Showing posts with label Henry Paulson. Show all posts
Showing posts with label Henry Paulson. Show all posts

Friday, October 19, 2007

Market Timing

Market TimingSocialTwist Tell-a-Friend
Fari Hamzei

I wrote a piece for FOX biz channel around 830 am PDT this morning, about my reasons why DOW should close about -350 to -500 today. Robert Gray, formerly of Bloomberg TV, quoted us near the close.

As a service to our loyal readers, here are my bullet points (part of these points were posted in our SuperPlatinum Virtual Trading Room in real time). Tomorrow in our Saturday Class we will explore these crucial issues in more detail.

1) expiration week is a counter trend -- we have been climbing a wall of worry since Aug 16th -- SPX hit massive resistance at MR1 Level (Monthly Resistance Level One) five times between October 8th and 15th and failed. We've had divergences between SPX and NDX at new highs with their respective cum advance decline lines -- see our Timer chart below.
2) Crude Oil is at ~85 to 90 USD per barrel.
3) Benazir Bhutto returning to Pakistan -- I wrote about this in early Aug on our Blog -- they have 40 confirmed nukes -- AQ is HQ'd there.
4) comrade Paulson putting his foot in his mouth on SIVs.
5) dollar trashing by Uncle Ben via pre-mature easing.
6) DJ Trans telegraphing massive slow down of the US Economy. See our Wyckoff Chart below.
7) 20th anniversary of Black Monday falling on October Expiration Day.

Have a great weekend......

Monday, February 5, 2007

The Carry Trade

The Carry TradeSocialTwist Tell-a-Friend
Sally Limantour
February 4, 2007

The yen was in the spotlight last week and volatility increased as speculation about the currency’s fragility would be a topic of concern with the G7 meeting. Hank Paulsen, the US Treasury Secretary added fuel to the fire when he told the US Senate last Wednesday that he was watching the Japanese currency “very, very closely.” The yen rallied right after these remarks. On Thursday, he came out and said that he did not think the yen was at an artificial level or had been influenced by political pressures which caused the yen to sell off. Political volatility is a dangerous game.

Japanese interest rates are at rock bottom and while concerns of deflation are being talked down, there does not seem to be a compelling reason for the BOJ to raise rates. The perception that rates and the yen will stay low is fueling the carry trade where any hedge fund can borrow in yen, invest in something with a higher yield, apply some leverage and achieve returns of 20 per cent or more. How long this game can go on is an important question as the unwinding of this carry trade could affect many different markets when it occurs.

Different analysts try to estimate the total size of the carry trade, but it seems a daunting task. Some economists guess at about $35 billion, while pi Economics (, in their research report, The Credit Bubble and the Yen, thinks it is more like $1,000 billion. The yen has thus been labeled the “ATM of the global credit world.”

It is not just hedge funds, but investment banks and other institutions that fund their deals with ultra cheap yen. Most of them do not seem worried as they are betting that Japan’s economic recovery will be slow, thereby keeping the yen weak and the carry trade alive and well. There are also too many interest groups that oppose a stronger yen.

Market volatility has been low making it cheap to use derivatives to insure against the risk of a rising yen. As a result, many hedge funds are buying protection against a stronger yen while playing the carry trade game. In a recent letter to the FT, Vineer Bhanasali, Executive Vice President of Pimco recently commented on this, “low volatility and high carry pairs -is due to “invisible hand” collusion between sellers of exchange rate volatility via options (everyone is selling options as a means to generate income in their portfolios, including many of the central banks) and the authorities, which are setting transparent, low inflation rate policies. The two continue to feed each other. Nothing short of a confidence can shake this fearful yet stable equilibrium. Waiting for that crisis, unfortunately is unprofitable and, given the cheapness of protection against the tail risks, not the course of action you should expect most profit-driven speculators to follow.”

For now, the general consensus is for the yen to stay weak as UBS, AG and RBC Capital Markets both reduced their estimates for the yen. There is, however, a dissenting voice from none other than our irreverent and insightful Marc Faber of the famed, Doom, Gloom and Boom report. In the recent Barron’s Round Table he shared a different take on it. Marc is betting on volatility this year and would play it this way:

“Consider the carry trade – investors buying in yen and investing in higher-yielding assets around the world. They’re not buying dividend-paying assets, but assets like the Indian stock market. The yen carry trade will unwind when, suddenly, these risky assets begin to perform badly relative to cash rates in Japan or the Japanese stock market. Then leverage will be reduced and people will reinvest in yen. When the reversal occurs, the yen will soar against, say, the dollar. My macro pick for 2007 is to buy the yen long or long-dated calls on yen. In the long run, it is a bad policy to borrow in a low-yielding currency and invest in a high-yielding currency. It works for one year, two years, three years, and suddenly it massively doesn’t work.”

As traders we have to understand both sides of the argument and, in addition, we must look at the charts, the Commitment of Traders report and consider the seasonal tendencies. Last week the yen took out the previous week’s high and low and closed higher for the week. In making that low the yen went below the lows going back to December of 2005, but quickly rejected it. I would consider this a critical area as we made a low last week of 82.38, taking out the 2005 low of 82.52. Back in 2003, we had a double bottom at 82.20 and then rallied sharply to 97.00 into 2004. So, this 82.20 - 82.50 area is critical support and taking it out could see prices break quickly to the 80.00 level.

The Commitment of Traders report (COT) reveals a market that is not overly short. On the CME the net short yen positions still represent only 38 per cent of all yen contracts. I would want to see the COT with a larger share of short positions to begin thinking about fading the short side. Also, the seasonal tendency for the yen is to sell off during this time of year. Over the last 10 years, the yen has consistently lost anywhere from 2.15% to 3.17% between February 3rd through April 12th. If we follow the seasonal pattern this year we could see the yen trade down and test the 80.00 level. Perhaps, then we could find some attractive long-dated calls on the yen.

We have to keep in mind that anything can happen and realize too that the Japanese investor’s appetite for overseas assets continues to be insatiable which adds to the yens weakness. Despite big outflows, 93 per cent of Japanese household wealth is still yen-denominated. All of this plays a role in the value of the yen, but as we all know trends do not continue forever and things can change rather quickly. Like Hank Paulsen, I will be watching this very, very closely both for direction and volatility - for volatility is the enemy of all carry strategies.

Disclaimer and Terms of Service

© Copyright 1998-2023, Hamzei Analytics, LLC. Hamzei Financial Network is published by Hamzei Analytics, LLC, Naples, FL 34112, (310) 306-1200. The information herein was obtained from sources which Hamzei Analytics, LLC believes are reliable, but we can not and do not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Hamzei Analytics, LLC or its principals may already have invested or may from time to time invest in securities or commodities that are recommended or otherwise covered on this website. Neither Hamzei Analytics, LLC nor its principals intend to disclose the extent of any current holdings or future transactions with respect to any particular security or commodity. You should consider this possibility before investing in any security or commodity based upon statements and information contained in any report, post, comment or recommendation you receive from us. The content on this site is provided as general information only and should not be taken as investment or trading advice. Any action that you take as a result of information, analysis, or conclusion on this site is ultimately your responsibility. Always consult your financial adviser(s) before making any investment or trading decisions.