Why forex traders tend to lose money...

Beware of Quadruple Witching
December 19, 2014


Asian bourses followed its Wall Street counterparts and posted its best day in 15 months on Friday with relief that the Federal Reserve will not rush to withdraw its accommodative policy and Japan’s commitment to maintain stimulus to shore up its economy and provided an upbeat assessment of the economy as the Bank of Japan cited improvement in exports, housing and production. In his press conference, Governor Kuroda downplayed the impact of oil prices on inflation in Japan and believes it to be transitory. What will be key will be its next meeting on January 21 -22 where Kuroda and company will be providing updated inflation forecasts from October.

The euro is weak and could test its multi-year low of 1.2247 as Reuters headlines suggest that the ECB is contemplating having peripheral nations such as Greece or Portugal set aside contingency funds to shield itself from any losses resulting from quantitative easing next year. The ECB also announced that banks would repay €7.1 billion in LTROs, which is lower than the previous two weeks. Divergent central bank policy between the Federal Reserve and the ECB will cause the euro to maintain a depreciating trend into the first half of 2015.

The lack of economic releases has the pound relying on broader market themes for direction. The focus for traders will be next week’s final GDP print and current account. The pair of GBP/USD has been contained within its six week trading range of 1.5541 to 1.5826.

As we head into the North American session, the Canadian dollar declined following the release of weaker than expected inflation data which slipped to 2.0% on an annualized basis in November from 2.4% the previous month. The softer print could place pressure on the Bank of Canada to strike a more dovish tone in its next meeting as the 2.0% target set by the central bank may not be maintained with the recent collapse of oil prices. In other data, retail sales for October came in line with forecast at 0.2%. Although there is no significant data on the docket for the US today with the exception of two Fed speakers – Evans and Lacker – and the release of Kansas City Fed Manufacturing Activity, forecasted to come in at 7.0, it is quadruple witching day and the squaring of positions could provide more volatility to markets. US equity markets are pointing to a positive open and will look to add to further gains following Thursday’s largest one-day gain since 2011 for the Dow.

Looking ahead to next week, liquidity will be thin due to the Christmas break, but US economic releases will include the PCE deflator and third quarter GDP which is anticipated to be revised upward to 4.3%.

by Moneycorp Dealer Team, Moneycorp

Lay off the franc!

Discrimination

Judges at the European Court of Justice have ruled that employers must not discriminate against people who eat too much. For now, they are still allowed to discriminate against employees who drink too much. The Swiss National Bank is discriminating against those who buy too much.

Three years ago, in the midst of the euro crisis, the SNB brought a halt to the franc's increasing and unwanted strength by setting a ceiling of €0.833, beyond which it would not allow the currency to appreciate. The central bank said it would sell as many francs as anyone wanted at SFr1.20 to the euro. The last time the SNB had to intervene was more than two years ago. But the flight of capital from Russia forced another intervention this week so the SNB raised the stakes yesterday, selectively charging banks up to 0.25% on their overnight deposits.
That move by the SNB, together with a further relaxation of tensions in financial markets, made the Swiss franc the weakest performer on Thursday. It lost a third of a cent to the euro and one and three quarter cents to sterling. The Japanese currency was only a nose ahead of the Swissy, losing two yen to the pound. The antipodean dollars were at the head of the pack, helped by what could be a turning point in the decline of oil and commodity prices, and the Norwegian krone was not far behind.

Pre-pre-Christmas sales boost sterling

UK retail sales in November were up by 1.6% from October and by an impressive 6.4% compared with the same month last year. The numbers were considerably better than forecast and investors responded by buying the pound.

Sterling strengthened by an average of 0.3% against the other dozen most actively-traded currencies, picking up two thirds of a US cent and more than one euro cent. It was steady against the South African rand.
Compared with a month ago the pound is an average of 3.5% higher against the other major currencies and ahead against every one of them. Since 19 December last year sterling is up by an average of 5.7%. Over those 12 months only the US dollar has done better, strengthening by seven and a quarter cents, 4.4%.

Thinking ahead
The coming week has only two and a half working days. Anyone with payments to make between now and the beginning of January would do well to make sure they are properly set up and double-checked, especially if they involve a foreign currency. Errors could prove costly.

Today's handful of ecostats began with improved German business confidence and continue with Italian industrial orders and the Canadian data for inflation and retail sales. The single UK statistic is for public sector borrowing.
Next week ought to be fairly quiet, and the following one quieter still, as market participants take time off to remind themselves that FX trading is perhaps not as stressful as they thought. Have a good weekend.

Fooled by Correlation

By Stijn Vanden Bossche

What always interested me is the degree to which one variable is related to another and how often this correlation is present, even though you wouldn’t expect it at all. However, it seems that not every modeler shares my opinion. We find that bad output results in risk analysis models are often caused by a lack (or wrong usage) of dependency modeling techniques.

For me, the first step is to look at the available data and fit it to a correlation structure to see if there is any pattern and what pattern shows up. The next step is harder as you should think about where the correlation could come from(?). I found some funny/weird correlations through surveys and research that seem completely unrelated, but that must have an explanation or common driving factor. I’ll give it my best shot to find an explanation, but please feel free to help me out and send other possible explanations and thoughts directly to me. We are organizing a free webcast on correlation, but more on that at the bottom of this email.

Correlation 1: 74 percent of people who can type without looking at the keyboard prefer a restaurant to a fast food chain, compared with 56 percent of people in general.
My first thought is: the next time I’m in McDonalds I will tell this trivia fact to the female cashier in the hope she wants to prove herself and mistypes the amount I have to pay.

My second thought is: people that can type without looking are most likely office workers. They are more used to going to restaurants for lunch meetings, dinners with clients. Also, office workers tend to earn more than non-office workers and we all know how much you need to pay for a juicy steak (or a cashew-mushroom pâté for the vegetarians among us) in a good restaurant.

Correlation 2: 82 percent of people with tattoos prefer hot weather over cold, compared with 63 percent of people in general.
Contrary to popular belief I think people with tattoos are happy with their body and want to decorate it, similar to women (sometimes men) putting on lipstick, wearing earrings, … Although some tattoos are very personal, a lot of tattoos are a way to express your identity and beliefs towards the outside world. The hotter it is, the less clothes you have to wear and therefore the more you can show your beliefs and identity.

Correlation 3: A UK study showed there was a strong correlation between wearing coats and car accidents.
A first study proclaimed that wearing a coat would obstruct the driver in his movements and therefore making it more dangerous to drive the car. The explanation for this correlation was wrong. A second study showed that the coats actually didn’t obstruct the free movement. Most people wear coats when it rains. In this example rain is the hidden, common “driving” factor.

In this line of thoughts more accidents occur when the windshield wipers are on, therefore we should consider turning off the windshield wipers.

Other funny/weird conclusions:

1. 26 percent of people who never took a ride on a motorcycle are multilingual, compared with 40 percent of people in general.
2. 15 percent of people who don’t like mayonnaise are good dancers, compared with 29 percent of people in general.
3. In general, 33 percent of people say their friends are mostly of the opposite sex. But among those with oily hair, 46 percent say their friends are mostly of the opposite sex.

If you can come up with a good explanation of why these variables could be correlated, please send me an email with some good arguments. The winner gets a risk analysis training video of their choice (see www.vosesoftware.com/trainingsuite.php) and will be announced in the next newsletter as sharpest knife in the drawer.

Other dangers in the world of correlation

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A big danger in correlation is the assumption that correlation is always symmetrical. Rank order correlation, for example, implies a symmetrical correlation. This assumes (in positive correlation) that when one variable is low the other is also at the low end and when the variable is high the other is also at the high end. We often see that variables are only strongly correlated at one end but at the other end very poorly. For that reason we can’t use symmetrical dependency modeling technique and have to revert to assymetrical, such as the clayton copula.

December 24, 2014

Federal Court in New York Orders MF Global Holdings Ltd. to Pay $1.212 Billion in Restitution for Unlawful Use of Customer Funds and Imposes a $100 Million Penalty

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) has obtained a federal court consent Order against Defendant MF Global Holdings Ltd. (MFGH) requiring it to pay $1.212 billion in restitution or such amount as necessary to ensure that claims of customers of its subsidiary, MF Global Inc. (MFGI), are paid in full. The CFTC previously filed and settled charges against MFGI for misuse of customer funds and related supervisory failures in violation of the Commodity Exchange Act and CFTC Regulations (see CFTC Press Release 6776-13). MFGI was required to pay $1.212 billion in restitution to its customers, as well as a $100 million penalty. MFGH’s restitution obligation is joint and several with MFGI’s restitution obligation, pursuant to which a substantial portion of the restitution obligation has already been paid (see CFTC Press Prelease 6904-14). The consent Order, entered on December 23, 2014, by Judge Victor Marrero of the U.S. District Court for the Southern District of New York, also imposes a $100 million civil monetary penalty on MFGH, to be paid after claims of customers and certain other creditors entitled to priority under bankruptcy law have been fully paid.

The consent Order arises out of the CFTC’s amended Complaint, filed on December 6, 2013, charging MFGH and the other Defendants with unlawful use of customer funds. In the consent Order, MFGH admits to the allegations pertaining to its liability based on the acts and omissions of its agents as set forth in the consent Order and the amended Complaint.

The CFTC’s amended Complaint charged that MFGH controlled MFGI’s operations and was responsible for MFGI’s unlawful use of customer segregated funds during the last week of October 2011. In addition to the misuse of customer funds, the amended Complaint alleged that MFGH is responsible for MFGI’s (i) failure to notify the CFTC immediately when it knew or should have known of the deficiencies in its customer accounts, (ii) filing of false statements in reports with the CFTC that failed to show the deficits in the customer accounts, and (iii) use of customer funds for impermissible investments in securities that were not considered readily marketable or highly liquid, in violation of CFTC regulations.

The CFTC’s litigation continues against the remaining Defendants, Jon S. Corzine and Edith O’Brien.

The CFTC appreciates the assistance of the U.S. Attorneys’ Offices for the Southern District of New York and the Northern District of Illinois, the Federal Bureau of Investigation, the Securities and Exchange Commission, and the Financial Conduct Authority in the United Kingdom.

The consent Order recognizes the cooperation of MFGH and requires MFGH’s continued cooperation with the CFTC.

Staff from the CFTC’s Division of Swap Dealer and Intermediary Oversight, Division of Clearing and Risk, and Office of Data and Technology assisted in this matter. CFTC Division of Enforcement staff members responsible for this matter are David W. Oakland, Chad Silverman, K. Brent Tomer, Douglas K. Yatter, Steven Ringer, Lenel Hickson, and Manal Sultan.

Media Contact
Dennis Holden
202-418-5088

Markets Rise Ahead of NFP Report ; Euro Touches 10-Year Low

The euro has reached a ten-year low following a report showing German factory orders fell in November more than market economists had predicted. One day ahead of the US December Jobs Report, this is the fifth consecutive day the euro has weakened, its longest stretch since May. Following an increase of 2.9% in October factory orders, the market was expecting a modest decline of 0.8% for November for Europe’s largest economy. Instead, markets were treated to a decline of 2.4%, which has some analysts now predicting a $1.10 EUR/USD level by the end of Q1. Additionally, Eurozone producer prices dropped 0.3% in November, which should add pressure to the ECB for additional stimulus when they meet on January 22nd.

Economic data was limited throughout the Asian session, as foreign exchange markets took direction from equity outperformance. Asian bourses were a sea of green after Wall Street finally put an end to their worst run to start a year since 2008. US equity futures are all higher this morning, as the market looks ahead to tomorrow’s Labor Department report. Economists are expecting the report will show an increase of 240,000 newly employed Americans following November’s large 321,000 print. US weekly jobless claims this morning showed 294,000 workers filed for first-time applications for unemployment benefits, down from 298,000 last week.

Looking to the UK, the (once) Great British Pound dropped to a 17-month low against the dollar following the conclusion of this week’s Bank of England monetary policy meeting. The Bank’s QE level remained firm at £375 billion as rates were unchanged. Markets are anticipating that the central bank will not make any change to the headline 0.50% interest rate for the duration of 2015. Oil has stabilized a bit this week, which is helping some of the “commodity currencies.” The Norwegian krone gained versus all but two of the world’s major currencies, also seeing gains were the Australian, New Zealand and Canadian dollars. Additionally, the Canadian dollar experienced a slight bump as the November New Housing Price Index showed an increase of 1.7% over the same period in 2013. On Friday, Canada will also unveil their December jobs report along with December housing starts data.

January trading should heat up next week as earnings season kicks off. The situation over Greek elections should also warrant attention approaching the snap election on January 25th. A bit of Chinese data after hours tonight as the world’s largest economy releases December inflation data, markets are anticipating a +1.4% print. One week to go until the 2015 US Pond Hockey Championships in Lake Nokomis, MN, everyone needs to stay warm and trade wisely.

Good luck!

Stephen Casey

Senior Foreign Exchange Trader and Market Analyst

Investors scorn euro zone deflation

Totally serious

There was absolutely nothing funny about yesterday's Euroland consumer price index data: Deflation slumped to -0.2% in the year to December. So investors saw no fundamental reason to attack the euro. The single currency survived the day almost unscathed.

The prediction had been that euro zone consumer prices in December would have been either unchanged or down by -0.1% from their levels 12 months earlier. Investors had spent the last fortnight psyching themselves up for a low figure that would force the European Central Bank into a programme of quantitative easing. Part of that process had involved sending the euro to a nine-year low against the US dollar.
That being the case, it sort of didn't matter whether the number turned out to be 0% or -0.5%: QE would be on the cards anyway. The reaction of investors to the -0.2% figure was therefore muted. Whilst they sold the euro on the news they did so with no great enthusiasm. On the day it fell two thirds of a US cent and moved a quarter of a cent lower against sterling.

No rush for safety

Investors were in no way panicked by the news from Euroland. If anything it made them braver, fortified by higher equity prices and a two-and-a-half-dollar rebound in the price of oil. The safe-haven yen, not the euro, was the day's biggest casualty.

By the same logic the Norwegian krone was the top performer on Wednesday. It has shown itself to be extremely sensitive to the price of oil and it strengthened yesterday by 1.2% to its highest level in a week. The Australian and New Zealand dollars shared second place.
The general mood was helped by the minutes of last month's Federal Open Market Committee meeting, which reinforced the idea that there will be no upward move for US interest until at least April. The minutes also revealed that "a number of participants saw a risk that [inflation] could run persistently below their 2 percent objective". So it looks as though money will remain globally cheap for most of the first half of the year.

Wot no ECB press conference?

For almost the first time since the shared currency was born, there will be no ECB president's press conference on the first Thursday of the month. Investors will have to make do with a short paragraph from the Bank of England and a handful of second-tier economic data.

From now on the ECB monetary policy meetings will take place eight, not twelve times a year. The US Fed has followed that pattern for ages and the BoE intends to move to a similar timetable. So the next ECB policy announcement will be on 22 January and the one after that on 5 March.

Today's ecostats have already shown a strong 7.5% monthly increase in Australian building permits and a -2.4% fall in German factory orders. Euroland retail sales are pencilled in for a 0.1% rise.

8th January 2015, MoneyCorp

U.S. Retakes the Helm of the Global Economy
By Rich Miller Jan 9, 2015 3:25 PM

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Photographer: Andrew Harrer/Bloomberg

Overseas demand may temper any jump in U.S. borrowing costs as the dollar strengthens.

The U.S. is back in the driver’s seat of the global economy after 15 years of watching China and emerging markets take the lead.

The world’s biggest economy will expand by 3.2 percent or more this year, its best performance since at least 2005, as an improving job market leads to stepped-up consumer spending, according to economists at JPMorgan Chase & Co., Deutsche Bank AG and BNP Paribas SA. That outcome would be about what each foresees for the world economy as a whole and would be the first time since 1999 that America hasn’t lagged behind global growth, based on data from the International Monetary Fund.

“The U.S. is again the engine of global growth,” said Allen Sinai, chief executive officer of Decision Economics in New York. “The economy is looking stellar and is in its best shape since the 1990s.”

In the latest sign of America’s resurgence, the Labor Department reported on Jan. 9 that payrolls rose 252,000 in December as the unemployment rate dropped to 5.6 percent, its lowest level since June 2008. Job growth last month was highlighted by the biggest gain in construction employment in almost a year. Factories, health-care providers and business services also kept adding to their payrolls.

About 3 million more Americans found work in 2014, the most in 15 years and a sign companies are optimistic U.S. demand will persist even as overseas markets struggle.

U.S. government securities rose after the report as investors focused on a surprise drop in hourly wages last month. Ten-year Treasury yields declined seven basis points to 1.95 percent at 5 p.m. in New York on Jan. 9.

“We are still waiting to see the kind of strengthening of wage numbers we would expect to be consistent with what we are seeing elsewhere in terms of growth and the absolute jobs numbers,” Federal Reserve Bank of Atlanta President Dennis Lockhart said in a Jan. 9 interview.

Breaking Away

The U.S. is breaking away from the rest of the world partly because it has had more success working off the debt-driven excesses that helped precipitate the worst recession since the Great Depression.

“The progress has been far greater in the U.S.,” Glenn Hubbard, dean of the Columbia Business School in New York and a former chief White House economist, told the American Economic Association annual conference in Boston on Jan. 3.

Delinquencies on consumer installment loans fell to a record-low 1.51 percent in the third quarter, the American Bankers Association said on Jan. 8. That’s “well under” the 15-year average of 2.3 percent on such loans, which include credit cards and borrowing for car purchases and home improvements, it said.
U.S. households have benefited from the strengthening job market and the collapse in oil prices. The nationwide average cost of a gallon of regular gasoline was $2.17 on Jan. 8, the cheapest since May 2009, according to figures from motoring group AAA.

Wage Gains

While wage gains have lagged -- average hourly earnings fell 0.2 percent last month from November -- they will accelerate as the labor market continues to tighten, according to Mohamed El-Erian, a Bloomberg View columnist and an adviser to Munich-based Allianz SE.

“It’s just a matter of time before wage growth picks up,” he told Bloomberg Television’s “In The Loop” program on Jan. 9.

Spending is already strengthening. Households splurged on new cars, appliances, televisions and clothing as spending climbed 0.6 percent in November, double the gain in October, according to figures from the Commerce Department in Washington. Light-vehicle sales totaled 16.5 million in 2014, the most since 2006.

“The economy picked up a nice tailwind at the end of the year,” Bill Fay, group vice president for Toyota Motor Corp.’s U.S. sales arm, said on a Jan. 5 conference call. “This strength will carry the auto industry to a sixth straight year of growth in 2015 with analyst projections ranging as high as 17 million.”
Consumer Spending

At $11.5 trillion in 2013, U.S. personal consumption expenditures were larger than the gross domestic product of any other country that year, including China, according to statistics from the IMF in Washington. The figures aren’t adjusted to reflect price discrepancies for the same goods in different nations -- so-called purchasing power parity -- which tends to inflate the output of developing nations where consumers pay less for everything from haircuts to coffee.

Deutsche Bank economists led by David Folkerts-Landau in London forecast U.S. GDP will expand 3.7 percent this year, after climbing 2.5 percent in 2014. The U.S. will contribute close to 18 percent to global growth of 3.6 percent in 2015, compared with 7 percent for all other industrial countries combined, they wrote in a Jan. 9 report.

While the U.S. is gathering strength, the BRIC nations -- Brazil, Russia, India and China -- are facing tougher times after spending much of the past 15 years basking in the attention of global investors.
BRICs Faltering

Brazil’s debt was downgraded last year for the first time in a decade while Russia is heading into recession, its economy pummeled by the collapse of oil prices and U.S. and European sanctions. Growth in China and India has slowed as both countries grapple with revamping their economies.
“Close the book on emerging markets driving global growth,” Nancy Lazar, co-founder and a partner at Cornerstone Macro LP in New York, wrote in a Jan. 8 report to clients
.
Even Jim O’Neill, the former Goldman Sachs Group Inc. chief economist who coined the BRIC acronym, has soured on some of its members, saying in an e-mail that he would be tempted to remove Brazil and Russia from the group if they fail to revive their flagging economies.

“It is tough for the BRIC countries to all repeat their remarkable growth rates” of the first decade of this century, said O’Neill, a Bloomberg View columnist and former chairman of Goldman Sachs Asset Management International.

He argued, though, that even at a slower growth rate, China will add more to the world economy this year than the U.S., when measuring their output on a purchasing power parity basis.

Policies Superior

The U.S. has pulled ahead of other industrial nations partly because its policy-making has been better, according to Paul Mortimer-Lee, chief economist for North America at BNP Paribas in New York.

European Central Bank President Mario Draghi and his colleagues are still weighing whether they should buy government bonds to fight off the danger of deflation -- a step that the Federal Reserve first took back in 2009.

U.S. budget policy also has been more effective than the euro region’s austerity strategy, which undercut the continent’s economy, Mortimer-Lee added.
Even Alberto Alesina, a long-time proponent of government spending cuts, thinks the euro area should adopt a more expansionary fiscal stance. Alesina, who is a professor at Harvard University in Cambridge, Massachusetts, told the AEA conference on Jan. 5 that he favors more “aggressive” tax cuts by the region’s policy makers.
J
apan, meanwhile, managed to throw its economy back into a recession by raising its consumption tax to 8 percent from 5 percent on April 1.
Looking across much of the rest of the world, “the U.S. continues to dominate,” Hubbard said.

To contact the reporter on this story: Rich Miller in Washington at [email protected]

To contact the editors responsible for this story: Chris Wellisz at [email protected] Mark Rohner, Brendan Murray

Forex Market Forecast
by Ignacio Albizuri
December 22, 2014

Euro and Yen on Christmas

Euro has started with a retracement after last week bearish movements against all crosses with single currency. The worst performer for second week straight is the Australian Dollar. Moreover, it seems that the Kiwi is starting to lose its relatively stable positions and is following its Australian peer due to the price drop in commodities. Also, the Japanese Yen has returned to its losing streak, after gaining for one week.

Regarding oil prices it seems that panic stopped for a while and give us a rest as retrace after a bottom at 53 USD per barrel. Russia crisis it is getting better after couple of crazy weeks that have shaken global economy. We hope that at least until second week of 2015 volatility will be lower and risk appetite will be positive looking for trading opportunities for next year.

GBP/USD

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Scenario 1: There is no real direction over this pair so the most logical trading for this week will be trading on sideways. We have maximums located at 1.5745 an minimums 1.5585 so we trade short on maximums and short trades on minimums. Stops will necessary be no more than 15 pips above or below this levels.

Scenario 2: If Dollar index continues the rally minimums can be trespassed although this week as liquidity systems are not working at 100% it is not common to help any interesting movements.

GBP/JPY

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Scenario 1: Again the king of this year continues with a solid bullish trend. It is quite near to first mid term target at 187.67 so we will need to trade above that target. Next bullish level it is located at 190.04 above previous maximums. We will trade long above first target with tight spreads as this cross it is not a big fan for big retracements.

Scenario 2: If price doesn´t move above 187.70 most probably price will rest for a bit waiting for a consolidation area . Bear movement will not be really safety so if we trade short no more than 10 or 15 pips will be considered.

EUR/JPY

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Scenario 1: Yen it is getting weaker and weaker and euro rebound has been harder against this cross. We have broke short term resistance that have opened some small levels to trade long. First target it is located at 147.66 (65 pips remaining) and second target 148.97 at previous relevant maximums. We will trade short looking for those 65 pips and hoping that bull wave will last the whole week. Stops should be located at last t long entry at 146.38.

Scenario 2: If euro goes back again to risky level short trades will be only below last long entry at 146.38 with tights stops as crosses against JPY it is only safe to do it long . Trade short against this cross it is really risky and normally risk reward ratios are not interesting.

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Euro and Yen on Christmas
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Euro and Yen on Christmas
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Euro and Yen on Christmas

THE WAVE PRINCIPLE AND THE PANIC OF 1907″


Have you ever heard of The Panic of 1907″? Before the Great Depression of 1929-1933, 1907 was known as one of the worst years in the history of the stock market. Needless to say nobody saw it coming when the Dow Jones Industrial Average climbed above the 100 dollar mark for the first time in January 1906. Everyone thought that this milestone is a sign of future prosperity and the uptrend was expected to continue. However, the Market does not care about opinions and expectations. Prices reached as high as $103 and then started declining. During the rest of 1906 people were disappointed, but not scared yet. Then came 1907 and the massive sell-off, which wiped out almost half of Dow Jones value. In the late 1907 prices finally formed a bottom at $53, thus ending a period of time, which would later be known as The Panic of 1907″.

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But you could probably read all that in any history book. Why are we telling you about it?

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We will get to that soon. First lets take a look at a chart, which would visualize the price action during the whole period we are talking about. The chart shows the 3-year rally from $42 in 1903 to $103 in 1906, as well as The Panic of 1907. To the untrained eye, this is all the chart shows and nothing more. But it offers a lot more to the experienced Elliott Wave analyst. Ralph Nelson Elliott published The Wave Principle in 1938 more than 30 years after The Panic of 1907. Now, in 2014, we can see, that if his theory was to be applied in 1906, it could have saved investors a lot of money by preventing them from buying at the top. Below you will see the same chart, but this time with an Elliott Wave labeling.

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Note that the 1903-1906 bull market has a perfect five-wave impulsive structure. The sub-waves of wave (3) are also clearly visible. According to the Elliott Wave Principle, every five-wave sequence is followed by a correction in the opposite direction. After every crisis or market crash there are speculations about the reasons, which led to the catastrophe. This was the case in 1907 as well. Opinions vary from market manipulations to money deficits, but to Elliotticians, The Panic of 1907 is nothing more than a natural market correction. So, if you were an investor in January 1906, who knows how to apply the Elliott Wave Principle, what would you be a bull or a bear?



Read more at: http://ewminteractive.com/the-wave-principle-and-the-panic-of-1907/ | EWM Interactive

Commodity Outlook

Not surprisingly, the Euro zone debt crisis continues to linger, and the situation in the Ukraine remains highly fluid. However, the takeaway from economic developments during the first half of February is a migration toward a global recovery. In addition to economic leadership from the US in the form of strong Non-Farm Payrolls and Initial Jobless Claims data, the US Fed has given sentiment a boost recently by its apparent patience with respect to hiking interest rates.

In addition, gains in US crude oil inventories look to secure low energy prices for at least the near future. While sharply lower crude oil prices have had a tendency to fan deflationary slowing fears and dent expectations for 2015 global commodity demand, we are encouraged by US economic numbers, German economic numbers, UK economic numbers and by the strength in the Japanese Nikkei. In our view, holding off on a June rate hike, a toning down of Greek fears and some measure of calm in the Ukraine would allow economic readings in Europe to improve during the weeks ahead. Markets that are oversold technically and offer bullish ending stocks/use indicators as well are sugar, natural gas and copper.


Markets to Watch

First Look at 2015 Crops for Corn, Wheat and Soybeans

Last week, the USDA Outlook Forum gave traders the “first look” at the 2015/16 season. These are best-guess estimates from USDA officials before any official acreage or production surveys are taken. In general, the reports show a bearish setup for soybeans and tightening supply for corn, even with lofty yield expectations. They also show a need for some weather issues to develop for wheat to avoid an increase in ending stocks.

Across the eight major crops, producers are forecast to plant 254.6 million acres, but traders believe this number is underestimated by 4-5 million. This year’s estimate is also down 3.3 million acres from last year. We should also note that CRP acres are down this year, which leaves more available for planting. Last year, plantings of the eight major crops were eventually adjusted higher by close to 4 million acres, with the bulk of that adjustment coming from an increase in soybean plantings.

Soybeans

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The USDA pegged 2015 soybean acreage at only 83.5 million acres, down from 83.7 million in 2014 and down from trade expectations of 86-87 million. Crush demand is expected to expand to a record-high 1.840 billion bushels, up 45 million from this year. Export demand is also forecast at a record high of 1.820 billion bushels, up 30 million from last year. This would result in an ending stocks estimate of 430 million bushels, up from 385 million for the 2014/15 crop year.
With record world beginning stocks, record Brazilian and Argentine production and a strong US Dollar, the USDA’s demand expectation is lofty.

More importantly, even with this lower than expected acreage number, the 2015/16 balance sheet could still show a significant year/year build in inventories.
If soybean plantings jump to 85 million acres (many traders see 88 million eventually), ending stocks could jump to 502 million bushels. If plantings reach 87 million acres, ending stocks could jump even further. It is also worth pointing out that these estimates include very high demand forecasts, up 21.3% in just three seasons!

Any sign of higher planted area or normal weather for this season could spark another leg down for soybeans, with $8.73 as a potential downside target for the July contract. Of course, poor weather is always a threat. If we throw out last year’s high yield and substitute an average of the past seven years (42.1 bushels/acre) for the 46.0 bushel/acre figure the USDA is currently using, then the Outlook Forum numbers would result in an ending stocks figure of just 107 million bushels.

Corn

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The USDA pegged corn acreage at 89.0 million acres, down from 90.6 million last year. Ending stocks were pegged at 1.687 billion bushels from 1.827 billion this year. Ethanol usage was estimated at 5.225 billion bushels (versus 5.250 billion this year), with exports at 1.850 billion bushels (versus 1.750 billion this year). Feed usage was estimated at only 5.275 billion bushels.

We see the demand numbers as too low. Furthermore, if there are changes in planted area, we are likely to see higher soybean acres and lower corn acres. Fertilizer prices are still high, and they are up significantly from last year. If prices stay low, producers will look to use less fertilizer or switch corn acres to other crops.

In the table below we laid out different yield results and left the USDA Outlook Forum acreage and demand numbers unchanged. With less fertilizer usage and more normal weather resulting in a 164.0 bushels/acre yield (which is still historically high) ending stocks could fall to 1.48 billion bushels with a stocks/usage of 10.8%. At the 20-year mathematical trend yield of 160.4 bushels/acre, ending stocks would slip to just 1.186 billion bushels. That would result in a stocks/usage of just 8.6%, which would be the fourth tightest in 55 years!

Wheat

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The USDA pegged all wheat planted area at 55.5 million acres, down from 56.8 million last year. Using a 45.2 bushels/acre yield, the USDA is putting ending stocks for the 2015/16 season at 763 million bushels, a 5-year high. This includes a jump of 120 million bushels in usage for the coming year, which is very suspect given the stiff competition that US exporters are seeing due to the strong US Dollar as well as from cheap corn that could eat into feeding demand. This suggests that future downward adjustments for demand are likely.

If the weather is good and yield jumps to the same level as it was in 2013/14, ending stocks could jump to 853 million bushels. If yield slips back to last year’s level, ending stocks could come in at 692 million bushels, unchanged from last year. The data shows the market’s need for poor weather to avoid increasing supply.

Funds are short wheat, and there is no weather premium, so the market is vulnerable to a bounce. However, without a weather issue, July Wheat looks to continue to drift lower, with $4.83 as the next downside target.

May Cotton

May Cotton prices have seen an impressive, 13.5% advance from their January 23rd contract low at 57.95, but they appear poised for a near-term correction.
A major concern for cotton market bulls is that the January/February rally corresponded with a more than 12% decline in open interest. This suggests that price gains were attributable to short-covering rather than fresh buying interest, which is not supportive to a continued rally.

This view would gain further confirmation if open interest was to expand as prices work lower.

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Additionally, the market has become technically overbought on its latest leg higher. Both the RSI and Slow Stochastics momentum indicators rolled over to the downside after the February 19th bearish reversal from a new five-month high. Also, the market failed to rally through the 65.95-66.33 gap resistance zone and subsequently reversed lower, which is another sign of waning momentum.

May Cotton appears to be in the initial stages of a downside correction off the January/February bounce, with a downside retracement target coming in at 60.93.

Why June Bonds are so Much Higher-Priced than March Bonds

As the US Treasury markets prepare for their roll from the March to the June futures, traders have noted an interesting phenomenon in regard to Bond prices. While the price difference between March and June 2-Year, 5-Year and 10-Year Notes are within 1 1/2 points of each other, the difference in June Bond futures price was a staggering 15 1/4 points higher than that March Bonds at the end of this week! Far from being the market’s verdict that US longer-term Treasury yield are going to nosedive during the next few months, this vast price difference is due in large part to events that occurred over a decade ago.

While there are many components to the pricing of Treasury futures, one of the major factors is the “cheapest to deliver” issue. With the Bond contract, that normally covers a remaining maturity period of 15 years to 25 years. During a period between early 2001 and early 2006, the US Treasury issued no longer-term Bonds.

For the June contract, this would leave one issue (February of 2031) that matures before 2036. However, the CME decided to make that issue ineligible for delivery. This means that the June 2015 Bond futures will not have any Treasury securities eligible for delivery that have less than 21 1/2 years of maturity, resulting in the sharp jump between the March and June futures prices.

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Near-Term Decline in Gold is a Long-Term Buy

1. Summer wage battle looms in South Africa.
2. Indian economy recovering and RBI has removed import duties.
3. Central banks back into reserve building, +477 tons in 2014.
4. South African gold production shrinks to just 5% of global output.
5. 48 to 49 million ounces of gold derivative holdings a bull/bear line ahead.

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The decline in the South Africa’s gold industry is well documented, with their recent production falling below 5% of global output from being almost 80% a few decades ago. Deep mining has resulted in significantly higher mining costs, South African wages have doubled over the last decade, and their energy costs have doubled as well.

Last year’s wage settlement agreements in the South African platinum sector resulted in wage gains of 20%, and South African gold miners are thought to be gunning for similar wage increases going into the end of their current contract in June. An issue that promises to exaggerate tensions between miners and management is an ongoing battle between competing unions.

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While the National Union of Mineworkers (NUM) claims three times as many members as the upstart Association of Mineworkers and Construction Union (AMCU), the AMCU has seen its membership share increase. Both unions see the next wage negotiation as an extremely critical junction. Just as US office-seekers promise voters more than they can deliver, the unions are likely to push for lucrative deals in order to expand their membership.

With the most recent Commitments of Traders report showing large and small speculators combined holding a net long position of roughly 150,000 contracts, geopolitical uncertainty declining, and expectations for a rise in US interest rates ahead, the path of least resistance in gold prices is pointing downward. In looking at the June Gold chart, one can see signs that the market views the sub-$1,200 level as a potential value zone, as buying interest has emerged every time the market has gotten close to that level recently.

We expect the Fed to post a one-time hike or adjustment in rates. Once that becomes official, it should drive the Dollar to its final peak. That would likely force gold into a technically based, position balancing washout. For June Gold to avoid a return to $1,170 (and perhaps lower) it might require gold ETF holdings to rise above 49 million ounces, evidence of an improvement in Indian gold import demand, or an earlier than expected start to South African wage negotiations.

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I Heart Capitalism

Let me begin by saying that if you aren’t on Twitter, you’re making a huge mistake. I was encouraged to get on Twitter years ago by a tech-savvy friend. There is a learning curve. It’s not the easiest thing to get the hang of. Used correctly, it can make you smarter. If you could take a smart pill to make you smarter, you would take it, right? Get on Twitter.

So I saw an interesting table on Twitter—someone had taken a photo of a table out of the print version of Barron’s magazine and tweeted it to their followers. I am reproducing it here:

Nasdaq, Then And Now

Below are the top 10 stocks in the Nasdaq Composite Index.

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The first thing you notice is that there’s been a huge turnover. Sun Microsystems disappeared, the box business was so bad Dell took itself private, and WorldCom… well, we all know what happened to it.

But the even more obvious thing is the valuations. If I’d told you 15 years ago that big tech companies like Cisco and Intel would end up with valuations in the teens, you would have called me crazy. And even if you had believed me, you probably would have thought that the P would go down, instead of the E going up.

I mean, think about this. The biggest company in the world—Apple—makes so much money that the stock is almost cheap. Some very smart people think it’s really cheap. I have at times considered making it one of my picks in Bull’s Eye Investor, where I make an effort to focus on value. And it has a $750 billion market cap!

I don’t mean to contradict myself in the span of two weeks, but it’s hard to make the argument that tech (or the overall market) is grossly overvalued judging from the column on the right. For clarification, I think that early-stage financing is out of whack, not big-cap tech.
Hold that thought.

Everything Is Amazing, and Nobody Is Happy

I bought a house recently, and we’re in the process of moving. My friend Adam flew up from Florida to help out. We were taking a break from lugging furniture around, and my wife was putting away some stuff in the kitchen. She took a waffle iron and put it in the cabinet.

“See that waffle iron?” I said to Adam. “We just got that from Walmart. $15. It makes amazingwaffles.

“The old waffle iron we got 18 years ago, it made crappy waffles and eventually broke. It cost $80 in 1996.”

Adjusted for the increase in quality, the price of that waffle iron dropped about 90% in 20 years.

Then we started looking around the house at other things that are cheaper today. Ceiling fans. Adam told us that a good, quiet ceiling fan costs about $200 today. 20 years ago, it would have been much more.

Same with apparel, which once took up 11-12% of the average household budget but is now only 3-4%. Why? Clothes can be produced overseas for less. We don’t even have a textiles industry anymore.

Improvements in global trade, better technology, better manufacturing techniques, and better logistics are responsible for cheaper clothes, cheaper ceiling fans, and cheaper waffle irons. Not to mention TVs, which are almost 99% cheaper in real terms.

So of all the pet peeves in the world, probably my biggest is when people (usually on the left) gripe about stagnant incomes over the last 15-20 years without taking into account the truly gargantuan increase in standard of living that we all enjoy, and how much purchasing power we’ve received from the deflationary effects of free-market capitalism.

If median incomes were about $30,000 for individuals in 2000 and are still about $30,000 today, that $30,000 goes much, much further today than it did back then.

So then I start to think: Are human beings really that dumb? Do we need to get paid more every year to think we are getting richer? Answer: Unfortunately, yes. Hence the push for inflation.

You might have heard that Walmart is raising its minimum wage. The company’s management aren’t dummies. They’re well aware that gasoline prices have plummeted and that the freed-up money in the consumers’ wallets is plowing back into its checkout lines—just in time for a price increase. As a client of mine eloquently stated, “Mrs. Walton raised no dumb children.”

The Pessimism Bias

People generally think things are getting worse. No doubt about it: the world is going to hell one way or another—just turn on the news. I actually stopped using the Drudge Report as a news source about a year ago. It’s so relentlessly bearish, it was screwing up my decision-making.

However, things are awesome right now. If you’ve ever seen that Louis C.K. bit on how great things are, he understates it massively. Things are much better than that. You can get waffle irons for $15, and you can get Cisco stock at a P/E ratio of 13.

But I’m always on the lookout for the turn, for when things actually do start getting worse. Like, I’m worried about net neutrality and the FCC’s interventions in the Internet. Surely this will make broadband more, not less expensive in the coming years.

And if you really want to read a book that will make your head explode, go pick up an out-of-print copy of Kiril Sokoloff and Gary Shilling’s 1983 book, Is Inflation Ending? Are You Ready?Monetarists tend to think that inflation arises from too much money, but Sokoloff and Shilling identified another cause: “inflation by fiat.” They looked at the deregulation that was happening in the early ‘80s and predicted that inflation was going to drop precipitously.
Speaking of inflation, you can get the book for a penny on Amazon.

I’m not even saying the stock market will go up (though it probably will). I’m saying don’t be so freaking grumpy all the time. It makes people make really bad decisions.

Skepticism is different from pessimism. Pessimism as a strategy generally doesn’t work. Optimism generally does. But the pessimistic argument is so compelling because it seemssmart.

If you time-stamped every doomsday prediction you saw in the news and put them all in a spreadsheet and monitored them over time, you would find that virtually none of them came to pass. Pessimism sells newspapers. You read about the one fatal car accident, not the 999,999 cars that didn’t get into an accident.

It’s okay to doubt. Doubt is the foundation of rational thought. But don’t confuse booms with bubbles, and don’t read any articles with “crash” in the title.
That should be a good start.
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Nobel Winner: Market is Looking a Lot Like the 1930's

For those in the markets, the name Robert Shiller may not ring much of a bell. But for those who are into the macroeconomic picture and oook to some of the best economists in the business at trends in the world and American economy to make bets in the markets, Robert Shiller is a name to know.

In economics, anyway, he’s become a household name. Shiller, a professor at Yale University and the 2013 Nobel Laureate in economics, spoke to CNBC this week from the Davos economic conference and gave a fascinating take on the stock market and where it might be headed.

Looking at the history of the market and the recent trajectgory, Shiller projected that this stock market looks a lot like that existed in the majority of the ecade of the 1930s, as the country was trying to come back from the Great Depression
.
“Let’s go back to 1982 when the stock market bottomed out,” Shiller said. ” People then had similar concerns (as now). They were worried about the national debt getting quite high, and hey were worried about inflation, believe it or not. and yet, the market zoomed up again until ’37. We’re on that sort of path now.”

Shiller does say that his analysis suggests that the market is just “middling” right now and may only outperform the inflation inde. But he also warns that while the market may not rise up much higher in the near-term from where it has been, he does caution that the possibility of a crash or significant correction is possible.

“I’m an optimistic person,” Shiller said. “I’m still in the market, but there is a potential for another collapse, definitely.”

The Kingdom Of Denmark
By Michael Lewitt

Excerpted from the March 1, 2015 issue of The Credit Strategist

“What is a debt, anyway? A debt is just the perversion of a promise. It is a promise corrupted by both math and violence. If freedom (real freedom) is the ability to make friends, then it is also, necessarily, the ability to make real promises. What sorts of promises might genuinely free men and women make to one another? At this point we can’t even say. It’s more a question of how we can get to a place that will allow us to find out. And the first step in that journey, in turn, is to accept that in the largest scheme of things, just as no one has the right to tell us our true value, no one has the right to tell us what we truly owe.”
– David Graeber, Debt: The First 5000 Years (2011, p. 391)

In Hamlet, Polonius advises his son Laertes as he sends him off to school: “Neither a borrower nor a lender be,/For loan oft loses both itself and friend,/And borrowing dulls the edge of husbandry.” Borrowers and lenders have conducted themselves over the ensuing centuries in ways that would not have surprised Shakespeare, who understood human nature all too well. Later in the play, Marcellus, a soldier, warns Hamlet that “Something is rotten in the Kingdom of Denmark” after they are spooked by the ghost of Hamlet’s father. This is a reference not only to the murder of Hamlet’s father, the King of Denmark, but speaks to the fouling of the relationships that govern the kingdom. Those relationships are ones of blood and obligation; in one form or another, they are different forms of debt. Debt is not merely a contract between two parties; it is a solemn pact of trust. When it is sundered, not only is money lost but husbandry – the management of society’s resources – is corrupted. We learn from Shakespeare’s great drama that a world ruled by debt is extremely fragile.

February 13th marked the 25th anniversary of the bankruptcy of Drexel Burnham Lambert. I remember driving to work at Drexel’s Beverly Hills office that morning having no idea what was about to happen. My years at Drexel in the late 1980s and those I spent managing the firm’s private equity holdings in the 1990s were an intensive education in credit and human nature. Twenty-five years after Drexel’s demise and seven years after a crisis that pushed the global economy to the brink of collapse, the world is drowning in debt and derivatives. As a point of reference, when Drexel filed for bankruptcy, it had a balance sheet of $3 billion. When Lehman Brothers filed for bankruptcy in 2008, its balance sheet was two hundred times larger at $600 billion. As Figure 1 below illustrates, debt has grown exponentially while the global economy has crept along at a petty pace. Six years after the financial crisis, interest rates have been driven below zero in much of the developed world,2 a sign that policy makers have failed to create sustainable economic growth. (The latest tally is that $1.9 trillion of European sovereign debt is trading with negative yields.)

They have managed to inflate financial assets but left the real economy behind. For example, U.S. equity prices have gained 122% since 2009 while US nominal growth has grown by only 18% over the same period. Having exhausted their ability to employ interest rates as a policy tool, policy makers are now shifting their sights to currencies to stimulate growth. But currencies are themselves nothing more than a form of debt, a promise by a sovereign. And those promises are being actively debauched in a series of currency wars that are certain to end badly for those who depend on fiat money for their daily bread.
Figure 1
Unsustainable
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Drexel and its aftermath taught me many lessons. The most important is that the world of finance is the world of human nature in all its terrible beauty. And that world is driven by incessant change. Drexel was thought to be the most powerful firm on Wall Street, yet it collapsed overnight. That taught all of us working there not only a lesson in humility but a lesson in the fragility of all financial structures, especially those built on leverage. Those who fail to acknowledge and adapt to change are always flirting with failure. Today’s investment landscape is filled with investors, strategists and media pundits who refuse to admit that we no longer live in a world that can pay its debts or respond to monetary stimulus as it did in the years before the financial crisis. Acknowledging these realities doesn’t mean one has to stop investing or stop taking risk. But it does mean one better do so with one’s eyes wide open.

U.S. Economy

Contrary to what the Federal Reserve, Wall Street and much of the financial media are telling people, U.S. economic growth is not robust. Uncritical focus on doctored economic data leads to the conclusion that growth is self-sustaining and accelerating. In fact, growth is sluggish and evidence that it can be sustained if interest rates ever normalize does not exist. Normalized interest rates still lie far in the future, however, so equity investors feel empowered to ignore these concerns and bid up stocks ‘til Kingdom come. But just as they did 15 years ago during the Internet Bubble and 7 years ago during the Housing Bubble, when Kingdom comes it will come with the Devil.

Figure 2 below, borrowed from Societe Generale’s Andrew Lapthorne, shows that downgrades in US earnings forecasts in February were the worst since the 2009 financial crisis. Mr. Lapthorne writes: “we believe that despite the many equity indices hitting post crisis highs, the message from within the equity market, and indeed from the strong performance of the sovereign bond market, is that investors are positioning themselves for an economic slowdown. For example, the relative and strong outperformance of higher quality stocks within the equity market has been highly positively correlated with the equally strong performance of sovereign bonds, both of which have rallied on the back of weakening earnings momentum. To simply disregard this economically consistent message as being simply a function of low oil prices, low inflation and central bank actions may be misguided to say the least.” (Andrew Lapthorne, Societe Generale Cross Asset Research, “Global Earnings Estimates Analysis: Is the US heading back into recession?” February 24, 2015.)

While Mr.Lapthorne may be placing too much emphasis on the performance of sovereign bonds, whose yields are artificially suppressed by massive central bank monetization programs, his point is well taken: earnings momentum is fading and doing so beyond the energy sector. It appears increasingly likely that S&P 500 revenues will experience their first year-over-year decline since the financial crisis and earnings may follow. The sharp drop in oil prices is a symptom rather than a cause of a global economic slowdown that is showing up in a broad array of data.

Figure 2â¨
No Earnings Momo
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Nobody, of course, is forecasting a recession. We are taught that recessions do not occur until the Fed tightens aggressively and the yield curve inverts. While the yield curve has flattened significantly over the last year, it is far from inverted. Whether this historical rule will apply at zero gravity remains to be seen. Trillions of dollars are counting on it.
Washin’ the Bullshit Down

“Whatever I was/You know it was all because/I’ve been on the town/ Washin’ the bullshit down.” Gordon Lightfoot

In grade school, we are taught to consider the source of what we read in order to appreciate that all discourse is colored by bias. Sadly, this is a lesson ignored by investors who stand to lose a great deal of money relying on the words of central bankers, Wall Street analysts and the financial media. Consider the bias of each of these groups as well as their accompanying forecast records, which are appallingly bad. (I owe a head’s up to Societe Generale’s Albert Edwards for pointing me to the studies referred to in the following discussion in his February 12, 2015 Global Strategy Weekly.) Recently, the San Francisco Fed published a paper entitled “Persistent Overoptimism about Economic Growth” (February 2, 2015, FRBSF Economic Letter 2015-03) in which it found that since 2007, the Federal Open Market Committee (FOMC) has consistently been too optimistic about U.S. growth. While that may be stating the obvious, it bears repeating since everyo ne hangs on every word uttered by the denizens of the Eccles Building. The authors of this paper – themselves Fed employees (we may live in Denmark but we do not live in Russia) – attribute these failures to several factors: missing warning signals about financial imbalances, overestimating the efficacy of monetary policy, and extrapolating the past into the future. To err is human; to do so repeatedly is apparently a job requirement of central bankers.

The private sector has proven no better at predicting recessions. The primary difference between private sector economists and government economists is that the former are better paid to be consistently wrong. Of course, the primary goal of private sector prognosticators is to convince their clients to buy as many stocks and bonds as possible, so their upward bias is not surprising. Readers looking for a comprehensive study of the failure of private sector economists to predict recessions should look at a presentation entitled “Fail Again? Fail Better? Forecasts by Economists during the Great Recession” given by IMF economists Hites Ahir and Prakash Loungani at the George Washington University Research Program in Forecasting Seminar on January 30, 2014 (http://www.gwu.edu/~forcpgm/Ahir_Loungani.pdf).

Finally we come to the financial media, which rarely features anything original or challenging to the bullish consensus. Dissenting voices are either dismissed or treated as minor interruptions to an incessant flow of happy talk. For example, Mizuho Securities USA’s Chief Economist Steve Ricchiuto recently appeared on CNBC and told presenters Simon Hobbs and Sara Eisen that the U.S. economy is not “accelerating” and that the bullish consensus is nonsense. He left Mr. Hobbs and Ms. Eisen fairly sputtering in his wake. We likely won’t see Mr. Ricchiuto back on the air any time soon, which is a shame, because he was correct.

(Of course, CNBC was much more willing to air the non-conforming views of one of the worst forecasters in history, former Federal Reserve Chairman Alan Greenspan. In a February 26 interview on the business network, Mr. Greenspan said that “Lower long term rates is [sic] not a conundrum, it’s an indication of how weak global economic growth is” and that “effective demand is extraordinarily weak – tantamount to the late stages of the great depression.” Fifteen years ago, as Mr. Greenspan was steering the economy to one bubble after another, this would have been front page news. Today it is consigned to zerohedge.com, which is by far the most useful media outlet for financial information on the scene today.)

With rare exceptions, the financial media traffics in noise rather than information. Noise is what we already know while information is what we don’t know. Information adds to our store of knowledge and prompts original thinking and moves us closer to the truth. The consensus is noise, not information. But investors need information, not noise. Valuable analysis helps investors skate to where the puck is going rather than where it’s been - and that means finding the flaws in the consensus and moving beyond it. The financial media, like public and private sector prognosticators, are noise machines. Value-added analysts are difference engines.

(This is why Real Vision TV is so valuable. It offers long-form interviews that allow the free-exchange of complex ideas about the markets, the economy and life in general. I was flattered to learn that more than 1,000 people viewed my recent interview on the site. I urge everyone to visit https://realvisiontv.com.)

Figure 3 below tells us what’s really happening in the economy. After trillions of dollars of stimulus, U.S. GDP growth is still only 2%. People can point to the weather, lower oil prices and the strong dollar for why the economy cannot achieve escape velocity, but the primary reason is the suffocating weight of public and private sector debt. Even with low (or non-existent) interest rates, an enormous amount of financial and intellectual capital is devoted to debt service rather than more productive uses. The result is structurally slow growth. Too much emphasis is placed on a single data point – payrolls – which is a lagging indicator and remains far below the levels of previous recoveries. One reason for this emphasis is that employment is part of the Fed’s dual mandate. The employment numbers have stabilized but they are not as robust as the headlines suggest. The broadest measure of employment, U6, is still running above 11%.

The other fi gure that is cited to support the bullish case is GDP growth, but last year’s GDP numbers were distorted by higher healthcare spending mandated by the Affordable Care Act. Theoretically, helping Americans live longer and healthier lives should lead to a more productive economy. Practically speaking, however, an economy that can’t provide enough jobs for its healthy members may not realize the benefits that a healthier populace would produce. Only 44% of healthy adult Americans are members of the work force, the lowest number since the 1970s. This is hardly the sign of an accelerating or robust economy about to take off into the wild blue whatever.

Figure 3
Difference Engine
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The Deleveraging Delusion

Last September, the Geneva-based International Centre for Monetary and Banking Studies published a study entitled Deleveraging? What Deleveraging? reporting that “[c]ontrary to widely held beliefs, the world has not yet begun to delever and the global debt-to-GDP is still growing, breaking new highs.” Going further, the report’s distinguished authors warned that, “in a poisonous combination, world growth and inflation are also lower than previously expected, also – though not only –as a legacy of the past crisis. Deleveraging and slower nominal growth are in many cases interacting in a vicious loop, with the latter making the deleveraging process harder and the former exacerbating the economic slowdown. Moreover, the global capacity to take on debt has been reduced through the combination of slower expansion in real output and lower inflation.”

Now, just a few months later, The McKinsey Global Institute has issued a report reiterating this daunting message. McKinsey’s version, entitled Debt and (Not Much Deleveraging), tells us that since 2007, global debt has grown by $57 trillion, raising the ratio of global debt-to-GDP by 17 percentage points. Developing countries have accounted for half of this growth; government debt has soared (by $25 trillion) and private sector deleveraging has been limited. Households in the U.S., UK, Spain and Ireland have deleveraged somewhat, but elsewhere they have not. In particular, China’s total debt has quadrupled from $7 trillion in 2007 to $28 trillion by mid-2014, fueled by real estate and shadow banking (but honestly, who knows what the real numbers are?). In an anodyne statement befitting a management consulting firm, McKinsey concludes that “(i)t is clear that deleveraging is rare and that the solutions are in short supply.” In fact, t he solutions are not in short supply; what is in short supply is the political and moral courage to implement them.

Figure 4
Denmark

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Both the McKinsey and the Geneva reports demonstrate beyond a shadow of a doubt the unsustainable and dangerous path on which the global economy is set. The question is whether global leaders will let the train run off the tracks, or whether someone will demonstrate the necessary leadership to take action. The message for investors is that they and their money are living on borrowed time. The currencies in which their financial assets are denominated are being diminished in value every minute of every day. Rather than sit passively and receive a crash course in nominal value, they should actively be seeking ways to protect the real value of their capital. In many cases, this will require them to abandon managers that aren’t generating adequate absolute returns and shift their assets to those who have demonstrated a genuine understanding of what is happening and an ability to connect the dots. The day- to-day volatility of the stock market is a side-show; the re al story is the massive build-up of debt and what it means for the value of the currencies in which those debts are allegedly going to be repaid in the future. The truth is that those debts are never going to be repaid in constant dollars. Those who understand that and act accordingly will profit enormously; those who don’t will fare very poorly.

Oil Update

Oil has rebounded by nearly 40% from January’s lows but remains well below last year’s prices. (As of February 28, Brent crude was trading at $62.58 per barrel compared to a low of $45.19 on January 13 and a high of $115.00 in June 2014.) This has led to rebounds in some oil equities and junk bonds. Investors are breathing a sigh of relief that oil producers are reacting to the plunge in prices by sharply cutting back drilling. Unfortunately, these efforts have yet to actually cut production; year-over-year production is still up. Companies have idled rigs for 12 consecutive weeks, bringing the rig count to its lowest level in five years, but they will need to do much more to stop the growth in production. The same improving technology that gave rise to the fracking boom and the ability to exploit the most promising acreage has rendered the rig count of limited use as an indicator of future production.

Oil prices were hit by a perfect storm of oversupply, slowing non-financial demand and sharply lower financial (i.e. trading) demand. The last factor is particularly noteworthy because it was triggered by concerns about global growth on the part of commodities traders in early-mid 2014. It makes eminent sense that a world suffocating under an ever-increasing burden of debt is going to struggle to grow. This is confirmed by reams of economic data from around the world. Other economically sensitive commodities such as iron ore, aluminum and copper are telling the same story. Markets are living organisms, however, and the oil market is no exception. Oil producers are cutting production as quickly as possible and oil prices are stabilizing. The International Energy Agency is predicting that oil demand will increase by 912 million barrels-per-day in 2015 and another 1.13 million barrels-per-day in 2016. Rising demand will meet lower supply to stabilize prices. The world w ill adjust. The only question is how much damage will be inflicted on overleveraged companies in the interim.

Figure 5
Whoops!
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Data shows that lower gasoline prices are still not translating into a consumer spending boom. As I have maintained all along (to the criticism of many), cheaper gas is unlikely to send consumers racing to the mall when the cost of healthcare and everything else is still rising. The Bureau of Economic Analysis, an arm of the Department of Commerce, reported that Americans spent $21.4 billion, or 18% of all spending on goods and services, in the fourth quarter of 2014 on healthcare. Those expecting lower gas prices to boost consumer spending should consider Figure 5 taken from a report by Goldman Sachs analyst Matthew J. Fassler. It shows that “the correlation between [Wal-Mart Stores, Inc.’s] US [same-store-sales] and gas prices has been nearly zero” since the beginning of 2007. (Matthew J. Fassler, “Wal-Mart Stores, Inc.: Results troughing, outlook plodding but improving nonetheless,” Goldman Sachs Research, February 15, 2015.) Figure 6, taken from the same report, looks at other major retailers like Sam’s Club, Target Corp. (TGT) and Costco Wholesale Corp. (COST) and shows only marginally more evidence that lower gas prices translate into higher retail sales, but Goldman deems the evidence “statistically insignificant.” On its most recent earnings call, Home Depot (HD) also confirmed that it has seen no correlation between lower gas prices and higher spending at its stores.

Figure 6
Statistically Insignificant
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So where are the savings going? J.C. Penney CEO Myron Ullman suggested that consumers are using their gasoline savings to pay down their credit card bills or buy necessities. While many experts expect consumers to behave as they have in the past and spend their gasoline savings on other disposable items, perhaps they should consider that earlier periods of sharply lower oil prices did not coincide with either higher government mandated healthcare spending or an ecommerce revolution. Consumer behavior is occurring in a radically different environment today and is unlikely to produce the same kinds of consumer spending boom as it did in the past.
Credit Derivatives in Denmark

High yield bonds performed poorly over the second half of 2014, particularly the lowest-rated credits. Between mid-June and mid-January, the spread on the Barclays High Yield Index widened by 185 basis points and the average bond price dropped by 7 points (performance has since recovered). The severity of the drop was not, however, fully reflected in the credit derivatives market; the spreads on credit default swaps (CDS) did not widen as much as spreads on the underlying cash bonds. One possible explanation for this anomaly is that investors are concerned that CDS contracts will not be enforced in the manner investors expect. The last time something like this occurred was in 2009 when counterparty fears led investors to question the value of CDS protection. This issue arose recently when requests were submitted to the body that determines whether payments are required to be made under CDS contracts in the cases of RadioShack and Caesars Entertainment Corp. (Caesars) .

This body, the ISDA Credit Determinations Committee (the “Determinations Committee”), produced a split vote regarding Caesars even after the gaming company defaulted on a bond payment due on December 15, 2014. This has raised questions about the integrity of these credit protection contracts and the stability of the markets.

Joshua Rosner of Graham Fisher & Co. has written some excellent papers on this topic exposing flaws in the process used to determine the occurrence of “credit events” that give rise to payments under CDS contracts. The Determinations Committee is comprised of the 15 largest users of credit default swaps. Ten voting members are sell-side firms and five are buy-side firms; the list includes the usual suspects. As a result, it is highly likely that the voting members will own a position in the instruments on which they are being asked to vote. Further, the determinations process lacks any of the normal procedural protections associated with what is effectively a juridical process. The following language from the Committee’s disclosure document highlights the problem:

The procedures of the Determinations Committees are set forth in the DC [Determinations Committees’] Rules. A Determinations Committee in accordance with the DC Rules may amend the DC Rules. None of the ISDA [International Swap Dealers Association], the institutions serving on the Determinations Committees or any external reviewers owes any duty to you in such capacity, and you may be prevented from pursuing claims with respect to actions taken by such persons under the DC Rules. Institutions serving on a Determinations Committee may base their votes on information that is not available to you, and have no duty to research, investigate, supplement or verify the accuracy of information on which a determination is based. In addition, a Determination Committee is not obligated to follow previous determinations or to apply principles of interpretation such as those that might guide a court in interpreting contractual provisions.

Therefore, a Determinations Committe e could reach a different determination on a similar set of facts. If we or an affiliate serve on a Determinations Committee, we may have an inherent conflict of interest in the outcome of any determinations. In such capacity, we or our affiliate may vote and take other actions without regard to your interests under a Credit Transaction.”

(International Swaps and Derivatives Association [ISDA] Credit Derivatives Determinations Committee Rules, September 16, 2014 Version,http://www2.isda.org/functional-areas/legal-and-documentation/disclosures/)

To characterize this process as arbitrary would be generous. The Committee can act without any duty to anybody, can ignore all principles of fairness, can act in absolute secrecy, and claims to have no liability to anybody. Investors in credit default swaps sign away all rights when they enter into standard CDS contracts. The members of the Committee are authorized to act in their own interest in the name of exercising their fiduciary duties to their own investors. Fairness and market integrity be damned.

The Determinations Committee failed to agree whether Caesars’ failure to make interest payments on certain bonds on December 15, 2014 constituted a default (a “credit event” in the CDS contract parlance) that would trigger payments on $1.68 billion of notional outstanding CDS contracts that were due to expire on December 20. While the company made it clear that it would not make those interest payments and was planning to file for bankruptcy pending conclusion of negotiations with bondholders, it still had a 30-day grace period in which to change its mind and make the payment and had sufficient cash on hand to do so.

Accordingly, some might argue that the default did not occur until the earlier of the end of the grace period or the date of bankruptcy filing (bondholders filed an involuntary bankruptcy petition on January 12; the company followed with a voluntary petition on January 15). Unable to reach a decision, the Committee is convening an exter nal arbitration panel for the first time in six years to determine whether a “credit event” occurred with respect to the CDS contracts that expired on December 20.

Concerns have been raised because Elliott Management, a large Caesars bondholder that sued the company on November 25, is one of the 15 members of the Committee. Elliott’s presence on the Committee – indeed, the presence of any market participant on the Committee –raises serious questions about the integrity of the determinations process. The market would be much better served by a process that recuses interested parties from participating in decisions involving their own investments. This would seem to be both an obvious and an easy problem to fix; it is also an important problem to fix in order to improve market confidence.

The credit default market, while smaller than it was before the financial crisis, is still $20 trillion in size, large enough to pose a systemic threat. Recently, the big banks were able to convince Congress to keep their hundreds of trillions of derivatives contracts inside their FDIC-insured subsidiaries. As a practical matte r, this changes little since the size of these derivatives are so overwhelming that the government will have no choice but to step in with some type of blanket guarantee during the next crisis regardless of where these instruments reside. But leaving them inside taxpayer-insured entities sends a signal that Congress doesn’t appreciate the risk these products pose and is enabling moral hazard to flourish.

Credit default swaps constitute only 3-4% of all outstanding derivatives yet at $20 trillion could easily wipe out the capital of the world’s banks in the blink of an eye. The least that should be done – and done immediately – is for an independent procedure for determining “credit events” to be put in place. The current regime is inadequate.

The Kingdom Of Denmark
John Mauldin | Mar 04, 2015

In Thoughts from the Frontline, I am in the middle of writing a series on debt. I realized on Sunday that the second installment wasn’t ready for prime time, so I will work on it some more and send it out (hopefully) this coming weekend. In the meantime, in keeping with the theme of debt, for today’s Outside the Box we have the following issue of The Credit Strategist from the ever-insightful Michael Lewitt. Michael starts out musing on debt and then shares a number of useful thoughts on a variety of market topics, with his usual panache.

“The day-to-day volatility of the stock market is a side-show; the real story is the massive build-up of debt and what it means for the value of the currencies in which those debts are allegedly going to be repaid in the future. The truth is that those debts are never going to be repaid in constant dollars. Those who understand that and act accordingly will profit enormously; those who don’t will fare very poorly.”
I appreciate Michael letting me forward this letter to you. You can subscribe to his letter at www.thecreditstrategist.com.

As I send this note I am flying from Orlando back to a much colder Dallas, but spring can’t be all that far off, can it? Better here than Boston, I guess. I am glad my travels have not taken me to the Land of the Frozen this winter.

Finally, I was saddened, as I know many were, to hear of the passing of Leonard Nimoy. He was, and always will be, Spock. He was part of the zeitgeist of my generation. The alien character he created with his acting made us think about what it meant to be human, in much the same way that Data did for later Trekkies. And while it is classified as sci-fi, Star Trek is a story about the human condition, and Spock was the perfect foil for the writers and creators of the stories.

I wrote a chapter in Bull’s Eye Investing called “Finding Your Inner Spock,” about the behavioral quirks that all investors have, suggesting that we all need to develop the ability to control our emotions in the investment process – by finding our inner Spock, so to speak.

Leonard Nimoy lived long and prospered, and now he boldly goes on to the next leg of his journey. I’m sure he will find it fascinating. I am, and will always be, his fan.

Your trying to understand debt analyst,
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John Mauldin, Editor
Outside the Box

Posted by Mark Rose
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If you’re a well-behaved investor … and I’m sure you are … chances are you religiously place a stop order whenever you open a trade.

It’s what we’re taught to do. And we know to measure our risk carefully, and not to step out of that comfort zone.

We’re told that the stop loss is our friend – it’s what keeps us out of trouble. Yet, this ‘friend’ is (without a shadow of a doubt) costing you money. There’s no ‘ifs’ or ‘buts’ about this – stop losses make us poorer. Fact.

But, can we afford to live without them?

Do stops work?

Tests have shown, conclusively, that trading without stop loss will, ultimately be more profitable that trading with one.

If the price moves against us … we can just wait for it to move back in our favour, using a time-based close rather than a price-based one.

Thomas Bulkowski ran a test in which he bought a stock, used a daily trailing stop and left the trade open for a month (unless it was stopped out in the meantime). The results showed clearly that the buy-and-hold method with no stop loss did the best. And that the closer the stop is to the current high, the more money you’ll lose, as stops take us out of trades that are ultimately profitable.

No matter where the stop is placed, it hurts performance. The tighter the stop, the worse the performance. Amazingly, even stops as far as 50% away hurt the performance.

So what’s the point of stops?

This shouldn’t really be shocking news to us (although you may be surprised at just how much your stops cost you).
We know that prices generally come back to a ‘mean’ level …
So, if our pockets are deep enough to ride any tumble on a trade … then we can just wait for our trades to move back into profit.
So, the ultimate scenario for us as traders would be to have unlimited funds … no stops … and to take any profits off the table as soon as we see them …
I’m going to repeat this ‘perfect’ scenario just to be sure you’ve digested it …
• unlimited funds
• no stop level
• take profits immediately (more on profit taking in a moment)

That’s not a strategy that you’ll find in many trading manuals!

And I’m not suggesting that we ordinary mortals trade without stops. The obvious problem is how deep our pockets are … none of us have unlimited funds. So, we have to make do with the funds we do have. And that means that we have to put the brakes on losing trades at some point.

But, how have we travelled so far from this ideal to traders’ obsessions with 2:1 risk-reward rates, letting profits run, and tight stop levels?

If we know that stops cost us money (a bit like paying for an insurance policy), and the tighter the stop, the more we lose … surely we should be trading with the widest stops we can afford?

What’s going on in our brains when we place stop orders?

Many traders rely on stop levels and profit targets as their sole means of exiting a position. Either we hit the target … or we’re stopped out …
Therefore our stop level is placed at the point where our trade plan would be proved ‘wrong’. Just on the wrong side of a support level, for example.
It all sounds very sensible.

Along come the pro traders (these are the ones with deep pockets, who don’t need to fret about their stop distances as much as we do) … our carefully positions stop levels are like sitting ducks to them, ready to be picked off.

It’s no coincidence that our stops get hit, only for markets to turn around.

It’s a paradox – the more we ‘think’ about the placement of our stops – the more vulnerable they tend to be.

And what about our profit targets?

If we’re putting our faith in the markets to generally move back to within their ‘mean’ range, and not to wildly run off … then we need to apply this wisdom to our profit targets too.

Sure, there are times when if we’d left a trade to run, it would have clocked up another 20 … 30 … 100 points … but most of the time, markets move within their expected ranges, and those kinds of profits just aren’t out there.

When the profit is on the table, we should learn to take it, and not obsess about how the distance to our profit target relates to the distance to our stop loss. If you want a data-set to obsess over, focus on your positive expectancy figure .
Am I seriously telling you to cut your winners and let your losers run?

Yes. But with provisos …

If you’re widening your stop levels, that doesn’t mean you should be taking greater risks – adjust your staking levels accordingly. And if you’re making this shift in your trading, you must expect to see a boost in your success rate.
This is a rejection of the ‘hope for the best’ type trade. Whether we have deep pockets or not, we can trade the market with faith and focus in the strategies we’re using, and the mindset of a pro.

This Map Of Religion In The Middle East Shows Why Iraq Is So Crucial
MICHAEL B KELLEY
JUN. 17, 2014

Jihadi extremists and Sunni tribes have commandeered north Iraq and are fighting Iran-backed Shia militiamen and volunteers within 50 miles of Baghdad.

http://static3.businessinsider.com/i...58.01%20am.pngMorgan Stanley

The conflict has all of the makings of a sectarian war at a time when the civil war in neighboring Syria grinds on in its fourth year. Brookings expert Matthew Pollack thinks that, absent a huge influx of military assistance from an foreign backer, "the fighting will probably continue for years and hundreds of thousands will die."

Furthermore, Dexter Filkins of The New Yorker notes that "the events unfolding in Iraq point toward a much wider war, reaching from the Iranian frontier to the Mediterranean coast."

http://static6.businessinsider.com/i...46.41%20am.pngscreenshot/Chris MatthewsThe Shia crescent

The implications for the Middle East are huge, especially given Iran's eagerness to bolster Baghdad while simultaneously running the show for the regime of Syrian President Bashar al-Assad by dispatching elite Iranian Revolutionary Guards (IRGC), Iranian-trained Iraqi militias, and Lebanese guerrilla fighters from its Shia proxy Hezbollah.

Iran's primary interest involves protecting the Shia crescent, which comprises Shia populations from Iran to to the Mediterranean coast in Lebanon.
That's why Tehran has been training Iraqi militias for years while infiltrating the Shi'ite-led government of Iraqi Prime Minister Nouri al-Maliki.
The above map from Morgan Stanley illustrates why Iraq is crucial to the Middle East amid flaring sectarian tensions. Iran is 91% Shia, Iraq is 66% Shia, Syria is 16% Shia, and Lebanon is 30% Shia.

Assad and Hezbollah are battling a overwhelming Sunni majority in Syria, and Tehran needs to maintain a robust supply line from Iran to Damascus and Beirut. Doing so requires fighting the Sunni minority that's revolting in Iraq.

Basically, Iran is angling to dominate the regions as it goes up in flames. Proactive moves in Syria and Lebanon combined with U.S. capitulation have worked out to Tehran's advantage.

Consequently, Iran is moving fast to bolster Baghdad and are willing to accept any help the U.S. is willing to provide.

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The Grand Deception Continues, More Fed Propaganda
Mar 09, 2015 - 08:29 PM GMT
By: Michael_Pento

Last Friday a photograph of a dress, whose exact colors were in doubt and became the subject of much debate, dominated the Internet. Not only is this a perfect example of the inane distractions that the public is fascinated with, but it is also a topic that should be elevated to a higher level of discussion. That is, how people can look at the same thing and yet interpret it in different ways?

Are Happy Days Really Here Again?

The current picture of economic growth in the United States is undergoing a similar debate. During the second and third quarters of 2014, Wall Street popped champagne corks because the average of the two periods displayed 4.8 percent economic growth. The better-than-expected GDP, coupled with a steady decline in the unemployment rate, led many to believe that our seven years of economic malaise were over. The economy appeared colored in growth — happy days were here again!

Unfortunately, the celebrations proved premature. Fourth quarter GDP has been revised downward to an annualized rate of 2.2 percent, not the 2.6 percent analysts had been expecting. And full-year GDP growth came in at an underwhelming 2.4 percent. Turning to data in Q1 this year, the Chicago PMI came in at 45.8, indicating contraction in the manufacturing sector in the Midwest for the first time since April 2013, and the number of Americans seeking first-time unemployment benefits rose last week back above the 300,000 mark.

But the bad news doesn't end there. In January existing Home Sales fell sharply to their lowest level in nine months, and despite bullish calls for consumer spending to be bolstered by falling energy prices, consumer outlays fell in both December and January, the first two-month decline since 2009.

Greenspan's Parallels Today's U.S. To Year 1937 Of The Great Depression

The former Chairman of the Federal Reserve, Alan Greenspan, doesn't think the color of the economy is all rosy. He told CNBC's "closing Bell" that effective demand is extraordinarily weak. Referring to the depression inside the Great Depression that occurred in 1937, he said, "The way I measure it, it's probably tantamount to what we saw in the later stages of the Great Depression."

Among other things, Greenspan blames entitlements for crowding out savings, a critical aspect to investing, and crowding out capital investment. Greenspan continued, "Capital investment is key to productivity growth. That has slowed down quite dramatically and productivity has followed right along."

Former Treasury Secretary Larry Summers sees the economy in shades similar to Greenspan. And he has a name for this color: "secular stagnation." Summers contends that the inflation-adjusted Fed Funds Rate should be as low as negative 2-3 percent "forever."

More Fed Propaganda

Despite the bleak hue seen by some, many of those who work at the Fed see the economy colored in blue skies forever and are confident we will see 3 percent growth this year. In fact, some members of the Federal Open Market Committee see the economic picture as so bright that they believe the Fed should dull it with immediate rate hikes.

St. Louis Fed President James Bullard, who is generally hawkish, called for rate hikes as part of "the normalization process," as he expects the unemployment rate to fall below 5 percent in the second half of this year and overall economic growth to be 3 percent for 2015.

Bullard claims, "These labor markets are improving so rapidly … if you haven't even come off zero and the unemployment rate has come down below 5 percent, that seems a little bit extreme to me."

Likewise, Federal Reserve Vice Chairman Stanley Fischer said recently, "If the labor market continues to strengthen, and if we see inflation beginning to increase, then the natural thing is to get the interest rates up."

But perhaps Bullard and Fischer should review their color charts. The last time we had annual GDP growth over 3 percent was in 2005. We have spent the last nine years growing well below the 3 percent level, despite the Fed's unprecedented accommodation. In case they forgot, we had the following growth rates for the past five years: 2010, 2.5 percent; 2011, 1.6 percent; 2012, 2.3 percent; 2013, 2.2 percent; 2014, 2.4 percent.

Why would the economy suddenly start growing at 3 percent if "quantitative easing" has ended and interest rates are projected to start rising? Do they expect companies to start building factories because the cost of capital is increasing, when they didn't build those factories when the cost of capital was next to nothing? Or do these color-blind pundits think that collapsing asset prices will finally spur consumer demand that has been absent for nearly a decade?

The Harsh Reality

While those at the Fed are busy tinkering with their color wheel, they are missing the contractionary and deflationary data points hanging all around them. They have spent the last seven years "mixing paint," but the economy has shown no signs of sustainable and robust growth.
The only things we have to show for years of central banks' absolute domination of free markets are worldwide asset bubbles in real estate, equities, and sovereign debt.

And now true to form, the Fed's reading of the economy is 180 degrees away from the economy's actual condition. Since our central planners have managed to artificially bring the belly of the yield curve down to around 2 percent, it won't take many increases in the Fed funds rate before banks find it unprofitable to make loans — and the economy shuts down just as it did in 2000 and 2007.

So once the Fed raises interest rates just a few times and flattens the yield curve, the real color of this economy's "dress" will become clear to everyone — and it is sackcloth and ashes.

MONEY MANAGEMENT

Trading Plan: Learn to Manage Money and Risks

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Managing money and risk is one of the most important skills traders should work on when creating their trading plan. Chris Svorcik developed a complete guide to building an effective trading plan entitled “Trading: The Battle Plan”, which aim is to help traders unleash their inner trading soldier. He considers that trading can be very much likened to a battle, and traders to soldiers. Some soldiers end up victorious, while some, unfortunately, do not. Nonetheless, more often than not, the soldiers who do end up winning their battles are the ones who had planned better; the ones who were able to devise of effective battle plans. This article refers to traders’ ability to manage risk and money, which can be considered as one of the core aspects of the creation of an effective trading plan.

Risk Management vs. Money Management

To not be able to apply risk and money management principles is most certainly very much disadvantageous to traders. To better understand this point, let us first define what Risk Management and Money Management are, respectively. By assessing market conditions, risk-reward ratios, probabilities, and the use of stop loss orders, and many others, Risk Management aims to minimize the losses for every trade. On the other hand, Money Management focuses on the steps necessary to maximize profit by the use of trailing stops and adjusting the transaction size, and many more.

What is your attitude toward risks?

Your attitude toward risks will affect how you trade. It is very important that your attitude toward risks be well-suited to your personal style as a trader. It is important to note that the longer you stay in the market, the higher the chances of risk becomes. With this being said, the trading approach which keeps you in the market for the longest amount of time is said to be the riskiest. This is why it is crucial to determine how you react toward risks. Are you a risk-taker, or are you risk averse?
Over-all, what is the risk in the market?

It is imperative that you make your mind up regarding the maximum amount of capital you are willing to place at risk at any given one time. You have to be prepared for the worst case scenarios. If the market crashes again, just like during 9/11, a catastrophic loss could come from having a very big percentage of your equity in the market. Most traders choose to just risk 1% on any one trade. This is while having a maximum exposure of 5% in total in all open trades. It is the lesser evil since even if you will still be losing the 5%, it will not be as horrific as losing way more than that.
How do you control Sector Risk exposure?

To control the sector risk, you have to limit the number of open positions in one sector.

How will you deal with Broker and Hardware Risk?

If your broker folds and you have no way of closing your open positions, what will you do? Suppose your PC or mobile device crashes and you need to take action on your position, what will you do? As a trader, you have to come up with possible ways to resolve these kinds of random problems when they suddenly arise. This is why you should put this in your Trading Battle Plan. It is never enough to just have a Plan A. There should always be a Plan B, C, D, and so on.
What is the Strategy Risk?

Always remember that the markets are ever-changing. A tried and tested trading strategy of yours may have been profitable last year or even last month, but now, there is always a possibility that your strategy may be disproven. What you can do in the event your trading strategy seems to have stopped working already is to measure the largest % drawdown on each trading strategy being used. After getting the % drawdown, multiply it by a factor of 1.5 to 2. Once you get the answer, check If the drawdown goes over this figure. If this occurs, STOP using the trading strategy!

How high are your chances of a profitable trade?

In the aspect of evaluating the specific risks involved with a proposed trade, a lot of traders only focus on the ratio of risk-reward. However, this piece of information is deemed to be pointless if you do not include probability in the equation. In order to evaluate the probability of success of a particular trading strategy, we must begin by properly setting an accurate, straight-forward definition for the trade setup. This is crucial to be able to spot the trade setup trading with real money on a real-time basis. Afterwards, if the setup had already been given precise definition, it must undergo a series of tests to check if the probability of success is far greater than that of failure. This is often termed as ‘Success Ratio’. To get this ratio, you must divide the total number of trades that were positively profitable by the total number of trades made. Then, get the percentage by multiplying the answer by 100. The answer is your success ratio.
What is Risk-Reward ratio?

So we can find out the Risk-Reward ratio, we must first know the success ratio, which had been discussed in 10.7., and the Sharpe ratio which is the average amount of money made on profitable trades relative to the average amount of money lost on the others. To compute for the risk-reward ratio, simply divide the average amount of money gained on profitable trades by the combined figures of the average amount of money gained and lost, then multiply by 100.

What is your risk per trade?

Even if you can forecast the direction the market will take 99% of the time, this will be meaningless if you risk 100% of your capital on every single trade. Yes, you could accumulate a fortune; however, the chance that one day you will lose everything is terrifyingly high. Most traders will never end up risking more than 1% of their capital at any given one time.

Why should you place your Stop Loss orders?

Unless you are an experienced trading expert, you must always ensure that you set up a stop loss for every trade. By doing so, you will have a guarantee that all losses will be cut short depending on the parameters you set for your stop loss. You must also vary the number of shares or contracts to make certain that you remain within the risk per trade parameters defined in 10.9.

When should you stop trading?

You should always know when to stop trading—this promotes discipline. This will protect you from being greedy with profit and from emotionally running after your losses in a hasty, thoughtless manner. On a ‘Profit Day’, stop trading once your financial target, which was initially set, had already been satisfied. On a ‘Loss Day’, you should stop trading when your trade hits the daily stop. Lastly, on a ‘No Opportunity Day’, you must not trade completely.
What will you do with large drawdowns and profits?
As a trader, you must always think about your capital in relation to your general financial status. You have to be wise enough to only trade with money you can afford to set aside; money you can afford to lose, if ever your trades go south. You have to ensure that losing the money you will be allocating for trading will not end up badly affecting your personal standard of living. Establish in your plan the parameters of which you are to follow as regards putting in more money during large drawdowns and withdrawing when you gain profit.

Which money management approaches will you use in your trading?

It will be very helpful to establish your objectives early on. Having a clear set of objectives will be advantageous in determining which money management approaches to apply in your personal trading performance. What will you do once your trades start bringing in profit? Will you risk more of your capital when you trade? Are you going to change your trading strategy and start diversifying? Make this clear for your own sake.
Will you lock in profits?

In trading, when you use a trailing stop to lock in all your profit, you can either end up having a substantial amount of profit, or having a scratch trade and have no losses—just a breakeven.

What is your trade’s transaction size?

When deciding how big or how small you want your transaction size to be, you have to bear in mind that the size of your transaction should not be bigger than the set risk management guidelines. Note that some strategies may carry a higher level of profitability; thus allowing you to choose a more sizeable transaction size upon entry. On the contrary, there are other strategies which promise a level of profitability far lower than others. In cases like this, you should choose a more conservative transaction size.

Chris Svorcik
Lead Educational Strategist
Admiral Markets

MONEY MANAGEMENT

How to Manage Money and Risk

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Developing the ability to manage money and risk is vital to novice retail traders who wish to experience profitability within their first year of trading. By having clear processes to manage those factors, traders are demonstrating that they are taking trading seriously, and as such often become successful. This is something which I have witnessed over many years of teaching Forex.

I’ve also witnessed the other side of the spectrum. Traders that don’t develop clear strategies for managing their capital and the uncertainty that trading can bring nearly always fall short. But it doesn’t have to be this way. There are simple steps every beginner can take to increase their chances of profitability over their first twelve months.

Think of Forex trading like a business

Treating Forex trading like a business is exceptionally important. A mindset of professionalism is central to creating the foundations of success, and it’s something I encourage all novice traders to adopt. When trading is treated like a part-time hobby, the results will almost always match the approach.

Many hope to get rich from Forex quickly. Unfortunately, it doesn’t quite work that way. Trading through technical analysis is a skill that needs to be mastered over time. It takes dedicated practice and a willingness to learn. I often compare it to learning a language or musical instrument. Fantastic progress can be made within a year, but it takes the right approach.

So how does one treat Forex like a business? The first step is to treat your time like a commodity. It must be dedicated to understanding a number of key concepts. Creating a consistent trading routine is also very important. Dedicate the same amount of time to learning and trading each day. Most traders I speak to actually do this to some degree when it comes to learning how price moves, or how a particular trading strategy works. A lower proportion invest time in creating a money and risk management plan, which is an absolute necessity for profitable trading.

1. Establish realistic expectations

Before creating a money and risk management plan, it’s important for traders to accept the reality of what they are likely to achieve within their first year of trading. I’ve yet to meet a novice trader who has become a millionaire in their opening months. That’s not to say having a goal like that is a bad thing, but having realistic time frames for achieving such an objective is vital.

Problems with risk and money management can occur when traders ingrain personal goals that are unrealistic, which then in turn forces traders to gamble more than they should. They can become a dangerous and toxic distraction.

Consistent and conservative gains are what novice traders should be aiming for, not just within their first twelve months, but throughout their entire careers. I say this because a series of targets which are achievable can act as an excellent way to boost morale. So think of Forex trading as a marathon. Those with plans geared to the long-term always do better. Profits that are generated from an over-leveraged approach are bound to be given back to the market, in addition to interest.

Many beginner retail traders may struggle to quantify a realistic target for their first year of trading. My advice would be set a target of between 2.5% to 7.5% for the whole year. Those targets can then steadily increase in years two and three.

2. Create clear rules to protect capital

Capital is absolutely everything for a Forex a trader, so being able to protect it is key. Not only an entry strategy or analysis of the market suffice to become a profitable trader, clear rules are needed to control money and risk. These rules act to minimise potential losses in tricky market conditions. The absence of these rules can lead to disastrous losses, which can wipe away entire accounts in one or two losing trades.

Capital protection is achieved via risk management, which allows traders to reduce their overall exposure to losses for every trade they place. This in turn allows traders to survive losing streaks, which happens to all traders, no matter how skilled they are.

For example, traders can cap the risk they take per trade and per day to a maximum percentage (anywhere from 0.1% to a maximum of 3% of capital in their trading account). The higher the percentage, the more chance there is of a drawdown or loss of capital. I would encourage all retail traders to employ caps of this kind.

Another aspect of money and risk management is making use of a protective stop loss. It’s a simple and effective way of controlling trading losses and is a very important tool to novice retail traders. A protective stop gives traders the opportunity to identify the maximum loss they are willing to make on single position for a particular trade.

When potential losses are managed in this way, in combination with capital caps, traders can acquire peace of mind that significant funds are not at the mercy of the markets.

Only trade with what you can afford

The final point for first-time traders to consider when managing money and risk is quite a simple one. Never trade with money that you can’t afford to lose. Doing so is irresponsible and can create a stressful environment which will affect trading performance.

If spare money is an issue, I would suggest practicing on a demo account for a number of months while saving a little capital. This then gives sufficient time for capital to build and for the trader in question to develop their all-around trading.

Chris Svorcik
Lead Educational Strategist
Admiral Markets

MONEY MANAGEMENT

The Cornerstone of Profitable Trading

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Foreign exchange traders and investors dedicate a significant amount of time studying and mastering new trading techniques, trading strategies, and approaches to the markets. However, only a few spend the equal amount of time to learn proper money management.

Money management is one of the most ignored and overlooked aspects of FX trading and at the same time is one of the key cornerstones that form part of a successful trading career.

TECHNICAL MONEY MANAGEMENT: A POWERFUL COMBINATION

The majority of currency traders focus most of their time on technical analysis to forecast price movements, trends, and find high probability trades. Therefore, their technical analysis is directly associated to their money management and risk mitigation strategies.

Risk needs to always be respected, calculated, and accurately managed in order to attain successful and profitable trading results. The combination of professional technical analysis techniques and strict money management can substantially enhance the chances of reaching growth in currency investments and funds.

THE BASICS OF APPLYING TECHNICAL MONEY MANAGEMENT

Technical analysis has been used for centuries since the times of rice trading in Japan. The information obtained through technical analysis can be an excellent guidance and a roadmap to where price may go next. Nevertheless, figuring out the historical data from a financial market is just the beginning.

This information can only become useful by combining it with other trading skills such as risk assessment, money management, and flawless trading execution. Applying a risk mitigation oriented strategy can provide a novice investor with consistency of profitability, which is normally only experienced by veteran traders.

Several technical analysis techniques may be utilized to reduce your trading losses and increase your currency portfolio’s earnings. In the next illustrations a variety of these techniques such as support and resistance, trend lines, and counter trend trading analysis will be exposed and explained in real life trading situations.

USING SUPPORT & RESISTANCE AS RISK CONTROL INDICATORS

Identifying support and resistance is part of any complete technical analysis session, and finding proper levels and zones can help you to better apply money management.

Support and resistance can be excellent risk control indicators as they can help us to determine profitable levels to partially or fully close our trading positions. Bear in mind that these levels become more and more influential as the market tests them over and over again. The more a price tests a level, the stronger that level becomes.

In the following illustration the use of support and resistance levels from a risk control perspective are explained and covered. In addition, the appropriate exit and take profit levels have been highlighted as well.

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As an example we are using the GBPUSD currency pair which offers several noticeable opportunities to utilize support and resistance. It can be observed how - by finding support and resistance levels - a trader is able to effectively recognize exit and take profit levels, helping him increase profitability and reduce exposure.

RECOGNIZING TRENDS TO REDUCE RISK IN TREND FOLLOWING & COUNTER TREND TRADES

Trending markets provide several high probability opportunities to enter the Forex market with a low exposure and a high rate of return in each position taken.
Furthermore, several currency markets have several instances where they present a trader with opportunities to enter trades in the opposite direction of the overall market trend (counter trend trading) and take advantage of minor trends.

Counter trend trades require a substantial amount of expertise since a trader can experience a higher level of volatility and false trading signals. These minor trends can often represent a good source of profitable trades when used properly.

It is important to remember that trades of this nature tend to come with a higher trading risk and will make it hard to achieve good levels of profitability, especially for traders without previous experience and proper training.

The following example presents a few examples of how to minimize the extra risk that can occur in a large number of counter trend trades and trend following trades. Always consider that counter trend trading can be difficult and will take time to master especially under high volatility and market uncertainty conditions.

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In this exhibit it can be observed the manner how trend following trades and counter trend traders occur together and develop the overall trend and its retracements. Trend following trades may be placed after price has tested the bottom trend line and has begun to bounce off of it.

On the other hand, counter trend trades may be placed after price has completed its cycle and starts to retrace to the opposite side and against the overall trend. In this occasion the counter trend opportunities will occur when price starts to retrace. An appropriate take profit and exit level would be close to the bottom trend line where price is very likely to test it and bounce off from it.

PROTECTING YOUR ACCOUNT BY FILTERING HIGH RISK TRADES

Capital preservation and risk assessment are main priorities of all large FX investment institutions such as banks, investment funds, and governments. However, independent beginner and veteran traders are more likely to focus on profits and losses rather than on exposure control.

Higher risk trades include several special trading circumstances where the stop loss orders are placed quiet close to the opening price, the volume in the markets is not adequate, and a higher number of false signals are present.

FILTERING HIGH PROBABILITY TRADES FROM LOW PROBABILITY TRADES

A successful trader understands that to be a successful trader only the best trades and with the highest probability of success should be taken. In foreign exchange trading the quality of the trades is considerably more important than the quantity of them.

Filtering the quality of all the trades that are planned and taken in a trader’s account is one of the quickest routes to become profitable and especially consistent.

The consistency of profitability becomes very powerful as you continue to grow your account, consistently overcome drawdown periods, and follow a trading strategy that focus on capital appreciation with controlled exposure to the market volatility.

The following illustrations cover some of the most common situations where you can filter the high probability trades from the low probability ones by using technical analysis.

In exhibit 3 you can see another example of how technical money management can improve a trader’s results by simply adding risk control practices into the equation. In this exhibit “B” and “D” represent a pretty strong support level and “A”, “C”, and “E” represent a trend line drawn in the highest highs of this price movement. Together they form a consolidation which gives the trader clues about where price may be headed and on how to reduce the overall risk of any new trading decisions.

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For instance, placing a long trade at “E” or placing a short trade at “B” or “D” would never be a high probability trade as the market is likely to obey the technical analysis and behave as a reflection of what the market participants are feelings regarding the markets.

Conversely, placing short orders at “C” and “E” would make them high probability trades as price has created a trend line that the market has tested several times. Buying EURUSD at “B” and “D” would as well count as high probability trades.

High probability trades are more likely to occur when you trade in the direction of a major trend. In the exhibit 4, placing sell trades during the downtrend and placing buy orders during the uptrend would convert every trade in a high probability trade.

Nonetheless, placing trades during the sideways market automatically makes them low probability trades as the volatility during sideways markets is substantially higher and unpredictable.

ADDING TECHNICAL MONEY MANAGEMENT TO YOUR TRADING ARSENAL

Technical money management can help traders to improve their trading by simply applying the same technical skills and analysis they use daily but with a risk control oriented approach.

The use of effective and well calculated money management is crucial for taking one’s trading career to a whole new level and becoming a better trader. Technical analysis alone is not enough to achieve consistent and highly profitable results.

But money management, combined with technical analysis, can improve anyone’s trading results by providing a better guide to trade the FX markets and have a higher chance of being successful as a currency trader.

Jose Molina
Executive Director
Vertical Forex