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/

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We have heard about the so called economic recovery for months now and while it is true that markets are higher we have our doubts that any of this optimism is seeping into the real economy.  Because of this we tend to believe that we are headed for a double dip recession, assuming that we ever got out of the first one.

Lately we have started to see renewed signs of a downturn in some of the economic indicators that we follow.  All things employment have been bad with the unemployment rate, exhaustion rate, and unemployment 27 weeks or longer rates up.  Anyone that is seeing an upturn in employment must be on an acid trip as there are no signs of anything but more unemployment.  Just Wednesday we had housing starts come in lower than expected.  One indicator that we follow is the Citi Economic Surprise Index.  They have them for all of the G-10 nations and it does a good job of showing if economic numbers are doing better or worse than expected.  As you can see in the chart below the index is turning over in both the United States as well as the G-10 indexes. (Click on chart twice to enlarge)

Citi Economic Surprise Index

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is actually long various indexes but since he’s negative on the economy is looking to lighten up on the first signs of weakness.

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 The Recovery Slowing Down?
URL: http://www.themacrotrader.com/2009/11/19/slowing-economic-recovery/

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We keep hearing that long term Treasury Bonds are going to tank and that we need to get short before they fall off a cliff.  While this may very well happen, we doubt that it occurs anytime soon.  We are not alone in this view as Bill Gross and the gang at PIMCO seem to agree.  While some argue with his view of a new slow growth period the market does not seem to have an issue with it.  Not only has Helicopter Ben said that the Fed is not raising rates anytime soon, but market indicators are saying the same thing.

One Treasury indicator that we use is the MOVE index which is a  “yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of volatilities on the CT2, CT5, CT10, and CT30.”  As you can see in the chart below it has been falling since July as the market has come to the realization that we are in for a slow growth period and that the Fed is not going to raise rates any time soon.

MOVE Index

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is currently long AGG

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: Interest Rates and the MOVE Index
URL: http://www.themacrotrader.com/2009/11/18/interest-rates-move-index/

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One of our major themes here at The Macro Trader over the past two years has been to short Europe.  We mean that in a general sense as we have been short Spain and Italy off and on for over a year and are bearish on most things EU relative to most of the world.  One area that we have been looking at a lot lately is that of the Euro.

After being overvalued by 40% back in March of 2008 the Euro fell about 20% as investors went into risk aversion mode and bought the US Dollar.  Since March of this year the Euro has once again climbed into wildly overvalued territory again and is currently about 35% overvalued. As you can see in the chart below when the Euro gets very far above or below the 20% bands it has a relatively sharp tendency to revert to the mean. (Click on chart twice to enlarge)

EUR/USD PPP Chart

Our view is that sometime in the next few months we will have a modest US Dollar rally as investors leave the Euro.  In fact this is one of the primary reasons why we think that gold has been working out so well.  Basically the EUR, USD, and JPY are all really weak and investors are doing anything possible to diversify out of them.

One tool that we use a lot to gauge our timing in regards to trading currencies via PPP valuations is that of the different volatility indexes.  While you can monitor the EVZ Euro VIX, we also look at the JP Morgan G-7 VIX so to help us gauge the risk aversion in other G-7 currencies as well.  Right now this is important as there are several currencies overvalued by 20% or more, but that is for another post.  Anyways as you can see in the chart below the JP Morgan G-7 VIX is at relatively low levels and is showing little sign that anything is happening yet.  (Click on chart twice to enlarge)

JP Morgan G-7 VIX

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is currently not short the EUR/USD  but that will change at some point.

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: The Euro Is Overvalued
URL: http://www.themacrotrader.com/2009/11/13/euro-is-overvalued/

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One of the largest problems that seems to be getting little attention is that of the pension fund crisis.  While it has yet to hit in earnest it is definitely upon us.  The basic problem is that due to poor returns, both nominal and adjusted for inflation, pension funds are extremely underfunded.  While everyone in the investment world seems to know about the problem it does not seem as though anyone is talking about it.  So here are some charts that show the problem with the standard pension fund.

In the chart below we are looking at someone who started at the beginning of 1995 investing $1,000 a month, in a 70/30 stock bond mix, rebalanced monthly.  We are using real returns on the SP500 and on the Dow Jones Corporate Bond Index as our investment proxies.  Also in the chart is the same $1,000 a month invested solely in T-Bills.  As you can see T-Bills are actually slightly ahead and have had very little volatility and is at $184,120.  The 70/30 mix on the other hand has had a rocky path and is at $181,173.20.  Essentially the typical 70/30 stock bond mix in real terms has returned virtually nothing.  You could have saved the same $1,000 a month and put it in T-Bills and you would be ahead after nearly 15 years. (Click on chart twice to enlarge)

70/30 Stock Bond Real Return $1,000/Month Rebalanced Monthly

We could write about this topic for days and will in fact cover it more in future posts but the problem is obvious.  Pension funds are underfunded and there is no way in hell that without a major bailout from the government that they will be able to meet their liabilities.  So add this to the mix of current spending habits, unfunded liabilities of medicaid and social security, and the other retiree problem.

What is the “other” retiree problem?  The primary issue is that if you have a 401K, IRA, or other non-pension fund retirement plan you are likely under water.  Up until this year when investors, along with the Fed, have been flocking into bonds, most investors have been primarily invested in stocks.  How has that done?  Well in nominal terms it has been less than great.  If you were invested in an index fund over the last 10 years you would still be under water.  In real terms things get even worse.

In the two charts below you can see the SP500 from 1950 to now adjusted for inflation as well as the % drawdown.  As you can see we are still very much under water.  In fact as of the end of October the indexer is down -45.51% from the highs reached back in August of 2000. (Click chart twice to enlarge)

SP500 Real Returns and % DrawDown

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We wish there was a way to short Pension Funds.

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: Real Returns, The Pension Fund Crisis, and Buy and Hold
URL: http://www.themacrotrader.com/2009/11/12/real-returns-and-the-pension-fund-crisis/

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There is some interesting news out of China that they may in fact re-export some of their copper stockpiles.  Here is the link to the Bloomberg story “China May Re-Export Copper on Stockpiles.”   While not a rally killer by itself this is pretty damning evidence that a major part of the rally in commodities came from Chinese stimulus buying.  This was more bargain buying than an actual demand driven rally.  This could lead to a good sized move down as demand has not picked up inline with supply and now China is not only done buying but may even start to sell.

As you an see in the chart below copper has been in a steady uptrend since the end of 2008 and the move preceded the rally in other risk assets that started in March 2009.  The trend has been very consistent and is up about 130% in that time. On the chart below you can also see that as China has presumably stopped their buying we have seen a momentum divergence as the copper rally has slowed down.  (click on chart twice to enlarge)

Copper

We would be wary of any move higher in copper and are currently looking at some possible shorts in the copper related ETF/ETN products JJC-Copper ETN and DBB-Base Metals ETF on a break of the trend line.  If China which appeared to be the only buyer earlier this year, and is such a huge part of the emerging growth story, has too much then who is left to buy?

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are not currently long or short any industrial metals but that could change at any time.

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: Did China Buy Too Much Copper
URL: http://www.themacrotrader.com/2009/11/10/china-copper-commodities/

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Since the start of our newsletter we have been using a relative strength table that looked at Fidelity Select Sector Funds to show what industry groups are leading and which groups are lagging.  The relative strength calculation is similar to the style used by Bill Oneil and IBD but is slightly shorter term in nature. We used the Fido Funds due the their price history and breadth of different groups.  Now that there are not only enough different industry group ETF’s, but also the needed price history we have revamped the model to use ETF’s instead.

We publish one list for United States industry groups and one that is focused on global ETF’s with several country and a few sector specific ETF’s.  These tables are valuable in a few ways.  One is that we have developed a trading model based upon them that uses the rankings along with buy, sell, and money management rules.  Over time this model has beaten the market with far less risk.  The other way that these tables are useful is that they show you what is strong and what is weak.

While this concept is not rocket science we are consistently surprised how little attention it is given by other traders.  By using relative strength we can see what is really working and where investors are going.  Many times the supposed “hot sector” is not really that hot.  By looking at the tables we can see what is really working and what is not.  For instance looking at the Global RS Ranking table below you can see the leaders and the laggards.  While it is no surprise that Brazil is at the top when was the last time you saw someone on CNBC telling you to buy Indonesia or Turkey?  Yeah we missed that segment as well. (click on table twice to enlarge)

Global RS Rankings

Right now this table is confirming to us that for the most part developed nations are weak and should be sold and that emerging markets are strong and should be bought.  No, this is not the first or the only tool that told us this same thing but it is one way in which we can systematically be long the best areas of the world and short the worst areas of the world.  It also gives us a road map of where investors are putting their money and where they are withdrawing it.

Another point worth noting is that while we are starting to run this as a “standalone system,” the system represents only a part of our portfolio.  In our trading and our newsletter model portfolio we use several different methods in order to build a less correlated portfolio trading across asset classes.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are long EWZ-Brazil, EWT-Taiwan, and EWM-Malaysia

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: Macro Trading Using Relative Stength
URL: http://www.themacrotrader.com/2009/11/10/macro-trading-relative-strength/

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While a lot has been made of the RBA raising Australia’s short term rates over the last week the fact is that most of the world is not doing quite as well.  Whereas Australia actually has some inflation the United States, Japan, and Europe are still not growing and rates are likely to stay around their current levels for at least a few more quarters.

Australia on the other hand was able to avoid a large part of the current global recession by supplying Asia, namely China, with commodities.  As you can see  in the chart below the short term rates have climbed but in spite of this the long term rates are still basically unchanged. (click on chart to enlarge)

Australia Interest Rates

Looking at the G-10 as a group we can see that rates are low and aside from Australia and New Zealand rates are essentially unchanged for the past six months as central banks continue to fight deflation and disinflation.  The trend is flat and likely to stay that way. (click on chart to enlarge)

G-10 Short Term Interest Rates

With the current rally and all the talk of inflation you would expect that long term rates would be climbing but instead they are flat to trending lower in every single G-10 country.  Treasury bonds night be in the bubble of a lifetime but we are not seeing that yet with lower rates and extremely slow global growth, especially in the developed world. (click on chart to enlarge)

G-10 10-Year Interest Rates

If you want to see a cleaner chart with the average G-10 long and short term rate you can look at the chart below where we have taken a simple average of G-10 long and short term interest rates.  As you can see everything has remained the same for a few months now. (click on chart to enlarge)

G-10 Interest Rates

Finally lets look at the whole investable world.  As you can see in the chart below the Global GDP weighted yield curve has been flat since May 2009 with very little change.  If inflation is hitting the world right now then it would appear as though bond investors are clueless.  In our experience bond investors are rarely clueless and we are inclined to bet with them.  Right now we are looking at potentially re-entering our long bond trade as investors come to the realization that we, along with investors such as PIMPCO (maybe its PIMCO but the way that Bill Gross ran the Fed last winter we can’t help ourselves) , see slow to negative global growth over the next year and probably for the next few years as the worlds financial system rebuilds, assuming we get that far. (click on chart to enlarge)

Global GDP Weighted Yield Curve

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are long some GLD, DBV, and HYG

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: G-10 Interest Rate Trends
URL: http://www.themacrotrader.com/2009/10/16/g-10-interest-rate-trends-macro-trading/

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Why are bonds going up at the same time that gold is climbing? Real yields are the highest that they have been since the late 1980’s and the third highest in the last 100 years, investors expecting slow to negative inflation and growth are buying and will keep buying as they grasp for yield. (click on chart to enlarge)

10-Year T-Note Real Yield

Why has the SP500 continued higher even when earnings have been weak and unsustainable and demand has been virtually non-existent?  There are several contributing factors such as the oversold condition, sentiment, etc. but our favorite one is that the Government is debasing our currency and in the process it is driving asset prices but not their actual values higher, if your investment in the SP500 is up but the actual value of your dollar is equally low then have you actually made any money? (click on chart to enlarge)

SP500 and US Dollar Index

If we are in a deflationary environment then why is gold climbing higher?  No one wants to hold the US Dollar so instead of being a inflation/deflation play the current move of gold is based more on the devaluation of the US Dollar than anything else-It’s a currency trade. (click on chart to enlarge)

GLD-Gold ETF and US Dollar Index

If housing is cheap, interest rates are low, and everyone wants to trade their US Dollars for other assets than why aren’t housing sales going through the roof?  While your mortgage broker may be calling and saying that rates are at or close to all time lows the reality is that real rates are at their highest levels since 1987, cheap money my #%$. (click on chart to enlarge)

Real 30-Year Fixed Mortgage Rates

If demand is so weak than why has oil been so strong?  Once again it gets back to not wanting to hold US Dollars, when the USD bounces oil will likely get hit hard. (click on chart to enlarge)

West Texas Crude Oil and US Dollar Index

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are long some GLD-Gold ETF

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: One Question, One Sentence, and One Chart Answers
URL: http://www.themacrotrader.com/2009/10/08/macro-trading-one-chart-answers/

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A lot is made of relative returns and how one strategy or fund does against the SP500.  While not the best benchmark for something like Global Macro it is nonetheless the benchmark that everyone is most familiar with and that is used the most on CNBC and in magazines.  So how does global macro stack up to the SP500?

The chart below shows how $1000 invested in the SP500 and the Barclays Global Macro Index would have done for YTD for 2009.  As you can see the SP500 while getting off to a rocky start is now leading the macro index by 9.68% so far.  While the performance of the SP500 has been impressive the other side of the story is that to get the 18.04% return in the SP500 you first had to go through a -19.56% drawdown in January and February to get it.  Contrast that to the Global Macro Index where you had a -2.06% drawdown and a 6.63% return YTD.  Yeah you are outperforming with the SP500 but the volatility has been huge. (click on chart to enlarge)

Barclays Global Macro Index vs SP500 2009 YTD

Of course nine months is not usually the best representation of a strategy.  Going from 1997 to the end of September 2009, how has the SP500 done in absolute and relative terms?  Since 1997 the SP500 has given a total return of 42.70% and a CAGR of 3.07%.  The Global Macro Index on the other hand has delivered a total return of 237.91% in the same time and a CAGR of 10.92%.  Looking at the chart below you can see that while the SP500 has periods of serious out performance, over time it has lagged in a big way. (click on chart to enlarge)

Barclays Global Macro Index vs SP500 1997-September 2009

Not only has the SP500 lagged in total return but when looking at the risk taken to achieve the anemic 42.7% you really have to step back and rethink a long only equity approach.  In fact if you have been in a SP500 index fund since 1997 we excuse you to go bang your head against the wall for a few minutes.  Once you are back look at the chart below of the drawdowns that you had to endure to get that awesome 42.7% total return.  Yes, you see two drawdowns over -45% each.  In 2002 we were down -46.28% and in early 2009 we were down -52.56%.  All this for a return that was not much better then sitting in T-Bills. (click on chart to enlarge)

SP500 Drawdown 1997-September 2009

Looking at the same chart for the Global Macro Index below we can see that the drawdowns are far lower and shorter in duration.  In fact the worst drawdown that we have seen so far is -6.42% in October 2008 and right now we are at new equity highs while the SP500 is still -31.78% below its highs.(click on chart to enlarge)

Barclays Global Macro Index Drawdown 1997-September 2009

Does this mean that everyone should go out and invest all their money in global macro and buy our weekly global macro newsletter?  No, on the first and yes on the latter.   All kidding aside what this does show is the fallacy of long only equity investing.  While being 100% invested in equities is great when they are moving higher you get absolutely crushed when things come crashing down.  In global macro you are not beholden to the possibility of equity risk premia but instead are able to look for the best risk to reward opportunities out there in any asset class.  This includes stocks, bonds, commodities, currencies, and more.  This flexibility to go where the best opportunities are enables the global macro investor to outperform not in any given year but in a full market cycle.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are a global macro research company and are therefore a bit biased in our investment views.

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: macro trading vs SP500 1997-September 2009
URL: http://www.themacrotrader.com/2009/10/07/macro-trading-vs-sp500-1997-september-2009

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