Thursday, May 08, 2008

Stocks take a tumble....

Stocks declined yesterday, on the back of record commodity prices which continue to rise. Crude staged a rally which led us to a record high 123.50 per barrel. This sent Interest rates lower and a general feeling of despair throughout the market. The Euro which has been under pressure the last few sessions, was incapable of staging a rally even as commodities rallied. Could this be a good sign for the dollar ? Well as any reader knows I have expected the dollar to rally for some time, today's price action gives me reason to believe that I am on the right track.

Brazil sold off aggressively today also, and the fixed income market melted for the third session in a row. This after the upgrade late last week. Although I think that the fixed income market still has some downside in it I think that the dollar against Brazil has run it's course and we are nearing a level to begin to short the dollar. Remember yields are currently 14% and the fundamental picture is still very good, and raising rates when inflation is a problem is a good thing. A little profit taking and getting rid of weak shorts is a good thing for this market overall.

Argentina is still having trouble with it's farmer's. This story on BLOOMBERG highlights the problems. I think that this situation will be resolved favorable and it will ultimately be good for the Peso. I am a strategic seller of dollar's (totally against the market view), so I sell and then hope and pray that I am right.

One recurring scenario that I have heard from traders is the "Summer Swoon". Those couple of months over the summer when EM melts down as everyone rushes for the exit in advance of vacations. To me if everyone is looking for it, maybe it doesn't happen.

Overall I think that there are some real potential opportunities.

1. Euro to sell off
2. Usd/Brl to sell off
3. Usd/Ars to sell off
4. Usd dollar rates to head higher (The Fed is done cutting for the foreseeable future as they are quite concerned about inflation)

With opportunities comes risk (in some of these trades considerable risk) but I think that in the bigger picture there is some real money to be made.

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