Silence is golden, up until certain limit though

Well, this is my first post in over a month... Not taking into account recent 3 weeks vacation, the desire to keep this blog alive was overwhelmed by the fear of saying something stupid. No, I am not afraid to start talking against the trend and neither I fear to be wrong (up to certain limit though). I just did not know what to say and I honestly did not want to say anything I did not believe in.

This break allowed me however to focus on other things and I also had an opportunity to write a small article for an university magazine. I will publish it later as soon as it becomes public. This was a tough task as anything I write in this blog is, among others, simply a writing exercise - need to express my thoughts better.


Feeling of uncertainty prevails, so it is time to go back to page one in financial theory book - risk free rate. This is probably the most commonly used "constant" in finance. So what is it now? German or US bills? Just some years ago I would have said yes without any doubt. The problem is some years ago I was still in the university. The reality now is it is much safer to purchase not the US bills, but 10year bonds as US government will buy them as part of QE. And German bills are no longer so attractive as Irish and Portuguese bonds are. You can be sure that ECB will purchase them and make sure there is no default risk associated with them as we all can count on bailout without any loss to bond investors.

The reality is we do not know any more what risk free rate is. So how does DCF and Black and Scholes models should work then, if indeed Irish bonds are safer then the ones of Germany?

Loooking at big picture

We indeed had a great September. Bucking the trend equities had a best year in 70 years and commodities followed. Most of the currencies strengthened vs dollar.

Can great September turn out to be a miserable October?

Last days of September were mainly characterised by expectations of FED easing, but recent data suggests that the economy is not yet there to employ heavy artillery. I, personally, it will take an effort to pass any additional easing as politics get involved.

Well, longer term charts suggest we're still not there to call it a winning situation and a full blown market rally. First of all, S&P monthly chart:

Long term momentum still remains down and 1155 is area where many moving averages cross. Moreover last 4 months of trading look more like a correction rather then a firm trend upwards.

This coincides with 15 month moving average in EURUSD, which worked well previously:

which currently acts like resistance. These are long term charts, so trading off them is difficult, but at least this will help to identify long term trends...

Commodities put a very good month thanks to weaker dollar and improving sentiment, however having copper at $8000 and oil at $82 still suggests long term bear trend. Faltering equities might as well put a cap on recent rally.

End of the month trading might result in bearish reversal days for equities (if we close under 1140) and EURUSD. (under 1.3560). While beginning of the month usually involves big money going onto either side of the market, I would wait until next week to have a clearer short term view on the markets...

Did we misunderstood the FED?

I mean, honestly, what did FED say during its last interest rate decision? Nothing new compared to a month prior decision, except for the fact that it acknowledged lack of inflation. Since officials are now questioning the benefit of additional stimulus I think any new ideas will run into the wall of bureaucracy. Yet weaker dollar will bring inflation so needed by FED to help it pay for its obligations among other things ... The problem is, with inflation, we will see higher yields, so here it is, the start of the bear market in bonds..... And that is exactly what FED does not want... but you cannot have both, stupid. Since demand is not there, it will be a big problem going forward... but for the moment we bought ourselves some time

Will this turn out  to be another crisis? probably yes

Do not underestimate weak dollar... last part

This is my final note that has to do with weak dollar. From now on I will focus on strength of other currencies rather then dollar weakness for a change. Just get the feeling that QE-2 will not end up good.

As mentioned earlier FED wants to have both inflation and lower bond yields. Correct me if I wrong but this does not work. Either you have inflation and high yields or deflation and low yields. Something has to give. But I have to admit until now it worked well. There is no indication of higher Bond yields yet as my favourite 10year maturity is still in the down trend:

Euro has posted another outside bullish day and is rising exponentially higher (dollar falling). Sign of a bubble, yes, but I would not try to catch falling knife. Portugal and Ireland are still a concern, but there is a greater evil out there. There is a resistance at March highs at 1.3770. Euro chart:

Oil is a boring market, base metals mainly follow weak dollar, so nothing interesting there. Still do not believe in higher equities, but cannot do much until we see some sort of top or fall under 1130:

To my mind while dollar weakness is substantiated, but risk on mode based just on that is a sign of bubble that will eventually burst. yet it is still not yet time to become a contrarian.

Dissociative Identity Disorder

Well, I admit, I might be having a dissociative identity disorder. Ask where market will go next and I can give plenty of reasons for them to go up or down and risks to either direction. And I will be right in both cases.

Here is the story from optimistic identity:


Technically S&P did not have a breather since end of August lows and went through range resistance, bounced off it and posted a new high. Fundamentally we will not have a double dip for the moment and FED will step in to support the markets if it happens. QE-2 (according to Goldman Sachs) will start as early as November. Companies sit on piles of cash saved from cost cutting and M&A activity is picking up. As a result of QE expectations dollar is falling and this will supports commodities.

A pessimistic part of me says:

Stupid, technically this is still a bear market as we have not reached post flash crash highs and weaker dollar is not a sign of healthy demand growth but rather then trying to pump a balloon with holes in it - you can try to make it bigger, but so will be the holes in it and it will eventually burst. This is still a bear market as real incomes will not rise to 2007 levels and we all know what will happen when inflation hits the market without underlying demand strength. Most likely FED's money printing is to end up with big kaboom...

You have countries that borrow money to finance economies with negative GDP growth at 6%. How long will they last? FED wants to have both inflation and low bond yields at the same time. Something have to give. Moreover, these days everyone wants to have their currency weak, especially vs dollar, but this is not the case. What started with Japan, may soon be followed by Switzerland, Europe. Brazil, Canada and other commodities exporters will follow. Currency wars? Protect your own - make life difficult for importers. 


A real me simply says WTF?!?! well, in fact you're both right,  while the optimist is assessing more short term views, the pessimist is looking at a slightly longer time frame. I am personally the pessimist and I think this is not a healthy environment for natural economy growth so I think these market will implode, probably this will be worse then 2008-2009 drop, but timing of this is uncertain. So instead of screaming this is the end of the world I will follow the winners...

I am asking myself, we remember what happens when dollar gets weak... Are we so stupid to repeat these events again?

Why I think Portugal will go bust or get bailed out...

I mean first of all simply because it will not be able to afford debt repayments... There are also dangerous signs in equity index, which to my mind is about to break down, whether it is because people are to realise above debt problems or economic data to get worse. But this descending triangle does not look good:

And momentum is not yet in oversold territory. So it is another bailout?

Is this a start of something big? PART2

Put it simply, I got it wrong. Last Friday's bearish reversals in European Equity indices did not materialise as we posted new highs.

As I said the problems will not come out of Ireland, but Portugal instead. And Portugal did not come off from the table. While 10 year yield has put a new high at 6.45% the chart looks concerning as we continue exponential rise. Only a move under 5.5% would stop the rise:

Now, this is a long term chart and effect while we can be taking clues from this market on active days rather then trying to anticipate the moves. bottom line this is a market to watch and risks remain for further yield rises.