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Tuesday July 3, 2007 - 11:44:51 GMT
Black Swan Capital -

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Wrong big time! Price action pointing down...

Key News
• Japanese retail investors play a growing role in the foreign exchange market, with the volume of currency margin trading on the Tokyo Financial Exchange jumping 45 percent in June from May, data showed on Tuesday. (Reuters)
• The yen's real trade-weighted value hit a fresh 22-year low in June. (Reuters)
• On CDO’s from Caroline Baum at Bloomberg:
“Q: Why should you care about complex Wall Street structured-finance products designed to turn a hefty profit without landing the issuer in jail?
“A: Because losses in one area have a way of rippling through to others; because risk is a four-letter word, especially if priced improperly; because uncertainty about the value of illiquid, opaque securities backed by home loans breeds risk aversion on the part of mortgage lender and CDO investor alike; because the lightly regulated derivatives market has become so big and so diffuse that some out-of-nowhere event may bring the domino theory back for a retest; and because each of us, directly or indirectly, owns a small piece of the rock.”
• Key Reports (WSJ):
7:45a.m. ICSC Chain Store Sales. Previous: -0.7%.
8:55a.m. Redbook Retail Sales Index. Previous: -1.0%.
10:00a.m. May Factory Orders. Expected: -1.2%. Previous: +0.3%.
10:00a.m. May Pending Home Sales. Previous: -3.2%.
5:00p.m. ABC/Wash Post Consumer Confidence. Previous: -12.


It is our true policy to steer clear of permanent alliances with any portion of the foreign world, so far, I mean, as we are now at liberty to do it; for let me not be understood as capable of patronizing infidelity to existing engagements. I hold the maxim no less applicable to public than to private affairs that honesty is always the best policy. I repeat, therefore, let those engagements be observed in their genuine sense, but in my opinion it is unnecessary and would be unwise to extend them.

Taking care always to keep ourselves by suitable establishments on a respectable defensive posture, we may safely trust to temporary alliances for extraordinary emergencies.

Harmony, liberal intercourse with all nations are recommended by policy, humanity, and interest, but even our commercial policy should hold an equal and impartial hand, neither seeking nor granting exclusive favors or preferences; consulting the natural course of things; diffusing and diversifying by gentle means the streams of commerce, but forcing nothing; establishing with powers so disposed, in order to give trade a stable course, to define the rights of our merchants, and to enable the government to support them, conventional rules of intercourse, the best that present circumstances and mutual opinion will permit, but temporary and liable to be from time to time abandoned or varied as experience and circumstances shall dictate; constantly keeping in view that it is folly in one nation to look for disinterested favors from another; that it must pay with a portion of its independence for whatever it may accept under that character; that by such acceptance it may place itself in the condition of having given equivalents for nominal favors, and yet of being reproached with ingratitude for not giving more. There can be no greater error than to expect or calculate upon real favors from nation to nation. It is an illusion which experience must cure, which a just pride ought to discard.

George Washington, Farwell Address 1796

FX Trading - Wrong, big time! Price action pointing down…

We have been thinking for some time “dollar rally.” Our view was predicated on two key themes:

1) Stronger than expected US growth leading to an shift in interest rate expectations from the Fed and a flow of dollar buying from some longer term players
2) Risk of some kind seeping back into the global economy forcing some US-based fund managers to dash back to US cash

We definitely got the morphing of US interest rate expectations from two cuts to on hold for ’07. And we have seen a few bouts of risk aversion; but we sure haven’t seen the “big one” (our assumption is we do see another “big one” in our lifetimes; some comments on that in “Reader Mail” below). So, morphing interest rate expectations and some bouts of risk aversion, yet the dollar did a swan dive as soon as it tested its daily trend-line resistance in mid-June as you can see in the chart below:

So far this morning, the buck is getting a slight reprieve. Yesterday the US$ index tested its 2007 low…a break of which could mean a swift move to a test of its 2005 low at 8039. And in the back of the every dollar bears mind is the magnetic attraction of the September 1992 low, which isn’t too far off at 7819.

Price action, within your trading time frame, is always the final arbiter of your view. The problem is that most of us playing the forex game view the market within such narrow scope—down to 60-minute charts or lower. A lot of us are forced into this because we trade with too much leverage, which is graciously doled out to us by our forex and futures houses. So when we do get an adverse price move we tend to jettison themes as fast as Liz unloaded husbands in her heyday. I think this is called schizophrenia.

I think schizophrenia is a disease running rampant in the forex markets. This is a list of the symptoms identifying this insidious malady; if you haven’t had these at sometime in your trading career, you haven’t traded enough:

People diagnosed with schizophrenia usually experience a combination of positive (i.e. hallucinations, delusions, racing thoughts), negative (i.e. apathy, lack of emotion, poor or nonexistant social functioning), and cognitive (disorganized thoughts, difficulty concentrating and/or following instructions, difficulty completing tasks, memory problems).


Our racing thoughts, hallucinations, and possibly delusions keep saying a real test of the “liquidity come easy profit asset bubble world” will come one day. And it may be good for the buck. But for now the dollar bears have the upper hand. And price action in all time frames is pointing down—and in the end that’s all that matters.

Jack Crooks, Black Swan Capital


Reader Mail on CDO fallout: This is from Yves Lamoureux, Investment Strategist, Blackmont Capital and posted on the “Planet Yelnick” blog on June 27th:

CDO’s : C’mon Down Obligations

If the price is right!

We have begun to see new contestants appear on the new financial show The Price is Right. The crowd of unwilling participants will only get bigger from here on. We had proposed earlier in the year our concerns regarding the incoming implosion of cheap liquidity. A rare theme at first, it is now receiving full recognition.

The size and its potential impact is however still misunderstood.The process appears to be in full progress and can only accelerate from here on. Bailing out troubled hedge funds will not reverse vanishing liquidity trends. Simply stated it is a non zero sum game.

The top of the” liquidity mountain” was my projection in our essay Big Speculators … are they about to hurt you. The banking index topped and never looked back. I believe this is a confirmation of a slowdown in debt growth. In most instances the banking index is a great leading indicator. It will weaken before the market drops and equally strengthen before the market rally. It has continued to show weakness in the face of a rallying market.

There can only be two possible outcomes but ultimately they will revert to synchronicity. I suggested a small short position to protect some of our holdings and I am still comfortable with it. It is a small price to pay for insurance. Equally now is a good time to start selling calls against one’s holdings.

It is amazing to have so many indicators point south while the market stubbornly goes up. Rarely do you get such a confluence of signals of strength and duration.

After careful study, panic buying is the most logical conclusion of this recent phenomenon. Any manager underperforming fully invested ETF’s will have no choice but to utilise all remaining cash available. Being prudent does not pay, it seems.

I have come up with my own assessment of the real effective mutual fund cash level. It is an approximation including the assets invested in ETF and mutual fund cash levels. The bear market of 1973 started with a cash level of 3.9%. My approximation today for cash level stands at 3.11%.

As a student of markets this is a most exciting time. The outcome is simply up for grabs. A tail event will have most participants dancing on their heads.

It will be so obvious but only after the fact.

In terms of longer trends, vanishing liquidity is here to stay.

What about a second possible driving force. Call it “Home Alone”: Full fledged repatriation of monies to respective countries. The grass next door has looked so green for so long that people are about to rediscover home.

Yves Lamoureux, Investment Strategist, Blackmont Capital

Disclaimer: opinions and projections contained are of the guestblog author and may not represent the views of Yelnick, Blackmont Capital (BCI) or any other organization.The information contained herein is for information purposes only and this report is not to be construed as an offer to buy or sell any securities. Neither Yelnick, BCI nor the author accepts any liability whatsoever for any loss arising from use of this report or its content.


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