October 2007

Australia’s
benchmark interest rate, at 6.50%, is already the highest in the industrialized
world, after New Zealand.
Ignoring the pleas of the Treasurer, the Central Bank of has all but decided to
hike rates even further into the stratosphere at its next meeting.  The country is in a bit of a pickle, since a
booming economy and the consequent inflation seems to demand a rate hike.  At the same time, this rate hike will ensure
that Australia continues to
be on the receiving end of Japanese carry trades, and this is precisely what irks
Peter Costello, Australia’s
Treasurer. In other words, the world’s
massive economic imbalances will only be exacerbated by an Australian rate
hike, but this may be a moot point as far as the Central Bank is concerned.  The Sydney Morning Herald reports:

Instability on global financial markets between now and the
next Reserve Bank board meeting on Melbourne Cup day is seen by economists as
the only force that could stay the bank’s hand from raising rates to the
highest level in a decade.

Read More: Look out for the tsunami, says Costello

Original post by Jimmy Atkinson and software by Elliott Back

Feeling Safe With Open-End Stocks When the phrase open-end was first used, apparently it meant merely that a company was continuing to issue additional shares of its stock, and to redeem shares, and that the total number of shares outstanding might rise or fall. But the meaning of open-end […]

Original post by Jimmy Atkinson and software by Elliott Back

The Chinese Yuan has crossed the psychological barrier of
7.5 RMB/USD, a level last seen nearly a decade ago.  The currency’s appreciation has been gradual
but visible, not withstanding the cries of western bureaucrats.  By all accounts, the Yuan will continue
rising, though not at the same pace as its trade surplus, which is projected to
jump from $177 Billion in 2006 to $300 Billion in 2007.  Predictions regarding the extent of the
appreciation range from 20% to 400%, the implication being that it depends who
you ask. But the general consensus is
clear: the Yuan is pointing upwards.  Bloomberg
News reports:

Non-deliverable forward contracts show traders are betting
the yuan will reach 7.0070 in 12 months, a gain of 6.9 percent from the spot
rate, and 6.95 by the end of 2008.

Read More: Yuan Gains Past 7.5
for First Time in Decade as Surplus Widens

Original post by Jimmy Atkinson and software by Elliott Back

Poor advice and erratic, emotional behavior result in stock market and investment losses, regardless of how good your advice was. Poor advice can come from friends, brokers or advisory services who just happen to get it wrong. Obviously, it is impossible to detect just how poor the advice is until it is too late, and guarding against it is virtually impossible — unless it is disregarded altogether.

Original post by Jimmy Atkinson and software by Elliott Back

The Dollar is still reeling from the 50 basis point rate cut
imposed by the Fed last month. Nonetheless,
some analysts are predicting that the Fed will cut rates again on October 31,
this time by a quarter of a percentage point, to 4.5%. The looming fall in real estate prices
(termed the sub-prime crisis) has officially spread to the rest of the economy,
and the Fed is trying to preempt a complete collapse in investor and consumer
confidence.  Experts remain divided as to
whether the Fed will cut rates now or next month. Either way, you can expect the Dollar to drop
to fresh lows against the Euro.  Thomson
Financial reports:

“The combination of weak US data, rising expectations of
aggressive Fed easing and a stable, albeit fragile, Wall Street is a perfect
recipe for euro-US dollar and Australian dollar-US dollar strength,” said one
analyst.

Read More: US dollar hovers near all-time low vs euro on
chances of Fed rate cut

Original post by Jimmy Atkinson and software by Elliott Back

The progression from constant-ratio formulas to variable ratios is completely logical. Once an investor understands the principles of constant-ratio planning, he might well wonder about the feasibility of adding some flexibility to a formula by increasing the ratio of common stocks when the market is low, and cutting back when the market is high, thus maximizing purchases of stock at low prices and minimizing risks at high levels.

Original post by Jimmy Atkinson and software by Elliott Back

Asian currencies, with the exception of the Chinese Yuan and
Japanese Yen, have notched stellar performances this year.  The currencies of Thailand, Malaysia,
Singapore, South Korea, to name but a few, have experienced double-digit
increases (in percentage terms) against the Dollar. Worried about the impact of a rising currency
on export growth, Asian central banks are in the process of intervening in
forex markets.  Singapore,
which uses currency manipulation as a form of monetary policy, believed to have
already made purchases of US government bonds in order to depress the Singapore
Dollar. South Korea, as well, has a history
of forex intervention, albeit unsuccessful intervention, and may issue currency
stabilization bonds before year-end.  The
Gulf Daily News reports:

The Bank of Korea has repeatedly stated that it would
closely monitor currency markets, expressing concern about the level of the won
and money supply growth.

Read More: Asian banks calm currency surge

Original post by Jimmy Atkinson and software by Elliott Back

Stocks And Corporations Corporations have a large amount of power in today’s society, but even large corporations occasionally listen to their smaller stockholders — particularly if a number of them band together and start singing the same tune.

Original post by Jimmy Atkinson and software by Elliott Back

The fact that some formulas have wound up in the junk heap after they proved inadequate to predict market conditions has led some observers to conclude that the whole idea must have been poor from the start. This is like saying that because the great majority of automobile companies have folded over the years, the automobile must therefore be a failure.

Original post by Jimmy Atkinson and software by Elliott Back

You have to admire the US for its persistence in pressuring China to appreciate the Yuan,
though it’s not as if anyone seriously expected it to back off. Fresh from the recent
G8 conference and enjoying the spotlight of the media, US Treasury Secretary
Hank Paulson called in China to put its money where its mouth is, and relax its hold on the Yuan. Paulson expressed
dissatisfaction with the pace at which the Chinese currency has appreciated-
approximately 10% since 2005.  He even
insinuated that there would be repercussions for the US-China trade
relationship if this demand was not at least partially fulfilled.  To add insult to injury, he warned that US public opinion of China is already at a low point, in
the wake of the quality control issues with Chinese exports and the subsequent
recalls.  Reuters reports:

“While we are trying to lower barriers to trade, there is a
risk that some in China are
stepping away from long-standing policies of closer global economic integration
– policies which have been a source of

China’s incredible growth.”

Read More: Paulson wants faster China yuan rise

Original post by Jimmy Atkinson and software by Elliott Back

In an official G7 press release, US Treasury Secretary Henry
Paulson proclaimed that the US
would continue to pursue a “Strong Dollar” policy. While this remark was certainly anticipated
and probably even appreciated, by representatives from the EU, analysts have
been quick to mock. Their point, which
is well-taken, is that it seems ridiculous for the US to insist that it supports a
strong Dollar when economic fundamentals support a continued decline. The current account deficit is not
retreating, interest rates are being lowered, and the credit crunch threatens
to collapse the US housing and stock markets. Meanwhile,
the USD has declined in five of the last six years, and the Bush administration
has not made any serious efforts (beyond rhetoric) to intervene on its behalf,
leaving market participants chuckling and scratching their heads when they hear
“Strong Dollar.” Reuters reports:

Paulson even before he became Treasury secretary said
publicly that the dollar would have to weaken to ameliorate the U.S. trade
shortfall. So his maintaining a strong-dollar policy may reflect a more global perspective…

Read More: Markets see U.S. policy of "ignore the dollar"

Original post by Jimmy Atkinson and software by Elliott Back

Investing In Large, But Not Big Companies Because so much is said and written about the giants, an investor may easily fail to notice the other large companies. But a major feature of American business organization is the numerous corporations, each one large compared to the average, but small alongside the […]

Original post by Jimmy Atkinson and software by Elliott Back

At last week’s G8 meeting in Washington, it was expected that currencies would be a hot topic of discussion.  With the Dollar retreating to record lows on a daily basis, the failure of China to allow the Yuan to appreciate, the Japanese Yen’s continued weakness despite its strong economy, and the recent parity of the Canadian Dollar and USD, there are certainly plenty of forex phenomena that deserve attention.  However, it is the Euro/USD relationship that probably received the most scrutiny, as the biggest contingent of the G8 uses the Euro.

European politicians and bureaucrats have spent the last few months arguing with America-as well as amongst themselves-over the declining Dollar.  The consensus is certainly that the Dollar is harming the European economies; as one German Minister phrased it, the “pain threshold” has been crossed.  At the same time, it is clear that a relatively weak Dollar is probably in the best interest of global economic stability, since the US current account and financial account imbalances can only be solved by changes in exchange rates.  Thus, there is a growing divide between European politicians, who tend to think in provincial terms, and the European Central Bank, which is more focused on the Big Picture.  The new President of France, for example, has been quite vocal in lamenting the appreciation of the Euro, even going so far as to demand the ECB step in.  Jean Claude Trichet, president of the ECB, responded by calling on European politicians to be circumspect in their comments on the Euro.

However, since Central Banks do not participate in G8 conferences, you can bet that politicians hounded Hank Paulson, US Secretary of the Treasury, on the declining Dollar.  Some analysts have even speculated that ‘intervention’ would enter into the discussions. In fact, the US has not intervened in forex markets since 1994, when Europe and American worked in tandem to prop up a then-ailing Dollar.  After a couple months, however, the plan was abandoned due to mixed results.  Is it possible that the US, confronted with the same situation, will once again attempt intervention?

The answer is “not likely.”  First, the Europeans are not even united in their position on the USD/Euro exchange rate.  Secretly, they would probably all prefer a stronger Dollar, but in public, only a handful have called for intervention.  Second, short of fixing the exchange rate (which would require the US to borrow money), it is very difficult for a government/central bank to control its currency.  Recent intervention by South Korea and Japan, as well as America’s efforts in 1994, ended in failure. Finally, there is the issue of China, which does control its currency.  The US would surely appear hypocritical if it intervened on behalf of the Dollar while simultaneously encouraging China to float the Yuan.  Thus, while certain US economic concessions may result of the G8 conference, a controlled appreciation of the Dollar will not likely be one of them.

Original post by Jimmy Atkinson and software by Elliott Back

The main vogue for formulas began in the late thirties, and was primarily a reaction to the market declines of 1929-32 and 1937-38. Naturally, the market analysts who first worked with formulas were more interested in building protection against declines than profiting from advances, and they understandably assumed that the severity of future drops in market prices could match these two earlier periods.

Original post by Jimmy Atkinson and software by Elliott Back

Benefits Of A Monthly Investment Plan One of the simplest, most effective, and most popular methods of buying stock is to start a Monthly Investment Plan, or MIP. Started in 1954, the MIP now has more than 93,000 accounts in force, and new ones are being written at the rate of […]

Original post by Jimmy Atkinson and software by Elliott Back

Somewhat similar to the constant-dollar plan is the constant-ratio formula. It is one of the oldest formulas in existence, having been used as long as 20 years ago.

Original post by Jimmy Atkinson and software by Elliott Back

Over the last few months, the Australian Dollar has risen over 15% against the USD, bringing the currency to a 23-year high. With parity (1:1 exchange rate) in sight, some analysts are beginning to draw parallels between the Australian Dollar and the Canadian Dollar, which skyrocketed to parity against the USD just last month.  Both economies are rich in natural resources, relying heavily on them to drive exports.  In fact, more than half of Australia’s exports are comprised of natural resources.  It is no surprise that as oil, gold, and a host of other raw materials have surged to record highs, the Australian economy has outperformed even the rosiest of expectations.  With China’s economic boom promising to keep raw material prices high for the near future, the prospects for Australia’s economy, and hence its currency, are brighter than ever.

What’s more, the basic divergence in growth is clearly tipping towards the momentum underlying the Aussie economy with consumer spending, business investment and export income promising strength for the economy and currency in the months to come.

DailyFX reports: Australian Dollar: The Next to Reach Parity?

Original post by Jimmy Atkinson and software by Elliott Back

Investing In Big Companies Let’s assume that in order to be called a giant, a corporation must have at least a billion dollars worth of property value. How many giants are there? Suppose we say that to be called a giant a corporation must have property valued at a billion […]

Original post by Jimmy Atkinson and software by Elliott Back

Most of the world’s emerging economies link their currencies to either the Dollar, the Euro or a basket of currencies, through an outright peg or a so-called "dirty float."  These countries have attracted waves of foreign money, with the intent of buying cheap exports, foreign direct investment, and capital/forex market speculation.  As a result, while the upside of these pegs has been seemingly boundless economic growth, the downside has been inflation, since many of these countries have been forced to print money in exchange for foreign currency.  Countries in the Middle East, Asia, and Eastern Europe, especially, have effected tremendous increases in their respective money supplies with double-digit inflation rates to match.  Many savvy investors, namely hedge funds, have begun to target countries with fixed exchange rates that are suffering high rates of inflation, with the reasoning that it is inevitable such currencies will soon be forced into appreciation. The Telegraph reports:

Further east, Vietnam is throwing in the towel as inflation hits 9pc. It said it will no longer hold down the dong by massive purchases of US bonds. Singapore, Taiwan, and Korea have begun to change tack, slowing dollar accumulation before inflation gets out of control.

Read More: Hedge funds target currency pegs

Original post by Jimmy Atkinson and software by Elliott Back

Continuing our coverage of BRIC countries (see previous post), the Brazilian Real has climbed 20% in value this year alone, on top of gains recorded in previous years. Fearing that an expensive currency will adversely affect its economy, Brazil’s Central Bank announced its plans to intervene in forex markets on behalf of the Real. The Central Bank will buy Dollars at the spot rate, which should bring down the Real slightly.  However, the Central Bank also intervened about two months ago, with limited effect on the Real.  And it doesn’t hold that this time around will be any different.  Ultimately, there are economic forces beyond the control of the Central Bank which are propelling the Real upward.  Reuters reports:

"But I don’t think the bank is going to be able to prevent the real from strengthening further," said one analyst. "The dollar inflows into the country are too strong."

Read More: Brazil stocks, currency slip as c.bank intervenes

Original post by Jimmy Atkinson and software by Elliott Back

Some individuals who are far from an office of a stock-exchange firm or who have no account with one often do business directly with an option-dealer. The option-dealer will hold options for the account of a customer and will exercise the options upon instructions from the customer.

Original post by Jimmy Atkinson and software by Elliott Back

Among the so-called BRIC developing countries (Brazil, Russia, India, China), India is probably the second hottest economy at the moment, after China of course. And following in the footsteps of other developing countries, it is quickly building a massive stock of foreign exchange reserves in order to hold down inflation. Previously, I resisted covering India, because its reserves were small compared to those of China and Japan and hence its potential impact on the Dollar was limited. However, having set another record, India’s forex reserves now top $250 Billion, which rank the country among the highest in the world in this regard. In fact, India is accumulating reserves at the blistering rate of $3 Billion/week!  The breakdown of the reserves (in terms of foreign currency) is unclear, but it seems reasonable to believe that it is dominated by Dollar assets.

Read More: India’s forex reserves rise to record $251 billion

Original post by Jimmy Atkinson and software by Elliott Back

Modern day business is run by a “market” economy, with the most accurate and best organized of the markets being those for securities.

Original post by Jimmy Atkinson and software by Elliott Back

The Basic Principles Behind Buying And Selling Stocks Many people do not fully understand the process of buying and selling stock. Who sets the price on a corporation’s stock? An amateur investor may naturally assume that the price is set by the management of the issuing corporation. […]

Original post by Jimmy Atkinson and software by Elliott Back

The UK Pound has been on a tear recently, both against the
USD and more surprisingly, against the Euro.  The currency has been given a boost by the
Bank of England’s reluctance to cut its benchmark interest rate, which at
5.75%, remains the highest among the world’s major currencies.  However, many economists feel the case for a
rate cut is growing stronger every month, whether or not the Bank of England is
willing to acknowledge it.  Inflation is
only moderately high, while the fall in housing prices-exacerbated by a prolonged
period of tight money-threatens to drag down the entire economy.  The markets are still pricing in a rate cut by
year-end, which would surely drag down the Pound should it obtain.  Dow Jones Newswires reports:

“We strongly suspect that market pessimism in this respect
will continue to grow, in reverse proportions to its expectations of a further
hike in U.K. interest rates,” said…a senior currency strategist.

Read More: Sterling’s Strength Can’t Last Much Longer

Original post by Jimmy Atkinson and software by Elliott Back

There is no way, except for the one I shall describe, that one can make a long-term gain in a declining market. If one has a profit on a short sale, that profit is a short-term gain regardless of how long one is “short” the stock.

Original post by Jimmy Atkinson and software by Elliott Back

As expected, the Bank of Japan left its benchmark interest
rate unchanged at its latest meeting.  The current rate of .5% remains the lowest in
the industrialized world and thus will continue to fuel the Japanese carry
trade.  The Bank fended off the criticism
of several European Ministers, wary of the Yen’s continued appreciation against
the Euro, including a 5% increase in the last month alone. The EU has insisted that Japan should
hike rates immediately both to avoid global economic imbalances and to prevent its
own economy from overheating.  Japan defended
its decision by pointing to certain small business indicators, which suggest
the sector is still underperforming.  Carry
traders, rest easy. Bloomberg News
reports:

“The Bank of Japan will probably need to put off a hike at
least until December to nail down its assessment of global growth as well as
the performance of small companies,” said Masaaki Kanno, a former central bank
official

Read More: Bank of Japan Votes 8-1 to Keep Key Rate at 0.5%

Original post by Jimmy Atkinson and software by Elliott Back

Let’s say a man is “short” 100 shares of XYZ stock which he sold short at 55 (he hopes to buy it back at 30), but the stock is now selling at 50. He originally deposited funds with his broker to margin this short sale, but he now has use for these funds.

Original post by Jimmy Atkinson and software by Elliott Back

Evidently frustrated by the Euro’s appreciation against the
USD, a group of EU ministers has turned its attention to China, calling
on it to allow the Yuan to appreciate against the Euro.  While the Yuan has appreciated nearly 10%
against the USD over the last two years, it has actually decreased in value
against the Euro.  As a result, the EU
trade deficit has set a fresh record nearly every month. Unfortunately, the Yuan basically remains
pegged to the USD, and since the USD is depreciating faster against the Euro
than against the Chinese Yuan, the law of triangular arbitrage dictates the
Euro must be appreciating against the Yuan.  It appears China’s hands are tied.  Bloomberg News
reports:

“I can assure you China will continue to adopt a
reform oriented policy on its exchange-rate mechanism,” said a Chinese Foreign
Ministry spokesman. “But these
adjustments have to be done gradually and in line with the market.”

Read More: EU Calls on China to Let Yuan Appreciate Against Euro

Original post by Jimmy Atkinson and software by Elliott Back

Taking On Closed-End Companies Investors need be wary of buying stock in closed-end companies. They tend to grow much more slowly than their open-end counterparts, and an investor with limited capital can find himself out of luck if he is unable to buy additional shares at a reduced price. […]

Original post by Jimmy Atkinson and software by Elliott Back

The Dollar has been sliding steadily for close to a year,
and Wall Street has been rushing to introduce a spate of new investment
products to help investors profit accordingly.  For those who do not want to trade currencies
directly, Exchange Traded Funds (ETF’s), probably represent the best
alternative. The typical currency ETF tracks a basket of currencies and most ETFs
are characterized by low fees.  In fact, over
$2.7 Billion is currently invested in such ETF’s, which have risen from virtually
nothing over the last 7 years. Another
option is to buy CDs or other money market instruments denominated in other
currencies. Online banks such as
Everbank offer such products. Yet
another option is to buy shares in mutual funds that aim to mimic the returns
offered by investing directly in foreign money market instruments.  Finally, one can simply buy shares in foreign
companies or in American multinational companies that do significant business
abroad.

Read More: Opinion divided on currency trading

Original post by Jimmy Atkinson and software by Elliott Back

Options are sold in units of 100 shares—never in odd lots. Nevertheless, orders for 500 or 1,000-share options are common, and orders for 10,000-share options occasionally come in to the market.

Original post by Jimmy Atkinson and software by Elliott Back

Rodrigo Rato, outgoing president of the International Monetary Fund ("IMF") recently offered his two cents on developments in the forex markets.  He began by cautioning against "excessive volatility," or the rapid fluctuations which have recently afflicted many of the world’s major currencies.  Next, he suggested that the Dollar has moved from being massively overvalued to being massively undervalued. In other words, it is his assessment that the Dollar has depreciated far too rapidly over the last few years.  Finally, he suggested that a tightening of Japanese monetary policy would be in the best interest of global economic stability.  As Rato is no doubt aware, higher Japanese interest rates would put an end to the carry trade, and drive the Yen upwards in value.  The Financial Times reports:

The outgoing IMF chief also hints at unease about Japan’s yen, which remains weak in part because of ultra-low interest rates. “Normalisation of monetary policy in Japan is an important medium-term objective.”

Read More: Rato speaks his mind on dollar

Original post by Jimmy Atkinson and software by Elliott Back

The Use Of Options I can remember when I testified before the Senate Finance Committee in 1934. I was, of course, younger and less experienced, but I had been in the option business for fifteen years at that time and, although the business then was different from what it is now, […]

Original post by Jimmy Atkinson and software by Elliott Back

Japan’s Central Bank now controls over $950 Billion in foreign exchange reserves, second only to those of China.  While Japan is not accumulating significant new reserves, its existing reserves have appreciated in value due to the