporations decide to get off the sidelines.

It is clear that German citizens want to see the Greeks introduce more austerity. In one sense, they want to make sure that the Greeks suffer for their financial mismanagement. This strategy could cause the financial crisis that the bailouts might avoid because if government spending is cut too much in the PIIGS, it could lead to a European-wide recession, which would have global consequences.

Will the Greeks give up? As I mentioned in my last post, since the Greeks can't be kicked out of the EMU will they simply decide to default? I need to find out when the next elections in Greece will be held. It's highly likely that the next president will promise that all of the problems can be solved while reversing the austerity measures.

Will the European policymakers move quickly enough to avoid an economic disaster? The lack of confidence in the politicians is what's driving the market right now.

I've gotten into the habit of writing fairly lengthy posts, but things are quite simple at the moment.

The Big Boys are positioning themselves for a recession.

I am expecting the USD to strengthen against the three commodity dollars. It should be a good ride. Once the recent, major support levels (post-August 2, 2011) are broken, I will begin to add positions.

This recession will be the springboard that launches the bull market that will allow me to retire early.

For those of you that read my 1st post early on, please take another look. I have updated the reading suggestions.

I really think the 19-paged document by Ray Dalio explains our present situation. I've read it a few times, and I probably will read it again. Perhaps, I will make a post about it soon.

By the way, one of the things that I realized about myself is that it really doesn't take 3-5 hours of reading to figure out where the market will be headed in the long term.

However, I've really grown to love to study the markets.