Friday September 2, 2005 - 14:15:16 GMT
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Black Swan Capital - www.blackswantrading.com
How cheerfully he seems to grin,
How neatly spread his claws,
And welcomes little fishes in
With gently smiling jaws!
Lewis Carroll, Alice’s Adventure in Wonderland
Did someone really important, other than the market, wake up yesterday and yell: REFLATION TRADE?
A Fed on hurricane hold seems the budding consensus. Fed Funds now only assigning a 55% probability of a hike to 3.75% during the next meeting scheduled for September 20; that’s down from a 100% probability, reports The Wall Street Journal this morning. Based on the price action alone yesterday, we thought the probability of hike went to 0%. Wow! The dollar took an ugly beating. And the gold bugs piled on for good measure.
We of course pronounced the dollar correction finished last week—great timing on our part. Just goes to show that no matter how much you think you know. No matter how much so-called analysis you think you do. And no matter how good you think your story sounds, you never ever know. Mark Douglas’, author of Trading in the Zone, most brilliant summary is ringing in our ears--again: “Every moment in the market is unique.”
Today there is another opportunity for fireworks; it comes in the form of the non-farm payroll report for August. With a million plus (not sure the number) people now out of work in Louisiana, Alabama, and Mississippi does today’s report really matter? (I mean that in the economic forecasting sense; relative to the human toll from this and other disasters across the globe, of the natural and man made variety, none of this stuff “really” matters.)
We received an email yesterday morning, from a friend of who lives in France—we thought in a similar vein, but the market obviously saw (or sees) it differently:
The damage in LA/MS from the hurricane:
(1) will boost GDP growth for 2006 (see ref below...or Google "hurricane Andrew" and "economic effect").
(2) may be short-term inflationary (building materials, energy).
Therefore, the probability of further Fed tightening has increased.
Net: now vs last week......
*there is a higher probability that gdp growth differentials favor USD
*there is a higher probability that real interest rate differentials will favor USD
*there remains the incentive under the American Jobs Creation Act to repatriate corporate profits before the end of the year at a 5.25% rate.
Therefore the euro is, naturally.......going up. (Either it's a great short, or I need to take up gardening.)
For now, given the power of yesterday’s move against the dollar, we would expect to see some follow-through. But, volatile times are upon us. Be careful out there.
Black Swan Capital
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