Rate 277.12. Reasons later.
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.
Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
Errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
13 January 2009
Bailouts and tradewars - closer than you think
Bailouts=Subsidies=Protectionism=Competitive devaluations=Trade wars=,,,,,
I stop there. just dont want to take it further, but its not getting better down the line - thats for sure.
So, where are we now?
I would suggest that the world is somewhere between subsidies and entering the stage of competitive devaluations.
Lets go for the easiest ones;
FX; Any economy with twin deficits still not freefloating? I will bet they will before long. Which other countries will get dragged down along with it? And if they are freefloating what does their net hardcurrency debt exposure look like? Who will sort it out? The IMF?
Equities; Any Bank lending in large to corporates and households in such a country? Sell that bank stock (again), it will soon be bailed out or become worthless. In either case, shareholders get nothing. Any construction company with huge balancesheet exposure in a country like this?,,,,,, etc etc
I suspect I will get a few reasons to revert on this theme again over the next few weeks.
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.
Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
Errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
I stop there. just dont want to take it further, but its not getting better down the line - thats for sure.
So, where are we now?
I would suggest that the world is somewhere between subsidies and entering the stage of competitive devaluations.
Lets go for the easiest ones;
FX; Any economy with twin deficits still not freefloating? I will bet they will before long. Which other countries will get dragged down along with it? And if they are freefloating what does their net hardcurrency debt exposure look like? Who will sort it out? The IMF?
Equities; Any Bank lending in large to corporates and households in such a country? Sell that bank stock (again), it will soon be bailed out or become worthless. In either case, shareholders get nothing. Any construction company with huge balancesheet exposure in a country like this?,,,,,, etc etc
I suspect I will get a few reasons to revert on this theme again over the next few weeks.
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.
Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
Errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
12 January 2009
Reasons to be long Nok/Sek
We are talking about two currencies, (NOK and SEK), which on any fundamental measure are very much undervalued. The most undervalued currencies in the G20 spectra, even.
However, I believe they will have two quite different scenarios to tackle near term. This will lead to one performing quite well (NOK), and the other one underperforming.
Norway
Admittedly, Norges Bank is (as usual), behind the curve, but have since cut rates fast, sinking the currency in the process. However, with expansive domestically funded measures around the corner, the NOK will have some good support going for it near term.
The Norwegian government has taken aggressive measures to support their economy. Now, fiscal expansions are normally currency positive as long as long as bond markets are willing to fund their deficits. In this case, it is taken one step further since the funding source for the fiscal measures will be the Norwegian Petroleum Fund, (renamed the Norwegian Pension Fund, but I will stick to the Petrol Fund in this text, since it is still the most renowned name).
This will have a substantially positive effect on the NOK.
The Norwegian Petroleum Fund have the majority of its assets denominated in Eur and Sek, since its holding are weighted in accordance with the importance of the trade relationship.
With the government intending to use up to 4% of the petroleum funds current asset value for fiscal measures, expect strong support for the NOK. Keylevel support in Eur/Nok will be the 9.31 level.
As a reference, until November of 2008, Norges Bank purchased foreign currency equivalent to 1500 MLN per day for the Norwegian Petroleum fund. These purchase have now stopped.
Actually, with the new expansionary fiscal approach, Norges Bank could potentially even become a buyer of NOK, as it repatriates petroleum fund assets. This would be the case if incoming oil revenues did not cope with the pace of fiscal expenditure increases and thus forced fundasset repatriation to cover up the difference.
Hence, the conclusion is that on a relative basis, there will be near term support for the NOK, at least from a government related FX flow perspective.
Sweden
Dominating and Sweden specific theme.
Well, ehhh, lets see,,,, at least two Swedish banks are "all in" into the Baltic states. The Swedish version of the subprime story. Not good.
The Swedish government forced the deal with the IMF and other Nordic states, Latvia, to NOT devalue the LVL. Yes, you read it correctly, it was MR Borg, the Swedish finance minister, who was the driving force in this according to IMF;s Christoph Rosenberg, Senior regional representative for Central Europe and the Baltics. Why would they do that? Any guesses? Well, the Swedish Banks wanted it.
So, what is the Swedish scope from here? With the Baltic states in kryptonite deflation mode, I would be very surprised if it took 6 months before they let go of the peg.
The decision not to unpeg, is one of the weirdest moves Ive seen. And this from a government that has extensive experience from the early nineties, when the WORLD as a whole was doing ok. It is simply irresponsible and everybody will pay extra for it in the end; the Swedish taxpayers and their economy. The Baltic populations and their economy, (yes, if Latvia unpegs, so will the others).
With Russia and Eastern Europe about to cave in, pegged currency economies will come under the most stress. They will depeg. Thus, consequences for the Swedish economy will be felt in a very harsh way when this takes place in the Baltics.
Bank bailouts, corporate bankruptcies, higher unemployment and imploding domestic demand are some of the consequences from the upcoming creditlosses. This will outweigh any domestic fiscalexpansion plans.
Hence, until the Baltic issue is solved, the SEK should have severe difficulties competing with the NOK on a relative basis.
I Buy NOK/SEK.
As usual, good luck.
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.
Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
Errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
However, I believe they will have two quite different scenarios to tackle near term. This will lead to one performing quite well (NOK), and the other one underperforming.
Norway
Admittedly, Norges Bank is (as usual), behind the curve, but have since cut rates fast, sinking the currency in the process. However, with expansive domestically funded measures around the corner, the NOK will have some good support going for it near term.
The Norwegian government has taken aggressive measures to support their economy. Now, fiscal expansions are normally currency positive as long as long as bond markets are willing to fund their deficits. In this case, it is taken one step further since the funding source for the fiscal measures will be the Norwegian Petroleum Fund, (renamed the Norwegian Pension Fund, but I will stick to the Petrol Fund in this text, since it is still the most renowned name).
This will have a substantially positive effect on the NOK.
The Norwegian Petroleum Fund have the majority of its assets denominated in Eur and Sek, since its holding are weighted in accordance with the importance of the trade relationship.
With the government intending to use up to 4% of the petroleum funds current asset value for fiscal measures, expect strong support for the NOK. Keylevel support in Eur/Nok will be the 9.31 level.
As a reference, until November of 2008, Norges Bank purchased foreign currency equivalent to 1500 MLN per day for the Norwegian Petroleum fund. These purchase have now stopped.
Actually, with the new expansionary fiscal approach, Norges Bank could potentially even become a buyer of NOK, as it repatriates petroleum fund assets. This would be the case if incoming oil revenues did not cope with the pace of fiscal expenditure increases and thus forced fundasset repatriation to cover up the difference.
Hence, the conclusion is that on a relative basis, there will be near term support for the NOK, at least from a government related FX flow perspective.
Sweden
Dominating and Sweden specific theme.
Well, ehhh, lets see,,,, at least two Swedish banks are "all in" into the Baltic states. The Swedish version of the subprime story. Not good.
The Swedish government forced the deal with the IMF and other Nordic states, Latvia, to NOT devalue the LVL. Yes, you read it correctly, it was MR Borg, the Swedish finance minister, who was the driving force in this according to IMF;s Christoph Rosenberg, Senior regional representative for Central Europe and the Baltics. Why would they do that? Any guesses? Well, the Swedish Banks wanted it.
So, what is the Swedish scope from here? With the Baltic states in kryptonite deflation mode, I would be very surprised if it took 6 months before they let go of the peg.
The decision not to unpeg, is one of the weirdest moves Ive seen. And this from a government that has extensive experience from the early nineties, when the WORLD as a whole was doing ok. It is simply irresponsible and everybody will pay extra for it in the end; the Swedish taxpayers and their economy. The Baltic populations and their economy, (yes, if Latvia unpegs, so will the others).
With Russia and Eastern Europe about to cave in, pegged currency economies will come under the most stress. They will depeg. Thus, consequences for the Swedish economy will be felt in a very harsh way when this takes place in the Baltics.
Bank bailouts, corporate bankruptcies, higher unemployment and imploding domestic demand are some of the consequences from the upcoming creditlosses. This will outweigh any domestic fiscalexpansion plans.
Hence, until the Baltic issue is solved, the SEK should have severe difficulties competing with the NOK on a relative basis.
I Buy NOK/SEK.
As usual, good luck.
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.
Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
Errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
I am long NOK/SEK
I am long Nok/Sek. Will revert with the reasons why later.
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.
Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
Errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.
Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
Errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
I am short Eur/Jpy, Eur/Usd - here is why
With the Eur curve set to steepen even further due to the domestic demand imploding, ECB will have to play catch up in order not to remain way behind the curve. We have, amongst other central bank meeting this week, the ECB one, which will be the focus. As mentioned on the 9 Jan, I expect the ECB to cut rates to 1% before long. Any sign of turnaround in the ECB stance this week will hit the Eur hard.
Increasing loss of investor confidence will also weaken the Eur as the tensions within the Euro area increases. The PIGS countries bonds spreads vs the German one is becoming unsustainable. If the PIGs countries were Emerging Market countries the IMF would have told them off. (At least the old IMF). The new one seems completely lost, see Latvia as the most recent extreme example of negligence.
The Eur yield curve steepening mentioned above is a very interesting variable.
The 2/10 Year Eur yield curve steepening over the last couple of weeks has not matched the historical correlation with Eur/Jpy. In fact, there was a complete correlation break up in December. I do NOT expect this to last.
The Eur surge in December was mainly stemming from European (German) banks repatriating assets from abroad for year end purposes and after the German government rejected a suggestion to start a "Bad asset bank" in order to clean out the banking sector.
Yes, the German government took a 25% stake in Commerzbank. This means they will become a more Euro and German oriented bank, from a strategic point of view, leading to repatriation of assets from abroad. On the other hand, the German government recently did a 180 degree turnaround as they indicated they would be more open to a "Bad asset bank" idea, and as they are looking to support further corporates under siege, decreasing the need for German corporate asset repatriation in the process
The Japanese lifers
Japan´s portfolio of net foreign assets is about 3 Trn Usd, of which 2Trn Usd is privately held, the rest is BOJ and MOF. The private holdings have partly diversified away from the Usd, with 35% of assets held in Eur. Lion part of the privately held assets are with Japanese Lifers.
These have and are still acting quite mechanically when it comes to hedging patterns; No currencyhedging as yieldcurves are inverted and vice versa as curves are positive. This in order not to hedge away the increased yield in their foreign investments.
With the Euro 2/10 year yield spread at about 160-170BP, it has increased the Lifers attention to currency hedging again.
Since Japanese lifers have committed themselves to deliver 2% yield annual returns and with the Euro yieldcurve to steepen further nearterm. A spread of 2% on the 2/10 Yr Euro curve would attract significant amount of currency hedging flows, strengthening the Jpy in the process. With the 10 Year JGB at 1.35% ish yield, expect a strong interest for currencyhedging from Japane lifers, with interest to increase as the Euro curve steepens further.
The US and the credit spread focus
As I mentioned in December in my Usd piece, the US authorities commitment and focus on the credit spreads will become a strong positive driver for the USD as well. Please read that piece for reference since it is still valid.
As always, good luck
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.
Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
Errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
Increasing loss of investor confidence will also weaken the Eur as the tensions within the Euro area increases. The PIGS countries bonds spreads vs the German one is becoming unsustainable. If the PIGs countries were Emerging Market countries the IMF would have told them off. (At least the old IMF). The new one seems completely lost, see Latvia as the most recent extreme example of negligence.
The Eur yield curve steepening mentioned above is a very interesting variable.
The 2/10 Year Eur yield curve steepening over the last couple of weeks has not matched the historical correlation with Eur/Jpy. In fact, there was a complete correlation break up in December. I do NOT expect this to last.
The Eur surge in December was mainly stemming from European (German) banks repatriating assets from abroad for year end purposes and after the German government rejected a suggestion to start a "Bad asset bank" in order to clean out the banking sector.
Yes, the German government took a 25% stake in Commerzbank. This means they will become a more Euro and German oriented bank, from a strategic point of view, leading to repatriation of assets from abroad. On the other hand, the German government recently did a 180 degree turnaround as they indicated they would be more open to a "Bad asset bank" idea, and as they are looking to support further corporates under siege, decreasing the need for German corporate asset repatriation in the process
The Japanese lifers
Japan´s portfolio of net foreign assets is about 3 Trn Usd, of which 2Trn Usd is privately held, the rest is BOJ and MOF. The private holdings have partly diversified away from the Usd, with 35% of assets held in Eur. Lion part of the privately held assets are with Japanese Lifers.
These have and are still acting quite mechanically when it comes to hedging patterns; No currencyhedging as yieldcurves are inverted and vice versa as curves are positive. This in order not to hedge away the increased yield in their foreign investments.
With the Euro 2/10 year yield spread at about 160-170BP, it has increased the Lifers attention to currency hedging again.
Since Japanese lifers have committed themselves to deliver 2% yield annual returns and with the Euro yieldcurve to steepen further nearterm. A spread of 2% on the 2/10 Yr Euro curve would attract significant amount of currency hedging flows, strengthening the Jpy in the process. With the 10 Year JGB at 1.35% ish yield, expect a strong interest for currencyhedging from Japane lifers, with interest to increase as the Euro curve steepens further.
The US and the credit spread focus
As I mentioned in December in my Usd piece, the US authorities commitment and focus on the credit spreads will become a strong positive driver for the USD as well. Please read that piece for reference since it is still valid.
As always, good luck
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.
Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
Errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
09 January 2009
NFP, Stocks and EUR/USD; New correlation
Corporate bonds still bid, which should help stock market bulls today, going into NFP.
In fact, unless there is a massive disappointment with todays NFP number, the stock market should remain well bid or rally post it. NFP consensus is at 650K due to mainly a weak ADP report, so NFP will have to come in at 700 plus to change any positive sentiment post it.
New correlation
However, dont expect Eur/Usd to rally due to a higher stock market. For this year, I expect the much talked about and expected capital market rebound to be US centered, ie US stocks and Usd outperforming their European peers. FX markets are still mechanically staying with their yield differential focus. This could support the Eur in the short term, but will sink it as ECB is forced to cut very aggressively during the 1Q. Eventually, we will see 1% or lower. The ECB is hopelessly behind the curve and it is only a short matter of time before it will dawn uponthem. As sure as the Baltic countries will devalue within the next 6 months.
As always, good luck
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.
Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
Errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
In fact, unless there is a massive disappointment with todays NFP number, the stock market should remain well bid or rally post it. NFP consensus is at 650K due to mainly a weak ADP report, so NFP will have to come in at 700 plus to change any positive sentiment post it.
New correlation
However, dont expect Eur/Usd to rally due to a higher stock market. For this year, I expect the much talked about and expected capital market rebound to be US centered, ie US stocks and Usd outperforming their European peers. FX markets are still mechanically staying with their yield differential focus. This could support the Eur in the short term, but will sink it as ECB is forced to cut very aggressively during the 1Q. Eventually, we will see 1% or lower. The ECB is hopelessly behind the curve and it is only a short matter of time before it will dawn uponthem. As sure as the Baltic countries will devalue within the next 6 months.
As always, good luck
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.
Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
Errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
08 January 2009
The deleveraged world. Welcome to 2009!
A new year, and opportunities are stacking up already. Hope readers have had a great Christmas and New Year!
Went skiing for post Christmas and New years and really enjoyed the break. A lot of work out too, apart from the skiing and iceskating.
A few familymembers got the flu and I am currently taking care of the youngest one.
Should be fine by Monday.
Now, over to the markets.
Stockvaluations - bullish, in the "old" leverage world context, not in the "new", deleveraged one.
Macrovariables that will affect the stock market;
Bullish
1) In the US, 3.7 Trn Usd has been invested in money market funds during 2008. This is 14% of the US Equity market capitalisation. With the long term average at 8%, its very high. Mean reversion exists, sure, but when this deviation adjusts is a different matter. This fact just points out that we live in exceptional times, which we already knew. Still, it is a very good reference indicator for asset allocations, which matters greatly.
2) The current fiscal and monetary approach is expected to stabilise economies (at least in the US) in the latter part of 2009.
♥ (This was typed by my youngest, dont know how she did it, but she messed up my keyboard in the process. Anyway, Ill keep it there).
3) The US bond market is facing record bond issuance in 2009, increasing risks of a setback and a shift from bonds into equities. With US dividend yields in excess of 3%, it beats the US T-bond market. This relationship is even more emphasised in Asia and will have positive currency implications there as Asian EMG has been mostly equity and FDI driven. As a reference, CEE inflows has been 80% bondmarket related. Thus, Asian EMG equity markets and currencies are to be favoured over CEE ones. China needs to keep their currency stable in this scenario though. If they dump their currency, all bets are off.
4) Share holdings of real money accounts, pension funds have reached an all time low.
5) Fiscal authorities are increasingly committed to stabilise asset prices.
Bearish- equity in a deleveraged world
The long run, the favourite equity sales story. It is time to revise it and include a new framework. Stocks are good in the long run, IF bought at the right price. Lets check out if the price is right according to the "old", leveraged world vs the "new", deleveraged one.
The Q ratio. The value of the stock market relative to the replacement cost of net assets.
Above 1 equals overvalued, below 1 equals undervalued. At 0.425 we are now at the lowest Q since 1987.
The PE ratio. Earnings per share, E is compared as a function of P, or price.
Lowest PE ratio since 1980-81. Using a 10 year moving average, valuations are still low, but less so. But, if we are to adjust for our future economy within the context of deleveraging vs leveraging, it might not look as attractive.
It seems, at least for the next few years, as if we are now moving into an environment where the government influence will increasingly substitute the freemarket forces and where regulation will overrule wild west capitalism. Corporate profits will no longer be a function of leverage and cheap financing.
It is a new world for stock market investors. The considerations below should have some bearing on Q ratios, PE ratios and, of course, stock prices going forward.
1) Reversing trends. Leverage and gearing ratios seems to be coming down. Availability of cheap financing is going down and might not return any time soon. (Excluding government fiscal stimulus and yield discounting.) Narrow yield spreads and low real corporate interest rates ditto. The historical trend of declining corporate tax rates might be bottoming out or turning.
2) Global GDP is going down and the free trade mentality is under pressure. Globally, separate ad hoc policy responses to this crisis with little or no coordination is not a good sign for future developments.
3) Management changes at the throwns of the former risk taking institutions?
The risk taking entrepreneurs of the past have been shown the exit, and the ones remaining are handcuffed. Bonuses, parachutes and executive compensation risk starting a new downward trend. This will not fit the old leverage world profile, rather the new deleveraging one, with lower testosterone levels. New rules, new management, lower hormone levels.
4) Deregulation and lower taxes trends might be coming to an end. This means lower growth for the private sector since it will affect innovation and productivity in a negative way. Profit and earnings per share growth will be negatively affected.
Summary
Stocks look cheap in the context of the old leveraged world provided by cheap financing and low corporate tax rates. However, that is a world of the past, not the the future for the next few years.
Increased regulation, lower leverage levels, increased corporate taxes, a deficit of entrepreuneurial spirits and an increased economic share of government spending will pressure the private sector, making it less productive in the process. This makes stocks less attractive and shifts the macro environment rules of stock valuation.
Lets hope the governments of the world focus on sound asset price support measures and recapitalisation of lending institutions. With the trend of governments increasingly owning financial institutions set in place, it might be a better idea to own corporate bonds instead of corporate stocks. Especially in US, due to their very focused approach of getting credit spreads down.
As I mentioned in the 1Q outlook for 2009, there will be fierce bear market rallies, and by all means, get on them. However, expect a more specific and stockpicking kind of environment with fewer outperformers and lower expectations on performance due to the future lower growth framework as mentioned above.
As usual, good luck
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.
Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
Errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
Went skiing for post Christmas and New years and really enjoyed the break. A lot of work out too, apart from the skiing and iceskating.
A few familymembers got the flu and I am currently taking care of the youngest one.
Should be fine by Monday.
Now, over to the markets.
Stockvaluations - bullish, in the "old" leverage world context, not in the "new", deleveraged one.
Macrovariables that will affect the stock market;
Bullish
1) In the US, 3.7 Trn Usd has been invested in money market funds during 2008. This is 14% of the US Equity market capitalisation. With the long term average at 8%, its very high. Mean reversion exists, sure, but when this deviation adjusts is a different matter. This fact just points out that we live in exceptional times, which we already knew. Still, it is a very good reference indicator for asset allocations, which matters greatly.
2) The current fiscal and monetary approach is expected to stabilise economies (at least in the US) in the latter part of 2009.
♥ (This was typed by my youngest, dont know how she did it, but she messed up my keyboard in the process. Anyway, Ill keep it there).
3) The US bond market is facing record bond issuance in 2009, increasing risks of a setback and a shift from bonds into equities. With US dividend yields in excess of 3%, it beats the US T-bond market. This relationship is even more emphasised in Asia and will have positive currency implications there as Asian EMG has been mostly equity and FDI driven. As a reference, CEE inflows has been 80% bondmarket related. Thus, Asian EMG equity markets and currencies are to be favoured over CEE ones. China needs to keep their currency stable in this scenario though. If they dump their currency, all bets are off.
4) Share holdings of real money accounts, pension funds have reached an all time low.
5) Fiscal authorities are increasingly committed to stabilise asset prices.
Bearish- equity in a deleveraged world
The long run, the favourite equity sales story. It is time to revise it and include a new framework. Stocks are good in the long run, IF bought at the right price. Lets check out if the price is right according to the "old", leveraged world vs the "new", deleveraged one.
The Q ratio. The value of the stock market relative to the replacement cost of net assets.
Above 1 equals overvalued, below 1 equals undervalued. At 0.425 we are now at the lowest Q since 1987.
The PE ratio. Earnings per share, E is compared as a function of P, or price.
Lowest PE ratio since 1980-81. Using a 10 year moving average, valuations are still low, but less so. But, if we are to adjust for our future economy within the context of deleveraging vs leveraging, it might not look as attractive.
It seems, at least for the next few years, as if we are now moving into an environment where the government influence will increasingly substitute the freemarket forces and where regulation will overrule wild west capitalism. Corporate profits will no longer be a function of leverage and cheap financing.
It is a new world for stock market investors. The considerations below should have some bearing on Q ratios, PE ratios and, of course, stock prices going forward.
1) Reversing trends. Leverage and gearing ratios seems to be coming down. Availability of cheap financing is going down and might not return any time soon. (Excluding government fiscal stimulus and yield discounting.) Narrow yield spreads and low real corporate interest rates ditto. The historical trend of declining corporate tax rates might be bottoming out or turning.
2) Global GDP is going down and the free trade mentality is under pressure. Globally, separate ad hoc policy responses to this crisis with little or no coordination is not a good sign for future developments.
3) Management changes at the throwns of the former risk taking institutions?
The risk taking entrepreneurs of the past have been shown the exit, and the ones remaining are handcuffed. Bonuses, parachutes and executive compensation risk starting a new downward trend. This will not fit the old leverage world profile, rather the new deleveraging one, with lower testosterone levels. New rules, new management, lower hormone levels.
4) Deregulation and lower taxes trends might be coming to an end. This means lower growth for the private sector since it will affect innovation and productivity in a negative way. Profit and earnings per share growth will be negatively affected.
Summary
Stocks look cheap in the context of the old leveraged world provided by cheap financing and low corporate tax rates. However, that is a world of the past, not the the future for the next few years.
Increased regulation, lower leverage levels, increased corporate taxes, a deficit of entrepreuneurial spirits and an increased economic share of government spending will pressure the private sector, making it less productive in the process. This makes stocks less attractive and shifts the macro environment rules of stock valuation.
Lets hope the governments of the world focus on sound asset price support measures and recapitalisation of lending institutions. With the trend of governments increasingly owning financial institutions set in place, it might be a better idea to own corporate bonds instead of corporate stocks. Especially in US, due to their very focused approach of getting credit spreads down.
As I mentioned in the 1Q outlook for 2009, there will be fierce bear market rallies, and by all means, get on them. However, expect a more specific and stockpicking kind of environment with fewer outperformers and lower expectations on performance due to the future lower growth framework as mentioned above.
As usual, good luck
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.
Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
Errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
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