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HomeBen Davies: Ex Scientia Pecuniae Libertas/Out of Knowledge of Money Comes Freedom
Posted by Larry Doyle on October 25th, 2010 8:47 AM |
I thoroughly appreciate those involved in the markets who also have an equal appreciation for history, languages, literature, and the arts and sciences. Rare is the individual who is able to intertwine their passions and fluent enough to share them with others.
I thank a loyal reader of Sense on Cents who brings us just such an individual, that being Ben Davies, CEO of London-based Hinde Capital. Davies spoke the other day to the Committee for Monetary Research and Education in New York. Although his remarks are extensive, I found them to be quite compelling and truly insightful. I commend Ben for his passion and well rounded perspectives. If you consider yourself a student of the markets, interested in our global economy, or merely a lover of topics well written, you will want to read and savor Ben’s thoughts. I am happy to share them here today.
Remarks by Ben Davies,
CEO, Hinde Capital, London
Fall Dinner Meeting
Committee for Monetary Research and Education
Union League Club, New York
Thursday, October 21, 2010 (more…)
February 6, 2010: Market Week in Review
Posted by Larry Doyle on February 6th, 2010 7:37 AM |
Global risks remain high. Global supports remain strapped. What are the results? Markets remain volatile and skittish. Why? Our global economy along with our domestic economy remain under the pressure of massive debts and deficits across the sovereign, corporate, and consumer spectrum.
Global governments can not prop economies and markets forever, try as they might. Can 2010 successfully transition from these total government supported and propped markets to a hoped for return to private enterprise with private capital? The year to date results of this transition are not pretty. We remain a long way from being out of the woods. Pack lightly and lets navigate.
Welcome to our Sense on Cents Week in Review where I provide a streamlined recap of the major economic news and month-to-date market returns. (more…)
All That Glitters Is Not Gold
Posted by Larry Doyle on December 22nd, 2009 12:45 PM |
The recent spike higher in the U.S. Dollar Index is having a dramatic impact on a variety of markets, but none more than gold.
Gold traded over $1200/oz. a mere few weeks ago, but it has retraced 10% from that level and is now trading at approximately $1080/oz. Many long term prognosticators forecast that our greenback will continue its trend lower. As such, commodities in general and gold specifically should benefit.
That said, I remain concerned about getting heavily involved in commodities, especially gold, because of the fact that there are many short term speculators involved in this sector. What happens given the preponderance of those market participants? Excessive volatility in the price action.
With gold dropping off the face of the cliff as pictured below, it is highly likely to fall into the $1050/oz range. Why that level? $1050 represents an approximate 50% retracement of gold’s move on the year.
Unless you are the type thrilled and skilled at skiing black diamonds, I recommend keeping gold plays to a small percentage of an overall portfolio.
LD
What’s the Market Telling Us?
Posted by Larry Doyle on December 11th, 2009 9:38 AM |
In the face of generally positive economic news the last two days, (Retail Sales this morning rose 1.3% and the improving Trade Deficit), the price action in the market is very interesting. What is it telling us? Let’s navigate.
With the U.S. Dollar Index having firmed over the last week, money does not appear to be coming out of the equity markets. The major equity averages are up anywhere from .5 to 2.5% on the month. What market segments are feeling the bulk of the pain? Government bonds and commodities, primarily oil and gold.
Interest rates on U.S. government bonds have continued to move higher as Treasury supply this week has not been well received. With rates on 10yr U.S. Treasurys higher by .35% over the last ten days, it would appear that market participants continue to believe the Fed will be forced to raise rates or make other moves to lessen the support and stimulus provided to the economy.
If rates are to move higher, our dollar should find support . . . and it is, as the U.S. Dollar Index remains above the 76.00 level. While dollar strength had been a harbinger of general weakness across almost all risk-based asset classes, the commodity sector is bearing the brunt of the pain currently.
The DJ-UBS Commodity Index has declined by 2.5% on the month led lower primarily by oil (down approximately 10% on the month) and gold (down 4% on the month).
Add it all up and what does it mean? If our domestic economy is in fact stabilizing, then the public at large and investors will compel the Grand Old Man, that is Uncle Sam, to back away from continuing to provide stimulus. As that occurs, the market may begin to normalize to levels at which private investors care to put money to work. At this juncture, investors are saying interest rates are not attractive at current levels. As interest rates rise, that may actually temper an economic rebound, especially in housing.
So be it. It is not realistic for market participants “to have their cake and eat it too.”
LD
Dollar Carry Trade Remains in Vogue
Posted by Larry Doyle on December 4th, 2009 3:47 PM |
Today’s price action in the markets is very telling. What is it telling us? The dollar carry trade remains in vogue and technicals continue to dominate overall flows much more than fundamentals. Let’s navigate.
Recall that the weakness in the U.S. dollar has facilitated a large number of hedge funds, market speculators, and to a less extent investors to borrow dollars and buy a variety of risk based assets. What assets? Equities, a wide array of bonds, a basket of commodities, primarily gold. How are these sectors performing?
After an initial spike of 1-1.5% across the equity markets, these major market averages have retraced and are now effectively unchanged to slightly better on the day. Is that a sign of investors not believing in the details of the employment report? No, anything but. In fact, I believe the equity performance today is quite strong given the fact that the dollar has increased by 1.6%.
Bonds have traded in a very narrow range. Interest rates moved higher by approximately 12 basis points (.12%) and have sat there almost all day. The question that now comes back front and center is when the Fed will decide to raise rates. While most analysts had written off the possibility of an increase in rates prior to 2011, now analysts are projecting that the Fed may raise rates by mid-2010.
If rates do rise here, what does that do for our greenback? It will do better and it is doing just that today. As I referenced the U.S. Dollar Index has increased by 1.6%. (more…)
October 10, 2009: Month to Date Market Review
Posted by Larry Doyle on October 10th, 2009 10:12 AM |
We are reaching a point in our new “Uncle Sam” economy where rhetoric from Wall Street, Washington, and global financial centers seems to be having greater impact than true market and economic fundamentals. Why? Our financial and political ‘wizards’ are working overtime to reconnect the great ‘disconnect’ between Wall Street and Main Street. While we receive glimmers of hope in certain economic statistics, the dark clouds in employment and housing remain daunting.
Are the ‘Washington wizards’ (Bernanke, Geithner, Summers) providing hints of support for our greenback while truly hoping for a manageable decline? I believe they are, and I believe this financial engineering is a very dangerous game.
I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents.
ECONOMIC DATA
> Non-manufacturing Institute of Supply Management: this report rose above 50 (an indication of growth) with a positive development in new orders (this is clearly good), but with no signs of improvement in employment and pricing power by manufacturers.
> Redbook: indications of slight improvement in same store sales although next week’s Retail Sales report will likely look exceptionally weak as it incorporates an end to the ‘Cash for Clunkers’ program. Overall signs point to what is expected to be a weak holiday retail season.
> Jobless Claims: overall claims declined, which presents a sign of stability within employment. That said, it is hard to be optimistic on the employment front on the heels of the employment report released on October 2nd (embedded within the Equity section of this commentary).
> Trade Deficit: this deficit surprisingly narrowed, with a slight increase in exports combined with a slight decrease in imports. All other things being equal, this report would be positive for our dollar but the noise surrounding our currency is overwhelming the focus within this one month reading.
I would typically lead my review with focus on the equity and bond markets, but those sectors are actually following developments in the currency and commodity markets so let’s shift our focus accordingly.
How did the markets handle the Fed-speak, the data, and technical flows? Let’s continue navigating. The figures I provide are the weekly close and the month-to-date returns on a percentage basis.
U.S. DOLLAR
$/Yen: 89.78 vs. 89.68
Euro/Dollar: 1.4709 vs. 1.4635
U.S. Dollar Index: 76.35 vs. 76.72
Commentary: the overall U.S. Dollar Index has declined by approximately .5% this month, but the volatility and focus on movements in this space have been tremendous. Precipitated by an increase in rates by the Australian Central Bank midweek, the U.S. Dollar Index plunged below 76 which represents multi-year lows. The dollar weakness led to a move higher in global equities as traders, investors, and speculators were emboldened to enter into more ‘positive dollar carry trades.’
While I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade. ECB President Jean-Claude Trichet voiced his concerns on this topic. Rest assured, the Asian nations feel the same way although they are careful in their comments. Adding further fuel to dollar weakness was speculation that the trading of oil and a basket of other commodities, which are currently transacted in U.S. dollars, would shift trading away from being dollar-based. On that note, let’s review the action in commodities.
COMMODITIES
Oil: $72.29/barrel vs. $70.39
Gold: $1050.1/oz. vs. $1008.2 !!!! THE BIG WINNER !!!!
DJ-UBS Commodity Index: 129.177 vs. 127.683
Commentary: I view this segment of the market to be the STRONGEST indicator of the global economic pulse. Additionally, the price action in commodities is likely a strong indication of the ‘positive carry’ trade put on by hedge funds and other traders.
The overall commodity index has moved higher by approximately 1.2% on the month, but the movements within specific commodities is gaining the real focus. Gold specifically has soared by over 4% this month. Why? Market speculation about a potential further slide in the greenback would be inflationary. Oil and other commodities also benefited from the story I referenced above. The conundrum I find in this space revolves around overall levels of international trade. Are these commodities moving higher truly because of an increase in demand or merely because of speculative investing and trading? Where do we go to get a pulse on that? The Baltic Dry Index. How is our friendly indicator of global shipping activity doing?
The Baltic Dry Index continues to move marginally lower. Can global equities in general and commodities specifically increase in value if the major indicator of global trade, that being the BDI (Baltic Dry Index), is in a downtrend? I think not for the long haul, but for a period of time a cheap funding vehicle, that is the U.S. dollar, can override market fundamentals.
I read these commodity tea leaves as sign of inflationary expectations in these ‘inputs’ while we encounter deflationary pressures in wages and real estate. What a world.
EQUITIES
DJIA: 9865, +1.6%
Nasdaq: 2139, +0.8%
S&P 500: 1071, +1.3%
MSCI Emerging Mkt Index: 946, +3.6%
DJ Global ex U.S.: 197.6, +1.5%
Commentary: equities regained momentum after last week’s selloff. Recall how just one week ago, we faced a remarkably weak and disappointing Unemployment Report which culminated a week in which equities had given up approximately 2%. Well, we not only recaptured that decline but rallied further by another 1-2%. This past week accounted for the strongest advancement in equities since early July. Are we poised for a breakout past 10,000 on the Dow? Well, we need to remain focused on what is driving the market . . . and that is the weak greenback.
Indications of economic strength in Australia compelled the Australian Central Bank to raise rates which drove the Aussie higher and the dollar to new lows. In the process, the ‘dollar carry trade’ gained momentum propelling global equities higher.
The initial earnings reports released continue to show no real signs of improvement in top line revenue generated by increased sales while the bottom lines have improved given ongoing cost cutting progams. If a company cuts ALL its costs, will its stock still go higher? Rising stock values ultimately need to be driven by ‘growth.’
BONDS/INTEREST RATES
2yr Treasury: .97%, an increase of 2 basis points or .01%
10yr Treasury: 3.39%, an increase of 9 basis points
The yield curve steepened (longer maturities underperformed shorter maturities) under the weight of another Treasury refunding (3yr, 10yr, and 30yr). The 30yr auction on Thursday was disappointing which precipitated the selloff. The bond market has been trading in sync with equities for the last few months. That price action is an anomaly as typically bonds will trade in an inverse relationship with equities. Comments by Bernanke in the latter part of the week about an eventual and timely increase in rates by the Fed did take the wind out of the bond market’s sails.
COY (High Yield ETF): 6.64, +3.8%
FMY (Mortgage ETF): 17.85, +0.3%
ITE (Government ETF): 57.77, -0.3%
NXR (Municipal ETF): 14.46, +0.1%
Commentary: while interest rates did move marginally higher over the week, overall they remain at remarkably low levels. The high-yield market remains on fire as that sector is benefiting from a lot of hedge funds allocating capital via the ‘dollar carry trade’ referenced previously.
Summary/Conclusion
The game continues. The disconnect between the overall domestic economy and the price action in the markets presents what one noted investor described as ‘the greatest experiment’ in modern finance. To the extent that people are putting money to work, I would focus on buying quality and utilizing ‘dollar cost averaging’ techniques.
Thanks for your support. If you like what you see here, please subscribe via e-mail, Twitter, Facebook, or an RSS feed.
Thoughts, comments, questions always appreciated.
Have a great day and weekend.
LD
Dollar Devaluation Is a Dangerous Game
Posted by Larry Doyle on October 8th, 2009 9:24 AM |
Can we ‘devalue’ our way back to our days of economic ‘wine and roses?’
Many debt-laden countries throughout economic history have chosen to implicitly or explicitly pursue a devaluation of their currency as a means of improving their economies. Are the ‘wizards in Washington’ taking this approach? Aside from a few perfunctory comments in defense of the greenback, Washington has been largely silent on the topic of the declining value of the dollar. Many believe Washington very much favors a weaker currency as a means of supporting our economy. I believe this of Washington, as well. Let’s navigate.
Going back to the G20 in London last Spring, the Obama administration has attempted to curry political favor with emerging economies, especially the BRIC nations, by ceding dollar sovereigncy as the preeminent international reserve currency in return for support of global economic stimulus programs. Why does Washington believe a weak currency serves our economic interests? A weak currency generates and supports the following:
1. Promotes inflation as imports decline. Washington would like some inflation, given the massive deflationary pressures presented by falling wages and declines in the value of commercial and residential real estate.
2. Promotes exports for corporations with a multi-national presence.
3. Supports labor by making it more attractive for companies to keep jobs here as opposed to opening factories or sending work overseas.
So, in light of our current economic crisis, why wouldn’t we want a substantially cheaper dollar to maximize these benefits?
Recall that economists always need to keep certain variables static in order to study the impact of a change in another variable or multiple variables. This approach, known as ‘ceteris paribus,’ is not quite as easy as some may think. Why? Variables are NEVER static, or ‘ceteris is NEVER paribus.’ (more…)
U.S. Markets Play “Follow the Leader”
Posted by Larry Doyle on October 7th, 2009 9:40 AM |
Yesterday’s rise in rates by the Australian central bank is a bellweather sign of the global shift in the balance of economic power. While the rise in rates by the Aussies is the first central bank move, it certainly will not be the last. Why did the Aussies raise rates and what does it mean both in the short term and for the long haul? Let’s navigate.
The Australian economy did not have near the level of debt that burdens the U.S. and Europe and thus they did not need near the amount of monetary stimulus to weather this global recession. Additionally, Australia has benefited from extensive trade in the Asian hemisphere.
The knee jerk reaction in the markets was focused primarily on a selloff in the greenback which supported a move higher in commodities and global equities via the ‘positive carry trade.’ The commodity which garnered the greatest focus was gold, which moved toward $1040/ounce.
What do these moves mean? I see cross currents on the economic landscape, including:
1. The dollar may not necessarily continue to weaken, but given its current weakness it will support those companies which garner a greater degree of sales overseas.
2. A weak dollar is usually affiliated with inflation. I do not think we are in a position to look at prices in terms of one overall index. Why? Given the technical and fundamental factors in our economy, certain price components will likely project increased inflation while others will not.
To be more specific, given the labor situation in our country, I do not see any appreciable increase in wages anytime soon. In fact, I think it is likely wages will trend lower.
Given the glut of supply and vacancies in both the residential and commercial real estate markets, I have a tough time believing these prices will move appreciably higher anytime soon.
Commodities may very well move higher. Why? High five to MC for sharing with me that there is increased dialogue in the international trade community to move oil away from trading in dollars. In fact, that story likely had a big impact in yesterday’s trading. Even if there is not an immediate shift in this market dynamic, the mere fact that it is being discussed will support oil specifically, oil-based products broadly, and other commodities as well.
Given that these commodities are primarily inputs, the prices for the outputs will likely move higher. This development is clearly inflationary.
3. What happens to interest rates here in the United States? While on one hand we have some deflationary forces at work which would keep rates low, we have the tug of other factors pushing them higher. How does it play out? My gut instinct tells me that overall pools of capital will be flowing away from the United States and, as such, people and private corporations will have to pay more to attract capital here in our country. I think those entities which focus the bulk of their economic activity here in the United States will be forced to pay higher rates to attract funding.
4. What about our equity markets and the Fed? While the Fed will want to keep our rates low for an ‘extended period,’ they may not have that luxury. If other nations follow Australia in raising rates, the U.S. may need to withdraw some liquidity sooner rather than later. Kansas City Fed chair Thomas Hoenig made this very assertion yesterday.
What would higher rates mean or even the thought of higher rates mean? Slower growth and a tough road for equities going forward.
Thoughts, comments, questions always appreciated.
LD
Related Sense on Cents Commentary
Dollar Carry Trade Drives Global Equities (September 16, 2009)
