Now, of course, the questions we need to ask are, where we do go from here? What are the implications for the binary plays and other forex trading vehicles next week and during the weeks ahead?

To help figure it out, we can parse the FOMC’s words.

Remember, the FOMC knows traders are paying close attention, so they choose their words very carefully. But even those carefully chosen words are revealing, especially when compared to previous FOMC statements.

Once again, we can use a word cloud — a visual representation of the words in the release.

Here is a word cloud from the FOMC’s decision this week:

Now look at the FOMC’s statement from the same week last year:

What is striking is the increase in the size of the word “inflation.” It confirms that it remains a main area of concern to the FOMC.

Reuters also did a world cloud for Bernanke’s press conference after the meeting. Though he tried to downplay inflation fears, that word crept up a lot. He also maintained that he supports a strong dollar… but the fact that the word is so hard to find in the cloud makes it clear it’s not a priority for him.

So, the Fed is thinking about inflation but not about the dollar. That means we should start betting against the dollar, right? Not so fast…

Remember, our best gains come when we catch the market by surprise. And up till the press conference, doubts about the dollar were merely the prevailing “mood.” Now, thanks to Bernanke, these fears are now structural — with no signs of U.S. growth and tighter money in sight, there is little hope for an increased dollar valuation.

In other words, the consensus is already counting on a weaker dollar. And that will make good contrarian currency plays hard to find.

There is, however, room for surprises in the commodities markets. Commodities are very sensitive to inflation fears, and that means trades that cover crude oil and gold will be excellent candidates. I’ll let you know more about a commodity strategy for May in the future…

Sincerely,
Abe Cofnas
Penny Sleuth

May 5, 2011

Currency in Focus: Reading Between Bernanke’s Lines was originally featured in the Penny Sleuth.

For instance, you can buy a binary saying that a currency will by above a certain rate. You can bet whether it will be above that rate in a few hours, by the end of the day or even the end of the week. If you’re right, you win — collecting double- or even triple-digit profits.

But even though plays are set up every day and even every few hours, I make most of my weekly Strategic Currency Trader recommendations Monday morning. Why?

The answer is one of the most powerful movers of binary options… and a concept that could lead to super-sized opportunities next week. Yes, I mean super-sized even compared to the kinds of gains my readers are seeing with binary options now!

The key word is “surprise.”

Simply put, currencies make their biggest moves when something surprises the markets.

For instance, last week the Financial Times reported an unexpected fall in the United Kingdom’s inflation rate. Its CPI in March increased 4%, down from 4.4% the month before.

The immediate reaction was a drop in the British pound.

The move was easy to understand: There is growing fear around the world about rising inflation. Central banks typically fight inflation by raising interest rates. Higher interest rates make a currency more attractive. And the expectation of a rate increase brings in speculators who hope to ride the currency up.

So the sudden revelation that Great Britain wasn’t actually seeing much inflation took its toll. As James Knightley, an economist at ING Bank, told the FT, “The prospect of a May rate hike has been significantly reduced by today’s surprise drop in UK CPI.”

Keep in mind, investors weren’t reacting to the absolute value of the CPI. For instance, the Bank of England’s (BoE) official inflation target is 2% — meaning March’s number is double what the BoE wants. But investors aren’t paying attention to that.

Instead, it’s all about currency economics 101 — the value of a currency rises or falls based on expectations of inflation. If inflation expectations are strong, the market sees an increased probability of the central bank increasing rates.

But it would be a mistake to perceive the GBPUSD reaction as simply a local U.K. event. The fact is, this is the open salvo leading to a much bigger surprise — one that is just a week away.

For now, however, all you need to know is how to put surprise to work for you. It may sound counterintuitive — after all, by definition you cannot plan for a surprise. But that’s not entirely true… especially when it comes to binary options.

On Monday morning, I scan over 20 binary contracts with over 100 strike prices. I sort through them using a sophisticated algorithm. Then I narrow them down to just plays with the biggest reward-to-risk ratios. After that, the real work begins.

You see, it’s not enough to find binaries that offer outsized profit potential. Any binary selling for under $50 is a chance to double your money… but you’ll want to have more going for you than that. That’s why I use technical analysis to show where prices could go, based on proven patterns and cycles.

Still, success or failure depends mostly on surprise.

That’s because a binary’s price reflects investor’s expectations. Every binary has chance to pay out $100 — and no one is going to buy it unless they think it has a chance of paying off. An option that has a trading ask price of $80 tells us the market expects there’s an 80% chance the binary will settle in-the-money.  In contrast, an option that costs $25 translates to 25% market expectation of success. But the other side of that is a potential 4:1 return, just for being a contrarian.

That’s why I like making binary plays on Monday morning. Coming out of the weekend, market expectations are likely to be at the height of error. The crowd-mind is most likely to be wrong because there are five days of unknowns. But my charts highlight the most likely moves. So if the market is caught by surprise, we enjoy high roller returns!

If you’re not familiar with binaries yet, you can read the brief tutorial I wrote for the Penny Sleuth just a few months ago.

Sincerely,
Abe Cofnas
Penny Sleuth

April 19, 2011

Big Surprise Behind Big Binary Profits was originally featured in the Penny Sleuth.

As you know by now, I am a “sentiment” analyst and trader. I focus on carefully quantifying bullish versus bearish sentiment in the currency markets. But how, exactly, is sentiment measured? That’s a key question. There are a lot of ways.

Among the most popular is the concept of a trend — the general direction in which something moves. An uptrend indicates a bullish dominant sentiment and a downtrend the opposite. I think, though, there are better ways to understand and map sentiment. In fact, I believe there is an excellent tool to track sentiment and quantify it.

I have written about it in my book, Sentiment Indicators (Bloomberg Press), and introduced it to you a few weeks back. Today I want to go a bit deeper as I use this method to show you my latest findings on the U.S. Dollar Index.

Look at the chart below showing the U.S. Dollar Index movements each day:

If you’re familiar with technical charts at all, you’ll recognize that it’s not a candlestick chart. It is called a price break chart. It shows consecutive daily new high closes (white) and consecutive daily new low closes (black).

If the U.S. Dollar Index doesn’t move enough to create a new high or a new low, no new bar is added. If the price moves enough to take out the previous three high closes, sentiment is considered reversed and we add a black bar. If the price moves enough to take out the previous three low closes, we switch back to using white bars.

This kind of chart really shows the ability of bullish or bearish sentiment to persist over time. And looking at the chart, we see very strong bearish dollar sentiment since June. It led to 18 consecutive new daily low closes.

We also see that right now the index is in a slightly bullish reversal, with three new high closes. In short, the U.S. dollar bears have had a challenge lately and couldn’t persist enough to keep a streak going. So the market sentiment on the U.S. dollar has shifted.

Keep in mind, this is not a prediction of future direction. It is a description of current facts. It is also important to quantify the size of the move. We can see that the white bars are not large. They are medium-sized, and a clue to future direction will be whether they get larger, showing stronger sentiment, or compress, showing signs of weakness. An interesting fact is that over the past two years, bearish sentiment sequences are longer and stronger than bullish ones. When there have been bullish shifts on the U.S. Dollar Index, they did not achieve consecutive new highs more than 11 days in a row. Put differently, bearish sequences have outperformed the bulls.

The tactical implications are very important and lead to support of a contrarian understanding of market moves. When the U.S. Dollar Index is in an extended period of either lows or highs, expect it to be punctuated by reversals. When the market shows choppy periods, it indicates a period of indecisiveness. This is the current environment, where there is a vast uncertainty about the Fed’s ability to restart economic growth. Choppy markets feed on themselves as they digest any bit of information to re-energize bullish or bearish sentiment.

Ultimately, the key driver is surprise. You can bet that the most likely outcome during any week is the unexpected, leading to price movements through less probable barriers… making every week an exciting ride!

I hope this little analysis whets your appetite for more sentiment indicators. The more you understand the forces that moves markets, the better you’ll get at playing them.

Regards,
Abe Cofnas
Penny Sleuth

November 30, 2010

How to Spot Sentiment-Driven Price Moves was originally featured in the Penny Sleuth.

The timing is right for a play on the dollar-yen currency pair. Both technical and fundamentals are converging and pointing to a crossroads. That’s because the yen is a global “safe-haven” currency that also reflects Japanese growth expectations. So the question before us is, which sentiment is dominant — risk aversion or risk appetite?

Technically, the weekly USDJPY is turning off a recent low of 84.7, which is a key resistance line. The last time the USDJPY pair was here was back in November ’09.

From daily price action geometry, the USDJPY pair has closed two consecutive weeks in a row with a new high. The last time it did this was back in July, when the USDJPY pair reversed from a descent to go back up three consecutive days.

However, fundamentally, at these levels we have increasing chatter that the Bank of Japan (BOJ) will very likely intervene. The last time the BOJ intervened was in March 2004. From a political perspective, a strong yen hurts Japanese manufacturers and exporters, which need to keep prices of their products competitive. A stronger yen means consumers purchasing Sony electronics or Japanese autos have to pay more per unit of purchase.

But extra stimulus is difficult in Japan, since its government debt is forecast to be 250% of its GDP by 2015. And in my view, the Japanese leaders know by now that intervention won’t work.

With these fundamental conditions, the fact that the yen hit a 15-year high last week means we are at a crossroads. And while the market seems to be favoring puts these days, I think going long is a good bet. The reality is that the yen is tied to the dollar, and weakness in the dollar — not strength in the Japanese economy — is the root cause of a dropping USDJPY pair.

So let’s prepare for a bounce in the pair now, and consider playing a fall at a later time.

[Ed. Note: For readers who aren’t familiar with trading currency pairs, yen plays are easily accessible thanks to the emergence of currency ETFs in recent years. Some of the more popular funds include the CurrencyShares Japanese Yen Trust (NYSE: FXY), iPath USD/JPY Exchange Rate ETN (NYSE: JYN), and WisdomTree Dreyfus Japanese Yen Fund (NYSE: JYF).

While each of these funds has a somewhat different investment objective, FXY is the most heavily traded by far, and most liquid.]

Sincerely,
Abe Cofnas
Penny Sleuth

August 27, 2010

[Independence Note: Unlike scores of other penny stock resources, we’re 100% independent from the companies we talk about in the Sleuth – that means that we never accept compensation in exchange for profiling a company, and our editors never own a position in any stocks they talk about.]

A New Tactic for Currency Traders was originally featured in the Penny Sleuth.

Binary options have been around at the institutional level for a while. They are now available on currencies and other instruments at the North American Derivatives Exchange, or Nadex. Anyone can open an account with just $100.

More importantly, Nadex has recently received U.S. Commodity Futures Trading Commission approval to allow Futures Commission Merchants (FCM) to route trades through it. This will enable many people to trade Nadex binary options in their regular account, since many brokerage firms are also FCMs.

Binaries cover currencies, commodities and key indexes. I like the fact that the market opens Sunday at 7:45 p.m. EST until Friday at 4:15 p.m. EST. That means you can start trading it at 3 a.m., and that helps keep track of currency markets.

But I’m getting ahead of myself. Let me introduce these powerful, flexible tools to you…

What are Binary Options?

Binaries are options that pay all or nothing. Those are the only two potential outcomes, which is why they called binary options. The central feature distinguishing binary options from regular options is that the payoff is fixed.

In a binary call, it doesn’t matter if the underlying instrument settles way above the strike price, just like it doesn’t matter how far the price falls below a binary put’s strike price. The payoff remains the same, $100 per contract.

Binary Calls

A binary call is a bet that the price of the underlying instrument will be ABOVE a strike price. If the trader is correct, then the payoff is $100 per contract. If the trader is wrong, then the payoff is $0.

It couldn’t be simpler — say you expect the GBP-USD exchange rate to be above 1.4860 by 3 p.m. today. Buy a binary call with that strike price and expiration time. If the pair is above 1.4860 by 3 p.m., you’re right, and the binary pays off. If it’s at 1.4860 or below, you get nothing.

Binary Puts

A binary put is a bet that the price will be AT OR BELOW a strike price. If the trader is correct, then the payoff is $100 per contract. Again, if the trader is wrong, there is zero return.

Costs of Investing in Binary Options Plays

Nadex charges $1 per contract, though they don’t call it a commission. When putting on a binary call, the trader will pay the offer or ask price. For a binary put, the trader will pay $100 MINUS the bid price.

Nadax offers binary options that expire hourly, daily, and weekly. You do not have to hold the position till the very end, however. You can trade it for a profit or loss at any time until it expires.

The Strategic Benefits of Binary Options

Why am I so excited about binary options? First, it is one of the lowest-cost ways to play options and build your skills. Secondly, their short duration means very quick feedback. But the key benefit is that binary options are like a rebate to your account when you are wrong! In effect, binaries are payouts to you in case you have damage to your account.

Let me show you how this works.

Let’s assume you’re a forex trader with an existing position in a currency pair. Let’s say you purchased a put and bet that the direction was going down. But instead, the market went the other way and your put option is losing value. With regular plain vanilla options, what do you do? The traditional choices are (1) do nothing and hope the market returns in your predicted direction; (2) do nothing and let it expire; (3) close the losing option and save some money.

Often in an option play, there is a period where the option is losing money, but then the market turns around. Many traders who get out then regret doing so. But here is where binaries come in.

For this put example, instead of closing the losing position, you can put on a binary call. You’ll get paid as the market goes north against your regular option. If this sounds exciting, it is!

So, to sum up, binary options open up a world of new investment possibilities. As straight-out trades, they offer quick and low-cost “all or nothing” trades — you don’t need to figure out how far a currency will move… just the minimum you expect it to move.

As hedges, they offer a chance to take in gains even as your other option positions lose money from the same moves. I’ll be filling you in on more about binary options and other opportunities very soon!

Sincerely,
Abe Cofnas
Penny Sleuth

June 30, 2010

How to Bet on Binary Options was originally featured in the Penny Sleuth.

Here’s a quick look at what’s going on in the world from a forex standpoint…

Australia Points to Recovery

As I predicted to my Master FX Options Trader readers earlier this week, the Reserve Bank of Australia (RBA) did indeed raise interest rates again, up a quarter point to a major market-leading figure of 4.25%.

If you’re keeping count, that’s the fifth increase in six meetings.

With housing prices climbing, unemployment believed to have peaked and housing credit expanding at a firm pace, the Bank stated it wants to move toward more “average rates.” In other words, the RBA believes recovery is under way.

The response to the rate hike was predictable, but muted. The currency climbed 100 pips in seven hours, creating a double top around .9250 (with the previous peak occurring on March 7) before pulling back to .9230. Is this the pinnacle before the foundation crumbles, or is it the start of another bull leg?

Don’t Trust U.S. Equity Rebounds

Economic news out of the United States is stellar: Jobs are being created. Pending home sales are up on a massive scale. The Institute for Supply Management’s service index jumped more than double what was expected. Fed-heads are “reviewing” the discount rate. (While not the same as the Fed Funds rate, an increase in the discount rate would still be a very bullish measure for the buck.)

But, as always, all that good news raises more questions than it answers.

For instance, the month of March saw weekly new unemployment claims above 1.5 million. So the creation of 160,000 jobs does very little to offset that. Pending home sales are an interesting forward-looking figure — but show me the completed sales and the comparative prices from where we were at the beginning of this whole debacle.

I can’t say that there is no good news coming out of the United States. But if anyone thinks that this is a recovery based on real private sector jobs because of real private sector hiring, and that real private sector spending is creating real private sector demand… think again.

EU: Greece Just Won’t Go Away…

A bloodbath.

That’s how one of my friends described the activity in Greek bonds to start the week. When I last checked, the spread on the Greek 3–6-month bonds was almost 250 basis points. What is that and what does it mean?

When you compare rates between two different maturities on bonds, it gives you an idea of what investors are charging governments for different amounts of holding time. As a rule, the longer you hold, the more risk you are taking, and the more you want to be compensated. But a 3–6-month period is barely any comparison at all. There would generally be very small differences in the rate. The difference is called the spread. For comparison purposes, the spread on the U.S. 3-6-month bonds is only 9 basis points. Investors are giving very much credence to the success of Greece even just six months out!

This has been the main news out of the European Union and will continue to be. It does have an interest rate announcement later in the week on Thursday. The European Central Bank is expected to stand pat. What else could it do? Maybe throw the PIIGS a bone and cut rates… but I wouldn’t count on it.

The UK Swells for a Pullback

The pound had seen a nice little retracement from the third week of March. But an intermediate-term double top precipitated a small pullback. GDP had been revised upward, and a jump in manufacturing provided some real release for pent-up bulls in the sterling. But slumping mortgage approvals continued to press down to a 15-month low. Like other Western economies, houses and their accompanying equity provided spending money in the United Kingdom during the last big bubble. The hope is to return housing-related spending to its previous levels. Such bad news on the mortgage credit front is a frontal attack on the Bank of England’s (BOE) efforts to keep the fledgling recovery going.

To that end, the BoE has not shut down it asset purchase program, although it has placed it on hold for the time being. The purchasing manager index (PMI) for the service sector was released today, showing a much larger drop than was expected. Thursday will also bring its interest rate announcement. Like the ECB, the bank is expected to stand pat. Should this resistance hold at 1.5330, we may be preparing for the next leg down.

Is the Yen Oversold Right Now?

In a significant correction, the yen has moved 9 cents from the end of November. This drop took it out of the trading range it had been following and may offer us a good opportunity. While the Bank of Japan decided to keep interest rates steady, there has been good news coming from the economy. Japan’s leading indicator exceeded expectations by more than a point. This on the heels of the best retail sales growth in four years, in addition to increasing factory orders.

In short, there is no good reason for the yen to continue to weaken, and we may see a nice move back up. Also, the 200-day moving average continues to fall, even while the 50-day moving average is bumping up against it. From a technical viewpoint, this could produce a bullish relationship with the dollar and see a run at the recent high around 117.

Until next time,
Bill Jenkins
Penny Sleuth

April 8, 2010

Foreign Exchange Markets: Around the World in 80 Pips was originally featured in the Penny Sleuth.

From time to time a substantial story rolls along that, while outside of my normal purview of our direct options, may still have an indirect impact on currency plays — and the Master FX Options Trader portfolio.

Such is the case with the United Arab Emirates, Abu Dhabi, Dubai, and its state-owned conglomerate, Dubai World.

If you heard all the Dubai news over the Thanksgiving weekend and saw the palpable fear on some commentators’ faces, but wondered what it all meant, I’m here today to set things straight.

Let’s begin with just a summary of the region and how it works.

The UAE, United Arab Emirates, is a confederation of seven states (called emirates). The two most well known are Abu Dhabi and Dubai.

The capital of the seven emirates is Abu Dhabi; it is the wealthiest and second-largest city in the group. It also lays claim to the sixth-largest oil reserve in the world. Just to prohibit some confusion, Abu Dhabi is the name of both the capital city and the state it is in, something like New York, New York.

In some respects, Abu Dhabi is like an older, wiser, more fiscally conservative brother to Dubai, which has been rather profligate in its assumption of debt and flamboyant in its projection the state’s image. Being a sort of Las Vegas and Disneyland of the region, it has built a gorgeous skyline, and as its oil revenues have dwindled, they have turned their attention to the money to be made in tourism. But attracting tourists to the desert is a difficult proposition. It takes glitz. It takes glamour. And apparently it takes around $60 billion in borrowed money.

The borrowing, however, was not done by the state of Dubai directly, and is not owed directly by them to any creditors. Instead, Dubai has a state-owned but “independent” company called Dubai World. My guess is that the more problems that stem out of the company, the more “independent” it will become. At any rate, this company has been the driving engine and catalyst for much of the growth seen in the region.

I do not know how much they have spent already. I don’t know how much they have borrowed and repaid up to this point. But that, as they say, is, water under the bridge. What matters is that they have requested a payment hiatus on $60 billion in loans.

The emirate of Dubai has said it is washing its hands of the whole thing. They are not offering a bailout, and they are not guaranteeing the company. This, of course, troubled investors and depositors in Dubai’s banks. Fearing a run on the “company store,” the central bank of the UAE stepped up to the plate and guaranteed all deposits in regional banks. In other words, no reason for the public to be afraid (and frankly, the markets liked that, too).

But what they didn’t say may be just as important — because the speech from the Dubai “Fed” did not offer help to the troubled Dubai World conglomerate. Essentially, since it guaranteed the public’s deposits but didn’t fork over public money to bail the troubled company out, they took the taxpayer right off the hook. If this is truly how it unfolds, then hooray for Abu Dhabi. The U.S. Fed could take some lessons. But the play is not quite over yet. If the UAE is not going to be on the hook for Dubai World’s excesses, who is? Who actually lent all this money out in the first place?

Actually, it looks as though the United Kingdom could be the hardest hit. Half of that debt is owed to banks based there. Some $13 billion of that money is on loan from the Royal Bank of Scotland and Standard Chartered; another $17 billion is from HSBC, whose stock fell from $62 down to $58 on the news.

Since the United Kingdom is still struggling to get any kind of recovery started, the news weighed heavily on its currency — at least initially. More bad debt on the books is not exactly what it needed at this point. Since the United Kingdom has already been issued a warning by Fitch about its sovereign debt rating, it certainly does not want an increase in borrowing costs for their gilts. This only adds to that burden.

But the world of finance has some pretty big bullies in it. I would think it highly likely that Abu Dhabi would be the subject of great external pressure if the situation remains wobbly. And this pressure could lead them to the conclusion that Dubai World is “to big to fail.”

That would relieve the pressure from the Eurozone (which has exposure by way of Germany) and U.K. banks. Beyond all doubt the West has financed itself up to its eyeballs, and one on this side of the world is willing to tack on a little more. RGE’s Nouriel Roubini is already predicting that the cost of U.S. bailout debt will rise from 40% to 80% of GDP. Not much room to borrow there.

And certainly Europe won’t be volunteering much help, because it’s having troubles of its own. It was recently announced that the cost of financing Greece’s debt has grown equal to that of Turkey’s debt… at one time considered a far more risky proposition. Should those individual countries continue to add to the red side of Europe’s ledger, some of the other larger states will need to jump in and bail them out. In the past, I’ve talked about the PIGS of the Eurozone: Portugal, Ireland, Greece and Spain. Add them to the increasing troubles in Lavia, Lithuania, Estonia, Belgium and Hungary, where foreign debt now exceeds 100% of GDP, and the “camel’s back” grows increasingly weaker.

But I digress. Back to Dubai… and Dubai World. CMA Datavision, a credit market tracking company, puts the chance at a full default of Dubai World at just under 36%. And while that would be bad for banks, it could have real effects in the commercial real estate market. Dubai World has some of the world’s premier properties under its control, including the world’s largest skyscraper and a series of man-made islands that resemble a palm tree and a world globe. Such things do not come cheaply. And they only have a limited application in terms of profitability. But if they go belly up, and are allowed to fail, that could make the sound of the “other shoe dropping” in the real estate venue. And considering that Abu Dhabi just gave Dubai a $10 billion bailout back in February, they may not be so anxious until some other pressure is applied.

Of course, the $60 billion of debt that Dubai has racked up is just a drop in the bucket compared to the TRILLIONS (that’s with a “T”) that have already flooded the market from other stimulating economies. David Buik, an analyst at London-based BGP Partners, figures the trouble in the UAE won’t amount to more than just an “unfortunate public relations exercise by Dubai.” We shall see how this unfolds and whether or not the ripples dissipate or turn into bigger waves.

And we’ll keep that in the back of our minds as we explore the news elsewhere around the globe.

Until next time,
Bill Jenkins

December 3, 2009

Understanding Dubai’s Debt Problem was originally featured in the Penny Sleuth.

Consider the Treasury International Capital (TIC) flow data. TIC measures foreign investment in the United States. This is important because we rely on foreign investors and sovereign governments to continue funding our deficit spending.

But the most recent numbers show a major decrease — $23.2 billion in March, versus an outflow of $91.1 billion the previous month. That will put Ben Bernanke and his boys in an even tougher spot.

Here’s our pal Chuck Butler from EverBank weighing in on this. “There are two ways they can try to entice these foreign investors back into the U.S. Treasury market. They can either let interest rates increase, or let the value of the U.S. dollar fall.

Now which do you think they will choose? They have been running the printing presses on overdrive in order to try and keep interest rates down to create another refinance boom. That tells me the Fed will try to do everything they can to keep interest rates down, so their only option is to let the U.S. dollar fall.”

The drop in TIC flows, combined with a huge increase in funding requirements by the United States, will have to lead to a general debasing of the U.S. dollar.

That’s not to say things are better on the other side of the Atlantic. The Eurozone (EZ) unveiled some nasty economic news last week.

Let’s start with the real engine of the EZ, Germany. Its first-quarter 2009 GDP number showed a contraction of 3.8%, worse than forecast, and the worst figure since 1970, when these records began. Annually, they are looking at a 6.7% contraction, another record.

In the last nine months, Germany has squandered all of its GDP gains accrued since 2005.

Right on their heels, the EZ composite stats showed a 2.5% GDP drop for the quarter. Again, annualized, that comes in at a 4.6% drop… both of these numbers are records, too.

Expanding our horizons just a bit, we see that Spain continues adding fuel to the fire. Even though Standard & Poor’s has already cut the country’s credit rating, the Spanish folks unveiled their worst recession in four decades. GDP shrank 1.8%, after a 1% drop in the last reading. A year ago, GDP was 2.9% higher. It isn’t a record number, but you’d have to go back 40 years to find something similar.

How much further can Spain fall (and Ireland, and Greece as well) before the euro enters crisis mode?

The truth is, we’ve never been down a road quite like this one. So the map we have is out of date. But there is one thing it can tell us — there is a cliff and a gorge ahead. We just can’t tell how far away it is, or around which bend we’ll find it. No matter, we’ll keep the pedal to the metal, so at least we can make good time getting there…

Adding to the loud accelerating noise in the Eurozone this week, Reuters reports that the European Central Bank (ECB) “has rejected several Central European central banks’ request to accept local currency bonds as collateral,” according to Hungarian central bank’s Kiraly.

Remember that the ECB adopted quantitative easing (QE) — buying bonds — some weeks ago, but there was a significant dissenting vote. Germany’s central bank, the Bundesbank, the most influential in the ECB, was completely against QE.

Axel Weber, the Bundesbank’s president, said, “the ECB has done enough to help the economy and shouldn’t consider further measures unless things get a lot worse.” He added, “The ECB doesn’t see the risk of a broad credit crunch or deflation in the euro area.”

I’m pretty sure his counterparts in Spain, Ireland and Greece will take umbrage at his position.

As I’ve written before, the bureaucracy in the EZ makes these decisions and policies tough to carry out. ECB President Jean-Claude Trichet is going to have to work out some kind of ceasefire between the factions. Which means they still have no concrete plan to stimulate anything other than infighting. While this is happening, the euro is speeding closer and closer to the cliff.

Sincerely,
Bill Jenkins

May 20, 2009

FOREX Update: The Dollar and the Importance of TIC Flows was originally featured in the Penny Sleuth.

Since the first of the year, we have lost three million jobs in the US.  Those folks have lots of month left over at the end of their money.  And as tragic as that is, there’s an even bigger story brewing here.

As a result of rising unemployment, tax receipts have been down 14%.  In April, we recorded a deficit for the month.  Why is that significant?  Because April is the biggest tax receipt month here in the US (you know, with April 15).

This is like saying you can’t meet your monthly budget on the month when you get your biggest bonus of the year.

For the US, that’s what April is.  And if we have too much month left over at the end of our money now, what is going to happen the rest of the year?

Well, unless you live under a rock, you’ve heard about skyrocketing deficits, unparalleled borrowing, endless spending and uninhibited ambition.

Combine these factors with an unlimited commitment to print money, and we have the recipe for unequalled price inflation.

It took America 240 years to accumulate $9 Trillion in debt.  And in one year we are adding $8 Trillion more.  That’s pretty sobering.  The Congressional budget office is looking at deficits for years to come, and they haven’t even factored in what will be the unmitigated damage caused by inflation.

The government warned earlier this week that in only seven years, Social Security will be paying out more than it takes in.  Our Medicare obligations are in even worse shape.  Last year Medicare paid out more in hospital expenses than it took in…a performance they will repeat again this year.

Administrations have put off dealing with this issue.  But the law of the harvest is coming true.  What you plant, is what you reap.  Planting financial foolishness, they are now reaping bankruptcy and insolvency.  No one wanted to touch it, because there is only one way to fix it.  Somebody is gonna have to have the guts to stand up and say so.  But the elected officials who do will not be re-elected.  They will likely be viewed as worse scoundrels than that group over at AIG.  People will say their names in disgust, and spit when they are mentioned.

What does all this have to do with the FX market?  Plenty!  A currency’s value, just like everything else, is tied to the Law of Supply and Demand.  When a government is committed to paying their bills by printing money, the supply of currency rises.  Ipso facto, the demand for the currency falls.  Falling demand is followed by falling prices.

In short, the Dollar is doomed.  No one will stand up and do the things that have to be done.  And if they did, assassination might shortly follow.  So how do we profit from the falling dollar?  Simple.  Short sell it against other, stronger currencies.  And when I say simple…I mean simple!  Just a few clicks on your mouse pad, and you’re in the biggest trading arena of all.

Of course, just because it is simple, doesn’t mean it is easy.

Lots and lots of traders lose their shirts every year because they mistake those two ideas.

But just this week we closed a position that traded on US dollar weakness, and Australian strength.  We profited 100% in just a few weeks.  And by the looks of things, we should have plenty more opportunities as the US FED and Treasury, (in conjunction with the Chinese, Russians, Brazilians, and Indians) sink the dollar.  We’ll have more on the efforts of these other nations next time.

Sincerely,
Bill Jenkins

May 14, 2009

What Happens When You Have More Month Left Over at the End of Your Money? was originally featured in the Penny Sleuth.

Forex, (which is shorthand for Foreign Exchange) is the largest market in the world. With 3 Trillion dollars in money exchanging hands every day, a trader only has to catch a tiny percentage of that to parlay a small nest egg into significant profits.

And there are significant advantages which trading Forex, or FX, for short, can offer.  One is that there are no “commissions” as you generally think of with stock trading.  The broker is paid by means of the “spread” between the bid and ask prices.  This is really nice, because if you want to get started in FX trading, and you want to start small (which is an excellent idea), all you have to cover is the spread, rather than a spread and a commission.

Here’s how it works….

Because of the various opportunities for leverage and margin in the FX markets, you can start with a small account, say $1,000.00, and adjust your pip size to 10 cents/pip.

As a general rule, a pip is 1/100 of a cent.  That may seem unusually small for a trading amount, but believe me, it really adds up!

In a $1,000.00 account, you can set your lot size to leverage $1,000.00, on just a $100.00 margin.  Then, each time your currency pair moves 1 pip, you make (or lose) 10 cents.  Again, that doesn’t seem like much until you see that currency pairs move 100-300 pips per day!  That works out to be $10-$30 daily on a $100 margin, or 10%-30%.

I do not price my gains against my margin. Instead, I price them against my entire account.  That means I could be looking at gains of 1%-3% every single day.  And believe me, these steady gains can add up quickly!

Getting Started with FX Trading

I’m sure you’ve all seen the Forex advertisements claiming you could double your money every month.  And mathematically, that is true.

However, wise traders know the probability of that happening is very low.  Truthfully, 95% of all FX traders will run their account down to zero in just a matter of months.  That means 5% of all traders are collecting the money from the 95% who are losing!  The market is unbelievably lopsided, but that doesn’t mean that a small trader is out of luck.  With some patience and a good strategy, an FX trader can return 10% monthly over an extended time period.  (Good traders don’t measure their success on a daily time frame—that’s way too short.)

The problem with most novice FX traders is that they are more like gamblers…and they don’t stay in the business long enough to actually get a good return.  They blow out their accounts and figure the game was rigged, or that their broker was cheating them, or some other excuse….

The fact is, most traders jump into the deep end of the pool, and don’t know how to swim. That’s because the FX is a different animal from stocks and bonds and commodities…

Why I Am Short the Euro

Right now, there is a lot of activity in the FX markets.  Traders and Investors worldwide are trying to ascertain which currency is the most sound and stable, and which will produce the best return.  For my money, currently, I am short the Euro.  While a lot of people are bashing the U.S. Dollar (and believe me, there are plenty of reasons to do so) from an FX standpoint, the dollar appears to be in much better shape than the Euro.

As all currencies trade in pairs, which means that one trades against another, if I am short the Euro, I will be long the USD.  Currently the USD is trading about $1.30 to the Euro.  This means it costs $1.30 to buy one of the European currency.  I am looking for this to fall over the longer term down to what is called “parity” level.  This is where $1 USD will buy 1 Euro.  That would be a drop of 30 cents– or 3,000 pips.

If you are keeping score at home, that would equal $300.00 at 10 cents/pip, or 30% on a $1,000.00 investment.

However, a larger trader may size his pip to 10.00 each.  That would provide a return of $30,000.00. And all we are doing is trading against the disparities between the two currencies.

As with all markets, the FX does not move straight up or down, and there will likely be a lot of bumps in the road between here and parity.  But each one offers a new chance to enter as we sell the rallies.

Until next time…Happy Trading!

Bill Jenkins

April 30, 2009

The Truth About Forex Trading was originally featured in the Penny Sleuth.