Diving into a ridiculously huge pond...

I'm kind of new at this, but hopefully as my understandings grow so will my vision of various markets. To cut to the chase, my goals are the following:

1) Review what I've read today to make sure I was paying attention.
2) Pass that knowledge on to you.
3) Have some fun.

Hopefully at least the first two objectives will be completed on a regular basis. I've been writing these kinds of entries on my own as reminders of what's been going on. My hopes are to get these posts everyday that the market is open and maybe a weekly expectations report on Sundays. So here are my entries for Sept 29 and 30, 2010. Enjoy!

Sept 29, 2010

In recent news, the USD seems to be under attack by nations all over the world as it has universally declined,  and marginally so, over the course of the past 24 hours. What is most shocking about this is that other currencies, especially the Euro (EUR) seem to be emitting false strength.  Many of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) have seen credit ratings cut again most notably Ireland, whose rating by Moody fell to Aa2 and AA- by Fitch. Although these ratings are still far from junk, the trend is downwards. Moreover, Germany blatantly and openly stated that it did not trust the other EUR nations the other day, which beckons the question of how a currency requiring the collaboration of so many nations such as the EUR can be built upon mistrust? 

The large contributors to the weakness in the dollar are the Chinese and the Brazilians who have expressed concerns with the devaluing dollar as it takes away competitive advantage, especially for Brazil whose currency is very, very overvalued. As for China, the amount of US debt they hold gives them reason to worry. The thought process: fixed income payments stay the same, but an inflated dollar means less purchasing power or in terms of exchange rates, less rmb to be had. Basically with these supporting details clearly voiced by Brazil’s finance minister and an advisor to the People’s Bank of China, the assault on the USD began.

To make matters worse, consumer confidence is down as it has continually tried to rally only to be met by oppression from the ever increase budget deficit coming out of Washington D.C. At the same time, volume is low as the end of the 3^rd quarter nears. It can only be expected that traders look to wait for the start of the next quarter to determine more solid market movements.

In terms of commodities, precious metals and energy commodities are up in general which can be easily explained by the weakness in the dollar. However, wheat and corn are down as many believe the recent Chinese tariff placed on chicken exports from the US into China will cause a surplus in those commodities and rightly so as much of wheat and corn are used to feed chickens.

Crude oil has increased in price but the contango continues to widen to $5.44 from $4.87 as it fights for storage (It is important to note that contangos indicate an increase in storage prices rather than a prediction on the price of the underlying commodity itself). Natural gas on the other hand has fallen as it continues to be found and mined in shale formations along the Applalachians and the Dakotas.

Gold has reached its resistance levels of $1300, which it has met and surpassed, but will be tried. Investments reflect attempts to hedge against inflation but here in the US it will likely be met with due pressure as November elections approach and hopes look high for Republicans. However, if Republicans fail to claim the House and/or Senate, Obama Administration spending will continue to promote dollar inflation. For the time being, though, technical analysis shows an increase in gold prices into the future and most certainly display that it is a bull market as both highs and lows continue to increase with each move.

Sept 30, 2010

The relentless assault on the USD has settled. Today marks the end of the 3^rd quarter and a very eventful month and so it can be expected that the FX market will settle. As a result, the dollar has made some gains against its recent retracements but continues to fall behind other currencies, most conspicuously the yen which continues to strengthen rapidly. We might expect to see intervention efforts arise again as the yen/dollar exchange rate has reached 83.25, dangerously close to sub 83 levels which would certainly trigger Japanese authorities to intervene. However, as made clear by the Swiss National Bank last month, unilateral intervention is a fruitless labor and the Japanese Ministry of Finance and the Bank of Japan will surely be met with the same fate unless they are able to miraculously gather support from the rest of the world. Unfortunately, we don’t live in a world where fairytales come true.

Economic data coming out of the US bolstered equities after early losses, but not quite enough to cover the earlier retracements. Important government reports showed the economy and personal consumption increased more than expected. The US GDP grew at annualized rate of 1.7% which was more than the forecasted 1.6%. Even more surprisingly, initial jobless claims were expected to stay about the as last week which reported 465,000. However, the market consensus was 460,000 but the figure dropped to 450,000 setting the tone for next week’s monthly Employment Situations Report. It is important to note that although this is bullish data on a week by week basis, it is a continuation of the nearly sideways movement in initial jobless claims that has been seen throughout 2010.

More shocking information coming out of the US is that the House passed legislation calling China a currency manipulator, which China will surely react to by testing out its stature. However, it is likely that the anti-free trade legislation will be squelched once it hits the Senate after elections over. Hopefully this kind of speculation will be made in China as to avoid furthering what looks like a developing trade war.

Energy prices are mixed. Yesterday’s inventories data from the Department of Energy reflected overall bullish news. Crude inventories fell 0.475 million barrels which was relatively bearish as estimates were -1 million barrels. Distillate inventories were -1.27 million barrels which was very bullish compared to the consensus at +0.25 million barrels. Most astonishing, however, were gasoline figures which reported -3.47 million barrels as compared to +0.25 million barrels as well. This is clearly extremely bullish data.