November 2007

Earlier this week, we reported that the members of OPEC are
mulling the possibility of pricing oil contracts in a basket of currencies,
rather than solely in Dollars.  In a
related move, the members of the Gulf Co-operation Council (GCC) are also
rethinking their exchange rate policies. Currently, the members of the GCC, consisting of United Arab Emirates (UAE),
Saudi Arabia, Kuwait, Qatar, Oman and Bahrain, all currently peg their
respective currencies to the Dollar, in some form or another.  However, this policy is being scrutinized as a
result of the falling Dollar, which has dragged down GCC currencies
proportionately and triggered double-digit inflation.

In fact, Kuwait
has already de-linked its currency from the USD and instead pegged it to a
basket of currencies, so as to give it more flexibility in conducting monetary
policy.  This represents the most likely
course for the rest of the GCC, since it would allow them to maintain exchange rate
stability while increasing their flexibility in conducting monetary policy.  This policy change, combined with the
potential switch in oil pricing among OPEC nations, bodes ill for the
Dollar. At the very least, it would
result in decreased demand for USD and for Dollar-denominated assets. At worst, it would result in active
diversification, of rotating foreign exchange reserves into assets denominated
in other currencies, to support the new peg.

Read More: Countdown to lift-off

Original post by Jimmy Atkinson and software by Elliott Back

India’s
forex reserves are growing at nearly $20 Billion every month and are quickly
approaching $300 Billion.  Of course,
accompanying this windfall are the inevitable questions about what to do with
the money.  The Royal Bank of India (RBI)
had determined that at most, the Indian economy can absorb $50 Billion a year.  Accordingly, the bulk of the capital inflows
are “sterilized” through the issuance of forex stabilization bonds, which are
aimed both at controlling inflation and limiting the appreciation of the Indian
Rupee.  Unfortunately, due to
already-high inflation in India,
the RBI must pay a higher rate of interest on the stabilization bonds than it
is earning on the underlying assets, which means the scheme is a losing
proposition.  The Economic Times reports:

The RBI is also hesitating to allow further appreciation in
exchange rate. While it can allow appreciation of the exchange rate to avoid
injecting liquidity (by way of buying dollars and selling rupees), it is
concerned about the fact that it is already over-valued.

Read More: The 250-bn dollar question of capital inflows

Original post by Jimmy Atkinson and software by Elliott Back

Currency traders who have done their homework are no doubt
well aware that one of the countervailing forces to the Dollar’s decline is the
so-called petrodollar phenomenon.  In
short, because oil contracts are settled in USD, the global demand for USD is
held artificially high.  However, due
primarily to the rapid decline of the Dollar, the members of OPEC are studying
the feasibility of pricing oil in terms of a basket of currencies, rather than
solely in terms of Dollars. This
proposal is still in the earliest stages of planning, and it’s not yet clear
exactly how it would work.  One thing is certain: if such a change were
implemented, the decline of the Dollar would accelerate.  OPEC is scheduled to hold several high-level
meetings over the next month, which should produce further developments. Reuters reports:

Venezuela’s
Energy Minister Rafael Ramirez said…“The need to establish a basket of
currencies … will probably be a point of discussion in the next OPEC summit.”

Read More: OPEC to study currency basket for pricing

Original post by Jimmy Atkinson and software by Elliott Back

Mutual Funds: Tools for Diversification Companies succeed and fail all the time — much like individuals do in their own careers. Putting all of one’s stock into one currently successful company can result in financial disaster, but in a diversified mutual fund, the past record of a company is a far […]

Original post by Jimmy Atkinson and software by Elliott Back

For nearly two months, the Central Bank of Brazil was content to sit on the sidelines and watch its currency, the Real, appreciate rapidly against the Dollar.  Beginning on October 8, however, the Central Bank has intervened in forex markets every day as part of a targeted effort to depress the Real.  Its efforts have been relatively straightforward; rather than issue currency stabilization bonds, the Central Bank has opted to purchase massive quantities of Dollar-denominated assets in the open market, bringing its foreign exchange reserves to $168 Billion.  Moreover, its efforts have been largely successful, as the Real has fallen slightly against the Dollar during this period of intervention.  However, logic (and past experience) dictate that as soon as it stops intervening, the Real will resume its  previous (upward) course against the Dollar. Bloomberg News reports:

Foreign flows into Brazilian financial markets and booming
commodity exports have made the real the best performer against
the dollar this year among the 16 most-actively traded
currencies tracked by Bloomberg, gaining 20 percent.

Read More: Brazilian Currency Falls After Central Bank Buys U.S. Dollars

Original post by Jimmy Atkinson and software by Elliott Back

How Preferred Are Preferred Stocks? In an attempt to combine the most attractive features of bonds and common stock, financial experts created preferred stock. In most cases, it pays more than a bond, but is safer than common stock because of its preferred position.

Original post by Jimmy Atkinson and software by Elliott Back

The carry trade is officially unwinding, if not coming to an outright end; the result is that the Yen is belatedly joining the ranks of the rest of the world’s major currencies, which have risen tremendously against the Dollar.  The reason for the sudden weakness in the carry trade (i.e. Yen strength) is volatility.  The US "credit crunch" began to significantly effect US bond and stock market valuations almost four months ago, but the full impact still hasn’t been felt.  The latest development concerns the quarterly earnings release for Freddie Mac, an American company whose main purpose is to provide liquidity to the US mortgage market, through the buying and selling of mortgage-backed securities.  However, Freddie Mac is now bleeding money, and while it is unofficially guaranteed by the federal government, investors are seriously questioning its ability to prop up the ailing market for housing CDOs.  And this uncertainty is causing investors to eschew risk, in short, to abandon the carry trade in favor of more traditional forex strategies.  Reuters reports:

The low-yielding Japanese currency tends to do well in times of risk aversion because investors unwind carry trades that use cheaply borrowed yen to buy higher-yielding currencies.

Read More: Dollar sinks to 2-year low vs yen, euro hits highs

Original post by Jimmy Atkinson and software by Elliott Back

As the Japanese Yen continues to enjoy the carry trade limelight, another currency fulfilling a similar role has been largely overlooked: the Swiss Franc.  While not quite as low as rates in Japan, Swiss interest rates are still extremely modest by international standards. As a result, many carry traders have used the Swiss Franc in much the same way as the Japanese Yen, selling it short in favor of higher-yielding currencies. And, just as the Japanese Yen has begun climbing over the last few months, so has the Swiss Franc.  The volatility in capital markets caused by the credit crunch is just as prevalent in forex markets, and is leading currency traders to eschew yield (high interest rates) in favor of stability, which benefits currencies like the Franc. The Economic Times reports:

Another trader with a multinational bank said with carry trades now coming under heavy pressure and banks being reluctant to fund investors entering into such trades, risk aversion seems to be taking over the global currency markets.

Read More: Swiss franc safe haven for carry trade

Original post by Jimmy Atkinson and software by Elliott Back

The Vassar Plan, although originally a moving average plan, changed so often while it was in use that it really fits in no single category, and was finally abandoned altogether. However, it was the first variable-ratio formula plan ever to receive wide publicity and is relatively simple in its principles.

Original post by Jimmy Atkinson and software by Elliott Back

In a recent speech, a prominent Federal Reserve Board governor strongly hinted that the Fed would maintain US interest rates at current levels at the Fed’s next meeting.  The Fed is caught in the delicate position of trying to balance economic growth with the specter of inflation.  While technically the Fed is always trying to meditate between these two outcomes, its current position is especially tenuous since the US economy is trending downward while inflation trends upward.  Despite the emphatic claims to the contrary, futures markets are still pricing in a rate cut, setting the stage for a showdown with the Fed.  As usual, the Dollar’s fate hangs in the balance.  The Financial Times reports:

Mr Kroszner said that in the near term "the economy will probably go through a rough patch" with falls in house prices, home construction and subdued consumer spending. He did not rule out a future cut in rates.

Read More: Fed and markets set to clash

Original post by Jimmy Atkinson and software by Elliott Back

Personal Opinion and Financial Decisions Fundamentally, all market activity is in one way or another a response to the interaction of personal opinions. Someone wants to buy, someone wants to sell, and thereby a market is made.

Original post by Jimmy Atkinson and software by Elliott Back

Yesterday, the Financial Times ran two stories on the Japanese carry trade, painting a seemingly contradictory picture.  The first article profiled the rise in the number of retail forex accounts in Japan, projected to reach 1 million by year-end.  More amazing is the fact that many of these traders are actually quite sophisticated, taking long and short positions in multiple currencies, though of course the most popular bet remains the carry trade, which involves going short the Yen and long a higher-yielding currency.  Meanwhile, as the second article expounded, the Yen carry trade is under pressure, having appreciated nearly 5% against the US Dollar, Euro and Australian Dollar.  The cause is certainly volatility in global capital markets, precipitated by what has been termed a "credit crunch," itself caused by the slump in housing prices. The hoard of Japanese retail investors may have to reverse their positions…

Read More: Pressure grows on yen carry trades and Forex Lures Japanese Investors

Original post by Jimmy Atkinson and software by Elliott Back

The constant ratio formula is not a new formula. The first widely publicized use of the constant-ratio formula n the late 1930s was the “Yale Plan,” so-called because Yale University managed a part of its endowment fund according to the formula.

Original post by Jimmy Atkinson and software by Elliott Back

Government Regulation And The Stock Market In a bank that is a member of the Federal Deposit Insurance Corporation (F.D.I.C.), a depositor has a flat guarantee from the U.S. Government that he can always get his money back, and promptly. But in corporate stocks and bonds, the government guarantees nothing. The […]

Original post by Jimmy Atkinson and software by Elliott Back

In fact, China may have to increase its exposure to the dollar, according to the comments of Brad Setser of the Council of Foreign Relations: "In my mind, so long as China resists more rapid appreciation of the renminbi versus the dollar, it’s rather difficult for China to diversify in any meaningful way against the dollar. If China really started to diversify away from the dollar, I think it’s a big enough player that it would put downward additional pressure on the dollar."

And additional downard pressure on the USD should be what China is trying to avoid. China, being the largest exporter to the U.S. does not want to see appreciation of its currency against the USD, as that would make its goods more expensive (and therefore less competitive) in America.

In fact, Setser goes on to say that in order to prevent the USD from sliding even further downward against the RMB, China would have to not only retain its present stock of USD, but in fact buy even more.

Read more: Can China Dump the Dollar?

Original post by Jimmy Atkinson and software by Elliott Back

Yesterday, we posted about the Central Bank of Australia, which intervened on behalf of its currency over the summer. In fact, several Central Banks have either intervened or are in the process of intervening, all with the goal of holding their currencies down (against the US Dollar) rather than lifting them up, as Australia had effected to do.  Columbia has already imposed strict rules governing the inflow of foreign capital, intended to discourage speculation, which is driving up the South American nation’s currency.  Indian regulators have since followed suit with similar rules.  South Korea’s Central Bank, meanwhile, is using slightly different tactics, undertaking a review of forex forward contracts, which it believes (probably erroneously) are interfering with its ability to hold down the Korean Won.  Bloomberg reports:

"Central banks are trying noninterest rate methods to stabilize growth and capital flows.  It’s something extraordinary. They haven’t used these venues for a long time. It’s sort of the last resort the central banks would like to tap."

Read More: Currency Controls Return as Central Banks Fight Gains

Original post by Jimmy Atkinson and software by Elliott Back

According to recently-released documents, the Central Bank of Australia intervened on behalf of its currency in August, marking the first such intervention in over six years.  Surprisingly, its purpose in intervening was to lift up its currency, rather than hold it down, which is the reason most central banks intervene.  Apparently, the global credit crunch that flared up over the summer, generated tremendous volatility in forex markets.  As a result, many carry traders- for whom volatility is anathema- quickly unwound long positions in the high-yielding currencies Australia and New Zealand, causing them to plummet.  However, both currencies have since resumed their appreciation, which means any future intervention will likely be aimed at holding the Australian Dollar down. Bloomberg News reports:

The Australian dollar underwent "a particularly sharp depreciation in mid-August as the increase in global risk aversion arising from the credit-market crunch triggered an unwinding of carry trades."

Read More: Australian Central Bank Bought Currency to Ease Market Turmoil

Original post by Jimmy Atkinson and software by Elliott Back

At its last meeting, the European Central Bank (ECB) voted to maintain rates at current levels.  Nonetheless, inflation risks persist, and the ECB has not ruled out the possibility of hiking rates at its next meeting. At the same time, the Euro-zone economy is stalling, and the Bank has the onerous task of balancing these risks in trying to facilitate a "Goldilocks" economy. As a result, the ECB is in "information-gathering mode." Additionally, most of this information is publicly available economic data, and forex traders would be wise to do their own research, since the Euro-USD exchange rate outlook is tied closely to the monetary policy outlook. The Guardian Unlimited reports:

The ECB has said that slower growth in the 13-nation region would have an impact on its policy-relevant medium-term inflation outlook, and Gonzalez-Paramo said currency movements were one factor affecting growth.

Read More: ECB still in data-gathering mode

Original post by Jimmy Atkinson and software by Elliott Back

Insider Hint: Brokers Are People Too A stockbroker finds his customers mostly among that minority of investors already accustomed to owning stock; he cannot rapidly make converts from among investors acquainted only with fixed-price items. Somewhat the same condition exists in any other business, and is even worse in such fields […]

Original post by Jimmy Atkinson and software by Elliott Back

Before beginning a constant-ratio plan, there are two decisions the investor must make. First, there is the problem of what ratio to adopt.

Original post by Jimmy Atkinson and software by Elliott Back

A recent speech by Ben Bernanke, chairman of the US Federal Reserve Bank, sent the Dollar spiraling downward to fresh lows against all of the world’s major currencies.  This is perhaps surprising, given that Bernanke used the speech to warn that higher-than-expected inflation may drive the Fed to hike rates, which is exactly what Dollar bulls wanted to hear.  The downside of the speech, reflected in the markets’ reaction, was that the primary cause of the inflation is rising oil prices, would could plunge the US economy into stagflation: slow growth and high inflation, an unenviable position if there ever was one.  Forbes reports:

Rhonda Staskow at Thomson’s IFR Markets said: ‘There is no Goldilocks
scenario from Bernanke, who sees risks from inflation and an economic
slowdown - the worst of both worlds.’

Read More: Dollar sinks after Bernanke speech

Original post by Jimmy Atkinson and software by Elliott Back

A Peek Inside “Members-Only” Investment Clubs One of the astonishing developments in investing in the past 10 years has been the rapid development of investment clubs throughout the nation.

Original post by Jimmy Atkinson and software by Elliott Back

A Peek Inside “Members-Only” Investment Clubs One of the astonishing developments in investing in the past 10 years has been the rapid development of investment clubs throughout the nation.

Original post by Jimmy Atkinson and software by Elliott Back

The search for automatic investing technique schemes which would produce profits by giving investors advance indication of market swings, based on a mechanical interpretation of market data has been going on for quite some time.

Original post by Jimmy Atkinson and software by Elliott Back

The European Central Bank (ECB) will likely maintain its benchmark interest rate at 4.00% at its meeting his week.  The Bank of England is also expected to hold its lending rate in place, at 5.75%.  While these two moves should be seen by Dollar bulls as acts of clemency, they are more akin to a stay of execution than to a commutation of its death sentence.  The reasoning is that it is inevitable that the US-EU interest rate difference will be bridged over the next few months, as the Fed continues to lower rates while the ECB is in the process of hiking them.  The only question is when.  Accordingly, analysts will be paying close attention to the language employed by the heads of the various Central Banks at their next meetings to get a sense of timing.

Read More: Dollar hovers above lows

Original post by Jimmy Atkinson and software by Elliott Back

The difficulties of building a fortune using the stock market are a painfully familiar subject to the large majority of those who have tried it. The gap between the apparent ease of beating the system and actual results of investors both professional and amateur is the principal justification for developing investment formulas.

Original post by Jimmy Atkinson and software by Elliott Back

A high-ranking official in China’s government recently gave a
speech urging the Central Bank to (continue to) diversify its vast holdings of
foreign exchange, currently estimated at $1.4 Trillion and rising.  The speech was atypical in its level of directness,
as Chinese officials tend to speak with a certain degree of circumspection if
they think there is any possibility that their comments will reach the
public. Specifically, he advocated making
a play on the current volatility in forex markets, by selling “weak currencies”
in favor of “strong currencies.”  In
fact, the most recent data shows that China is already doing just that: its holdings of US government bonds have declined
even as its reserves have risen.  The Financial
Times reports:

Although he later tried to play down his comments, saying he
had not been speaking in an official capacity, the damage was done.

Read More: Dollar sinks to new lows

Original post by Jimmy Atkinson and software by Elliott Back

Keeping Your Investment Risk At A Minimum No one likes to be told that in order to succeed he must put his nose to the grindstone, but that’s exactly what smart investors must do if they are to stand a chance of making a profit. An amateur, wanting to avoid gambling […]

Original post by Jimmy Atkinson and software by Elliott Back

Yesterday, I posted about how market volatility could spell the end of the carry trade, bringing down the Australian Dollar in the process. Today, I will explore the opposite side of the debate, by looking at the factor(s) which support a continued appreciation of the AUD.  A rise in global commodity prices have provided a windfall to Australia, which is rich in natural resources. Unfortunately, the boom in exports and the surge in domestic demand has trickled down in the form of inflation.  As a result, the Central Bank of Australia recently embarked on a campaign of tightening monetary policy.  While this may curb domestic demand, it may attract more foreign capital in the form of carry trades. The gap between US and Australian interest rates is now 2.25%, and looks set to widen further. The Australian Business reports:

The [Australian] dollar’s trade-weighted value rose by 20 per cent between late 2002 and early 2004 but was much slower to respond in the 1970s boom, when the exchange rate was set by government.

Read More: Action needed as current boom echoes overheating of 1970s

Original post by Jimmy Atkinson and software by Elliott Back

The category of variable-ratio plans generally known as “intrinsic value” formulas are without doubt the most sophisticated of all the formula investing techniques. For this reason they are also the most complicated, some of them so much so that they offer little practical guidance to the investor who manages his own portfolio.

Original post by Jimmy Atkinson and software by Elliott Back

Advocates of the carry trade have long argued that the only thing that could possibly put an end to their fun would be a significant rise in Japanese interest rates, which seems quite unlikely at this point.  However, a new threat to the carry trade has emerged: volatility. Global capital markets have see-sawed over the last few months as credit concerns have surfaced, often related to America’s housing bubble.  This month, the Australian Dollar and New Zealand Kiwi have been the two worst performers among the world’s 17 most actively-traded currencies.  This is notable because these two currencies are most likely to be on the long end of carry trades.  Bloomberg News reports:

The currencies also slid against the U.S. dollar as Citigroup Inc. said it will report as much as $11 billion in additional writedowns, reducing demand for so-called carry trades.

Read More: Australian, New Zealand Dollars Fall on Renewed Credit Concerns

Original post by Jimmy Atkinson and software by Elliott Back

This week, the Central Bank of Hong Kong intervened in forex markets for the first time in nearly two years, by purchasing over $1 Billion in US government securities.  The intervention was precipitated by fluctuation on the HK Dollar, which had been tending towards the upper end of its tightly controlled trading band.  Strength in the HK economy combined with a strong performance in HK capital markets have sucked large amounts of foreign capital into the Chinese-controlled city-state, which exerted upward pressure on its currency.  Hong Kong’s Central Bank also matched the recent rate cut by the Fed with a rate cut of their own.  Many analysts had put forth the idea that Hong Kong would scrap its peg when the Chinese Yuan slid past it, but this recent move suggests the Dollar peg is here to stay.  The Financial Times reports:

Joseph Yam, HKMA chief executive, said on Thursday: “We again reaffirm that the [Hong Kong] government has been clear in its financial policy and is committed to maintaining the peg.”

Read More: Hong Kong to stick with US dollar

Original post by Jimmy Atkinson and software by Elliott Back

The investor who concludes that he might profit by using a formula is, naturally, faced with the problem of what type he wants to use, and exactly what kind of rules he is going to set up for himself. A basic consideration, of course, is the amount of risk he is willing to assume.

Original post by Jimmy Atkinson and software by Elliott Back

The Canadian Dollar, or Loonie, recently cleared a 47-year
high against the US Dollar.  Its next
major milestone is crossing a level last seen in the late 19^th century!
There are a few reasons for the Loonie’s
continued strength, namely interest rate parity and economic strength.  As a result of the Fed cutting rates for the
second time in as many months, the Canadian benchmark interest rate is now
equal to the American federal funds rate, both at 4.5%.  In addition, record-breaking oil and commodity
prices will ensure that Canada’s
economy will expand further, perhaps as the same pace as its currency.  Reuters reports:

If the U.S. Central bank signals another rate cut in December, or if it goes against
expectations and chops rates by 50 basis points, it could pull the rug out from
under an already unsteady U.S. dollar and clear the way for the Canadian
currency to shoot higher.

Read More: Loonie eyes 130-year high if Fed makes big rate
cut

Original post by Jimmy Atkinson and software by Elliott Back

Paying the Piper: Taxes on Investments No one likes paying taxes, but you know how the saying goes: There are only two certainties in life, and death is the other one.

Original post by Jimmy Atkinson and software by Elliott Back

What better way to invest in your future than through the Internet?
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