Saturday, December 6, 2008
Friday, December 5, 2008
Frequently, I will take a lunch break at this hour of the trading day and return again to trade the volatility of the closing hour of trading.
The global asset sell-off is causing grain prices to plummet. Funds are liquidating grain futures and open interest is plunging. Note the intraday corn chart above and the daily chart below. The same speculators that were blamed for driving commodity prices higher six months ago are getting no credit or thanks for selling and driving prices to excessively-low levels now. Where's the justice?
I was so surprised when treasuries temporarily sold off earlier this morning. What a great time to buy more treasury futures at a discount. Now, treasuries have regained their footing and are rising again. The 10-year note shown in this chart has just crossed into positive territory for the day (see yesterday's close as the purple line in the left chart)!
Here is an article with more details.
Thursday, December 4, 2008
Key word: Optimism! The Dow closing hour yesterday:Key word: Pessimism! Buy the rumor (above) and sell the fact (below)?
The Dow closing hour today (see below):
It appears that the financial markets aren't convinced, after seeing the automaker's CEOs testify before Congress today, that this bailout will work. But they are convinced that it will cost the American People a lot of money! Dr. Mark Zandi of Moody's testified that it won't cost just $34 billion; he said it will cost a figure closer to $125 billion. Look out belooooow:
Dupont cutting 2,500 jobs (+ 4,000 contractors)
Credit Suisse cutting 5,300 jobs (mostly in U.S.)
AT&T cutting 12,000 jobs
Nomura cutting 1,000 jobs
Belden to cut 20% of staff
Viacom to cut 7% of staff
Adobe to cut 600 jobs
New unemployment claims fell last week by 21,000. However, the 4-week moving average, which is the number market insiders watch, continues to climb.
Did you see the testimony of Dr. Mark Zandi, chief economist for Moody's economy.com website? He said that it was very likely that the automakers would be coming back to the U.S. government for more money by Q3 2009. He said the total tin cup request by the Big Three could be as high as $125 billion!
Wednesday, December 3, 2008
Volatility is the bread and butter of traders like me. Market movement is very good when it brings large moves in one direction or the other, and whether that movement is up or down doesn't matter. However, on a day like today, when the market is volatile, but in several directions on the same day, it becomes much more difficult to trade, and can often bring sharp losses.
"Harvard officials said they were planning for a decline of 30% in value for the year. Harvard said the school's worst single-year investment loss was 12.2% in 1974, when the endowment stood at less than $1 billion and its funds contributed far less to the school's operations."
Liquidity matters! When I read this article, I realized that Harvard made investments that were profitable, but which couldn't be sold when they started to lose momentum. This is why I try to concentrate my trading on futures instruments that are liquid. If you can't get rid of it, you can't turn paper profits into real ones! "Honey, Junior's tuition is going to go up!"
Buying treasury futures over the past few weeks has been one of the most reliable sources of profits. Now, with stocks finally sinking today, traders are buying still more treasuries, escalating prices to new record highs again today.
The ADP jobs report, a private report issued monthly two days before the BLS report issued by the U.S. government's NFP report, shows that employment declined in the United States by 250,000 during November. Unlike the U.S. government figure, the ADP only includes private sector jobs. It suggests that perhaps Friday's NFP figure may also disappoint to the downside. The figure was a larger drop than expected, and stock index futures are moving somewhat lower as a result. However, despite the lower open, the futures don't appear to me to be powerfully down.
The three American automakers presented a plan to Congress yesterday for a bailout request of $34 billion. GM and Chrysler have indicated that without the bailout, they will be forced into bankruptcy before the end of this month. Tomorrow, the companies' CEO will testify once again before Congress.
Chrysler is a private company. The company was taken private when Cerberus bought Chrysler from Daimler Benz several months ago. Why are the taxpayers being put on the hook to bail out a private equity-owned company?
Isn't this just money down a rat hole? If the automakers want a bridge loan, then where is the bridge to? And since the government doesn't have the money to fund the bailout, the only way they can do it is to borrow even more money. Doesn't the government need a plan to avoid bankruptcy even more than the automakers?
Click here for a great Wall Street Journal editorial on why it won't work.
Tuesday, December 2, 2008
That headline is not mine. It is one of the bullet points in the latest assessment of the U.S. economy by David Rosenberg, North American Economist for Merrill Lynch. Here is a small excerpt:
Translation: It's bad, folks! And, if he's right that we will see another 4.5% GDP contraction in the first quarter of 2009, it's going to get a whole lot worse!
Expect the worst recession in the post-WWII era
First, this is going to be the worst recession in the post-World War II era, in our view. The ECRI leading indicator hit a record low for the fifth week in a row – down to - 29.2 as of the November 21st week versus -28.2 the week before. This index, which leads real GDP by two quarters with a 70% historical correlation, is getting further and further away from the prior all-time low of -19.8 that defined the worst recession of the post-WWII era and saw a six-quarter consumer recession coincide with a 45% peak-to-trough decline in the stock market. Perhaps the fact that this bear market is proving to be even more severe is symptomatic of an economic downturn that will also prove to be deeper and more prolonged. After the flurry of data released just before Thanksgiving, we are now tracking close to a 4.5% QoQ annualized fall in real GDP in 4Q. This would be the largest pullback since the 1982 recession, and we see a similar contraction in the first quarter of 2009.
"Open in interest in the corn market dropped by a staggering 350,000 contracts after expiration of December options, according to the latest CFTC commitments report, delayed due to the Thanksgiving holiday. Funds were net buyers on the week, however, though speculative hedge funds remain net short overall. Open interest dropped another 10,000 contracts yesterday on December deliveries, with 1,850 contracts put out. Stoppers are starting to emerge, as holding corn provides a better return that investing in Treasuries."
Monday, December 1, 2008
The National Bureau of Economic Research, the non-partisan group of economists that determines economic cycles, today officially announced that the United States began a recession in December 2007. The official announcement always arrives in a belated manner because the nature of the data only permits economists to analyze and recognize a recession after it has begun. This may seem like just a semantic technicality, since most people already acknowledge that the United States is in a recessionary period. However, the NBER is the group that makes the designation official. Therefore, there can no longer be any debate about whether it is a fact. It is a fact!
Here is a story on Forbes about the announcement.
At the precise moment that Fed Chairman Ben Bernanke's speech was released today, treasuries, which had already risen dramatically today, rocketed still higher and at an accelerated pace. The green arrow on this chart represents the moment that Mr. Bernanke began his speech. This reaction was almost certainly due to Mr. Bernanke's comment that the Fed may lower interest rates even more at the next FOMC meeting mid-December, and that the Fed will continue to buy treasuries, probably at an accelerated pace. The Fed funds rate is at only 1% now, so the Fed can't lower rates too much more. JP Morgan has predicted that the Fed will cut rates to 0% in January '09. Fed Fund futures traders seem to agree.
I love to trade Eurodollar (this is the interest rate instrument, not the Forex-related one) futures because they are very liquid (OI > 1,000,000 contracts) and provide one of the most reliable signals in futures. However, I must admit that I haven't the slightest idea what moves this futures instrument. It does not correlate at all with treasuries. The CME's website says that the Eurodollar represents US Dollars on deposit in banks outside the United States and that the contract is settled upon delivery at the LIBOR rate. However, it seems to operate with very little correlation to the US Dollar Index, LIBOR (except on the delivery date), or treasury interest rates. It also tends to move much more gradually than most other trading instruments, so I don't have to have a lightening-fast clicking finger to trade it.
With grain prices having been so strongly linked to demand decay and poor economic performance lately, grains continue to show weakness in the price complex. I fully expect to see a stout rally in the grains sometime this winter, but today, prices continue to show weakness. We should keep in mind that Congressional mandates for the 2009 season require that nearly 50% of all domestic corn production be used for ethanol, an amount significantly higher than it was for 2008.
China's government data released last night indicated that the manufacturing sector there is contracting rapidly. This caused all sorts of assets, including all physical commodities and equities, to sell off heavily today. China has continued to report high GDP growth, and this report suggests that there is a likelihood of a hard landing in China, and that will in turn crush demand for many commodities.
I had read over the weekend news reports that in China, manufacturing company CEOs are disappearing without a trace. In China, bad performance may not only result in poor bonuses. Because of the legal loopholes and often onerous government oversight, poor performance may result in being imprisoned or even worse. Thus, some manufacturing executives, rather than run the risk of terrible consequences, are choosing to run or hide instead.
Black Friday's retail sales numbers looked good, so why are stocks slumping today? The headline figure, showing a healthy increase over last year's numbers, looked great. However, the devil is in the details, and they show some rather dour internals. It isn't my purpose to review them here (too busy trading), but many shoppers indicated in surveys that they have alread completed all their holiday shopping. (I am one of those. I finished shopping more than a week ago. However, I've always tried to complete my Christmas shopping list before Thanksgiving.) Furthermore, retailers have slashed their prices so far already that margins are terrible.
Crude oil has plunged today also, given that OPEC was unable to reach agreement over the weekend on a production cut. The price of crude oil has fallen far enough today that the line showing last Friday's settlement price no longer even appears on the screen shot. It is down about $4.50 so far today. Take that, Hugo Chavez!
Treasuries continue to be bought heavily, both by fearful investors and the U.S. government itself to fund its on-going rescue operations. I believe this is the biggest bubble in history, as yields continue to plunge, in some cases even going negative, as fear drives strategies around the world. I have been buying treasury futures also, but I don't buy them for the yields. I will hold them only as long as they continue to rise. Once a reversal or consolidation occurs, I'll exit. I watch my Exponential Moving Average meticulously, and I watch the Klinger Volume indicator for early signs that momentum is shifting to the sell side. So far, so good!
Moody's economist.com chief economist Dr. Mark Zandi is now saying that if the United States sees GDP at 0% growth for 2009, we'll be lucky! He says that 0% GDP for 2009 is optimistic rather than realistic!