Sunday, June 28, 2009



A Quick Preview of What World Financial Markets are Hinting About the Coming Week

1. Big Themes For the Coming Week

Forex, Commodities, World Stock Indexes are likely to remain in trading ranges of the past 6 weeks until further clarification about economic recovery. If nothing comes sooner, U.S. banking earnings in the coming weeks could be the catalyst for the next big move.

March rally in world stocks may be well ahead of supporting fundamentals, thus vulnerable to pullback.

- Resulting risk-aversion would be likely to include:

- Gains by safe-haven currencies (JPY, USD, CHF) against riskier and commodity-based export currencies (AUD, NZD, CAD)

- Downward pressure on commodities, stocks

2. US Dollar Nears Breakout Versus Euro, Awaits Nonfarm Payrolls Results

Overall USD Outlook: Neutral

- Markets awaiting further clarification

- Dollar Rallies on Monday stock selloff, loses gains on improving optimism

- Technical weakness in stocks suggests increasing risk aversion, USD breakout risk up

While the USD finished the week slightly down against key counterparts, and may show further short term downward momentum, markets remain indecisive as reflected by generally narrow trading ranges for USD pairs like the EUR/USD and GBP/USD.

In sum, markets appear to be waiting for news to clarify near term direction, and the coming calendar of events might provide it. The likely big news of the week is Thursday’s US Nonfarm Payrolls data, though most expect US employment to continue to worsen even as other data shows improvement. Tuesday’s Conference Board Consumer Confidence numbers may spark some movement, though improving optimism has not been influential because it has not resulted in increased spending. Wednesday’s ISM Manufacturing results, especially the ISM Manufacturing Employment index, could also set the mood coming into Thursday’s US employment report.

As noted before, stocks world-wide remain up 20-30% since the March rally began, despite any evidence suggesting that jobs, earnings, GDP, or any other meaningful metric will improve by that much in the coming year. This leaves them vulnerable to a decline which the past weeks show may have already begun. If so, declining risk appetite would likely boost the USD (also JPY and CHF) against other majors, especially those seen as higher risk (AUD, NZD) and/or linked to commodity prices (CAD).

3. Euro Volatility Likely Ahead of Central Bank Interest Rate Decision

Overall Euro Outlook: Bearish

- Despite poor growth and possible deflation prospects for 2009, ECB resisting pressure for rate cuts

- Uncertain if ECB’s loans last week to major banks will translate into cheaper, easier credit for businesses

The ECB issues a contested interest rate decision Thursday. The ECB continues to maintain that current interest rates are “appropriate” for now, while other influential voices, including the OECD are urging that rates cuts toward zero similar to those of the U.S.

Credit Suisse’s overnight index swap index shows traders are now pricing in a 56.5% chance of a 25 basis rate cut, a noticeable reversal from the 62.7% chance of a rate hike showing just two days ago. Besides the admittedly global phenomenon of sickly economic growth in 2009, arguably the most pressing reason to reduce the cost of money is to check the onset of deflation, which recent Euro zone PPI and CPI suggest could be a real threat.

Although the ECB did offer an unprecedented 442 billion euro in 12-month bank loans as a means of de-facto monetary easing and will also move forward with a 60 billion bond-buying scheme announced at the last policy meeting, these measures may prove woefully inadequate.

There is no guarantee that banks will lend out the funds and thereby stimulate the broad economy. Indeed, banks may chose to hang on to the cash as a buffer against $1.1 trillion in as yet unrealized losses linked to the subprime mess, per the IMF, as well as the fallout from a developing currency devaluation in Latvia. Alternatively, they may use the funds to reduce other obligations and shore up their balance sheets.

Still, the ECB seems willing to concede economic performance to ensure low inflation, with ECB member Jurgen Stark openly suggesting that GDP growth may say low “for years to come”. Thus traders could punish the Euro as they price in expectations that the region will substantially lag behind other industrial economies in recovering from the current downturn, forcing interest rates to stay lower for longer than elsewhere.

Euro Zone Economic Confidence figures are expected to tick up in June, though some recovery in sentiment is to be expected as governments’ fiscal efforts filter into the broad economy.

The big question for now is whether growth is sustainable after stimulus cash dries up.

4. JPY Likely to Strengthen as Risk Appetite Fades

Fundamental Outlook for Japanese Yen: Bullish

- Japanese Consumer Price Tumble Lower in May, Raising Risks for Deflation

- Manufacturing Confidence Rebounds From Record Low

- Japanese Trade Surplus Widens as Imports Falter

Similar to the USD, the near term fortunes of the JPY will depend on how optimistic markets are feeling about the recovery, and the ensuing level of risk appetite. The greater the fear level, the better the JPY will do, and vice versa.

The World Bank further lowered its already dismal growth outlook on Monday, which prompted a world-wide selloff in virtually everything except the JPY and USD. As the week progressed markets chose to focus on what positive news there was, including, a modestly more upbeat forecast from the OECD, was based on a more optimistic forecast for U.S. recovery to outweigh worsening conditions elsewhere.

While the Bank of Japan forecasts some economic recovery in the latter half of 2009, retail spending is expected to contract for the ninth consecutive month in May, with the unemployment rate projected to increase to 5.2% during the same period, which would be the highest since 2003. This data could create a weakening outlook for the world economy as the downside risks for growth and inflation intensify.

5. Disappointing Growth Figures Threaten British Pound

Outlook for British Pound: Bearish

- House prices fell by 0.4% in June, which was the first decline in five months

- The British Banker’s Association reported an increase in mortgage approvals in May to 31,162, the highest since April 2008

- OECD lowered its growth forecast for the U.K. to -4.3% from -3.7%

The British Pound finished the week on a positive note after a week of inconsistent price action as it found support from increasing appetite after Monday’s selloff in stocks. Also, the first decline in house prices in five months raised questions over the scope of a U.K. recovery and added to sterling weakness to start the week. The OECD downgrading their growth outlook for the U.K. economy to -4.3% from -3.7% furthered the dour outlook for the economy. A mid week head & shoulder’s pattern and a break below the 20-Day SMA appeared that the pound was head for a significant retrace before it regained its footing.

The BoE warned on Friday that the banking system is still vulnerable to any new economic or financial tensions and that banks will need to be able to survive without government help. It expressed concerns about the ability of banks to extend enough credit to support economic growth if new market strains appeared. Additionally, the central banks cautioned lenders that the level of government aide will dwindle as it becomes less effective, leaving them to fend for themselves. Therefore, if we see the pace of the recovery slow then the downside risks for the GBP could increase exponentially.

The UK economic calendar may give us some insight into the pace of the recovery and the depth of the hole that it finds itself in. Final 1Q GDP figures are expected to be revised lower to -4.3% from -4.1% as the recession deepened during the period. Preliminary GDP readings showed a 12.1% drop in total production which was already double the decline from the fourth quarter.

Forward looking forex traders may not rely on past performance. Rather they may focus on the upcoming PMI readings. The manufacturing gauge is expected to improve for a fifth straight month to 46.4 from 45.4, which would be the highest level since July 2008.

However, the service sector is predicted to fall to 51.5 from 51.7 which is similar to what we saw in the Euro-Zone figures. This sector accounts for much more of the U.K. economy, as much as 70%, and may have a greater impact on sentiment. If we see an upside surprise in the service data then we could see sterling continue its gains with a test of 1.665 the June 3rd high. Meanwhile, weakness in both sectors could be the catalyst for a retreat of the GBP. The GBP/USD has been supported by the 20-Day SMA and a clean break below that level would be a strong signal of more bearish potential with a possible test of 1.600.

6. Commodities and Equities

As noted in the first section above, these will move together with sentiment on the recovery. Optimism suggests

- Growing demand for industrial and agricultural commodities

- Better earnings and thus rising stock prices

- Possible inflation, especially with the unprecedented flood of new fiat bills in all major currencies and thus rising demand for precious metals and other hard assets as an inflation hedge

7. Conclusion: So What Do You Do?

Stock markets tend to be the best barometers of recovery sentiment. Thus:

1. If equity indexes rise, expect commodities and higher risk currencies and commodity currencies [AUD, NZD, CAD] related stocks to perform better against the safer currencies, the JPY and USD.

2. Expect the opposite if they fall.

Thus traders to go long the first group if the overall economic picture looks better, and short these assets if things look worse, The likely beneficiaries of further pessimism would be short positions of the first group, and long positions in the USD and JPY.

Investors, especially buy and hold income investors, need to take a longer view that reflects the big themes mentioned in section 1 above, which we suspect will endure for the coming months. Their income investments should be tied to a diverse basket of currencies, commodities, and other hard assets.

In the longer term, as economies eventually do recover, inflation is likely to be the big concern, which would favor assets linked to commodities, other hard assets, and the currencies with the least debt and oversupply.

8. Disclosure & More Info

Disclosure: I have positions in most of the above mentioned investments.

Interested in learning more about investing in stocks that provide reliable high dividends with better transparency, appreciation potential, and liquidity than bonds? Visit

Want a quick read on the big picture on how world markets affect each other and your investment? Watch for the coming: as well as daily weekly commentary at

Friday, June 26, 2009

Beware: Why U.S. Banks Will Rock World Stocks, FX, Commodities


Or: This Summer’s Real Blockbuster: Night of the Living Dead (Banks) II: A Sneak Preview – and Survival Guide

Or, It’s Bank Earnings Time: Assume the Position, Chicken Boy,

Forget the movies. Forget the roller coasters. This summer’s real excitement: the coming second quarter bank earnings announcements, and their potential affect on world stocks, currencies, and commodities markets.

Having followed all these markets for a while now, it’s a lot like any classic horror or action flick. You know the basic plot, but it can still get you sweating.

1. Introduction: The Chronicle of a Crisis

All major market shifts since 2007 have begun with the U.S. banks. With them the crisis began, with them the rallies began. With them may come the next move down, and only from their true recovery will there arise a genuine recovery. Amen.

Their coming earnings announcements, and the ensuing government responses, are likely to be the economic event of the summer.

Let’s quickly review a brief chronicle of the crisis.

The current world economic crisis began as a self-inflicted U.S. banking crisis.

The still alive March rally in stocks and commodities began when the big financial institutions announced first quarter profits. As repeatedly noted by this author and others, this feat required an unprecedented collaboration/conspiracy involving Washington and Wall Street. These profits were not from genuine ongoing operating results likely to be repeated, but were rather a result of a combination of some rather irregular activities, including:

· fabricated hyper-profitable fixed income department trades with AIG, which by themselves were large enough to outweigh the enormous real operating losses

· overstated asset values aided and abetted by bank regulators and the suspension of market to market accounting

When that rally faltered, Washington announced more help in the form of the Public-Private Investment Program (PPIP), another thinly disguised bank welfare program, paid for by U.S. taxpayers. That maintained optimism about the banks, and thus the market, and forced the massive shorts to unwind, thus continuing the low volume meander up to 30% gains.

Within the month, the leading financial institutions on which America depends will announce second quarter earnings. For example, Citibank (C) and Goldman Sachs (GS) are scheduled to announce on July 17th. Rumors and whisper numbers may come sooner. If positive, the will almost certainly be leaked sooner.

Unemployment is already around 10%, well past bank stress test worst case scenario 8.9%. That means many thousands more residential and commercial mortgage defaults. Worse, those tests were before GM officially rolled over into bankruptcy.

Can Team Washington & Wall Street pull it off again?

Barring some incredible surprise, luck, or creativity (all possible), we think not, and here's what that means.

2. Scenario 1: Banks Show Losses: Ramifications for World Stock, Commodity, and Currency Markets

Given the above history, if bank earnings disappoint, we can expect some version of the following chain of events: In essence, faith in the fragile, nascent, embryonic world recovery breaks down. From this follows:

A. U.S. stock markets plunge

We get a likely to retest March lows assuming the process hasn't already begun. A brief look at a daily S&P chart will show the March uptrend has already been decisively broken.


S&P Daily Chart (courtesy

B. World stock markets follow

They have faithfully followed each other through this crisis, and thus can be expected to continue to do so barring evidence to the contrary. After all, the U.S. is still the major customer of the big exporters, including China. Their economies depend on the America. For all the talk at the first official BRICs summit, the BRICs will crack without a robust U.S. consumer market.

Think the world can roll along without a sick U.S. economy? This past week both the IMF and the Paris based Organization of Economic Development (OECD) came out with predictions about the world economic situation. The IMF said things were getting worse. The OECD disagreed. What was the basis for their difference? The OECD believed the U.S. would improve enough to make up for the continuing worsening situation in the rest of its member countries.

C. Commodities Crash Too

The ensuing gloom presumes weakened demand for industrial commodities like crude oil, at least in the short term. Deflation becomes a bigger concern than inflation, so the precious metals become less so.

D. Currencies: JPY, USD, CHF Tend to Rise Against Other Major Currencies

Paradoxically, the U.S. dollar actually becomes a short term beneficiary of the pessimism about the U.S. and world economy. For those who don't follow currencies trading, the USD is considered a safe-haven currency in times of fear or "risk aversion,” second only to the Japanese Yen (and then followed by the Swiss Franc).

For example note how the Euro-dollar currency pair EUR/USD (currencies always trade in pairs, since one currency must somehow be priced relative to something else) has behaved since stock markets were at March 3rd lows, as depicted on the below daily EUR/USD chart. Note that we read this combination to mean "Dollars per Euro." Thus the rising price of this currency pair mean more dollars per Euro, the Euro is appreciating against the dollar.


EUR/USD Daily Chart (courtesy

Note how when fear was at its highest in autumn 2008 and in early March 2009, the Euro, and all other major currencies (except the Yen), were at recent lows against the USD. As the March rally has progressed, they've generally gained (except the Yen) against the USD, as optimism fed "risk appetite" and currency traders sought higher yielding currencies.

Here's another example, a daily chart of the AUD/USD. Note a similar pattern.


AUD/USD Daily Chart (courtesy

The Australian dollar tends to behave in an especially inverse manner to the USD. Not only does its central bank pay among the very highest interest rates among the major currencies (unlike the Fed with the USD paying among the lowest), Australia is a commodity export based economy. Thus demand for its exports, and for the AUD, varies with anticipated economic growth more than the USD. So when the world economy looks bad, lower exports are anticipated and traders tend to dump the AUD in favor of the USD and JPY. Whether you agree that these are in fact safer or not, that's how traders treat them.

3. Scenario 2: Banks Post Positive Results: The Opposite Reaction?

Here's where it gets less clear. The short answer is, it depends how positive. If they somehow show profits from ongoing operations that are likely to continue (no, I don't see how either, but put that aside for the moment), then depending how convincing their ongoing prosperity is, the recovery is likely to be truly under way. If however, the results are mixed, or, as is so the fashion these days "less bad than expected and thus somehow positive" then the picture is murky.

4. Conclusion: So What Do You Do?

If the banks were left to themselves, the strong likelihood would be scenario 1. But given that Washington can't let them die, the question really is, how much can Washington still do to minimize the damage?

If you believe in Scenario 1, take profits on stocks; consider some kind of short on stocks (buy puts on the S&P or other indices, Ultrashort Proshares for short term hedging (like SDS on the S&P, SDK on the financials). Currency and commodity traders should short commodities, go long USD, JPY against other major currencies, especially the CAD and AUD.

If you believe in Scenario 2? If the mood is very positive, consider buying stocks, commodities, and the higher yielding currencies (AUD, NZD) or commodity currencies (AUD, CAD) against the USD and JPY.

Disclosure: The author may hold positions in the above instruments.

5. Conclusion, Disclosure & More Info

In Part I we looked at the current market, and the case against the US Dollar.

In Part II we reviewed the current market, the case for the USD, and the key criteria that make a high dividend stock a USD hedge.

In Part III we briefly described the best sectors and listed specific recommendations that fit these criteria. Thus we saw a listing of the best high dividend stocks outside of the U.S.

In Part IV we’ll look at the best high yield dollar hedges among the U.S. stocks.

The coming articles will examine individual categories and stocks in greater detail.

Disclosure: I have positions in most of the above mentioned investments.

Interested in learning more about investing in stocks that provide reliable high dividends with better transparency, appreciation potential, and liquidity than bonds? Visit

Thursday, June 25, 2009

Why I'd Buy Toyota, The #1 Automaker in the U.S.

  • Introduction

    In Why I'd Avoid Toyota, The #1 Automaker in the U.S, Tom Lindmark sites the Wall Street Journal's report that shrunken down post bankruptcy versions of General Motors and Chrysler will leave Toyota the #1 seller of light vehicles in the U.S.

    His essential point was that while Toyota might triumph in the long run, in the short run they must contend with "the most fearsome of competitors-government owned companies."

    Fortunately I wasn't drinking anything when I read that line. Spraying liquid through one's nose is so undignified.

    Actually, Mr. Lindmark has some justification, saying "In the short run it (the government takeover) could be formidable as the government does whatever is necessary to prove it didn't make the stupid decision that everyone acknowledges it."

    But seriously, folks. Let's think about this for a minute.

    Reasons To Be Cheerful (for Toyota)

    Inexperienced Bureaucrats & Politicians to the Rescue: Right. GM could not compete when run by presumably well paid experienced executives with real budgets at their disposal. How will they compete with the same basic team under inexperienced government bureaucrats with atrophied resources, no matter what high profile wizard they find to run daily operations?

    Government Resources Are NOT Unlimited: Given its current commitments bailout commitments, how much more taxpayer cash can the government politically (forget the overheating presses at the mint) afford to throw down another sinkhole as taxes rise and the dollar decomposes? As Treasury Secretary Geithner's meetings with U.S. creditor nations over the past month have shown, our debt holders' patience is not limitless.

    U.S. Creditors' Patience is REALLY Not Unlimited: Since when did China, Japan, Russia, the IMF, and Moody's have all feel the need to reaffirm their commitment to the U.S. dollar as the world's reserve currency is indicative that they felt the need to do so. Doubts are growing. They need to protect both the value of their USD reserves, as well as the US consumer's ability to keep buying the world's exports. The Russians and Chinese know what too much socialism brings. The Japanese know all about what happens when you don't let "Zombie" companies expire.

    Washington's Stellar Track Record: Even with taxpayer subsidies, when has the US government and its sheltered bureaucrats ever beaten a determined, well capitalized, well run competitor with its own cash on the line?

    Package delivery? See Fedex, UPS, et al.
    Public Education? Ask any parent who can afford the alternative.

    A Tale of Two Companies – How Each Dealt with Competitive Threats.

    Having watched both companies since high school days in the early 1970s, two incidents come to mind about how each dealt with competitive threats.

    In my days as an MBA student at Cornell, we had an affable GM board member/executive (I forget which, but the difference is irrelevant) as a part time teacher/scholar in residence. He appeared on occasion as a substitute teacher to tell us war stories meant to give us a taste of real corporate life. Burdened with heavy course loads, we avoided his amusing but mostly irrelevant classes whenever we knew he'd appear. However, he left me with one key lesson.

    Whenever asked about how GM, THE symbol of American industrial might, planned to counter the clearly more reliable, fuel efficient cars that Toyota et. al were making, he assured us GM cars were just as reliable, overall just as good, and all was well at GM.

    I was shocked. We were all a bit amused.

    Of course, everyone knew this was nonsense. Even my conservative-buy-American parents, stung by both the bitter fruits of "planned obsolescence" and the fuel crisis of the early 1970s, had recently bought there first non-American made car ever – a Toyota. The differences in reliability and fuel efficiency were clear even to them and their skeptical peers.

    Yet this captain of one of America's most important companies didn't get it. As the following years showed, he was indeed a representative sample of GM leadership.

    A few days ago, Toyota leaders met to discuss their first quarterly loss ever, newly crowned company president Akio Toyota kicked off his tenure by publicly accusing company leadership of imitating the failed habits of GM and vowed to return the company to success by slashing expenses and producing more fuel efficient, affordable cars.

    This kind of public table pounding is, ahem, rare in the oh-so polite, face-saving corporate culture of Japan.

    Clearly Akio intends a quick turnaround, not a 30 year slide. Face-saving be damned.

    They already have the most fuel efficient car on the road, the Prius. The firm plans to have a fuel cell car by 2015. No resting on laurels here.

    Conclusion: So How To Profit?

    When the banking crisis is truly over and stocks bottom out (not yet, see my prior posts for more) Toyota might be an investment for those who want to an auto industry play.

    Don't worry about Toyota. Save your concern for the auto workers and suppliers stuck with GM.

    "Ladies and Gentlemen. In this corner, wearing the World Champion belt, Toyota Motors, led by Akio "the Ninja" Toyoda. In this corner, wearing nothing but a barrel, G.M, led by Obama Administration and UAW approved, former Postmaster General, Political Hack Extraordinaire…

    Oh well, may Obama can get Theo Epstein to take a leave of absence from the Red Sox. Hey, they hadn't won for 80 years.

    Disclosure: The author owns a Toyota Prius, and (sigh) some GM bonds.

Overseas Markets Regain Support Levels, Europe Stumbles, Will Wall Street?

(As of approximately 2:00pm GMT Thursday, 10:00 am EST)


Despite mixed news on Wednesday, world stock indexes and commodities continued to erase the Monday's losses, and along with currencies have returned to their multi-week trading ranges prior to this June 22nd worldwide selloff.

As we've noted earlier, the continuing lack of overall positive news that might suggest that employment, earnings, GDP, or any other significant economic measure is likely to improve within the coming year as much as stock prices have already increased, it remains to be seen if world markets can continue to stabilize and improve.


Reflecting the return to recent trading ranges in other markets, major currency pairs have returned to pre-Monday trading ranges along with stocks and commodities, providing chances for traders to open positions near support or resistance as currency pairs test the lower and upper price ranges.

The dollar against the Euro and Yen, helped by a surprising surge in May Durable Goods Orders, suggesting growing production, and supportive words from the Minutes from the concluded Federal Reserve Open Market Committee, which included:

No change (i.e. increase in planned monetary or debt expansion) in current stimulus programs
A modestly upgraded outlook for the U.S. economy

World Stock Indexes

After Monday's drop, the daily charts for Tuesday on the S&P and most other world stock indices showed cross shaped candlesticks called Doji Stars, which typically indicate uncertainty (since prices fluctuate but end the day unchanged, like someone failing to make up their mind about which way to go) and a possible change in direction.

For the third straight time this month, these candlesticks correctly forecasted a direction change, this time to the up side. Asian markets showed solid gains in the early hours (GMT) of Wednesday, Europe generally followed through with more modest gains, and the U.S. markets rose strongly. The major Asian stock indexes opened Thursday's trading with a repeat of impressive 1%-2%+ gains, but Major European indices are down as Euro zone industrial orders dropped by over 33%, a record decline, indicating falling demand for capital and intermediate goods. In response, S&P futures point to a mildly negative opening of U.S. markets

It is interesting to note that this disappointing news from European industry stands in stark contrast to Wednesday's strong durable goods orders increase in the U.S. The European central bank has been more restrained in its stimulus programs than its American counterpart, the U.S. Federal Reserve. Could these results begin to suggest which approach has been correct?


Declines in both pessimism and the USD helped Crude and Gold get back over recent support levels of around $68 and $923 respectively. Further short term moves will depend on news. Both have been trading within tight ranges just above prior weeks' support.

Breaking News to Know

Yen Weaker Against USD as Fed Indicates Improving American Economy

Short Selling of S&P Rises for First Time Since March. Do Short Sellers See a Near Term Drop Coming? Health care companies were among the biggest targets of short sellers as Obama's proposed health care industry reform is widely viewed as a threat to profits.

The final reading for first quarter of U.S. GDP came in with a 5.5% annualized decline, which is a slight improvement from the 5.7% annualized decline that was previously reported and also below the 5.7% decline that was widely expected. Personal consumption for the first quarter was revised modestly lower to reflect a 1.4% increase. Initial jobless claims for the week ending June 20 totaled 627,000, which is above the 600,000 claims that were expected. Initial claims in the prior week were revised upward

Coming News to Watch

S&P futures vs fair value: -5.00. Nasdaq futures vs fair value: -8.00. In overseas trading, European stocks are grappling with selling pressure

Economic Calendar (All times GMT, order of figures from left to right: Actual-Forecasted-Prior)

Today's major economic calendar includes data coming out includes:

1:30pm USD Unemployment Claims ? 605K 608K
3:00pm USD Fed Chairman Bernanke Testifies
11:45pm NZD GDP q/q ? -0.7% -0.9%

Wednesday, June 24, 2009

WorldMarketsGuideDiary: Fear Eases, Stocks Stabilize, Commodities, Currencies Rebound Against USD


(as of approximately 12:00 GMT, 8:00am EST Wednesday)


Despite the lack of any really positive news to balance the World Bank's negative announcement about the world's economic prospects, on Tuesday traders appeared to calm down.

1. International stock markets stabilized with bargain hunting buyers balancing the sellers, and Asian markets opened Wednesday with respectable moves up.

2. Forex traders favored higher yielding, riskier currencies at the expense of the safer USD and JPY, showing a return of risk appetite

3. Commodities rose back to recent support levels, apparently due to a combination of a weakening dollar and less fear.

Given the continuing lack of news that suggests employment, earnings, GDP, or any other significant economic measure is likely to improve within the coming year as much as stock prices have already have increased, it remains to be seen world markets can continue to stabilize and improve.

The USD and JPY were generally down against the other majors, and the commodity-driven CAD and AUD benefited from both the USD drop and rise in commodities.

World Stock Indexes

American and European markets held steady Tuesday, slightly up, down, or, like the S&P, unchanged. Thus the S&P daily candlestick chart flashed another Doji Star (cross shaped candlestick) that indicates indecision as prices move around and end unchanged. Dojis near the top or bottom of a trend often suggest a coming change in direction, which is worrisome given world stocks' advance since March in the absence of supporting fundamental data.
Indeed, since the start of June, each doji on the S&P daily candlestick chart has been followed by a decline within 2 trading days.

Looming Bank Q2 Results
As we've been noting repeatedly, with plenty of potentially bad news coming about the health of the financial sector, including second quarter earnings reports within a month (and rumors sooner still) traders and investors need to be on guard. News from the financial sector sparked both the current multi-year economic crisis and the current multi-month rally. It matters. A lot. Already the blogosphere is full of speculation and articles like:

Three TARP Banks Already Classified as Deadbeats? Uh-Oh
Big Banks in Trouble: Huge Mortgage Write-Downs Inevitable

Declines in both pessimism and the USD helped Crude and Gold get back over recent support levels of around $68 and $923 respectively. Further short term moves will depend on news

Breaking News to Know

The OECD Raises Economic Outlook, Contradicting the World Bank: The Organization for Economic Cooperation and Development raised its forecast for the economy of its 30 member nations for the first time in two years as the U.S. slump shows signs of easing.

The improved outlook conflicts with that of the World Bank, which this week said the global recession will be deeper than it predicted three months ago, and may have been a primary reason for Monday's sell-off in stocks, commodities, and commodity based currencies worldwide. Could this announcement be the needed news to support for a further bounce up?

In anticipating a weak recovery staggered across different economies, the OECD signaled that the Federal Reserve and Bank of Japan should not raise interest rates before 2011 and recommended the European Central Bank cut its benchmark further.

The U.S. economy was largely responsible for the OECD’s prediction that the global recession will reach its bottom in the second half of this year. It believed that the U.S. economy will shrink 2.8 percent this year, and then grow 0.9 percent next year. The organization had previously forecast that U.S. growth would decline 4 percent in 2009 and see zero growth in 2010.

The OECD also raised its forecasted growth for China to 7.7% from the 6.3% predicted in March. (Bloomberg)

Coming News

The U.S. Federal Reserve began a two-day meeting on Tuesday at which it is expected to dampen expectations for interest rate hikes this year, while holding steady on its plans for asset purchases.


the author may have positions in the above instruments

Tuesday, June 23, 2009


A pre US Market Opening Preview from the World

(As of approximately 12:30 GMT, 7:00am EST)


On Monday, before the U.S. markets opened in the U.S. we warned that while stocks had recently remained range bound, there were worrisome signs of more downside.

We saw the above daily S&P chart. The "Doji Star" (cross-shape) candlestick of June 19 is marked by the white hand. Near term support of around 877 was shown by the horizontal green line.

"However [on Friday June 19] the S&P ominously printed another disturbing Doji Star (cross shaped candlestick). These suggest indecision and often a change in the direction of the trend. Thus at the top of rally, they can foreshadow a coming reversal.

For example, if you look at a daily candlestick chart of the S&P, note the double dojis on June 10-11, and the three day drop that followed. Given that stocks have risen 20-30% world-wide since March, and that the recovery has not suggested similar growth in the coming year, the markets are vulnerable to a bigger pullback than we've seen thus far. Looking at recent support on the S&P, another 30 points down to around 877 just as a technical test of this support level wouldn't shock anyone. News on economic fundamentals like unemployment, housing, spending, and earnings will most likely determine if that support, if hit, holds steady or collapses for deeper support tests."

Thus while many say that Monday's pessimistic World Bank forecast, that cut 2009 growth forecasts for most economies, was the main cause of the world-wide retreat in stocks, at most it was just a catalyst, with the above noted downward pressures just waiting for something like this to release them.

The Trading Opportunity

For all the below instruments, the new pessimism has created opportunities to open trades around new tests of support and resistance that in most cases have not been reached for 6 weeks. This allows traders to place stop loss orders near these levels to keep risk low compared to the potential gain if prices bounce back towards the chosen target exit price.


Significantly, the new gloom established that not just the JPY, but even the recently maligned USD, are still perceived as safe havens and tend to rise against other majors when fear and risk aversion rule. Given the dollar's recent troubles, some had questioned whether this was still the case. We have our answer. The USD is still seen as a safe haven and is still likely to rise when stocks drop. Given the recent decline of the USD against most other currencies due to the recent rapid expansion of USD supply and debt, this is a welcome source of support

Similarly, the CAD and AUD retreated with commodity prices and fears of more to come.

The good news for FX traders is that a variety of currency pairs involving the USD, JPY, CAD, and AUD are testing levels of support and resistance, providing traders with chances to open position near these levels with nearby stop loss orders to keep risk down.

World Stock Markets

As noted in the above introduction, there were already thick fumes of uncertainty in the world stock markets. The World Bank announcement was the spark that ignited them.

As of this writing, Asian stocks again closed down for June 23rd, Europe has opened mixed, and struggles to stabilize.

The big trading opportunity for stock index traders is that support levels not tested since mid-May are now being tested or approached. As noted above, opening trades near these levels allows traders to place relatively close stop losses to minimize risk compared to the potential gain if the index moves as hoped.

Bank Earnings Loomng Ahead

The biggest near term threat to the possible recovery? Note that Second Quarter Bank earnings will be coming out in less than a month. The current crisis began with very bad news from the banks, and the recent rally began with surprise reports of bank profits. Earnings announcements are less than a month away. Rumors and "whisper numbers" will come sooner, especially if positive, since that could steady or even lift world stocks (and allow banks to sell more stock to help recapitalize, just like Bank of America and others did over the past months).

Unemployment is already close 10%, well beyond the stress tests' worst case 8.9%. That means more residential foreclosures, lower consumer spending, more commercial foreclosures, etc. The banks will need all the cash they can get.


Given the above pessimism on the recovery and strengthening of the USD, commodities too are testing multi-week support. Crude and broke recent support of $68 and has fallen below $67, while Gold fell past $923 to settle around $918.

As above, traders may have opportunities to enter trades near these levels with relatively tight stop losses to keep risk down in what could be a volatile time for commodities.

Economic Calendar

Breaking News to Know:
CHF Swiss Trade Balance of 2.01B beats forecasted 1.86B

Coming News to Watch

3:00pm GMT USD Existing Home Sales

Conclusion & Disclosure

The author may have positions in the above instruments. To understand financial markets you need a grasp of what's happening in all of them. For income stocks visit:

For daily and weekly reviews of what's happened in world Forex, Commodities, and Stock Indices, visit

Monday, June 22, 2009



Currencies, Commodities, and Stocks Continue in Horizontal Range Trading Mode. Entering & Exiting Trades at Reliable Support and Resistance Appears to Be the Key for Now

1. Currencies

Potential low risk trading opportunities continue to be common, as major currency pairs continue to trade in clear ranges, mostly in flat, horizontal channels. The chart below illustrates the EUR/GBP trade we discussed on Friday. Note how the EUR/GBP moved up of over 1% up within 90 minutes, then down again over 1% over the next 8 hours. A reasonable 30-pip stop loss outside these support and resistance levels ( or trailing stop loss) would have limited their risk to about 0.33%, giving them a conservative 1:3 risk/reward ratio.

Here's the 1 Hour EUR/GBP Chart


That's why range trading is so great for low risk trading. If there is any major breach of these clear price tunnels or channels, traders can get out with only a small loss. However, if they can catch the full move within the trading range, they can make gains many times what they risked.

Traders who caught either of those moves using just $5000 at 200:1 leverage would have controlled $1million worth of currency and made about $10,000, 200% profit, just by identifying and exploiting the rather clear support and resistance levels. Alert traders who caught both moves could have made $20,000 within under 12 hours!

Note that there was never any mention of complex technical analysis or expensive computerized trading programs. Traders could make 200% profits just by this kind simple buy-low-sell-high (or the opposite) range-bound trading.

In sum, low risk and simple. That's how even new traders can trade profitably. Even if they lose on over half their trades, as long as the losses are small compared to the gains on the winning trades, they can still be profitable.

The EUR/GBP was just one example of many such simple low risk trading opportunities. Look at the range or channel alert traders could have noticed while watching the USD/JPY on June 16-17.


USD/JPY 1 hour chart.

Note how the USD/JPY chart June 16-17 showed resistance around 97.00, and strong support around 95.60 Traders who caught just most of the move between June 18-19 could again have made over 1% within a day. As above, a $5000 position at 200:1 leverage would bring around $10,000, a 200% profit, in less than a day. Using a reasonable 10 pip trailing stop loss and sell stop placed just beyond these ranges would have kept risk to about 10% of the potential gain from a move across the trading range.

Alert traders who caught the ride down June 19-20 had just as much fun and profit. Those catching both had a very

Thus even beginners could find opportunities to take positions near likely resistance or support levels. Traders can then limit risk by placing stop losses just beyond these levels. Thus if the expected short term low price or high price is broken, traders are automatically closed out with only small losses. If the levels hold, traders may potentially place sell orders near the upper range of recent prices and capture gains far larger than their potential losses.

Note: If stock indices continue to slide, this could support the USD and Yen in the short term as risk averse traders seek these as safe havens.

2. World Stock Markets

Stocks too stayed in tight trading ranges. On Thursday Asian and European stocks held support and made respectable gains. Wall Street built on these gains, boosted by better than expected manufacturing and inflation data. On Friday Asian stocks followed through with further gains, so did European indices. U.S. indexes were range-bound and ended mixed. The Nasdaq 100 and Russell 2000 were slightly up.

A. Doji Star Omen?

However the S&P ominously printed another disturbing Doji Star (cross shaped candlestick). These shapes suggest indecision (makes sense, up, down, then no net change) and often a change in the direction of the trend. Thus at the top of rally, they can foreshadow a coming reversal.


S&P 500 Daily Chart: Note Doji Star (cross shaped candlesticks) June 10-11, and the 3-day drop that followed. Does the June 19th Doji Star foreshadow the next move down?

For example, if you look at a daily candlestick chart of the S&P, note the double dojis on June 10-11, and the three day drop that followed. Given that stocks have risen 20-30% world-wide since March, and that the recovery has not suggested similar growth in the coming year, the markets are vulnerable to a bigger pullback than we've seen thus far. Looking at recent support on the S&P, another 30 points down to around 877 wouldn't shock anyone. It could also drag overseas markets down as well, unless local conditions prove more optimistic.

B. The Vultures Gathering for Bank Earnings Announcements?

Forget Godot, we’re waiting for Q2 bank earnings announcements. Potentially disappointing results could be THE biggest near term threat to the possible recovery.

Note that Second Quarter Bank earnings will be coming out in less than a month. The current crisis began with very bad news from the banks. The current rally began with hopeful news from them. Decisively positive or negative news from the financial sector, both U.S. and international, could be the next really big news that moves the markets. Advanced leaks or rumors from unnamed sources could well provide earlier surprises that stir the pot in the coming weeks.

Positive news will very likely be leaked early, as banks and Washington both want to keep equity markets positive, even if it’s just long enough for the banks to sell more stock that helps them recapitalize.

Be on guard.

3. Commodities

ATTENTION ALL RANGE TRADERS! Crude oil has dropped to test its $68-$72 range. The same goes for Gold, currently at 925.3, its recent range being $925-$940. Will support hold? Will it break down? Whatever your theory, you've got a chance to try a trade and find out quickly with small loss if you’re wrong. If you're right, enjoy riding the bounce!

Crude is likely to remain in its range until there is further clarity on the supply/demand situation. Rising economies or declining inventories could boost it back to around $72 in the short term. The opposite news would indeed test the $68 support level.

Gold awaits news on whether inflation is coming soon or will remain dormant for a while. Most commentators suspect the massive increase in money supply across all major currency groups will bring inflation at some point. The debate now is whether world economic weakness will continue and perhaps bring deflationary pressures, which in turn would pressure gold prices.

Of course, negative economic or stock news could cause commodity prices to shatter these support levels.

4. Economic Calendar

German Business Ifo Business Climate survey came in at 85.9, beating a forecasted 85.1. The news had no significant effect, the Euro was mostly dropping before and after the news.

Breaking News to Know

U.S. Treasury Says The $134 Billion of Treasury Bonds were Counterfeit. Two Japanese men caught in Italy trying to cross into Switzerland with what appeared to be $134 Billion in U.S bonds in fact held nothing buy fakes according to the US Treasury Department.

Coming News to Watch

Tuesday: USD Existing Home Sales

5. Conclusion, Disclosure & More Info

Disclosure: I have positions in most of the above mentioned investments.

Interested in learning more about investing in stocks that provide reliable high dividends with better transparency, appreciation potential, and liquidity than bonds? Visit

All major financial markets influence each other. Keep up with all world markets in just minutes. Visit for updates on Forex, Commodities, and international stock indices.

Insights for Traders on the Coming Week: Will "Range-Trader's Delight" Continue?

Introduction: A Range Trader's Market
As the week opens, perhaps the biggest question is whether Forex, Commodities, and World Stock Indices will continue to trade in relatively tight, well defined trading ranges/channels/tunnels (whatever term you prefer), as all markets await further news to clarify whether the purported world economic recovery really exists, and if so, when will it begin to show itself in employment, spending, housing, banking etc.

The coming week is relatively light on economic and earnings news, with little potential for big surprises. Of course, by definition, big surprises are always unexpected.

If there is market moving news in the coming week, it may come from possible downgrades of banks or the State of California, or from unanticipated geopolitical disturbance spilling over from current tensions with North Korea or Iran.

Meanwhile, the range bound markets have provided range traders with ample opportunities to open trades at well defined support or resistance and then close out trades when prices bounce up or down to the opposite side of the channel or tunnel, which has typically been between 1% with major currencies, to over 4% with crude oil.

Many traders, especially beginners, love these situations because the clear channels not only provide clear entry and exit points, they also allow cautious, risk-averse traders to place stop losses just outside these levels so that if they were wrong and these levels don't hold, the trader exits with only a small loss. Also, clear trading ranges or channels make it easy to spot profit targets at which the position should be closed or at which trailing sell stops should be tightened in order to maximize profits.


For example, look at hourly charts of the EUR/GBP or USD/JPY. Note how both currency pairs established trading ranges early in the week, allowing alert, disciplined traders to enter trades later in the week for quick low risk gains if they used stop losses and sell limit orders placed just beyond the trading ranges. See our daily market summary for Friday June 19 or Monday June 22 for details (

Unless some market moving news comes out, traders are likely to find similar opportunities. Futures traders have been favoring the commodity currencies, the CAD and AUD, suggesting a belief in a possible technical bounce in commodities may be in the cards. Regarding the CAD, however, Bank of Canada Governor Carney has repeatedly expressed concern that the CAD's recent strength could hurt Canada's export-driven economy, and that "intervention" from the BOC beyond this anti-CAD talk was possible. Moreover, any additional pessimism and /or stock declines could pressure commodities and their related currencies.

The GBP is also near it's 7 month high against a number of majors, and thus may be vulnerable to a pullback to test support.

While the USD has still held some of its gains from all the G8 happy talk, those gains have been eroding. However, as discussed below, further declines in stocks could well give the USD and Yen a lift as traders seek safer currencies.

On the one hand, commodities may be due for at least a technical bounce, given their recent pullbacks. On the other, any additional pessimism and / or stock market declines, even just a technical test of deeper support, could pressure commodities too. Weak economies use less crude, and they don't tend to worry about inflation, thus pressuring precious metals prices.

For the early part of the week at least, both Gold and Crude Oil may provide profitable trading opportunities. As of this writing both are at or very close to multi-week support, thus possibly either setting up for a bounce up or a break to new lows. This close to support, traders can take positions long or short. If wrong, they can get out quickly with small losses, If right, they can just pick a price level near the other side of the range as an exit point.

Again, however, renewed pessimism and stock market declines could cause commodities to slice right through their support levels.

World Stocks
Given that world stock markets have risen 20%-30% since March without strong evidence that earnings or jobs will match that kind of growth within the next year, equity markets may be vulnerable to further pullbacks unless we see some positive surprises.
Even if news remains neutral, the bias is more likely to be towards profit taking or at least a technical test of lower support levels.

Forget Godot, We're Waiting for the Banks
Perhaps the biggest black cloud hanging over world stocks is doubt about the health of the financial sector. A destabilized financial sector (caused by irresponsible mortgage lending) ignited the current economic crisis, and unexpected announcements of bank profits in March sparked the current stock rally. Second Quarter earnings announcements from the big banks will be out within the month, which means whisper numbers and rumors will be coming within a few weeks.
If the news is positive, it could come even sooner, as both banks and governments seek to keep financial markets positive, if for no other reason than to allow the banks a chance to sell more stock into a rally to help them recapitalize. Decisively positive or negative news could well set economic expectations in the near future and be the catalyst for the next big market moves. In the U.S., unemployment is already approaching 10%, well beyond the bank stress tests worst case scenario of 8.9% for 2009.

We look to the coming week for additional clues. As this article goes to press, the week is opening on a negative note, with stocks and commodities falling,

Sunday, June 21, 2009




Worldwide Stock Markets Drop, then Stabilize, Join Currencies and Commodities Horizontal Range Trading Mode. Finding, Entering & Exiting Trades at Reliable Support and Resistance Appears to Be the Key for Now, As Markets Wait for Coming News for Direction.

1. Introduction: Trading Ranges for Low Risk, High Reward

While action junkies love lots of volatility, those of us who actually trade to make money love it when instruments stay within clear channels or ranges, because these situations create potential low risk, high reward trades that even relative beginners can spot.

A. Here Are the Basic Steps:

You just need to do the following.

Identify likely support and resistance levels within the time frame of your choice.

1. Place your order near one of these levels

2. If you think the overall trend is up, then:

a. Place a buy order near (a bit below or above, depending on when you suspect prices will turn) the low end of the channel/trading range, otherwise known as support.

b. Place a sell order near the specific price top or “ceiling” (aka resistance) of that range. Instead of setting a specific sell price, you can set a trailing stop that automatically sells out your position when prices retreat by a certain amount or percentage. Each kind of sell order has its advantages and disadvantages

3. If you think the overall trend is down, then do the above in reverse. Place a sell order near that anticipated “ceiling” and a buy order to close the position near the bottom of the range that appears to be the near term support level.

B. Clear Trading Ranges Make it Easy to Keep Your Losses Small, Let Your Profits Run

Relatively clear support / resistance levels make it easy to set your stop losses relatively close to your entry point, (which you ALWAYS do, right?) after your position opens, and thus KEEP YOUR LOSS RISK LOW. If your get in near your chosen support/resistance level, and that level is breached, you know right away that your theory was wrong and your nearby stop loss(which you ALREADY SET when you entered the position so there is no emotional struggle to close the trade) takes you out of the position with only a small loss. If you’re right, a trailing stop loss can keep you in the trade and let you ride it for most of its gain.

C. Example: The EUR/GBP Pair

See the Currencies section below for a classic example from the past week of how even beginner traders could make low risk high reward trades.

2. Currencies

The past week was full of potentially low risk high reward range trading opportunities, as major currency pairs mostly traded in clear ranges over the past days, mostly in flat, horizontal channels.

Note the below 30 minute EUR/GBP chart. A trader watching this pair on hourly or 30 minute charts could have easily noted by late afternoon (GMT) on 6/17 that the pair had a possible support level around 0.8500, and might have put in a buy order on the pair with a stop loss around 0.8470 for maximum likely loss of 30 pips (a pip= 0.0001) or 0.35%. Using a trailing sell stop of 30 pips, from 07:30 to around 9:00am GMT on 6/18, the trader could have made about 1% in just 90 minutes as the pair rose above 0.8600. Assuming the 30 pip trailing stop closed the position around 0.8587, our trader profited with a very conservative a 1:3 risk reward ratio.


EUR/GBP presents clear support/resistance for low risk high yield potential trade (Chart courtesy of

After watching the pair trade for a few more hours, our trader could easily have decided the move had run its course and was ready to test support around 0.8500. By setting a sell order on the pair around 0.8580, again with a trailing stop of 30 pips, this sell stop would have kept the trader in the move down until it rebounded at around 0.8479 around 11am GMT on 6/19, an over 100 pip move (over 1%).

Note there was no mention here of arcane oscillators or other bits of high end technical analysis alchemy. The tools were just basic observation of support and resistance levels, and disciplined use of stop losses to protect us when we are wrong.

Given that 200:1 leverage is common in Forex trading, a $5000 investment would control 1,000,000 units of currency, resulting in an approximately $10,000 dollar move in each direction, with potential loss of just $3k for each trade.

Yes, that leverage can DEFINITELY cut against you as well. That’s why we ALWAYS use stop losses, and try not to enter trades that don’t show us a likely exit point 3x the distance of a reasonable stop loss.

The point is, with a range-bound currency market, you don’t need any special education or resources to trade profitably, just diligence, discipline, and a bit of education on the basics of trading and technical analysis.

For those needing an introduction or review, there are many good, free online resources. For example, visit , select “Resources” and then Educational Center. In addition, there are free courses and ebooks too. Many forex trading sites offer variations on these, at times with free customer support via live chat and toll-free phone support.

Note too, that the above example was far from an isolated case. Wednesday and Thursday also saw some equally playable moves in other currency pairs. For example, check out the USD/JPY Chart below.


USD/JPY 30 Minute Chart (courtesy

Now class, who can tell me what support/resistance levels they would use? Put your hand down, Miss Granger. How about you, Mr. Potter? Mr. Longbottom?

World Stock Markets Also Stick to Tight Trading Ranges

If you follow US stock markets, then you have a good picture of what happened worldwide, as virtually all major international indexes followed mostly the same pattern. After flattening out into tight trading ranges over the past week, stocks dove in on Monday and Tuesday, and then spend the week stabilizing at newfound support or making partial recoveries on low volume. As I’ve noted in recent articles (see ), investors are waiting for further evidence to justify the 20-30% gains in stocks worldwide since March. Will there really be that kind of growth in jobs or earnings?

Unemployment in the U.S. is already pushing 10%, well beyond the supposedly conservative 8.9% unemployment rate used in the bank stress tests. For all the whining by the BRICs recently about the U.S. dollar, these countries desperately need the U.S. and European consumers. Not only will they thus continue to buy Treasury bonds and other developed world debt to fund that consumption, they will also be watching the related stock markets for signs about likely demand for their exports.

As with currencies, the near term ranges present trading opportunities for the traders. Buy and hold investors must be very careful.


Crude oil remains in its recent $68-$72 range, and appears headed towards its second day of mild gains following bullish inventory data from the U.S. and China.  Gold was mostly flat, staying well within recent ranges after having pulled back.

Like currencies, both have been in trading ranges and have offered chances to take positions at support or resistance levels as traders watch the equity markets and other indicators for signs about the direction of the world economy. Further signs of deterioration could pressure industrial commodities like crude on fears of declining demand, and dispel near term inflation worries, which could further pressure gold.

Like other markets, commodities are waiting for some news for hints of direction.

Economic Calendar

Next week is relatively light on planned economic announcements, or earnings though with trouble in Iran and Nigeria, the energy producer’s keep to their role as geopolitical wildcards, who could always do something to give crude another whack to the upside.

If you don’t like quiet, hang on. We’re about a month away from Q2 earnings announcements from the banks. As the source of both the current crisis and the recent stock rally and optimism, these results could once again move markets. Big time.

5. Conclusion, Disclosure & More Info

Disclosure: I have positions in most of the above mentioned investments.

Interested in learning more about investing in stocks that provide reliable high dividends with better transparency, appreciation potential, and liquidity than bonds? Visit

Markets are all interrelated! To keep up on currencies, commodities, and international stock markets in just a few minutes a day, visit and get the big picture on world markets.

Friday, June 19, 2009



A Mid-Month Review of What Forex, Commodities, and World Stock Indices are Telling High Dividend Stock Investors

1. "It's the Economy, Stupid"

This was the famous summary of Bill Clinton's presidential campaign theme that helped him seize the White House from George Bush Senior in 1992. Then too, the U.S. economy was suffering a decline that started with…surprise!!... irresponsible bank lending and a resulting Savings & Loan banking crisis that threatened the health of even the largest U.S. banks.

Sadly, the U.S. Government did not learn from this painful bit of recent history that the profit motive and banking don't always mix, at least not for the common good.

Because we didn’t learn from history, we were indeed destined to repeat it, and we have.

Since June began, doubts about the strength (or existence) of the world economic recovery has been the underlying cause of events in world stock indices, commodities, and currencies.

A. The Big Question

Is the assumption of ongoing recovery, in fact true? Let's look at the following international asset classes: Forex, Commodities, and Stocks Indexes.

Most instruments have generally followed a similar pattern (timing has varied a bit) over the past two weeks:

1. Continued their existing rally into June

2. Brief multi day reversal

3. Settle into horizontal trading range in the past days

2. Forex

The same recent pessimism and decline in commodities has helped demand for safer currencies like the USD and Yen at the expense of the commodity currencies like the AUD, CAD, and also of higher yielding currencies like the NZD.

Virtually all major currency pairs have spent the past week or more in a trading range.

The USD got extra help over the past weeks from a chorus of support from both the U.S government and its creditors. These creditors have alternately expressed both frustration at the recently declining value of their dollar holdings, and support for both the dollar's status as the world's reserve currency and for continued purchase of U.S. Treasury bonds.

The common theme among their conflicting remarks: sheer self interest. After all, these same creditors need to protect both their USD denominated foreign currency reserves, AND the U.S. consumer's continued demand for imports from these creditor countries like Japan, China, Brazil, and Russia.

Playing its part, the U.S. has added its own comments of support for the dollar. After U.S. Treasury Secretary Geithner met with the Chinese in early June, Fed Chairmen Bernanke declared the U.S. needed to reduce it's money printing and it's debt. How do you say "amen" in Chinese? Assorted Asian officials also reiterated willingness to buy Treasury bonds even if they lost their AAA rating.

3. Commodities

Crude oil has followed the same pattern as pessimism about growth and oil demand reversed stopped and briefly reversed a roughly 100% climb since January from around $36/barrel to about $72/barrel. It has been trading between $68 to $72 a barrel. Here too, there are opportunities for those able to establish positions at reliable support or resistance.

Gold has ceased its multi-month rally and has been trading recently between $930 and $960 as pessimism about growth has eased inflation concerns, despite exploding supplies of virtually all currency groups. The consensus seems to be that as long as world economies continue to contract and/or fail to grow, inflation is not a near term threat despite new currency pumping out via high pressure hoses throughout the world. When job growth returns and consumers are able to spend, then watch gold fly.

4. World Stock Markets

Since early June world stock markets mostly stopped rising, traded in range, have recently pulled back and are now settled into trading ranges as they await further signs that there is enough real economic improvement coming within the next year to justify their 20-30% climb since early March. These same doubts are reflected in the below asset classes.

The coming FOMC meeting may provide key hints about the US, as may the coming second quarter bank earnings reports. Remember, it was trouble in the banking sector that really ignited both the current crisis and the March rally.

Stocks are currently in a mostly horizontal trading range, that may provide lucrative opportunities for those able to catch moves at solid support or resistance levels.

5. So What do Income Investors Do?

It depends how you prefer to invest. To paraphrase King Solomon:

“Everything has its season, and there is a time for everything under the heaven”

A. Short Term Trader’s Delight

If you like to trade in and out of stocks, forex, or commodities, this is your time. The range-bound nature of these markets will provide opportunities galore for those adept at picking reliable support and resistance levels, and who are able to catch the desired instruments at these levels. Best of all, these levels allow the smart, disciplined traders/investors uniquely low risk, high reward situations. Well defined support and resistance levels allow traders to know quickly if their theory about support or resistance is correct, and thus to place stop loss orders a short distance beyond these levels and get out with a small loss. The markets remain skittish and news driven, hence prone to unpredictable moves beyond near term support or resistance levels.

B. Long Term Buy and Hold High Dividend Stock Investors Stand Aside & Prepare

If you prefer to buy and hold high dividend stocks, stand aside for now, or limit purchases to partial positions. Place orders for stocks we've recommended around March lows.

As detailed in earlier articles, there is too much potential bad news waiting to happen, especially considering stocks have risen 20-30% since March in the absence of any signs of anything close to actual economic growth, never mind 20% or more growth.

In case you forgot, remember just a few minor details.

Worries about the financial system started this crisis, signs of bank profits in Q1 of 2009 started the March rally.

There are serious doubts that these were sustainable. Q2 disappointments will hammer stocks and commodities as pessimism returns in force.

Even if the banks survive Q2, there remain, still growing unemployment (already around 9.2%, well beyond the 8.9% "worst case" scenarios of the recent stress tests,


1. further erode consumer spending to sustain both residential and commercial debt portfolios

2. coming residential mortgage rate resets (read: massive increases) will further accelerate the deterioration of bank residential mortgages

Let's not even get into credit card debt.

Meanwhile, take note of March lows in stocks we've recommended. These are buy points.

While energy and precious metals get hammered as pessimism reduces demand for energy and the inflation fears that feed gold demand, take positions in related income stocks.

6. Conclusion, Disclosure & More Info

The author has positions in the above recommendations.

Interested in learning more about investing in stocks that provide reliable high dividends with better transparency, appreciation potential, and liquidity than bonds? Visit

Friday, June 12, 2009


1. Introduction

From the beginning of the week until 06:00pm GMT Thursday, virtually every currency was rising against the U.S. dollar. Demand for riskier, higher yielding currencies like the AUD and NZD, along with concerns about growing US debt and future inflation, drove the USD lower despite better than expected news on retail sales and unemployment. Even the lower yielding Euro and British Pound were in strong multi-day up trends against the USD Crude oil continued its surge upwards (over 100% since the beginning of the year) as the weakening dollar (in which oil is priced) and lower than expected inventories continued to feed its uptrend.

Then around 06:00pm GMT the dollar got stronger. Why?

2. Mr. Geithner Goes To Beijing: The Dollar Love-Fest, Part I

Think back to the beginning of June, when Treasury Secretary Geithner made his first trip to China. The Chinese have been one of the principal buyers of US bonds for many years. Thus a very large portion of their cash reserves are in U.S. dollars. Given the rapidly plummeting value of these holdings due to exploding levels of U.S. debt and money supply, they were not pleased, and no doubt wanted to, ahem, politely but firmly express their concern. In order to set the proper mood, in the days prior to the meeting, they publicly suggested replacing the dollar as the world’s reserve currency. No doubt poor Tim got an earful, and perhaps learned a few new Chinese expressions beyond polite greetings and goodbyes (though perhaps common to Chinese translators of Gangsta Rap).

Not surprisingly, then, Geithner proclaimed that the U.S. would support the dollar. Fed Chairman Ben Bernanke chimed in a few days with similar words, though he did backtrack ever so slightly by mentioning something about the banks still possibly needing some help. Reuter’s mentioned that Chinese and other unnamed “Asian monetary officials” (happy to play their part in covering their own assets) would continue to buy Treasury bonds even if the U.S. lost its AAA rating.

Given at least these token signs of support, the USD strengthened for a few days, as the below hourly chart of the EUR/USD shows in the early days of June.

3. Mr. Geithner Goes to Italy: The Dollar-Love Fest, Part II

Now, here we are mid June. With the dollars’ “Obama-nable” fundamentals of rapidly expanding debt and supply still in place with no sign of abating, and the talk of early June a distant memory, the USD has spend this past week mostly losing value against other currencies.

For example, look at this hourly chart of the EUR/USD. From June 8th, the EUR had been in a steady up trend against the USD, which broke around 6 p.m. GMT. As of this writing is has fallen and broken through 4 layers of support:

1. 1.4089: Its 200 hour simple moving average

2. 1.4033: A major hourly resistance level at which no less than THREE KINDS OF RESISTANCE CONVERGE:

a. its 50 hour simple moving average,

b. it's lower rising channel line,

c. AND its lower Bollinger Band (set at 20, 2 for the technical analysts among you).



Why the change?

Just maybe, traders thought back to the beginning of June and his meeting with the Chinese.

Then they noted:

1. The coming G8 meeting Saturday

2. U.S. Treasury Secretary Geithner's pre-summit meetings on Friday with Finance ministers from Japan and Russia

3. Like China, both Japan and Russia hold large portions of their foreign currency reserves in U.S. dollars. Like China, they too are not pleased.

4. Like China, Russia recently set the tone for its meeting by openly considering reducing its dollar holdings.

What do you think they’ll be discussing?

Given the recent pattern of events surrounding Geithner’s meeting with the Chinese, what do you think he’ll be saying when he comes out of these meetings?

4. How to Profit? Learn from the Forex Traders

It seems that foreign exchange traders (aka forex traders) anticipate another round of statements by the U.S. and its creditors that the dollar will be supported and Treasury bonds will continue to be bought.

So how do you profit?

Since we appear to be seeing another round of short term spin management, traders and investors should use this opportunity of a rising dollar to sell dollar assets and buy assets that ideally benefit from the dollar’s weakness.

As mentioned in many earlier articles, my favorite assets are those that

· Benefit from commodity price increases

· Earn in another currency

· And ideally, also pay you an income based on that foreign currency while you hold the asset.

If you haven’t read them yet, here are a few to look for ideas.

Best Investments for Rising Oil? High Dividend Energy Stocks

Commodities for Income Investors

Two Must-Have Canadian Income Trusts for High Dividend Diversification

The High Dividend Stock Investor's Collapsing Dollar Survival Guide, Part 3

5. Conclusion, Disclosure & More Info

Disclosure: I have positions in most of the above mentioned investments.

Interested in learning more about investing in stocks that provide reliable high dividends with better transparency, appreciation potential, and liquidity than bonds? Visit

Sunday, June 7, 2009




Given the multi-month recovery in energy prices (aided by the ongoing long term weakness in the US dollars in which energy is priced); one sees a lot written on how to play energy’s recovery.

For example, in Best Investments for Rising Oil, fellow SA contributor Jason Kelly noted a number of worthy ways to play in long term rise in oil.

However, most of these do not provide significant dividends, and are thus a pure bet on price appreciation. To profit on them, you need to be right not only on their price direction, but on WHEN to sell. That’s fine if you like to gamble.

Here’s a better idea. The below stocks offer even better returns and lower risks. Why?

· They rise along with energy prices: They rise along with energy prices at similar rates to those ETFs and stocks in the above mentioned article.

· High, steady income: They pay some of the highest and most reliable dividends available, typically 7-11%, sometimes more. The energy producer trusts mentioned below have to cut dividends when energy prices are dropping, so their dividends are more risky, but only if you believe energy prices will drop back even more than they did earlier this year.

· USD Hedge: The Canadian firms pay their distributions in Canadian dollars, thus providing a USD hedge for those based in US dollars. Many expect the CAD to appreciate against the USD as energy prices recover, fueling additional price and income gains.

· Energy infrastructure firms’ income does not drop if energy prices fall: The Infrastructure firms (both Canadian and American) offer yields that are not only high but unusually steady, as described below.

So, if you’re in the markets to make money rather than gamble why not place your money in stocks that not only rise right along with energy, but also pay you some of the market’s highest dividends while you hold them.

I’ve discussed recommended buy prices for many of these in past posts, and hope to go in depth on the US MLPs in the near future. Also, the stock market appears overbought and due for a correction, so this is not the time to be taking more than partial positions, especially with the more thinly traded Canadian stocks, which can be volatile.

Also, on or before 2011, the Canadian Income Trusts will be taxed at higher rates due to Canadian tax “reform.” As mentioned earlier in 2011, A Canadian Tax Odyssey: Canadian Income Trust Investors' Guide the firms mentioned below are well positioned to continue to maintain or grow their current distributions. Some have already committed to doing so. If energy prices recover, maintaining current distributions won’t be difficult.

2. Canadian Oil/Gas Energy Income Trusts

Their revenues, dividends, and share prices move with energy prices. They dropped 30-60% from last summer to this past winter, and are charging back. For example, check charts of ERF (paying over 8%) and VETMF.PK (paying over 7%). Dividends, yields, and prices will rise if energy continues its move up.

Plus, you get the added bonus of being paid in Canadian dollars, which are likely to rise against the USD and give those based in USD assets a hedge against the USD.

· ARC Energy Trust (OTC: AETUF, TSX: AET-UN)

· Claymore/SWM Canadian Energy Income Fund (ENY): A fund of these and others.

· Enerplus Resources Fund (ERF)

· Peyto Energy Trust (OTC: PEYUF, TSX: PEY.UN)

· Provident Energy Trust (PVX, TSX: PVE.UN)

· Vermillion Energy Trust (OTC: VETMF, TSX: VET.UN)

3. Canadian Clean Energy Income Trusts

Similar story but also benefit from inevitable government bias toward green energy. Plus that great USD hedge from being paid in CAD.

· Energy Savings Income Fund (OTC: JUSTF, TSX: SIF.UN): symbol recently changed from ESIUF

· Innergex Power Income Fund (OTC: INRGF, TSX: IEF.UN)

· Macquarie Power & Infrastructure (OTC: MCQPF, TSX: MPT.UN)

· Great Lakes Hydro Income Fund (OTC: GLHIF, TSX: GLH.UN)

4. Canadian Energy Infrastructure Income Funds

In fact, their incomes are mostly fixed by long term volume based contracts, though their prices tend to move with energy anyway, making them especially good buys when energy is down and these companies revenues and dividends remain steady. These too give you the USD hedge by paying you in CAD.

· Altagas Income Trust (OTC: ATGFF, TSX: ALA.UN),

· Pembina Pipeline Fund (OTC: PMBIF, TSX: PIF.UN)

5. U.S. Energy Infrastructure Master Limited Partnerships (MLPs)

The above comments about Canadian Infrastructure Income funds apply here too. They make most of their money on preset volume contracts and thus have steadier income than the above energy producers. As American companies they pay in USD and lack the USD hedge bonus of the Canadian firms. However, they have near monopoly pricing power in their regions of operation (tempered by regulators).

· Buckeye Partners (BPL)

· El Paso Pipeline Partners (EPB)

· Enterprise Products Partners (EPD)

· Energy Transfer Partners (ETP)

· Kinder Morgan Energy Partners (KMP)

· Magellan Midstream Partners (MMP)

· Nustar Energy (NS)

· ONEOK Partners (OKS)

· Sunoco Logistics Partners (SXL)

· TEPPCO Partners (TPP),

· Tortoise Energy Infrastructure Partners (TYG) (actually a basic of MLPs)

6. U.S. Coal MLPs

Hardly green energy, but nonetheless essential and often a substitute for oil. As the world economy improves, demand for coal is aided by rising demand for steel, for which certain kinds of coal are needed. Demand for coal isn’t going away, and its price will likely rise with other energy prices, as it always has.

· Alliance Resource Partners (ARLP)

· Northern Resource Partners (NRP)

· Penn Virginia Resources Partners (PVR)

7. Conclusion, Disclosure & More Info

While it’s more likely that stock prices may retreat in the near term, energy stocks remain among the best long term plays, especially if you are well paid while you hold them with almost junk bond like returns despite their far safer dividends.

Opinions presented are strictly those of the author and of those disseminating these articles or otherwise associated with the author.

The coming articles will examine individual categories and stocks in greater detail.

Disclosure: I have positions in most of the above mentioned investments.

Interested in learning more about investing in stocks that provide reliable high dividends with better transparency, appreciation potential, and liquidity than bonds? Visit



While recent news on US economy, especially the non-farms payroll data, as been positive (OK, more like less negative than expected), in the past weeks, a number of powerful long term market trends have continued in currency and commodities markets and should continue over the coming months, albeit with the usual short term counter moves.

In sum, these include

• The weakening dollar against all major currencies

• The ensuing up trend in commodity prices (commodities are priced in USD) and their related currencies, the CAD and AUD against other major currencies.

However, we remain skeptical that the multi-month rally in equity markets will endure. Thus we do not recommend new long positions in them, and await shorting opportunities.

Here are the details.

2. What's Killing the Dollar

The biggest single story is the deterioration of the long term fundamentals of the USD. Why? In short, President Obama has no choice but to continue to expand the money supply at rates that will badly damage its value.

A. Why Washington Must Continue to Print Dollars

Washington has no real choice but to continue inflating money supply at unprecedented rates, because it is faced with a virtually unprecedented situation.

1. The Immediate Threat: Lack of Liquidity Causing Financial Collapse

President Obama is like an emergency room doctor dealing with a patient who has just been shot in the heart and will die in minutes if the heart can't be repaired and the blood circulation restored. The bullet was the subprime crisis and ensuing collapse of the housing and credit markets.

Thus he must first keep the heart going and stop the bleeding. The heart here is the financial system, particularly the largest institutions like Citibank, Bank of America, and those that insure their huge debt portfolios. It these bleed out liquidity, they will stop beating out available cash to depositors and credit to businesses, the lifeblood of the financial system depends. The heart, the banks cannot stop beating out blood, cash and credit, or the patient, the US economy, dies on the table.

So the printing of new dollars and expansion of money supply must continue.

2. The Underlying Disease – Excess Debt+Money Supply = Weakening Dollar

Unfortunately, the patient is already suffering from potentially fatal cancer of a weakening USD caused by massive debt, government bailouts of the financial sector, and expansion of money supply to pay these. There is no historical precedent for a country inflating its way to prosperity. While many argue massive spending saved the US from the depression, others would argue that the real cure was that WWII left the about half the world's production destroyed and the US as producer of about half the world's goods and services. But I digress.

To cure the immediate threat to the patient/economy, the doctor must continue to create new money/blood, which worsens the long term cancer of a weakening USD and inflation. If left unchecked, this cancer of a weakening USD will ultimately force up interest rates and may choke off the liquidity/blood supply from the heart/financial system.

Oh yes, major organ failure is continuing, with the bankruptcies of GM and Chrysler, plus a slow but steady rise in bank failures. These in turn threaten another spike in unemployment, ensuing residential foreclosures and reduced consumer spending. These in turn could cause further declines in:

• Overall business activity

• Values of banks’ commercial real estate and mortgage portfolios with further oversupply

• Banking income and balance sheet health and more commercial real estate foreclosures

• Local tax revenues and ensuing credit worthiness of local governments etc.

"Doctor Obama to ICU, STAT."

What's that loud beeping sound? Better fix the heart quickly!

3. The Results of a Weakening USD for Commodity Markets

Because they are priced in USD, commodities and their related currencies (AUD and CAD) are expected to continue their long term uptrend as the dollar weakens, even if relative supply and demand remains unchanged. Additional long term reasons for rising commodity prices include:

• Upward pressure on oil prices due to both the relatively inelastic long term demand, and the continued solid growth of the Chinese economy.

• As the USD's position as currency of last resort fades, demand for gold (and silver) increases because they're seen as safe stores of value.

• As China, other export economies, and other large holders of the USD lose confidence in the USD (public statements to the contrary aside), they buy commodities both to hedge (there is no obvious liquid substitute for the USD at this time) their wealth and to ensure a relatively cheap supply to support their production at lower prices.

4. Equity Indices

The multi-month trend in equities, however, appears far less durable.

Since March, major indices continue to rally despite minimal signs of true turnaround in the underlying fundamentals of their economies. Consider:

• Most of the positive news on which markets have risen consists of slowing contraction, not growth.

• The apparent return to profitability by the financial sector was the cause of the stock markets' latest rally. There is significant evidence that the prior quarter's results were not sustainable. In addition to evidence of outright manipulation of those results (beyond the scope of this article) consider:

· Recent problems in commercial mortgages like the failure of GGP, one of the leading mall operators.

· Coming interest rate resets in the next 2-3 years and resulting possible increases in foreclosures and erosion of bank residential mortgage portfolios.

· the continued deep problems in industries that employ the largest numbers, like construction and autos, and the effects of their decline on the values of the financial sector's residential and commercial lending portfolios.

The continued rally in the US stock markets has been more of a low volume, low credibility rise based more on short-covering by quant funds than a believable rally supported by real fundamental and technical evidence.

Could the rally continue for a while yet? Sure, especially with Washington and Wall Street cooperating so, ahem, intimately. But how many are willing to take new long positions after a 30% rise in stock prices without real improvement in underlying fundamentals beyond merely a slowing contraction?

5. Ramifications for High Dividend Stock Investors

In sum, we appear to be at the upper end of a trading range, with the overall trend continuing down. Continue to invest only with funds allocated for longer term investment that you don’t need for the next six to eighteen months at least. What you buy now may well go lower.

1. Consider a Partial Hedge with Selected Ultrashort ETFs

Thus, in addition to collecting your high yields, those seeking a more active hedge may wish to consider taking measured positions some of the Ultrashort Proshares ETFs as a partial hedge. For the unfamiliar, these are ETFs that move at twice the inverse of a selected sector of stocks. Thus for example if the S&P 500 index falls 1%, then SDS, its Ultrashort ETF, will rise by 2% (and vice versa).

The time is ripe to consider some of these. While by nature these are volatile, you want to buy these only as a partial hedge at strong support when the market has just stopped feeling very optimistic, as a rally begins to show signs of fading.

This looks like the time. Consider taking partial positions in the following.

· UltraShort S & P 500 Proshares (SDS) – Buy under $60, Strong Buy under $55

· UltraShort Financials ProShares (SKF) -- Buy Under $50; Strong Buy below $40

· UltraShort QQQ ProShares (QID) – Buy Under $40, Strong Buy under $35

· UltraShort Real Estate ProShares (SRS) – Buy Under $30, Strong Buy under $20

· UltraShort Russell2000 ProShares (TWM) – Buy Under $50, Strong Buy under $40

If you look at a chart for these, you’ll note my buys are very conservatively low. There is a lot of cash on the sidelines now, earning virtually nothing. Big players and insiders continue buying stocks we’ve been mentioning, because they’re clearly cheap and excellent long term values. As the past few months have shown, any glimmer of positive news brings buyers as everyone is waiting for the sign to jump in. Lots of cash on the sidelines will provide lots of fuel in the tanks for a rally.

If that happens, these ultrashorts can plummet fast, so you only want to buy them at strong support, so that if these levels don’t hold up you’ll know quickly and can get out before taking a big loss. Thus place sell stops no more than 10% below the Strong Buy levels to protect your capital. There are other Ultrashorts for other sectors, like the Ultrashort Oil and Gas DUG for shorting oil and gas. This one has been popular, but betting against energy and other commodities is dangerous and strictly for short term traders with expertise in these, so avoid this one.

2. Continue to Take Partial Positions at Our Recommended Strong Support Levels

Beyond the Ultrashort ETFs if you can earn reliable dividends from 8-12 percent or more while you wait for recovery, ongoing investment makes sense. You just need to find the best bargain priced quality high yield stocks, and collect your income while waiting for the market to improve and offer additional options. As noted above, with a confirmed downtrend and good evidence for a further 20% overall drop, refer to our past recommended buy levels, which are at strong support levels.

Since prices are up and thus yields are down, many of our stocks are above recommended buy points. Do not chase them, though taking partial positions above these prices is acceptable for those with lots of cash lying fallow. This is particularly so with the energy producers.

Remember our key criteria for new stock purchases: In sum, we’re seeking stocks of strong companies that mostly earn and distribute a high dividend in a non-USD currency and have a dominant position in a market for an essential product or service. Ideally, the stock’s fortunes should rise with those of commodities and other hard assets that remain in demand, like residential real estate, power generation and distribution, etc.

That’s my focus at .

3. Use Sell Stops?

While our emphasis is buy and hold as long as the distribution is safe and fundamentals hold steady, some may want to hedge their bets, especially if they may need the cash within the next year or so. Those in that position should consider using sell stops around 15% below the Strong Buy price as partial principle protection, though you risk getting knocked out of your positions, only to see them come back soon and possibly rise higher while you miss the dividend. It’s a judgment call, though not a bad one for at least some of your holdings given the current pessimism (which of course can change, fast).

Again, our focus is on getting high yields from healthy businesses whose price will recover while we earn outsized returns, and we don’t try to time the market too much.

6. Conclusion, Disclosure & More Info

Bear market rallies are a normal part of bear markets, and they can indeed last for months. While they are driven by positive news, what distinguishes them from market bottoms is the lack of evidence of long term improvement in underlying fundamentals. Slowing contraction is good, but it doesn’t necessarily mean a bottoming.

Thus we continue to warn, “beware the bear.”

Opinions presented are strictly those of the author and of those disseminating these articles or otherwise associated with the author.

The coming articles will examine individual categories and stocks in greater detail.

Disclosure: I have positions in most of the above mentioned investments.

Interested in learning more about investing in stocks that provide reliable high dividends with better transparency, appreciation potential, and liquidity than bonds? Visit