One group of indicators that we follow quite closely are yield spreads.  They work as great risk indicators as well as  economic indicators. In the case of junk spreads they tend to lead rather than coincide or lag the overall economy.  One area where they really shine is at the darker end of the economy.  As you can see in the chart below junk spreads tend to lead the initial unemployment claims by anywhere from two-five months.  For the past four months junk spreads have been inching higher and higher as the economy has noticeably weakened.  What does this mean?  Well if the correlation holds up then we would expect initial claims to move higher.  This would go along well with most of the indicators that we are seeing such as the various manufacturing indexes pointing lower, with the exception of the Chicago PMI, as most indicators whether economic or market are pointing to a weaker economy. (Click on chart to enlarge)

Junk Spreads and Initial Unemployment Claims

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Disclaimer-We are long US Treasuries and Gold.

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

So hopefully it is fairly obvious that we are in deflation or at least disinflation.  If that isn’t obvious enough then read our previous posts.  If nothing else you will see that it has been our view since at least June of 2009 is that we are in deflation.  That being said we are currently long gold.  Some of you might be thinking that we must be smoking crack, after all how can we be long gold if we dont see inflation anytime soon.  Because of the general perception that gold is an inflation trade we thought it would be useful to look at the current situation.

Currently the situation in Europe is pretty bad.  The EU is essentially in complete disarray as new problems seem to surface every couple of weeks.  Everyone but the EU knew that the PIIGS had problems but now Hungary, Belgium, and even France are coming up in the news as problem areas.   We are seeing currency issues, debt issues, liquidity issues, structural issues, etc.  The EU right now is like the Lindsay Lohan of regimes with all of its issues.  All of this adds up to what is the largest fear, a sovereign default.  If this were to happen, or when it happens we will see some major turmoil across all markets.

So what are investors doing right now?  The have been fleeing the Euro and Euro denominated assets.  No one wants EU based stocks, bonds, or the Euro.  As they leave the Euro they have been going into the US Dollar, US Treasuries, and into gold.  Yes, they are leaving the Euro to buy gold.  While investors across the world have been buying gold the trend has been especially obvious in the EU and its neighbors.  We can see this in the following charts.

Here is GLD the gold ETF.  As you can see it has been steadily moving higher but only recently started hitting new highs as it sold off back in December and took a long time to consolidate.

GLD-Gold

For real evidence that gold is going up on worries of a sovereign default we need to look at gold priced in Euros.  As you can see in the chart below gold in Euros consolidated but has barely even pulled back during the past year and has really accelerated to the upside over the last few months.

Gold in Euros

Being very tied to the mainland Europe, and having a weak economy as well many UK investors have also been buying gold to get out of Pounds.  While not quite the move of the Gold/EUR this has been a strong and steady move.

Gold in Pounds

Finally lets look at gold in Swiss Francs.  As you an see the trend has been pretty much the same with a steady move higher and very tight consolidation.  One thing worth noting with the Swiss Franc is that in a normal crisis investors would be taking their money out of their regular bank and putting it in Swiss banks.  This time around Switzerland gave up their role as the ultimate bank by giving away their client list to the I.R.S.  We think that Swiss Banks will be looking back and shaking their heads at that move.  This is not the only reason (the Swiss want a weak currency for example) for the relatively poor performance of the Swissy but it does not help, especially in the long term.

Gold in Swiss Francs

Comparing gold in US Dollars to gold in European currencies it is obvious that people want out of the Euro and see gold as a reasonable substitute.  Hopefully this helps answer why gold can be a good investment even if we are in a deflationary environment.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are long GLD

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

One important indicator for gold is the Goldollar index.  The Goldollar index is formulated by taking the price of gold and multiply it by the US Dollar Index.  This has the effect of giving us the trend of the price of gold isolated from movements in the US Dollar.  As far as we know the Goldollar index was devised by the McClellans of McClellan Oscillator fame.  Just as the developers intended we use this index to help forecast and confirm what the price of gold is likely to do and what it is currently doing.  If the Goldollar index breaks out to the upside gold usually follows, and if it tanks then gold follow to the downside as well.  While it is not perfect it has definitely aided us in our trading.

So what is the Goldollar index showing us right now?  As you can see in the chart below the Goldollar index in the lower pane looks similar to the gold chart in the upper pane.  The main difference is that the Goldollar index has broken out from its consolidation and is right at its highs and gold is not.  While not the holy grail, and therefore sometimes wrong this would indicate to us that in the relatively near future gold will be moving higher. (Click on chart to enlarge)

Gold and Goldollar Index

Disclaimer-currently hold no position in gold but that is likely to change soon

Happy Trading,

Dave@TheMacroTrader.com

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

Back in December when we wrote our post “Is It Finally Time To Sort The Euro” we got a lot of flack for saying that the US Dollar was bottoming out and that the Euro was going to drop.  We received e-mails telling us about all of the problems with the US and why the Dollar is going down forever.  Our basic answer has been that while the US has tons, and by tons we mean trillions upon trillions, of problems the US Dollar is not going the way of toilet paper anytime soon.

While we knew of many of the problems in the EU when we wrote our post we had no idea how bad and how fast they would manifest themselves.  As you can see in the chart below since our post the Euro has broken down, consolidated at the 200-day moving average, and then broke down some more. (Click on cart to enlarge)

EUR/USD Daily Chart

So what do we see going forward?  In our earlier post we showed a chart of the EUR/USD purchasing power parity that showed the Euro as being 35% overvalued relative to the US Dollar.  As you can see in the chart below the Euro has narrowed the valuation gap considerably but is still 22% overvalued to the USD.  We would not be surprised to see the EUR/USD hit the 2008 lows around 1.25 before finding strong support.  (Click on chart to enlarge)

EUR/USD PPP Chart

Happy Trading,

Dave@TheMacroTrader.com

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

We decided that it was worth sharing our views of the inflation/deflation debate with all of our readers.  In our weekly newsletter we are already positioned to take advantage of some of the current as well as potential trends that will benefit from our scenario.

The following are our views on different parts of the puzzle that show that we are currently in, and will likely be experiencing deflation for longer then most people seem to think.

Savings-

Here are some interesting, and unfortunately not surprising, savings rate numbers.  The current savings rate is 5.7%, the all time high in 5/1/75 was 14.6%, the all time low was in 8/1/05 with a savings rate of -2.7%, the historical average is 6.8%, and the 10-Year average is 1.7%.  As you can see in the chart the past year has seen a huge uptick in the savings rate as consumers are trying to pay off debt and save some money.

Personal Saving Rate

Of course as savings go up spending goes down.  While this is good for the individual household it is a negative for the overall economy as it means less money is being spent on items from housing to cars to clothes.  While this could just be an abnormal blip in the scheme of things there are several reasons to think that this time the trend will hold for a while.

Baby boomers as a group don’t have anywhere near the funds to retire.  After 2008 wiped out 42% of the worlds wealth they should be scared and saving for their rapidly approaching retirements.  Once the economy starts to pick up they may very well start spending like it was 1999 again but we don’t think that they will because while most people are ok with the idea of working a bit past the age of 65, they do not plan on working into their 80′s and 90′s.

If the savings rate gets back up to the historical average of 6.8% or higher and then stays there for a while, it will be a huge drag on the economy. As consumers buy less and less, pricing will likely come down.  We are already seeing this in the form of huge sales in stores across the nation.  Many retailers have already had several markdown sales and it is safe to assume that this trend will continue for at least the next year or so.  If our projections are right and the savings rate gets back to “normal” we will likely see a re-pricing as most businesses just accept that fact that their profit margins will be smaller going forward.

Housing-

The monthly proclamations of a bottom by the NAR notwithstanding we have yet to see anything resembling a bottom in real estate. The Case Shiller 10-City index is down 33% from its peak and the 20-City index is down 32%.  Both charts look the same, which is to say each month is lower then the last month.  So far there has been no bottom.

Case Shiller 10-City Index

Not surprisingly housing sales numbers don’t look much better.  In spite of the monthly bottom calling we continue to see more new lows every few months.  As you can see in the chart below we are just off of new all time lows since the data series started in 1963.

SA Housing Sales

Zooming in a bit you can see that while we have had several blips over the last few years none of them have lasted for more then a few months and all have led to new lows. Our best guess is that we are headed lower in the next few months.

SA Housing Sales-A Closer Look

As if residential housing was not enough, the commercial real estate market is playing catch up.  Residential peaked in June 2006 and commercial held up until October of 2007.  Since October of last year however commercial has made a valiant effort to catch up and is now down -29.48% since then.  In fact from March to April alone it dropped -8.62%.  If real estate has found at bottom it is keeping its location secret because none of the data that we have seen points to it.

Moody’s REAL Commercial Property Price Index Composite(CPPI)

Of course you may be thinking that there has to be some commercial real estate that has found a bottom.  This may be the case on a geographic basis but it is definitely not the case when it comes to segments of the commercial market.  As you can see in the chart below industrial is the strongest part of the market and yet it is still down -14.26% from its highs.  Apartments are next being down -19.01%, followed by retail which is down -23.11%, and finally office space which is down a whopping -30.22%.  Judging by the massive drop this last quarter it is safe to assume that we have a ways to go before we really hit the bottom.

Moody’s REAL Commercial Property Price Indices

Employment-

In case you haven’t noticed employment has been horrible and getting worse.  One of the newest “in indicators” is the exhaustion rate.  While this indicator is not new it has luckily not garnered much attention over the years because it only gives a real signal once or twice a decade.  The exhaustion rate is the rate at which people come off, or exhaust, their unemployment benefits without having securing a job.  Why is this the “it indicator” right now?  Well if you look at the chart below you can see that we are not only at all time highs but are actually at 49.23%.  Yes, that means that almost half of the unemployed are done receiving unemployment money.  That of course leads to even less money to spend on anything.

Exhaustion Rate

After looking at the exhaustion rate chart it should come as now surprise that unemployment is high.  In fact it is at its second highest level ever at 9.4%.  As bad as unemployment is right now, it is going to get worse before it gets better.  We will likely hit at least 11% ,and we would not be surprised to see 12-14% unemployment before jobs data bottoms out.

Unemployment Rate

At this point it should not be much of a surprise but as you can see in the chart below, average weekly hours and non farm payrolls data are also both declining on a year over year basis.

Average Weekly Hours and Non Farm Payrolls

So how does all of this effect deflation?  If people are not working then they are not able to spend as much on consumer goods and services.  That includes clothing, food, entertainment, transportation, etc.  If they stay unemployed long enough and fall off of their unemployment benefits then they are able to spend even less.  Along with the lack of, or at least severely impaired, spending power there is a host of other side effects, which includes everything from defaulting on credit cards to defaulting on their mortgages.  As consumers spend less, businesses have to lay off more employees as sales drop off and margins are squeezed with exacerbates the situation.  One consistent relationship is that of the unemployment rate and capacity utilization.  As unemployment rises, capacity utilization drops as demand falls out.

Unemployment and Capacity Utilization (inverted)

If there is no demand then there is no spending.  If no one is spending then there can be no inflation.  If things are contracting then we are in deflation.  One more indicator that shows this is that of the output gap. The output gap is the difference between the amount that we can produce and the amount that we are currently producing.  In the chart below a positive number indicates under-utilization, and negative numbers reflect over-utilization.  If the line is rising things are getting worse and if it is declining things are improving.  As you can see the line has risen quite a bit and at least for now is showing no signs of turning around.  The output gap is a good indication of available demand.  As you can see. the output gap is bad and getting worse as demand continues to decline.

5-Year Output Gap

Banking-

While we could go on and on about banking we will try and keep it short.  Most people are pointing to the charts from the Fed on bank reserves and saying that they will cause hyper inflation.  Yes, the monetary base is at historic highs but guess what?  Until that money is actually in circulation it does not cause inflation.  You can print ten quadrillion dollars but if you bury it in a hole then it does not cause inflation.

Look at the chart below of the Adjusted Reserves.  As you can see it is at record high levels.  While it is extremely high it is not in circulation yet and likely will not make it to consumers for some time.

Adjusted Reserves

This number is extremely high due to all of the money that has been printed over the past year in response to the financial crisis.  But the inflationistas are missing one important point, namely that until banks have rebuilt their reserves they will not be lending.  As long as residential and commercial mortgage defaults continue banks will continue to rebuild their balance sheets.  Once they have a stable asset base they will start lending and we will likely see some really high inflation but until then we will be in a deflationary environment as the money is not being put into circulation.

Commodities-

Commodities are another reason that many use to justify their inflation arguments.  After having a good bull market from the end of 2002 until fall of 2007, they took off and got a bit parabolic for the first half of 2008 before crashing and coming back to levels not seen since 2002. Of course as anyone who has filled up their gas tank knows, commodities have started to climb once again moving from 200 up to 250 from the March lows.

Commodity Research Bureau Index

The rise has been widespread with energy, base metals, agriculturals, and even precious metals rising considerably.  Aside from precious metals it appears as though the primary reason that we had such a strong rebound was due to buying out of China.  In the first two quarters of the year the Chinese government decided to use some of their surplus to buy raw materials.  They bought a lot of copper, secured oil contracts, and stocked up on everything else.  Now it appears as though their buying is slowing to a trickle of what it was and with the run up in prices they are taking a break as they will likely get to buy more at lower levels.

While the buying out of China may help commodities put in a bottom, it does not appear as though it will drive them much higher.  With the possible exceptions of precious metals and energy we see most commodities turning in flat to slightly negative results for the rest of the year.  With the demand destruction that we have seen over the past year commodities have a tough road ahead of them before they will be able to climb higher.

Deflation-

So where does all this leave us?  Demand has been absolutely crushed on several fronts:  People are finally saving and paying down debt instead of spending.  Real estate is still falling, and with inventories as high as they are, will likely not fully recover for years.  Employment is as bad as at any time in the Post WW2 era.  Banks are still impaired and unable/scared to lend.  And with all this demand destruction commodities are unlikely to continue upwards for a while.

Finally there is the matter that while we can speculate on inflation we are currently in deflation as can be seen in the chart below of the CPI.  We have officially been in deflation for the last three months and while it might slowdown a bit we will likely stay in a deflationary environment for longer then most people think.

CPI-YoY % Change 1922-Now

What are we doing?

So if we believe that we are in deflation what do we do about it?  The best deflation trade that we have found is to be long bonds.  As we stated in our last blog post as well as the last few newsletter we are long TLT-20+ Year Treasury Bond ETF.  Not only are we in deflation but the trade was decent on its own merits.

Real yields on Treasury bonds at the end of May were at their highest levels since February 1995 and right now they are at 4.76% for the 10-Year and 5.58% for the 30-Year.  In an environment where we expect most assets to fall or go nowhere, we think that Treasury Bonds offer good value.

10-Year Treasury Bond Real Yield

Treasury bonds got almost as oversold recently as they were overbought back at the end of 2008.  By normalizing the trend using a 200-day moving average we build reversion to the mean charts that show how far above or below securities are from their mean.  In the case of the long bond our charts showed that it was extremely oversold and that it was a good time to start building a position.

TYX-30-Year Treasury Bond Yield Reversion to the Mean Chart

Looking at the chart of the TLT we could see it running up into the 100-105 range over the next month or two as investors take advantage of deflation, the oversold conditions, and the favorable real yield.

TLT 20+ Year Treasury ETF

While the long bond is definitely our favorite deflation trade, it also makes some sense to go long the US Dollar and/or the Japanese Yen as investors flock towards safety.  Other trades would be to short stocks and short commodities in anticipation of them falling as demand continues to decline and margins shrink.

And what about inflation?  We actually do believe that eventually all of this printed money will lead to some hefty inflation but right now we are in deflation.   Additionally the inflation trade is  the most overcrowded and one sided trade in the financial markets right now.  If we are right we will do well, and with the aid of risk management if we are wrong we will be stopped out for a small loss.

Happy Trading,

The Macro Trader

Dave@TheMacroTrader.com

Disclaimer-We currently hold positions in TLT

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: Deflation And What We Are Doing About It
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We were long precious metals coming into 2009 as gold, silver, and even platinum were climbing higher.  Eventually we got stopped out as the group consolidated for the next three months.  The last two weeks gold and silver have been able to breakout of the consolidation and is once again in an uptrend.  We went long in out model portfolio last week and are currently looking to add to our position if the trend continues.

GLD Gold ETF

SLV Silver ETF

In order to catch our trades in precious metals as well as other asset classes like stocks, bonds, currencies, and other commodities then sign up for a quarterly or annual subscription to The Macro Trader weekly newsletter with frequent intra-week updates.

Happy Trading,

Dave@TheMacroTrader.com

Active Beta? What’s that? It is our term for a systematic and relatively passive way to enhance returns by capturing risk premia but at the same time manage risk and provide a real long term edge over standard buy and hold.

Having read countless books and papers preaching the long term upward drift in stock and bond prices we realize that risk premia is a good thing. Of course after having come through the 2000-2003 bear market we also know that if risk premia is good then risk management is even better. After reading Jim Leitners’ interview in the book Inside the House of Money we started to look at different ways we could gain more exposure and safely earn risk premia by using systematic strategies that have us involved in different asset classes.

Currently we have models built to capture risk premia in equities and fixed income. We are still working on ways to capture it in currencies and precious metals/commodities. We have built, bought, and researched several timing models over the years that are based off of technicals, valuations, sentiment, monetary inputs, and any mix of the above. Over time several of these timing models have proven to have a substantial edge over buy and hold especially when it comes to risk control. We have experimented with several different ways to use these models but so far have found that simpler is better and for each bullish model we enter X%. Currently for both fixed income and equities we enter 10% of our position for each model that is bullish using up to 50% of the model portfolio.

Right now we are working on a currency model that takes advantage of the carry trade, but with a risk management filter. We had been struggling to do it in a systematic risk controlled manner but thanks to a post by Macro Man we may have found a solution. If the testing works out we will post an update. As for the Precious Metals/Commodities model portfolio we are working on a CTA technical trend following model. We questioned calling this an Active Beta strategy but after re-reading some research by Bridgewater we decided that with the relative ease (No, it’s not actually easy. But once you have it up and running you shouldn’t have to tweak it much to keep it running.) to maintain it we would include it as Active Beta. Expect more posts on these models in the future as we get further in our research.

Happy Trading,

The Macro Trader

P.S. If you liked this post please add us to your RSS reader. if you have any questions, comments, praises, or criticisms feel free to e-mail us at Editor@TheMacroTrader.com

For further reading on Active Beta and systematic capturing of risk premia, here are some links to go to.
Inside the House of Money Excellent book filled with interviews with leading Global Macro Traders.
Pioneering Portfolio Management Must read book by David Swensen, portfolio manager of the Yale Endowment Fund.
Formula Research Nelson Freeburg builds some of the best systems out there.
World Beta blog Mebane Faber has done a lot of work on systematic methods of reducing risk.
Macro Man blog Macro Man has lots of witty takes on the markets and does quite a bit of solid research.

If you would like to receive our new FREE course “Macro Trading 101″ put your e-mail in the box below.

Here at The Macro Trader we run five different model portfolios: US equities, fixed income, precious metals, foreign equities, and currencies. We use ETF’s and the occasional Closed End Fund as our trading vehicles.

The starting value of each portfolio was $100,000.00. We typically risk from .5% to 2% (usually 1%) on each position, with each position taking up no more than 25% of the model portfolio’s equity. So for example, with a $100,000.00 portfolio, we would risk no more than $1000.00 from entry to stop on one position, and that one position initially could not take up more than $25,000.00 in equity.

We track each model portfolio against two different benchmarks: The 0-line and the standard benchmarks in their asset class. We use two benchmarks for two reasons: First we believe in absolute returns. Our newsletter is patterned after a Global Macro Hedge Fund, so we pay strict heed to risk controls and positive returns. Who cares if you beat the SP500 because it lost 25% that year, and you “only” lost 20%? Sure, you may have won in Morningstar’s eyes, but you and your investors lost real money. In addition as long as you have positive returns, you could potentially lever up your portfolio to juice up your returns if your trading is sufficiently risk-adverse.

That said, we also track our relative benchmarks because people are used to them and doing so helps us gauge the effectiveness of some of our risk-taking. For instance, if we are taking on a lot of risk and are lagging our relative benchmark, then we need to scale back. If on the other hand we are beating the benchmark while taking far less risk, it may be appropriate to take on a bit more risk. As we will discuss later in this post, the latter situation has been our problem as of late.

US Equities

When we started the letter we had been bearish on US equities for some time. That said, we remained in cash until our 2/1/08 issue when we went short the XLF-Financials ETF. So far we have had three closed out trades. Of the three trades, two were profitable and one was closed at a loss. Our return has thus far been 1.57%. In the same time the SP500 has returned -3.28%. So on an absolute basis we are positive with a 1.57% return and on a relative basis we are beating the SP500 by 4.85%.

Fixed Income

In fixed income our first trade came in the 12/28/07 issue and was a buy of the TIP-TIP’s ETF. Since then we have had six closed out trades and currently have one open position. Of the seven trades all but one has been profitable. Our total return has been 1.9%. In the same time our primary benchmark the TLT-20 Year Treasuries has returned -4.1%. So on an absolute basis we are positive with a 1.9% return, and we are beating our benchmark by 6%. (By the way, as the universe of fixed income ETF’s expands we may change our benchmark to the Lehman Aggregate Index AGG-ETF)

Precious Metals

The first trade we had in precious metals came in the 12/7/07 issue. We went long GLD-Gold ETF. Since that time we have had three total trades in the metals portfolio and all of them have been profitable. Our performance has been good with a 5.23% return which beats the XAU Philly Gold/Silver index by 5.24% and the price of gold by .89%. We were able to achieve this while never being more than 54% invested.

Global Equities

Our first trade was a short in the EWW-Mexico ETF in the 12/1/07 issue. Since then we have had a total of six positions. Four of them have been closed out, and we currently have two open positions. Of our closed trades, three were losses and one was profitable. Currently our two open positions are profitable. Our P/L for this portfolio is -1.33%. That of course comes out to a -$1,326.48 loss. On an absolute basis we are obviously down. Depending on the benchmark used, we are either a bit ahead of a bit behind. Using the EFA-ETF which returned -6.64% we are ahead by 5.31%. Using the EEM-ETF which returned -.09% we are behind by 1.24%.

Currencies

We didn’t have our first currency trade until the 2/22/08 issue. Since then we have had four trades: Three winners and one loser. We are up 3.12%. As of now we are using the DBV-Currency Harvest ETF as our benchmark. Since there is no real benchmark for currencies, we decided to use the carry trading DBV-ETF as a benchmark. The DBV is down -3.71%, so we have beat our benchmark by 6.83%.

Overall the model portfolios are up 2.1% as of today’s close (5/7/08). Of our 20 closed out trades 14 have been winners and six have been losers. Our winners have made $13,894.01 and our losers have lost $3,675.88 for a total gain of $10,218.13. We currently have three open positions, all three are profitable, adding an additional $278.70.

While evaluating our performance, we have realized that we need to take on more risk. With a 70% accuracy rate and a 3.78 profit factor we should probably either be bigger in our positions, have more open positions, or a combination of both. Going forward this will definitely be an area that we will be working on.

Happy Trading,

The Macro Trader

In our December 7^th, 2007 issue we went bullish gold. By way of the ETF GLD we got in at $79.60. Currently it is right around $87. So to help our subscribers and potential subscribers understand our trade process we felt it would be helpful to walk you through this trade.

We look for potential trades fundamentally and trade them technically. As we have mentioned before technical analysis helps us define our risk vs. reward and makes our trading more objective. We like to think we get the best of both worlds.

Fundamentally there are several things that are bullish for gold and precious metals in general.

-Negative real rates. When inflation adjusted rates are negative you want your money in real assets.

-Falling US Dollar. If the US Dollar is declining in value relative to almost anything you want your money in other currencies. While we don’t necessarily think we need to be back on the gold standard, we do see gold as an alternative currency.

-Rising Swiss Franc. Historically when the Swiss Franc is rising it means that investors are putting their money in a safe haven currency. The correlations between gold and the Swiss Franc have held over the long term due to many of the same reasons.

-Rising Inflation. Again if your money is devaluing you want to put it somewhere else.

These are but a few of the reasons that we have been bullish gold. After we have a fundamental reason to go long or go short as the case may be we then look for a catalyst. That catalyst can come in many ways. Sometimes it is an actual economic number, a chart pattern, or any number of things. In this case it was a textbook example of a triangle consolidation.

As we have posted before we are huge proponents of risk management. We have found that for us technical analysis is one of the big pieces of the puzzle. Using charts we are able to define entry and exit points in an objective way. Some may disagree with us but we have found charts to be invaluable. In the case of gold we had wanted to get long for a while but it was overextended. Well patience paid off because it pulled back and consolidated and formed a strong triangle. We placed it in our macrotrader.com/members/signup.php?product_id=1″title=”Macro Trader Newsletter” >newsletter and that same week we got in at $79.60. As of tonights close it is at $86.50 and our current stop is at $84.38

Happy Trading,

The Macro Trader

P.S. If you have any questions regarding our newsletter or anything else feel free to e-mail us at Editor@TheMacroTrader.com

If you would like to receive our new FREE course “Macro Trading 101″ put your e-mail in the box below.

As mentioned in previous posts we run a variety of automatic as well as discretionary trading systems. Running them alongside each other helps us to spot market trends that we might not otherwise see. Well here are a few macro themes that we have found and currently are tracking for good entry points with relatively low risk.

Energy and Raw Materials-Yes, we know that this isn’t exactly a novel idea. But the fact remains that if the world is to continue expanding we are going to need more energy. If more people in third and second world countries are buying cars guess what they need? Yeah you guessed right. They need gasoline and the car companies need steel. If the BRIC’s and friends are to continue growing at their current pace or even half of the current rate then they need raw materials and energy to build. So we are for the most part energy and hard asset (commodity) bulls. While an index probably isn’t a bad way to go we feel that we can get better risk adjusted returns by looking for our own trades and scaling in and out of different securities. So we track a lot of different individual stocks, ETF’s, and commodities.

Housing-We are housing bears. While we don’t see this trend continuing forever or even for ten years we do see it going for at least another year. Does that mean we are shorting everything in housing? No, in fact we currently only have one short position in housing (HOV). But it is a theme we will continue to monitor.

Healthcare-Ultimately the outcome of the health-care industry is probably going to end up with politicians deciding if it is allowed to win or not. For the next 40 years we see several reasons to be long healthcare. Unfortunately we see a reason to be very hesitant. Because of the aging populations in the western world the bulk of the voting population will probably favor government controls on the health system. That being said we still see many potential opportunities in healthcare and bio-tech.

Global Telecom-This is a theme that has been good to us off and on for some time now. We have found that in a lot areas of the world some of the best stocks have been in the telecom industry. Off and on we have been long VIP, MBT, AMX, CHL, SKM, and TKC. In fact last week we re entered TKC. Basically telecom is one of our favorite emerging market industries and whenever a country meets our other criteria it is usually one of the first areas we look at.

These are some of our major trading themes right now. We have other themes we monitor but these should give you an idea as to where we are looking and what we look for. Basically we look for areas that should have long lasting trends and real fundamentals. We then look for entries that present a good risk to reward scenario. We aren’t in the business of risking a dollar to try and make a dollar. We are looking to risk a dollar to make three or four and sometimes even ten.

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Happy Trading,
The Macro Trader

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