Today’s Call: USDCHF – Bearish below .9215

In line with yesterday’s bullish call for sentiment USDCHF saw initial gains, supported by positive momentum. This upside stalled near .9300 and all initial gains were reversed into the close. These losses have been continued in Asia and although intraday signals are approaching oversold extremes we look for this decline to deepen. In view of this our call is bearish below .9215 The immediate objective is .9140, Tuesday’s low, with a move below that point targeting .9117, then last Friday’s bottom at .9075.
The risk to this call is that oversold extremes begin to correct earlier and higher than currently assessed. This would be signalled by a move above .9215 with subsequent upside targeting .9236, then yesterday’s peak at .9277.

source from: tradingfloor

Grain report – bullish!

The U.S. Department of agriculture today released the long awaited report about U.S. farmers’ planting intentions for the 2011/12 crop season.

The total acreage came in slightly higher than expected at 239.4 mio acres, which is 9.4 mio acres more than the 2010/11 season.

The biggest winner, compared with expectations, was wheat and corn while the losers were soybeans and cotton (see table below). The corn acreage will be the second largest since 1944 as strong demand for food and ethanol has reduced world stockpiles. It has outpaced increases for wheat and soybeans as farmers can make more profit per unit of corn compared with the other crops.

The USDA also released first quarter stock levels where both corn and soybeans levels were lower than expected, while wheat was higher.

Despite almost meeting expectations and considering the current tightness in especially corn and soybeans, this report looks bullish for the whole sector as dwindling stock levels means weather developments over the coming months will be absolutely crucial in order to achieve status quo.

The global market will struggle to absorb weather related shocks like the ones we saw in 2010 – in particular the Russian drought and flooding elsewhere.

source from: tradingfloor

Hennes & Mauritz and Wal-Mart feeling pain of rising input costs

As commodity prices continue to surge there’s a pressing yet unanswered question hanging in the air: When will this lead to an aggregate slowdown in companies’ operating margins or an ignition of inflation as retailers attempt to pass on costs to consumers?

Today, Hennes & Mauritz released its first quarter earnings (ending February 28) which showed a decline in sales, primarily related to a surge in the Swedish krona against most export countries’ currencies. More importantly, the company saw a sharp decline in its gross margin; however, this is normal for the company in its first quarter but the decline was the largest since the first quarter of 2009. According to management the effects on gross margin are due to cost inflation in their sourcing markets (primarily Asia) with for example, significantly higher cotton prices, less spare capacity and increased transportation costs due to higher oil prices. Instead of passing on these cost increases to customers, the company has chosen to strengthen its price position. This might prove to be the right tactic, but if margins continue to get hurt shareholders might have a different opinion.

Looking at the chart below, it is very clear that cotton prices are beginning to hurt clothing retailers. Cotton has increased five times since the beginning of 2009 but the main part of that increase has come since summer 2010.

Source: Bloomberg

If you look at Hennes & Mauritz’s gross margin on a quarterly basis it fluctuates quite a bit so it is difficult to analyse the true trend in gross margin. Looking at the trailing twelve months (TTM) gross margin though it is quite clear that the company is experiencing increased pressure on its margins; the gross margin TTM has been falling for three consecutive quarters now, which was unseen during the financial crisis. Interestingly enough, but will the trend continue? We believe it will because it is all about how companies plan their operations – they operate with long-term contracts and not in the spot market.

Source: Bloomberg and own calculations

So why has Hennes & Mauritz’s gross margin not been hit harder? Companies are not planning their operations in the spot market, they sign long-term contracts to hedge and better budget their costs, so most producers of clothing probably had long-term contracts with favourable prices when commodity prices collapsed at the end of 2008. That is why the rising prices in the futures (and spot) markets are slow to filter through the production chain and it also explains why operating margins have spiked at a rate never seen in decades. As these favourable contracts roll-over the new contracts will reflect the rising commodity prices and squeeze Hennes & Mauritz’s and other companies’ gross and operating margins.

Across the pond, Wal-Mart’s CEO Bill Simon expects inflationary impacts in the months ahead on clothing, food and other products. In an interview with USD Today, Simon said “we are seeing cost increases starting to come through at a pretty rapid rate”. It is not only the surge in cotton and other agricultural prices that is hurting retailers; the price of crude oil has also surged since late 2010 pushing transportation and production costs higher. The large retailers have so far been able to insulate consumers from rising commodity prices which are primarily due to companies planning their operations on longer term contracts and not in the spot market; so as these contracts roll over the new and higher prices will filter through the production chain into the shelves of retailers. On an aggregate level, core inflation (excluding food and energy) rose 0.2 percent month-over-month exceeding estimates.

With these indications from Hennes & Mauritz, Wal-Mart and other companies it is only a matter of quarters now before input costs will pose a threat to companies’ profitability and consumers will not remain shielded from these rapidly rising commodity prices. With this in mind, the next couple of earnings seasons will be very interesting to watch.

source from: tradingfloor

Steen’s Chronicle: Price of money rising; when is the bill due?

Stocks had a rough close Monday and, at least in the S&P E-mini, there was a key reversal. But for now, rotation continues into stocks from fixed income, as stocks are seen as a ‘tangible asset’ for many who continue to shun metals as an alternative in their portfolios.

Monday’s price action in the S&P was indeed compromising for an overall positive view on stocks. There is some risk that the move between asset classes is reaching a zenith – volumes are coming down while the fixed income market is at levels which either need to hold or break.

If a Tuesday rally doesn’t materialise (Tuesday tends to be very positive), we may need to readjust our medium-term target of 1385-00 on the S&P. But if there’s no rally, or rates do break lower, it would only pave the way to a repeat of last year’s April/May correction.

But it would be just that - a correction - because all roads still lead to QE3.

Looking at Southern Europe yields is obvious that the present levels are unsustainable over time:

Source: Bloomberg

Meanwhile, the medium- to long-term outlook in the US yields is clearly higher as seen here:

Source: Stockcharts.com

These rate expectations, combined with increased rhetoric from Fed officials on QE exit in June, have moved both yields and inflation expectations:

Source: Bloomberg

Thus, there is ample evidence, both in the market in the form of inflation expectations, and in actual moves by the Fed and ECB, to expect less accommodation going into the summer. The Fed and the ECB look set on preparing the market for normalization. In the case of the Fed, there’s ample evidence of this, including:

• The announcement of the US Treasury selling its mortgage portfolio
• The AIG auction – with the ensuing denial to Bank of America paying a dividend
• Regional Fed governors been all over the press confusing market with almost hawkish talk (Bullard + Evans)
• A new press policy from Bernanke – indicating need for more communication from Fed in lead in to higher rates

We see this as a massaging of expectations of hikes to come. But to come only if, and that’s and important if, unemployment rates start to move down, disposable incomes rise beyond the negative energy and food prices, and the stock market does holds support at 1250 on the S&P. If Bernanke is able to create an air of normality, compared to today’s crisis management, ahead of the 2012 election, he will have helped himself, his boss, and Geithner.

In the Eurozone it’s a little more straight-forward in communication terms. We have the expected rate hike from the ECB on 7 April. But this is to satisfy the German paymaster, who runs the EU with Iron Hand. There are NO other lenders of last resort left in the EU system.

In summary, central bankers are preparing the markets for normalisation. And yes there are a lot of preconditions, political and practical obstacles before an actual hike. Given the latter, we remain skeptical on policy moves, but bullish on the bond vigilantes’ ability to move longer rates higher and test the long term downtrend in rates.

2011 will truly be a battle of intentions, but we side with the theory/path of marginal cost will rise, and rise more than markets are pricing in.

source from: tradingfloor

If Bill Gross Sees U.S. as Shaky, Check Japan: William Pesek

This question leaps to the mind navigating the ruins of Japanese cities like Tagajo. Skylines now look as if Dali’s surrealist brush had a hand in rendering things so out of place. Escher’s mind seems at work, too. Interlocking shapes that shouldn’t exist in the three-dimensional world litter cityscapes that before March 11’s earthquake and tsunami were pretty run of the mill.

The mess one confronts in the northeast — flattened buildings, fleets of destroyed Toyotas at ports, ships sitting in the middle of streets, the search for bodies — graphically demonstrates whyStandard & Poor’s is so worried about Japan. Concerned about the magnitude of the reconstruction bill, S&P cut Japan’s rating outlook.

So is Japan on the verge of a debt crisis? No, and that may just be the problem.

Rising stocks and bond prices show traders aren’t buying the despair about Japan’s finances. They are focusing on the nation’s $15 trillion of household savings, the government’s latitude to raise taxes and the fact that about 95 percent of public debt is held domestically.

Yet Japan’s day of reckoning will arrive at some point, and the longer it’s delayed, the worse it will be. This is an ideal moment for the bond vigilantes, who from time to time take matters into their own hands and boost yields, to teach Japan a lesson. Nothing of the sort is happening.

Keep Borrowing

On Wednesday, the day S&P threatened to downgrade Japan, credit-default swaps protecting government debt for five years returned to their pre-March 11 trading range. The message to politicians: By all means, continue borrowing with abandon.

It’s not unlike what’s afoot in the U.S. Negativity about America’s budget deficit has investors like Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., abandoning Treasuries. Bond dealers disagree, as evidenced by the 3.32 percent yield on the 10-year note. Broadly speaking, the bond market doesn’t seem worried about the U.S.

Looked at through this lens, traders are even less perturbed by Japan’s debt load; 10-year yields are a paltry 1.2 percent. One explanation for why markets are ignoring S&P is that credit rating companies, wrong on just about every major crisis of the last 15 years, have lost all credibility inAsia.

Complacent Markets

The more worrisome one is that markets are complacent. It’s hard not to draw this conclusion when you trek around the Sendai region, which was inundated by the tsunami. From my vantage point, the initial $300 billion reconstruction estimates are fanciful. So, too, might be S&P’s suggestion that the price tag would, at the high end, be $613 billion. It may cost far more.

The challenges that held Japan back before the quake are more acute now. The one most evident in the tsunami zone is how an aging and shrinking population symbolizes the decline of economic life in rural areas. The question isn’t just how to rebuild, but whether to even bother in some places.

There’s also the question of when to start. Economic logic tells you to begin right away. After a 1995 quake, the city of Kobe acted fast and vibrant growth followed. Such thinking is callous and borderline immoral to the likes of Shintaro Takegawa.

Takegawa, 57, is a Sendai truck driver whose company lost more than 90 percent of its fleet when the oceans poured into the city center. He was intrigued to see a wandering foreigner in his midst and offered me a ride back to the train station, a few kilometers from Sendai’s main port.

Why the Hurry?

“There is a big hurry to rebuild, but we have to have respect for the dead and the missing — more than 25,000 people,” Takegawa explains. “Why can’t we wait a few months?”

This sentiment is common in Japan’s northeast. I heard it, for example, from police officers in the city of Natori, which was literally wiped off the map last month. My Bloomberg News colleagues who have traveled extensively around Tohoku since March 11 routinely encounter it, too. It underscores the challenges facing a nation anxious to dispatch construction crews.

The nuclear crisis in Fukushima is another wild card. This week, electronics maker Sharp Corp. became the latest company to delay making forecasts for this year, citing difficulty in estimating the financial toll of the last several weeks.

Japan is in bizarre economic territory. Bank of Japan Governor Masaaki Shirakawa isn’t exaggerating when he says the economy faces “strong downward pressure.” That dynamic, coupled with the cost of rebuilding Tohoku, means issuing lots of new debt.

You would think that with Japan’s debt-to-gross domestic product ratio — already 200 percent — set to widen, traders would be wary. You would think a nation with a shrinking population would be chastened by markets for over-borrowing and forced to find another way to boost growth.

No, traders are saying all is well and giving Japan the green light to sell bonds. One can only imagine the market surrealism that will begin once that light turns yellow or, worse, red.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

source from: bloomberg

Li Ka-shing’s Hui Xian Hong Kong Yuan IPO Declines on Debut

Trust, Hong Kong’s first stock sale denominated in yuan, fell on its debut after offering the lowest yield among property trusts in the city.

Hui Xian declined as much as 11 percent and ended its first day 9.4 percent lower at 4.75 yuan. The trust raised 10.5 billion yuan ($1.6 billion) selling units at 5.24 yuan each, the low end of its price range.

Backed by an office and retail development in Beijing, the trust has a forecast yield of 4.26 percent compared with an average estimated yield of 4.85 percent for Hong Kong-traded REITS. Hui Xian marked the first time in at least eight years that 82-year-old Li, the city’s richest man, had to settle for the lowest amount sought in an IPO of a property trust.

“One of the trust’s selling point was that you’re also betting on yuan appreciation, but this might’ve turned away some investors because they thought the procedure of exchanging yuan to invest is just too much trouble and complicated,” saidCastor Pang, research director at Cinda International Holdings Ltd. “This adds to the fact that it offers a slightly lower return than most other REITs out there.”

Individuals applied for about 2.2 times the stock reserved for them, according to a statement to the Hong Kong stock exchange yesterday.

The three other REITs backed by Li that sold stock in IPOs since 2003 raised the maximum targeted amount, data compiled by Bloomberg show. Prosperity REIT, Li’s last REIT IPO in Hong Kong, which started trading in December 2005, drew retail orders of 300 times the stock on offer.

Li’s REITs

Underwriters BOC International Holdings Ltd., Citic Securities and HSBC Holdings Plc (HSBA)set aside 20 percent of the total offering in Hui Xian for individuals, double the typical retail allotment in Hong Kong IPOs. The decision was driven by expectations that Hui Xian would be popular among retail investors, people familiar with the process said.

“It looks like it won’t be as successful as people thought it would be,” Alex Au, managing director of Richland Capital Management Ltd. in Hong Kong, which oversees $300 million of assets, said before the shares started trading. “Very strong response for the IPO was expected from the retail market, but it turns out it was barely oversubscribed.”

Prosperity REIT (808) now has an indicated yield of 5.91 percent, according to Bloomberg data. Suntec Real Estate Investment Trust and Fortune Real Estate Investment, the REITs Li took public in Singapore in 2003 and 2004, have yields of 6.07 percent and 6.51 percent, respectively, according to Bloomberg data.

Yuan Deposits

Li is seeking to take advantage of China’s efforts to promote international use of its currency and swelling yuan deposits in Hong Kong.

There are about 200 billion yuan of “idle” Chinese- currency deposits in Hong Kong that could flow into the IPO, according to a sales document sent by one of the underwriters before marketing for the stock sale.

“Originally, people thought that if this is successful, there will be more yuan-denominated IPOs in Hong Kong, but if this stock goes below water, then the interest for future yuan- denominated IPOs will be lower,” Au said.

Yuan deposits in Hong Kong may rise to 870 billion yuan by the end of this year, Zhang Guangping, deputy director general of the China Banking Regulatory Commission’s Shanghai branch, said today. The city’s yuan-denominated deposits reached a record $52 billion in February.

Oriental Plaza

Hui Xian, controlled by Li’s Cheung Kong (Holdings) Ltd. and Hutchison Whampoa Ltd. (13), is backed by the Oriental Plaza in Central Beijing. Covering 100,000 square meters (1.1 million square feet), Oriental Plaza consists of eight premium office towers, a shopping mall, a Grand Hyatt Hotel and serviced apartments, according to its website.

“The properties are of good quality in a prime location, but that may not make up for other risk factors,” said Katie Chan, Hong Kong-based analyst at Haitong International Securities Group Ltd. “For example, some investors may think there may be potential exchange rate gain, but the IPO prospectus actually made it clear that dividends may not be paid in yuan.”

Hui Xian’s ownership claim to the assets backing the trust expires in 2049, according to the IPO prospectus.

Li was ranked 11th in Forbes magazine’s annual global rich list last month with an estimated wealth of $26 billion.

source from: bloomberg

Buffett to Face Questions on Praising Sokol Before Audit Report

for misleading the company about stock trades.

Buffett uses his meeting and annual Omaha, Nebraska, press conference to promote Berkshire’s growth, pitch the company as an acquirer to potential takeover targets and tout his emphasis on ethics. The 80-year-old chief executive officer started having journalists screen shareholder inquiries in 2009 and encouraged them to pick the most challenging ones to replace inquires from prior years about baseball and religion.

The departure of David Sokol, 54, in March, after he invested in a firm he pitched as a buyout candidate, raised questions about Buffett’s oversight and succession planning. Sokol, once considered a possible replacement for Buffett as CEO, violated Berkshire’s ethics, the audit committee said April 26, weeks after Buffett praised his “extraordinary” contributions in announcing his resignation.

“Buffett is going to get questions about his own behavior” at tomorrow’s meeting said Lyman Johnson, professor of corporate law at Washington and Lee University School of Law. “I do think that Buffett erred in his initial announcement.”

Buffett oversees the heads of Berkshire’s more than 70 subsidiaries with the help of Vice Chairman Charles Munger, 87, and a staff of about 20 at the company’s headquarters. Berkshire employs more than 250,000 people across industries spanning insurance, energy and consumer goods, and Buffett entrusts operational authority to the CEOs of the individual units.

Governance, Credit

Berkshire is facing “governance challenges” that may hurt the company’s credit quality, Moody’s Investors Service said April 1, citing Sokol’s stock trades and resignation. The Securities and Exchange Commission is probing whether Sokol bought Lubrizol Corp. (LZ) shares on inside information, a person who declined to be identified said on March 31.

Buffett, who disclosed the trades in a March 30 statement announcing Sokol’s departure, praised the manager for his work leading Berkshire’s MidAmerican Energy Holdings, its roofing unit Johns Manville and luxury-flight unit NetJets. “Neither Dave nor I feel his Lubrizol purchases were in any way unlawful,” Buffett said.

“The whole notion of Berkshire Hathaway operating on a higher plane was based upon the idea they didn’t just do what was legal, they did what was ethical,” said Cornelius Hurley, a professor at Boston University School of Law and former assistant general counsel at the Federal Reserve Board of Governors. “When one of your senior officers gets caught with his hand in the jar and you say, ‘Oh it’s legal,’ you’ve kind of blown away that principle of higher standards.”

Share Surge

Sokol’s purchase of about $10 million in Lubrizol stock while representing Berkshire in discussions about buying the lubricant maker violated company policies on insider trading, the committee found. Prior to his agreement to buy Lubrizol, Buffett was unaware of the timing of Sokol’s trades and that he was working with Citigroup Inc. (C) bankers to deal with the Wickliffe, Ohio-based company, according to the report. Lubrizol jumped 28 percent on March 14 when Buffett announced the $9 billion deal.

Sokol’s “misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor he owed the company,” the committee said.

Sokol “would not, and did not, trade improperly, nor did he violate any fair reading of the Berkshire Hathaway policies,” according to a statement from William Levine, a lawyer for Sokol at Dickstein Shapiro LLP in Washington.

‘The Great Inquisition’

Buffett, who built the world’s third-biggest personal fortune by boosting Berkshire’s stock price in four decades as CEO, told executives in a 2010 memo that the while the company can withstand financial losses, “We can’t afford to lose reputation — even a shred of reputation.”

Andrew Ross Sorkin, the New York Times writer who is scheduled to be on the panel asking questions, said in an April 5 column that this year’s meeting could be called “The Great Inquisition” because of questions about Sokol rather than the “Woodstock” for capitalism, as it has been called by Buffett.

Buffett was asked at last year’s meeting about Berkshire’s $5 billion investment in Goldman Sachs Group Inc. (GS), which was sued by the SEC earlier in 2010 over its disclosures tied to collateralized debt obligations. Buffett praised Goldman Sachs, which settled the suit in July by agreeing to pay $550 million and said it made a mistake by omitting some information from investors.

PetroChina Stake

Shareholders at the 2007 meeting called on Buffett to divest a $3.3 billion stake in PetroChina Co. because its parent company held oil reserves in pipelines in Sudan where the government was accused of supporting genocide. Buffett said at the meeting he had no disagreement with PetroChina’s actions. He sold the stake later that year.

In 2009, when Buffett instituted the new format, Berkshire was recovering from a year in which its shares fell 32 percent. The company’s Class A shares advanced 21 percent in 2010 and 3.6 percent this year through yesterday. Buffett in his annual letter requested shareholder questions and said that he and Munger “know the journalists will pick some tough ones, and that’s the way we like it.”

More than 30,000 people travel from around the world to Omaha for the annual meeting at the Qwest Center, where Buffett and Munger take questions for about five hours. Buffett’s annual press conference is scheduled for May 1.

source from: bloomberg

IMF Candidate Carstens Wins Over Bond Investors: Mexico Credit

Governor Agustin Carstens’s ability to hold down inflation in Latin America’s second-biggest economy.

The yield gap between government debt tied to inflation and fixed-rate notes, a gauge of investor expectations for annual price increases over the next three and a half years, tumbled 116 basis points since March 7 to a four-month low of 3.5 percentage points. As concern about inflation wanes, traders are pushing back their estimates for when Carstens, a candidate to head the International Monetary Fund, will begin raising the benchmark rate to December, futures trading shows.

While policy makers from Brazil to Chile have been ratcheting up borrowing costs over the past year to quell surging inflation, Carstens has held Mexico’s key rate at a record low 4.5 percent as a bet that the economic expansion wouldn’t trigger a jump in consumer prices. Annual inflation slowed to 3.3 percent in mid-May from 4.4 percent in 2010 and touched a five-year low of 3.04 percent in March.

Carstens’s “credibility has been enhanced,” Pablo Cisilino, who helps manage $22 billion in emerging-market debt at Stone Harbor Investment in New York, said in a telephone interview. “Carstens came out and said we’re going to stay put and inflation is not going to pick up, it’s going to come down. Something that you’ve been predicting happens, your credibility gets enhanced.”

Today’s Meeting

Banco de Mexico’s board, led by Carstens, kept the overnight rate at 4.5 percent at a nineteenth straight meeting today. The decision matched the forecast of all 15 economists surveyed by Bloomberg.

Yields on 28-day interbank rate futures due in December, known as TIIE, has declined 34 basis points, or 0.34 percentage point, in the past month to 5.03 percent, indicating traders are betting the central bank will wait until that month to increase the key rate. As recently as April 4, they predicted an increase by July, according to data compiled by Bloomberg.

The yield on Mexico’s 9.5 percent peso bonds due 2014 have dropped 75 basis points from a 10-month high on March 7 to 5.97 percent, helping narrow the gap with inflation-linked bonds, according to data compiled by Bloomberg. The 116-basis point drop in the yield differential between the two securities, known as the breakeven rate, compares with declines of 52 basis points in Colombia and 34 in Brazil in the same period.

“It definitely says that the market is perfectly happy with the way that Carstens is conducting monetary policy,” Kieran Curtis, who helps manage more than $3 billion of emerging-market assets, including peso debt, at Aviva Investors in London, said in a telephone interview. “No change for still a reasonable period of time is quite a reasonable sort of policy outlook to expect.”

‘Well-Behaved’

Policy makers on May 11 kept their annual inflation forecast of 3 percent to 4 percent for 2011 while raising growth estimates. The economy will expand as much as 5 percent, up from a previous forecast of up to 4.8 percent, the central bank in its quarterly inflation report.

“Taking everything together, inflationary expectations are relatively well-behaved,” Carstens, who served as finance minister from 2006 to 2009, told reporters in Mexico City on May 11.

The central bank declined to comment further in an e-mailed statement yesterday.

Mexico’s consumer prices fell for the first time in 10 months in April as housing costs tumbled. Prices fell 0.01 percent in April from a month earlier while rising 3.36 percent from a year earlier, the central bank reported May 9. Prices in the first two weeks of May declined 0.75 percent. The median forecast in a Bloomberg survey of 12 analysts was for a 0.41 percent drop.

‘Weak’ Growth

The extra yield investors demand to own Mexican dollar bonds instead of U.S. Treasuries was unchanged today at 147 basis points, according to JPMorgan Chase & Co.

The peso rose 0.6 percent to 11.6035 per U.S. dollar.

Yields on futures contracts for the 28-day interbank rate due in October fell one basis point to 4.91 percent.

The cost to protect Mexican debt against non-payment for five years fell one basis point to 105, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

“Weak” economic growth is more responsible for the decline in consumer prices in Mexico than Carstens, said Benito Berber, Latin America strategist at Nomura Securities.

France’s Lagarde

Gross domestic product grew 4.6 percent in the first quarter, less than the 5 percent median forecast in a Bloomberg survey of 17 analysts, the government said in a report on May 19. TheU.S. economy, which buys about 80 percent of Mexico’s exports, expanded at a 1.8 percent annual rate in the first quarter, less than the 2.2 percent median forecast in a Bloomberg News survey.

“The economy is weak,” Berber said in a telephone interview in New York. “The recent collapse in break-even inflation is just because people realize growth is not there.”

Mexico has nominated Carstens, who was deputy managing director at the IMF from 2003 to 2006, to replace Dominique Strauss-Kahn, who resigned as head of the organization last week to defend himself against criminal charges including attempted rape. French Finance MinisterChristine Lagarde, who is also seeking the top job at the Washington-based Fund, has won endorsements from European countries including the U.K., Germany and Sweden.

‘Model’ Country

Carstens said in a May 24 interview on Bloomberg Television that it was too early to say which countries will back his nomination and that he has “a chance” of winning the race.

Stone Harbor’s Cisilino said Carstens would be a “great” IMF head because of his experience helping Mexico recover from past crises. The economy last year rebounded from a 6.1 percent contraction in 2009, the worst since 1995, when a devaluation of the peso sparked capital outflows across the region in what became known as the Tequila Crisis.

“Mexico — it’s a model, they’ve been through every crisis you can imagine in emerging markets,” Cisilino said. “They have so much experience. It would be wonderful. They should be a model for a lot of guys in emerging markets. He would be a wonderful head of the IMF.”

source from: bloomberg

Blackstone to Buy Valad in its Second Distressed Australian Property Deal

Australian property company in less than two months.

The world’s largest private-equity firm will pay A$1.80 a share, 56 percent more than Valad’s closing price on April 27, the Sydney-based company said in a statement. The purchase values the owner of Australian office buildings and industrial properties at A$208 million ($227 million), according to Valad spokesman Ian Pemberton, principal at P&L Corporate Communications. Blackstone will also assume some A$600 million of Valad’s liabilities, Pemberton said.

The deal follows Blackstone’s $9.4 billion March agreement to buy the U.S. shopping centers of Australia’s Centro Properties Group. (CNP) For Valad shareholders, who watched the stock sink 99 percent in the 22 months to March 2009, it offers a way out after the company struggled to pay off debt after the value of its assets tumbled through the financial crisis.

“In the absence of another bid, this is the lesser of the two evils,” said Winston Sammut, managing director of Sydney- based Maxim Asset Management Ltd. “If there was a wind down of the company, it’s doubtful whether shareholders would be able to get that price.”

Valad’s shares soared 52 percent to A$1.75 as of the 4:10 p.m. close in Sydney, the most since December 2002. The shares peaked at A$42.92 in May 2007, then slumped to 44 Australian cents in March 2009. Blackstone shares fell 1.7 percent to end the day at $19.15 in New Yorkyesterday.

Deploying Capital

Stephen Schwarzman, Blackstone’s chairman and chief executive officer, told investors on a March 8 conference call that the New York-based buyout firm will continue to “aggressively deploy capital” in real estate as prices recover with the economy. A fourfold increase in profit from its real estate funds helped Blackstone post its best quarterly results since going public in 2007, the company said on April 21.

Centro is Blackstone’s largest real estate deal since 2007, when it bought the hotel chain since renamed Hilton Worldwide and Equity Office Properties Trust. Both Centro and Valad struggled to repay debt after the global property market tumbled from late 2007 to 2009.

Valad oversees about A$8 billion of real estate, including office buildings and industrial properties, mainly in Australia, according to its website. It also manages unlisted property funds in Australia and Europe.

Board Recommends

Peter Hurley resigned as managing director of Valad on April 18 after his proposal for a management-led buyout of the company’s European unit failed. Valad in December called the proposal “incomplete.”

Valad bought more than A$2 billion worth of properties in 2007. While it has sold off some of them and raised new equity to repay loans since then, the company has struggled to cut debt, reporting a A$50.7 million net loss in the six months to December.

Valad’s board unanimously recommended Blackstone’s bid “in the absence of a superior proposal,” the company said in today’s statement.

Blackstone bought A$165 million of Valad convertible notes from Kimco Realty Corp. (KIM), New York-based Kimco said in a statement on April 27.

Buying Valad adds to Blackstone’s acquisitions last year of 180 warehouse properties from Denver-based ProLogis (PLD) and investments in hotel chain Extended Stay Inc. and mall owner General Growth Properties Inc. (GGP) With the Valad purchase, Blackstone adds buildings from the Gold Fields House in Sydney’s center to the MacGregor Mega Center in Brisbane. In November, Blackstone took over the management of $2 billion of Asian real estate assets from Bank of America Merrill Lynch.

Blackstone is planning to raise its next real estate fund, with a target of about $10 billion, later this year. The company has the largest real estate business of the big private-equity firms, with $33.2 billion under management at the end of 2010.

source from: bloomberg

European Inflation Quickens on Oil; Business Confidence Drops

European inflation accelerated to the fastest pace in two and a half years and confidence in the economic outlook declined as surging energy prices threatened to undermine growth.

Inflation in the 17-nation euro region quickened to 2.8 percent in April from 2.7 percent, the European Union’s statistics office in Luxembourg said today in an initial estimate. Economists had expected inflation to remain unchanged, according to the median of 34 forecasts in a Bloomberg News survey. An index of executive and consumer sentiment slipped to 106.2 from 107.3 in March, the sharpest drop since May 2010, and unemployment held at 9.9 percent, separate reports showed.

Crude-oil prices have soared 38 percent in the past six months, pushing inflation above the European Central Bank’s 2 percent limit and prompting policy makers to raise interest rates this month for the first time in almost three years. At the same time, higher raw-material costs are weighing on consumption and company profits, just as governments across the region cut spending to narrow budget deficits.

“Business confidence is starting to come down from very high levels, signaling that growth momentum will ease gradually,” said Marco Valli, chief euro-area economist at Unicredit Global Research in Milan. “The main headwinds are high oil prices. While inflation will probably stabilize in the next few months, it could accelerate to 3 percent at the end of summer.”

German Output

The euro was little changed after the data were released, trading at $1.4854 at 11:02 a.m. in Brussels, up 0.2%.

European services and manufacturing growth unexpectedly accelerated in April, driven by higher output in Germany and France, the region’s largest economies. Still, European investor confidence declined as faster inflation and higher interest rates may hurt the recovery. Euro-region growth will slow to 1.6 percent this year from 1.8 percent in 2010, the European Commission forecast last month.

A gauge of sentiment among euro-region manufacturers slipped to 5.8 in April from 6.7 in the previous month, the European Commission said today. Services confidence dropped to 10.4 from 10.8 and an index of consumer confidence eased to minus 11.6 from minus 10.6. Sentiment among builders rose to minus 24.2 from minus 25.4.

Debt Crisis

Capacity utilization rose to 81.3 percent in the second quarter from 80.3 percent in the previous three months, the commission said.

As governments from Ireland to Spain cut spending to contain a sovereign debt crisis, eroding consumer and investment spending, European companies have relied on faster-growing markets to bolster sales. Volkswagen AG (VOW), Europe’s biggest automaker, this week reported record operating profit in the first quarter on stronger demand from China.

An indicator of manufacturers’ export order books jumped to 0.6 from minus 0.7 in March while a gauge of production expectations slipped to 15.7 from 17.9. Companies’ confidence in their ability to hire workers eased, with a gauge of employment expectations dropping to 7.2 from 8.6.

About 15.6 million people were unemployed in March, down 9,000 from the previous month, today’s report showed. In the 27- nation EU, unemployment remained at 9.5 percent. At 20.7 percent, Spain had the highest jobless rate and the Netherlands the lowest, with 4.2 percent. Nine EU member states reported a drop from a year earlier, while four had an increase in unemployment.

‘Significant Sales’

Closely held automotive supplier ZF Friedrichshafen AG plans to create 5,000 jobs by the end of this year, including 2,000 in Germany, on expectations of “significant sales and profit growth,” Chief Executive Officer Hans-Georg Haerter said on April 21.

Puma AG, Europe’s second-largest sporting-goods maker, is targeting revenue of 3 billion euros ($4.5 billion) after first- quarter profit rose 7.2 percent, the Herzogenaurach, Germany- based company said on April 26. Puma will raise prices in the fourth quarter to adjust for higher raw-material costs, Chief Executive Officer Jochen Zeitz said.

An indicator measuring households’ assessment of price developments over the coming 12 months remained close to the highest level in almost three years, easing to 30.7 from 30.8, the commission said. A gauge of consumers’ willingness to spend on big-ticket items dropped to minus 25.4 from minus 24.1 and households grew less confident in their ability to save money. A gauge of euro-region manufacturers’ selling-price expectations slipped to 21.5 from 24.4.

Wage Demands

ECB officials are worried that workers will demand higher wages in compensation for rising costs. Germany’s Ver.di services union seeks 6.5 percent more pay for workers in the state of North Rhine-Westphalia, the country’s most populous.

At their May 5 meeting, the ECB’s Governing Council will have to weigh threats to economic growth with the risks of faster inflation and decide whether to signal an interest-rate increase in June. The Frankfurt-based central bank last month forecast euro-region inflation to average about 2.3 percent this year and 1.7 percent in 2012.

“The ECB’s benchmark rate is still too low in light of economic growth and inflation expectations,” Andrew Bosomworth, a fund manager at Pacific Investment Management Co., wrote in a guest commentary for Germany’s Boersen-Zeitung yesterday. “The ECB has to raiseinterest rates higher than markets expect to damp increasing inflation pressure in the euro region.”

Economists forecast two more quarter-point increases in the ECB’s benchmark rate to 1.75 percent this year, the median of 29 forecasts in a Bloomberg News survey shows. Eurostat will release a breakdown of April consumer prices including core rates excluding volatile costs on May 16.

source from: bloomberg

Sony Chief Stringer Blindsided by Hackers

Sony Corp. (6758), besieged by hackers since April, considered its PlayStation Network an unlikely target even after threats by the online collective Anonymous and three separate security incidents in 2008.

The hacker group declared in April that it would wage a cyber war against Sony for trying to stop people from tinkering with the PlayStation 3. Three years earlier, the company faced three breaches in Europe, including one in which Sony said some PlayStation Network user data might have been stolen.

The repeated incidents should have warned Sony its online network was vulnerable, said Eugene Spafford, a computer science professor at Purdue University in West Lafayette, Indiana. The failure to enact safeguards such as appointing a single chief of security may show Sony misunderstands the risks inherent in Chairman and Chief Executive Officer Howard Stringer’s networked strategy, he said.

“The evidence we’ve seen so far speaks to a lack of a good data management plan and a good security plan,” said Spafford, whospecializes in information security, computer crime investigation and information ethics.

Japan’s Ministry of Economy, Trade and Industry said today it told Sony to carry out preventive measures against data breaches, instructed the company to ease customer concerns over misuse of credit cards and share more information among affiliates.

Spreading Attacks

Sony has struggled to keep up with the barrage that started in mid-April. The Qriocity and PlayStation Network entertainment services were knocked out for almost a month, compromising data in more than 100 million accounts.

In the past week, the Tokyo-based company has been hit with smaller intrusions — a breach at online-service unit So-net Entertainment Corp. (3789) led to the misuse of user names and passwords of 128 customers. This week, Sony shut web pages that were targeted in Greece,Canada, Thailand and Indonesia.

The PlayStation Network will resume in Japan, Taiwan, Singapore, Malaysia, Indonesia and Thailand tomorrow, while services in South Korea and Hong Kong will remain suspended until further notice, Sony said today.

“Obviously our network security didn’t stop the attack and we’re trying to understand why, and we’ve made big strides in bolstering our security,” Stringer said in a May 17 interview, before the most recent incidents.

Sony believed it had “good, robust security,” Stringer said. He rejected suggestions that the company is paying for a lack of vigilance and said he was unaware of the 2008 intrusion on the PlayStation Network.

‘New Experience’

Since most users of PSN don’t pay, and most threats focus on stealing credit card information, the theft of passwords and other personal data from those services appeared less likely, Stringer said.

“We have a network that gave people services free,” Stringer said. “It didn’t seem like the likeliest place for an attack.”

When the April incursion first started, he didn’t know how serious it was, Stringer said. “I really don’t think I could apologize for not knowing,” he said. “It’s a whole new experience for everybody at this scale.”

Anonymous Vow

There were warning signs. Sony was singled out for retaliation by Anonymous, the hacker group that brought down the websites of MasterCard Inc. (MA) in December, after the company sued 21-year-old George “GeoHot” Hotz for posting information on how to modify the PlayStation game console. The case was settled on March 31.

Anonymous announced its revenge campaign, “Operation Payback,” on the website anonnews.org. In an early May statement, the group denied involvement in the PlayStation and Qriocity breaches, while saying some members of the loosely organized collective may have been behind it.

Sony, Japan’s largest consumer-electronics exporter, must connect its televisions, Blu-ray players, game consoles and digital cameras via the Internet to music, movies and video games, Stringer has said. Unconnected devices rapidly become commodities as rivals compete for customers, he has said.

Sony’s investigation into the cause and search for suspects in the mid-April attack is ongoing, the company said. In a letter to U.S. lawmakers today, the company said it believes it knows how the network was penetrated. The company said it doesn’t know who was responsible or precisely how much information was taken.

‘Failure of Trust’

On May 23, Sony said it may spend more than $170 million related to the hack. The company also said it discovered personal data may have been stolen from 8,500 user accounts in a music entertainment site in Greece.

The company erred in “thinking of these incidents in terms of a breach of systems” and communicating with its customers based on the severity of the failure, said Kevin Kosh, a partner at Waltham, Massachusetts-based Chen PR, which represents technology companies.

“When you’re a consumer-facing organization, that’s not the way you should think,” Kosh said. “It’s first and foremost a business failure and a failure of trust.”

In March 2008, Sony informed users in Europe that an unauthorized person may have gained access to personal data on PSN through personal computers. There is no evidence that personal information or credit-card data was taken, and the security flaw, which is unrelated to the recent attack, was fixed, the company said in response to questions for this story.

2008 Probes

London Metropolitan Police questioned a teenager about a separate, September 2008 hacking attack into Sony’s developer network, according to three people familiar with the incident.

The network has no identifying information about customers and isn’t attached to the PlayStation Network, Sony said in the statement provided by Dan Race, a spokesman.

In December 2008, a user revealed a flaw in Sony’s PlayStation Home virtual-world game for the PS3 that let him manipulate pictures and videos on his own device. That person never had access to Sony’s servers, the company said.

“The one incident that related to PlayStation Network, once we identified what it was, they went in and fixed it,” Race said. The April attacks were much more sophisticated than 2008 and appear to be unrelated, Sony said.

In the weeks leading up to the April 16 breach, Sony missed key opportunities to plug holes in its system, said Bret McDanel, a security expert who monitored publicly available server logs.

Navy Server

The company’s network security should have seen a sustained probing of its systems from a Navy medical computer in Southern California, which may have been used as a proxy server by potential attackers, McDanel said.

The company hasn’t turned up evidence of such a probe of its servers, said a person with knowledge of Sony’s efforts to trace the cause of the security break.

“The truth is that people test for vulnerabilities on network systems on a daily basis, and Sony is constantly monitoring for unauthorized activity, conducting our own vulnerability tests and making constant enhancements,” Race said.

He declined to say whether Sony found evidence of a probe from the Department of Defenseserver. Justin Cole, a spokesman for the U.S. Navy, didn’t return a call requesting comment.

The attack in April was launched through a server rented from Amazon.com Inc. (AMZN)’s cloud-computing service, a person with knowledge of the matter said this month. The account was shut and Amazon’s servers weren’t compromised, the person said.

Security Chief

Companies should consider carefully what data belongs on open servers, put one person in charge of administrative rights and keep track of how and when the network is accessed, said Yuichi Uzawa, a Tokyo-based senior consultant in charge of investigative response at Verizon Business. Nevertheless, determined hackers can often find ways to break in, he said.

“In the end, it’s extremely difficult to defend a network from an organized, targeted attack,” Uzawa said. “Early discovery of signs of intrusion through monitoring of key assets is the best defense.”

Sony said it takes network security and the protection of personal information seriously. There are multiple layers of protection and the company constantly monitors for unauthorized activity, including testing for vulnerabilities, it said.

Even so, Sony’s chief information officer oversaw network security as part of his duties until after the April attacks. A chief information-security officer was then appointed, reporting to the CIO, to provide an additional layer of security, the company said.

Failing to take such a step earlier was a critical shortcoming, according to Chen PR’s Kosh.

“Adding a CISO after the fact is like hiring a bodyguard after you’ve been fatally wounded,” Kosh said. “It creates an impression that there’s a lack of accountability.”

source from: bloomberg

Forex Secrects

A forex secrets can easily make the difference between you being a profitable trader. The advantages of having a detailed trading system to follow are endless.

To be successful trading forex with forex secrets all you need to do is find a simple method that works and keep following it. The thing is profitable trading can be repetitive, this is something to be thankful for rather then dealing with mixed irrational emotions.

Basically, foreign exchange trading or simply FOREX trading is just the buying and selling of the world’s currencies. Money today is not the same as money tomorrow. Money has time value. The worth of a currency can go up or down.There is one secret that FOREX traders live by. And it is buy low, sell high. Don’t ever forget that rule.

However, the trick is to know when to buy and when to sell. In FOREX trading, everything is by speculation.That is why in FOREX trading, another secret to live by is to be aware of the national news in the country concerned.

last secret : Let me leave you one last secret I learned from my father. If everyone is going in this direction, go the other way. This applies to FOREX and other areas of life. You won’t ever get rich by following the crowd.Besides buying low and selling high, follow that last secret and you might just join the ranks of the taipans and billionaires.

Source : aboutforex

FX Options Analytics: Vols, Risk Reversals, & Pin Risk: 1230 GMT

ATM VOLATILITIES

Pair	Spot	1w	1m	3m	6m	1y
EURUSD	1.4298 (-0.90%)	12.85 (+0.85)	12.68 (+0.18)	13.1 (+0.2)	13.5 (+0.3)	13.9 (+0.2)
USDJPY	81.09 (0.71%)	10.3 (+1.4)	10 (+0.1)	10.55 (+0.1)	11.5 (+0.1)	12.65 (+0.1)
GBPUSD	1.6463 (-0.90%)	9.12 (+0.62)	9.05 (+0.05)	9.65 (+0)	10.25 (+0.1)	11.05 (+0.1)
AUDUSD	1.0704 (-1.20%)	11.5 (+0)	12.1 (-0.15)	12.85 (-0.1)	13.75 (+0)	14.5 (+0)
USDCAD	0.9760 (0.29%)	8.9 (+0)	8.9 (-0.4)	9.3 (-0.35)	9.75 (-0.2)	10.15 (-0.15)
USDCHF	0.8550 (1.73%)	12.5 (+1.25)	12.2 (+0.6)	12.5 (+0.5)	12.82 (+0.35)	13.35 (+0.47)
EURJPY	115.95 (-0.19%)	14.5 (+0.35)	14.75 (+0.1)	15 (-0.1)	15.55 (+0.05)	16.15 (+0.2)
EURGBP	0.8684 (0.02%)	10 (+0.85)	10.1 (+0.25)	10.5 (+0.25)	10.92 (+0.38)	11.35 (+0.35)
EURCHF	1.2223 (0.87%)	11.75 (+1)	11.7 (+0.65)	12 (+0.7)	12.18 (+0.48)	12.32 (+0.52)
GOLD	1529.99 (-0.70%)	13.55 (-1.5)	14.2 (-1.3)	15.9 (-1.1)	17.9 (-0.4)	20 (-0.3)
SILVER	38.0620 (-2.93%)	58 (-0.5)	47.5 (-1.5)	41.25 (-0.5)	39.75 (+0)	37.75 (+0)

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Change from 2011-05-26 12:30 to 2011-05-27 12:30 UTC

SAXO BANK FX Options Analytics 2011-05-27 12:32 UTC

At-the-money (ATM) implied volatilities are the prices (in volatility terms) for the most liquidly quoted forex option contracts. Significant changes can indicate a change in market expectation of future variability in the underlying forex spot market. Learn more about implied volatility

25-DELTA RISK REVERSAL

Pair	Spot	1w	1m	3m	6m	1y
EURUSD	1.4298 (-0.90%)	-1 (+0.3)	-1.9 (+0)	-2.1 (-0.05)	-2.2 (-0.1)	-2.3 (-0.05)
USDJPY	81.09 (0.71%)	-0.2 (-0.1)	-0.4 (-0.1)	-0.7 (-0.1)	-0.9 (+0)	-1.2 (-0.05)
GBPUSD	1.6463 (-0.90%)	-0.7 (+0)	-0.85 (+0)	-1.3 (+0)	-1.55 (+0)	-1.7 (-0)
AUDUSD	1.0704 (-1.20%)	-0.8 (+0)	-2.15 (+0)	-3.05 (+0)	-3.5 (+0)	-3.75 (+0)
USDCAD	0.9760 (0.29%)	0.8 (+0)	1.3 (+0)	1.4 (+0)	1.6 (-0)	1.7 (-0)
USDCHF	0.8550 (1.73%)	-0.1 (-0)	-0.45 (+0)	-0.5 (+0)	-0.55 (+0)	-0.6 (-0)
EURJPY	115.95 (-0.19%)	-1.2 (+0)	-1.8 (-0)	-3 (-0)	-3.65 (-0)	-4 (-0)
EURGBP	0.8684 (0.02%)	-0.2 (+0)	-0.05 (+0)	0.05 (-0)	0.1 (+0)	0.25 (+0)
EURCHF	1.2223 (0.87%)	-1.3 (+0)	-1.8 (-0)	-2.5 (+0)	-3 (+0)	-3.4 (+0)
GOLD	1529.99 (-0.70%)	0.1 (+0)	0.5 (+0.1)	1 (+0)	1.7 (-0)	2.3 (+0)
SILVER	38.0620 (-2.93%)	-3 (+0)	-3.2 (+0)	-3.3 (+0)	-3.4 (-0)	-3.8 (+0)

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Change from 2011-05-26 12:30 to 2011-05-27 12:30 UTC

SAXO BANK FX Options Analytics 2011-05-27 12:32 UTC

25-delta risk reversals show the difference in volatility, and therefore price, between puts and calls on the most liquid out-of-the-money (OTM) options quoted on the OTC market. Positive values indicate calls being more expensive than puts (upside protection on the underlying forex spot is relatively more expensive), while negative values indicate puts are more expensive than calls (downside protection is relatively more expensive). Significant changes can indicate a change in market expectations for the future direction in the underlying forex spot rate. Learn more about the volatility smile

OTC VOLUME INDEX

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SAXO BANK FX Options Analytics 2011-05-27 12:32 UTC

Saxo Bank observe trades of standard contracts taking place in the over-the-counter (OTC) forex options market. The OTC volume index shows volume traded in the past 24-hours versus a rolling one month daily average. While not capturing all OTC flow, the index is a barometer of volume on liquid contracts for different crosses. Values over 100 indicate volume higher than the average, values under 100 indicate volume lower than the average.

MARKET PIN RISK

Friday 27-May-2011	Monday 30-May-2011	Tuesday 31-May-2011	Wednesday 01-Jun-2011	Thursday 02-Jun-2011
AUDUSD 1.0755 1.0715 EURUSD 1.4560 1.4235 1.4100 USDJPY 82.250	AUDUSD 1.0560 USDCAD 0.9755	EURCHF 1.3030 1.2825 USDJPY 82.650 82.550	EURGBP 0.8650 USDJPY 82.050	EURCHF 1.2790 EURGBP 0.8620 EURUSD 1.4830 1.4820 1.4815 GBPUSD 1.6665 USDCAD 0.9485 USDJPY 81.850 81.800

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Strikes displayed for (NY) cut 2011-05-27

SAXO BANK FX Options Analytics 2011-05-27 12:32 UTC

Positions of significant size in the forex options market can have an influence on the underlying forex spot rate. FX Options strikes in large notional amounts, when close to the current spot level, can have a magnetic effect on spot prices. That is, spot may trend around those strikes as the holders of the options will aggressively hedge the underlying delta. The Market Pin Risk report shows large options expiring in the next 5 days that Saxo have observed on the OTC forex options market. Red strikes indicate sizeable open interest close to the current forex spot rate.

EURUSD CHARTS
Implied vs. Historic Volatility	Risk Reversal vs. Spot
USDJPY CHARTS
Implied vs. Historic Volatility	Risk Reversal vs. Spot
GBPUSD CHARTS
Implied vs. Historic Volatility	Risk Reversal vs. Spot

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SAXO BANK FX Options Analytics 2011-05-27 12:32 UTC

Implied vs. Historic Volatility: Large differences in implied (quoted for option prices) and historic (realised, i.e., actual movements in spot price) volatilities can be interpreted as relative over or under-pricing of options by the market. These charts show one month historic volatility versus the one month at-the-money volatility quoted by the market for option prices.
Risk Reversal vs. Spot: Risk reversals show the relative price difference between puts (downside expectation) and calls (upside expectation). This chart illustrates the historic relationship between one month 25-delta risk reversals versus the underlying spot rate. Positive values indicate calls valued higher than puts, negative values indicate puts valued higher than calls.

source from: tradingfloor

Basics Currency Trading

Investors and traders around the world are looking to the Forex market as a new speculation opportunity. But, how are transactions conducted in the Forex market? Or, what are the basics of Forex Trading? Before adventuring in the Forex market we need to make sure we understand the basics, otherwise we will find ourselves lost where we less expected. This is what this article is aimed to, to understand the basics of currency trading.

There is no two ways about it-if you want to profit from the currency market, you’ve got to know the basics currency trading. Currency trading is not about spur of the moment decisions and uninformed choices; though some experts would have you believe that. Are you doing any of the following? These practices could prevent profits for you and even result in huge losses-

All currency trades involve the buying of one currency and the selling of another, simultaneously. Currency quotes are given as exchange rates; that is, the value of one currency relative to another. The relative supply and demand of both currencies will determine the value of the exchange rate.if you are in the currency market- you will suffer losses at some point of time! If you stick to a bad position- you will just cough up losses in the long term. Get smart- remember that it is just a trade and don’t commit permanently to a position!Concentrate on suitable stop losses at every point and just relax- you CANT control the market beyond that!

Source : forexsecretexposed

Solutions In Sight?

News in the US today has the Republicans largely going through the political motions of introducing a bill on the debt ceiling debate that will be vetoed by the President if it passes the House, but rumors of a “secret meeting” taking place have raised hopes that a compromise can be reached.

The global markets are in need of some sort of stability as these crises have left Central banks around the globe in limbo as they need to allow these situations to play out before they can potentially raise interest rates to cool off their own expanding economies. At least that’s the thought in Australia and Canada as the release of the minutes from the RBA rate policy meeting and the BOC interest rate decision confirm.

Rounding out the morning are US Housing Starts and Building Permits figures which are likely to beat expectations as the bar has been lowered so much after last month’s dismal reports. So the markets are in risk-taking mode this morning, with global stocks higher, as well as oil and gold.

In the forex market:

Aussie (AUD): The Aussie is mostly higher on risk appetite as the minutes from the RBA rate policy meeting confirmed that the RBA was in “wait and see” mode with regard to the Euro debt and US debt ceiling crises. Inflation is a mild concern but does not outweigh the overall risk to global economic stability.

Kiwi (NZD): The Kiwi is also higher this morning on risk appetite and the carry-over effects of the CPI data that was reported earlier this week. The RBNZ may want to “normalize” rate policy to slow down inflation.

Loonie (CAD): The Loonie is also higher this morning as oil is trading higher despite the fact that the market expects the BOC to leave interest rates unchanged this morning at 1%. The reasoning behind this is similar to that of the RBA, but the market is expecting at least 2 quarter point rate hikes before the end of the year, the first of which could come at the September meeting. (Click chart to enlarge)

Euro (EUR): The Euro is also trading up despite the weaker than expected ZEW economic survey figures that were reported earlier this morning. The big news is that Euro zone ministers are moving closer to finding a solution to the debt crisis, as the ECB has indicated it may be more “flexible”. Yields on a Spanish bond offering soared from just 1 month ago. (Click chart to enlarge)

Pound (GBP): With no news on the docket, the Pound is drifting higher ahead of tomorrow’s release of the BOE rate policy meeting minutes.

Swissie (CHF): The Swissie is lower across the board as demand for safe-havens has decreased due to increased risk appetite. Gold is also trading slightly lower, though still above $1600.

Dollar (USD): The Dollar Index is falling this morning after much better than expected Housing Starts and Building Permits figures showed that the housing market may not be dead just yet. Improving economic data may mitigate fears of QE3, but we’re not out of the woods yet.

Yen (JPY): The Yen is mostly lower on risk themes and department store sales came in better than expected, showing signs that domestic demand may be improving as a result of the devastating natural disasters.

It’s not over until it’s over, as the saying goes, and these words couldn’t ring more true with regard to the Euro debt crisis and the US debt ceiling debate. While markets may believe that solutions are near, risk still abounds.

Meanwhile, just to update, the BOC did indeed leave rates unchanged, but the hawkish tone could mean a rate hike at September’s meeting.

Until that time, watch the economic data to see signs of economic improvement globally and whether or not Central bankers will be able to address their own domestic economies.

source from: forexnews

Forex Trading Tutorial

One of the leading causes for the failure of many businesses is their lack of planning. I think most successful people would agree that if you want to be successful in life and business you need to have a plan for how to obtain that success, set goals to meet along the way, and then work on executing your plan and meeting your goals. This is a concise currency trading tutorial, which will give you all you need to get started in currency trading and develop a trading system for triple digit annual gains…

The first point you need to keep in mind is 95% of traders lose and only 5% win. While anyone has the ability to learn currency trading and win, most lose . Discipline and Self Control:Anyone can learn a forex trading system with a currency trading tutorial but the key to success is, executing it with discipline when you are losing. It’s not easy to keep putting in your trading signals, while the market hands you losses and makes you look a fool. You need to be disciplined until you hit a home run.

There are 2 basic types of analysis you can take when approaching the forex:

Fundamental analysis : Fundamental analysis is a way of looking at the market through economic, social and political forces that affect supply and demand. In other words, you look at whose economy is doing well, and whose economy sucks. The idea behind this type of analysis is that if a country’s economy is doing well, their currency will also be doing well.
Technical analysis. : Technical analysis is the study of price movement. In one word, technical analysis = charts. The idea is that a person can look at historical price movements, and, based on the price action, can determine at some level where the price will go. By looking at charts, you can identify trends and patterns which can help you find good trading opportunities.

Source : forextradingtutorial

Fundamental analysis is a way of looking at the market through economic, social and political forces that affect supply and demand.

How to Cash in on Ugly Markets

Just yesterday, I was talking to my kids about reputations. I told my sons it takes a long time to build up a reputation but it only takes one act of stupidity to destroy it.

Unfortunately, in life, most things are like that. The good things worth having always take longer to achieve.

Well, financial markets are no different…

The “prettiest,” positive markets happen when the global economy is firing on all cylinders. Inflation is under control. Unemployment is low. Corporate earnings are climbing.

That kind of market takes years to build. But that’s when you see year-long rallies in stocks, commodities and currencies.

Unfortunately, it only takes one serious correction to erase those kinds of returns. If you were invested during the 2008 crash, you know how fast those “pretty” markets can turn ugly. In fact, the single down year in 2008 destroyed the previous five years of stock returns.

Right now, I have reason to believe that we’re heading into another one of those ugly markets… one that could erase up to 20% of your stock returns if you’re not careful.

So what do you do? Sell everything and sit in cash? Sure, you could. But I would rather make money on the way down. In just a second, I’ll tell you how to do that.

One “Down Year” Took Away 5 “Good Years!”

Certain Currencies Drop Just As Fast in “Ugly” Stock Markets

In the Forex market, foreign currencies have the potential to rise and fall just as fast as stocks. The good news is foreign currencies are easier to short on the way down. Also, there are a few currencies that can protect you from this kind of crash.

Take a look at the Australian dollar below. The high-yielding Aussie dollar calmly climbed higher for six years… and then lost all those gains inside of three months. Check it out below…

What a Difference 3 Months Can Make

As you can see, ugly markets come on much faster than bullish, positive markets. So what makes “ugly” markets so much more powerful?

Unfortunately, when economies start unraveling, it can cause a domino effect.

When retail sales slow down, employers cut their payroll. So jobs are lost. When fewer people have jobs, they cut their spending. That means lower retail sales. That can cause even more layoffs.

It’s a vicious cycle. It can cause markets to unravel quickly. But that’s not the whole story.

Fear Grips Investors and Hastens the Downward Spiral!

Markets are made up of people, so human emotion can punish the markets even more once this downward spiral begins.

There are two enormously powerful forces in the world. One of them is “fear” and the other is “poverty.” But the only thing worse than both is “the fear of poverty.”

That’s what forces traders to dump their shares the second markets start falling. Traders suddenly become irrational. It’s like brains stop functioning, and our instinct for flight makes us sell everything, no matter what’s really going on.

As I write this, I’m seeing signs that this is already happening.

This past weekend, Italian regulators created a new rule to restrict traders from short-selling Italian stocks. Every time a government tries to stop traders from short-selling, it means they are panicking. It’s a government’s last line of defense to stop the markets from falling.

Unfortunately, everyone knows this. So all the regulators did was give traders another reason to dump Italian stocks. That’s why Italian stocks corrected very severely this week. As I write this, Italian stocks are crashing through crucial support levels.

This Italian correction bled over into other parts of Europe, and eventually us here in theUnited States. French stocks are now sitting upon a crucial trend line andU.S.stocks have corrected 2% in one day.

Again, this is the downward spiral I was talking about. It’s a self-sustaining vicious cycle. Right now, it’s time to take cover before it’s too late.

4 Currencies to Buy When Markets Turn Ugly

You may have heard “there’s always a bull market in currencies.” Well, that’s true – to a certain extent. But what it really means is all currencies are priced in other currencies. One is only worth something based on another. So as one falls, another rises.

As such, it’s impossible for all currencies to drop at the same time. Even during the worst stock market correction, certain currencies always rally.

For the most part, those are the safe haven, defensive currencies like the Swiss franc, Japanese yen, and yes, even the U.S. dollar.

In fact right now, the U.S. dollar is awakening out of its slumber and springing back to life. That’s not a good sign for stocks because investors only run to the world’s reserve currency when things are unraveling.

The other currency that continues to perform extremely well is gold. I’m talking about a long-term position in gold bullion or even certain gold ETFs. Either has the potential to rise in the case of a stock market correction.

Bottom line: a correction is coming. It may have already started. Take cover now with these four currencies that promise to rise as the stocks both here and abroad sink.

source from: forexnews

Do we care that Canada is an unequal society

In Canada, there are too many poor people. The country that often likes to congratulate itself can’t take comfort from an inescapable fact: We’re becoming a more unequal society.

Legislative committees and think tanks sometimes work on poverty, but, for the general public, income inequalities are consigned to the dead-letter box in this apparently conservative age. Even the NDP, which takes poverty more seriously than the other parties, has taken to talking incessantly about the “middle class,” figuring that’s where the voters are and where the poor would rather be if they could

PHOTOS

The Conference Board of Canada, hardly a bastion of far-left thinking, just reminded Canadians about the growing income inequalities in their society.

The richest group of Canadians, those in the top fifth of income earners, saw their share of national income rise from 1993 to 2008. Within that fortunate group, the biggest gainers were the super rich, the top 1 per cent. And they got even richer not so much from investments but from basic salaries of the kind paid bank presidents and company CEOs.

From 1980 to 2005, the earnings of the top group rose by 16.4 per cent, while middle-income Canadians’ incomes stagnated, and earnings for those in the bottom group slid.

There are various ways of measuring inequality. One is the Gini coefficent, which tracks inequality on a scale of 0 to 1, with 0 being a world of total equality and 1 being total inequality.

Canada, it turns out, ranks 12 among 17 comparable countries in income inequality. Canada’s Gini score is 0.32, slightly worse than that of Australia and Germany, and far behind Denmark (0.23), Sweden (0.23), Finland (0.26) and Norway (0.27) The United States and Britain, two countries against which Canada measures itself, are the worst performers – that is, the most unequal societies of the 17. Put another way, anglophone countries are the most unequal, at least compared with continental European ones, and two of them (the U.S. and the U.K.) are also in desperate fiscal shape.

The U.S. Gini score is 0.38, reflecting the fact that income inequality is at a record high, greater even than during the Roaring Twenties. During the past decade, the top 10 per cent of U.S. earners took 49.7 per cent of income gains.

In Canada, the top fifth of income earners take 39.2 per cent of total income (up from 35 per cent in the 1980s), while the lowest quintile takes 7.2 per cent. Vancouver has the highest share of people in the lowest quintile of earners among Canadian cities; Quebec City has the lowest.

So why are we a more unequal society? That’s the subject of fierce debate. Other countries’ income inequalities are also growing, albeit to varying degrees, and the inequalities in big developing countries such as China, India and Brazil are much higher than anything in Canada or Europe.

It’s argued that globalization rewards some of the highly skilled (and people who can manipulate other people’s money, as in hedge funds, banking and financial services), while leaving others behind. Clearly, the struggles of manufacturing in North America and Europe have robbed those societies of millions of good-paying, often unionized, jobs. Some of these have been replaced by better-paying service-sector jobs; most have not.

The Conference Board notes that government transfer programs flatten out some inequalities, but not as effectively as 20 years ago. Unemployment benefits go to fewer people; welfare rates haven’t always kept up with the cost of living.

Many of the Harper government’s tax cuts, for example, have disproportionately benefited those better off, since they’re not geared to income – as in all those itsy-bitsy bribes for sports equipment, the GST cut and the child benefit cheques than come through the mail every month.

Committees of both the House of Commons and Senate have issued reports on poverty; neither stirred much interest. Income inequalities are apparently not deemed important subjects in this self-centered age.

source from: forexnews

USD/JPY Looks Like its Having its Own “Flash Crash”!

USD/JPY has been getting “the jitters” lately as traders aggressively push the pair lower. However, these traders are having a “nail biting” experience right now because USD/JPY is now in the “intervention zone” (the area that the Bank of Japan started intervening in the currency market last time). It’s caused a lot of craziness in the pair lately.

For instance, check out these huge drops in the pair on the 5 minute chart. These drops are happening within minutes, not hours or days…Click on the chart to enlarge it.

USD/JPY Shaves Off 100 Pips Within Minutes!

I’d be leery of being a short-seller here. The downside gain vs. the upside pain could be harsh if the Bank of Japan (or G-7) decided to intervene in the yen again. It would surprise me if the Bank of Japan allows a “strong yen” to stand in the way of their fragile economic recovery. This doesn’t mean they have to do something about it tomorrow morning. But they aren’t likely to put up with this “overly strong” yen for too long either.

So be careful if you’re shorting any yen pairs out there. An intervention could be very painful.

source from: forexnews

Euro Bank Stress Tests Ineffectual!

Meanwhile, we are no further along in the debt ceiling talks here in the US, which adds additional uncertainty to the mix and makes for a risk-averse investing environment. As we would expect in a risk-averse environment, gold is reaching new nominal all-time highs, trading over $1600, as the additional threat of QE3 has the inflation hawks squawking.

The Swiss franc, US dollar, and Japanese yen are all higher as well, with oil and the commodity currencies trading lower, as well as stock markets around the globe.

Two countries moving in seemingly different directions with regard to inflation are New Zealand and the UK. In New Zealand, CPI data came in hotter than expected, showing inflation of 5.3% vs. an expectation of 5.1%, and in the UK, home prices fell 1.6% last month.

This means that there is the possibility that the RBNZ may have to “normalize” interest rates (hike), while the BOE is content to do nothing. If QE3 pops up here in the US though, look out!

In the forex market:

Aussie (AUD): The Aussie is mostly lower on risk aversion as world markets are lower to start the day ahead of tomorrow’s release of the RBA rate policy meeting minutes. The market expects the next move in Australia to be a rate reduction, rather than a hike at this point in time.

Kiwi (NZD): The Kiwi is mostly lower though seeing some strength as CPI data came in hotter than expected. In addition, the Performance of Services figure also came in better than last month showing signs that the NZ economy is improving and that a return to “normalized” rates may be necessary to thwart inflation after the RBNZ lowered more recently in response to the devastating earthquakes.

Loonie (CAD): Tomorrow’s rate policy decision is expected to produce no change to interest rates, leaving them steady at 1%. Wednesday’s monetary policy report could give some further clarity, but expect the Loonie to trade on risk themes and with oil prices, as well as US economic data. CPI data is due out on Friday.

Euro (EUR): While there is some ancillary data due out this week on manufacturing, we all know that the market will be focused on the bond yields of the periphery countries and whether contagion spreads to Spain and Italy in a big way.

Pound (GBP): The Pound is mostly lower after house prices came in lower than expected, but the big news this week will be the release of the BOE rate policy meeting minutes which will show if they have any concern about inflation at all, or if they will continue to allow austerity alone to hopefully bring prices lower. Retail sales figures on Thursday will show how citizens are responding to the economic times. (Click chart to enlarge)

Swissie (CHF): The Swissie continues to be the safe haven currency of choice for the moment, and new highs vs. the Euro at 1.14 have already induced the calls for parity and SNB intervention. Economic expectations figures are due out on Thursday. (Click chart to enlarge)

Dollar (USD): The Dollar is higher on risk aversion though overall sentiment is for weakness with the debt ceiling debate and the possibility of QE3 on the table. There is a slew of housing data due out this week which is likely to show continued weakness, but US corporate stock earning have been coming in better than expected which could balance out the weaker economic data.

Yen (JPY): Congrats to Japan for winning the women’s World Cup, though that happiness may be short-lived if the Yen continues to strengthen. Expect the Yen to continue to trade as a proxy for risk, and for BOJ officials to try to jawbone it lower if given the chance.

This week is apparently setting up as just more of the same. Euro bank stress tests from last week were essentially a joke, and the US is no closer to a debt ceiling resolution as the clock continues to tick.

Meanwhile, corporate stock earnings here in the US have been pretty good to start out and with week monetary policy in place markets could rally if either the US or Euro zone can get their house in order.

While no one is expecting a solution to either problem to happen overnight, meaningful progress needs to be made to show the markets that solutions do indeed exist and that they may actually happen despite the political climate.

Otherwise, these politicians will be fighting over smoking embers as the whole system will come crashing down!

source from: forexnews

Beware of the technical rally

High frequency trading hedge funds were the stars of the volatility fireworks in this past week. The sheer explosion of volumes, the price action and the relentless rumour-mongering in a traditionally slow trading period are a trademark of this bunch. The resulting short-term ban on short selling introduced by France, Italy, Spain and Belgium may mean that they have lost this battle, but certainly not the war.

The aim of the rumour-mongering was clear: take a shot at the next domino in the European construct by putting the stocks of French banks under pressure through the sovereign downgrade rumours (French banks would get downgraded if their sovereign did). Taking aim at individual banks, namely Societe Generale, hedge funds tried to force a potential rescue by the French government, in which case the country could get downgraded anyway. In turn, this would probably force the collapse of the EFSF structure, since it is heavily dependent on the AAA rating of the second-biggest economy in Europe.

In this particular case, the short selling ban was therefore somewhat justified, since a major French bank going under would only happen as a self-fulfilling prophecy. Indeed, all French banks have a large deposit base. Hence the “Northern Rock” or “US Investment Banks” model does not apply here. Furthermore, the ECB would fill any necessary short-term funding gap in whatever currency. Hence any argument for the collapse of a major French name at least due to a short-term funding issue just does not add up.

Still, short sellers would not be involved in the European situation if the structural problems did not justify it. The pressure put on European governments by financial markets to act may not be enough. The Greeks are indeed eerily quiet, the Dutch just won’t shut up and the Germans are balking at increasing their exposure to the Old Continent’s debacle. Any structural reform at the European level (think fiscal consolidation) would take months if not years to be negotiated and implemented.

If that was not enough, a potential slowdown of the global economy would make the mathematics of budget balances only look worse, even if deep cuts are implemented (which would decrease growth anyway!). Hence, more than ever, the European Union has painted itself in a tiny corner, trying to fight the wolves with short-term actions via the only flexible entity around, namely the ECB.

The trump card for this quicksand scenario is whether the U.S. economy is simply experiencing a slowdown rather than an outright double dip. The judge is still out there although the odds seem to be slowly turning against this rosy perspective. One thing is for sure, bond markets are not pricing a deflation scenario in the U.S., as shown in the chart below:

Fed’s 5-year Forward Breakeven Inflation Rate – source Bloomberg

Although this inflation guage has fallen quite steeply this week, we are still far from a deflation scenario. Still this makes the upcoming U.S. CPI reading one of the most important reports next week.

In Europe, the agenda will remain driven by unpredictable political announcements and some may happen no later than the coming weekend. More short bans and other policy responses could well be announced before the Monday Asian market open.

Looking at indices in the short term, volatility is set to remain high. Our observation is that the type of corrections we have seen recently generally come in the form of an ABC wave. Hence, we would look at retracement levels to fade the rally underway. Still we would not go into the weekend short for the reason just mentioned.

An overcrowded trade before the sell-off, the DAX index created a line in the sand at the 5,500 level. In the current rebound, 6,000-6,100 should be a major hurdle before the downtrend can be broken. Should the 6,100 level be held or broken on announcements over the weekend, then we expect the rebound to extend to the Fukujima disaster lows or about 50% retracement of the latest sell-off (6,400 to 6,500 area).

DAX Index – daily chart – source Bloomberg

Then, it may be wise to cover your longs as we get closer to September since it is historically a bad month for stocks (sic!). In this respect, net short positions around the 6,500-mark should offer some reasonable odds of success.

For the S&P 500, the same reasoning applies: 1,180 – 1,200 looks to be a major hurdle and a break of the level should fuel the rally towards the 1,240 to 1,250 area. The line in the sand on the index for the downside comes at 1,100.

Strategically, we look for sound individual stocks that get punished due to earning misses as the over-reaction in nervous markets may create longer term opportunities. In the emerging markets space, we look to Brazil as a market that provides long-term opportunity since it is trading at a large discount to Asia and close to Russia on several metrics, whilst providing outstanding long-term fundamentals.

If you have the urge to get involved in short-term trading next week, small positions sizes and wide stops will remain the name of the game.

source from: tradingfloor

Stock Market Volatility Reaches Twice the EURUSD

A look into the market volatility reveals forex movements are about half as volatile as the stock market. Therefore, choose to trade a pair that meets your volatility appetite.

The crash in stock prices we have seen in the past 2 weeks has created a significant increase in volatility. For the past 3 trading days, the stock market movement has seen little net progress though the daily trading ranges have hovered near 5%.

The chart above shows how the Average True Range (ATR) has tracked as a percentage of the price. So yesterday, the ATR value for the EURUSD was 205 pips and the closing price was 1.4239. Therefore, the calculation is :

.0205 / 1.4239 = 1.4% Average Daily Range

This means the average daily range is running about 1.4% of the price. When the percentage increases, that means volatility is increasing. The chart above covers the past 4 years of data so we can see how these percentages move during quiet and volatile market conditions.

The picture is fairly clear. The stock market has typically been a more volatile market to trade relative to the EURUSD. And lately, that volatility has picked up in stocks with less of an uptick on the EURUSD.

Since August 1, 2011, the EURUSD Average Daily Range Percentages have been running about 1.1% to 1.4%. During the same time period, the US30 (a CFD that tracks the Dow Jones Industrials) has grown from 1.6% to 3.6%. So the stock market is running about twice as volatile as the EURUSD.

In my webinars this week, I asked the listeners about how much volatility they like to trade. Depending upon your volatility appetite will depend on which pair you should consider trading.

The above chart lists the ATR percentages for the 7 majors. The USDCHF, NZDUSD, and AUDUSD show the most volatile pairs involving the US Dollar. The least volatile majors are the EURUSD, USDJPY, USDCAD, and GBPUSD. If you find yourself thirsty for volatile pairs, consider the CHF, NZD, AUD and their crosses with each other.

If you want less of a roller coaster ride in the market, lean towards the EUR, JPY, CAD, GBP and their crosses with each other.

Also, volatility in your trading account also depends on the amount of effective leverage utilized. Relatively less effective leverage will smooth out the peaks and valleys of the equity in your account. If you find the market upsetting your stomach, check the pair you are trading AND the leverage you are using.

source from: dailyfx

Probability of US recession appears overblown

Slowing global trade, weak economic figures and a sovereign debt crisis in the Eurozone (that just does not want to go away) have understandably led to volatile markets in recent times. Is it possible that the weakness in the U.S. has been overstated?

Abysmal 2Q GDP report
The theatrics on the part of Congress threatened to temporarily overshadow the batch of deteriorating economic reports culminating in the GDP report two weeks ago. In the report, the Bureau of Economic Analysis (BEA) estimated that the economy grew just 1.3 percent in the second quarter* (annualised) and what is more the BEA also made sweeping revisions to prior data points, which saw Q1 ’11 GDP growth be revised down to just 0.4 percent.

Chart 1: Gross Domestic Product

Given the weakness underlined by the GDP report and stressed in other reports such as ISM Manufacturing and Consumer Spending, it is constructive to keep an eye on what the forward-looking indicators tell us about the development in the coming quarters.

U.S. leading indicators
To investigate this we have gathered a collection of 25 time series believed to provide information about the economic growth in the coming quarters. We will offer a caveat up front, though, as the exercise forecasts GDP directly rather than the components. Hence unusual developments in government spending (roughly 20 percent of inflation-adjusted GDP) - for example elevated austerity - can alter the projected outcome.

From this basket of indicators we find the principal component representing most of the variance of the indicators one, two, three and four quarters ahead and regress this on GDP. In other words, by means of PCA we can represent the 25 indicators by a single series, which explains more than 50 percent of the evolution in the underlying indicators. This series can then be used to estimate GDP for all four forecasting horizons. To avoid being overly repetitive, we will only investigate the regressions for GDP two and four quarters out in detail.

Table 1: Regression information

Coefficients*
Forecast horizon (quarters)	2	4
Constant	6.27	6.41
T-statistic	13.02	14.26
Principal Component	-1.12	-0.94
T-statistic	8.78	7.54
R-squared	0.51	0.44
R-squared, adjusted	0.51	0.43
F-statistic (df = 1, 73)	77.14	56.82
* multiplied by 1,000

The table above indicates that the parameters belonging to the constant and the PCA component are both significant at all reasonable levels with an adjusted R-squared statistic of 0.51 and 0.43, respectively. Moving on, let us have a look at the predictions visually:

Chart 2a: Fitted and predicted values two quarters ahead

Chart 2b: Fitted and predicted values four quarters ahead

Both charts more or less confirm our own outlook for the U.S. economy in the coming quarters. It will rebound from the weak performance in the first half of this year, but growth will not be impressive by any historical standards. If we dig a little deeper we get more of an understanding of why the models predict as they do. The 25 time series are represented in the first principal component two and four quarters out in the following way:

Chart 3: PCA loadings in first principal component

Unsurprisingly, several of the time series are well-known leading indicators often used when discussing the outlook of the economy such as ISM Manufacturing – New Orders and various regional Federal Reserve counterparts. We also note that the Conference Board’s (CB) own index of Leading Indicators enters into the principal component when we move out to four quarters and so does the ISM Manufacturing New Orders to Inventories differential. The differential is often used as a leading indicator, but it did fail in the summer of last year when it predicted more weakness than was actually the outcome.

What to make of it all?
Putting all the models together we get forecasts for the economy in the next four quarters, which suggest that even though there is definitely plenty of weakness the economy is not likely about to descend into recession again. Rather, the models predict that the U.S. will return to annualised quarterly growth rates of 2 percent in the near future with the yearly growth rate accelerating a bit to 2 percent as well.

Chart 4: Predicted Gross Domestic Product in the coming four quarters

We stress that the above prediction on the direction of the U.S. economy is only a qualified guess based on a basket of leading indicators; it is not resistant to neither renewed financial stress nor unusual government spending patterns. We also note that it does not take into account the coming revisions of GDP and other series.
Nevertheless, judging by the results shown above the economy is about to pick up a little bit of pace in the second half of the year, but not at all enough for us all to be running around with our arms above our heads.

source from: tradingfloor