With Christmas only hours away we thought it appropriate to give Santa something to mull over as he flies around the world giving all the good kids presents.  Here is our Christmas list and to hoping that we were good enough this year to get any of them.

-European leaders to realize that this is more than a liquidity problem.  Alternatively for European leaders to lead instead of the ridiculous statements that have been coming out of that continent for over  year now.

-Democrats and Republicans to find some competence.  Currently they seem to be trying to make stupid seem smart.  We realize that this is a tall order for Santa but if we got this present we would be content for years.

-Correlations to drop.  This past year everything has been trading with a correlation of either 1 or -1, neither of which is conducive to directional trading.  We like buying good industry groups, shorting bad ones, buying certain commodities, and selling others.  This past year has had us either buying “risk” assets or buying USD and Treasuries.  Santa please fix it as this is getting old.

-For the hyper inflationistas to STFU.  Yeah we said it.  I am completely sick of people like Peter Schiff coming on my TV and radio to tell me that hyper inflation is hiding right around the corner.  You have been yelling for four years and so far we have had mild inflation at best.  Please Santa if you would like to shut these people up it would be a great Christmas and New Year.

-Teach financial writers how to write headlines.  ”Market is down .01% on housing numbers.”  If the market barely moved then why do you have to apply a reason for it?  Just say that the market is up x% today and then list off what happened that day.  We don’t need a made up reason that only annoys us.

-An Energy Policy.  We realize that this present is as hard to deliver.  After all since WW2 every single president has said that we will be energy independent in X amount of years and yet after they are in office they do nothing, absolutely nothing.  Even though we realize that this present can’t fit under the tree it would be amazing to finally get it.

That’s it.  We already have our Red Ryder BB gun, our Radio Flyer wagon, a snuggy, etc.  This Christmas we would love for some of these problems to at least be addressed if not solved.  World Peace would also be awesome but we would be more than happy to settle for any and/or all of the above.

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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  Not only did China stall out in mid-2009 but it has now surpassed the lows set in mid-2010.

Shanghai Index

 One of many indicators pointing to more troubles ahead, the port data out of LA and Long Beach is showing that trade has been slowing down for some time.  Usually traffic peaks in August-October but this year we hit a high in May that we were not able to break.

LA and Long Beach Port Traffic

The bottom line is that Europe may be getting all of the headlines but China has been slowing, is still slowing, and looks as if it will continue to slow.  With Europe and China basically in recession how much longer can the United States hold out?

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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Right now we think it highly likely that going forward we see an increase in the rate of economic deterioration.  Europe is already in a mess but the economy in the United States is now showing signs of its last gasp of growth.  One indicator that we track is the Citi Economic Surprise Index.  In the chart below you can see that economic numbers have been coming in very strong for the past few months.  Based upon previous history it is safe to say that we have peaked or are very near peaking and that economic numbers going forward should start to turn lower.

Citi Economic Surprise Index USD and G-10

Not only are economic numbers expected to turn lower but we are also seeing several signs that inflation is dropping.  One relationship that we follow closely is that of the CRB Raw Industrials Index against the SP500.  As you can see in the chart below the two are usually very correlated.  When the industrials are moving higher stocks usually follow and when they turn down stocks tend to do the same.  Right now there is a disconnect, one that we expect to be resolved with the SP500 moving lower.

CRB Raw Industrials Index and SP500

This relationship matters because if inflation moves lower the stock market will as well.  We can see this very clearly in the next chart where we have overlaid the weekly SP500 with the 10-Yr TIPS breakeven rate.  As you can see these have a very tight relationship.  What you can’t see is that this relationship goes back long before the crisis.  When inflation expectations rise the stock market rises and when they fall the market falls.

SP500 and 10-Yr Breakeven Rate

Other signs that inflation is not upon are that government bond yields are hovering around historic lows.  As you can see in the next chart the 2-Year Treasury yield has been low and headed lower.  Despite all the hype regarding hyperinflation we have not seen any of it, and based upon the messages from the bond market we are not seeing it anytime soon.  In case you are wondering we are seeing the same thing farther out on the curve with 10 and 30 year yields also near their lows.

2-Yr US Treasury Yield

Another sign that we have been following is this chart of the Shanghai composite and the CRB index.  As you can see the two indexes peaked within two weeks of each other and have been steadily working their way lower for the past eight months.  As the nation of commodity stockpiling has slowed down so have their stockpiles.  As this huge underlying commodity bid has vanished it has allowed industrial commodities to drop.

Shanghai Composite and CRB Index

Whether it becomes an all out crash, ala 2008, or not is not known but we are confident that the global slowdown will continue.  So what have we done with this view?  In our model portfolio we are short the AUD/USD as we expect the Australian Dollar to move lower as commodity prices and Asian demand continues to falter.  We are short the EUR/USD via options in a trade we placed back in August.  Recently we bought the USD/CHF as we expect the Swiss Franc to weaken considerably from here.  We are also short the SP500 via options and long the Lehman/Barclays Aggregate index which is highly weighted with US Treasuries and investment grade credits.

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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