Archive for January 2010
In 2009 the U.S. dollar was strongly, inversely correlated to the global equity markets. When the market was increasing because of an increase in appetite for risk, the U.S. dollar declined. When investors were concerned with global economics or the state of the market, investors rushed back into the U.S. dollar as a safe-haven. This is evident in the second half of 2008 when the U.S. dollar shot up as the markets plummeted and then the exact opposite occurred in 2009. When the markets rallied off the bottom in March the U.S. dollar declined.
The U.S. dollar has recently been gaining strength against other world currencies. This can be seen in the graph of the USD vs. Major World Currencies. In late 2009 the U.S. dollar broke its downward pattern and is currently on an up trend. Interestingly, the global stock markets have not been declining at the same time. From a technical perspective these events are signaling that the U.S. might be in for a bounce.
Last year one of the major hot topics was deflation versus infl ation (we will have a redux on this debate soon enough). More recently the debate has switched to the fate of the U.S. dollar. Many investors are looking at the large U.S. debt and the vast amounts of money that have been printed and believe that the dollar is in for a longterm slide. Others believe that being the reserve currency of the world offers special benefi ts that will help protect the dollar or at least make its descent tolerable.
The debate is going to continue and both camps are probably right, it is just a matter of the timing of when the events are going to occur. There is another consideration in the debate.
Many investors are not aware that the U.S. dollar is being used for carrytrades, where investors borrow U.S. dollars at low interest rates and then invest in other higher yielding assets. This strategy is in essence a short on the dollar. Hedge funds are notorious for using this strategy.
Their favourite carry-trade over the last decade or longer has been the Yen carry-trade. After the collapse of its economy and stock market, Japan lowered its interest rates to…..almost zero (umm…sounds familiar). International investors saw this as an opportunity and borrowed Yen and then invested elsewhere.
The trade works just fi ne until the currency that you are borrowing increases in value. At this point investors have to cover their positions by selling their assets and repurchasing the currency that they used for their loan. The result is that the currency is forced up in value and its rise can be very rapid. I mention this because if the U.S. dollar does start to increase in value there is a possibility that the strength of its run can surprise a lot of investors. Currently the U.S. dollar is in a time period where it tends to do well seasonally. This is usually the result of international businesses starting to implement their plans for the year using the reserve currency of the world, the U.S. dollar.
I have included a graph of the Canadian dollar versus the U.S. dollar directly below the graph of the U.S. dollar versus international currencies. The Canadian dollar has recently bucked the trend. As the U.S. dollar has been increasing relative to other currencies, the Canadian dollar has been increasing against he U.S. dollar. This is in large part because countries and investors are trying to diversify their holdings of foreign currencies and are favouring Canada.
On the international stage Canada is seen as a well managed country, with a low debt level and lots of natural resources — all very positive. In December Russia announced that it was purchasing Canadian dollars for its foreign reserve in order to diversify away from the U.S. dollar. Watch for other countries to follow their lead.
Although this is a positive for the Canadian dollar, investors should note that the Canadian dollar in recent times has not diverged away from the inverse relationship between the U.S. dollar and world currencies, or at least not for long. At this time there is a divergence, but it probably cannot last for long.
The Canadian dollar is just short of a strong resistance level. It is possible the dollar can run through parity on strong sentiment, but it is going to be diffi cult for the dollar to breach the $0.98 resistance level.
Investors should be continue to also look at the strength of the U.S. dollar relative to world currencies. If the U.S. dollar continues to strengthen against world currencies, then the Canadian dollar has a much higher likelihood of correcting.
The long and the short of it is that although the Canadian dollar is the preferred currency over the long-term there are times when the U.S. currency will outperform and we are probably at the doorstep of one of those time periods.
Canadian financial stocks typically start their out-performance towards the end of October. This year the sector’s performance has been substandard. It is possible for Canadian banks to do well if the American banks “prove” themselves with strong earnings.
On the other hand, it is extremely difficult to determine how the U.S. banks are doing because of the amount of government involvement. Leading into the earnings season, the U.S. financial sector has been performing below the market. At the start of the New Year the financial sector picked up as investors started to get interested in the sector. The above graph plots the U.S. financial sector relative to the S&P 500. The reversal at year-end shows a break in trend. Citigroup is reporting its earnings on January 19th and this should help set the pace for the sector.
I know it’s been a month since I’ve last posted. Been very busy with life. Now lets get back to work!
Now if you are a seasonal trader, you would know that by Mid January, it was a good time to start shorting Gold Stocks. This process repeats every year almost. Gold has had its highs, and its about time for it to reach its lows. Normally Gold will have its down period t’ll July – August. So short the Gold Stocks if you want to see some money coming in.
I would like to share an article with you that I got from another website. It talks about the predictions of Gold from the billionaire investor George Soros.
Here is the article:
Davos 2010: George Soros warns gold is now the ‘ultimate bubble’
Gold is now “the ultimate bubble”, billionaire investor George Soros has declared, sparking fears that prices for the precious metal may soon suffer a tumble.
Mr Soros, arguably the most famous hedge fund manager in history, warned that with interest rates low around the world, policymakers were risking generating new bubbles which could cause crashes in the future. In comments delivered on the fringe of the World Economic Forum, Mr Soros said: “When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold.”
Gold prices last month reached a record level of just over $1,225 per ounce, having risen around 40pc last year. Investors are piling into the metal amid fears both of potential inflation and fading faith about the stability of previously-assumed safe assets such as government debt. However, the chairman of Barrick Gold, the world’s biggest producer, Peter Munk, said he expected the metal’s upward march to continue.
Mr Soros added that by proposing imminent “exit strategies” from the unprecedented support handed out to troubled banks and consumers, governments around the world could be in danger of triggering a double-dip in the global economy. In comments which will reinforce Labour’s plan to fight the next election on promises not to start raising taxes or cutting spending too soon, he said that it was still too early to slash budget deficits.
He said: “I think that since the adjustment process to the recession is incomplete, there is a need for additional stimulus. Some countries, like the US and European countries, have plenty of room to increase their deficits. The political resistance to doing so increases the chances of a double dip in the economy in 2011 and after that.”
The Conservatives have pledged to start cutting public spending almost immediately after this year’s election, but their promise was weakened earlier this week by an International Monetary Fund report warning that it may still be too early to begin this process. Mr Soros also came out in favour of Barack Obama’s plan to split up large US banks, but said that proposals to tax the banking system could also endanger the recovery.
In December I wrote about how the technology sector does well from the starting in October and typically outperforms the market into January. Up until now the sector has outperformed the S&P 500. I also stated that on average the period of seasonal strength ends anywhere from the start of the Consumer Electronics Show in Las Vegas to January 17th. We are now in the sell date range for the technology sector.
The agriculture sector, represented in the fund by the holding MOO, Market Vectors – Agribusiness ETF, has performed extremely well. On a seasonal basis the agriculture sector usually outperforms from August to December. It is possible for the sector to continue to do well, but we have moved past the seasonal sell date for the sector.
The consumer discretionary sector has been performing as expected as it is outperforming the consumer staples sector. During the favourable six months from the end of October to the beginning of May the discretionary sector is the preferred sector. This year the consumer discretionary sector has been outperforming the consumer staples sector, as expected.
On a seasonal basis, the retail sector typically does well from January 21st to April 12th. Currently the technical profile for the sector is weak. The retail sector, as represented by (RTH), is just below resistance and the price seems to be rolling over. If this sector is able to breakthrough $97.50 on strong volume later this month, the technical profile will become positive.
The materials (U.S.) sector typically does well from January 29th to May 6th. From 1990 to 2008 the materials sector has produced an average gain of 8.0% and has been positive fourteen out of twenty times.
Currently the technical pattern on the U.S. materials sector, as represented by the ETF, XLB, is positive – the sector has recently broken through resistance.
The U.S. materials sector is substantially different than the Canadian materials sector as the U.S. sector has very little gold and approximately 60% chemical companies.
One of the major reasons that the sector has had an early seasonal start is that some of the brokerage houses in the U.S. have just upgraded the chemical companies in their recommendations. As a result many investors have been entering the sector. Look for XLB to pullback on market weakness to $33 before the typical buy date on January 29th.
The metals and mining sector typically outperforms from November 19th to May 5th.
The metals and mining sector broke resistance just before year-end and has developed a positive technical profile. The sector can soften in the middle weeks of January. Look for a pullback to the resistance line, which is now the support line, at $50 on XME, and then for the sector to do well into May.
Canadian traded ETF alternatives in the metals and mining sector are: Claymore’s S&P/TSX Global Mining ETF (Symbol CMW) and BMO’s S&P/TSX Equal Weight Global Base Metals Hedged to CAD Index ETF ( Symbol ZMT) and BetaPro’s S&P/TSX Global Base Metals Index Leveraged Bull Fund (HMU). Please see prospectuses for more information.
The period of seasonal strength for platinum is from January 1st to May 31st. The primary driver for this period of seasonal strength is the auto industry ordering platinum for catalytic converters and investors optimistically anticipating increased car sales at the beginning of the year.
Platinum has been very strong since the beginning of the year. Since July it has been in an upwards trading channel that has been very tight and the 50 day moving average has been providing support. We are currently at the top of the trading channel and if platinum is able to breakthrough this it will be very positive. If Platinum does correct at this point, there is a strong likelihood that platinum will bounce of the bottom of its trading channel once again. Up until recently, investors really only had one ETF to use as a vehicle to invest in platinum (iPath ETN DJ-AIG Plat A, Symbol PGM). At the end of last week ETF Securities launched a platinum ETF (PPLT) that holds platinum (metal) in a vault.