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Tuesday October 7, 2008 - 13:55:39 GMT
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Time to look in the other direction—at least for short-term bounce?

Key News
• Australia's central bank cut its benchmark interest rate by one percentage point. (Bloomberg)

US Economic Events (WSJ):
7:45a.m. ICSC Chain Store Sales Index For Oct 4: Previous: -0.2%.
8:55a.m. Redbook Retail Sales Index For Oct 4: Previous: -1.3%.
2:15p.m. Sep 16 FOMC Minutes
3:00p.m. Aug Consumer Credit: Expected: +$6B. Previous: +$4.6B.
5:00p.m. ABC/Wash Post Consumer Conf For Oct 4: Previous: -41.

“Why are markets turbulent?  I am a scientist, not a philosopher; so I can only hazard some suggestions.  One possible source is the world outside markets—what economist call exogenous effects.  After I had, in the early 1960s, focused on scaling and long-term dependence, key traits of turbulence, I soon found innumerable other examples in many natural phenomena; these phenomena, in turn, may impress a corresponding pattern on prices.  For instance, I have found characteristic scaling patterns, from many small items to a few large ones, in the area and reserves of oil fields.  The valuation of certain gold, uranium, and diamond mines in South Africa scales.  Storms and earthquakes scale.

“You can imagine a chain reaction.  Weather affects harvests, and harvests affect prices.  The distribution of natural resources around the globe—oil, gold, and other minerals—affects supply, hence affects prices.  The same goes for business: The size of the firms in an industry, from mighty Microsoft to a legion of little software houses, also follows a scaling pattern.  So, industry concentration affects profit, hence affects stock prices.  Now, this is unsatisfactory for a rigorous analysis of cause and effect in economics.  But if one must have a ‘story’ to explain data, then this is at least a plausible partial one.  Scaling enters the system from the fundamentals of weather patterns, resource distributions, and industrial organization.  Scaling finishes—and feeds back through the system again—in the market place.

“…Imagine, finally the world economy: a chamber of mirrors.  Each company relays, distorts, and attenuates the economic signals as they flash around the globe.  The signals fade in time.  But it can take months, years, or decades for a signal to become so weak and remote as to be unremarkable.  Such is long-term dependence in an economy: Every event, no matter how remote or long ago, echoes across all other events.”

    Benoit Mandelbrot, The Misbehavior of Markets


FX Trading – Time to look in the other direction—at least for short-term bounce?

We saw a significant degree of real and psychological capitulation yesterday in favor of the dollar.  The driver for the buck continues to be risk (money back to the center to hide, we see it in the bond prices and soaring labor yield), global growth screeching to a halt (we see that in the big cut out of Australia), and emerging markets most everywhere being crushed.

10-yr Treasury Notes Daily

(Chart unavailable in text format.)

Time for a breather here?

(Chart unavailable in text format.)

Aussie: Is it “sell the rumor and buy the news”?  Or is it trying to catch a falling knife?  Maybe not a bad short-term risk/reward bet given the massive hammering of the Aussie yesterday.  Buying power is available, as evidenced by the following stat from the Commitment of Traders report as of 30 Sep 2008 (this is likely magnified now):

Spec Traders:

Short Aussie futures 23,450   72%
Long Aussie futures   9,103    18%

 (Chart unavailable in text format.)

A bounce is worth a bunch of points. But this is a trade you enter at your peril—take a shot with a stop-loss only.  Big down moves usually don’t turn on a dime.  And the fundamentals really haven’t changed.  We think deflation will soon replace inflation as the order of the day.  Deflation isn’t good news for currencies such as the Aussie levered for global growth and inflation.  But I guess that is clear to many already!
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If we had to pick a “looking in the other direction” favorite, I guess it’s the good old Swissie.  With the Eurozone breaking down in a big way, Switzerland, though not setting the world on fire and still smarting from the reality that Swiss bankers don’t seem to be able to control risk any better than anyone else, seems as though it might garner some money flow from the zone and Central Europe. 

Swiss futures Daily: A decent risk/reward setup we think.  We know where to run from the trade…it appears the selling pressure is waning, evidenced by the decline in selling volume in the Swiss futures listed on the CME. Notice the high volume of selling at the previous low, #3, compared to the selling even though that low was pierced.  Maybe this is telling us something.  Key word is “maybe.”  But, we are thinking risk to reward and as stated, we know where we are wrong on the trade and it isn’t far away.

(Chart unavailable in text format.)
Longer term our reasons why the dollar has put in a long-term bottom haven’t changed.  The trend is validating those reasons.  We think the buck is beginning at the early stages of a multi-year bull market rally.  We stay with those reasons and that trend over the intermediate-term until something changes.  But we can’t help pecking when a near-term opportunity in the other direction sets up.

Black Swan Capital


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