Saturday, January 26, 2008

What a week....

Sitting at my desk yesterday morning I felt totally drained. The week had been a series of up's and Downs and alot of uncertainty. The big news of the week was the tremendous fraud at Soceite Generale, the large French bank. My thoughts here are how can one person lose that amount of money in such a short period of time. After reading a few of the articles it seems to me that the lose was much smaller (1.7 billion usd according to some accounts) and that the remainder was incurred while trying to exit the position during the down trend on Monday,Tuesday,Wednesday.

In the aftermath it caused a lot of discussion in the markets. Did the Fed cut because they new about the large loss (interesting that the U.S. Fed would be cutting rates due to a European Bank Problem)? Did the Americans cut rates because stocks were falling, while the "only" reason they were falling was because of Soc Gen's liquidation.

I think this view is quite naive. The U.S. economy is slowing. It was slowing before the Soc Gen incident and it is slowing after the Soc Gen incident. The price action yesterday tells you (in my opinion) that stocks are heading lower, U.S. rates are heading lower (I am still looking for another 50bp this week from the Fed) EM markets (currencies and stocks) are set to weaken and the dollar (against major currencies) will do better. Also I think this puts added pressure on the ECB to lower rates. I know of alot of traders in the market getting long Euribor futures. It makes sense to me European rates will need to come lower. U.K. also.

So the trades I have on for now.

Long Usd/Ars
Long Usd/Brl
Short Usd/Clp (I am looking to cover this on Monday)
Long Usd/Krw

I covered back alot of my narrowing differential plays in Mexico,Brazil and Chile. I still think rates in these countries come lower (Mexican rates came off hard this week), I just think that the U.S. will out pace them for now. Also there are better ways to play this (Brazilian DI's, Mexican TIIE's) and I will be placing bets there next week.

Wow, I am glad it is Saturday.

This "Fake" e-mail explaining what happened at Societe Generale has been circulating around the market. I thought it was funny.
Kerviel hid his November losses in a batch of wonderfully fresh croissant

FRIENDS of rogue trader Jerome Kerviel last night blamed his $7 billion losses on unbearable levels of stress brought on by a punishing 30 hour week.

Kerviel was known to start work as early as nine in the morning and still be at his desk at five or even five-thirty, often with just an hour and a half for lunch.

One colleague said: "He was, how you say, une workaholique. I have a family and a mistress so I would leave the office at around 2pm at the latest, if I wasn't on strike.

"But Jerome was tied to that desk. One day I came back to the office at 3pm because I had forgotten my stupid little hat, and there he was, fast asleep on the photocopier.

"At first I assumed he had been having sex with it, but then I remembered he'd been working for almost six hours."

As the losses mounted, Kerviel tried to conceal his bad trades by covering them with an intense red wine sauce, later switching to delicate pastry horns.

At one point he managed to dispose of dozens of transactions by hiding them inside vol-au-vent cases and staging a fake reception.

Last night a spokesman for Sócíété Générálé denied that Kerviel was overworked, insisting he lost the money after betting that the French were about to stop being rude, lazy, arrogant bastards.


Good luck and Good Forex Trading.

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Tuesday, January 22, 2008

The Fed to the Rescue

So the Fed came to the rescue of the economy today cutting interest rates 75bp after Stocks globally came crashing off yesterday. What amazed me the most (I have written this in the past) is that no other CB cut rates or even eluded to the need to do this. Do they really think that this is just a U.S. problem ? Today to the first time Mexican interest rates made a considerable move lower. I look for this to continue. As for stocks I think we may have seen a temporary bottom. This was a big deal today. Opening down 450+ points loer, to rebound on the back of the rate cut. I do not look for another opening like this near term.

I still think overseas markets will take a hit in the weeks ahead and this will give the "Big Dollar" a boost.

Any thoughts on this market would be helpful, as I have not been very successful of late.

Good Luck and Good Forex trading.


Monday, January 21, 2008

Stocks under pressure.

Global stocks are down as much as 6% on growing fears of a global slowdown. Currencies are following and as such the US Dollar is doing much better. Look for this to continue. Check out these headlines on BLOOMBERG. Doom and Gloom everywhere.

Good Luck and Good Forex Trading.


Sunday, January 20, 2008

Markets in Turmoil.....

This was quite an interesting week. The markets continued their downward spiral as Merrill reported even more losses and bond insurers were downgraded. Things look bleak and it will probably take many months (years?) for the financial system to work through this. During times like this I like to break things down to its simplest point and work backwards.

Is the consumer, stopping his spending ways? Well this is a good question. On the surface yes, retail store sales are slumping and most retailers have projected lower sales in the months to come. Clearly Housing prices/sales a main driver of the U.S. economy are heading lower. If the consumer doesn't buy a new house, there is no need for the new washer/dryer, dishwasher etc etc. I fully except that this is happening but I am still on the fence as to how bad things will get.

1. Yes housing in slumping, this is a fact, but I have recently tried hiring contractors at my house and found it very difficult to find one with time to come by.
2. Last week I stopped out for drinks on Monday night. The bar I was in was packed with people on Monday night!
3. Friday afternoon I met a friend for lunch. We needed to go to 3 places until we found one that only had a 20 minute wait.

As I said earlier I like to break things down to the simplest level possible. As such the consumer still seems to be spending. Sure people have mortgaged their homes to the limit, and that will certainly be the reason for the slowing economy going forward (people mortgaged their home for updates to their homes, new car, adult toys...ATV's, Jet Ski's etc etc) and as such will have no where to turn for additional cash. But I have not heard of anyone losing their homes due to not being able to make their mortgage payment (Yet...famous last words). Yes I have heard of 3 people this week who lost their jobs (and 68 in my firm since the beginning of the year)and this may be where my miscalculation comes in, but for now I think that we will have definite slowing and this situation will be with us for at least 12 mths.

I see a stimulus package hitting the American people very quickly putting 300-600 usd into our pockets immediately. Putting this money in everyone's hands is a waste as it needs to get to the people who will spend it the most. But what will this solve? It should give the economy a modest jolt but with little long lasting effects. The slowdown in 2001 was solved by lowing interest rates to 1.0%. This caused 30yr mortgage rates to fall to 4.5(ish)% and gave everyone to buy slightly more house then the needed. Also it allowed the average American the opportunity to refinance at lower rates giving them more dispensable income. This time around as rates begin to fall you see 30 year mortgages at higher rates then 12 months ago. This is because this time around the Banks are not lending as this is a credit situation. A real Credit Crunch. Lower rates will not help alone. I do not have the answers but I think it is one of those times where the market excesses have to get wrung out. Housing prices will continue lower, as will stock's, it could take a while so be ready. I do not see free fall in the works but rather a slow steady grind lower.

As for trades. If you believe in the de-coupling theory do not read below.

1. Short Euro and Gbp against the dollar.
2. Lower rates in Mexico and Brazil
3. Lower rates in the U.K.
4. Steepening curves in the U.S., Europe and the U.K. (2-10 years)
5. Lower rates in Europe. This is one I have been calling for, for quite some time with no success. I first wrote the last quarter of 07, pushed it to the first quarter of 08 and now I am looking at the second quarter of 08. I promise if (when) it happens I will not count that one as a "correct call".

Good Luck and Good Forex Trading.

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Saturday, January 12, 2008

What a start to the year.

Another poor employment number here in the states, weak store sales, a continued slumping housing market and it all adds up to lower U.S. rates. This of course is exactly what Mr Bernanke said this week. The market (as am I) are looking for 50bp later this month when the Fed meets. The curve has steepened out tremendously and I look for more of the same in the months to come. What confuses me is the De-coupling that is and has been going on. As U.S. numbers come out weak and talk of lower rates we see Emerging Markets currencies continuing to strengthen. Chile, Argentina,Brazil and Colombia all strengthened against the dollar this week. Is this to continue? Hhhhmmmm..... I am not so sure BUT, I am not willing to go against the trend. Some of the trades I currently like (although do not necessarily have on at the moment) are:

1. Look for lower rates in Brazil. The CB has taken a break from cutting recently but in the current environment I find it hard to believe that they will raise rates. Currently the DI fis is officially at 11.25% (but traditionally trades below there) with the Jan 09 yielding 12.10% (this is a simply vanilla IRS fixed/floating). Earn 12.10% while paying away 11.25% provides substantial positive carry. I would suggest keeping the size on the smaller side so that you do not get "stopped out" by a margin call.
2.Lower rates in the U.K., and a steepening curve like what is occurring in the U.S. They seem to be showing the first sign of buckling with the Sub-Prime mess. This week they kept rates on hold, but their currency has been under pressure for a few weeks and I think that it is a sign of perceived rate cuts in the coming months.
3.A stronger dollar. I know that I have been saying this for a while, but I still think (hope and pray) that a stronger dollar is in our short term (3-6 months) future.
4.Lower U.S. rates. This is a pretty easy call. I think over the next 1-2years we will be looking at some pretty slow growth here in the U.S. With this slow growth will cone some signs of a recovery and with those signs some spikes in interest rates as the market perceives the situation as being over. This will result in a difficult trading environment in the coming months.

Given my forth point I think it is very important to trade from a shorter term perspective. Also trade slightly smaller size then usual IF trading (like myself) abit longer term.

Good Luck and Good Forex Trading

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Tuesday, January 01, 2008

2008 here we come.....

It seems this time of year that most people are filled with hope and a new sense of life. New year, a new chance to start over. In the trading business you "Start Fresh" and begin the process of accumulating profits all over again. It often surprises me the amount of times that people think that things will change just because the calender has changed. Will the dollar reverse it's weakening path? Is the Sub-Prime situation in our rear view mirror? Will the housing market bottom and begin a move higher? I do not know any of the answers to the questions that I have posed, but I do not think that just because the calender says 2008 that things will be different. The dollar have been in a weakening trend for 3 years and unless foreign countries economies begin to struggle do I see it turning around. Similarly in the housing market's, I see no turn around in the near future and stocks grinding sideways (at best)for the forseeable future. Remember this is how I feel now and as economic numbers come out I will adjust my views, starting with this friday when the U.S. employment number comes out.

I do like a few trades for now and here they are.

1. Short Gbp/Euro. I think that the U.K. economy is rolling over and they will begin cutting rates pretty soon. I previously wrote that I thought that Europe would cut rates in the first quarter of 2008, although I think that is still a possibility I think that there is a better chance that the U.K. cuts rates quicker.
2. U.S. rates continue lower. This is really a no brainer, I think the tricker aspect will be trying to make money on the extreme volitility. As I am more of a medium term trader I will be looking to put on a yield curve steppening trade.
3. Short Usd/Cny. The Chinese have consistently kept the pace of apprciation ahead of what I thought they would do. I have been pretty much out of this market but based on the last 12 months plus the fact that the olympics are this year, and the Chinese want (I would think) to put their best face on the country, I think thet will speed up the pace of apprciation to stop and comments in the press.

These are my first thoughts on the New Year. Please read my "Quote of the Day", below. It is an interesting way of looking at things.

When I hear somebody sigh that life is hard, I am always tempted to ask, "Compared to what?" Good Luck in 2008 and Good Forex Trading.

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