Tag Archives: british pound

COT Report Shows British Pound Sellers at $1.60

The Commodity Futures Trading Commission(CFTC) publishes a weekly report entitled, “Commitments of Traders.” This report classifies the markets’ largest positions by trading groups – speculators, managed money, index traders and commercial traders. Our research focuses on the commercial trader group. We’ve been able to quantify correlated movement between the commercial traders’ net position and commercial trader momentum with the underlying market movement accurately enough to use this as the first screen in our trade selection process. We hypothesize that their accuracy is due to the laser focus necessary when one’s livelihood is derived solely from the movement of an individual market.

Continue reading COT Report Shows British Pound Sellers at $1.60

Currency Reversal on Scottish Vote

Today’s Scottish secession vote takes a 300-year-old issue and covers it with 21st century journalism. There’s hardly any angle that hasn’t been talked to death. Surprisingly, I’ve found something of major importance leading up to the vote that isn’t being discussed anywhere. The commercial traders in the Commodity Futures Trading Commission’s weekly Commitment of Traders report are making a clear point that they collectively feel that the currency markets are about to tighten, rather than continuing to widen as they have for the last month or so.

Continue reading Currency Reversal on Scottish Vote

Currency Trading the Scottish Secession Vote

Thursday’s landmark vote to return Scotland to its own sovereignty is becoming a tighter race with each passing day. The interesting part in the analysis is that the money has been flowing into the British Pound and Euro Currency and out of the U.S. Dollar Index. This places the commercial traders’ actions directly at odds with the currency markets’ collective movement over the last two to three months leading into the Scottish secession vote.

We cover the analysis of the following charts in Equities.com.

Currency Reversal on Scottish Vote

us dollar buying into scottish vote
US Dollar Index sees major commercial trader selling heading into Scottish vote.

See more of our Recent Trades at COTSignals.

Pound Sterling buying before scottish vote
Strong buying of British Pound Sterling heading into Scottish vote.

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buying the Euro into scottish vote
Strong buying of Euro Currency heading into Scottish vote.

Tracking Commercial Interest in the Commodity Markets

The commodity markets have been unkind to long only funds and indexes in 2014. Most of the commodity markets have been sideways to lower with a couple of exceptions like cocoa and cattle. This week, we’re focusing on the broader commodity landscape due to an article published on Bloomberg by Debarati Roy in which she stated that open interest in gold had slumped to a five year low. We’ve expanded on this topic to include 27 general commodity markets and compared their current open interest to where they stood both one month and one year ago respectively. The purpose is to determine whether smart money is headed into or, out of the commodity markets in general as well as what affect this may have on the markets going forward.

Continue reading Tracking Commercial Interest in the Commodity Markets

World’s Strongest Currency

The true measure of strength in any currency is the faith
its users place in it. This is the definition of a fiat currency – a currency
that is backed by faith, rather than hard assets. These include the Euro, the Dollar,
Yuan, Canadian Dollar, British Pound, etc. A loss of faith in any of these
countries’ ability to pay their debts results in devaluation of that country’s
currency. The same is true if they decide to print more money to meet current
needs or even if the world simply thinks their country is being run poorly.

What if I told you there’s an international currency
unencumbered by entitlement programs and liabilities. This currency is not
subject to governmental manipulation and the money supply is always a live
public statistic. This currency neither buys nor sells any debt. Would it surprise
you, given this set of circumstances that this is the single strongest currency
in the world over the last year?

The currency I’m referring to is called, Bitcoin. Bitcoin is
an internet currency that is traded globally for goods and services and can be cashed
out in the currency of your choice. It is, “mined” on individual computers that
are placed, by anyone, on the network. The mining is basically using your
computer to solve an equation. The equations get harder and harder through
time. This ensures that the supply of Bitcoins grows at a stable rate. The
publicly validated equations place more Bitcoins into circulation by the people
who’ve mined them. The number of Bitcoins, currently stands at 6.6 million. The
next equation and number of coins in circulation are all publicly available in
real time. People are able to take their Bitcoin out of circulation to keep offline to improve security and minimize the chance of their digital wallet being hacked, look more into bitcoin cold storage for extra information.

The value of Bitcoins is tracked on trading sites that look
just like foreign exchange trading sites. There are quotes in Dollars, Pounds,
Euros, Francs, Rubles and most any other denomination. There are bids and
offers to sell and buy bitcoin as well as the amount that is up for trading. Bitcoins
can be actively traded across currencies just like any other currency.
Currently, one Bitcoin is worth approximately $14. This equals a U.S. market
value of more than $90 million dollars.

Without getting too technical, faith is being placed in the
mathematical equations that regulate the supply. The supply can be verified,
from the equation through circulation by anyone on the network. While the
equations require lots of computing power to solve, they can be checked very
easily, just like any math problem.

The demand is built up due to the freedoms and low cost of
use. Bitcoins have no transaction fees. There are no middlemen. There are no
PayPal, Western Union, wire or, credit card processing fees. The coins can be
spent online anywhere that accepts them, including, Ebay, Amazon and other
merchants as well as online poker sites and other places your credit card
company won’t let you spend your money. Bitcoin is gaining traction and now
processes more than 10,000 transactions per day. Many have begun research into
Bitcoin IRA Review options, and others are finding unique ways to use the currency.
A survey of Cragslist even
turns up business opportunities including one with a Stanford PhD looking for a
technical lead developer in Bitcoin mining.

I am not promoting Bitcoin and I haven’t used it.
Personally, I think it may be the most forward thinking and libertarian store
of value yet developed. The idea that the fundamental supply is always known
and that it isn’t subject to government budgets and political elections
combined with the fact that it is stored with each individual participant
rather than any banking system makes Bitcoin a revolutionary endeavor of the
electronic age.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Foreign Alternatives to Domestic Problems

People interested in the safety of investing short term cash
in certificates of deposit who are unhappy with yields they’ve been receiving
may want to consider some other options. The total return on CD’s has been
hammered throughout the economic crisis by the compounded effects of the
declining U.S. Dollar and the fiscal stimulus packages designed to lower
interest rates and create inflation. This has created a net negative return for
the people who are most reliant on income generating, principal protected

The fiscal stimulus plans have been designed to keep
interest rates low with the intention that low rates will spur economic growth.
The hope has been that businesses will take advantage of these low rates by
borrowing money and putting it to work increasing their gross revenues and
hiring more workers in the process. However, early on in the economic crisis
when the Federal Reserve Board began printing money and slashing rates, the
money they created was bottlenecked by the banking industry trying to heal
their own balance sheets and make up for their own overextension into the sub
prime real estate lending market. Thus, much of the initial stimulus never made
it to small businesses that might have been willing to borrow early on. The
depth and severity of this crisis has since scared off those same businesses as
it has dragged on and on with no pickup in consumer demand. Now that the money
is finally flowing, businesses have no need to ramp up production.

The official unemployment rate is 3.5% higher now than it
was when the economy collapsed in October of 2008. I have a hard time cheering
about an unemployment rate just because it’s less than 10%. Perhaps a more
telling statistic is that the number of employed people aged 16 and over has
declined by 5.8 million people over the last two years. The fiscal stimulus
package has not been designed to create employment. The effect is a mild opiate
for the masses in the form of increased subsidies and treatment of the economic
symptoms like home and auto loans without establishing a rigorous protocol for
fixing the economy and weaning the public off of its pain medication.

The haphazard way in which the fiscal stimulus has been
doled out has been viewed by the world as U.S. Dollar negative. The U.S. Dollar
Index, which is down approximately 14% since the crisis began, only tells part
of the story. This index is calculated by the value of our Dollar against a
basket of foreign currencies. The Euro Currency, Japanese Yen and the British
Pound dominate that currency basket. These three countries, which total more
than 80% of the U.S. Dollar Index each have their own economic crises to deal
with and are therefore, not reflective of the global value of our currency.

The only real source of global inflation at the moment is in
the emerging countries. China is main headline and rightfully so. China holds
the key to the next wave of developing middle class. Their growing consumer
base will fuel the next round of global economic recovery, along with India,
Brazil and numerous smaller Asian economies. These countries are experiencing
their very own, “Industrial Revolutions.” Their metamorphosis is happening much
faster than the one in our history books and it is their healthy economies that
can provide those seeking principal protected earnings some measure of value.

Those of you invested in domestic money markets and CD’s are
well aware of the deleterious effects of declining interest rates and a falling
Dollar. The compressed yields aren’t enough to offset the waning value of the
principal denominated in U.S. Dollars. Fortunately, the global economy brings
global alternatives. Our firm trades currency futures. We do not have access to
foreign certificates of deposit or, global money market accounts. These ideas
are from my personal finance management and are being passed along because they
are investments that I’m personally entertaining.

A brief survey of domestic six month CD’s provides us with
investment opportunities ranging from a low of 0.05% at Fifth Third Bank to a
high of 0.20% at Chase and PNC Bank. Compare those with the following six-
month foreign currency deposit rates; South African Rand- 3.68%, Norwegian
Krone – 0.6%, Mexican Peso – 2.14% and the Australian Dollar at 3.25%. These
investments are not free money and the risks need to be understood. These risks
include but are not limited to, the currency exchange rate between the U.S.
Dollar and the currency you choose to invest in and also include interest rate
policy shifts within the individual countries. However, as it becomes clearer
and clearer that the United States’ Federal Reserve Board is going to continue
to push for lower rates and flood the market with cheap Dollars via their
second round of Quantitative Easing, it becomes increasingly important to protect
the value of what we have and that means trading shiftless Dollars for global
industrial development.

This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk of loss in investing in futures.

Uncovering Value in the Commodity Markets

Uncovering Value in the Commodity Markets

The electronic meltdown in the stock market also cued a selloff in many commodity markets. Typically, markets move in their own individual rhythms. However, when fear dispossesses logic and panic takes over, it becomes a case of sell first and ask questions later. As the stock market selloff accelerated and we watched the media reports of the riots in Greece, survival became the primary concern. Now that the dust has settled, it’s time to appraise the current state of the markets. I believe the shock to the system uncovered some fruitful trading opportunities.

First, let’s examine the context of the markets prior to the selloff. In the currency markets, the Australian and Canadian Dollar as well as the Japanese Yen had been consolidating near the upper end of their ranges. All three had been holding their own since the U.S. Dollar’s rally has come, primarily, at the expense of the Euro, Swiss Franc and British Pound. The same pattern appears in the metals and energies as gold, silver and platinum as well as heating oil, unleaded and crude had also had been consolidating near their highs.

Secondly, let’s consider the composition of the markets’ participants through the Commitment of Traders Report at these price levels. Commercial trader positions in the markets above were gaining momentum in the direction of their established trends with the only exception being the silver market. This means that even as the markets were moving higher, the traders we follow, commercial hedgers, anticipated higher prices yet to come. For our purpose, we track the commercial hedgers. Prior to the market shock, we presumed that we were in a value driven futures market and no one knows fair value like the people who produce it or, have to use it. In fact, it is precisely their sense of value that provides the commodity market’s rhythmic meanderings that swing traders love so much. Let’s face it, producers know when their product is overvalued and it should be sold just as well as end line users know when they should be stocking up at low prices.

Finally, in the wake of “Volatility’s Perfect Storm,” we have seen the commodity markets snap back from losses of 3% – 4% in the world currency markets to 7% – 10% in the physical commodity markets. This sharp selloff and snap back to the previous range of consolidation prices is called a “Spike and Ledge” formation in technical analysis and pattern recognition. Typically, this occurs when an outside force creates a counter trend shock to the market and scares everyone out. The fear of being in the market is replaced immediately by the fear of NOT being in the market and missing the move. The shock forces out the market’s weaker players while allowing the strong to accumulate more positions at better prices. This is why COT Signals has been kicking out buy signals since the meltdown. Following the commercial trader positions has allowed us to buy into oversold markets. Our targets for these positions can be calculated by adding the depth of the market’s decline to the top of the consolidation levels. If the market you’re following sold off 5% from its highs, a spike and ledge projected target is 5% above the market’s previous highs and a protective stop would be placed just beyond the spike.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.


The Foundation of the Dollar’s Rally

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

I’m publishing this reprint from John Mauldin’s “Outside the Box,” weekly letter as support for my last blog Pandora’s Grecian Riddle. I’ve fielded numerous calls from clients who feel that the U.S. Dollar is overvalued and that this rally should be sold against the February high around 81.70. I still feel that the Dollar should be viewed in terms of relative strength, rather than absolute strength. The U.S. Dollar Index is comprised of 57.6% Euro currency, 13.6% Japanese Yen and 11.9% British Pound. Therefore, with 71% of its value being tied to Euro land, the U.S. Dollar will continue to look pretty good as the Greece / Euro mess plays out – in spite of our troubles here in the U.S.



Contact John Mauldin


Print Version

Volume 6 – Issue 15March 22, 2010Has Germany just killed the dream of a European superstate? From the Financial Times and the London Telegraph

While the US was focused on the health care drama over the weekend, over across the pond events are rapidly deteriorating in euro land. For this week’s Outside the Box I offer two columns, one from the Financial Times and another from the London Telegraph. Both describe the problems that the eurozone faces. It is not pretty.

I was sent this note from a Steve Stough who translated this from a German TV news show’ It is a nice set-up for the two short columns.

I was reading an interview with Germany’s most-quoted economist and then, all of a sudden, his face pops up on a TV show (a panel discussion on Germany’s version of Fox Business News) at the same time, so I paid close attention. Hans-Werner Sinn’s remarks are apparently listened to as closely as are the Federal Reserve Chairman’s remarks in the US. He said:

  • The Greek drama will have a ‘frightful’ (‘schreklich’) ending no matter which course of action is taken. The objective is to avoid having a Greek default trigger another banking crisis across the EU.
  • The EU member states are too financially fragile to take on any flaky Greek debt. The actual Greek deficit is running at 16% of GDP, not 12% as previously reported. Greece is in a deepening retraction, not a recovery, as previously claimed. [Germany’s social security, welfare, unemployment, and health care entitlement programs are all running cash-negative or soon will be, but that is another subject entirely. Angela Merkel has a committee established to work on tax reform, meaning tax rate reductions – Steve].
  • There are three bad alternatives. He recommends #3 (effectively, default):
    1. A Franco-German bailout. Dr. Sinn believes this is impractical and the worst of the three alternatives because the amounts required for an effective bailout are so large that it would trigger a jump in yields on French and German sovereign debt which would result in a Euro-wide financial crisis. In addition, Angela Merkel said ‘no,’ and so did Guido Westerwelle (her coalition partner and foreign minister).
    2. IMF loans. Dr. Sinn believes that this would accelerate the Greek economic contraction with a dramatic deflation of wages and prices, which could lead to civil war, revolution and a political destabilization of the area.
    3. Exit the Euro zone, revive the Drachma, re-denominate the sovereign bonds in Drachma, let the Drachma collapse, and rebuild after the collapse, largely on tourist remittances Assuming a small amount of domestic (internal) default, this would be the least-painful to the Greek populace, but German banks and investors would lose approximately $38 Bn in bond investments +/- what can be recovered after the Greek economy recovers. Eventually, Greece would be allowed to re-join the EU.
  • Formation of an EU monetary fund is out of the question, he believes, because it requires treaty modifications that might take many years to pass.
  • As an aside, he said that if German tax rates are not lowered, that Germany will slide back into recession.

Steve Stough

As a quick aside, I know I said two weeks ago that I would do an assessment of the affect of taxes on the US economy. I decided to hold off until we can see what the health care taxes rally look like, rather than guessing. I will get to it, as I am quite curious as to the total level of the tax increases.

Now, to this week’s OTB.

John Mauldin, EditorOutside the Box

Has Germany just killed the dream of a European superstate?
By Ambrose Evans-Pritchard from the Telegraph

image001German Chancellor Angela Merkel has little hope of selling a bail-out of Greece to German voters

German and Dutch leaders have concluded in the nick of time that they cannot defy the will of their sovereign parliaments by propping up a country that lied about its deficits, or risk court defeats by breaching the no-bail-out clause in Article 125 of the EU Treaties.

Chancellor Angela Merkel has halted at the Rubicon. So has Dutch premier Jan Peter Balkenende, as well he might in charge of a broken government facing elections in a country where far-right leader Geert Wilders is the second political force, and where the Tweede Kamer has categorically blocked loans for Greece.

The failure of EU leaders to cobble together a plausible bail-out – if that is what occurs at this week’s Brussels summit – is a ‘game-changer’ in market parlance. Eurogroup chair Jean-Claude Juncker said last month that such an outcome would shatter the credibility of monetary union. It certainly shatters many assumptions.

There will be no inevitable move to fiscal federalism; no EU treasury or economic government; no debt union. It is Stalingrad for the federalist camp and the institutions of the permanent EU government.

I remember hearing Joschka Fischer, then German Vice-Chancellor, telling Euro-MPs a decade ago that EMU was “a quantum leap … creating an inexorable federal logic”. Such views were in vogue then.

Any euro crisis would force Europe to create the necessary machinery to make it work, acting as a catalyst for full-fledged union. Yet the moment of truth has come. There is no quantum leap. We have a Merkel pirouette.

Paris is watching nervously. As Le Monde put it last week, “behind the question of aid to Greece is a France-Germany match that pitches two conceptions of Europe against each other.” The game is not going well for ‘Les Bleus’. The whole point of the euro for the Quai D’Orsay was to lock Germany into economic fusion. Instead we have fission.

EU leaders may yet rustle up a rescue package that keeps the IMF at bay, but alliances are shifting fast. Even Italy has slipped into the pro-IMF camp, knowing that rescue costs can be shifted on to the US, Japan, Britain, Russia, China, and the Saudis, lessening the burden for Rome.

Besides, too much has been said over the last week that cannot be unsaid. Mrs Merkel’s speech to the Bundestag was epochal, a defiant warning that henceforth Germany would pursue the German national interest in EU affairs, capped by her call for treaty changes to allow the expulsion of fiscal sinners from Euroland. Nothing seems so permanent about the euro any more.

Days later, Thilo Sarrazin from the Bundesbank blurted out that if Greece cannot pay its bills “it should do what every debtor has to do and file for insolvency. This would be a suitably frightening example for every other potentially unsound state,” he said, pointedly excluding France from the list of sound countries.

Dr Sarrazin should be locked up in a Frankfurt Sanatorium. It was such flippancy that led to the Lehman disaster, requiring state rescues of half the world’s financial system. A Greek default would alone be twice the size of the combined defaults by Argentina and Russia. Contagion across Club Med would instantly set off a second banking crisis.

Some suspect that ultra-hawks in Germany want to bring the EMU crisis to a head, deeming delay to be the greater danger. How else to interpret last week’s speech by Jürgen Stark, Germany’s man at the European Central Bank, calling for tightening to head off inflation.

This is alarming. Core inflation in Euroland was 0.9pc in February, the lowest since the data series began. It is certain to fall further as the doubling of oil prices fades from the base effect. M3 money has been contracting for a year. Business credit is shrinking at a 2.7pc rate.

So, it is not enough for the EU to impose a fiscal squeeze of 10pc of GDP on Greece, 8pc on Spain, and 6pc on Portugal, and 5pc on France over three years, we need a dose of 1930s monetary policy as well to make sure life is Hell for everybody.

Be that as it may, Greece’s George Papandreou says his country is in the worst of both worlds, suffering IMF-style austerity without receiving IMF money – which comes cheap at around 3.25pc. So why allow his country to be used as a “guinea pig” – as he put it – by EU factions pursuing conflicting agendas?

The IMF option has its limits too. The maximum ever lent by the Fund is 12 times quota, or €15bn for Greece, not enough to nurse the country through to June. The standard IMF cure of devaluation is blocked by euro membership. So Greece will have to sweat it out with a public debt spiralling to 135pc of GDP next year, stuck in slump with no exit route.

The deeper truth that few care to face is that under the current EMU structure Berlin will have to do for Greece and Club Med what it has done for East Germany, pay vast subsidies for decades. Events of the last week have made it clear that no such money will ever be forthcoming.

Let me be clear. I do not blame Greece, Ireland, Italy, or Spain for what has happened. No central bank could have tried more heroically than the Banco d’España to counter the effects of negative real interest rates, but the macro-policy error of monetary union washed over its efforts.

Nor do I blame Germany, which generously agreed to give up the D-Mark to keep the political peace. It was the price that France demanded in exchange for tolerating reunification after the Berlin Wall came down.

I blame the EU elites that charged ahead with this project for the wrong reasons – some cynically, mostly out of Hegelian absolutism – ignoring the economic anthropology of Europe and the rules of basic common sense. They must answer for a depression.

Gaps in the eurozone ‘football league’

By Wolfgang Münchau from the Financial Times

At last we are heading towards a resolution, albeit a bad one. After weeks of pledges of political and financial support, Angela Merkel appears ready to send Greece crawling to the International Monetary Fund.

Germany cites legal reasons for its position. In past rulings, its constitutional court has interpreted the stability clauses in European law in the strictest possible sense. These rulings have left a deep impression among government officials. It is hard to say whether this argument is for real or is just an excuse not to sanction a bail-out that would be politically unpopular. It is probably a combination of the two.

I have heard suggestions that a deal may still be possible at this week’s European summit, but only if everybody were to agree to Germany’s gruesome agenda to reform the stability pact. That would have to include stricter rules and the dreaded exit clause, under which a country could be forced to leave the eurozone against its will. I am not holding my breath.

But either outcome will mark the beginning of the end of Europe’s economic and monetary union as we know it. This is the true historical significance of Ms Merkel’s decision.

While Greece faces the most acute difficulties, it is not the only member in trouble. There are at least four – Greece, Spain, Portugal and Ireland – that are probably not in a position to maintain a monetary union with Germany under current policies indefinitely. There may be several more, where the problems are not yet quite so evident. In the presence of extreme current account imbalances and a lack of bail-out or fiscal redistribution mechanisms, a monetary union among such a diverse group of countries is probably not sustainable.

In a column several weeks ago I put forward three conditions necessary for the eurozone to survive in the long run: a crisis resolution mechanism, a procedure to deal with internal imbalances, and a common banking supervisor. Since then, things have been moving in the wrong direction on all three counts.

For a start, we have come from a situation in which the “no bail-out” clause of the Maastricht treaty, having been almost universally disbelieved for 10 years, is suddenly 100 per cent credible. The minute the IMF marches into Greece, all ambiguity will end.

The debate on imbalances is also regressing. It would be unreasonable to ask Germany to raise wages or cut exports, but there is a legitimate complaint about Germany’s lack of domestic demand. Berlin should accept it needs to develop a strategy. But the opposite is happening. Rainer Brüderle, economics minister, said last week there was nothing the government could do about demand because consumption was a decision by private individuals. A senior Bundesbank official even compared the eurozone to a football league, in which Germany proudly held the number one slot. The long-term direction of fiscal policy is even more alarming, as the gap between Germany and the others will widen.

On banking supervision, the main reason for a common European system is macroeconomic. In a monetary union, imbalances would matter a lot less if the banking system were truly anchored at the level of the union, not the member state. As banks can obtain liquidity from the European Central Bank, even extreme and persistent current account deficits should not matter in good times. But they matter in times of crisis. For as long as bank failures remain a national liability, persistent imbalances could ultimately lead to a national insolvency. If the banking sector were genuinely European, imbalances would still be an important metric of relative competitiveness but we would need to worry a lot less, just as we do not worry about the current account deficit of a city relative to its state.

The lack of a bail-out system, of an agenda to reduce imbalances and of a common banking system are realities that investors should take into account when making long-term decisions, as should policy-makers when they make important choices for citizens. The reality is that the eurozone, as it works today, is not a monetary union but a souped-up fixed exchange rate system.

In the past, global investors have placed a lot of trust in European politicians. They believed Peer Steinbrück, the former German finance minister, in February 2009 when he ended a speculative attack on Ireland, Greece and others with a simple statement of support. They also believed, as I did myself, that political leaders would ultimately do the right thing to save the system, having first explored all the alternatives. As I follow the political debate in Berlin, I am no longer certain that is the case.

Ms Merkel is not a politician driven by a strong historical destiny, unlike Helmut Kohl, her predecessor but one as chancellor. However real the constitutional problems may be, I suspect Mr Kohl would never have hidden behind a technical or legal argument on such a crucial issue.

Europe’s current generation of leaders lacks this accident-avoiding instinct. So when Ms Merkel and her colleagues in the European Council see the iceberg coming, they will tend to rush not to the helm but to the nearest constitutional judge.

I am not predicting a catastrophe. I am merely pointing out that the present policy choices are inconsistent with the survival of the eurozone in its current form.

imageJohn F. Mauldinjohnmauldin@investorsinsight.comimage image
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Multiple Confirmations

Chart traders often find themselves with conflicting commodity trading signals. On the same chart, one man’s failing rally is another man’s bull flag. While looking at multiple time frames of the same chart can yield drastically different projections. How often has a daily chart given a strong indication one way, only to have the weekly chart totally counteract it in the context of the bigger picture?

One analysis technique I like to use when individual charts are yielding conflicting signals, is correlated chart analysis. For example, while the Dollar Index may yield mixed signals, I can use the Euro, Yen, Pound and Canadian which make up 57, 14, 12, and 10% of the index, respectively, to develop a consensus of the markets traded against the Dollar.

Another example would be to use interest rate futures to determine a bottom in the stock index futures. In times of duress, money flows out of the stock market and into the safer government backed securities. This is the, “flight to quality,” so frequently discussed in print and on t.v. Currently, there is much debate as to whether the bottom is in for the stock market or, not. As a trader, I’m not concerned about the rest of the year, only finding quality trading opportunities. Recent statistical analysis is suggesting the stock market rally may continue (see, “Counter Trend Moves…What’s Next?) However, conflicting evidence manifested itself during yesterday’s stock market decline. The flight to quality generated a significant rally (higher price/lower yield) in interest rate futures. However, it’s important to keep in mind that interest rates were rallying off their lowest levels in a month. Yesterday’s action suggests a further rally in in interest futures and declining yields over the coming weeks.

So, we now have statistical analysis that suggests a two week rally in both 5yr. Notes and the S&P 500. Has using multiple market analysis created more confusion than clarity?

Fortunately, macro economic theory holds that, in a healthy normal market relationship, we will see a positive correlation between interest rates and stocks. Therefore, if the pressure is off of the stock market and we are turning the economic corner, it is very possible that we see rallies in both of these markets. It is reasonable to suggest that yesterday’s correction in the stock market was a necessary correction in a market that bounced off of its lows too far and too quickly. Furthermore, given that the interest rate quadrant did not fall through the June lows as the stock market bounced does suggest that we may be seeing a return to “normal” market behavior. Lastly, given the election season, the Federal Reserve Board is far more likely to cut rates at the next meeting than to raise them.