Friday, December 11, 2009

Indicators point to a bounce in the USD

You say "But EVERYONE is short the US Dollar?"
So what. Is the USD worth zero? We already have lost 20% of the value of our currency in a year. That is a huge move. Let's look forward.

There are fundamental factors that could facilitate a rebound in the USD. A default of Greece, Russia, Hungary, Latvia, Mexico, or a major international bank all might cause a flight back to the USD. Also the completion or ending of the mortgage purchase program, Treasury purchase program, and declining effect of the stimulus all will have a deflationary effect on the USD.

In fact there are market indicators that show the USD could head higher from here in the short term.

The first is the possible break in the USD downward trendline. The euro is foretelling a break of that six month trend.

Second is the options action on the USD Jan 10 Option Chain (expressed through the UUP - USD Bullish ETF). At least one major hedge fund or active market participant has engaged in a bull call spread that will make money as UUP crosses $25.25 or so. Minimal action on the put side of the equation is a bad sign for anyone short the USD.

These positions could be just foolish bets from large accounts dumb money. But sometimes making positions in front of any trend where lots of money is moving in the same direction is the best place to be, smart or dumb.

Thursday, December 3, 2009

Time for a makeover!

Hi, this blog is going to get a makeover. Not just eyebrows and toes either. A whole new look!

If anyone has ideas for a motif, send them my way.

Unemployment peaking in 2011?

Good morning. I have had lots of family come and go over the past few weeks and it gave me a chance to take a breather from the market. Except for helping a friend out with some questions and stocking some gold, I have been pretty quiet.

News this morning... Goldman has released predictions that give us some food for thought for positions to take now.

"If Goldman Sachs is right, of course. Here is the firm’s 2011 forecast:

The key features of our 2011 outlook: (1) a strengthening in growth from 2.1% on average in 2010 to 2.4% in 2011, with real GDP rising at an above-potential 3½% pace in late 2011; (2) a peaking in unemployment in mid-2011 at about 10¾%; (3) extremely low inflation – close to zero on a core basis during 2011; and (4) a continuation of the Fed’s (near) zero interest rate policy (ZIRP) throughout 2011"

Let's examine each one and comment...

1) GDP growth of 2.1 % through 2010

From such a low base, this is just bouncing along the bottom

2) Unemployment peaking in mid-2011 at 10.75 %

Whoa. CalculatedRisk has noted that the Fed does not raise interest rates until "six months after peak unemployment". So monetary stimulus via the Fed will continue for at least another year. That means more downward pressure on the USD, and thus more upward pressure on commodity prices from domestic sources.

3) Extremely Low Inflation

If you think you can get a 6% yield over the next year with low risk of principal, I think you will have definitely beat S&P index returns and any low risk instrument. This is where you will sleep well.

4) Continuation of the ZIRP

The Fed will continue to create inflation to fight credit related deflation. Money, money, everywhere yet none of it to spend.

This blogger suggests buying Met Life A series at $20.90. Although all big insurers are suffering from investment losses and still holds significant exposures, Met Life must be gaining from the fall of it's biggest competitor in the marketplace.

This security will provide a solid yield while the Fed keeps rates low and includes protection if the Fed must quickly increase rates to address hyperinflation of any sort if it were to occur down the line. If the security is deemed by Met Life in the next few years, then the principal pop will provide an addtional 20%+ return over that time period (annualized rate will be lower).

"Met Life preferred A series securities at MetLife Inc., Floating Rating Non-Cumulative Preferred Stock, Series A, liquidation preference $25 per share, redeemable at the issuer's option on or after 9/15/2010 at $25 per share plus declared and unpaid dividends, with no stated maturity, and with non-cumulative floating rate distributions paid quarterly on 3/15, 6/15, 9/15 & 12/15 to holders of record on the 15th calendar day prior to the payment date or on the date fixed by the board, not more than 60 days or less than 10 days prior to the payment date. The floating rate will be the greater of 4.00% or 1.00% above the three month LIBOR rate. In regards to payment of dividends and upon liquidation, the preferred shares rank equally with other preferreds and senior to the common shares of the company."