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Friday September 14, 2007 - 05:23:04 GMT
Black Swan Capital - www.blackswantrading.com

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Bookends?

Key News
• The Bank of England has agreed to give emergency financial support to the Northern Rock, one of the UK's largest mortgage lenders. (BBC)

GBPUSD Weekly:

     Chart......Timber

Goldman's Global Alpha hedge fund declined 22.7% last month, the worst month in the fund's 12-year history…“August was a difficult month for the overall markets, but even more difficult for a surprising number of hedge funds. Some funds that use a ‘quantitative,’ or ‘quant,’ strategy of using models to set strategies and computers to carry them out got clobbered when many of the funds wound up having to sell similar investments at the same time, driving prices down…Global Alpha's dismal record this year is especially startling because it is a ‘multi-strategy fund’ and can engage in an array of strategies. In theory this should give it the flexibility to adapt to volatile and difficult markets and avoid problems arising from any single strategy. But over the past year practically everything Global Alpha touched went wrong.” (WSJ)

Key Reports Due (WSJ):
8:30a.m. August Import Prices. Expected: +0.1%. Previous: +1.5%.
8:30a.m. August Retail & Food Sales. Expected: +0.4%. Previous: +0.3%.
8:30a.m. August Retail & Food Sales, Ex-Autos. Expected: +0.3%. Previous: +0.4%.
8:30a.m. 2Q Current Account Balance. Expected: -190B. Previous: -$192.6B.
9:15a.m. August Industrial Production. Expected: +0.3%. Previous: +0.3%.
9:15a.m. August Capacity Utilization. Expected: 82.1%. Previous: 81.9.
10:00a.m. July Business Inventories. Expected: +0.3%. Previous: +0.4%.
10:00a.m. Mid-Sep Reuters/U Of Mich Sentiment Index. Previous: 83.4.


Quotable

“The provision of large liquidity facilities panalises those financial institutions that sat out the dance, encourages hear behavior and increases the intensity of future crises.”

     Mervyn King, Bank of England governor


FX Trading – Bookends?

In case you live you haven’t read a paper or watched TV for the last two days—oil spiked to over $80 per barrel.  Yikes!  And why do we care?  A few reasons: 1) We own cars and they ain’t hybrids; 2) the crude - $ connection makes a lot of sense; and 3) Crude at $80 may sow the seeds of its own price destruction, as it dents global growth, which by the way may already be getting dinged by the ongoing credit crunch.  The same crunch that claimed a new victim in the UK—Northern Rock; it’s one of the country’s largest mortgage lenders (Can you say: UK housing bust!). 

Anyway, back to crude and the lowly buck.  Below is a weekly chart comparing crude and the US$ Index inverted so you can see how it moves with crude i.e. the blue line going up is the US$ index inverted and it really means the dollar is going down as crude, the black line, rises):

   

Explanations abound, some that make sense to us:

1) Crude suppliers need to price their oil higher because the dollar is falling in value
2) Because the dollar is falling in value, crude oil suppliers are quickly exchanging their large stash of dollar earnings i.e. crude is priced in $’s on the world market (mostly), into other currencies. 

Hmmm…is it the chicken or the egg?  It sounds like a bit of the old vicious circle reasoning going on here.

Although we know little about the dynamics of oil, we suspect the price has something to do with global demand.  So, an oil price at $80 likely means global demand is still brisk—or was brisk.  And this idea of brisk global demand (or continued incredible high energy input per unit output in China) goes to the heart of the global decoupling theme i.e. all is right in the world except for the US so therefore dump dollars as fast as you can.  The US is no longer the big dog on the block; it’s sneezing and the world is immune.  So, buy oil, sell dollars, buy China, don’t worry about stocks with global exposure and sleep tight.

Maybe!  But as they say, maybe not!

We have always believed, and continue to believe, the subprime problem is global.  And global in the sense that derivatives contagion threatens housing in Europe, especially in the UK, Spain, and Italy.  Evidence is growing.  UK housing prices are slipping.  And a key mortgage lender, Northern Rock, is in trouble.  Spain needs more bodies to fill its housing stock, and Italy, basking in the glow of bond yields it shouldn’t possess thanks to the euro, and well...you get the point. 

If we couple this with the fact that the ECB has pumped more money into the system than the US Fed (suggesting the banking system there is seizing more than in the US) and we add on the resignation of Japanese Prime Minister Shinzo Abe, it could mean the engines of decoupling aren’t revving up as expected.

[Engines of decoupling: Euro-zone, UK, Japan, and China]

China is still blowing and going.  But as much as everyone loves China, it’s no Atlas.  A little more pollution, higher pig prices, a couple thousand more riots, and the realization that its companies are running on wafer thin margins and a lot of that is financial engineering thanks to the stock market…and viola—sleeping tight at night is no longer as easy as it used to be. Those dreams of decoupling could turn nightmarish fast.

Going out on a very thin reed, but here we go: Maybe a bell is ringing for the dollar.  It peaked on Fed Chairman Alan Greenspan’s emergency Fed funds rate of 1% back in 2000.  This is the rate that ushered in the credit binge we’ve witnessed for the last five years.  And now, Mr. G is back.  This time for the book tour, or shall we say the magical revisionist history tour.  How perfect would that be if Mr. G’s last hurrah was a bookend on the dollar bear market!  

 

Have a great weekend.  And an FYI if you are attending the Forex Expo in Vegas this weekend, I will be there as guest of the Philadelphia Stock Exchange—please stop by and say hello.  You can’t miss me; I’m the one who appears permanently sleep deprived. 

A slew of data out in the US today, so stay tuned. 

Take care and enjoy your weekend. 

Jack Crooks
Black Swan Capital

 

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