Candlesticks, Bamboo Sticks

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Originally uploaded by iiiink.

Currency trading using candlestick charts is similar to observing a bamboo thicket.
But without the serenity. A 30-minute candlestick chart sometimes gives a pattern like the picture. When it does, the market is consolidating quietly. But when the momentum shifts, one must act accordingly. King Kong may have entered your quiet grove.

Fine Line

Icy Bridge
Originally uploaded by WisDoc.

Sometimes trading currency reminds me of this icy bridge. You can see your way ahead for a few feet and it is treacherous, but beyond that it gets mysterious. As Paul McCartney says in his recent song, Fine Line: There is a fine line/ Between recklessness and courage/ It's about time/ You understood which road to take/ It's a fine line/ And your decision makes a difference/ Get it wrong and you'll be making a big mistake//

Meat Slicer

Meat Slicer
Originally uploaded by enuwy.

My year in England spanned fall 1975 to fall 1976. I enjoyed the local traditions, and one especially was the costume of the butcher. I'm glad to see that some things never change. This photo was uploaded to the web today. Trading currency markets is a lot like being a butcher. You take the raw meat and put it in little packages for your customers. It is a traditional occupation with no end in sight. Some people find it exciting?

PIMCO Manages over $463 billion in Assets

Bill Gross, managing director of PIMCO, widely regarded as the country's leading fixed income authority, may be worth a listen when he publishes his outlook.

FRB: Speech, Greenspan--Budget policy--December 2, 2005

Well worth reading and studying. Alan Greenspan is having a farewell party in London this weekend at the G-7 meeting. The text is at www.federalreserve.gov

Economy growing but at uneven pace: Beige Book - Banks - Financial - Industrial, Diversified - Retail - Financial Services - Industrial Products & Ser

Just in case you thought the Beige Book was something to ignore. Perhaps beige is not your favorite color? The Fed does not wave red flags. That would alarm the high-strung financial community too much. Most of what they say is very neutral. The beige flag is about all you will get--thank goodness.

PIMCO Bonds - IO December 2005

I learned today that William H. Gross, Managing Director of PIMCO (Pacific Investment Management Company) is known as a Bond Guru.

He has just published at www.picmo.com his investment outlook for the next year. One could do worse as far as prophesies go. It is only 4 pages. Well worth a look.

Raghee Horner's Book, ForeX Trading for Maximum Profit

EC_ProductDetail

Bush Names Bernanke to Replace Greenspan

U.S. stocks logged their biggest one-day gain in six months as Bernanke's nomination laid to rest market uncertainty over who would by Greenspan's replacement. Bond prices ended lower on worries a Bernanke Fed could take an easier line on inflation, despite his assurances on Monday that he would steer the central bank along Greenspan's course.

As if these yahoos know why the market went up or down today. So much pretended knowingness.

Great New Picture of the Author

Larry Williams calls The Zurich Axioms "The best book I have had the joy to read on speculation."

The Zurich Axioms Article at Michael Covel Blog

Larry Williams in his book, Trade Stocks & Commodities with the Insiders--Secrets of the COT Report, mentions that Max Gunther's 1985 book The Zurich Axioms is "The best book I have had the joy to read on speculation." A fingernail version is available on this blog. Check it out.

But he paid it all back with interest on Monday!

On Monday, October 10, Phillip Bennett, CEO of Refco the futures broker, was placed on leave of absence at the Board's request. It was announced that an internal review found that he had failed to disclose owing the company around $430 million. Refco stock had closed around $28 on Friday. It closed on Monday less than $16. Refco said it must restate earnings back to 2002 and delay filing its next quarterly report, originally scheduled for next week.
Bennett was said to have repaid the $430 million with interest Monday.

On Tuesday, October 11, a story about Mr. Bennett and Refco appeared in the Financial Times and many other places. On the same day,

Federman & Sherwood Announces That a Securities Class Action Lawsuit Was Filed Against Refco, Inc.
On October 11, 2005, the class action lawsuit was filed in the United States District Court for the Southern District of New York against Refco, Inc. (NYSE : RFX) . The complaint alleges violations of federal securities laws, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, including allegations of issuing a series of material misrepresentations to the market which had the effect of artificially inflating the market price. The class period is from August 11, 2005 through October 7, 2005.

Plaintiff seeks to recover damages on behalf of the Class. If you are a member of the Class as described above, you may move the Court no later than Monday, December 12, 2005, to serve as a lead plaintiff for the Class. However, in order to do so, you must meet certain legal requirements pursuant to the Private Securities Litigation Reform Act of 1995.

If you wish to discuss this action, participate in this suit, or have any questions or concerns regarding this notice, or preservation of your rights, please contact: William B. Federman FEDERMAN & SHERWOOD 120 N. Robinson, Suite 2720 Oklahoma City, OK 73102 (405) 235-1560/FAX: (405) 239-2112 Email to: wfederman@aol.com - http://www.federmanlaw.com

SOURCE Federman & Sherwood William B. Federman of Federman & Sherwood, +1-405-235-1560, or fax, +1-405-239-2112, or wfederman@aol.com http://www.prnewswire.com

That's pretty quick, William Federman of Oklahoma City! The stock closed Tuesday at less than $14.



Warning Issued to Past and Current Shareholders of Refco, Inc. by the Law Firm of Lerach Coughlin Stoia Geller Rudman & Robbins LLP
On October 11, 2005, the law firm of Lerach Coughlin Stoia Geller Rudman & Robbins LLP ("Lerach Coughlin") (http :) (http :) filed a complaint on behalf of all those who purchased the common stock of Refco, Inc. ("Refco" or the "Company") (NYSE :) (NYSE : RFX) . The complaint alleges a series of false and misleading statements associated with the company's accounting practices and follows a lengthy investigation by Lerach Coughlin. Since Lerach Coughlin filed a complaint, The Law of Firm of Schatz & Nobel has issued a press release claiming to offer "information" about joining the suit. Be advised that this firm has not even filed a complaint. Rather, the press release appears to be an advertisement designed to solicit clients so that the firm can participate in this case.

You too are very quick on the draw, Lerach!

On Tuesday, the New York-based Refco said it had voluntarily contacted the Securities and Exchange Commission, the U.S. Commodity Futures Trading Commission, the New York Stock Exchange and other regulators, and was co-operating with their inquiries.

On Wednesday, October 12, Phillip Bennett was arrested by federal prosecutors and charged with securities fraud in U.S. District Court in Manhattan a day after Refco announced that a $430-million-US debt to the company owed by a firm controlled by the ousted chairman and chief executive was hidden through secret transfers to an unnamed customer account.

Securities Fraud Class Action Against Refco, Inc. is Filed by Scott+Scott, LLC
Scott+Scott, LLC (http :) represents investors in a securities class action filed today in the United States District Court for the Southern District of New York against Refco, Inc. ("Refco") (NYSE :) (NYSE : RFX) and certain of its officers and directors. Refco securities purchasers between August 11, 2005 and October 10, 2005, inclusive (the "Class Period") are putative class members. Refco provides execution and clearing services for exchange-traded derivatives, and brokerage services in the fixed income and foreign exchange markets in the United States, Bermuda and the United Kingdom. Refco went public via an initial public offering in August 2005.



Wechsler Harwood LLP Files Securities Class Action Suit Against Refco, Inc. -- RFX
Wechsler Harwood LLP today announced that it has filed a Federal Securities fraud class action suit on behalf of all other persons or entities who purchased or otherwise acquired Refco, Inc. ("Refco" or the "Company") (NYSE :) (NYSE :RFX) common stock pursuant or traceable to the Company's Initial Public Offering ("IPO") on August 11, 2005, and on behalf of all other persons or entities who purchased or otherwise acquired Refco common stock between August 11, 2005 and October 10, 2005, both dates inclusive (the "Class Period").

The action entitled, FrontPoint Financial Services Fund, LP. v. Refco, Inc., et al., Case No. 05-Civ-8663 (DC)(RHM), is pending in the United States District Court for the Southern District of New York seeks to pursue remedies under both the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act") and names as defendants, the Company, certain of its senior officers and directors, as well as its commercial/investment bankers/underwriters involved with the Company's IPO. A copy of the complaint can be obtained from the Court or can be viewed on Wechsler Harwood web site at: www.whesq.com.



Pomerantz Haudek Block Grossman & Gross LLP Commences Securities Class Action Against Refco, Inc. -- RFX
The Pomerantz Firm (www.pomerantzlaw.com) has filed a class action complaint in the United States District Court, Southern District of New York, against Refco, Inc. ("Refco" or the "Company") (NYSE :) has filed a class action complaint in the United States District Court, Southern District of New York, against Refco, Inc. ("Refco" or the "Company") (NYSE :) (NYSE :RFX) , two of its officers, certain underwriters and the Company's outside auditor. The class action was filed on behalf of public investors who purchased the common stock of Refco during the period of August 11, 2005 and October 7, 2005, inclusive (the "Class Period"). It includes those investors who purchased the common stock of Refco pursuant and/or traceable to the Company's initial public offering on August 11, 2005 ("IPO").



Milberg Weiss Announces the Filing of a Class Action Suit against Refco Inc. and Certain of Its Officers and Directors on Behalf of Investors
The law firm of Milberg Weiss Bershad & Schulman LLP announces that a class action lawsuit was filed today on behalf of purchasers of the securities of Refco Inc. ("Refco" or the "Company") (NYSE :) (NYSE : RFX) between August 11, 2005 and October 7, 2005, inclusive (the "Class Period"), including purchasers of the Company's shares pursuant or traceable to the Company's initial public offering (the "Offering") on August 11, 2005. The action seeks to pursue remedies under the Securities Act of 1933 ("Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act").

Shares dropped 28% on Thursday morning before trading was halted by the New York Stock Exchange.

According to a Bloomberg story today, to remain out of jail, Bennett was forced to pledge his Park Avenue apartment in Manhattan and his country horse farm in New Jersey, along with $55 million in a bond and cash.

FRB: Speech, Greenspan--Closing remarks--August 27, 2005

FRB: Speech, Greenspan--Closing remarks--August 27, 2005

FRB: Speech, Greenspan--Reflections on central banking--August 26, 2005

http://www.federalreserve.gov/BoardDocs/speeches/2005/20050826/default.htm

Thinking With Mergers and Acquisitions in terms of Foreign Exchange

FX Power Student center: "Mergers and Acquisitions

What are they?

� M&A Deals -> Average 1% Appreciation in Target's Currency

� Every $1 Billion Dollars -> 0.5% Positive Impact on Target's Currency

Mergers and acquisitions (M&A) involve the combining of two corporations or the acquisition of a part of a corporation by another corporation. Large cross border M&A activity of greater than US$500 million often has an impact on the Foreign Exchange market. A study done by the Bank for International Settlements (BIS) disclosed that large M&A deals cause the target corporation's domestic currency to appreciate 1%, on average, relative to that of the acquiring corporation. In fact, the report finds that in the period immediately after the deal is announced, there is generally a strong upward movement in the target corporation's domestic currency (relative to the acquirer's currency). Fifty days after the announcement, the target currency is then on average 1% stronger. Based upon this sample, every $1 billion deal has an approximately 0.5% positive impact on the target currency. The study also showed this impact to peak at around 5%.

How are they used in Foreign Exchange?

� All Cash Deal -> Most Significant Impact � All Stock Deal -> Minimal Impact

� Stock & Cash -> Impact Based Upon % of Cash

It is very important for traders to consider the specifics of the deal itself. For instance, deals comprised entirely of stock swaps rarely have an impact on the FX market because there is no foreign exchange transaction taking place. On the other hand, deals involving large cash transfers strongly affect the FX market. Deals involving a mixture of both elements require a more in depth assessment of the relative value of the cash portion of the transaction and whether or not it is significant enough to move the markets.

The following charts are examples of two deals done in 2003 and another in 2000. In each of the three examples, the target corporation's currency appreciated significantly against the acquirer's currency in the months following the announcement, which illustrates how M&A transactions move markets."

Earnings Estimate Revisions are the most powerful force impacting stock prices.

Go to the link and read this free report. The Zack's Rank--Harnessing the Power of Earnings Estimate Revisions.

Food for thought.

Katrina and the Price of Oil--The Dollar

Katrina may wreak considerable damage to the oil drilling rigs in the gulf. She may possibly damage the refining capacity in the area as well. This could temporarily jimmy the supply and demand for oil, causing an increase in the price of oil. This may be bearish for the dollar near term.

Or not. It's still a crapshoot.

Tom Buchanan's Trading Room

Looking into the future, which is always a crapshoot, but big and small business always have to do it, Goldman Sachs has raised its estimate of average oil prices for the next five years from $45 (its previous estimate set earlier this year) to $60 a barrel for West Texas Intermediate Crude. Compare this to Barclay's Capital which forecasts that WTI will remain above $50, Merrill Lynch forecasts $45 and Deutsche Bank estimates $38-40. Thus saith Friday's Financial Times.

It also says that while cash reserves have been accumulating in the oil industry, the rate of reinvestment has not yet picked up. The cost of development projects has doubled and is now in the tens of billions. With that much money on the line, the future forecasts have to be fairly accurate. Where is Nicky Engel when you need him?

What do it mean?

Bernanke Confirmed by Senate

Latest Business News and Financial Information | Reuters.com

FRB: Testimony, Greenspan--The economic outlook--June 9, 2005

FRB: Testimony, Greenspan--The economic outlook--June 9, 2005


We are all ears, O wise one. Your words move markets as usual. You calm our anxious hearts with the voice of reason. The dollar resumes its rise.

Gann's Advice

"You should learn to trade on knowledge and eliminate fear and hope. When you are no longer influenced by hope or fear, and are guided by knowledge you will have the nerve to trade and make profits.

". . . If you study price movements correctly, they will tell you more about what the market is going to do than any broker, newspaper, or so-called inside information. The time period is the most essential, because time tells what prices are going to do.

"LEARN To Be Independent: The greatest help that I can give you is to show you how to help yourself. If a man or woman depends upon others for advice, or for inside information and follows what others think about Commodities, he will never make a success in speculation--or anything else. You must learn to be independent. Learn to do by doing, and to know by study and application. When you are following something that you KNOW, you will have the confidence and courage to be successful.

"The most important thing outside your health for you to protect is your money. Therefore, take time to study. Prepare yourself to handle your money yourself and do not depend forever and entirely upon others.

"Knowledge is not enough. You must put into use what you learn in order to benefit. You will learn by doing. Action and execution at the proper time bring profits.

"NERVE. A man can have the finest gun in the world, but if he hasn't the nerve to pull the trigger he will never kill any game. You can have all the knowledge in the world, but if you haven't the nerve to buy and sell you cannot make profit. Knowledge gives a man nerve, makes him bold and enables him to act at the right time. When a man fails to buy or sell at the right time, the result is that he becomes afraid. Fear is a detrimental influence. When he has too much nerve and buys on hope at the top, he is guessing. When influenced by hope alone, he cannot expect profits.

"GOOD Health. . . . I have tried to trade when I was in bad health, always resulting in failure, but when I am in good physical condition, I act at the right time, making a success. If your health gives away, the most important thing is to work to get your health back in perfect shape, for HEALTH is WEALTH.


"To stand in a brokerage office or sit in a brokerage office and try to beat the market by reading the ticker and watching every quotation that comes out, is the most foolish thing a man could do, and the greatest waste of time, and the man who thinks that is the way to make money trading in commodities is making the mistake of his life. Those of us who have tried it, know. Expert tape readers are few and far between. It is the study of a lifetime, and while the tape does show the trend of the market, there are so many minor changes and quick reversals that the average man cannot tell whether the main trend has turned or whether it is only a minor change that will last a few hours, a few days, or a few weeks before the main trend is resumed again.

"You make a greater success when you sit at home or in your office, quietly follow your charts and trade on definite indications.

"I am not guessing or giving you a wild theory. I have gone through the mills. I have had every ticker in my office for years. I have thought I could not get along without them, and lost plenty of money by having them in the office and getting in wrong because the ticker showed some minor trend and threw me off the main trend which I had figured. I made a greater success when I took all the tickers out of my office and have not had a ticker in my office for the past ten years.

". . . A man cannot watch the tape and not be influenced by hope or fear.

--W.D. Gann, 1942, How To Make Profits Trading In Commodities


I think he's trying to tell me something. When I read him in 1985 I thought he had some good stuff to say, but after 20 more years, he seems wiser.

--

US Dollar--What Are The Most Market-Moving Economic Indicators?

DollarMarketMovers.pdf (application/pdf Object)


Thanks to Kathy Lien, Refco's Chief Strategist, for confirming in spades my own market observations of the past few months. Namely, that the market adjusts to economic news releases very quickly, usually within 10-20 minutes of the data release. For the small-time currency trader like myself, this suggests a strategy I call 'fishing'.

You have to be at the fishing hole ready to go, just before the news event, but not yet fishing. Then, with the release of the news, quickly throw your line in the water depending in which way the data indicates the market will go. Or which way the market is going as revealed in the first five minutes. You should have enough excitement during the succeeding 15 minutes to equal any fishing. Pull your line out. Maybe throw it in again later.

FRB: Speech, Greenspan--Derivatives markets--May 5, 2005

FRB: Speech, Greenspan--Derivatives markets--May 5, 2005

Read Chairman Greenspan's speech on derivatives here. Click on link.

FT.com / Currencies - Asian currencies withstand Chinese talk

FT.com / Currencies - Asian currencies withstand Chinese talk


Mr. Johnson puts forth the common wisdom regarding the Chinese renminbi revaluation and its effect on the currencies. See link.

"The yen drew support from continuing speculation of a renminbi revaluation by China, a move seen as heralding a period of broad Asian currency strength. . . .

"However, with the yen having already rallied from Y108.80 against the dollar in the past four weeks, Chris Towner, consultant at risk manager HIFX, argued it could be a case of 'buy the rumor, sell the fact.' The yen may have already staged its Chinese revaluation rally and could weaken when Beijing finally moves."

Time will tell, meanwhile last Friday's Commitment of Traders report from the CFTC shows the commercials are long the yen by about 31,000 contracts on the Merc. Moi? I'm sitting on the sidelines until after tomorrow's non-farm payroll report.

Philly Fed Surprise Bullish for Dollar

http://quote.bloomberg.com/apps/news?pid=10000103&sid=anEJaU2BEfvk&refer=news_index

The consensus was for a rise to 14.5. Instead, the number was 25.3, indicating stronger than expected business climate. The dollar strengthened immediately. A surprise will do that. Others attribute the dollar's sudden strengthening to a resurfacing of the rumor that Osama Bin Laden has been captured. Take your pick. In the past hour the dollar has improved against the Euro by nearly 100 pips.

FRB: Speech, Ferguson—-U.S. Current Account Deficit: Causes and Consequences—-April 20, 2005

FRB: Speech, Ferguson—-U.S. Current Account Deficit: Causes and Consequences—-April 20, 2005


This is very worthwhile reading. It includes footnotes, charts, and comes from a good source. See his bio at the link

What are the Bretton Woods Institutions?

Background to the issues

This link defines the term and gives background to the issues.

UofT G8 Information Centre: G7 Finance Ministers

UofT G8 Information Centre: G7 Finance Ministers

I find this website at University of Toronto gives you the statements from G7 meetings. You can read for yourself and see what they say without the spins from the helpful news media.

FRB: FOMC Minutes--March 22, 2005

FRB: FOMC Minutes--March 22, 2005

The minutes are now available to the public. That means me and you. Read them at the link. Find out if interest rates are going up faster or not. These minutes can cause the currency markets to twitter or untwitter.

Commitments of Traders

http://www.cftc.gov/cftc/cftccotreports.htm

Commitments of Traders may not sound at first like a technical term. It may sound like a term describing a relationship of questionable monogamy. Nevertheless, the Commitments of Traders, or COT, as it is sometimes called, is a weekly report published by the Commodities Futures Trading Commission (a government agency). It contains a plethora of information both for the most recent reporting period and historical data back to 1986. It is available on line at the link.

Most valuable is probably the information concerning the Commercial holdings. If I were considering taking a position in a currency, I would want to know if the commercials are net long or short that currency. In the Yen, for example, the commercials would be major financial institutions. They are usually on the right side of the market. So if you are interested in seeing what the big money is doing, look there. You could do as the commercials and be considered to have some financial wisdom. As of April 5 the commercials were net long the Yen by a wide margin. Last month they were net short through March 15.

FRB: Testimony, Greenspan -- Regulatory reform of the government-sponsored enterprises -- April 6, 2005

FRB: Testimony, Greenspan -- Regulatory reform of the government-sponsored enterprises -- April 6, 2005

These remarks did not cause the dollar to strengthen. But, as always, they are an education. For example, here we learn that the combined portfolios of Ginnie Mae and Fannie Mae were $1.38 trillion, or 23 percent of the home mortgage market as of 2003. Doing the math, the 2003 home mortgage market was $6 trillion!

FRB: Speech, Greenspan--Energy--April 5, 2005

FRB: Speech, Greenspan--Energy--April 5, 2005

Greenspan Appears in San Antonio (via satellite). His remarks did not push the dollar higher today. But he wasn't talking about raising interest rates.

William Poole's Saturday Remarks at Princeton University

Latest News and Financial Information | Reuters.com

William Poole, president of the Federal Reserve Bank of St. Louis, is known as an inflation hawk. He is also one of the 20 most influential people in Foreign Exchange markets. So when he speaks, sometimes the market moves. When the non-farm payroll number was less than expected, the market was wondering if the Fed would be able to raise interest rates more quickly than the quarter point "measured pace" of the past few months. Poole's remarks seem to indicate a yes, to the hyper imagination of the currency market.

Lately, remarks from the Fed have been bullish for the dollar. With several appearances from Alan Greenspan this week, I predict a good week for the greenback.

Institute for Supply Management figures can move the market

ROB042005.pdf (application/pdf Object)

The dollar is stronger today. After the non-farm payroll report last week came out weaker than expected--a number which creates the most volatility in the market of anything that happens monthly--the continued strength in the dollar is something of a puzzle.

Enter the ISM number--a measure of the condition of the economy. The higher than expected ISM number shows the American economy is expanding. For those who try to explain the market's movements in terms of the flow of economic indicators through the news, the ISM number is something to watch more closely than the screaming headlines. Check out the link.

Origin of Cable as synonym for British Pound?

What was the Exchange Rate Then?

A little economic history for you. My take on it is that the pound is called 'cable' because the foreign exchange market was mostly cable transfers of British pounds up until 1913 or so.

The Sharpe Ratio

The Sharpe Ratio

From the horse's mouth, the skinny on the Sharpe Ratio. The higher the better.

HedgeIndex - Home Page

HedgeIndex - Home Page

The Credit Suisse First Boston/Tremont Hedgefund Index is the largest asset-weighted hedge fund index. It is broadly diversified, encompassing around 400 funds across ten style-based sectors, and representative of the entire hedge fund industry. This industry has grown to about a trillion dollars from more modest beginnings in 1949 with the fund of Alfred Winslow Jones. In short, this page gives you a snapshot of that whole hedgfund thang you keep hearin bout.

Swiss National Bank websit

SNB BNS Schweizerische Nationalbank. Banque nationale suisse. Swiss National Bank. Banca nazionale swizzera.

The place to find the speeches of Jean-Pierre Roth is at this website.

The link shows his latest. http://www.snb.ch/e/aktuelles/index.html?file=referate/text_referate1.html

Philipp Hildebrand, the 41-year-old Harvard trained, member of the Governing Board,
has representative speeches here also. His February 4, 2005, speech on Hedge Funds is there.

Welcome to the Bank of England website

Welcome to the Bank of England

This website is the convenient place to find the remarks of Mervyn King, Governor Bank of England. You might say this website is the virtual Old Lady of Threadneedle Street.

Statement by the Hon. SADAKAZU TANIGAKI,Governor of the Fund and the Bank for Japan,at the Joint Annual Discussion

Statement by the Hon. SADAKAZU TANIGAKI,Governor of the Fund and the Bank for Japan,at the Joint Annual Discussion

Here is an example of Japanese Finance Minister Tanigaki's thoughts.

Bank of Japan Speeches and Statements

Speeches and Statements

Governor Toshihiko Fukui's speeches can be found at this site.

ECB: Monthly Bulletin

ECB: Monthly Bulletin

The European Central Bank Monthly Bulletin is available online at the link above. Maybe not as riveting as Stephen King, but good background for the person interested in the world of foreign exchange. A 200-page treasure trove of information each month.

The 20 Most Influential People in FX

20MostInfluentialPeopleinFXRefco.pdf (application/pdf Object)

This article by Boris Schlossberg of Refco is well worth reading. Among the many things he says is the following quote about Gordon Brown, UK Chancellor of the Exchecquer. "Mr. Brown is considered to be the most talented and effective public servant in the G-7 world. Under his stewardship UK has continued its streak of 46 consecutive quarters of economic growth, remaining the only G-7 country to avoid recession since the year 2000."

European Central Bank and the Stability Pact

Bloomberg.com: Bloomberg Columnists

French and German budget deficits have breached the 3 percent level agreed upon in the so called stability pact. Now what?

Consumer Price Index Summary

Consumer Price Index Summary

This morning's CPI was up .6 percent before seasonal adjustment. After seasonal adjustment it met the expectation of .4 percent. This was mildly bullish for the dollar for about 15 minutes. Afterwards, the trading range returned to what it was before the announcement. For more information on the Consumer Price Index, investigate at the Bureau of Labor Statistics website, www.bls.gov

FRB: Press Release--FOMC statement and Board discount rate action--March 22, 2005

FRB: Press Release--FOMC statement and Board discount rate action--March 22, 2005

The release of this statement caused the dollar to strengthen immediately by close to a penny against the British Pound and about a penny against the Euro. Thus spaketh Chairman Greenspan.

What Did Wolfowitz Say Yesterday?

Examine his statement here word for word, without any spins from the media.

js2321_attachment.pdf (application/pdf Object)

Treasury International Capital Data for January $91.5 billion

js2314_attachment.pdf (application/pdf Object)

This number ($91.5 billion) compared with the $58 billion current account deficit shows that financing of the deficit continues stably and is not a problem at the moment.

The Bottom Line According to Greenspan

FRB: Testimony, Greenspan --Future of the Social Security program and economics of retirement -- March 15, 2005: "The necessary adjustments will become ever more difficult and larger the longer we delay. No changes will be easy. All programs in our budget exist because a majority of the Congress and the President considered them of value to our society. Adjustments will thus involve making tradeoffs among valued alternatives. The Congress must choose which alternatives are the most valued in the context of limited resources. In doing so, you will need to consider not only the distributional effects of policy changes but also the broader economic effects on labor supply, retirement behavior, and national saving. The benefits to taking sound, timely action could extend many decades into the future."

Social Security Taxes may need to increase from the present 12.4 percent to 18 percent by mid-century. Individual savings must also rise. Truly sobering projections.

FRB: Testimony, Greenspan --Future of the Social Security program and economics of retirement -- March 15, 2005

FRB: Testimony, Greenspan --Future of the Social Security program and economics of retirement -- March 15, 2005

Chairman Greenspan expresses his own views and not necessarily those of the Federal Reserve Board. Before the Senate Special Committee on Aging.

Anything Worth Doing Is Worth Overdoing.

shreve.pdf (application/pdf Object)

Here is a 350 page study on the connection between Stochastic Calculus and Finance. Not for the faint of heart. A quant needs to know this kind of stuff, though. I wonder if Alan Greenspan knows this subject. I wouldn't be surprised. I'm sure some of his staff do.

Carnegie-Mellon offers a Masters for Financial Quants. Master of Science in Computational Finance (MSCF)

MSCF : Statistical Arbitrage 46-936

The following course comes from that program. MSCF : Statistical Arbitrage 46-936. Could be interesting in light of the recent enlightenment on the subject of Statistical Arbitrage received by yours truly from a practitioner of this black art.

Uranium Data from the Department of Energy 1949-2003

sec9_7.pdf (application/pdf Object)

The price of uranium has about doubled in the past two years.
Good chance to test the supply elasticity of Uranium. In other words, we can see how much more uranium is produced at this higher price and how quickly that drives the price back down. Unless there is a uranium cartel I haven't heard of.

Graph of Uranium Price per Pound

UxC: Historical Price Graphs

Warren Buffet's Latest Letter to the Shareholders of Berkshire Hathaway

2004ltr.pdf (application/pdf Object)

See especially page 18 under Foreign Currencies

Valuation Models :: Balance of Payments

Daily FX :: Fundamental Research :: Valuation Models :: Balance of Payments

Carry Trades Defined and their relationship to the Interest Rate Parity valuation model

A Hole in the Interest Rate Parity Theorem -- Carry Trades

However, this theory has not held true since 1990, because despite higher interest rates in the U.S. versus Japan, the USD has appreciated against the JPY. One of the reasons for this shift is the popularity of carry trades. A carry trade involves buying or lending a currency with a high interest rate and selling or borrowing a currency with a low interest rate. Investors have been moving their funds into higher yielding currencies, therefore causing the higher yielding currencies to appreciate. These trades are popular in times of risk seeking and least successful in times of risk aversion. That is in risk seeking environments, investors tend to reshuffle their portfolios and sell low risk, but high value assets and buy higher risk and low value assets. Riskier currencies - those with large current account deficits - are forced to offer a higher interest rate to compensate investors for the risk of a sharper depreciation than that predicted by uncovered interest rate parity. The profit from a carry trade is an investor's payment for taking this risk. Carry trades are more likely to go wrong in times of risk aversion, such as global economic instability and geopolitical uncertainty. In such times, the riskier currencies - upon which carry trades rely for their returns - tend to depreciate. Typically, riskier currencies have current account deficits and, as risk appetite wanes, investors retreat to the safety of their home markets, making these deficits harder to fund.

Daily FX :: Fundamental Research :: Valuation Models :: Interest Rate Parity

FRB: Testimony, Greenspan --Economic outlook and current fiscal issues-- March 2, 2005

FRB: Testimony, Greenspan --Economic outlook and current fiscal issues-- March 2, 2005

Purchasing Power Parity Numbers from OECD for December 2004

The Purchasing Power Parity Theorem states that the foreign exchange rate of the currency tends towards the number that brings about the same purchasing power in the different countries.

18598721.pdf (application/pdf Object)

Another Look at Ichimoku Charts

A terse description of the Ichimoku charts and signals it generates can be seen at the link below.

This article and more available at Investopedia.com

Learning to Read Ichimoku Charts

The Japanese word "Ichimoku" can be translated as "one look" or "one glance." A Japanese newspaper man whose real name was Goichi Hosada, but who used the pen name "Ichimoku Sanjin," invented a charting technique before WWII.

Ichimoku's guidebook on the charts finally appeared in 1968, many years later. An article by Ken Muranaka which introduces these charts can be found at the following link.


ichimoku.pdf (application/pdf Object)

Although Mr. Muranaka translates many Japanese words to English, I think he goes a bit too far when he talks about "the standard line" and "the turning line." It is just as easy to go with the Japanese words for these, which are Kijun-Sen and Tenkan-Sen. The reason I say this is that the Ichimoku charts I look at most frequently come from the London office of the Mizuho Bank, and they show the lines simply as Kijun Sen and Tenkan Sen, rather than translating them into English. They are just wiggly lines on a chart, so it doesn't matter much what you call them. I just think it is less confusing if we use the names that appear on the charts you can look at every day.

http://www.mizuho-cb.co.uk/TresInternet/PDF'S/eur.pdf

For example, today's chart of the Euro/US$ showing the Ichimoku chart. More later.

Chairman Greenspan's Testimony & Semi-annual Monetary Policy Report to the Congress

"The Federal Reserve will pursue its statutory objectives of price stability and maximum sustainable employment--the latter of which we have learned can best be achieved in the long run by maintaining price stability. This is the surest contribution that the Federal Reserve can make in fostering the economic prosperity and well-being of our nation and its people."

http://www.federalreserve.gov/boarddocs/hh/2005/february/testimony.htm

Economic Projections for 2005 and 2006

Federal Reserve policymakers expect the economy to expand moderately and inflation to remain low in 2005 and 2006. Real GDP growth is expected be be 3.75 to 4 percent for 2005 and about 3.5 percent in 2006. The unemployment rate is expected to average about 5.25 percent in the fourth quarter of 2005 and they expect the unemployment rate to edge down to between 5 percent and 5.25 percent for 2006. The price index for core personal consumption expenditures is expected to be about the same as the 1.6 percent increase posted over 2004.

http://www.federalreserve.gov/boarddocs/hh/2005/february/fullreport.htm

Tom notes that real estate still looks like a good investment.

Tossing A Coin

During the next two days, Chairman Greenspan will be testifying before congress. The global economy will be intent on his remarks. In the meantime, I report here on his Frankfurt panel discussion from November 19, 2004, which he mentioned in his recent London remarks.

Perhaps the most sensible observation he makes is not one I would like to hear. "Nonetheless, despite extensive efforts on the part of analysts, to my knowledge, no model projecting directional movements in exchange rates is significantly superior to tossing a coin. I am aware that, of the thousands who try, some are quite successful. So are winners of coin tossing contests."

This is confirmed by my own experience trading currencies over the years, and yet. . . the game goes on.

In the November speech, Greenspan takes what seems to me an unusual step and emphasizes that "I speak for myself and not necessarily for the Federal Reserve." He also refers to a paper by Caroline L. Freund. The type of document is an International Finance Discussion Paper, "circulated to stimulate discussion and critical comment." Caroline Freund is an economist in the International Finance Division of the Federal Reserve Board. She emphasizes that the views presented are solely her responsibility and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or any other person associated with the Federal Reserve System.

The International Finance Discussion Paper, Number 692, is dated December 2000, and is called Current Account Adjustment In Industrialized Countries. In it she presents 25 examples of large current account adjustments which have occurred since 1980. (Including the United States in 1987). The typical current account reversal begins when the current account deficit as about 5 percent of GDP, that it is associated with slowing income growth and a significant real depreciation over a period of about three years. The short-term interest rate displays a hump-shaped pattern, it is elevated by about 2 percent in the year the current account bottomed out.

The conditions facing the U.S. are similar to those seen before. The current account deficit is now more than 5 percent of GDP. Short term interest rates are expected to ramp up by around 2 percent this year. The dollar may weaken over the next three years to bring the deficit under control. Conceivably the economy could be headed toward slower growth in the next three years.

What is not mentioned specifically is the trade imbalance with China. The current arrangement between the U.S. and China is a fixed exchange rate. This does not allow the current account to adjust in the normal way. China must revalue its currency. They will drag their feet as long as they can. But change must come.

Treasury International Capital Data for December

Because I prefer to look at the data for myself, rather than depend on the spinmeisters and headline makers, and because I still enjoy the instant publication of the source data over the internet, I visited the U.S. Treasury web site this morning to get the report on the net capital flows for December. http://www.treas.gov/press/releases/reports/js2251tic_data.pdf

I like to download and print out the .pdf file from the Treasury and print it out because it is only two pages, and I like the picture of the treasury building that is part of the 'letterhead.' It just looks like money. The report follows a consistent format and with a little practice, your eye can look on page two and pick out the number that is so widely reported. Under the heading Net Long-Term Securities Flows it appears. It appears again at the bottom right hand corner of the table of numbers published at the end of the report.

The numbers in the table give a context to The Number in terms of a series of similar numbers. Thus we see that December's $61.3 billion inflow of net long-term securities can be compared with the monthly figures for the previous three months, and with the figures for the whole years of 2004, 2003 and 2002.

A useful number for comparison is our balance of trade in goods and services for the latest month. You need to look to the Census Department for that one.
http://www.census.gov/foreign-trade/statistics/highlights/monthly.html

So we see that the December 2004 trade balance was minus $56.4 billion. This was a 4.9% improvement from the previous month. So basically the Treasury International Capital data released today shows that the trade imbalance was financed by net capital inflows from foreign investors.

A third useful number for comparison to the TIC data is the expected number. In other words, the market will anticipate what the Treasury will release. If the number is better than expected, this would be positive for the dollar. If the number is not as good as expected, this can have an impact negatively. Today's number was a bit better than expected.

This number caused an added volatility in the market for about an hour, but now the market is trading about where it was before the report was released. A good place to find what the expected number is, previous to its release is the U.S. Economic Calendar published by Refco Global Research among many others. See link at https://research.refco.com/ms/reports/

For a more in-depth article on the TIC system, see Federal Reserve Bulletin for October 2001, pages 633-650

Australian Dollar Rising

If you visit the link today, you may see the current Australian Dollar chart.

http://www.mizuho-cb.co.uk/TresInternet/PDF%27S/start.pdf

A good link for Australia financial information is the webpage of Reserve Bank of Australia--their central bank. Tom says check it out.

www.rba.gov.au/PublicationsAndResearch/

The Reserve Bank of Australia (RBA) finalized a Statement on Monetary Policy on February 3. One of the highlights of the report is that world prices of Australia's base metals exports are now around 40 percent higher than they were two years ago. Supply bottlenecks in the mining sector have held back export growth recently, but capacity expansions are being worked on. BHP Billiton is a Melbourne-based company with global interests in resources such as iron and coal, copper, etc.

http://www.bhpbilliton.com/bb/aboutUs/home.jsp

Their shares trade on the New York Stock Exchange as American Depository Receipts (ADR) with the symbol BBL. Might be interesting to follow that company and see if it benefits from the continued demand for base metals and coal due to the global expansion and especially Chinese expansion.

If you get a chance, read the RBA statement on monetary policy. It is a fast road to familiarity with that sector of the world economy.

Stock photo 

Still Pondering Greenspan's February 4 Remarks in London

Chairman Greenspan's remarks last Friday, February 4, in London regarding the U.S. current account were weighty, complex, and revealing. A close reading of his speech allows the student of the world economy to glimpse shapes beyond the swirling mists of data and the distorting media haze. To begin, the scene is set with reference to the 1980 Economic Journal article by Martin Feldstein and Charles Horoika, vol. 90, pp. 314-329. The article is a kind of stepping stone which allows those uninitated into the fraternity of economic globalization to grasp the chairman's opening remarks. Without that stepping stone, the water gets deep quickly. So I spent several hours poring over Domestic Savings and International Capital Flows and finally crawled up onto that first stepping stone.

The article examines 15 years of data for 21 developed countries to answer the question 'How internationally mobile is the world's supply of capital?' Does capital flow among industrial countries to equalize the yield to investors? Or, does the saving that originates in a country remain to be invested there? If the ratio of savings to investment is close to 1, then the reality is that domestic savings stay at home. If the ratio approaches zero, then domestic savings can escape overseas to seek the best return to the investor.

The 1980 article shows that domestic savings stay at home, despite the level of foreign trade imbalances.

Chairman Greenspan remarks that "in the past decade, expanding trade has been associated with the emergence of ever-larger U.S. current account deficits. . . matched by a corresponding widening of external surpluses in a majority of trading nations."

"The increasing dispersion of these external imbalances is mirrored in a decline in the tight association between national saving rates and domestic investment rates. The correlation between the two, for countries representing four-fifths of world GDP, declined from a coefficient of around 0.96 in 1992, where it had hovered for half a century, to an estimated low of 0.8 last year."

So the proposition that domestic savings stay at home to be invested at home is becoming less true, though it is still 80 percent true. Greenspan concludes: "The decline in home bias, as economists call the parochial tendency to invest domestic savings at home, has clearly enlarged the capacity of the United States to fund deficits."

Later in his remarks, he refers to the speech he gave in Frankfurt on November 19, 2004.

I have argued elsewhere that the U.S. current account deficit cannot widen forever but that, fortunately, the increased flexibility of the American economy will likely facilitate any adjustment without significant consequences to aggregate economic activity.

More on that speech later. We note that at the time of the speech the Euro was about $1.30, and that it continued to appreciate for more than a month to $1.3666 on December 29, before returning to $1.2872 the day before these February 4 remarks.

Greenspan at the Adam Smith Memorial Lecture, February 6, Kirkaldy, Scotland

Alan Greenspan followed his dollar-supporting London speech on February 4 with an important, though lower key lecture on Superbowl Sunday. (http://www.federalreserve.gov/board/Docs/speeches/2005/20050206/default.htm)

The following wry remarks show Greenspan's respect and affinity for Gordon Brown, Chancellor of the Exchequer:

Kirkaldy--the birthplace, in 1723, of Adam Smith and, by extension, of modern economics--is also, of course, where your Chancellor of the Exchequer was reared. I am led to ponder to what extent the Chancellor's renowned economic and financial skills are the result of exposure to the subliminal intellect-enhancing emanations of this area. . .

Starting in the 1970s, American Presidents, supported by bipartisan majorities it the Congress, deregulated large segments of America's transportation, communications, energy, and financial services industries. Similar initiatives were advanced in Britain and elsewhere. The stated purpose was to enhance competition, which following Adam Smith was increasingly seen as a significant spur to the growth of productivity and standards of living. The slow, but persistent, lowering of barriers to cross-border trade and finance assisted in the dismantling of economic rigidities.

By the 1980s, the success of that strategy in the United States confirmed the earlier views that a loosening of regulatory restraint on business would improve the flexibility of our economies. Flexibility implies a faster response to shocks, a correspondingly greater ability to absorb the downside consequences, and a quicker recovery in their aftermath. Enhanced flexibility has the advantage of enabling market economies to adjust automatically and not having to rest on policymakers' initiatives, which often come too late or are misguided. Such views, which echo Jean Baptiste Say in some ways, clearly have been paramount in a renewed twenty-first century appreciation of Adam Smith's contributions.

My Analysis

The first remark is praise. Simple enough.

The second is less obvious, but the word "flexibility" is nuanced. Chancellor Brown is encouraging the UK to join the European Union, an "irreversible" decision, provided the economics are right. Since 1997, the government has set 5 tests that must be met to show the economic case for joining is clear and unambiguous. One of these tests (the second) is "flexibility."

Greenspan points out that "flexibility" has been brought about in America by deregulation and by "slow, but persistent, lowering of barriers to cross-border trade and finance." He also mentions that such views echo Jean Baptiste Say--a Frenchman. I don't know if I'm reading too much into it, but it seems to me that he hints that too much government regulation in the UK has been the problem and that a French economist from the early 19th century who in effect disagreed with Lord Keynes got it right after all. A gentle and humorous chiding, perhaps?

For more on the 5 tests, see the following link:

http://www.hm-treasury.gov.uk/documents/the_euro/assessment/report/euro_assess03_repindex.cfm

What Did He Say Exactly?

Alan Greenspan's London address in toto (with footnotes) can be read at this link
http://www.federalreserve.gov/boardDocs/speeches/2005/20050204/default.htm

So far the results are bullish for the dollar.

Greenspan's first footnote refers to a June 1980 article from The Economic Journal (p. 314-329) called Domestic Saving and International Capital Flows. That sent me scurrying to my reference library--thank goodness for the internet!

Footnote 6 refers to the correlation between the current account deficit and mortgage refinancing. Pretty interesting stuff. R squared equals 0.7. How bout them apples?

Non-Farm Payroll Report

On the other hand, the calm may be due to traders squaring up their positions before the twin events tomorrow morning of the Non-Farm Payroll Report, notoriously unpredictable but expected to come in around 190,000 jobs created, and Chairman Greenspan's words on the balance of payments. Either or both of these events may shake the markets out of their range bound condition. I'm betting on a continuation of the range, due to the parity in interest rates. But of course, I'm willing to be wrong and jump the other way if the market changes direction.

Interest Rate Parity

One of the models for making sense out of the levels of the currency exchange markets is the Interest Rate Parity Theorem. Supposedly the exchange rate will hold steady at some interest rate. Other things being equal, of course. Lately the Fed has been raising our interest rates at a measured pace of a quarter percent per meeting of the Federal Open Market Committee (FOMC). Last week (January 25) the Bank of Canada did not change their overnight interest rate at their meeting, but left it at 2.5%. This week the Federal Reserve raised ours to 2.5%. Thus, we have interest rate parity between the two currencies. The USD/CAD rate has been holding pretty steady at around 1.24 for the past week. Today the European Central Bank (ECB) left its rate unchanged at 2%. The perception is that the Fed will continue to raise interest rates here and the ECB will hold steady at 2% for the next few months. If there were no other factors involved, this would tend to strengthen the dollar vs. the euro. Since the euro has appreciated quite a bit vs. the dollar in the past quarter, these interest rate moves may restore stability in this important exchange rate. The relative calm in the currency markets over the past few days may be a result of an temporory equilibrium due to interest rate parity.

Bush's State of the Union Message

President George W. Bush's State of the Union speech last night passed without incident in the currency markets. This is no small feat of statesmanship. With the jaundiced eyes of the world looking on for an hour, not to make waves takes a bit of skill.

Chairman Greenspan's speech on the trade balance deficit in the morning may require the nuance of a virtuoso--and he will no doubt deliver.

Opining with elbows. 

Fed Raises Rates As Expected

Without signaling any change in policy, the Fed increased interest rates today by a quarter point. We look forward to Chairman Greenspan's comments on the trade balance at the upcoming G-7 meeting.

The announcement did not disturb the equilibrium of the markets that has been in effect for the past few days.