Merry Christmas and a profitable New Year!

Bank of America breaks the 5$ Maginot line

There was a wide debate going on whether the Bank of America stock price will drop below the 5$ psychological support level. It was deemed as protected by a vast amount of bids and though as the point of no return signalling a market correction. Now it happened folks: BA dropped to 4.95 and it is currently holding that level, which means we are in store for a correction in the US equities, a correction most probably caused and led by the financial sector. This could actually be the market sell-off that Bernanke is waiting for to allow him to announce QE3 in January.

North Korean dictator Kim Jong-il dies

It has not been a very good year for dictators. In 2011 we saw the fall of the Libian dictator Muammar Gaddafi, the so-called President of Tunisia Zine El Abidine Ben Ali and  Egiptian president Mubarak. Now the time has come for the 70 year old North-Korean supreme leader Kim Jong-il to clear "the throne". The official Korean Central News Agency stated that Kim Jong II passed away due to "great mental and physical strain" after a 17 year state tenure.

Lee Myung-bak, the South-Korean president canceled all appointments and convened an emergency security session. As a result all police officers in South-Korea were called to work for emergency duty and the military is discussing whether to raise its "watchcon" and "defcon" levels.

Bullish economic data, just in time to save equity markets

Just after a major sell-off in precious metals (during which I was stop-loss-ed) and a slump in the S&P and the Dow, "good news" about the health of the economy surfaced: the initial and and continuous unemployment claims printed lower than expected, the the Producer's Price Index (PPI) signaled a mildly increasing inflation, an increase in manufacturing orders from -2.07 to 5.10 and a lower overall current account deficit. This coupled with FED chairman Bernanke's faith in the strength of the US economy suggests that the economic outlook has to get a lot worse before he will pull out more monetary firepower.

Risk off as EU summit talks dissapoint

The risk markets sold off today as a reaction to the news that UK rejected the European fiscal and budgetary constraints, followed by Intel's 1 billion revenue slash. Ratings agencies Moody's, Standard and Poor's and Fitch were again late at the party in expressing their worries about the long term sustainability of the rescue plan. Fitch declared that last week's summit did little to address the regions sovereign debt crisis and predicted a "significant economic downturn" across the region. Standard and Poor's added that European officials might need another financial shock to get it moving. Gold sold off today as well, in what is a more and more obvious correlation with equity markets. The precious metal is losing its safe haven status.

Europe divided (again)

David Cameron, the Prime Minister of UK managed to stir the markets up a bit yesterday by vetoing the new EU treaty. The accord was meant to turn the European Union into a fiscal union which, in turn, would strengthen the common currency. After 10 hours of negotiation in Brussels, all other 26 member countries agreed to sign the new treaty, but as treaty rules say, in order to amend or change any parts a consensus must be reached.

My 2 Cents about the future of EU

Nowadays news are full of reports on the financial difficulties that European countries are facing: rising interest rates, high rates of unemployment, political turmoil, economic malaise, but once you look for the real source of these systemic risks, you realise that this is window-dressing for something bigger. The fact that the European Union is under a process of fiscal and budgetary unification followed by the political unification and it is using the financial and economic news-bombs as excuses for the loss of sovereignty of some less fortunate EU members.

What about the $15.100.000.000.000 US public debt ?

It has been less than a month since the US public exceeded $15 trillion (a scale pretty hard to imagine without the help of an explanatory diagram). In only 2 short weeks, the figure has been boosted with an additional 100 billion and is not hovering around $15.18 trillion. This amounts to almost 99.5% of the 2010 US Gross Domestic Product and I`m expecting it to reach triple digits by the end of the year. What do you expect: the difference is a measly $70 billion.

And surprise: German 1 year yield turns negative

Prost! or Cheers! from Germany as it becomes the European liquidity sponge. After the Chinese have lowered the reserve ratio requirements and the FED lowered the swap interest rates, thereby setting loose more easy money, German 1 year yields have reached the all-time, mind puzzling value of -0.068%. Yes that is a negative yield and it means that investors are preferring to store their money in the relative safety (and probably tax advantaged) German Treasuries even if it means that they have to pay for such a right. Although a temporary situation, it still comes to show that large institutional investors are bidding the German bund into negative territory.

China opened the flood doors by cutting reserve requirements

When the world screams for liquidity (shown by the increasing inter-banking swap rates), China comes to the rescue by lowering the reserve requirements and therefore unleashing a new wave of cheap money into the system. The markets responded very quick to this Chinese monetary stimulus, with equity and commodities spiking up, in a risk-on trade. Furthermore, in a following move, most of the leading Central Banks are now receiving USD swaps by 50 basis points less. Result: cheaper money.

Santa Claus rally in the S&P500 and FTSE100 ?

Now that the year is drawing to a close and the liquidity is thinner and thinner fund managers are preparing for their Christmas gift: a traditional year-end equity rally, to massage the bottom line. The S&P has seen December rallies in 4 out of the last 5 years and 2011 is most likely not going to be an exception.

I wouldn't bet the farm on a sustainable growth though, because after the punch bowl empties out, there will most likely be a hangover on the stock market.

Meanwhile in Eastern Europe: Step aside Italy! Hungary downgraded to junk

The financial ratings agency Moody's has proceeded today to downgrade the sovereign debt of Hungary to junk status (Ba1 with an negative outlook) down one notch. Competing rating agency S&P held its bazooka and kept the rating of Hungarian debt constant. The pressure on Hungary to seek a joint IMF/EU deal is mounting on the shoulders of Viktor Orban.

Like a boss: about the upcomming Euro-bonds

When mentioning the possibility of a joint euro-bond a few years ago the audience would have almost instantly burst into laughter and the one bringing it into discussion would probably have realised what a fool he suddenly looked like. Not anymore, peeps, as the French President Sarkozy is pressing for allowing the European Central Bank to issue joint bonds in order to stop the "stampede against European debt". This move comes after yesterday, Germany has failed to auction 10 year Bunds (considered the most safest debt instruments in the entire Eurozone) with a bid/cover rate of only 1.07 and an actual bid of 65% of the 6 billion asked. The rest of 35% had to be covered by the German Bundesbank. As Germany is finding it harder and harder to borrow at such low yields, the only way to stop the bloodbath will definitely be to monetize through the European Central Bank.

German Banks showing signs of weakness

The German financial sectors has been hit hard by the European debt crisis and rumors are now emerging of more and more financial institutions that lack the capital to withstand more pain. Even if they are not in the top 4 banks by Italian and Greek debt holdings (the bonds that were hit by far by the recent debacle), Deutsche Bank, through its North American Taunus Group and Commerzbank are maintaining toxic Euro-debt at a very thin capitalization. I am talking here about contagion at the very core of the European Union.

The $1.2 trillion deadline: 23 of November

We are approaching a big day, ladies and gentlemen. It is the 23rd of November when US budget committee will have to agree on budget cuts of at least $1.2 trillion dollars over the next decade. The 12 members of the committee, both Republican and Democrats, will have to decide on measures that would curb spending and increase the fiscal intake. While the US public debt recently crossed the $15 trillion yardstick, and the  $54.5 trillion total government debt which includes unfunded liabilities like Medicare, Medicaid and toxic mortgages still held at Freddie Mac and Fannie May still in full swing, it is business as usual in Washington.

One more sell-off before QE 3

Today was one of those days that raise my blood pressure to extreme levels. The risk instrument markets sold off, with the S&P 500 going down 1.55% to $1216 and with Gold crashing 3.14% to what is now $1716. Long term chart damage has been done in both of the instruments and it can be taken as a sign of trouble to come: the utter failure of the US budget committee or the failure to bail-out the insolvent Italy. At this point FED is waiting for a major sell-off in equities before announcing another QE programme.

Who is still holding toxic Italian debt ?

The Italian yields have cooled-off a bit, revolving around the 6.50%-7.00% area, partially due to the ECB rather frequent interventions and on the news that Mario Monti, a former European Commisioner, will lead the Italian government.  Spanish yields on the 10y benchmark are still high up there at 6.31% after recent weak macroeconomic news and French 10 year bonds rose today to 3.72%. The most solid European country, Germany, which reported today a 0.5% quarterly increase in GDP and its 10 year yields stand at 1.81%. Who is taking this loss ?

What does FED's zero interest rate for the foreseable future mean ?

Despite that bond yields in Europe are imploding, and Italy becoming the newest member of the elitist 7% club, among countries like Greece, Portugal, Ireland, all seems to be running well in the US wonderland. The cost of borrowing, as measured by US T-bills, has reached the lowest level since the beginning of the financial crisis. The demand of short term bills, namely 3 weeks, which are yielding 0%, and 13 weeks which are yielding 0.005%, is still extremely high as the bid/cover ratio stood at 3.41 in the most recent Treasury Auction.

Berlusconi is out. European markets applaud.

The Prime Minister of Italy Silvio Berlusconi has resigned today after more than 17 years dominating the political scene. The move comes after losing parliamentary majority and after pushing a new austerity plan designed to shrink the budget deficit from 120% of GDP (only seconded by Greece's budget deficit). Most likely, Mario Monti, a technocrat, will be appointed by President Giorgio Napolitano to lead the new government. Mario Monti, a former European Union Commissioner and pro-euro advocate will start negotiating with the major political parties later this evening. The pattern is becoming more and more obvious: EU is pushing for less national political control in exchange for financial protection. Will this ultimately end up creating the United States or Europe or break it apart ?

What about the other perypheral EU countries: Hungary

With most of the investor focus nowadays on the PIIGS "fallen angels", and  on the forthcoming US presidential campaign, not much has been heard about some of the other EU countries: Hungary, Romania, Slovakia, Bulgaria. Rumors in the market are that banks there are slowly withdrawing capital and scaling out of their less profitable businesses, but is there any cause of concern regarding their financial stability ? How did they surf the crisis wave and do they still require a safeguard ? Are they going to be left out of the core-Europe, in case such plan materializes or not ?

Gold "beware": Better than expected initial jobless claims at 390.000

The number of US citizen filing for unemployment benefits fell last week  to the lowes figure recorded in 7 months. They printed at 390.000 (in seasonally adjusted data), down 10.000 from last week's figure. There were 398.753 initial claimants under state programs, without any adjustments, in the week ending with November 5, an increase of 29,106 from previous week. According to the Bureau of Labor Statistics the official number of unemployed citizen is still at 13.9 million, adding up to an unemployment rate of 9.0%. There is simply not enough job creation and not in the right sectors.

FOREX update: All roads lead to Rome

So much erratic behavior on the FOREX markets today as the European contagion has definitely spread to Italy. Berlusconi has yet to resolve the political crisis which his country is facing as the austerity measures have not been voted by the dwindling majority. As a result, 10 year Italian bond prices have soared past 7%, a level at which Greece was already asking for European bailout and without quick measures Italy will follow the same path.

Weekly FOREX outlook: USD/HUF, USD/JPY and GLD

Provided that Berlusconi does not surprise us in a negative way, this week's investor sentiment should switch from from the European debt crisis to the US structural problems. The day of 23rd of November is closer and closer and by that date the leading American parties will have to decide on $1.2 trillion in spending cuts over the next decade. If the budgetary supercommittee fails to reach an agreement, the US budget crisis circus may repeat itself. So the limelight switches to US.

Where to Olympus ?

For how long can a company hide investment losses ? For 2 years, or  maybe 4 years? How about more than 30 years?  The senior management of Olympus Corp. , a Japanese manufacturer of high-tech machinery and instruments, announced that it covered up investment losses dating back to the 1980s. Apparently the blame had to fall on the former Presindent and chairman Tsuyoshi Kikukawa (who quit on the 26^th of October), on the Vice-President Hisashi Mori and the internal auditor Hideo Yamada, but considering the sheer size of the company it is impossible to say that they were the only people familiarized with the cover-up.

Precious metals leap forward as contagion spreads to Italy

  

Now that the waters have cleared for a bit in Greece, where Prime-minister Papandreou is going to form an unprecedented national unity government to push further budget cuts, the European bond vigilantes apparently have started to target the next weakest chain: Italy. The yields on 10 year Italian sovereign debt surged to 6.56% after reaching a record 6.68%. The Italian Prime Minister Silvio Berlusconi will be under-fire tomorrow as the parliament will vote on a state financing bill. His majority within the parliament is weaker by the day and rumors that he would resign hit today's news, only to cause a prompt dismissal.Who is going to bail-out Italy in case it fails? EFSF which receives 140 billion euro in guarantees from Italy ?

Berskshire's Q3 income brought down by derivative losses

The holding company managed by billionaire investor Warren Buffet, Berkshire Hathaway Inc. (BRK/A) announced that Q3 profits declined by 24% due to the index derivative bets. Warren Buffet speculated on the long term recovery of the stock market (through several global indexes such as the S&P500 and the FTSE100) by selling puts on the indexes. Needless to say this derivative position is in the red for about $2 billion according to Warren Buffet out of  $4.9 billion position.

Nice old algo-trading in USD/HUF

A time will come when human trading will become obsolete, with algorithmic, or robo, or the so-called black box trading tacking its place. Why take the time and analyze the market direction when you can have a high frequency robo-trader which takes advantage of pockets of liquidity and scalps a few pips out of the market ? Some recent examples include the May 2010 Flash crash when the DOW slumped for more than 1000 points as what seems to be the result of high frequency trading and algorithmic trading. What happens if there will be an error in the Matrix again ?

Gold soars, as the European bailout is back on track

Investors were reminded once again today that there are no golden pennies lying on the sidewalk, as gold shed all concerns and manged to pull itself up to the 1763 level. Not very nice for me since I exited all my gold positions at 1755. Silver went pretty much through the same lines as the other precious metals, rising today from $34.02 to $34.50, in what seems to be a rather anemic movement. The main drivers today was ECB's rate cut and (again) turmoil on the Greek political scene as Papandreou succesfully bluffed most of media with his resignation story.

European circus continues as Papandreou is rumored to resign

The farce is underway as the newest juicy rumor that hit the press is that the Greek Prime Minister will offer to resign in the next 30 minutes. According to BBC, Pap "will meet the Greek President Karolos Papoulios after the emergency cabinet meting finishes". The new coalition government will supposedly have "former Greek central banker Lucas Papademos at the helm". This comes after the surprising decision of Papandreou to call a referendum on the European Bailout Plan.

FED's Chairman Bernanke sees trouble ahead

It's time to sober up and say a little prayer for the wellbeing of the United States of America. The recent Federal Open Market Committee decided today to keep the benchmark interest rate at the 0% - 0.25% interval, effectively prolonging the Zero Interest Rate Policy, through at least mid- 2013. FED's policy makers agreed that the economy picked up some steam while "signficant downsize risk" still remains. The US Federal Reserve will still conduct the so called "Operation Twist" which aims to swap short term Treasuries with longer term maturities in order to flatten the yield curve and lower the costs of capital investments. 

The inflation rate, measured by the CPI rose to 2.9% in September, the highest since 2008, while the core-CPI (excluding housing and energy costs) rose to 1.6%.

Greece, wadup? Problems ?

It took a while for the financial markets to cool of from the Greek debt concerns (especially as the credibility of the European Rescue Fund is close to zero without IMF, Chinese, Russian and Brasilian support). I hope you enjoyed the brief silence, cause last night George Papandrou decided on the 31st of October (coincidentally on Halloween) to stirr things up a bit one more time and call for a referendum on the Greek debt deal and restructure the defence ministry.  As his power over the parliament is schrinking, the confidence vote may turn into a desaster if he doesn't manage to shore up enough support. Meenwhile stock markets around the world take a hit, with the S&P down to $1230 and the FTSE down to 5410.

...and it's Yentervention time !

The Bank of Japan has unilaterally intervened on the FOREX market to devalue the YEN last night. After reaching pre-World War II levels, the yen was brought back to 79.15 where the chart turned into a horizontal line for a few hours (signaling a great support level), then trending downwards to the 78.8 level. The devaluing of the Japanese Yen would arguably stimulate the exports and the external demand of Japanese products, but is not a sustainable move since they have large current account and balance of trade surpluses

Next week's FOREX trading outlook

This week has been a hectic trading week, with most of the FOREX currency pairs behaving like in a bee hive. The global turmoil was enhanced by the two major news: first is the agreed haircut of 50% of the Greek debt and the subsequent leverage of the EFSF and the second one is the systematic dump of US Treasuries by the foreign investors (the latest to join the party is the Norwegian sovereign wealth fund which dumped all US Treasuries and all US mortgage backed securities). What is in store for us next week?

FOREX market, why u so mean ?

Trading on the Foreign exchange market has been a bumpy ride, and the highest possibility is that it will get even bumpier. Most of the currency pairs surprised investors some way or the other: the EUR/CHF Swiss Bank intervention, the EUR/USD sharp drop then rebound on  EFSF news, the USD/JPY fat finger and the expected Japanese easing, the USD/HUF breakout of its channel and imminent retest of channel resistance, etc. It's been a looong month.

Greek gentlemen, we have a deal ! Or do we ?

Talks on the third wave of financial aid for Greece have come to an end (finally), during last night's second crisis summit held in Brussels. The conclusion? Greek bondholders will accept a 50% haircut on Greek debt, while the EU will provide guarantees and collateral through the EFSF and will work on the recapitalization of European Banks. The "hot potato" question still remains? Who is going to provide the money for all this? The US, the IMF, China ?

Precious metals rebound as global uncertainty deepens

Gold managed to break out from its bearish flag formation and sailed right through the $1700 level. Silver, on the other hand, is still within the bearish flag and at the moment is struggling to push through the $33.4 level. For long term investors this is a confirmation of the long term trend in gold and silver (which is here to stay), but for short term investors this may prove to be a good opportunity to reap a few profits by going short.

When the EU tsunami clears out the US debt crisis tidal wave will emerge

Nowadays the media are painting a bleak picture of the European Union debt crisis. The EFSF has been leveraged, the proposed "hair-cut" on Greek debt has been twisted and turned on all sides, without any visible conclusion. Contagion from the perypheral countries (PIGS) may spread out to the more stable countries: Germany and France (which is already on a credit downgrade outlook from Moody's). Meanwhile the US debt crisis tidal wave is closing by without anyone noticing.

Yen reaches pre-WWII levels as FED hints at more easing

Interesting development on the FOREX market today was the unparalleled volume in the USD/JPY. The Japanese currency appreciated 0.9% to Y76.14 after it reached its all-time low of Y75.82. If you want to pick up this trade, tread carefully, as an intervention from from Bank of Japan is imminent on further signs of weakness. The Bank of Japan is trying to maintain the JPY at low levels to keep Japanese exports attractive, but doing so it hurts the Japanese savers who see their wealth generating lower and lower real returns.

Qvo vadis, Gold ?

The precious metals have been under fire recently, with gold dropping from its all-time high of $1920 close to its 200 daily Exponential Moving Average which acted as support level for such movements since early 2008. It spiked downwards beneath the 200d EMA for a brief period to its recent low of $1533 after quickly recovering ground and consolidating in the $1610-$1690 interval.

Is the EFSF going to save Greece ?

The yields on peripheral countries are getting higher and higher, reflecting worries about the high levels of debt and fiscal deficit within these countries (Portugal, Ireland, Greece and Spain). The 1 year Greek yield reached an apex of 188%. Just a year ago the yield on a 1 year Greek bonds was only 5%. The same goes for Portugal where the 1 year yields 18%, from 3.2% the 2010 figure. Ireland was partially saved by bond purchases and the yield stabilized to 8% after peaking at 22%. Will the EFSF cool-off the European debt crisis ?

While Greek yields skyrocket, the US continues its road to serfdom

The European Union may have done a very costly mistake by banning naked CDS shorts, because traders will now retort to outright shorting the underlying bonds. And short they will: Greek yields reached a staggering 188% for a 1yr note and they don't show any signs of cooling off. With Angela Merkel and  Nicolas Sarkozy still undecided about the European Rescue Fund, things can only get worse. Meanwhile America continues its slow road to serfdom.

Germany fails to auction 10y Bunds on EFSF concerns

Growing concerns regarding the leveraging of the European Financial Stability Facility (EFSF) are weakening the core EU financial markets. Yesterday, Spain has been downgraded by the rating agency Moody's, two notches to AA1 level and France looks to be the next to lose its triple A rating.

All these concerns have started to spill out at the core of the European Union: Germany, France and the United Kingdom. Does EU really have a firm response for the upcoming debt crisis ?

Market Talk: Risk-off day in all major asset classes

A sharp reaction from the financial markets came today after the participants expect further economic turmoil. US Stocks slump as the Goldman Sachs reported its second quarterly loss in almost 12 years and as IBM shows signs of weekness. Commodities drop, precious metals leading with Gold down 2.46%, and silver down 1.86%. Just a Manic Monday.

Yuan closer to reserve currency status

Even though the Chinese currency, the Yuan (or Renminbi), is still pegged to the current reserve currency, the Chinese officials are taking more and more steps towards consolidating the global role of Yuan. One of them is the long term purchase of gold, as the saying goes, with every dip, there is Chinese gold buying. The second step is to start offering gold in Yuan. The next step can only be denominating the yuan in gold and restricting yuan purchases.

Are Gold and Silver still alpha investments ?

After the recent slump in precious metals, with gold falling from its all time high of $1920 to $1532, an almost 21% percent drop in less than a week there is a growing concern that the 11 years precious metals bull market is coming a close. Silver looks like it has been drop-kicked twice and there is significant chart damage in the upward trend. Investors are beginning to wonder if this is the sign of a market top.

How is inflation created and what can be done about it ?

The debate on the real cause of inflation, and whether its positive effects outweigh the negative ones  is growing steam, with the talks of more Quantitative Easing under way. Is QE3 going to generate more inflation or not? Is the view that QE and further market operations (POMOs) will fuel the increase in prices ?

To answer these questions, one has to start from the root of the problem. What is inflation and how should it be measured ?

Are the Initial Jobless Claims "better than expected" ?

Today's initial jobless claims printed at 404k, "way better" than the estimate of 405k. That means the economy is going to get better and banks will start crediting again. Is that so?

Let's take a closer look on how the Department of Labor arrives at this particular figure:

Gold and Silver in upward trend as Bernanke considers more QE

The Federal Reserve released  the minutes of the September 20-21 session in which there is talk of more monetary stimulus.  Fed officials are considering further large scale asset purchases (QE3) as a form of boosting the economy due to “the considerable uncertainty” in the US growth prospects.

Marc Faber: Americans need to tighten their belts and save more

Marc Faber, the well known author of the GloomBoomDoom Report, and widely regarded as one of the investors who predicted the 2008 crisis, has declared in a recent interview on CNBC: 

"I will tell you what the US needs.  The US needs a Lee Kwan Yew who stands in front of the US  and tells them, listen you lazy bugger, now you have to tighten your belts, you have to save more, work more for lower salaries and only through that will we get out of the current dilemma that essentially prevents the economy from growing."

Smoke and mirrors in finance and investment

This blog is created to provide quality economic, financial and investment analysis. Whilst sometimes focusing on macroeconomics or microeconomics, the clear tendency is to stick to down-to-earth common sense.

In the investment world, as you may know, common sense is not so common.