Tag: finance

Collecting 2 and 20 in a world where “alpha-creation” through insider trading (thank you 72 Cummings Point Road for ending that party) is now history will be even more difficult after the current year is over when LPs get their year end performance reports and find out that for the fifth year in a row they have underperformed not only the S&P (by a whopping 75%) but the average plain vanilla mutual fund, which happens to collect a fraction of the fees hedge funds charge just to enjoy the privilege of engaging in pissing matches on CNBC with other hedge fund billionaires.

As the chart below shows, through October 31, the average hedge fund has returned a paltry 6%, 75% below the return of the S&P 500 and the average mutual fund. And while the traditional retort: “hedge funds aren’t supposed to outperform the market but to hedge downside risk” is always at the ready, the retort to that retort is that as long as Mr. Yellen is Chief Risk Officer for the S&P, and the Federal Reserve is engaged in QE and otherwise generating a “wealth effect”, which according to many will be in perpetuity or until the Fed finally and mercifully is abolished, the purpose behind the existence of hedge funds is simply no longer there as the Fed will never again voluntarily allow the kind of market drop that would make the existence of hedge funds meaningful.

Of course, if and when the Fed loses control, not even the best hedged fund will do much to offset the ensuing cataclysm.

Some other observations from Goldman:

• The typical hedge fund generated a 2013 YTD return of 6% through October 31, compared with 25% gains for both the S&P 500 and the average large-cap core mutual fund. At mid-year 2013 the average hedge fund had returned 4%, suggesting second-half gains of 2% while the S&P 500 rose nearly 5%.
• The distribution of YTD performance suggests that 20% of hedge funds have generated absolute losses. The standard deviation of YTD hedge fund returns is wide, at 11 percentage points. Fewer than 5% of hedge funds have outperformed the S&P 500 or the average large-cap core mutual fund YTD.
• Equity long/short funds have posted slightly better returns than the average across all funds, at 10%. Many of the poorest performers YTD are macro funds, which generated an average YTD return of -4%.
• Stock pickers have received a boost from their long books, as the most important long positions have outperformed the S&P 500 by nearly 500 bp so far in 2013. Our Hedge Fund VIP basket has returned 30% YTD.
• However, many widely-held short positions continue to outperform, offsetting the strong performance of popular longs and hampering overall hedge fund returns. The 50 stocks over $1 billion market cap with the highest short interest as a percentage of market cap have returned an average of 34% YTD. More than half of the 50 key short positions have outperformed the S&P 500 YTD, and five have returned over 100%

Precisely as we forecast they would 14 months ago.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/HGHoEmQ_I0E/story01.htm Tyler Durden

Submitted by Philipp Bagus via the Ludwig von Mises Institute,

Still unnoticed by a large part of the population is that we have been living through a period of relative impoverishment. Money has been squandered in welfare spending, bailing out banks or even — as in Europe — of fellow governments. But many people still do not feel the pain.

However, malinvestments have destroyed an immense amount of real wealth. Government spending for welfare programs and military ventures has caused increasing public debts and deficits in the Western world. These debts will never be paid back in real terms.

The welfare-warfare state is the biggest malinvestment today. It does not satisfy the preferences of freely interacting individuals and would be liquidated immediately if it were not continuously propped up by taxpayer money collected under the threat of violence.

Another source of malinvestment has been the business cycle triggered by the credit expansion of the semi-public fractional reserve banking system. After the financial crisis of 2008, malinvestments were only partially liquidated. The investors that had financed the malinvestments such as overextended car producers and mortgage lenders were bailed out by governments; be it directly through capital infusions or indirectly through subsidies and public works. The bursting of the housing bubble caused losses for the banking system, but the banking system did not assume these losses in full because it was bailed out by governments worldwide. Consequently, bad debts were shifted from the private to the public sector, but they did not disappear. In time, new bad debts were created through an increase in public welfare spending such as unemployment benefits and a myriad of “stimulus” programs. Government debt exploded.

In other words, the losses resulting from the malinvestments of the past cycle have been shifted to an important degree onto the balance sheets of governments and their central banks. Neither the original investors, nor bank shareholders, nor bank creditors, nor holders of public debt have assumed these losses. Shifting bad debts around cannot recreate the lost wealth, however, and the debt remains.

To illustrate, let us consider Robinson Crusoe and the younger Friday on their island. Robinson works hard for decades and saves for retirement. He invests in bonds issued by Friday. Friday invests in a project. He starts constructing a fishing boat that will produce enough fish to feed both of them when Robinson retires and stops working.

At retirement Robinson wants to start consuming his capital. He wants to sell his bonds and buy goods (the fish) that Friday produces. But the plan will not work if the capital has been squandered in malinvestments. Friday may be unable to pay back the bonds in real terms, because he simply has consumed Robinson’s savings without working or because the investment project financed with Robinson’s savings has failed.

For instance, imagine that the boat is constructed badly and sinks; or that Friday never builds the boat because he prefers partying. The wealth that Robinson thought to own is simply not there. Of course, for some time Robinson may maintain the illusion that he is wealthy. In fact, he still owns the bonds.

Let us imagine that there is a government with its central bank on the island. To “fix” the situation, the island’s government buys and nationalizes Friday’s failed company (and the sunken boat). Or the government could bail Friday out by transferring money to him through the issuance of new government debt that is bought by the central bank. Friday may then pay back Robinson with newly printed money. Alternatively the central banks may also just print paper money to buy the bonds directly from Robinson. The bad assets (represented by the bonds) are shifted onto the balance sheet of the central bank or the government.

As a consequence, Robinson Crusoe may have the illusion that he is still rich because he owns government bonds, paper money, or the bonds issued by a nationalized or subsidized company. In a similar way, people feel rich today because they own savings accounts, government bonds, mutual funds, or a life insurance policy (with the banks, the funds, and the life insurance companies being heavily invested in government bonds). However, the wealth destruction (the sinking of the boat) cannot be undone. At the end of the day, Robinson cannot eat the bonds, paper, or other entitlements he owns. There is simply no real wealth backing them. No one is actually catching fish, so there will simply not be enough fishes to feed both Robinson and Friday.

Something similar is true today. Many people believe they own real wealth that does not exist. Their capital has been squandered by government malinvestments directly and indirectly. Governments have spent resources in welfare programs and have issued promises for public pension schemes; they have bailed out companies by creating artificial markets, through subsidies or capital injections. Government debt has exploded.

Many people believe the paper wealth they own in the form of government bonds, investment funds, insurance policies, bank deposits, and entitlements will provide them with nice sunset years. However, at retirement they will only be able to consume what is produced by the real economy. But the economy’s real production capacity has been severely distorted and reduced by government intervention. The paper wealth is backed to a great extent by hot air. The ongoing transfer of bad debts onto the balance sheets of governments and central banks cannot undo the destruction of wealth. Savers and pensioners will at some point find out that the real value of their wealth is much less than they expected. In which way, exactly, the illusion will be destroyed remains to be seen.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/suR4tpC7fSE/story01.htm Tyler Durden

Submitted by Philipp Bagus via the Ludwig von Mises Institute,

Still unnoticed by a large part of the population is that we have been living through a period of relative impoverishment. Money has been squandered in welfare spending, bailing out banks or even — as in Europe — of fellow governments. But many people still do not feel the pain.

However, malinvestments have destroyed an immense amount of real wealth. Government spending for welfare programs and military ventures has caused increasing public debts and deficits in the Western world. These debts will never be paid back in real terms.

The welfare-warfare state is the biggest malinvestment today. It does not satisfy the preferences of freely interacting individuals and would be liquidated immediately if it were not continuously propped up by taxpayer money collected under the threat of violence.

Another source of malinvestment has been the business cycle triggered by the credit expansion of the semi-public fractional reserve banking system. After the financial crisis of 2008, malinvestments were only partially liquidated. The investors that had financed the malinvestments such as overextended car producers and mortgage lenders were bailed out by governments; be it directly through capital infusions or indirectly through subsidies and public works. The bursting of the housing bubble caused losses for the banking system, but the banking system did not assume these losses in full because it was bailed out by governments worldwide. Consequently, bad debts were shifted from the private to the public sector, but they did not disappear. In time, new bad debts were created through an increase in public welfare spending such as unemployment benefits and a myriad of “stimulus” programs. Government debt exploded.

In other words, the losses resulting from the malinvestments of the past cycle have been shifted to an important degree onto the balance sheets of governments and their central banks. Neither the original investors, nor bank shareholders, nor bank creditors, nor holders of public debt have assumed these losses. Shifting bad debts around cannot recreate the lost wealth, however, and the debt remains.

To illustrate, let us consider Robinson Crusoe and the younger Friday on their island. Robinson works hard for decades and saves for retirement. He invests in bonds issued by Friday. Friday invests in a project. He starts constructing a fishing boat that will produce enough fish to feed both of them when Robinson retires and stops working.

At retirement Robinson wants to start consuming his capital. He wants to sell his bonds and buy goods (the fish) that Friday produces. But the plan will not work if the capital has been squandered in malinvestments. Friday may be unable to pay back the bonds in real terms, because he simply has consumed Robinson’s savings without working or because the investment project financed with Robinson’s savings has failed.

For instance, imagine that the boat is constructed badly and sinks; or that Friday never builds the boat because he prefers partying. The wealth that Robinson thought to own is simply not there. Of course, for some time Robinson may maintain the illusion that he is wealthy. In fact, he still owns the bonds.

Let us imagine that there is a government with its central bank on the island. To “fix” the situation, the island’s government buys and nationalizes Friday’s failed company (and the sunken boat). Or the government could bail Friday out by transferring money to him through the issuance of new government debt that is bought by the central bank. Friday may then pay back Robinson with newly printed money. Alternatively the central banks may also just print paper money to buy the bonds directly from Robinson. The bad assets (represented by the bonds) are shifted onto the balance sheet of the central bank or the government.

As a consequence, Robinson Crusoe may have the illusion that he is still rich because he owns government bonds, paper money, or the bonds issued by a nationalized or subsidized company. In a similar way, people feel rich today because they own savings accounts, government bonds, mutual funds, or a life insurance policy (with the banks, the funds, and the life insurance companies being heavily invested in government bonds). However, the wealth destruction (the sinking of the boat) cannot be undone. At the end of the day, Robinson cannot eat the bonds, paper, or other entitlements he owns. There is simply no real wealth backing them. No one is actually catching fish, so there will simply not be enough fishes to feed both Robinson and Friday.

Something similar is true today. Many people believe they own real wealth that does not exist. Their capital has been squandered by government malinvestments directly and indirectly. Governments have spent resources in welfare programs and have issued promises for public pension schemes; they have bailed out companies by creating artificial markets, through subsidies or capital injections. Government debt has exploded.

Many people believe the paper wealth they own in the form of government bonds, investment funds, insurance policies, bank deposits, and entitlements will provide them with nice sunset years. However, at retirement they will only be able to consume what is produced by the real economy. But the economy’s real production capacity has been severely distorted and reduced by government intervention. The paper wealth is backed to a great extent by hot air. The ongoing transfer of bad debts onto the balance sheets of governments and central banks cannot undo the destruction of wealth. Savers and pensioners will at some point find out that the real value of their wealth is much less than they expected. In which way, exactly, the illusion will be destroyed remains to be seen.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/suR4tpC7fSE/story01.htm Tyler Durden

Warren Buffett once noted, Gold doesn’t do anything “but look at you.” It doesn’t pay a dividend or produce cash flow.

 

However, the fact of the matter is that Gold has dramatically outperformed the stock market for the better part of 40 years.

 

I say 40 years because there is no point comparing Gold to stocks during periods in which Gold was pegged to world currencies. Most of the analysis I see comparing the benefits of owning Gold to stocks goes back to the early 20^th century.

 

However Gold was pegged to global currencies up until 1967. Stocks weren’t. Comparing the two during this time period is just bad analysis.

 

However, once the Gold peg officially ended with France dropping it in 1967, the precious metal has outperformed both the Dow and the S&P 500 by a massive margin.

 

See for yourself… the above chart is in normalized terms courtesy of Bill King’s The King Report.

According to King, Gold has risen 37.43 fold since 1967. That is more than twice the performance of the Dow over the same time period (18.45 fold). So much for the claim that stocks are a better investment than Gold long-term.

 

Indeed, once Gold was no longer pegged to world currencies there was only a single period in which stocks outperformed the precious metal. That period was from 1997-2000 during the height of the Tech Bubble (the single biggest stock market bubble in over 100 years).

 

In simple terms, as a long-term investment, Gold has arguably been the single best passive investment of the last 40+ years.

 

Moreover, I think there is considerable value in Gold today as an investment. Indeed, I can make the arguments that Gold is both cheap as a cigar butt and as a moat.

 

If we look at Gold as a cigar butt (trading at a discount to its intrinsic value), we must first consider Gold’s intrinsic value.

 

Many investors argue that Gold has no intrinsic value. I disagree with this assessment as it does not consider the nature of the financial system.

 

Let’s compare Gold to the US Dollar.

 

Every asset in the financial system trades based on relative value. Ultimately, this value is denominated in US Dollars because the Dollar is the reserve currency of the world.

 

However, even the US Dollar itself trades based on relative value. Remember the Dollar is merely a sheet of linen and cotton that is printed by the Fed and is backed by the full faith and credit of the Unites States.

In this sense, the Dollar’s value is derived from the confidence investors that the US will honor its debts.

 

A second item to consider is the fact that the Dollar’s value today also derived from the Fed’s money printing. Indeed, a Dollar today, is worth only 5% of a Dollar’s value from the early 20^th century because the Fed has debased the currency.

 

As a result of this the world has adjusted to this change in relative “value” resulting in a Dollar buying less today than it did 100 years ago.

 

In this sense, Gold’s value is derived from investors’ faith in the Financial System (ultimately backstopped by the Dollar) and the Fed’s actions.

 

Gold also moves based on investors’ confidence in the system. If investors’ are afraid that the system is under duress (meaning that they have little confidence in the Dollar-based financial system) then they perceive Gold has having a higher value.

 

Similarly, if the Fed prints Dollars by the billions, Gold is perceived as having a higher value relative to the Dollar.

 

Thus, Gold does not have any less intrinsic value than the US Dollar does. In that regard we can price it relative to the Fed’s actions and to the fear of systemic risk to get an assessment of its true value.

 

With that in mind, today Gold is clearly undervalued relative the Federal Reserve’s balance sheet (see Figure 3 on the next page).

 

Since the Crash hit in 2008, the price of Gold has been very closely correlated to the Fed’s balance sheet expansion. Put another way, the more money the Fed printed, the higher the price of Gold went.

 

Gold did become overextended relative to the Fed’s balance sheet in 2011 when it entered a bubble with Silver.  However, with the Fed now printing some $85 billion per month, the precious metal is now significantly undervalued relative to the Fed’s balance sheet.

 

Indeed, for Gold to even realign based on the Fed’s actions, it would need to be north of $1,800. That’s a full 30% higher than where it trades today. Eventually this relationship will normalize. Gold is clearly being manipulated lower.

For a FREE Special Report on how to beat the market both during bull market and bear market runs, visit us at:

 

http://phoenixcapitalmarketing.com/special-reports.html

 

Best Regards

 

Phoenix Capital Research

 

 

 

 

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/NOJ-7GJ4eJQ/story01.htm Phoenix Capital Research

With just a week to go until the Obama-promised “all clear” healthcare.gov date of November 30, the president is scrambling to boost enrollment in the 11th hour. As reported by Reuters, the administration announced a flurry of fixes to its troubled HealthCare.gov website on Friday that officials said would soon double its current capacity, a crucial step toward getting the system working by a November 30 deadline. It also pushed back a deadline for people to enroll in insurance plans for 2014 under President Barack Obama’s Affordable Care Act in a nod to millions of applicants who have been unable to sign up because of technical glitches for nearly two months. The reason for the push is that consumers need to make decisions on healthcare plans in December if they want insurance in place by January.

The problem as discussed ad nauseam is that with its 500 million lines of code, its accessibility problems and its security concerns,  healthcare.gov is simply not a viable option in the long or short-run. And yet Obama keeps insisting on band aid fixes only now the president has decided to boost direct enrollment as a workaround would the latest attempt to fix the site crash and burn again.

Jeffrey Zients, the troubleshooter named by Obama to oversee fixes to HealthCare.gov told reporters on Friday that the website will soon be able to handle 50,000 simultaneous users – twice its current capacity, and up from fewer than 1,000 in the days after its botched launch on Oct 1.

 

Some of the technical fixes will allow insurance companies to more easily directly enroll consumers in health plans, a senior administration official said.

 

The administration will run a pilot program for direct enrollment in three states with large numbers of uninsured people – Texas, Florida and Ohio – and use the results to expand the availability of the “direct enrollment” option.

 

“We do believe that it’s substantial. We’re looking at hundreds of thousands of people who we believe may well opt to do this,” the official told Reuters.

In the meanwhile the first delay to the rollout was announced: it will, however, hardly have a meaningful impact:

People needing health insurance by January 1, 2014 will have eight extra days to sign up, officials said. The original deadline for year-end coverage was December 15, but now will be moved to December 23.

More importantly, the administration has also decided to push back the deadline for the second yearof enrollment, which just happens to fall at a critical time – just after the midterm elections which also means Americans will not know how high premiums surge as a result of Obamacare until after the election.

With the first enrollment period barely off the ground, the Obama administration also has decided to delay enrollment for the second year of the program to give insurance companies more time to calculate rates, White House spokesman Jay Carney told reporters.

 

The delay will mean consumers will start shopping for insurance for Year Two of Obamacare on November 15, 2014 – more than a week after voters go to the polls for midterm elections, when congressional Democrats are expected to face tough questions about the policy they supported.

 

“That means that if premiums go through the roof in the first year of Obamacare, no one will know about it until after the election,” said Republican Senator Charles Grassley of Iowa. But Carney rejected any assertion that politics was behind the extension.

“The fact is, we’re doing it because it make sense for insurers to have as clear a sense of the pool of consumers they gain in the market this year, before setting rates for next year,” Carney said.

And as usual, the White House is convinced it can just lie and just keep getting away with it thanks to a press that is infatuated with a president who until recently could, in the eyes of the “independent” media, walk on water but no more.

Elsewhere, in an attempt to artificially boost excitement in a program that has gone from Obama’s crowning achievement to his most abysmal failure, the WaPo reports that there has been a surge in enrollment after the abysmal results from the first enrollment month:

After anemic enrollment in the federal health insurance marketplace, several states running their own online exchanges are reporting a rapid increase in the number of people signing up for coverage, a trend officials say is encouraging for President Obama’s health-care law.

 

By mid-November, the 14 state-based marketplaces reported data showing enrollment has nearly doubled from last month, jumping to about 150,000 from 79,000, according to state and federal statistics. The nonprofit Commonwealth Fund, which has been tracking the data, called the most recent numbers “a November enrollment surge.”

 

The latest figures from the state-run exchanges, combined with totals on the federal exchange, bring the national number to at least 176,000.

One wonders how much of the “surge” is due to the change in crtieria to just needing to have Obamacare in one’s checkout cart. Either way, even if one believes the propaganda, and it is unclear why anyone would after the endless barrage of lies in the past 5 years, “while the pace of enrollments increased this month, sign-ups are still well below early projections.”

A far bigger problem beyond simple propaganda is that once again just like with jobs, it is a quality not quantity issue something which central-planning regimes everywhere are unable to grasp – as reported before, if only older, treatment “troubled” individuals sign up and younger Americans skip the healthcare experiment, the outcome would be even worse than if Obamacare had not been unleashed as the Ponzi Scheme (by definition) is critically reliant on younger payors who don’t extract more from the system than they put in, at least not early on. Then again, what is central-planning without propaganda:

Some of the state exchanges are seeing the pace of enrollment pick up daily. California has been out in front; the state’s enrollments have grown steadily in November and now account for nearly half of all health law sign-ups. The state has had its strongest two weeks of enrollment this month.

 

“We’re seeing much larger numbers than we expected,” Covered California Executive Director Peter Lee told reporters this week.

Sure you are. Because since actions still speak louder than propaganda, we can only assume that the resignation of the official charged with launching Hawaii’s troubled ObamaCare insurance exchange will resign next month, according to multiple reports. From The Hill:

Coral Andrews, the executive directo
r of Hawaii Health Connector, is the first marketplace director to leave her post since Oct. 1, when the exchanges launched.  The Hawaii Health Connector went live on Oct. 15 due to software problems and had only enrolled 257 people in its first month of operation, according to the Honolulu Star Advertiser.

 

Andrews will reportedly depart on Dec. 6 and be replaced on an interim basis by Tom Matsuda, who headed up ObamaCare’s implementation in the state. “I am honored to have been a part of implementing part of the Affordable Care Act for the people of Hawaii,” Andrews said in a statement.

Expect increasingly more resignations as the Obamacare “surge” continues.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/mJ9XdCjMUws/story01.htm Tyler Durden

The market seemed to get confused last week between the noise and the signal and this confusion gave the dollar a bit of a reprieve.  However, by the end of the week, the market seemed to be back on message.  

 

Specifically, market sentiment swung from what was perceived as dovish comments at Yellen’s confirmation hearing to Fed can taper in December after reading the FOMC minutes.  Similarly, speculation of a negative deposit rate in Europe triggered a quick decline in the euro.   Surveys suggest that the perceived odds of Fed tapering this year are still low and Draghi and other ECB officials played down the likelihood of a negative deposit rate (though did not take it off the table entirely). 

 

The divergent performance of the US dollar makes it difficult to talk about in general.  The Dollar Index itself is really mostly Europe, which accounts for almost 80% of its basket.  Against the European currencies, the US dollar looks heavy.   The Dollar Index can work lower.  

 

Since the ECB’s rate cut on Nov 7 and the stronger than expected US employment , the Dollar Index has been flirting with the 100-day moving average.  After repeated attempts in vain to close above it, the Dollar Index may have to work lower first.   A break of the 80.40 area could signal a move toward 79.50 before better support is found.  

 

On the other hand, the US dollar’s outlook against the yen, Canadian dollar and Antipodean currencies appears more constructive.   These were the worst performing major currencies over the past week, with the former two losing about 1% and the latter two losing about 2.2%.  

 

From a technical perspective, this divergence is set to continue.  The euro-yen and sterling yen crosses capture the theme.  Both are trading at multi-year highs, even though the dollar remains a few percentage points below the high it set against the yen in May. 

 

The euro traded down to almost the support near GBP0.8300, but sterling is at 3-year highs against the Australian dollar, while the euro is well below the peak it made in late Aug, just above AUD1.50  Sterling poked through CAD1.71 for the first time since early 2010, and although it pulled back, may not be done.   

 

Technically, the euro and sterling have scope for additional near-term gains without encountering strong resistance.  For the euro the $1.3600-50 area stands in the way of the 2-year high set last month near $1.3830.  Sterling faces the double top set in early- and late-October near $1.6260.  A convincing break could spur a move to $1.6400.   For the euro, a break of $1.3400 would call this constructive view into question.  A similar level for sterling is near $1.6050.  

 

The US dollar finished the week above JPY100 for four consecutive sessions.  In the last two sessions it closed above JPY101.  It is at the highest level since July.  Although we are sympathetic to the divergence of monetary policy trajectories, we not that the US 10-year premium over Japan has not risen above the Sept high near 222 bp.    Moreover, the euro gains against the yen may also not have been driven by interest rates.  Over the past month, for example, the German premium on 2-year as well as 10-year money actually eased compared to Japan. 

 

The immediate target for the dollar is near JPY101.60 and then the May high set at almost JPY103.75.  We remain attentive to 1) the inverse relationship between the yen and Nikkei and 2) the risk that Japanese investors take profits on equities ahead of the doubling of the capital gains tax (to 20% on Jan 1).  The Nikkei made new six-month highs at the end of last week, but had a weak close before the weekend.   While technical indicators are constructive, a wave of profit-taking could buoy the yen.   

 

The US dollar is near the upper end of its five-month range against the Canadian dollar.  The Bank of Canada has moved away from the forward guidance that suggested it would need to remove some liquidity (i.e. raise rates) next year and the soft inflation figures (headline CPI was 0.7% in October) may keep it on the defensive.  The year’s high set in early July just above CAD1.06 is the next immediate target for the greenback, though it probably requires a break of the Q4 2011 high near CAD1.0660 to signal a break out.  

 

The Australian and New Zealand dollars appear to have carved out a topping pattern that looks like a complicated head and shoulders pattern.  The objective of the Australian dollar’s head and shoulders pattern is around $0.8800, which is just below the August low of $0.8850.  Resistance is seen near $0.9280.  The New Zealand dollar closed well below the $0.8200 neckline on a weekly basis.  The measuring objective is around $0.7950.  On a break of $0.8130, the next target is about $0.8030. 

 

The US dollar peaked against the Mexican peso on Thursday near MXN13.15.  It settled on Friday on the session lows near MXN12.97.  The bottom of the recent range is a little more than another percentage point lower at MXN12.80.  Real sector data has softened, but the bullish case for the peso is 1) anticipation of structural reforms and especially the measure to open up the oil and telecom sectors and 2) the clearing of the previous overhang of positions.  

 

Observations from the speculative positioning in the CME currency futures:  

 

1.  The latest CFTC reporting period, for the week ending Nov 19, position adjustment by speculators in the currency futures were generally minor.  The main exception is the rise in the gross short yen position by almost 16k contracts.  This market segment was anticipating the break out that took place two sessions after the reporting period ended.  At 131k contracts, the gross short yen position was the largest since late March.  It has risen from 80k contracts in late October.

 

2.  The second largest position adjustment was in the rise in the gross long sterling contracts.  Here too the speculators were rewarded.  Sterling finished the week above $1.6200, the best level in a month.  The gross short sterling positions remain substantial and the net position is still slightly short.  It probably swung to the long side during the current period.

 

3.  The speculative market appeared to get wrong-footed with the euro.  They have been dramatically cutting back on gross long euro position.  Since late October, the gross long position has been slashed by around 55k contracts, driving the net position below 9k contracts from 72k.   The euro finished last week with its highest close of the month (thus far).  The gross long euro position remains considerable larger than in any other currency futures, with sterling’s nearly 54k contracts a distant second.

 

4.  There has been a bit of a tug-of-war in the peso.  The gross short position has doubled since mid-October to 31k, the highest in two months.   The gross long peso position has nearly doubled to almost 41k contracts.  The bulls may have been happy as the dollar slipped to new 3-week lows at the start of the week nearing MXN12.85.  Two days after the reporting period ended, the dollar has rallied back to MXN13.15. The dollar reversed lower on Thursday (Nov 21) and there was good follow through on Friday, where the greenback settled on its lows just below MXN12.97.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/o6e4DE5G0i8/story01.htm Marc To Market

The market seemed to get confused last week between the noise and the signal and this confusion gave the dollar a bit of a reprieve.  However, by the end of the week, the market seemed to be back on message.  

 

Specifically, market sentiment swung from what was perceived as dovish comments at Yellen’s confirmation hearing to Fed can taper in December after reading the FOMC minutes.  Similarly, speculation of a negative deposit rate in Europe triggered a quick decline in the euro.   Surveys suggest that the perceived odds of Fed tapering this year are still low and Draghi and other ECB officials played down the likelihood of a negative deposit rate (though did not take it off the table entirely). 

 

The divergent performance of the US dollar makes it difficult to talk about in general.  The Dollar Index itself is really mostly Europe, which accounts for almost 80% of its basket.  Against the European currencies, the US dollar looks heavy.   The Dollar Index can work lower.  

 

Since the ECB’s rate cut on Nov 7 and the stronger than expected US employment , the Dollar Index has been flirting with the 100-day moving average.  After repeated attempts in vain to close above it, the Dollar Index may have to work lower first.   A break of the 80.40 area could signal a move toward 79.50 before better support is found.  

 

On the other hand, the US dollar’s outlook against the yen, Canadian dollar and Antipodean currencies appears more constructive.   These were the worst performing major currencies over the past week, with the former two losing about 1% and the latter two losing about 2.2%.  

 

From a technical perspective, this divergence is set to continue.  The euro-yen and sterling yen crosses capture the theme.  Both are trading at multi-year highs, even though the dollar remains a few percentage points below the high it set against the yen in May. 

 

The euro traded down to almost the support near GBP0.8300, but sterling is at 3-year highs against the Australian dollar, while the euro is well below the peak it made in late Aug, just above AUD1.50  Sterling poked through CAD1.71 for the first time since early 2010, and although it pulled back, may not be done.   

 

Technically, the euro and sterling have scope for additional near-term gains without encountering strong resistance.  For the euro the $1.3600-50 area stands in the way of the 2-year high set last month near $1.3830.  Sterling faces the double top set in early- and late-October near $1.6260.  A convincing break could spur a move to $1.6400.   For the euro, a break of $1.3400 would call this constructive view into question.  A similar level for sterling is near $1.6050.  

 

The US dollar finished the week above JPY100 for four consecutive sessions.  In the last two sessions it closed above JPY101.  It is at the highest level since July.  Although we are sympathetic to the divergence of monetary policy trajectories, we not that the US 10-year premium over Japan has not risen above the Sept high near 222 bp.    Moreover, the euro gains against the yen may also not have been driven by interest rates.  Over the past month, for example, the German premium on 2-year as well as 10-year money actually eased compared to Japan. 

 

The immediate target for the dollar is near JPY101.60 and then the May high set at almost JPY103.75.  We remain attentive to 1) the inverse relationship between the yen and Nikkei and 2) the risk that Japanese investors take profits on equities ahead of the doubling of the capital gains tax (to 20% on Jan 1).  The Nikkei made new six-month highs at the end of last week, but had a weak close before the weekend.   While technical indicators are constructive, a wave of profit-taking could buoy the yen.   

 

The US dollar is near the upper end of its five-month range against the Canadian dollar.  The Bank of Canada has moved away from the forward guidance that suggested it would need to remove some liquidity (i.e. raise rates) next year and the soft inflation figures (headline CPI was 0.7% in October) may keep it on the defensive.  The year’s high set in early July just above CAD1.06 is the next immediate target for the greenback, though it probably requires a break of the Q4 2011 high near CAD1.0660 to signal a break out.  

 

The Australian and New Zealand dollars appear to have carved out a topping pattern that looks like a complicated head and shoulders pattern.  The objective of the Australian dollar’s head and shoulders pattern is around $0.8800, which is just below the August low of $0.8850.  Resistance is seen near $0.9280.  The New Zealand dollar closed well below the $0.8200 neckline on a weekly basis.  The measuring objective is around $0.7950.  On a break of $0.8130, the next target is about $0.8030. 

 

The US dollar peaked against the Mexican peso on Thursday near MXN13.15.  It settled on Friday on the session lows near MXN12.97.  The bottom of the recent range is a little more than another percentage point lower at MXN12.80.  Real sector data has softened, but the bullish case for the peso is 1) anticipation of structural reforms and especially the measure to open up the oil and telecom sectors and 2) the clearing of the previous overhang of positions.  

 

Observations from the speculative positioning in the CME currency futures:  

 

1.  The latest CFTC reporting period, for the week ending Nov 19, position adjustment by speculators in the currency futures were generally minor.  The main exception is the rise in the gross short yen position by almost 16k contracts.  This market segment was anticipating the break out that took place two sessions after the reporting period ended.  At 131k contracts, the gross short yen position was the largest since late March.  It has risen from 80k contracts in late October.

 

2.  The second largest position adjustment was in the rise in the gross long sterling contracts.  Here too the speculators were rewarded.  Sterling finished the week above $1.6200, the best level in a month.  The gross short sterling positions remain substantial and the net position is still slightly short.  It probably swung to the long side during the current period.

 

3.  The speculative market appeared to get wrong-footed with the euro.  They have been dramatically cutting back on gross long euro position.  Since late October, the gross long position has been slashed by around 55k contracts, driving the net position below 9k contracts from 72k.   The euro finished last week with its highest close of the month (thus far).  The gross long euro position remains considerable larger than in any other currency futures, with sterling’s nearly 54k contracts a distant second.

 

4.  There has been a bit of a tug-of-war in the peso.  The gross short position has doubled since mid-October to 31k, the highest in two months.   The gross long peso position has nearly doubled to almost 41k contracts.  The bulls may have been happy as the dollar slipped to new 3-week lows at the start of the week nearing MXN12.85.  Two days after the reporting period ended, the dollar has rallied back to MXN13.15. The dollar reversed lower on Thursday (Nov 21) and there was good follow through on Friday, where the greenback settled on its lows just below MXN12.97.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/mOw-Pllz53U/story01.htm Marc To Market

Submitted by Lance Roberts of STA Wealth Management,

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/blJsSbQJ7Lc/story01.htm Tyler Durden

The recent shutdown sheds light on what agencies we really find important.

 

Image compliments of Masters in Accounting Degrees

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Submitted by Derrick Wulf via NoEasyTrade blog,

Reading between the lines of recent Fed communications, it’s becoming increasingly clear to me that the Fed wants to exit its quantitative easing policies as soon as possible. Though they’re loath to admit it, the architects of quantitative easing now recognize that their efforts are achieving diminishing marginal returns while at the same time building up massive imbalances, distortions, and speculative excesses in the capital markets. Moreover, they’re realizing that the eventual exit costs are also likely much higher than they had previously thought, and continue to rise with each new asset purchase. Never was this more clear than when the Fed first hinted at tapering its large scale asset purchases over the summer: equity prices fell, interest rates rose, volatility increased, and huge sums of hot money were repatriated from various emerging markets, causing significant disruptions to local overseas economies and currencies in the process.

The market’s strong reaction to the mere hint of a taper also threw cold water on the widely held belief among Fed officials that the primary impact of their asset purchases comes through the accumulated “stock” of their holdings rather than the ongoing “flow” of purchases. This sudden and unexpected realization among policymakers has forced a complete rethink of their strategy. Indeed, one of the most basic premises of their monetary policy assumptions has been shown to be false. Markets are, in fact, forward looking.

Fearing the economic impact of an unwanted tightening of financial conditions, the Fed quickly stepped back from the tapering abyss in September. Since then, FOMC officials, along with their staff researchers and economists, have been working diligently on devising a new strategy, floating numerous trial balloons along the way. Their primary objective is to allow for a taper and ultimate exit from QE while somehow minimizing the flow impacts of such a shift in policy. There has been a renewed focus on the Fed’s other policy tools – namely the overnight lending rates and forward guidance – as a means to that end. There have been active discussions about lowering unemployment thresholds, increasing inflation tolerances through “optimal control,” and cutting interest on excess reserves to help guide market expectations towards a lower future path of interest rates.

It is my belief that one or more of these options is likely to be adopted alongside a modest tapering of asset purchases, perhaps even as early as December. While central bank officials don’t want to disrupt the fragile economic recovery through a premature tightening of monetary policy, they are also well aware that the longer they wait, the more difficult it will become later on. In a word, they’re starting to feel trapped. They want to wriggle themselves free of this as soon as conditions will possibly allow.

I expect to see more public comments and newspaper articles indicating as much in the coming days and weeks. Economic data – namely the November employment report – will clearly play a very important role in shaping expectations as well, but barring a material deterioration in the employment and growth outlook, I expect a tapering announcement, coupled perhaps with an IOER cut or more aggressive forward guidance, to come sooner rather than later.

Implications for the markets, which may not yet be fully prepared for this outcome, are likely to be significant. In short, I would expect yield curves to steepen, the dollar to strengthen, equities to fall, credit spreads to widen, commodities to weaken (the metals in particular), and volatility to rise. How the Fed will then respond to these developments will be very telling indeed. Their hand will be forced, and we may all soon learn how strong the QE trap has become.

My preferred strategy until then is to buy inexpensive volatility, either directly or indirectly through longer-dated options, and to continue to trade the Euro and Yen from the short side.

I also like maintaining a core curve steepener, preferably in 5s / 30s (or long FVZ against a duration-neutral USZ short), and establishing some equity shorts near trend resistance around 1810 in ESZ (see yesterday’s note for charts). On the curve, with 5s / 30s now having cleared resistance at 240, I expect to see 300 tested again before much longer, with new wides to follow.

 

The first two major episodes of the current multi-year steepening trend – the crisis and the response – both widened the 5s / 30s curve by 200 basis points. If the third episode, the exit, follows a similar trajectory, we could see eventually see 5s / 30s hit 390.

 

 

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