We are sick of talking about QE2.  Instead lets look at the EU.   European Credit Default Swaps are blowing out, and really it is the consistently weak countries known as the PIIGS.  Italy is actually doing alright although it too is ticking higher but Ireland, Portugal, Greece, and Spain are once again on the races to see who can suck the worst…again.  If this continues, and it probably will, we will have to revisit  shorting the Euro.  For now we will just sit back and watch.

Ireland 5-Yr CDS

Portugal 5-Yr CDS

Greece 5-Yr CDS

Spain 5-Yr CDS

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-Right now we are riding out Ben “The Bubble” Bernanke’s bubble (long a slug of “risky” assets) but are looking to short the Euro soon.

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

Bookmarks

With the steepest global yield curve in history it appeared in mid 2009 as though we were going to go on the credit binge to end all credit binges.  We were going to see inflation of eight gazillion percent and gold was headed to $50,000 as we went back to the gold standard.  As we now know that is not what happened. Instead banks bought Treasuries and there has been a massive contraction in lending as borrowing.  Instead of massive amounts of real growth the record steep yield curve instead brought with it a credit contraction that appears to be slowly but steadily sapping the energy from this so-called recovery.

Looking at the global GDP weighted yield curve right now you can see that since April of 2010 long term government rates have been steadily coming down as the short term rates are close to zero percent in many developed nations, which of course make up the bulk of a GDP weighted yield curve.

Global GDP Weighted Yield Curve

What is obvious to us when looking at this chart is that we are in a slow to negative growth environment for the foreseeable future.  We see this in both the economic data as well as in the markets themselves with stocks showing increased volatility and bond yields of all maturities hitting new lows or close to near lows. Until we start to see signs of real growth we expect the curve to continue to flatten, primarily on the long end.   One potential trade to take advantage of declining long bond yields is to either buy the long bond or buy TLT the 20+ year Treasury ETF. While we expect pullbacks and corrections, we expect long term Treasuries to continue to do well as an investment over the coming several months and maybe even the next few years.  Yes, yields are low but they can go lower.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In our model portfolio we are long TLT

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

Bookmarks

Today while looking at the exhaustion rate the thought occurred to me that five or six months ago everyone and their dog (including me) were talking about the exhaustion rate.  Of course this was because in normal times no one looks at it as it rarely is at an extreme.  This time however it was hitting new highs.  After getting a lot of press for a few weeks the exhaustion rate kind of faded back into the depths of the Department of Labor stats department.

Why did it fade from glory?  As best I can tell it faded because it kept telling the same story month after month.  That story is the fact that the exhaustion rate has remained at its all time high levels for the past 10 months staying above 50 the whole time.  (Click on chart to enlarge)

Exhaustion Rate

After looking at the exhaustion rate I went over to the BLS stats that show how many people are unemployed and for how long.  First off  of course is the unemployment rate.  As you can see it is at 9.7% slightly down from the cycle high of 10.2%.  (Click on chart to enlarge)

Unemployment Rate

Next up is the number of people who have been unemployed for 15 weeks or more.  As you can likely guess from the exhaustion rate the number is quite high.  We took this number a step further and calculated the number of people unemployed for 15 weeks or more as a percentage of the labor force. As you can see in the chart below 5.78% of the labor force has been unemployed for 15 weeks or more.  (Click on chart to enlarge)

Unemployed 15+ Weeks Or More As A Percentage Of The Labor Force

Finally lets look at the number of people unemployed for 27 weeks or more as a percentage of the labor force.  As you can imagine by the previous charts, most notably the exhaustion rate, this number is quite high and is at all time highs almost double the previous peak. (Click on chart to enlarge)

Unemployed 27 Weeks Or More As A Percentage Of The Labor Force

So why aren’t these numbers with the exception of the unemployment rate getting much press lately?  Well there are likely a variety of reasons but the most likely reason I could come up with is that they have not changed.  The employment situation has been bad and getting worse for over a year now. So while they can try and spin the weekly initial claims number any way they want the underlying problems are not improving.  If this recovery is real, meaning we don’t fall into a double dip recession, then we are going to need to see more than just a token improvement in the employment numbers.

Happy Trading,

Dave@TheMacroTrader.com

P.S. The idea for weeks unemployed as a percentage of the labor force was from a chart we saw at EconomPic.  If you like mainstream and obscure economic numbers as well as different ways to look at them then you should mark Jakes site as a daily read.

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

Bookmarks

Today in the Financial Times there was an article entitled “Macro Funds Miss Out On Crisis” where they show how many macro funds are currently lagging their expected performance so far for 2010.  While it is true that many funds are relatively flat e are surprised that the article had nothing good to say.  We being proponents of Global Macro as not only a strategy but as the best strategy across a full market cycle decided to take it upon ourselves to look at Global Macro against the SP500 from the beginning of the crisis October 2007 to now.

What we find is that while the SP500 is down -24.41% from the beginning of the crisis, the HFRXM Global Macro Index is basically flat at +1.04% for that same time.  In fact if you had invested $1000 in each of the HFRXM and the SP500 on October 1, 2007 your investment in the Global Macro Index would be ahead of the SP500 by 33%.  So while you wold not have huge absolute gains, you would also not have huge absolute losses.

$1,000 Invested In HFRXM and SP500

Of course such comparison offer little real value since the SP500 is a horrible benchmark for a macro trader.  Global macro encompasses stocks, bonds, commodities, and currencies so it should be relatively uncorrelated to any one asset class.  What sets global macro apart from other strategies is that it enables the trader to go wherever they see the best opportunities.  Of course just because they have the flexibility does not mean that they will catch every move, but it does allow them the flexibility needed to avoid large losses.

Happy Trading,

Dave@TheMacroTrader.com

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

Bookmarks

One of the many indicators that we track is that of the Los Angeles and Long Beach port data.  Combined these two ports handle almost 50% of the shipping traffic for the United States so they are obvioulsy useful in order to follow global trade.  As you can see in the chart port data s very seasonal.  You can see that total trade (the green line) typically peaks in October and typically bottoms in February.  Sometimes this cycle is off by a month in either direction but for the most part it’s very consistent. (Click on chart to enlarge)

LA and Long Beach Port Data

While total shipping volume, outbound plus inbound containers, is down over 25% from the peak back in September of 2007 it is important to look at the same month due to seasonality.  Looking at shipping volume from Feb 2010 against the peak Feb in 2007 shipping is down -13.7% or 118,562 containers.

So is trade improving or getting worse?  By breaking the data down into performance by month we can see if this January and February are better or worse than other years.  In the chart below you can see that for 2010 Jan and Feb were both actually slightly above their historical averages.  The average January sees traffic shrink by -3.10% and this year it only shrank by -3.05%.  February sees an average decline of -4.42% and for 2010 it only declined -2.89%. (Click on chart to enlarge)

Port Data Seasonality For Jan And Feb

Frankly right now the data isn’t screaming at us.  Numbers are coming in close to the historical norms but overall there is little to get too worked up about. Basically port data is currently telling us that the recovery is still in progress but that nothing is really improving or declining.  What would be a constructive sign would be to see March where we have a historical average increase of 10.69%.  A large miss would be a bad sign while an average or even slightly higher number would be considered by us to be very bullish.

Happy Trading,

Dave@TheMacroTrader.com

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

Bookmarks

10-Yr Swap Spreads hit their lowest level since 1988 on 3/9/10 hitting 3.25.  How many more days until they go negative? (Click on chart to enlarge)

10-Yr Swap Spread

Go short Treasuries, its the most obvious trade ever right?  While they might go up or down the MOVE Index continues to forecast less and less volatility, which at least to us indicates that the market is not expecting yields to change a whole lot anytime soon. (Click on chart to enlarge)

MOVE Index

Not sure if Chanos is right on China being in a huge bubble, but looking at the chart it appears as though at least a few investors are less than bullish. (Click on chart to enlarge)

FXI China ETF

We just crossed the one year anniversary of the current rally/bull market the other day.  Over that time on a weekly closing basis the SP500 is up over 66%.  This has been the largest one year rally in over 60 years.  We are starting to hedge our long exposure as we are currently cautiously bullish. (Click on chart to enlarge)

SP500 1-Yr Rolling Returns

Back in December we shorted the Euro on the basis of the EU being weak, overvalued, and sentiment becoming far too one sided.  In these pages we also looked at buying the USD on a technical basis. Looking at the USD and T-Bills however shows another reason for the USD rally. (Click on chart to enlarge)

US Dollar and T-Bill Yield

Happy Trading,

Dave@TheMacroTrader.com

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

Bookmarks

One trade that we currently like is that of shorting the EUR/SEK.  As you can see in the chart below the Euro has been losing ground to the Krona for most of the past year.  It formed a large head and shoulders top and then consolidated in a long bear flag until recently breaking down.  We think that this trade could go down to 9.5 over the next few months. (Click on chart to enlarge)

EUR/SEK Weekly Chart

We have been bearish on the Euro for some time now and lately the news has been going our way as many of the problems that were buried have been coming to the surface.  Not only is Greece in shambles but Spain, Italy, and Portugal are also near disaster as their debt costs continue to go up while their economies languish.  As the PIIGS continue to worsen there is more and more momentum building that could eventually kill the Euro.  We doubt that this happens any time soon but if the PIIGS are unable to correct their course it will happen.

Along with our negative view on the Euro another  thing that we really like about this trade is the extreme overvaluation of the Euro relative to the Swedish Krona.  As you can see in the chart below the Euro is trading at a 42.58% premium to the Swedish Krona.  While it has been outside of the 20% bands for a while now, we think that it is due time for a major correction on the weakness in the Euro and the relative strength of the Krona. (Click on chart to enlarge)

EUR-SEK PPP Chart

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In The Macro Trader newsletter we are short the EUR/SEK

Bookmarks

It has been a while since the last time we posted our global GDP weighted yield curve.  While it has been months it might as well have been a day as nothing has really changed.  After being inverted for all of 2007 and most of 2008 the yield curve flipped and became extremely positive as central banks worldwide lowered short term rates.  You can see this very clearly in the chart below of the G-10 nations short and long term rates. In spite of Australia raising theirs, short term interest rates remain extremely low everywhere else.

G-10 Short and Long Term Interest Rates

Another way to look at interest rates and in fact the title of this post is by using the global GDP weighted yield curve.  In the chart below you can see the global yield curve.  While it has fluctuated it has essentially gone nowhere for the last eight months.

Global GDP Weighted Yield Curve

So whats The Macro Traders outlook?  We think that things will remain more or less the same for most if not all of 2010.  On the deflationary side banks have not started to lend, real estate is not going up anytime soon, debt deleveraging is in overdrive, unemployment is as bad as ever, etc.  On the inflation side commodities are up, stocks are up, and bonds are up.  At best we would call this a standstill.  So while we could envision long term rates going higher on credit risk, yes we think that sovereign debt is full of credit risk, we think that short term rates will remain low for most if not all of 2010.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is long TLT

Bookmarks

Yesterday we wrote about how we feel that the Euro is headed lower due to overvaluation, the technical picture, and market positioning.  In light of that we thought that we would show the technical picture of the US Dollar index.

In the chart below you can see a chart of the US Dollar index all the way back to 1971.  In the lower panel we have plotted the distance from the 200-day sma shown as a percentage.  Not surprisingly the index rarely strays more than 10% away from the 200-day.  In fact since 1971 it has only gone above or below by 10% 11 times.  Since 1992 it has only breached the 10% level once back in 2008 in the midst of the financial crisis. Right now we are close to the lower levels of a typical move.  Could it go lower?  Of course the answer is that yes it can, but if history is any guide we doubt that we have much lower to go before a decent sized bounce. (Click on chart twice to enlarge)

US Dollar Index

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In The Macro Trader newsletter we are currently short the EUR/USD

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: Is It Time To Buy The US Dollar?
URL: http://www.themacrotrader.com/2009/12/10/time-for-us-dollar/

Bookmarks

We have been bearish on the EUR/USD for some time now.  Some investors are convinced that the USD is going down forever and that the US is the next Zimbabwe.  The reality is that while the United States has a ton of issues such as the huge and rapidly expanding deficit, the rest of the world is not exactly in great shape either.

One of the weaker areas of the world happens to be the European Union.  They continue to have issues such as Spain and its almost 25% unemployment rate, the IMF estimate that EU banks have only written off 50% of their bad debt, and the potential for major defaults in Eastern European nations.

The timing for a short position is starting to look right.  As you can see in the chart below on a purchasing power parity basis the Euro is 35% overvalued to the USD.  In previous periods of over and undervaluation this is past the levels that are typically seen before a reversal of trend. (Click on chart twice to enlarge)

EUR/USD PPP

Another indicator that we follow is that of FX risk reversals.  Risk reversals essentially show how option traders are positioned.  A negative reading means that option traders expect a move lower and positive reading mean that they expect a move higher.

Typically we look for contrarian signals at the extremes, usually when the reading is very negative or positive the trade is crowded and the price goes in the opposite direction.  This time however is a bit different as option traders are extremely bearish but the spot price has remained strong.  Because of this we suspect that if the price breaks we could see a swift move lower.(Click on chart twice to enlarge)

EUR/USD 25R 3M Risk Reversal

Looking at the chart below of the Euro ETF you can see that the price has broken below its current trend line.  In the lower panel you can also see that we also have had a momentum divergence during the last part of the advance.(Click on chart twice to enlarge)

FXE-Euro ETF

All of these signs point to a lower Euro.  We think that the timing is right to dip our toes in the water.  If the trade starts to move in our favor we will be looking to add to it as it could move quite a bit lower due to how overcrowded the trade is, valuations, and the fact that the EU in our view is just as broken as the US.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-we are currently short the Euro in The Macro Trader newsletter.

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: Is it Finally Time To Short The Euro?
URL: http://www.themacrotrader.com/2009/12/09/shorting-the-euro/

Bookmarks