Why forex traders tend to lose money...

ECB leaves rates unchanged ; Draghi announces details of asset-buying program

The ECB left rates unchanged at 0.05% and Chairman Draghi announced some details of the new European asset buying program. For the last few weeks the market had been anticipating and wondering what, how much, from whom and when the ECB would begin buying assets, and today we got the answer. Mr. Draghi announced that the ECB will begin buying covered bonds in mid-October and ABS from Q4 of this year. Mr. Draghi announced that the program will last two years and these measures should push inflation closer to the 2% target the central bank has. The ECB was unanimous in its decision and is ready for additional measures if needed. The euro was mostly unchanged on this news, only rising slightly off of 2 year lows, as more specific details of the program will be released at 9:30am EST through a press release. So for now, the market will continue to wait and see on that.

It was a fairly quiet night in Asia ahead of this morning’s ECB rate decision and press conference. The Australian dollar was the big winner following some better than expected building permits for the month of August while the yen strengthened in what has become an oversold market. Most currencies moved up a bit against the dollar as the market is finally beginning to question this one sided move that began in May when the ECB first acknowledged they would initiate some kind of asset buying program. Stocks were a sea of red in Asia and for most of Europe as the market mostly anticipated a disappointing statement from the ECB Chairman, as he has delivered too often in the past.

In the US, Challenger Job Cuts were a touch lower than expected at +30k versus +40k expected. This report, which provides information on the number of the announced corporate layoffs by industry and region, had no impact on markets ahead of Chairman Draghi’s address. US weekly jobless claims were +287k, an unexpected decline from last week, and August factory orders are still to come at 10am. The market is expecting a 9% drop for August after a strong 10% rise in July. The US dollar has risen over 3.5% in the last month alone and in some cases it is beginning to consolidate, leaving many on Wall Street asking if it is time to take profit. USDJPY took a brief look over 110 and USDCAD took a brief look over 1.12 but both currencies are mounting a marginal comeback into the second half of this week. Looking to Canada, data is scant this week as the RBC Manufacturing PMI missed slightly this morning, coming in at 53.5 against expectations of 54.5.

US non-farm payrolls for September is the next big event tomorrow at 8:30am. Following six straight months of +200k-plus prints, the US missed the mark badly in August and the market is anticipating a solid bounce back now that the summer has ended. With Q3 growth expectations centered around 3%, tomorrow’s number should be around +200K with a chance for a positive adjustment to August’s dismal +142k number. US data has begun to wane a bit here, notably yesterday’s Manufacturing PMI. US dollar bulls will need a strong NFP print to continue this bullish run.

Have a great day!

Stephen Casey

Senior Foreign Exchange Trader and Market Analyst

US Dollar continues its ascent with solid nonfarm payroll report


Asian bourses reversed losses and ended the trading week in positive territory as Hong Kong’s top official, Leung Chun-ying agreed for a fresh round of talks with pro-democratic activists. China’s non manufacturing PMI released in the overnight session eased to 54.0 in September from 54.4 the previous month, its fourth consecutive month of decline, primarily due to a drop in new orders and places fresh pressure on China to provide more stimuli to bolster the economy as concerns mount on the global growth outlook. The yen shrugged off a stronger than anticipated PMI in September with a reading of 52.5 as bill purchases from the Bank of Japan took center stage and weakened the yen toward the 109 handle. In its effort to spur inflation, the Bank of Japan purchased a record 3.5 trillion yen of Treasury bills and has pushed down the three-month yield to -0.02% and the two year government bond yield at 0.06%. Comments from Governor Haruhiko Kuroda that a weaker yen is unlikely to pose a threat to the economy fueled further losses for the currency.

The euro has traded on the defensive as ECB President Mario Draghi failed to reassure markets that the ECB will do “whatever it takes” to expand its balance sheet at his press conference on Thursday where markets were looking for further details on its plan to buy secured debt. The Euro zones’ economic woes deepened with the release of PMIs from France and Italy which came in below the key level of 50 that separates contraction from expansion at 48.4 and 48.8 respectively. Germany served as the only bright spot with an improved reading from 54.9 to 55.7. The euro zone as a whole slipped to a ten month low of 52.0 in September from 52.5 in August. In other economic data, retail sales for August rebounded from 0.5% to 1.9% on an annualized basis.

In a speech to the Institute of Directors, UK Chancellor George Osborne cited that weak euro zone growth is the largest near term risk to UK growth. Compounded with a softer PMI reading at 58.7, it builds concerns that next week’s economic docket of industrial and manufacturing production, trade balance and housing data could miss expectations as well which could lead the pound below the 1.6000 handle.

As we head into the North American session, a strong nonfarm payroll report has lifted the US dollar. For the month of September, 248,000 jobs were added to the economy and the unemployment rate declined to 5.9% from 6.1% the prior month. August figures were also revised upward from 142,000 to 180,000. With a labor market that is gaining traction, wage growth which is one of the areas that is scrutinized by the Federal Reserve stalled at 2.0% on an annualized basis. This set of data supports the view that the era of cheap money is coming to an end and that the Federal Reserve remains on the right trajectory toward policy normalization. Trade balance for the US in August narrowed to $40.1 billion with September Services PMI, Composite PMI and ISM non-manufacturing PMI on deck later this morning.

The Canadian dollar is weak due to broader US dollar strength as a result of a strong US jobs report and softer domestic fundamentals where August trade balance showed a surplus of $0.61 billion, missing estimates of $1.6 bn. Further, an escalation of global growth concerns has driven oil and commodity prices lower which has also weighed on the loonie.

Global Growth Divergence Dominates Sentiment:

The pronounced narratives that have been driving market price action for the latter half of 2014 are at the forefront of participants’ minds to begin the new trading week, with global growth concerns dampening risk appetite while the greenback remains in vogue on slumping oil prices and monetary policy divergence between the Federal Reserve and other developed central banks. The concerns surrounding global growth have been spurred by disappointing Chinese trade data that was released overnight, and although China’s trade surplus widened by a larger amount than expected, this was a consequence of a sharp collapse in import growth which saw the value of imported goods fall by 6.7% compared to the last twelve months.

The shockingly soft import data is reflective of the recent slide in energy prices, though volume of energy imports were also down, which is consistent with an overall slowing growth trajectory for the world’s second largest economy. Expectations had been for imported goods to rise by 3.8% on a y/o/y basis, so the wide miss has stoked conjecture the government will find it apt to assess further rate cuts and other stimulus measures as a means to save growth from coming in below target. As a result, the Shanghai Comp barreled higher with a gain of 2.86% on its session, while USDCNY rose due to a weakening yuan despite the PBoC fixing the CNY stronger. We would caution the stage is set for a highly volatile upcoming year in China, with the government looking to navigate the economy through a rough patch while reducing their reliance on “nuclear” monetary policy tools, but also having the ability to utilize the exchange rate as a means to steer growth. Two-way volatility in the CNY will likely amplify in 2015, which has implications for corporations with any linkages to China, not just ones trading the Renminbi.

The data flow out of Europe has been light this morning, so the big focus for market participants has been the inability of the hydrocarbon complex to seal the exodus of capital. The soft Chinese trade data was compounded with a bout of analysts’ price downgrades throughout 2015 and 2016 for the black gold, causing WTI and Brent to slide further and are now trading in the mid $64/barrel and low $67/barrel respectively. Friday’s rally in the DXY after the enthusiastic Non-Farm Payrolls number seems to still have some legs, with market participants adjusting expectations for a more hawkish Federal Reserve meeting to end the year when the FOMC meets next week. That said, today’s DXY strength is heavily reliant on the greenback’s price action against the Euro (largest currency allocation in the DXY basket) as the big dollar is seeing some consolidation against the Pound, Yen, and Loonie. While the CAD isn’t making any great strides against its American counterpart, its outperforming when compared to its commodity-linked brethren given the new lows experienced today in the oil market. Housing starts and building permits for the Canadian economy came in slightly better than expectations this morning, though with a lack of tier-one domestic data on the docket for the remainder of the week, price action in oil and broader USD-linked developments will drive Loonie sentiment.

Have a great week!

Scott Smith, CFA

Senior Market Analyst

Key Benchmarks


West Texas Crude - 64.44 USD / bb

NYMEX Natural Gas - 3.68 USD / mmbtu

COMEX Copper - 290.00 USD / lb

COMEX Gold - 1,194.20 USD / t oz.

DJ Industrial Average - 17,958.79

S&P 500 Composite - 2,075.37

TSX Composite - 14,473.70

US 10 Year Treasury - 2.30%

CDN 10 Year Treasury - 1.94%

Mon
08

CNY: Trade Balance, November
CAD: Building Permits, October

09
09
GBP: Manufacturing Production, October
CNY: CPI, November

1010

NZD: RBNZ Interest Rate Decision
AUD: Employment Change, November

1111

EUR: Targeted LTRO
USD: Retail Sales, November
CAD: New Housing Price Index, October

12

CNY: Industrial Production, November
USD: Preliminary UoM Consumer Sentiment, December

Chinese Collateral Crunch Craters Equities:

December 9, 2014

Global equities are experiencing a continuation from yesterday’s pessimistic price action, as officials in China raised collateral requirements that sparked a liquidity crunch and caused investors to reduce their exposure to risk-correlated assets. The Chinese Securities Depository and Clearing Corp (CSDC) implemented new policy that would only allow corporate bonds with ratings of AAA, and those issues by firms with a rating of AA and above, to be used in the repo market, a move that will drastically limit the amount of collateral that can be used against borrowing, and thus have the knock-on effect of forcing many participants to de-leverage their positions. Initial estimates are that the amount of eligible collateral on deposit at the CSDC will be halved, further reducing the demand for lower-rated corporate debt. The stricter collateral rules combined with another higher USDCNY fix from the PBoC illustrate the central bank might feel things have gotten a little frothy in the equity and fixed income markets given participants expectations for further monetary policy accommodation, and subsequently today’s actions have led to the Shanghai Comps’ biggest plunge since August of 2009, dropping 5.31% by the time markets in Asia closed.
Sentiment wasn’t able to recover at European traders arrived at their desks, with the light economic calendar being insufficient to alter slide in equities. German trade balance numbers for October came in slightly more robust than expected with a larger than forecast surplus, though a challenging consumer demand environment where imports fell by 3.1% illustrates the current struggles for the overall zone. While exports did fall by a lesser extent than has been estimated into the report, the cause for concern comes from a drop-off in imported goods, a factor of a decline in purchasing power from a weaker Euro and tough economic conditions permeating throughout the common-currency bloc.

In addition, Greek equity markets are in free-fall this morning, adding to the already terse conditions as Prime Minister Samaras accelerated the process of electing the next president. The concern for investors that praise stability is that the opposition Syriza is currently polling quite well, and if they gain sufficient traction so Samaras is unable to hold the super-majority required to select the next president, this would force elections as soon as next year. The Athens stock index is down over 10% after the dissemination of the decision; however, with the USD in consolidative mode as commodity prices halt their tumble for the time being, the Euro is higher against the greenback midway through the European session as EURUSD edges into the high-1.23s.
The Sterling has also been a benefactor of the corrective forces at work in the DXY book, despite manufacturing and industrial output both coming in below forecasts for the month of October. Both measures saw a decline in activity of 0.7% and 0.1% respectively when compared to the previous month, though GBPUSD has remained resilient, pivoting in the high-1.56s heading into the North American open.

As we get set for the opening bell, the softness in equities has picked up momentum and is spiraling into a larger wash-out, though the commodity complex (with the exception of copper) is finding a bid tone and has seemingly avoided another leg lower for the time being. Both WTI and Brent have picked up off the new cyclical lows experienced yesterday, managing to claw their way back into the mid-$63s and mid-$66s respectively. The Loonie has managed to gain some traction on the back of the hydrocarbon bounce and USDJPY plunging through the 120 handle, with USDCAD backing away from the psychologically important 1.15 area to trade back in the mid-1.14s. The JOLTS employment report for October is set to drop later this morning in about an hour, with the expectation continued improvement in the overall labour market will see job openings increase from September. Though somewhat stale in regards to overall timeliness, another strong labour market indicator will increase speculation the FOMC will be looking to change their forward guidance language at next week’s meeting.


Key Benchmarks

West Texas Crude - 63.63 USD/bb

NYMEX Natural Gas - 3.63 USD/mmbtu

COMEX Copper - 289.20 USD/lb

COMEX Gold - 1,217.21 USD/t oz.

DJ Industrial Average - 17,852.48

S&P 500 Composite - 2,060.31

S&P TSX Composite - 14,144.17

US 10 Year Treasury - 2.22%

CDN 10 Year Treasury - 1.88%

Have a great day!

Scott Smith, CFA
Senior Market Analyst

The benefits of any activity should outweigh the costs. Risk should be commensurate with return. In fact and theory, risk and return are inseparable. Analysts say the relationship between risk and return is positive – the greater the risk, the greater the expected reward. The foundations of market theory, CAPM and MPT, are predicated on this.

The influence of these theories is enormous. They underpin astronomical values of investments. They inform economic, financial, monetary, and fiscal policies. Every economics and business student learns them. Professionals and academics build careers on them. That they may be divorced from empirical evidence has not proven an impediment to their use.


Model Good. Data Bad.


In the past year, various studies have redefined the risk-return relationship to accommodate economic realities. Major institutions are adopting new risk models. Practice may be diverging from established theory. These are steps towards a better understanding of the nature of risk and uncertainty.

A new study from Boston University and the London School of Economics turns risk and return on its head. The paper finds “a negative relationship between risk and expected return…in line with empirical evidence but in contrast to standard theories.”

This “inversion,” as the Financial Times calls it, has been empirically evident in equity markets since 1926. Until about 1970, the risk-return relationship was flat. Since 1970, inversion has become increasingly manifest. For 45 years, low-risk stocks have tended to offer better returns than higher risk equities. This is no statistical anomaly – it has persisted for the better part of a century. The Financial Times concludes these findings “suggest deeply distorted markets.”


Nine Decades of Bad Data?


The Great Recession dealt a tremendous blow to financial theory. Nobel prizes aside, theory appears to have been weak from the cradle. Markowitz’s E-V model of risk as volatility is from 1952. CAPM proposed beta as a risk measure in 1961. The Sharpe Ratio (which incorporates E-V ) is from 1966. A 2014 study from Spain’s IESE Business School argues CAPM, “an asset pricing model that relates risk and return…is not supported by empirical evidence.” One wonders if financial theory may have ignored decades of market data.


Are Low Rates Deflationary?


Noah Smith, writing in Bloomberg, points out another fundamental theory bogged down in the reality quagmire: conventional wisdom says pumping money into an economy (such as through Quantitative Easing) leads to inflation. So far, countries employing QE have not seen it. Instead, they struggle with disinflation or outright deflation. Smith asks, what if “low interest rates…are actually deflationary”? What if raising rates stimulates economic growth?

Studies indicate this might be the case, at least under current circumstances. The argument connecting persistent low rates to deflation begins with one of the simplest identities in economics – the Fisher Equation –which essentially says the nominal interest rate equals the real interest rate plus inflation (rnom = rreal + i). In other words, monetary policy to raise rates could very well be expansionary.

The Fisher Equation works. In the following graph, the break-even inflation rate (the black line, calculated using the equation) tracks expected inflation well:

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In the graph below, the green line is the nominal rate; blue represents the real rate; and the red line is expected inflation:


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This thinking is not new. Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis,explained the idea in 2010. The federal funds rate he refers to is the overnight rate at which US banks lend their reserves, held in the Federal Reserve Bank, to each other.

If the Federal Open Market Committee maintains the fed funds rate at its current level of 0 to 25 basispoints for too long, both anticipated and actual inflation have to become negative. Why? It is simple arithmetic. Let us say that the real rate of return on safe investments is 1% and we need to add an amount of anticipated inflation that will result in a fed funds rate of 0.25%. The only way to get that is to add a negative number, in this case, −0.75%.
In terms of the Fisher Equation, 0.25 = 1 – 0.75. Four years later, the fed funds rate is 0.09%.

William T. Gavin, a Vice President of the Federal Reserve Bank of St. Louis, describes the significance of the Fisher Equation similarly:

The Fisher equation has important implications for the expected inflation rate. If the real economy is currently rebounding to a sustainable growth trend, the real interest rate will rise and the only outcomes possible will be either a higher nominal federal funds rate or a negative expected inflation rate … One reason to worry about deflation is that the federal funds rate is expected to be held near zero.

One influential economist posing this idea is John H. Cochrane at the University of Chicago. In his study, Cochrane describes the phenomenon (he calls it “Neo-Fisherian”) this way:
(After raising nominal rates), we should expect a consumption boom with little inflation, then consumption to revert to normal slowly as inflation picks up…. The prediction that raising nominal interest rates is expansionary is pretty central to the basic structure of this model.

http://globalriskinsights.com/wp-con...r-300x175.jpeg

Cochrane admits the Neo-Fisherian thinking is counterintuitive:

The basic logic is pretty simple: raising nominal interest rates either raises inflation or raises real interest rates. If it raises real interest rates, it must raise consumption growth. The prediction is only counterintuitive because for so long we have persuaded ourselves of the opposite, despite the Fisher equation and the consumer’s first order condition linking consumption growth to the real rate.

In a blog post,“Heretics,” Cochrane writes, “we’re getting low inflation or deflation because interest rates are pegged at zero, and maybe the way to raise inflation is for the Fed to raise interest rates.” He is clearly intrigued by the idea and calls for further study.

Theory is not holding up well in the face of reality these day

By Steven Slezak

The golden dragon or the injured bear?
BY PETE THOMAS
December 15, 2014

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Back in October in Futures magazine I wrote at length in the article Brave New World for Gold that the most beneficial move for the gold market would be a reduction in the taxes on the sale of gold in the Asian market. So as we approach the end of the Year the Indian government in a rather rapid fashion has working in concert with the Reserve Bank of India towards lowering the current 10% import duty which is referred to as the 80-20 rule.

So if this tax or duty could be lowered over the next few weeks India will enjoy a rather large influx of metals purchases bleeding over from the merchant side of the gold market but just as importantly there will be the flow from the off the books trade as well. India has long wanted the black market gold sales migrated back onto the regulated books and with a reduction in the tax base this should bring about this shift rather rapidly.

Now as to the strength or weakness of the metals market. The overall well-being of the metals is going to be split by the collapse of the oil market. With less funds flooding into the Middle East we will see the demand for metals reduced over the short term unless we drop down to levels which make it very attractive.
Also with the Ruble in free fall the overall demand from Russia for gold to stockpile in the Central Bank will have to wane just due to the degradation of the currency itself. The other side of the coin is that as the price drifts to lower levels you will see the natural occurring demand start to go up. Also with the current moves occurring in Shanghai on the gold exchange (SGE) you will see an increase over the next three of a rather large increase in gold bullion. So the question is low taxes and demand or lower demand and sliding currencies. Which will win remains to be seen but I hope an unencumbered free market in the largest Democracy wins out.

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Quant Fund Two Sigma Up 47% As Machines Beat Hedge Funds Confused By Oil
Dec 12 2014 | 8:03am ET
By Kelly Bit (Bloomberg) -- The quants are winning.


Hedge funds that rely on computer programs to trade are producing some of the highest returns in the industry after a particularly profitable November. Two Sigma, a $24 billion firm run by a former artificial intelligence academic and a mathematics olympian, rose 10 percent last month in one of its strategies and is up 47 percent this year.

Cantab Capital Partners jumped 18 percent in its main fund in November and has returned 32 percent this year and Aspect Capital advanced 12 percent for the month, doubling its return in 2014.

Scientists, mathematicians and engineers are beating star managers by capturing price discrepancies across markets, making money from a plunge in oil prices and on government bonds that human traders dismissed. The Newedge Trend Index, which tracks firms that that use models to profit from market trends, has advanced 17 percent this year through November, compared with a 3.7 percent gain for funds across strategies.

“Discretionary traders did not see value in buying and holding sovereign bonds in the U.S., U.K. and Germany,” which benefited quantitative funds, said Anthony Lawler, a money manager for GAM Holding, which invests in hedge funds. “Short energy was a large winning trade, whereas discretionary traders were by and large not in,” he said, referring to bets against the industry made by human decision-makers.

Paulson Losses

Quants are succeeding as some of the most well known stock and bond pickers struggle in forecasting the outcome of corporate mergers or gauging the impact of central bankers on markets. Richard Perry, Jeffrey Altman and Paul Tudor Jones are UNDERPERFORMING equity and credit indexes this year; billionaire

John Paulson has lost 27 percent in his event-driven fund and hedge funds are closing at a rate not seen since the financial crisis.

Jim Simons, a former military codebreaker and chairman of the mathematics department at Stony Brook University, is regarded as a pioneer of investment strategies that use computer models. He formed a firm that became East Setauket, New York- based Renaissance in 1977 and hired scientists and engineers to mine data from financial markets looking for relationships among stocks, bonds, derivatives and commodities.

Assets overseen by quants have more than doubled to $796 billion since 2008 after the firms returned 21 percent that year, according to Hedge Fund Research Inc. and Newedge’s trend- following index. The average hedge fund declined 19 percent, according to data compiled by Bloomberg, and the Standard & Poor’s 500 Index dropped 38 percent.

Replicating Success

Computer-driven firms haven’t always replicated that 2008 success, losing money in at least two of the past five years, according to Newedge and data compiled by Bloomberg. In comparison, hedge funds on average made money during the period except in 2011.

Quantitative firms this year have been boosted by the more than 40 percent drop in oil prices since June.

Firms that follow trends, such as rising stocks or falling commodity prices, gained an average of 7.3 percent in November and those that use models to make decisions on macroeconomic themes returned 4.6 percent. The average hedge fund rose 1.2 percent, according to HFR.

Two Sigma had the best-performing strategy in its Compass Enhanced fund, which trades futures and currencies.

The New York-based firm was founded in 2001 by David Siegel, the former chief technology officer at Tudor Investment Corp., who received a PhD in computer science from MIT, and John Overdeck from D.E. Shaw & Co., who was an International Mathematics Olympiad Silver Medalist in 1986.

Backgammon, Billiards

Its website boasts of the firm’s technology pedigree rather than connections to Wall Street. Two Sigma touts the first open source software artist, billiard and backgammon champions and the founder of Hungary’s first commercial internet service provider among its employees.

This year isn’t a fluke. The Two Sigma Compass Enhanced fund has posted an annualized return of 30 percent since inception in 2005, according to a person with knowledge of the matter, who asked not to be named because the information is private.

Others making money this year include Aspect, a $4.8 billion London-based trend-following firm. Its Aspect Diversified Fund has gained 24 percent for the year, according to a person briefed on the returns.

Renaissance, with $25 billion, rose 4.2 percent last month and is up 12 percent this year in its Renaissance Institutional Diversified Alpha Fund, according to a person briefed on the returns.

Algorithmic Funds

Not all algorithmic-driven funds have done well this year. Quantitative Investment Management, the $1.9 billion Charlottesville, Virginia-based firm, fell 8.7 percent in its main fund after losing 0.1 percent last month on bets against German stocks and wagers on the Japanese yen, according to a performance update, a copy of which was obtained by Bloomberg News.

The firm’s more volatile Quantitative Tactical Aggressive Fund surged 27 percent in November to bring year-to-date gains to 2.3 percent, according to the update.

Returns at quant funds can be turbulent. Cantab, the $3 billion firm co-founded by Goldman Sachs Group Inc.’s former quantitative trading head Ewan Kirk, had its best month in November since starting, according to a person with knowledge of the returns. Aristarchus, the largest share class in the $3 billion quantitative fund, is up 32 percent this year after losing 28 percent in 2013.

Ackman Competition

This year some stock and bond pickers have also been competitive with programmers. Bill Ackman’s Pershing Square International fund rose 4 percent in November and 38 percent in 2014 by taking concentrated bets on companies. Other luminaries, such as David Einhorn and Daniel Loeb, are up 11 percent and 9.1 percent this year through November.

The upper hand is still with the quants. In previous years the firms had been deprived of markets where assets held direction for an extended period, said Tim Bruce, director of traditional research and partner at NEPC LLC, which advises clients on hedge fund investments.
“If you don’t have a trend that persists for four, eight or 12 weeks, you really can’t get any traction and make money,” said Bruce. “That’s been the challenge for the past couple of years. This year you’ve seen some trends develop.”
Spokesmen for the firms declined to comment on the returns.

--With assistance from Simone Foxman and Saijel Kishan in New York.

December 16, 2014

FX Volatility Heats Up; Fed in Focus

There has been little in the way of reprieve from volatility in financial markets recently, with the oil rout incentivizing a fresh wave of risk aversion that has sent global equities into retreat this morning. In an effort to curb the exodus of capital induced by crumbling oil prices, the Russian Central Bank stepped into action last night and hiked interest rates from 10.5% to 17%, hoping the 650bps increase would limit the recent surge in Rouble devaluation and inflation risks. The emergency rate hike helped to stabilize USDRUB briefly as the pair slid back to the 59 handle; however, the monetary policy tightening measure was not enough to curb speculators from establishing new short positions in the Rouble, along with a swell of corporate demand to buy USD to fund foreign denominated debt as corporations worry the central bank is losing its grip on the market. Volatility in USDRUB has been enormous this morning, with the pair reversing its earlier losses and printing fresh record highs just below the 80 handle, but at the time of writing has seen some consolidation and is pivoting around the 73 level.

The Shanghai Comp was able to buck the trend of sagging global equity performance and increased by 2.3% on its session, with risk appetite bolstered by a softer than expected HSBC Manufacturing PMI which supports market expectations there will further monetary accommodation from the People’s Bank of China. The headline reading fell from 50.0 to 49.5, signaling purchasing manager activity in the manufacturing sector contracted from the previous month, and combined with last week’s disappointing data increases the likelihood there will be new measures introduced in order to grease the monetary policy wheels to save annual GDP growth from falling below the government’s preferred levels. As a result, the Aussie and Loonie have enjoyed a slight reprieve from oil taking another leg lower, with the export-linked currencies garnering attention from participants on expectations of a pick-up in activity from China.
The news flow out of Europe has been positive across the board this morning, a statement that hasn’t been issues relatively frequently in the past few months. The flash PMI readings for the month of December showed that activity in both the service and manufacturing sectors across the Eurozone accelerated from the previous month, beating estimates after German manufacturing PMI buoyed the composite reading for the zone. In combination with the slightly cheery purchasing manager numbers, the survey on investor confidence in Germany that is conducted by the ZEW institute blew expectations out of the water, with the headline printing at 34.9 in December, up from the 11.5 registered in November. The positive economic docket along with continued anecdotal reports that the majority of the ECB governing body is still a ways away from agreeing on a coordinated QE program has lifted the Euro against the greenback this morning, with EURUSD punching through the 1.25 handle.

As we head into the North American open, the early morning slide in oil with WTI tumbling below $54/barrel induced flow into US treasuries, with the downward pressure on yields dragging the DXY lower and as a result sent USDJPY into a tailspin as the pair broke the 116 handle to the downside. There has since been a slight recovery as equity futures come off their lows after building permits and housing starts for December came in slightly weaker than anticipated, though the resulting rebound has only pushed USDJPY back into the mid-116s. The Loonie is on slightly stronger footing against the USD before the opening bell, managing to ease USDCAD back from another run at 1.17 as Chinese stimulus hopes and consolidative price action in the DXY provides support for the commodity-linked currency. On the economic front Canada’s domestic data came in mixed this morning with manufacturing sales sliding by more than expected October, though demand for Canadian securities from foreigners picked up over the same month. USDCAD continues to be a buy on dips as the hydrocarbon complex struggles to find a base, though it is likely volatility will be elevated ahead of tomorrow’s monetary policy statement from the Federal Reserve. With the labour market continuing to develop in a constructive manner, market participants will be keenly eyeing the language in the statement for the key phrases of whether slack in the labour market is still significant, and if ‘considerable’ is still apt to characterize the time after asset purchases have end to when interest rates will rise. The recent liquidation in oil and the impending lower prices at the pump are likely to also have an effect on the Fed’s updated inflation projections, so there will be lots of moving pieces that could potentially generate volatility over the course of the next few days.

Good luck out there!

Scott Smith, CFA
Senior Market Analyst

Posted on 16th December 2014, by Moneycorp Dealer Team, Moneycorp

Stress Everywhere

Making the ruble bounce

Central bank intervention is an inexact science. In general, it stands more chance of success when the aim is to depress the currency than when the aim is to prop it up. Bold moves tend to bring the best results. That is not what Bank Rosii delivered this morning.
Overnight the Russian central bank bumped up its benchmark interest rate from 10.5% to 17%. Earlier this year the bank had spent more than $70bn of its foreign reserves buying the ruble to support its value. Since the currency was allowed to float, today's is the third rate increase intended to achieve the same result. It raises two questions. Is it dramatic enough to shock and awe the FX market? And has the ruble been falling because of speculative selling? If the answer to either is No, this morning's bounce by the ruble will be no more than a blip.
The currency has fallen by 40% against sterling in the last three months. Were it to continue at that pace it would have lost 94% of its value by next September. Against that prospect, unlikely though it is, the 17% cost of covering a short position is small change. And it is not clear whether the selling is driven by speculation or capital flight. If Russians are moving their money abroad they will not be deterred by a more attractive interest rate.

Safety first

Falling prices for energy, precious metals and other commodities have got investors rattled. They continued to offload equities yesterday and sought the security of the safe-haven currencies, classically the Swiss franc and the Japanese yen.

The yen was the day's top performer, strengthening by three yen against sterling. Switzerland's franc went up by nearly a cent but would surely have risen further had it not been held back by the euro, which added two thirds of a cent. The US dollar was also up by two thirds of a cent against the pound and the antipodeans managed to edge ahead. At the back of the field the South African rand dropped 13 1/2 cents and was only narrowly beaten by the Northern Scandinavian crowns.

Tuesday's ecostats showed falling producer prices in Switzerland, a narrower trade surplus in Norway, improved order books for British industry and a useful lift in US industrial output. US house-builders were a little less upbeat and there was a net outflow of US capital investment in October.

Stress and inflation

This morning the Bank of England announced the results of its stress tests on the country's lending institutions. Three banks will need to raise more capital but only one failed the test. The CPI data at half past nine are expected to show inflation slowing to 1.2%.
The stress test results have had no noticeable impact on sterling. It might not be so resilient to a further decline in inflation, even though one has already been flagged in the Bank of England's Inflation Report.

Russia Crisis Hits Pimco Fund, Wipes Out Options As Ruble Sinks

Dec 17 2014 | 3:58am ET
By Vladimir Kuznetsov, Ksenia Galouchko and Ye Xie (Bloomberg)

After the single worst day in Russia’s nine- month-old financial crisis, the fallout is spreading across global markets.

Pacific Investment Management Co. is facing mounting losses on its Russian bond holdings; almost every bullish ruble option contract registered in the U.S. has been made worthless; and foreign-exchange brokers in New York and London told clients they’re no longer taking ruble trades. Sergey Shvetsov, a first deputy central bank governor, expressed astonishment at the scope of the collapse during a conference in Moscow.

“We couldn’t imagine what’s happening in our worst nightmare even a year ago,” Shvetsov, who oversees financial markets at Bank of Russia, said yesterday. He said the surprise interest-rate increase in the middle of the night, a 6.5 percentage-point move that failed to stem the run on the ruble yesterday, was a choice between a “very bad” option and a “very, very bad” option.

The ruble sank beyond 80 a dollar, a record low, as panic swept across Moscow’s financial markets before it rebounded after Economy Minister Alexei Ulyukayev denied speculation the government would impose restrictions to stop Russians from converting cash into dollars. The currency ended the day at 67.9, down 5.4 percent on the day, while bonds and stocks also tumbled. The ruble fell 4.4 percent to 70.5885 at 10:08 a.m. in Moscow, as the Micex fluctuated between gains and losses today.

Oil Collapse

The speed of the ruble’s retreat indicates policy makers are losing control as the six-month tumble in oil robs President Vladimir Putin of the hard currency he needs to sustain an economy faltering under the weight of international sanctions tied to the Ukraine conflict. The selloff in Moscow is being felt in other developing nations, where investors are pulling money amid concern that Russia’s financial struggles and the tumble in oil point to a global economic slowdown.

A Bloomberg gauge tracking the top developing nation currencies fell to the lowest since 2003, while the MSCI Emerging Market Index of shares slid 0.3 percent, bring its losses for this month to 9.7 percent. Indonesian policy makers have been propping up the rupiah after it sank to a 16-year low. Crude oil fell 0.8 percent in New York.

Pimco Losses

Pimco’s $3.3 billion Emerging Markets Bond Fund has been one of the hardest hit. It held $803 million of Russian corporate and sovereign bonds at the end of September, equal to 21 percent of total assets, an amount that’s more than double that of the benchmark it tracks, according to data compiled by Bloomberg. The fund has lost 7.9 percent in the past month, trailing 95 percent of its peers.

“The investment themes in Pimco’s portfolios are based on long-term ideas and views,” said Michael Gomez, the head of emerging markets at Pimco. “While emerging markets have been volatile, we think segments of the market offer compelling risk- reward opportunities for long-term investors.”
Traders and investors in the currency options market were also caught off-guard by the ruble’s 52 percent slide this year. In a market with hundreds of bullish call options worth more than $15 billion combined, only one of them -- a $5 million contract expiring a year from now -- is still profitable at the current exchange rate.

Worthless Options

Every single other contract is now out-of-the-money because they gave traders the right to buy the ruble at exchange rates that are stronger than yesterday’s closing level, according to data compiled by the Depository Trust & Clearing Corp. from clients of U.S. banks.

The volatility is proving too much for some brokers. New York-based FXCM Inc., the third-largest currency broker for retail clients, will stop offering the ruble versus the dollar and begin closing its customers’ trades while Alpari UK stopped clients from taking new positions.

Hedge fund Alden Global Capital is profiting from the turmoil sweeping across Russia’s financial markets. The $1.8 billion New York-based firm run by Randy Smith has been betting against the ruble for the past month and a half, according to two people familiar with the trade.

Government officials including central bank Governor Elvira Nabiullina and Finance Minister Anton Siluanov huddled outside Moscow yesterday to discuss ways to combat the crisis. The rate increase to 17 percent, taken less than 24 hours earlier, only managed to stoke a brief rally in the ruble.

In addition to denying that officials were considering currency restrictions, Ulyukayev, the economy minister, told reporters after the meeting that “of course” rates should have been raised earlier. No policy changes were announced.

Capital Controls

Speculation has been growing that foreign-exchange controls were imminent, with firms from Schroder Investment Management Ltd. to Skandinaviska Enskilda Banken AB, or SEB, saying they were possible. Per Hammarlund, chief emerging-markets strategist at SEB, said the government could make it harder for depositors to swap cash into hard currency or require exporters to bring some earnings into the country.

While there were no initial signs yesterday of Russians lining up in downtown Moscow to pull their ruble deposits and buy dollars, Khanty-Mansiysk Otkritie Bank, the retail arm of the country’s second-largest private lender, said demand for foreign currencies was three to four times the daily average.
Even after rebounding late in Moscow, the ruble was still down 14 percent this week and 27 percent this month. It earlier fell the most in a day since the country defaulted and devalued the currency in 1998. The annual cost of insuring against a debt non-payment climbed to 5.76 percent in the credit-default swap market, the highest since 2009.

‘No Bids’

“Our traders are informing me that we see no bids to buy rubles,” SEB’s Hammarlund said. “I thought 17 percent would give them at least a month of breathing space. We next have to look at the experience in 1998-1999. We are also one big step closer to capital controls.”
The ruble has kept plunging even after the central bank raised rates 11.5 percentage points this year and spent more than $80 billion in the foreign-exchange market, draining reserves to a five-year low of $416 billion. Economists surveyed by Bloomberg said they expect central bankers to step up intervention again, spending about another $70 billion.

Stagflation Risk

Russia, meanwhile, is sinking into stagflation.

A recession looms at the same time that inflation is soaring to a three-year high. The economy may shrink as much as 4.7 percent next year if oil, the country’s biggest export, averages $60 a barrel under a “stress scenario,” the central bank said earlier this week. Net capital outflows may reach $134 billion this year, more than double last year’s total. Prices for benchmark Brent crude fell below $60 yesterday, leaving them down 48 percent in the past six months.
While Putin’s approval rating remains near an all-time high on the back of his stance over Ukraine, the currency crisis risks eroding his popularity. There are few signs the crisis will fade any time soon.
“It’s very hard to stop the panic,” Vadim Bit-Avragim, a money manager at Kapital Asset Management LLC in Moscow, said by phone. “Everyone is betting against the ruble.”

Pharos Russia Fund Off To Awarding Start In ‘10

Mar 5 2010 | 2:50pm ET

Moscow-based hedge fund firm Pharos Financial Group is doing very well in its home base.

The firm’s Russia Fund is up 7.3% this year, just in time for Pharos to be named the best hedge fund manager at Terrapinn’s fourth annual Middle East hedge fund awards on Sunday. Of course, success is nothing new for the Pharos fund, which has been the best-performing Russian hedge fund over the past 13 years and has annualized returns of 26.1% since 2000.

Pharos’ long/short fund is currently long-biased, as the firm has a positive outlook on Russian stocks.

Pharos was founded by American Peter Halloran in 1997, and opened an office in Dubai in 2008.

The Terrapinn award is based on historical track record, downside protection, 2009 performance and marketing in the Middle East

Blackstone Quits Russia

Sep 23 2014 | 7:29am ET

The Blackstone Group is abandoning a three-year effort to establish a foothold in Russia.

The private-equity giant is “giving up on Russia” and has chosen not to renew its consultants’ contracts in the country, the Financial Times reports. Blackstone does not have an office of its own in the country.

The move comes amidst growing tensions between Russia and the U.S. and European Union, which have imposed sanctions on Russia after its invasion and annexation of the Ukraine’s Crimea region. The west has also accused Russia of backing pro-Russian rebels in the eastern Ukraine, including the group that shot down a passenger airliner in July.

Blackstone has been trying to break into Russia for three years. The effort saw co-founder Stephen Schwarzman join the advisory board of the Russian Direct Investment Fund—he remains a member—but has yet to produce a single deal for Blackstone in the country.

“In the good times, Blackstone couldn’t find anything to do and in the bad times, Blackstone can’t imagine doing anything,” the FT’s source said.

By Timothy Heritage

MOSCOW (Reuters) - A prominent opponent has warned Vladimir Putin his days in power are numbered, as Russia awaits the president's response to the dramatic decline of the rouble.

Putin has been silent as the currency collapsed against the U.S. dollar this week before making up some of the lost ground on Wednesday, but he is sure to be asked about it at his end-of-year news conference starting at noon (0900 GMT) on Thursday.

Former Prime Minister Mikhail Kasyanov, an ex-ally who is now an opposition leader, blamed the growing financial crisis on economic mismanagement by Putin, as well as Western sanctions over the Ukraine crisis and a fall in global oil prices.

"Russia is going into decline," Kasyanov, 57, told Reuters in an interview on Wednesday evening. "2015 is a year in which Putin must make a 'principle' decision."

Warning the president would face protests, he said Putin could choose a "further squeezing of the political environment", meaning a tightening of the screws on critics, or accept "he needs an exit strategy" and agree to hold free elections early.

"As a result of that, (he should have) just a quiet departure through presidential elections. I don't believe he will win presidential elections if they are free and fair," Kasyanov said.

Opinion polls show Putin has sky-high popularity ratings since annexing the Crimea peninsula from Ukraine in March and suggest Kasyanov, who worked under him as premier until 2004, has little public support. But Kasyanov said opposition would quickly mount early next year as the economic crisis worsened.

The next presidential election is due in 2018. Putin, 62, has not said whether he will seek another six-year term.

The rouble is about 45 percent down against the dollar this year and its fall has aroused fears of financial meltdown.

A 6.5 percentage point increase in the key lending rate to 17 percent failed to prop the rouble up on Tuesday, and it was about 20 percent down on the day at one point. Russia has also spent more than $80 billion this year trying to shore it up.

Putin failed in a state-of-the-nation address on Dec. 4 to offer any big ideas to turn around the economy.

His annual news conference and phone-in, shown live on television, is usually a marathon performance that can last more than four hours. Putin is likely to use it to shift blame onto the West for Russia's problems, as he did on Dec. 4.

(Reporting by Timothy Heritage; editing by Andrew Roche)

Ruble currency crisis could create contagion
BY MARK O’BYRNE

December 17, 2014

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Russia’s currency market witnessed further huge volatility again today. The finance ministry said it would start selling foreign exchange which are primarily in dollars. This appeared to reduce selling pressure on the battered rouble.

The fall of the ruble this year has been severe, with a 50 percent fall against the dollar and of course gold this year. The slide has been precipitous as in the past two days alone, it fell about 20 percent against the dollar and gold.

On Monday, the ruble fell 10% against the dollar and gold followed by another crash of 11% on Tuesday, despite a massive rate hike.

The heavy selling pressure this week, made the central bank sharply increase its key interest rate by an unexpected 6.5 percent or 650 basis points. The move did little to buttress the currency in the short term as speculators and traders continued to sell the ruble.

Momentum is clearly down and computer driven markets and increasing dominance of algorithmic or black box trading is exacerbating the rouble’s short term weakness.
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However, the sharp increase in interest rates and the fact that the fundamentals of the Russian economy remain reasonably sound and not much worse than many western economies, will support the rouble. It is likely to stabilise at these levels and recover in the coming months. It is also important to note that political and economic relations between Russia and China are very good at the moment and China would likely provide financial assistance--if indeed that is needed.

The ruble rout is due in part to the collapse in oil and now very low oil prices. It may also be due to the effects of western sanctions. This is likely to rally the Russian people behind Putin and will not have the impact that western leaders hope it to have.

The effects of the crisis are already being felt in western Europe and in the global financial system.

Austria’s third largest bank, Raiffeisen Bank lost 10.3% of it’s share value on the news that the Russian central bank had raised rates a stunning 6.5% overnight on Monday.

It is worth remembering that it was the bankruptcy in 1931 of Austrian bank Creditanstalt’s, founded by the Rothchild family, that resulted in a new global financial crisis and ultimately the bank failures and deep recessions of the Great Depression.

In France, Societe General – a bank which is also exposed to the Russian economy to the tune of €25 billion--lost 6.3% of it’s share value. If the Russian crisis continues, and there is little to suggest it won’t – with the U.S. set to impose a new round of sanctions, the repercussions for the west and the global economy could be drastic.

In the modern, interconnected globalism (world of today), real sense and risk in western leaders are “cutting off our nose to spite our face.”

The global banking system has a very limited capacity to absorb sizeable losses and the risk of contagion is as high now as in 2008. It may be the case that western banks and institutions have more to lose than Russia in the longer term.

Crude Trading Alertoji-generated Reversal?
BY NADIA SIMMONS

December 17, 2014

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The price of crude oil declined yesterday once again–-was the bottom reached yet?
In our opinion--not yet, but it could be the case that we’ll see some kind of pause shortly. The big picture provides us with the same implications as it did yesterday.

http://media.resourceinvestor.com/re...12/17/nad1.png
Source: stockcharts.com

Our previous comments remain up-to-date:

The first thing that catches the eye on the above charts is a breakdown below the long-term blue support line (based on the 2002 and 2009 lows and marked on the monthly chart) and the 70.7% Fibonacci retracement based on the entire 2009-2014 rally (marked with green on the weekly chart), which suggests further deterioration in the coming day (or days). If this is the case, the commodity could drop to around $51-$52.73, where the 76.4% and 78.6% Fibonacci retracement levels are.

If the long-term outlook is that bearish, then why can we expect a pause here? Because on a short-term basis we saw a daily reversal (doji candlestick) on significant volume.

http://media.resourceinvestor.com/re...12/17/nad2.png
Source: stockcharts.com

Since doji on high volume is a reversal sign, we could see one, but since the momentum is so strong in case of the crude oil market, it could be the case that the correction that we’ll see will be very limited--perhaps similarly to what we’ve seen at the beginning of the month.

Summing up, while we may see a corrective upswing shortly, it doesn’t seem that the decline in crude oil is completely over. The space for declines seems limited, and consequently we think that opening short positions at these levels is not justified from the risk/reward perspective.

Very short-term outlook: bearish

Short-term outlook: mixed with bearish bias

MT outlook: mixed

LT outlook: bullish

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective at the moment, but we will keep you informed should anything change.

Eurozone Sentiment Touching Lows for the Year. UK Weak Too.
Posted by Hugh Taggart at 4:11 PM

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The aftermath of the G20 meetings in Australia over the weekend were not just marked by headlines concerning Russia and the Ukraine but also by the UK Prime Minister returning to London saying global economies faced significant macroeconomic headwinds.

Cameron mentions many problems - the Eurozone, a slowdown in emerging markets, Ebola, Russia/Ukraine and so on. Given time we could analyse the trend in sentiment to all of these matters, but in this post, let’s just take a look at sentiment toward the major economies.

You’ll see from the attached charts* that sentiment would beg to differ with Mr Cameron on a couple of matters. He appears to be correct, however, on the Eurozone, where the 14-day and 30-day RSIs are back around their lowest for the year.

The first point of difference is that the UK is doing well. We show that relative sentiment is far from healthy. Perhaps Cameron’s critics are right and the UK PM is getting his excuses in early?

But things aren’t all perfume and flowers forJapan and the US either.
http://4.bp.blogspot.com/-PooVR0G8Q5...Nov%2B16th.png

In fact, if you’re just looking at relative sentiment, Canada, Australia, New Zealand and China seem to be leading the pack.

If we take a closer look at the major laggard, the Eurozone, the weakness in sentiment is being driven by news about the economies that make up the bloc.

That’s measured by events that fall under the topic “economy” in the RavenPack dataset - things like economic data and related guidance given by central banks. Drilling down into constituent countries shows that sentiment is weak in France and, a little surprisingly, Ireland. Relative good performers are Germany and Italy. If we take the countries formerly known as the PIIGS as a whole, sentiment is around neutral. The aggregate sentiment of the majors - France, Germany and the events concerning the Eurozone as a whole - relative sentiment is very weak, mostly due to the French influence.

The Burning Questions For 2015
John Mauldin | Dec 18, 2014


Louis Gave is one of my favorite investment and economic thinkers, besides being a good friend and an all-around fun guy. When he and his father Charles and the well-known European journalist Anatole Kaletsky decided to form Gavekal some 15 years ago, Louis moved to Hong Kong, as they felt that Asia and especially China would be a part of the world they would have to understand. Since then Gavekal has expanded its research offices all over the world. The Gavekal team’s various research arms produce an astounding amount of work on an incredibly wide range of topics, but somehow Louis always seems to be on top of all of it.

Longtime readers know that I often republish a piece by someone in their firm (typically Charles or Louis). I have to be somewhat judicious, as their research is actually quite expensive, but they kindly give me permission to share it from time to time.

This week, for your Outside the Box reading, I bring you one of the more thought-provoking pieces I’ve read from Louis in some time. In Thoughts from the Frontline I have been looking at world problems we need to focus on as we enter 2015. Today, Louis also gives us a piece along these lines, called “The Burning Questions for 2015,” in which he thinks about a “Chinese Marshall Plan” (and what a stronger US dollar might do to China), Abenomics as a “sideshow,” US capital misallocation, and whether or not we should even care about Europe. I think you will find the piece well worth your time.

Think about this part of his conclusion as you read:

Most investors go about their job trying to identify ‘winners’. But more often than not, investing is about avoiding losers. Like successful gamblers at the racing track, an investor’s starting point should be to eliminate the assets that do not stand a chance, and then spread the rest of one’s capital amongst the remainder.

Wise words indeed.

A Yellow Card from Barry

What you don’t often get to see is the lively debate that happens among my friends about my writing, even as I comment on theirs. Barry Ritholtz of The Big Picture pulled a yellow card on me over a piece of data he contended I had cherry-picked from Zero Hedge. He has a point. I should have either not copied that sentence (the rest of the quote was OK) or noted the issue date. Quoting Barry:

Did you cherry pick this a little much?

“… because since December 2007, or roughly the start of the global depression, shale oil states have added 1.36 million jobs while non-shale states have lost 424,000 jobs.”

I must point out how intellectually disingenuous this start date is, heading right into the crisis – why not use December 2010? Or 5 or 10 years? This is misleading in other ways:

It is geared to start before the crisis & recovery, so that it forces the 10 million jobs lost in the crisis to be offset by the 10 million new jobs added since the recovery began. That creates a very misleading picture of where growth comes from.

We have created 10 million new jobs since June 2009. Has Texas really created 4 million new jobs? The answer is no.

According to [the St. Louis Fed] FRED [database]:

PAYEMS – or NFP – has gone from 130,944 to 140,045, a gain of 9,101 over that period.

TXNA – Total Nonfarm in Texas – has gone from 10,284 to 11,708, for a gain of 1,424.

That gain represents 15.6% of the 9.1MM total.

Well yes, Barry, but because of oil and other things (like a business-friendly climate), Texas did not lose as many jobs in the recession as the rest of the nation did, which is where you can get skewed data, depending on when you start the count and what you are trying to illustrate.

My main point is that energy production has been a huge upside producer of jobs, and that source of new jobs is going away. And yes, Josh, the net benefit for at least the first six months until the job non-production shows up (if it does) is a positive for the economy and the consumer. But I was trying to highlight a potential problem that could hurt US growth. Oil is likely to go to $40 before settling in the $50 range for a while. Will it eventually go back up? Yes. But it’s anybody’s guess as to when.

By the way, a former major hedge fund manager who closed his fund a number of years ago casually mentioned at a party the other night that he hopes oil goes to $35 and that we see a true shakeout in the oil patch. He grew up in a West Texas oil family and truly understands the cycles in the industry, especially for the smaller producers. From his point of view, a substantial shakeout creates massive upside opportunities in lots of places. “Almost enough,” he said, “to tempt me to open a new fund.”

On a different note, everyone is Christmas shopping and trying to find the right gift. Two recommendations. First, the Panasonic wet/dry electric razor (with five blades). I just bought a new set of blades and covers for mine after two years (you do have to replace them every now and then); and the new, improved shave reminded me how much I was in love with it when I bought it. Best shaver ever.

Second, and I know this is a little odd, but for a number of years I’ve been recommending a face cream that contains skin stem cells, which I and quite a number of my readers have noticed really helps rejuvenate our older skin. (I came across the product while researching stem-cell companies with Patrick Cox.) It clearly makes a difference for some people. I get ladies coming up all the time and thanking me for the recommendation, and guys too sometimes shyly admit they use it regularly. (It turns out that just as many men buy the product as women.) The company is Lifeline Skin Care, and they have discounted the product for my readers. If you can get past the fact that this is a financial analyst recommending a skin cream for a Christmas gift, then click on this link.

It is time to hit the send button. I trust you are having a good week. Now settle in and grab a cup of coffee or some wine (depending on the time of day and your mood), and let’s see what Louis has to say.


Your trying to catch up analyst,

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John Mauldin, Editor

Putin vows to boost ruble, says West won't defang Russian bear
https://s.yimg.com/bt/api/res/1.2/xT...ory_081043.jpgBy Laura Mills And Vladimir Isachenkov, The Associated Press

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2. 
   
   Reuters/REUTERS - Russian President Vladimir Putin speaks during his annual end-of-year news conference in Moscow, December 18, 2014. The rouble edged lower against the dollar on Thursday, with traders saying President Vladimir Putin had offered few concrete …more

By Laura Mills And Vladimir Isachenkov, The Associated Press

MOSCOW - Sternly warning the West it cannot defang the metaphorical Russian bear, a confident-looking President Vladimir Putin promised Thursday to shore up the plummeting ruble and revive the economy within two years.

While he issued a litany of sharp rebukes against the West, Putin struck a conciliatory note on Ukraine, saying that the rebellious east should remain part of the country, backing a quick exchange of war prisoners and praising his Ukrainian counterpart.

The mixture of blistering anti-Western rhetoric and constructive signals appeared to indicate that Putin is eager to negotiate a face-saving solution to the Ukrainian crisis, but has no intention of conceding defeat in his standoff with the West.

In his first public appearance since the crash of the ruble's value this week, Putin accepted responsibility for the economic crisis.

He said Western sanctions accounted for at least 25 per cent of the ruble's fall, but the main reason was Russia's failure to ease its overwhelming dependence on oil and gas exports.

In his speech, the man who has led Russia for 15 years sought to soothe market fears, saying the country has sufficient currency reserves and would not resort to administrative controls, such as fixing exchange rates or obliging exporters to convert their Western currency holdings to rubles.

Following Putin's performance, the Russian currency traded between 60 and 62 rubles to the dollar, roughly the same level as late Wednesday, when it rallied 12 per cent after plummeting to a historic low of 80 rubles per dollar. Still, the currency has lost about half its value since January.

In Brussels, the European Union strengthened its sanctions against Russia with new measures Thursday that ban investment and discourage tourism in Crimea.

And in Washington, President Barack Obama signed legislation authorizing new sanctions on Russia but said he does not plan to impose the penalties outlined in the measure.

Putin shrugged off speculation that some members of his inner circle hurt by Western sanctions could rebel against him in a "palace coup," citing strong public support.

An Associated Press-NORC Center for Public Affairs Research poll released Thursday backed up that view, recording his approval rating among Russians at 81 per cent, a level far above typical ratings for world leaders.

The poll was conducted before the ruble's slump this week, which spurred many Russians to withdraw bank deposits and buy Western currencies or durable goods in an attempt to protect the value of their savings.

Audi was the latest major company to suspend deliveries in Russia amid the ruble's turmoil. Apple halted online sales earlier this week.

If the Kremlin fails to stabilize the ruble soon, panic could spread, triggering an even more massive run on banks and a sharp surge in inflation that could swiftly erode Putin's support.

The president argued that the nation's hard currency reserves are sufficient to keep the economy stable. He said the Central Bank should not "thoughtlessly burn" its reserves worth $419 billion.

Putin appealed to Russia's exporters to turn their foreign-generated profits back into rubles at home, adding that he had personally asked some executives to do this.

"Our economy will overcome the current situation. How much time will be needed for that? Under the most unfavourable circumstances, I think it will take about two years," he said.

Chris Weafer, senior partner at Moscow-based Macro Advisory, said Putin's comments reflected a greater political will to push overdue reforms, but also amounted to an acknowledgment that the government lacks a clear strategy. He summed up Putin's message as, "We're definitely in a world of pain here and there is no obvious solution."

Putin struck a defiant note against the United States and the 28-nation EU, saying the sanctions they slapped on Russia after it seized the Black Sea region of Crimea in March were part of a historical campaign to weaken Russia.

To illustrate his point, he raised the metaphorical Russian bear.

"Sometimes I think maybe it would be better for our bear to sit quietly, rather than chasing around the forest after piglets. To sit eating berries and honey instead. Maybe they will leave it in peace," Putin said.

"They will not. Because they will always try to put him on a chain, and as soon as they succeed in doing so, they tear out his fangs and his claws."

Putin said he was referring to Russia's nuclear arsenal, which protected its valuable natural resources.

"Once they've taken out his claws and his fangs, then the bear ... (will) become a stuffed animal," he said. "The issue is not Crimea. The issue is that we are protecting our sovereignty and our right to exist."

Putin said he wanted a political solution to the crisis in Ukraine, where pro-Russian insurgents have battled Ukrainian government troops since April, leaving more than 4,700 dead.

He said Ukraine must remain one country and the two sides should hold a prisoner swap before Christmas.

Yet he defended Russia's increased military activities, including Baltic air patrols that NATO says are putting civilian flights at risk, as a necessary response to what he described as Western aggression.

Putin said he was sure that Ukrainian President Petro Poroshenko wanted a peaceful settlement, but other forces in Ukraine did not. He urged the Ukrainian government to grant amnesty to the rebels and offer broad rights to eastern residents.

Despite his strong criticism of the West, Putin still held out hope for normalizing ties, saying Russia wants to restore full-scale economic and security co-operation if its interests are respected.

"Yes, we want equal relations," he said, "but with full respect for our security and economic interests."

Putin also softened his rhetoric against liberal critics at home, whom he previously dismissed as Western stooges.

In an apparent goodwill gesture hours before the press conference, a Russian tycoon under house arrest since September, Vladimir Yevtushenkov, was released. Shares in Yevtushenkov's company Sistema shot up more than 100 per cent on Moscow's stock exchange as Putin expressed hope that it would regain its market strength.

One of Sistema's most lucrative assets, the oil company Bashneft, was transferred to government ownership this month, but Putin said money-laundering charges against Yevtushenkov have been dropped.