Market Wrap: May 6, 2011

Posted on May 7, 2011 by Clemens Kownatzki, MBA

GBR Market Wrap, May 6, 2011

In this Week’s Issue

Weekly Snapshot
• U.S. economy adds 244,000 jobs, unemployment rate ticks up to 9% in April (AP)
• Broad selloff in commodities drives bearish moves in oil and silver ETFs (WSJ)
• The Bank of England held interest rates at a record low of 0.5% (Reuters)
• ECB left its key refinancing rate at 1.25%, in line with expectations (WSJ)
• Mexico’s central bank bought 93.3 tons of gold worth $4.3 billion (Economist)
• Portugal has reached a deal with the EU and IMF for a €78B 3-year bailout (WSJ)
• U.S. becomes net exporter of fuel for the first time in nearly 20 years (FT)
• India raises key lending rate by 50bps to 7.25% to rein in inflation (FT)
• CME announced an 84% increase in silver margin requirements since April 25 (Bloomberg)
• Silver had its biggest one-day drop in three decades on Tuesday (AP)
• Investors reduced some of their exposure to equities move back into cash in April (Reuters)
• U.S. factory orders rise a better-than-expected 3% as business spending picks up (FT)
• Consumer price inflation in developed economies hit 2.7% in March (OECD)
• U.S. forces have killed Osama bin Laden; markets moved only for a few hours (FT)

Market Barometers

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Bang! Bang! Maxwell’s Silver Hammer
The famous Beatles song came to mind as I reflected on this week’s market movements. It was all about commodities in another episode of trader’s nausea, but this time, led by some 30% price declines in silver. What led to the massive selloff will be the topic of endless panel discussions in the days and weeks to come. Take any one of the possible events below and you could have a good enough reason to produce significant price movements. The combination of these events however, not necessarily in this order and magnitude of impact, was a perfect recipe for broader turmoil in the commodities markets.

• Bottoming of U.S. Dollar?
• Bin Laden killed by U.S. forces?
• End of Quantitative Easing 2.0 in June?
• George Soros and other hedge funds exiting silver?
• Much higher margin requirements for silver futures?
• Technical factors, profit taking after parabolic price rises?
• IPO of Glencore, the largest commodity trader – top of the market?

There may be several other factors you can include in this list. For me, it was a much more benign event that led me to pull the trigger on silver the week before. As I opened the Financial Times to start my daily morning briefing, a big glossy brochure popped out advertising silver as “the most indispensable and miraculous metal on Earth.” This was yet another one of those gold/silver “experts” whose ads have been mushrooming in the media. The brochure featured a shiny embossed replica of a one-ounce U.S. silver eagle along with a quote by an unnamed “leading silver analyst” who called silver: “The best financial asset you can own.”

Granted, your typical FT reader is usually not of the widow and orphan kind, but still…

What timing to tout investors toward a none-the-less speculative investment only to see that investment lose 30% of its value in a week. How much worse it must feel if an average investor, scared by these ads into buying precious metals, losing almost one-third of the investment in five days. While we cannot deny the fact that the U.S. Dollar has lost much of its luster, we must question the inherent (investment) value of precious metals as well. In particular, one should be wary of parabolic price increases as we discussed last week. To get a different perspective on silver and to appreciate why some exchanges dramatically increased margin requirements in recent weeks, please consider the chart below showing the recent history of actual dollar values of gold and silver futures contracts. For some of the big names in the trading community, the recent rise was too much, too fast, and so they pulled out. Very curious to find out if more investors will take the foot off the pedal next week…

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A Brief Technical Perspective On Silver
Silver was all the rage it seemed until last week. Technicians however, must have been somewhat concerned about the dramatic price changes, which seemed to occur rather fast even for traders of volatility-laden commodities. In a span of just a few days, silver fell through several technical support levels. On Thursday, it pierced through the closely watched 61.8% Fibonacci retracement area, indicating a trend reversal rather than just a pause in the underlying short-term trend.

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To get a better sense of the medium-term trend, please consider the weekly chart below. The sudden rise and fall of silver is more obvious now in the context of the underlying trend channel. Still bad news if you bought silver anywhere above $40 as it appears more likely that silver will return to the trend channel, possibly reaching an area closer to the $30 range. Still, the silver bulls may take some comfort from the fact that the major underlying trend remains intact. This breakout may have just been a brief exaggeration in an otherwise upward trending major bull run. Stay tuned to see how deep the rabbit hole goes.

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Recommended Video: Lines in the Sand
Please consider some interesting perspectives from Barry Ritholtz. Given what we saw in commodities markets this week, you may wish to review his “lines in the sand” on an S&P 500 chart. Enjoy!

Good luck and good investing!

Clemens Kownatzki, MBA is an adjunct professor of financial risk management at the Graziadio School of Business and Management, as well as the founder and CEO of FX Investment Strategies, a Registered Investment Advisor. In addition to running his investment advisory firm, he is a contributing author at SeekingAlpha.com and BusinessInsider.com. He also publishes the popular investment blog www.fxinvestmentstrategies.com along with a weekly news-letter.

Disclaimer
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Market Wrap: April 29, 2011

Posted on April 29, 2011 by Clemens Kownatzki, MBA

GBR Market Wrap, April 29, 2011

In this Week’s Issue

Weekly Snapshot
• Spot Gold surges to yet another all-time high near $1,570 on Friday (FT)
• The U.S. Dollar fell to a new low of 0.8625 against the Swiss Franc (AP)
• Eurozone inflation in April rose to 2.8%, the highest level since October 2008 (Reuters)
• The Chinese yuan has breached 6.5 to the dollar for the first time since 1993 (Reuters)
• Ben Bernanke: rates will stay at 0-0.25% for another “couple of meetings” at least (CNBC)
• BEA advance estimate: U.S. real GDP grew 1.8% in the first quarter of 2011 (ESA)
• S&P cut outlook on Japan to negative from stable, and affirmed its AA- rating (Reuters)
• March new orders for U.S. manufactured goods rose 2.5% to $208.4 billion (ESA)
• Greece’s budget deficit in 2010 significantly larger than expected (WSJ)
• Greek 10-year Bond yields over 16%, 2-year yields above 25% (Bloomberg)
• Home prices in 20 U.S. cities decreased 3.3% from year earlier (Bloomberg)
• The price of spot silver reached a 31-year high of $49.85 on Monday (Bloomberg)

Market Barometers

Chart(s) Of The Week

Are you nauseated by this week’s market movements? Welcome to the club…

Fed Chairman Ben Bernanke gave the first news conference after a Fed meeting (see video below), which was seen as a non-event by some commentators. Still, I thought there were some important takeaways, not so much in terms of what he said but how he said it. For instance,

The federal reserve believes that a strong and stable dollar is both in American interests and in the interest of the global economy. There are many factors that cause the dollar to move up and down over short periods of time. Over the medium term, where our policy is aimed, we’re doing two things. First, we are trying to maintain low and stable inflation by our definition of price stability. By maintaining the purchasing value of the dollar, keeping inflation low, that’s obviously good for the dollar. The second thing we’re trying to accomplish is to get a stronger recovery and to achieve maximum employment. Again, a strong economy growing with attracting foreign capital is going to be good for the dollar. In our view, if we do what’s needed to pursue our dual mandate of price stability and maximum employment, that will also generate fundamentals that will help the dollar in the medium term.

Steve Liesman’s Response: Mr. Chairman, one can’t help but notice it’s been unsuccessful so far.

If you felt a lack of confidence in his voice and demeanor, you were in the same camp as market sentiment, which was most immediately apparent in the price of Gold that shot up following the Q&A session.

Gold versus Bernanke

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There were also a number of other negative records in U.S. Dollar terms which supported Steve Liesman’s response to Ben Bernanke. The Dollar dropped close to multi-decade lows against numerous currencies. Other currencies, such as the Singapore Dollar and Swiss Franc, let the U.S. Dollar tank to successive new historic lows, continuing the sad trend in recent months.

USD versus Singapore Dollar

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USD versus Swiss Franc

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Following the financial crisis, the Fed wanted asset prices to rise and so they did. Outside of housing, most asset prices have been on the rise since QE1 and QE2 were implemented. However, there was a cost to it and it has been showing in an ultra weak U.S. Dollar.

U.S. Dollar Index

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And lastly, in terms of quantifying U.S. Dollar weakness, our recently mentioned targets of $50 for silver and $1,600 for gold are now clearly up for grabs. Take a look at how silver brings a new meaning to the notion of parabolic rise. This of course raises the question as to how much further the rally can go? Time for a mini-survey. When and at what price do you think silver will top?

Spot Silver

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Recommended Read
Amidst all the hoopla about gold, silver, and the waning greenback, it’s easy to forget that other regions have their share of economic struggles too. Not nearly as talked about these days is the ongoing Greek (fiscal) tragedy showing up in almost unreal bond yields. Double-digit yields, which are highest in 2-3 year maturities, indicate that the market sees a much greater likelihood of default within the next couple of years.

2-year Greek Bond Yield

3-year Greek Bond Yield

In this context, please consider: The eurozone’s quack solutions will be no cure by Wolfgang Münchau.

Recommended Video
Here now is the Q&A session during Ben Bernanke’s news conference. Enjoy!

Good luck and good investing!

Market Wrap: April 8, 2011

Posted on April 8, 2011 by Clemens Kownatzki, MBA

GBR Market Wrap, April 8, 2011

In this Week’s Issue:

Weekly Snapshot

• Spot Gold rose to yet another record above $1,474 per ounce (Reuters)
• Spot Silver above $40 per ounce for the first time since 1980 (Reuters)
• WTI Oil futures price above $113, Brent Crude oil above $126 on Friday (AP)
• The Dollar under renewed pressure as U.S. budget deadline looms (WSJ)
• China to let Yuan be traded against a wider variety of currencies (AP)
• Australian dollar above 1.05 highest in 29 years against the U.S. dollar (Reuters)
• European Central Bank raised interest rates by a quarter point to 1.25% (AP)
• Bank of England kept its benchmark interest rate at a record low of 0.5% (Bloomberg)
• Portugal seeks bailout and becomes 3rd victim of European debt crisis (AP)
• Nasdaq 100 rebalancing will slash Apple’s weighting from 20.49% to 12.33% (Reuters)
• Moody’s has cut Portugal’s long-term government-bond rating to Baa1 from A3 (WSJ)
• China raised rates for the 4th time since October; one-year lending rate at 6.31% (AP)
• China’s consumer prices rose 4.9% in February, driven by an 11% jump in food costs (AP)

Market Barometers

Macke’s Purple Crayon
Traders aren’t known to be of the quiet introspective kind; there is typically not enough time to be too analytical when the clock is ticking and your positions are exposed to market risk. Instead, most traders stick to a few rules that are time-tested and work in practice. To learn a few of these rules including some color recommendations, please consider the often controversial but always entertaining Jeff Macke.

Chart Of The Week

Speaking of purple crayons, this week’s markets caused a much higher than usual consumption of purple crayons, at least in our office. While Mr. Bernanke maintains the view that inflation is under control, commodity prices have been on fire, reaching a number of new records (see weekly snapshot above). In this context, I’d like to add one more rule to Mr. Macke’s purple crayon rules: Don’t fight the trend!

Whether you believe in technical analysis or not, one of the most effective tools in terms of establishing major trend-lines is indeed the purple crayon (you may of course use a different color of your liking). It has one overarching purpose: Determine the major price trend and make sure your position is in line with that trend. Now let’s examine one more chart in addition to Jeff Macke’s examples: Silver!

As the purple crayon shows, the underlying long-term trend is up. But we are also using another color (red) to indicate a hot trend. Silver has indeed been red-hot as it broke through the major trend line on the upside earlier this year. If you are long silver, congratulations! How much higher can we go from here? According to some recent analyst reports, $50 is the next target. Having said that, you may still want to use one of Jeff Macke’s exit rules and set a stop below the (red) trend line this time. We probably won’t see a change in the overall trend (purple) in the near-term, but if Macke is right in terms of taking some money off the table, you may consider yet another rule: Don’t get married to your position(s). Or, as Jeff Macke puts it:

“Love is for your kids and your dog, not for your investments.”

Things That Make You Go Hmm…
In light of the possible U.S. government shutdown over the debate on the debt ceiling, the inquiring mind is pondering about the Presidential Proclamation of April as the “National Financial Literacy Month.” As the proclamation notes:

Americans’ ability to build a secure future for themselves and their families requires the navigation of an increasingly complex financial system. As we recover from the worst economic crisis in generations, it is more important than ever to be knowledgeable about the consequences of our financial decisions. During National Financial Literacy Month, we recommit to improving financial literacy and ensuring all Americans have access to trustworthy financial services and products.

Good luck, good investing and hmm…

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Category Archives: WSJ

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