• Japan’s export dropped 40.9 percent in May from a year earlier, more than April’s 39.1 percent decline, the Finance Ministry said today in Tokyo. (Bloomberg)
• The European Central Bank said it will lend banks 442 billion euros ($621 billion) for 12 months as it steps up efforts to unblock credit markets in the 16- nation euro region. (Bloomberg)

Key Reports Due (WSJ):

7:00 a.m. June 1 Mortgage Refinance Applications: Previous: -23.3%.
8:30 a.m. May Durable Goods Orders: Expected: -1.5%. Previous: +1.9%.
10:00 a.m. May New Home Sales: Expected: +2.6%. Previous: +0.3%.
10:30 a.m. June 1 U.S. Energy Dept Oil Inventories

Black Swan Live Webinar Events Today:

11:30 a.m. EST - Sponsored by DTI “Global Rebalancing, part 1”: To register, click on the link below: http://www.dtitrader.com/trading_education_FedDay_6_24_09_Register_BSwan.htm -

4:30 p.m. EST - Sponsored by International Securities Exchange “China: Risk and Benefit to the Global Currency Market”: To register, please click on the link below
https://ise.webex.com/ise/onstage/g.php?p=7&t=m

Quotable

“To know that you do not know is the best.
To pretend to know when you do not know is a disease.”

Lao-tzu

FX Trading – Bad day of the dollar
We were expecting at least one day of follow-through (actually more) on the green shoot to brown weed re-think, thinking it would benefit the dollar as it did on Monday, but no dice. It seems all attention is back on the Fed and quantitative ease and signs of recovery—QE and recovery both synonymous in traders’ minds to sell the greenback.

Not to let the facts get in the way of anyone’s expectations, knowing we’ve been steamrolled by real prices moved by real peoples’ expectations, but if you didn’t notice in the Key News items above, we wanted to re-iterate and expand a bit:

Japan, one of the world’s MAJOR exporters, just posted a 40.9% DECLINE in exports for the month of May, compared to May last year.

o Steel, autos, and semiconductors led the slump

o China’s 4 trillion yuan ($585 billion) in stimulus measures haven’t been enough to offset sales declines in the U.S. and Europe.

Ho hum….

Durable goods orders at 8:30 and new homes sales at 10:00, with the verdict from the Fed is delivered at 2:15 p.m. today. Stay tuned.

Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com

Black Swan Capital LLC
www.blackswantrading.com

Currency Currents - June 22, 2009

Key News
• The World Bank has cut its 2009 global growth forecast, saying the world economy will shrink by 2.9 percent. (AP)
• European Central Bank Governing Council member Ewald Nowotny said the bank is likely to keep interest rates steady for at least the rest of the year. (Bloomberg)
• German business confidence rose for a third month in June. (Bloomberg)

Key Reports Due (WSJ):
No economic events are scheduled for today.

Quotable

“A few years from now, strange as it may sound, we might all find that we are hungry for more capitalism, not less. An economic crisis slows growth, and when countries need growth, they turn to markets. After the Mexican and East Asian currency crises—which were far more painful in those countries than the current downturn has been in America—we saw the pace of market-oriented reform speed up. If, in the years ahead, the American consumer remains reluctant to spend, if federal and state governments groan under their debt loads, if government-owned companies remain expensive burdens, then private-sector activity will become the only path to create jobs. The simple truth is that with all its flaws, capitalism remains the most productive economic engine we have yet invented. Like Churchill’s line about democracy, it is the worst of all economic systems, except for the others. Its chief vindication today has come halfway across the world, in countries like China and India, which have been able to grow and pull hundreds of millions of people out of poverty by supporting markets and free trade. Last month India held elections during the worst of this crisis. Its powerful left-wing parties campaigned against liberalization and got their worst drubbing at the polls in 40 years.”

Fareed Zakaria

FX Trading – Being in the Market!
Some days I struggle for things to rave or rant about in this morning missive. Often, after bleeding at the keyboard for an hour or two, something seemingly worth saying pours on to the screen; but there are those days when only the keyboard is stained. Today is one of those days.

So, my guest columnist, if you will, is F.J. Chu. Mr. Chu wrote a wonderful little book titled “Paradigm Lost.” It’s a real gem of a book that I often return to, and consistently find increasing amounts of wisdom each visit. I was re-reading his section on “Being In the Market,” and thought you might enjoy it, especially as we start our week in the market. Here is an excerpt:

“We find it upsetting that the market, or at least the rational and quantitative aspects of it that are explained to us by the experts, only describe the surface of our investment world. But the truth is that market prices are determined by a set of complex variables that resist precise quantification. Beneath that appearance exists another world that is disclosed to us by volatile stock price movements and by direct experience. Unlike the familiar language of precise financial data, dry economic analysis, and quantitative rankings, this other world is increasingly throbbing and moving, driven by the basest emotions, and fed by rumor, misinformation, and fantasy. The investor is told that the first world is ‘objective,’ rational and real; while the second world is ‘subjective,’ irrational, and alien. For comic relief, a sage once suggested that someone who is skeptical of the reliability of his physical senses should by whipped until he is convinced of its certainty.

“Since we have already split market reality in two, which one is the one that predominates? That answer is that they both do, although the timing and the degree to which they determine actual market prices is refractory to investors’ power of anticipation. As a consequence, the investor is shunted between these two worlds, feeling like an anonymous and unwitting cog in the great game of the markets. Is there a way out? Now if this were merely an academic argument between university professors, we could dismiss it as the cogitation of overly refined intellects. But this duality infects the whole of our investment world and reaches deep into our portfolios.

“The unique and fascinating nature of the markets is due to the centrality of Being—the mind of the investor, many investors, and in its totality the mind of the market. Its uniqueness has to do with the way the investor stands out within time and in relation to time. In every trade (or every click of the mouse) the past, present, and future all converge in on instant in one physical space. The unique character of each investor’s mind—in infinite variations of reason and emotion, fear and greed—finds its expression in the cascade of market prices. What is suggested is no less than the Socratic ideal of an individual, intelligent, and informed investor who thinks for himself, uses independent judgment, and acts with deliberate choice. It is the real of—Being-in-the-Market—where extraordinary power of ideas takes shape.

“The fundamentals of our financial markets have been well explored by others, to the full accompaniment of graphs, charts, and statistical minutiae. But all the quantitative attempts by the technician are merely seeking to describe an emotional state of the market. The stock market is really too multifaceted and complex to be sufficiently captured by any single methodology or ideology. But all this discussion will probably have little ‘cash value’ for the economists and market technicians. They will continue to look through Being—Being-in-the-Market—because it is so transparent that they cannot see it. In the end, however, Being is what the market technician cannot account for. “And Being is what points the way toward a real comprehension of the markets as a whole.”

Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com

Currency Currents - June 18, 2009

Key News
• World Bank Raises Forecast for China (WSJ)
• BRIC Dollar Bonds Beat Ruble, Real, Yuan Debt as Medvedev Blasts Currency (Bloomberg)
• Wall Street afternoon rally peters out (Financial Times)
• China bulls will be let down (Financial Times)

Key Reports Due (WSJ):
8:30 a.m. Initial Jobless Claims For June 13 Week: Expected: +9K. Previous: -24K.
10:00 a.m. June Philadelphia Fed Business Index: Expected: -18. Previous: -22.6.
10:00 a.m. May Conference Board Leading Indicators: Expected: +1%. Previous: +1%.
10:00 a.m. DJ-BTMU Business Barometer For June 6: Previous: unch.
10:30 a.m. June 5 EIA Natural Gas Inventories

Quotable

“The narrow monetary aggregate, M1, is up 15.6% from a year ago, but the aggregate has fluctuated wildly in recent weeks as risk aversion has faded. Moreover, monetary easing has lifted the monetary base (bank reserves plus currency) relatively more, so the ‘money multiplier’ has edged lower after plunging late in 2008. So, tracking the effects of monetary easing on inflation potential through the monetary aggregates is tricky.”

Richard Berner

FX Trading – Lose the Correlation

The correlation between stocks and currencies is working; risk-appetite at its finest.

But say we didn’t have this connection … say a 0.023% rise in the S&P 500 didn’t equate to the same 0.023% rise in the Australian dollar or euro or whatever. How would these currencies behave without this risk correlation?

Would it be an all-or-nothing proposition for the buck like it is now? I’d like to think not.

Think about it: why has the dollar benefited from risk-aversion? Why is it the safe haven currency during these very uncertain times?

I think it’s because investors understand the United States offers a financial environment that nearly no other single country can offer. Plus, the US dollar is deeply seeded in the global economy.

But as we often say: currency trading is a relative game. It’s about the value of one currency appreciating or depreciating relative to the value of another currency. And from 2001 to 2008 there was a big bet placed against the fiat king.

The US dollar lost its appeal (and its value) not because any currency threatened to steal its thrown, but rather because of the effects from a changed global financial landscape. Abundant dollar liquidity drove growth in countries epitomizing instability … countries dependent upon outside forces … countries once wallowing in economic stagnation … et cetera.

The United States growth differential narrowed.

We all know what happened – we witnessed an overflow in the US current account deficit. Look no further, right now, to see that a major shift to this dollar-credit dynamic is shifting again. In the first quarter, the US deficit on goods shrunk by more than $53 billion. That’s good enough to be the largest quarterly reduction in the deficit on goods as far back as records show.

Source: Northern Trust Economic Research

It seems tough to argue the validity of this point, one that takes some pressure off of the dollar bear story. But it’s easy to turn attention elsewhere.

Inflation expectations seem the biggest hindrance to a major dollar recovery. And right now it absolutely is ‘expectations’ because no signs of actual, significant price increases exist. The worry stems from the Federal Reserve’s money pumping plus the federal deficit insofar as it could potentially instigate more Fed money pumping.

We understand the markets are forward looking, and we understand how inflation impacts currency expectations. But is the current mindset too forward-looking? Are we expecting recovery too soon? And are we then expecting the Federal Reserve to fail at tightening up the reins … too soon?

Underestimation leading to overestimation is what we’re currently witnessing.

So with no one set to annex the dollar’s place as fiat king (except of course all those who think talking about dollar collapse will get them somewhere), we see little immediate reason why the relative position of the US dollar versus its counterparts should not improve.

Regards,

John Ross Crooks, III
Black Swan Capital LLC
www.blackswantrading.com

Currency Currents - June 17, 2009

Key News
• Sweden is ready to “deal with” a Latvian economic deterioration Sweden’s banks are the Baltics’ biggest and Fitch Ratings estimates they face loan losses from the region that may cost Sweden 5 percent of gross domestic product to absorb. (Bloomberg)
• UK unemployment hit a 12-year high of 2.26 million during the three months to April but new figures revealed today that the pace of decline had eased. (TimesOnline)

Key Reports Due (WSJ):
7:00 a.m. June 1 Mortgage Refinance Applications: Previous: -11.8%.
8:30 a.m. May Consumer Price Index: Expected: 0.3%. Previous: 0%.
8:30 p.m. May Consumer Price Index, ex-food energy: Expected: +0.1%. Previous: +0.3%.
8:30 a.m. 1Q Current Account: Expected: -$85.0B. Previous: -$132.8B.
4:30 p.m. U.S. Energy Dept Oil Inventories

Quotable

“The great likelihood is that the world economy will need aggressive monetary and fiscal policies far longer than many believe. That is going to be make policymakers – and investors – nervous.”

“Two opposing dangers arise. One is that the stimulus is withdrawn too soon, as happened in the 1930s and in Japan in the late 1990s. There will then be a relapse into recession, because the private sector is still unable, or unwilling, to spend. The other danger is that stimulus is withdrawn too late. That would lead to a loss of confidence in monetary stability worsened by concerns over the sustainability of public debt, particularly in the US, the provider of the world’s key currency. At the limit, soaring dollar prices of commodities and rising long-term interest rates on government bonds might put the US – and world economies – into a malign stagflation. Contrary to some alarmists, I see no signs of such a panic today. But it might happen.”

“Last year the world economy tipped over into a slump. The policy response has been massive. But those sure we are at the beginning of a robust private sector-led recovery are almost certainly deluded. The race to full recovery is likely to be long, hard and uncertain.”

Martin Wolf, from the FT today

FX Trading – Humpty ComDols Sat on a Wall …
If you get a chance, we think Martin Wolfe’s piece in the FT today is worth the read, as it compares where we are in this global recession relative to where we were this time during the great depression. I like the part above we used in Quotable:

“The policy response has been massive. But those sure we are at the beginning of a robust private sector-led recovery are almost certainly deluded.”

Delusion has always been part of the market process. It always will be. And it’s why trying to find the perfect trading algorithm is a long journey with no destination in site.

Delusions are created by feedback loops of false rationales. False rationales flourish like green shoots, popping up everywhere thanks to our belief that data being streamed at us from every imaginable angle throughout the day actually makes us more knowledgeable. And of course this belief we are more knowledgeable adds to our hubris, and our hubris breeds false rationales. Price validates said rationale.

Put another way, by Charles Mackay, a man who wrote a book about delusion, Extraordinary Popular Delusions and the Madness of Crowds,

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one”

The question going forward: Is the idea BRICs (Brazil, Russia, India, and China), which are primarily export-driven economies, can generate enough demand to carry the globe out of the morass a popular delusion validated by price action alone?

Looking at the price action in comodols (that’s elevated forex trader lingo that means commodity dollars; you know you’re in the club when you can use words like that) and oil of late kind of suggests to us that just maybe some of the herd is starting “recover their senses slowly.”

And, drum roll please…………………………….for the biggie….

To suggest oil goes from $30 to $72.50 in four months sounds delusional; but I guess no more delusional than oil going to $147 a barrel losing all ties to a reality bite that says ultimately supply and demand drive oil in the end. A lesson seemingly lost already.

So, we watch oil again to find out if it and its currency brethren are about to tumble off the BRIC wall.

Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com

Currency Currents - June 16, 2009

Key News
• German Investor Confidence Jumps to Three-Year High on Signs Slump Easing (Bloomberg)
• BRIC Nations May Buy Each Other’s Bonds to Reduce Reliance on U.S. Dollar (Bloomberg)
• German industry groups say finance tight for firms (Forbes)

Key Reports Due (WSJ):
7:45 a.m. ICSC Chain Store Sales Index For June 13: Previous: +0.2%.
8:30 a.m. May Housing Starts: Expected: +4.8%. Previous: -12.8%.
8:55 a.m. Redbook Retail Sales Index For June 13: Previous: -4.3%.
8:30 a.m. May Producer Price Index: Expected: +0.6%. Previous: +0.3%.
8:30 a.m. May Producer Price Index, ex-food & energy: Expected: +0.1%. Previous: +0.1%.
9:15 a.m. May Industrial Production: Expected: -1.1%. Previous: -0.5%.
9:15 a.m. May Capacity Utilization: Expected: 68.3%. Previous: 69.1%.
4:30 p.m. June 1 API Oil Industry Report
5:00 p.m. ABC/Wash Post Consumer Conf For June 13: Previous: -47.

Quotable

“You must often make erasures if you mean to write what is worthy of being read a second time; and don’t labor for the admiration of the crowd, but be content with a few choice readers.”

Horace

FX Trading – The Only Explanation is Cockeyed Perception

If I happened to know the German national anthem I’d likely break out in song right now before I finished typing up this piece. Oh, by the way, did you hear that German investor confidence blew past expectations in a sign that the recession is coming to a close?

Yeah, I’m serious.

And I bet you can imagine what that announcement did for the currencies. Zoom-zoom goes the euro, bye-bye goes the dollar, amounting to a swift kick in the face for those trying to buy the buck on the tail end of yesterday’s dollar rally.

A friend once offered some wise advice: you are what you are perceived to be. I understood but did not care for her advice at the time … as her perceptions didn’t jive with my perceptions.

To that, I guess there might be another disconnect in my perceptions … this time I’m not jiving with the market’s perceptions (at least in the very short-term, I hope!)

More than likely you know how I perceive the current state of the economy and financial system here in the US, over in Europe and elsewhere — I write about it all the time. Now let’s get back to Germany …

Investors jumped all over the ZEW investor confidence number released earlier today in Germany. Why? Well because the reading jumped from 31.1 to 44.8. And in case you don’t have this data series committed to memory, that’s the highest that confidence among analysts and investors has been since May of 2006. Whoa!

So if you’re scratching your head as those surveyed folks look ahead six months and see green pastures full of shoots, I’m right there with you scratching away. I guess we’ve got to start hoping for the best at some point; by now you know the hope and change mantra.

But in case you’re not scratching your head, I’ve got something that ought to make it itch.

As we elaborated on in the Currency Strategist yesterday, the prospects for recovery are MIA for major German companies. The DIHK survey of 20,000+ German companies revealed real cause for concern, depending on how you look at it I guess.

Here’s what we said about it:

A DIHK survey of German industry sure doesn’t jive with expectations of an improving state of affairs. If you thought credit markets had improved enough to support a growth recovery, think again.

A third of the biggest German companies surveyed said they expected credit conditions to become even tighter. The takeaway from the survey results is that credit conditions are the toughest they’ve been since the onset of this financial crisis. Financing and new orders are on the skids because companies can’t get their hands on borrowed funds; this falls in line with last week’s report that European industrial production slumped by another 22 percent in April, year-over-year.

Again, maybe my perceptions are skewed – Bloomberg highlighted an improved outlook on German exports (rising from -35 to -34). Yes, that’s what they perceived.

As I wrap up this morning, the dollar remains under pressure. The euro trudges higher; same thing for the pound; the Aussie is well bid on the back of a relatively bullish release of RBA minutes; and the Japanese yen gained some serious ground overnight.

Yesterday was a huge down day for US stocks. I perceive today’s early action in S&P futures to be working off some of yesterday’s declines. And I perceive today’s move against the buck to be corrective.

But hey, maybe I’m the one that’s looking at this all cockeyed. The markets are what they are perceived to be … until they prove your perceptions all wrong!

Have a good day.

Regards,

John Ross Crooks, III
Black Swan Capital
www.blackswantrading.com

Next Page »