Month: April 2011

By Justice Litle, Editorial Director, Taipan Publishing Group, taipanpublishinggroup.com

A Note from Editor Sara Nunnally: Today, I’m traveling back to Baltimore for an editorial meeting with the Taipan Publishing Group. While I’m traveling, I’d like to share with you an inside look at Justice Litle’s service, Macro Trader.

Justice is our editorial director, and his big-picture thinking follows major global trends. As our economy becomes more and more obviously enmeshed with the rest of the world, this service can really guide investors through the intricacies of macro trends.

Here’s a recent article (March 16) to show you what I mean…

Crash Warning — Three Storm Fronts Converge

Justice Litle’s Quote of the Week

The past six weeks have brought enough market-moving news to fill a reasonably exciting year, or, for that matter, a dull decade… as we go to press, after a catastrophic earthquake and tsunami, Japan is now faced with a meltdown — not in the figurative, but in a very literal sense; the Middle East is once again proving flammable in the extreme, as the decades of neglect of festering political sores play out in the only way they could have… Europe is back in crisis mode (the only mode in which the European Union actually gets anything done)…

— Hedge fund manager Eric Kraus, “Trading Strategies for the Apocalypse”

Stock Market Commentary

The phrase “perfect storm” is much overused in the financial press, and should be restricted to the most severe of circumstances if not retired outright.

But if ever there were a time to highlight “perfect storm” conditions, this would be it…

Right now we have three fronts converging on the equity markets, coupled with a fourth “portfolio contagion” factor that threatens to act like kerosene on a fire. Those three converging fronts come from Japan, Europe and the Middle East.

Front One: Japan “Effectively Out of Control”

The phrase “effectively out of control” is not what you want to hear in respect to nuclear reactors. But those are the words Günther Oettinger, the European Union commissioner for energy, used to describe the situation in Japan.

“In the coming hours there could be further catastrophic events which could pose a threat to the lives of people on the island,” he added.

Japan has asked the U.S. military for help in containing the nuclear reactor situation. Various rescue missions and helicopter operations have had to be called off because of potential radiation threats to rescue personnel. The situation is fluid and may have changed substantially even by the time you read this.

It is sadly ironic that Japan would suffer a nuclear crisis, because the Japanese financial situation has long been described in “nuclear” or “time bomb” terms. Noted hedge fund manager Hugh Hendry is on record as calling Japan “a nuclear bomb strapped to the chest of the world economy.” It should be noted he made that metaphor a long time before the present turn of events.

Japan’s fiscal situation is deadly serious because the country is sitting on a huge and unsustainable debt load in the form of Japanese government bonds, or JGBs. The Japanese government is leveraged to the hilt after 20 years of failed stimulus policies and zero or near zero interest rates. Japan watchers have long predicted that, at some point, the JGB “time bomb” would go off — probably when Japanese retirees stopped putting their savings into bonds — and a major currency meltdown would follow.

The irony of the situation is that Japan’s currency has risen sharply in response to the crisis. The expectation is that large capital flows of yen will return home, pushing up the value of the currency. Meanwhile the BOJ (Bank of Japan) is scared to intervene in a large way because they fear accidentally setting off the JGB “time bomb.”

But when that debt time bomb does go off, as eventually it must, we could see the Japanese yen transform from one of the strongest currencies in the world to a new version of the Thai baht or the Chilean peso.

Right now the unknowns of Japan center around human catastrophe and global supply chains. Japan is a major hub for many important electronics and high-end manufacturing parts, and so the nuclear power plant catastrophe threatens disruption and shutdown to significant portions of global trade. But the bigger unknown is how the JGB question and the inherent leverage in Japan’s economy plays out…

Front Two: The Middle East, Bahrain Burning, Rebels on the Brink

Meanwhile, even as the world fixates on Japan, the situation in the Middle East is going from bad to worse. Libya’s rebels are begging the West to flat-out assassinate Gadhafi, or otherwise establish no-fly zones, as Gadhafi pounds them with money and military firepower.

As the WSJ reports,

Col. Moammar Gadhafi’s forces seized the last town standing between them and the rebel capital, raising the specter that, even if the U.S. and Europe decide to intervene on the rebels’ behalf, their help may come too late.

In a devastating development for the rebel cause, Col. Gadhafi’s fighter jets bombed the center of the town of Ajdabiya, and his troops outmaneuvered rebel forces there, clearing a path to the rebel capital of Benghazi, in eastern Libya.

“The city is in ruins,” said Ali Faraj Hammada, leader of Ajdabiya’s revolutionary committee, as he fled toward Benghazi in a blood-soaked car…

Meanwhile the situation is going from bad to worse in Bahrain, where Saudi troops have intervened aggressively and even opened fire on protesters. As the Financial Times reports,

The crisis escalated this week after protesters over-ran the police on Sunday and took effective control of large swaths of the capital, spurring the arrival of more than 1,000 Saudi Arabian troops and light armour on Monday.

The arrival of Saudi soldiers and some police from the United Arab Emirates has escalated tensions in the already volatile Middle East region.

While the opposition denies there are any ties between Iran and the protesters, Saudi Arabia’s military intervention has sparked concerns that Tehran could try to take advantage of the unrest in Bahrain.

As we have written of previously, Saudi Arabia is “Sunni” Muslim… Iran is “Shia” Muslim… and there is no love lost between the two. At the same time, Saudi Arabia has a disgruntled Shia minority situated in very oil-sensitive areas of the country. And so Iran has not been able to miss this golden opportunity to stir up trouble…

The net result is that the little country of Bahrain may wind up becoming a proxy battleground for a massive Sunni/Shia fight between Saudi Arabia and Iran.

(I may be a guest editor for Smart Investing Daily, but editors Sara Nunnally and Jared Levy simplify the stock market everyday with their easy-to-understand investment articles.)

Front Three: Europe Still in Crisis

And last but not least we have Portugal contributing to the mix again today… as long-time Macro Trader readers know, we consider the fiscal situation in Europe to fall somewhere between a disaster and a farce, with the high likelihood of ending in tears.

It simply does not make sense for the powerhouse export machine that is Germany to be linked together with the much more fragile and debt-laden periphery countries (Portugal, Spain, Italy, etc.). This linkage is political in nature, an “experiment” that never gave true weight to crisis considerations.

And so now we are seeing monetary union with a lack of true cultural or political union cause Europe to lurch from crisis to crisis, with the endgame (in our opinion) being a massive devaluation of the euro as the European Central Bank (ECB) is forced to run the printing presses full tilt. As Reuters reports,

Portugal‘s government blamed higher rates paid at a debt auction on Wednesday on the opposition’s refusal to back its latest austerity plans, warning a political standoff could force it to seek a bailout.

Pressure on Lisbon mounted after Moody’s rating agency downgraded Portugal by two notches late on Tuesday, highlighting the challenges it faces in riding out its debt crisis.

The worsening financing situation for Portugal — which many economists say is the next likely eurozone country to need a bailout after Greece and Ireland — suggests the deal to boost the eurozone rescue fund may have come too late for it…

The Fourth Vector: Portfolio Contagion

Another major issue the markets face is that of “portfolio contagion” — the risk that overleveraged long investors, hedge funds, mutual funds and the like, are forced to sell positions in healthy parts of their portfolios simply to “stop the bleeding.”

The portfolio contagion issue is intensified by the fact that hedge funds became more leveraged in January (according to Bloomberg) than at any point since 2007 in their willingness to make leveraged long equity bets. This “leveraging up” was a function of the “can’t lose” mentality associated with the Bid ‘Em Up Bernanke stock market.

But now all that leverage threatens to have a powerful reverse effect in the form of contagion. The more exposure that leveraged long investors have to sharp declines, the more aggressively they will have to cut losses and get out.

And when too many of them attempt to do this all at once, the result is a cascading avalanche of selling that feeds on itself… i.e. a full-blown stock market crash.

Editor’s Note: You’ll be hearing from Justice later this week, so keep your eyes peeled for his letter. If you want to learn more about Justice’s Macro Trader, you can visit the website here.

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About the Author

Justice Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader and Managing Editor of the free financial market news e-letter Taipan Daily. Justice began his career by pursuing a Ph.D. in literature and philosophy at Oxford University in England, and continued his education at Pulacki University in Olomouc, Czech Republic, and Macquarie University in Sydney, Australia.

Aside from his career in the financial industry, Justice enjoys playing chess and poker; he enjoys scuba diving, snowboarding, hiking and traveling. The Cliffs of Moher in Ireland and Fox Glacier in New Zealand are two of his favorite places in the world, especially for hiking. What he loves most about traveling is the scenery and the friendly locals.

April 7 (Bloomberg) — David Blanchflower, professor of economics at Dartmouth College and a former policy maker at the Bank of England, talks about the European Central Bank’s decision to raise its benchmark interest ratea quarter percentage point to 1.25 percent and the impact on euro-zone economies and the region’s sovereign-debt crisis. Blanchflower speaks with Margaret Brennan on Bloomberg Television’s “InBusiness.” (Source: Bloomberg)

Adam Hewison’s 1pm Afternoon Update on the Forex, Stocks, Commodities, ETF Markets

See the video archive on our blog or leave a comment

Warren Buffett – The Difference Between Gold and Silver?

By Adrian Ash on 6 April 2011

The bluntest difference between gold and silver? Warren Buffett…

WE’VE BEEN inundated here at BullionVault with comments and queries in response to Gold Value $3844, Paul Tustain’s new video presentation.

Apologies if we’ve not got round to answering your email yet. Chief amongst the queries? “What’s your view of silver?” Which on a risk-adjusted, ‘fair value’ basis, is tougher still to answer.

Just as you can with gold, you could plug your own forecast for changes to the silver price – under different levels of consumer-price inflation – into Paul’s gold value calculator (see column E. You’d also need to reset the “Current price” to $40 of course in cell E3). Simply running this exercise for silver but using Paul’s view of the various gold price outcomes, the current “fair value” would come out nearer $109 per ounce – again, like gold, significantly higher than today’s market price.

But silver is a very different market to gold. Most crucially, there’s no commonly accepted benchmark value – such as a suit of men’s clothes for an ounce of gold – against which to measure silver across time.

See Forbes magazine, for instance, on long-term valuations. All gold, no silver. Looking back 2,500 years, Stephen Harmston – writing for the World Gold Council in 1998 – found the same long-term value reversion in gold prices vs. the cost of bread. Again, no silver. Not having a base value for silver doesn’t interfere with Paul Tustain’s mathematics on his calculator. But it does mess with the methodology, denying the vital importance – in the absence of cashflow – of “over-” or “under-valuation”.

Sure, you could plug in a base value for silver, figured off that suit of men’s clothes, using the gold/silver ratio. But that would:

a) rely on agreeing a long-term ratio (open to fierce debate);
b) ignore silver’s changing industrial use (and thus its changing economic value);
c) relegate silver’s value to merely a function of gold.

Another route might be to track mining-output costs per ounce. Because, other things being equal, the price of a commodity should – in a free market — revert long-term towards its cost of production. Interestingly, the GFMS consultancy now puts total costs per ounce of gold, including infrastructure spend, above $800 per ounce…not too far from Paul’s current “suit of men’s clothes”. (Using Google to average the top 20 prices for a good men’s suit in the US, Tom Anderson at PassantGardant finds a base value of gold at $800-$850 per ounce today.) But silver is typically a by-product of other mineral extraction, rather than the primary target. So it’s impossible to judge today’s global “average”, let alone calculate historical mining costs for the kind of back-check which Paul runs for 1980 gold.

Yes, both gold and silver have been used as money throughout history. But while gold has tended to adopt the “store of value” function of money, silver has been used more as a “means of exchange”. India continued to mint silver rupees until 1947, for example, long after the Great Britain quit the gold standard. US silver certificates could be redeemed for Silver Dollar coins until 1968, almost 35 years after private gold-ownership had been banned.

Longer-lived than gold money, the purchasing power of silver coins was much more variable over time, thanks to regular debasement by greedy governments. The English Pound, for instance, contained barely one-third as much silver in 1600 as it did 300 years earlier, while the Genoese Lira in Italy shrank by nearer 90%. Gold coins was remarkably stable in comparison.

Silver’s other big difference from gold has been its changing industrial use. Some 60% of annual demand now comes from industry, rather than those store-of-wealth uses (coin, bar, jewellery and ornament) accounting for more than 89% of gold demand. The composition of silver’s industrial demand has also changed dramatically over time. In only the last 10 years, for instance, photographic demand has collapsed, while other existing uses (such as in solar panels) have surged and many new uses have been developed (in hospital linen, deodorants, wood preservatives).

The bluntest difference? Perhaps it’s Warren Buffett. The famous “value investor” has said he doesn’t understand gold, because it has “no utility”. Never mind its 5,000-year history of storing wealth. Anyone watching the gold market from Mars “would be scratching their head” to see it “dug up in Africa” only to be buried again in a vault underground, says Buffett.

Yet his Berkshire Hathaway fund tried to corner the silver market in the late 1990s, selling its massive position in 2006 for a fair profit. So while Buffett doesn’t “get” gold, his Graham-and-Dodd value investing made silver a valid play. Because he thought it was undervalued against the outlook for industrial demand.

Gold analysts are spared having to guess how technology might affect prices. Whereas the bigger prize – for you, Warren Buffett and for the Hunt brothers, who famously attempted a silver corner in the late 1970s – may look to be in judging silver’s future mix of monetary, investment and industrial use.

Adrian Ash
for Money Morning Australia

Adrian Ash is head of research at www.BullionVault.com

By CountingPips.com

The European common currency has been on the defensive in forex trading this morning following the widely expected interest rate hike by the European Central Bank. The ECB increased the interest rate by 25 basis points to the 1.25 percent level. This marked the first interest rate increase for the ECB since July 2008 which occurred just a few months before the global financial crisis.

The rate hike is an attempt to combat rising price inflation as the latest inflation data out of the EU showed that prices rose by 2.6 percent on an annual basis in March. February’s annual inflation rate had registered an increase of 2.2 percent.

The ECB annual inflation target is 2.0 percent.

The Bank of England was also out with its interest rate decision today and held its interest rate at the 0.50 percent level as widely expected. The bank maintained its bond buying program at the 200B GBP level.

Euro falls in Forex

The euro has been lower in forex trading against the major currencies so far today. The euro has fallen against the US dollar, Swiss franc, British pound sterling, Japanese yen, New Zealand dollar, Australian dollar and the Canadian dollar, according to currency data by Oanda.

David Song, currency analyst at DailyFX, commented on the euro dollar exchange rate saying, “As the EUR/USD maintains the upward trend from earlier this year, the exchange rate should work its way towards the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4440-50, but fears surrounding the euro-area may continue to drag on the single-currency as the EU maintains a relaxed approach in addressing the sovereign debt crisis.”

EUR/USD Chart – The euro coming down off of yesterday’s high at the 1.4350 level to today trading below 1.4300 near 1.4280. Likely support will come in around the 1.4265 level.

The European Central Bank hiked its key lending rate to 1.25% from 1% in a widely-anticipated move in order to prevent rising inflation pressures. President Jean Claude Trichet’s conference is scheduled to start at 8:30 AM ET. The move comes as European officials struggle with an ongoing debt crisis.

The Bank of England kept its benchmark interest rate at a record low as policy makers focus on the need to aid recovery, according to a Bloomberg report. The Monetary Policy Committee set the key rate at 0.5% for the 26th month and left its bond-purchase program at 200 billion pounds. Policy makers are under pressure to curb inflation that has soared to more than twice the central bank’s 2% target. Economists expect the ECB will announce its first rate increase since July 2008 later today.

By Russell Glaser

To continue with a previous analysis of the EUR/JPY, the pair continues to move higher prior to the release of the ECB interest rate announcement. Due to the sharp appreciation the pair, technicals show the pair may be overbought and faces a risk of a pull back on a buy the rumor, sell the fact.

Expectations for rising interest rates in the EU continue to support bids for the euro. Should ECB president Jean-Claude Trichet announce today the ECB’s intention to continue the tightening of EU monetary policy the euro will garner further support. However, the ECB says it never pre-commits to interest rate increases. Therefore, there is a risk of a buy the rumor of the interest rate hike and a sell the fact at the release which could hurt the euro in the short term and trigger profit taking on long EUR/JPY trades.

A resumption of the carry trade has the yen on its back foot both against not only the euro but also versus the pound, greenback, and Aussie dollar. The coordinated intervention by the G7 nations is not the only factor for the decline of the yen but it certainly was a trigger for the current deprecation of the yen versus the majors.

Looking at the technicals, the weekly chart shows the pair paused on Friday at the 119.60 resistance level only to charge higher this week to a high of 122.60. Stochastics on both the daily and the weekly show the pair is overbought but rising momentum hints at future gains in the pair.

As such, traders may want to raise their stop below last week’s high at 119.60 or take profit on profitable trades. For future trades, traders should be targeting a range between 127 and 128 which falls between the 2009 summer lows and the April 2010 high. Mid-term targets are 134.30 and 138.50. A breach of this level would target at the 2007 low/pre financial crisis near 150.00.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

Source: ForexYard

The euro took some mild losses against the yen and US dollar during the Asian session ahead of today’s euro-zone Minimum Bid Rate, scheduled to be announced at 11:45 GMT. The European Central Bank is widely expected to raise interest rates, a move which will likely help the EUR turn bullish once again to close out the week.

Economic News

USD – Dollar Remains Bearish Against European Currencies

While the US dollar was able to eke out small gains against most of its main currency rivals in overnight trading, the currency remained bearish overall ahead of a key decision from the European Central Bank later this morning. It is widely assumed that the ECB will hike euro-zone interest rates up to 1.25%, a move which is likely to send the EUR/USD pair soaring. In addition, the dollar has recently taken losses against the UK pound, as positive US data has sent investors toward riskier assets.

Currently the EUR/USD is trading at1.4300, down about 50 pips from yesterday’s high but still very much bullish overall. Similarly the GBP/USD, currently trading close to 1.6300, dropped slightly during the overnight session, but is still well above levels seen at the beginning of the week. The yen appears to be the only currency the dollar has been able to consistently make gains on. The USD/JPY pair went up close to 60 pips yesterday before staging a mild correction, and is currently trading at 85.15.

Turning to today, in addition to the ECB rate decision, traders will also want to pay attention to the US Unemployment Claims figure, set to be released at 12:30 GMT. Following last week’s surprisingly positive Non-Farm Payrolls report, a low unemployment number today may help the dollar recoup some of its recent losses as we near the end of the week.

EUR – EUR Shrugs off Portugal Debt Worries Ahead of Rate Decision

Despite the news that Portugal would need further EU assistance to overcome its sovereign debt troubles, the euro remained bullish overall ahead of a key rate decision by the ECB. An expected hike in euro-zone interest rates has helped investors maintain their confidence in the euro. While the EUR/JPY dropped close to 70 pips during Asian trading, the pair remains close to its recent 11-month high. In addition, the EUR/USD appears to be trading steady around the 1.4300 level after dropping around 35 pips last night.

After the ECB decision is announced, it is widely expected that these pairs will turn bullish once again, providing traders with an excellent opportunity to make some short term profits. That being said, today’s US Unemployment Claims figure could still play a role in the markets today. The number of people seeking first time unemployment insurance in the US is expected to drop from last week. If true, the news may help blunt any gains the euro makes in afternoon trading.

JPY – Yen Remains Down As Japan Rebuilds

The Japanese yen remained bearish overall in overnight trading, as the Bank of Japan has signaled that it will keep its monetary policy on hold in light of efforts to rebuild the tsunami ravaged nation. Experts are warning that the full scope of the disaster is not yet known, and that the cost of rebuilding will likely be massive.

The USD/JPY remains close to its recent six month high, and is currently trading right around the 85.15 level. The EUR/JPY came off its recent 11-month high during the overnight session, but remains up overall. The pair is currently trading around the 121.80 level.

Today, the yen is unlikely to see any major gains, as the expected euro-zone interest rate hike is expected to drive investors to riskier currencies. Whether the euro will be able to exceed its recent 11-month high against the Japanese currency is yet to be seen, but analysts are warning that it may happen.

OIL – New Price High Despite Low Volatility

Crude oil prices moved higher yesterday despite low price volatility in the commodity. The price of spot crude oil climbed as high as $109.12 to close at $108.41 from an opening day price of $108.07. Yesterday traders shrugged off higher than expected US inventories as the weekly inventory report showed an increase of US stocks by 2.0M on expectations of 1.3M.

A noticeable decline in volatility has occurred this week as crude oil traders may need a new catalyst to send the commodity higher. The 20-day Average True Range has fallen to $2.10 from a high of $3.50 since the middle of March. Yesterday the commodity moved only $1.21.

Supply fears driven by the geopolitical events in the Middle East and Africa remain in the back of traders’ minds as increasing economic growth is providing a bulk of the support for the crude oil gains. Despite short term indicators showing crude prices are overbought, forecasts remain for rising crude oil prices with a near term target at $121. Support is found at $107 and $102.

Technical News

EUR/USD

The currency pair continues to perform well and yesterday put in a solid close above the 1.4280 resistance level off of the November high. Serious technical damage will be inflicted should the pair close on a weekly basis above this level as it also coincides with a long term trend line off of the July 2008 high. Traders will now target the January 2010 high at 1.4580 with a possible extension to 1.5140. To the downside, support comes in at 1.4280 and the 20-day moving average at 1.4120.

GBP/USD

Sterling remains well bid following a rebound near the 100-day moving average at 1.5950 and should continue to find buyers near this support level. The 50-day moving average at 1.6150 should also prove to be supportive. To the upside, the 1.6400 mark is in play today. Further resistance is found at 1.6460 followed by a target of 1.6880 off of the November 2009 high.

USD/JPY

Yesterday’s price decline of 14 pips, albeit a modest decline was the first price drop in 6 trading sessions and the pair failed to move above the trend line off of the 2007 high. However, momentum remains to the upside and traders should be targeting the mid-September high at 86 followed by 88.

USD/CHF

The franc rose sharply against the dollar yesterday and the USD/CHF traded as low as 0.9130, a level that coincides with the short term trend line from the pair’s all-time low in March. A move below 0.9100 would put the bears back in the driver’s seat and target the all-time low at 0.8904.

The Wild Card

Silver

Spot silver climbed higher yesterday to $39.74 from $39.36. The all-time high for spot silver at $48.70 was made on January 17th, 1980. As it stands now, the commodity looks on its way towards this level and forex traders should be targeting this price. Supports come in at $38.15, followed by $36.50 and $31.60.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

Video courtesy of ForexCT – A leading Australian forex broker, liscensed by the Australian Securities & Investments Commission, offers the MetaTrader4 and PROfit Platform to retail traders. Other services include Segregated Accounts, Trading workshops, Tutorials, and Commodities trading.