Wednesday December 28, 2005 - 13:28:48 GMT
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Black Swan Capital - www.blackswantrading.com
“All successful trading comes down to three things, knowledge, nerve, and the ability to lose money.”
2/10 inversion is upon us! If history be our guide, it tells us the Fed is almost done.
According to a report by Maria Fiorini Ramirez, Inc, “2s/10’s have inverted three times since the mid-80’s…In each of these cases, the first session in which 2s/10s inverted came one-four months before the final tightening move.”
March ’06 eurodollar futures say about 4.75% i.e. one more 25 basis point hikes from the Fed.
ED H6 Daily:
The mantra for many regarding the ECB was “one and done.” Now the mantra building regarding the Fed is “one more and done.” But the new Fed mantra comes at a time when the old ECB mantra may have to be altered. The mix of mantras at the moment equals declining positive yield differential expectations for the dollar. And that seems to be playing out today in EURUSD.
Some are taking this 2/10 inversion thing a bit beyond just slowdown. “This is a warning signal…that we are on recession watch now,” said Paul Kasriel, chief economist at Northern Trust, as reported in this morning’s Journal. There is little doubt among most observers, home sweet home and the debt burden associated is the trigger for “recession watch.”
Source: Mortgage Bankers Association
And yet, housing stocks are still trading in rarefied air, as you can see in the weekly Philly Housing Stock Index below:
And as we look at the housing stocks and we ponder the slowdown scenario, our attention turns to Mr. Industrial metal—copper. It’s blowing and going. China is the demand leader. But besides real demand, one has to imagine there is much in the way of speculative money in the copper market that might come flowing out on any validation/sign/expectation US consumer demand is waning, or likely to wane. For it is still ultimately US consumer demand that drives much of China’s growth, we think.
Below is the same Philly housing chart, but this time we added copper futures to see how they are tracking together. Bingo! They seem to be on the same trajectory. But copper is beyond rarified; it has lurched well into ozone territory.
But keep the following news tidbit in mind should the copper/housing/consumer demand triad spur an idea of shorting copper, it the idea has already victimized many (we know for sure of at least one):
Dec. 28 (Bloomberg) – “Copper rose to a record in London on speculation that a threatened strike at Codelco, the world's biggest producer of the metal, may disrupt supplies at a time when industrial production in nations such as Japan is expanding.
“Workers at state-owned Codelco in Chile will strike today unless the government agrees to discuss their request for more pay, union leader Danilo Jorquera said yesterday. Codelco holds a fifth of the world's copper reserves. Copper stockpiles monitored by exchanges in London, Shanghai and New York are equal to less than four days of global consumption.”
We get a look at US consumer confidence at 10:00 a.m. today. It might be a good test for the 2/10 inversion and other ideas that come to mind.
Black Swan Capital
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