Tag Archives: canadian dollar

Canadian Dollar Selling Opportunity at $.80 to the U.S. Dollar

The Canadian Dollar is primarily a commodity based currency. Whether the commodity is being  extracted, processed or exported, the commodity itself touches a lot of Canadian hands on its way out the door. As such, it’s not surprising that the recent commodity rally has sparked a bid in the Canadian Dollar just as the oil and grain washout contributed to its oversold condition at the beginning of this year. This week, we’ll look at some fundamental background, then illustrate the current situation and the setup we see coming on the included Canadian Dollar weekly and daily charts.

Continue reading Canadian Dollar Selling Opportunity at $.80 to the U.S. Dollar

Weekly Commodity Strategy Review

Tough week in the markets as we generally got continuation where we were looking for rebounds. This led to a a pair of losers in gold and the Canadian Dollar against a winning trade in the stock indices due to their rebound.

Continue reading Weekly Commodity Strategy Review

Commitment of Traders Report Points to Canadian Dollar Bottom

The Commodity Futures Trading Commission publishes a weekly report entitled, “Commitments of Traders.” This report breaks each domestic futures markets’ participants into four main categories – large speculators, small speculators, index traders and commercial traders. Our research has shown a consistently significant advantage in following the trend of the commercial trader group. This week, we’ll look at its application to the Canadian Dollar over the last year and what it says about our current position in the market’s cycle.

Continue reading Commitment of Traders Report Points to Canadian Dollar Bottom

Is the Canadian Rout Over?

The Canadian Dollar was trading above $.94 as recently as June. This has provided a clear picture of what can happen to an unevenly balanced economy whose currency value has become pegged to any individual sector. The global economy slow down and the associated decline in oil has absolutely pounded the Canadian Dollar to the tune of a 15% haircut in six months. That’s a very large move in a first world currency. Fortunately, we can use the commercial traders’ forecasts derived from the CFTC’s weekly Commitment of Traders report to keep us on the look out for the big moves and out of harm’s way.

The first point to make is that we only take trades in the established direction of the commercial traders’ momentum. Therefore, we spent the first half of the year looking for selling opportunities as the commercial traders sold more than 100,000 contracts through June of 2014 between $.89 and $.93 cents to the U.S. Dollar.

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You can see on the chart below that commercial traders were quick to cover a little more than half of their short position through fall’s decline between $.87 and $.91 cents to the Dollar. This left them comfortably short for most of the decline and leads us to our current situation.

Commercial traders predicting and taking advantage of Canadian Dollar's decline.
Commercial traders predicting and taking advantage of Canadian Dollar’s decline.

Commercial traders now appear to be once again interested in the long side of the Canadian Dollar trade. Their recent purchases of approximately 15,000 contracts has been strong enough to turn momentum’s tide and put us on the lookout for buy signals like the one generated last night. We’re not sure how all of the global banking variables are going to sort themselves out over the coming year but, we do see this as a supported trading opportunity on the long side of an oversold first world currency.

Commercial Support in the Canadian Dollar

The Commodity Futures Trading Commission releases its Commitment of Traders data weekly. This data tracks the amount of buying or selling in the commodity markets by the markets’ primary trader categories. I review this data every Sunday night when I begin compiling my trading plan for the coming week. The Canadian Dollar has hit my radar for each of the last three weeks as the commercial traders’ position has grown faster than at any time in the past and their total position has only been exceeded once in the history of the data set.

The Commitment of Traders data goes back to 1983 in the Canadian Dollar and the first meaningful blip on the radar shows up in February of 1986 when the Canadian Dollar bottomed around $.69 cents to the U.S. Dollar. Commercial traders went from neutral to net long more than 9,400 contracts, the equivalent of nearly $1 billion dollars at full contract value. The market rallied nearly 6% over the next three months. Commercial traders next set a record long position in March of 1990 at 10,270 contracts or, just over $1 billion at full contract value and the market rallied 5.5% in the next few months.

Commercial traders’ buying the futures doesn’t always lead directly to a rally. There are times when it simply slows the decline as they cover short positions, as well. There are considerable spikes in August of 1993 and January of 1995 when the Canadian Dollar had been on a steady decline since its $.90 cent peak in 1991. In fact, the commercial buying peaked at 28,000 contracts at the bottom of the market in January of 1995. In this case it’s important to remember the old rule, “Whether getting long or, covering shorts; buying is buying.” It would take another three years and the, “Asian contagion” to generate enough commercial interest to eclipse the buying peak at the 1995 trough.

The Canadian government has done an amazing job of revamping their monetary policies and budgets over the last 15 years. The primary impetus for this was the 1995 budget, which cut governmental spending across the board while allowing greater freedom to the individual provinces as to how they could spend the federal money they received. The provinces were then able to target the funds to their individual needs. Furthermore, the corporate tax and capital gains taxes were restructured to facilitate capital expenditures and new business generation. Finally, they implemented a federal General Services Tax. This is similar to the European Union VAT (Value Added Tax), which is a consumption tax that is paid proportionately by higher income people who spend more.

These changes significantly improved the Canadian economy. Their workforce has grown substantially. Unemployment has declined and jobs have been added to the economy. Welfare recipients declined along with the percentage of people below the poverty line. In fact, the number of low-income families declined by more than 30%. This was all achieved while cutting their debt to GDP ratio from 80% down to 45%. Their current debt to GDP has now reverted back around 85% due to the economic collapse. Meanwhile, our debt to GDP ratio has surpassed 100%. There is no question that our neighbors to the north are doing a far better job of maintaining their budget than we are.

The total net long record for commercial traders in the Canadian Dollar is 105,543 contracts. Commercial traders accumulated a net position of $10.5 billion dollars worth of Canadian Dollars in January of 2007 when the market was trading at $.85 cents to the U.S. Dollar. The Canadian Dollar then reached a record high of $1.10 by early November that same year. Equally important, these same commercial traders had pared this position down by more than 90% at the high water mark. That, my friends, is pretty darn good trading.

Currently, we have seen commercial traders’ positions increase from 4,431 contracts in mid January to more than 86,000 contracts, currently. The Canadian Dollar is currently trading around $.97 to the U.S. Dollar. This market has held above $.95 for the better part of the last three years. We view the strong commercial purchases as a sign of supporting the market at these levels. Commercial traders have demonstrated their forecasting ability admirably in the past and we will lean on them for support as we buy into this market. However, managing risk is always our number one concern. Therefore, we will place our protective stop under the current swing low of $.9650 in the June Canadian Dollar futures as we anticipate a move back to parity with our U.S. Dollar.

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.

The Value of the U.S. Dollar

The Federal Reserve Board is printing money at an unprecedented rate. The ECB is following suit. The Bank of England and China are both cutting rates to spur their economies and global sovereign debt is piling up like manure behind the elephant pen. Clearly, our currency is being devalued by the day. Some would argue that there’s a race to devalue among the major global currencies as the G7 nations attempt to boost exports and spur their respective domestic economies. Tangible assets like gold and silver or soybeans and crude oil may be the only true stores of value left in an increasingly wayward world. We read this every day. The truth is far less dramatic. In an ugly world, the U.S. Dollar is the prettiest of the ugly sisters at the ball.

The U.S. Dollar Index is exactly where it was four years ago. This is interesting considering that the aggregate money supply in the U.S. as a result of the quantitative easing programs has nearly doubled since the housing market collapsed. Theoretically, doubling the supply of U.S. Dollars should mean that each new dollar is worth half as much. Take this one step further and it’s logical to assume that if each new dollar is worth half as much then it should take twice as many dollars to make the same purchases that were made in 2008 yet, the Consumer Price Index is only 4.5% higher than it was then. Finally, I would suggest that considering the growth of the money supply and its characteristic devaluation, we should see an influx of foreign direct investment picking up U.S. assets at bargain basement prices. While logical, this is also incorrect as the U.S. Department of Commerce shows that foreign direct investment only exceeded U.S. investment abroad in 6 out of the last 20 years with 2005 as the most recent.

What has happened through the artificial manipulation of interest rates in the world’s largest market is that the U.S. Dollar has begun attracting large amounts of money as U.S. and global investors park their cash while waiting for clarification on the world’s major financial and political issues. Real interest rates in the U.S. are negative at least 10 years out. The Euro Zone is no closer to resolution. China is in the midst of changing leadership in a softening economy. Finally, what was an assured re-election of President Obama is now a legitimate race.

The inflows to the U.S. Dollar are easily tracked through the commercial trader positions published weekly by the Commodity Futures Trading Commission. The U.S. Dollar Index contract has a face value of $100,000 dollars. Commercial traders have purchased more than 25,000 contracts in the last few weeks, now parking an additional $25 billion dollars. The build in this position can also be seen in their selling of the Euro, Japanese Yen and Canadian Dollars. The Dollar Index is made up of these currencies by 57%, 13% and 9%, respectively. Collectively, commercial selling in these markets adds another $5 billion to their long U.S. Dollar total. The magnitude of these moves makes commercial traders the most bullish they’ve been on the U.S. Dollar since August of last year which immediately led to a 7.5% rally in the U.S. Dollar in September.

The degree of bullishness by the commercial traders in the U.S. Dollar forces us to examine the markets most closely related to it in order to monitor the spillover effect a rally in the Dollar might create. The stock market has traded opposite the Dollar for all but four weeks in the last two years. The last time these markets traded in the same direction on a monthly basis is August of 2008. The current correlation values of – .29 weekly and -.43 monthly suggest that for every 1% higher the Dollar moves, the S&P500 should fall by .29% and .43%, respectively. Therefore, a bullish Dollar outlook must be coupled with a bearish equity market forecast.

Finally, we see the same type of relationship building in the Treasury markets. The U.S. Dollar is positively correlated to the U.S. Treasury market. This makes all the sense in the world considering foreign holdings of U.S. debt have increased over 5% through the first seven months of 2012 (Fed’s most recent data). The bulk of these foreign purchases of U.S. debt are repatriated immediately to eliminate currency exchange risk. This process of sterilization forces interest rates and the Dollar to trade in roughly the same direction. This relationship turned briefly negative between April and June of this year on a weekly basis while one has to go back to March of 2010 to find a negative correlation at the monthly level.

Obviously, the trade here is to buy the U.S. Dollar. The negative speculative sentiment coupled with the bullish and growing position of the commercial traders could fuel a forceful rally. Small speculators typically accumulate their largest positions and are the most wrong at the major turning points. A recent study in the Wall Street Journal discussing individual traders’ biggest mistakes puts it succinctly. Small traders’ biggest mistakes, accounting for 60% of the total responses are being too late to get in and too cautious to take the next trade. Once burnt from exiting the last trade too late, the small investor is too scared jump in the next trade which reinforces the negative feedback loop they typically end up stuck in. Take advantage of this analysis and at least, prepare yourself with an alternate game plan.

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.

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.

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 buy and sell 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. 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.

A Model for Economic Recovery

I’m re- posting an article I read this week. It’s so easy to focus on the problems and argue about the details. I had completely forgotten the magnitude of Canada’s economic turnaround. This is a great example of focusing on the solution.
All rights go to John Mauldin and David Hay.

O Canada!

“Debt and deficits are not inventions of ideology. They are facts of arithmetic.”

– Paul Martin, Canada’s finance minister at the start of the country’s “Redemptive Decade”

Arrivaderci, Italia; Yo, Canada

It’s ok—you can be honest with me. Many of you on the receiving end of this newsletter were probably wondering if I had developed some kind of Italian infatuation, sort of like the young cyclist in that fun movie from the late 1970s, Breaking Away. You can rest easy. Although I readily concede it is a breathtakingly beautiful country (save for Naples, which we discovered is the Tijuana of Italy), my wife and I were thrilled to be back in the US of A, where the first thing I did was order a cheeseburger.

Certainly, the Italian locals were consistently friendly and extremely gracious even as we mangled their lovely language. However, as they opened up to us, it became clear how fearful they are about their country’s economic future. Like so many southern European nations, Italy’s debt levels have soared to grotesque levels, even compared to our own current state of fiscal debauchery. Therefore, it was somewhat ironic that one of the two books I read while over there was about Canada and, specifically, the extraordinary financial turnaround that country has made over the last 15 years. Remarkably, if you were to roll the clock back to 1995, Canada was actually deeper in debt than Italy. In those days, the Canadian dollar was derisively known as either the Loonie (after the bird on Canada’s $1 coins) or the Northern Peso. The situation was so dire that the Wall Street Journal ran what turned out to be a pivotal article in which the authors asserted that Canada had become “an honorary member of the Third World in the unmanageability of its debt problem.”

This editorial set off shock waves around the world and, of course, within Canada itself. To its credit, Canada’s political establishment got fiscal responsibility religion in a hurry; it was almost like they went from being atheists to Southern Baptists overnight. And, get this: for the most part, it was Canada’s equivalent our Democratic Party that assumed the yoke of pulling the country back toward the high ground of financial solvency. Do you think that perchance we could learn a thing or two from Canada’s experience?

Canada High and Dry

It’s been a consistent theme of mine for a year or more that Americans are not going to passively accept the disastrous fiscal path on which our brilliant political parties have put us. It has also been my belief that politicians from both sides of the aisle would get the message. At this time last year, there weren’t many who agreed with me (in fact, when I put forth this theory to the CEO of a huge financial firm 13 months ago, he looked at me like I was suggesting the Mariners’ front office knew how to run a baseball team). But the public backlash against unsafe and insane fiscal policies is now unmistakable, and it’s very much a bipartisan movement. Politicians, being the generally feckless creatures they are, have scrupulously (or should that be un-) avoided putting forth much in the way of tangible solutions prior to the critical mid-term elections, now just a month away. Yes, I know, the GOP came up with the Pledge to America, and it’s a start—of sorts—but it strikes me as woefully unequal to the massive task. A far more rational way to approach the problem (I realize that rationality and politicians rarely converge) would be to make the book I just finished—The Canadian Century, Moving Out of America’s Shadow—required reading for all incoming members of Congress. It would be nice to demand this from incumbents as well, but let’s face it: most of them don’t even bother to read the legislation they put into law.

Many of you also know that I’ve brought up the remarkable Canadian renaissance more than a few times. Thus, I was truly excited to read the aforementioned book after seeing a review of it earlier this year. Though I was aware of the happy outcome, I really had no idea how Canada pulled off moving from “basket case to world beater,” in the writers’ own words. And there’s no exaggeration in that statement; Canada then was in far worse shape than even we are now in our headlong rush to fiscal perdition. For example, in the mid-1990s, one-third of all government revenues were being devoured by interest costs on Canada’s rapidly escalating debt. To illustrate how bad that was, in the US today interest expenses consume just 10% of tax revenues, excluding the non-cash interest accrual on Treasury debt held by the Social Security trust fund (more on that later).

By the 1990s, Canada had also become one of the developed world’s most socialized economies, with the government accounting for 53% of the country’s GDP. Economic growth was stagnating, while debt levels were inexorably and dangerously mounting. At its scariest zenith, Canadian federal and provincial government debt amounted to 120% of GDP, with roughly 70% at the national level and an outrageously bloated 50% owed by the provinces. Again, to put that in perspective, despite our debt binge over the last decade, US government debt is around 60% of GDP, while state debt is nearly 17% of GDP, or 77% overall (this is based on net, not gross, debt and excludes the Social Security trust fund holdings as well as intergovernmental liabilities). Moreover, unlike in our present situation, Canada’s interest rates were rising due to worries about the nation’s solvency. Its coveted AAA credit rating was yanked, and the market was treating it as an increasingly unreliable borrower. In other words, it was much like the situation a number of European countries find themselves in today—except that Canada didn’t have Germany to bail it out. As you can readily see, there’s simply no question that Canada was in some very deep doo-doo. Which begs the multitrillion-dollar question: How the heck did it get out of that jam?

Northern Composure

As I’ve given various speeches over the last year, it has become clear to me that very few Americans are aware of the extraordinary recovery Canada has achieved since the mid-1990s. When I bring it up, most people seem surprised that Canada could have gone from a laughing stock to the envy of the developed world in just a decade. But, actually, 10 years wasn’t the true recovery period. And that was my big surprise from reading The Canadian Century. The reality is that Canada achieved stunning progress in a mere three years. Further, this time frame was consistent at both the federal and provincial levels. In case you think I’m exaggerating the speed and magnitude of the rehabilitation, let me provide some specificity:

• Paul Martin, the finance minister for the national Liberal Party, unveiled a budget in early 1995 that shocked all the cynics accustomed to smoke-and-mirrors accounting. It reduced program spending by 8.8% over two years (and our politicos quiver over a mere hint of spending freezes).

• As part of this radical spending rationalization, federal government employment was reduced by 14%.

• Federal grants to the provinces were reduced by 14% as well, but the trade-off was that they were allowed to control how the money was spent. Provincial governments also needed to provide half of all funding (i.e., put skin in the game).

• While some taxes were raised (and, according to the authors, these worked against the recovery), spending cuts were 4 ½ times tax hikes.

• Canada’s welfare system was dramatically modified. Rather than just providing a blank check to the provinces (which administered the welfare programs), Ottawa incentivized them to put the funds to better use. Benefits were cut for single, employable individuals and aggressive efforts were made to get them back in the work force.

• Despite accusations from the far left that the poor would suffer due to these changes, the percentage of welfare recipients fell in just a few short years from 10.7% of the population to 6.8% by 2000. From 1997 to 2007, the percentage of Canadians classified as low-income plunged by over 30%.

• The tax structure was dramatically redesigned. Corporate tax rates were cut by nearly a third, taxes on corporate capital were abolished, and personal income and capital gains taxes were reduced.

• The General Services Tax (basically a consumption tax or VAT) was instituted to pay for the tax cuts described above. While initially very unpopular, it was a key part of the rehab plan.

• The Canada Pension Plan (CPP), the country’s version of Social Security, also underwent major surgery. Instead of payroll taxes gradually rising to 14%, the increases were pulled forward but capped at under 10%. This produced immediate surpluses that were invested in higher-returning corporate securities. (As noted in past EVAs, this is a huge defect with our Social Security system; its many trillions are tied up in low-yielding US government bonds that simply add to our overall national indebtedness.) The CPP today is well-funded and actuarially sound.

• As a result of these actions, and many others I’ve left out, the federal budget was balanced within three years.

After achieving this remarkable feat, Canada went on to produce 11 straight budget surpluses. This allowed our northern neighbors to reduce their federal debt from 80% of GDP to 45%. Further demonstrating how quickly good policy can turn things around, the provinces enacted similar measures. Most of them also moved to balanced budgets or surpluses within just three years, though in the case of Ontario it took five years. However, that was still one year ahead of schedule (pronounced “shh-edule”, of course). By contrast, even Congressman Paul Ryan’s allegedly bold goal to balance the US budget will take decades to attain.

One of the recurring themes from The Canadian Century is the concept that not all taxes are created equal. Some have a much more negative impact on economic activity than others. This totally resonates with me and it’s why I believe estate taxes should be our version of the VAT. However, I would concede that possibly a combination of the two might be necessary and desirable.

Most of all, I have tremendous respect for what has worked in the real world and within a country so similar to our own. By the way, in case you think that Canadians universally supported these rational reforms as they were first enacted, consider how similar our northern friends are to us. They are every bit as fractious as we are. There was a cacophonous chorus of extreme Keynesians (those who believe government spending should never be cut) who predicted Canada’s grand experiment would be an abject failure. Yet, despite all those who were sure that downsizing government would do the same to their growth rate, Canada’s economy grew at 3.3% per year versus the developed-world average of 2.7%. Notwithstanding Canada’s undeniable success, should we decide to follow in its footsteps, be prepared for folks like NY Times columnist Paul Krugman to wax apocalyptic. Come to think of it, given his forecasting track record, that would be a good thing.

Quite an amazing story, eh? Unquestionably; and it’s interesting that today, most of Europe is essentially following the same game plan (without giving Canada credit—probably due to its legendary pride, bordering on arrogance). Yet there is one immensely important difference.

The Crucial Currency Tailwind

The aforementioned Wall Street Journal article from early 1995 that strongly suggested Canada was careening toward bankruptcy not only served as a national wake-up call, it also tanked the Canadian currency. While this collapse was highly embarrassing to its citizenry, it sowed powerful seeds of recovery. Canadian goods became very inexpensive on world markets, thereby stoking demand. And Canada’s real estate became irresistibly attractive to both American and Asian investors, drawing in massive amounts of hard currency. As mentioned in numerous past EVAs, this is the vital missing link for countries like Italy. The stunning rise in the euro from the depths early this summer is the worst thing that could be happening to the Continent, especially for the weaker countries—almost all of them except Germany.

Fortunately for us, our situation is much more like Canada’s was in the 1990s. The buck is once again seriously undervalued, not only against the euro but versus the yen as well (the dollar recently touched 15-year lows against Japan’s currency). This will greatly aid our exporters, who are already prospering.

Perhaps I’ve missed it, but I haven’t heard a single representative from either party bring up the notion of emulating Canada. Both parties seem to be infected with, among other maladies, an acute case of Not Invented Here-itis. Maybe it’s time for all of us who are deeply concerned about our country’s financial future to harness the power of the internet to influence the many fresh faces that will soon be moving to the other Washington. The good news is that this incoming class promises to be far less indoctrinated by their respective parties’ failed ideologies and much more open to innovative concepts. If they are, it’s not a stretch to believe that our finances can begin to track the Canadian path, as illustrated below.

Role reversal time? The Canadian Century was clearly written for domestic consumption. As such, there is a fair amount of chest-puffing over Canada’s accomplishments, as well as some thinly veiled savoring of our own current predicament (the Germans have a perfect word for this: schadenfreude). Yet the authors also concede a few chinks in Canada’s armor. For one thing, they note that there is some serious backsliding going on when it comes to adhering to the fiscal reformation creed. A certain amount of this is attributable to combating the ravages of the Great Recession, even though Canada was not nearly as hard-hit as the US. But beyond this, the authors are seeing clear evidence that the resolve to restrain spending seems to be waning. Alas, this does seem to be the natural cycle of democracies: Governments spend recklessly until the situation is so bleak there is no choice but to drastically cut back. Once financial health is restored, there then seems to ensue a long, almost imperceptible erosion of fortitude until a crisis hits and debt levels rise so terrifyingly that corrective action becomes unavoidable. Often, as in Canada, it’s the more putatively liberal party that administers the tough but necessary medicine.

The book is also quite candid in its admission that Canada’s healthcare system is largely as dysfunctional as our own. The authors point out the immense challenge that lies ahead for both countries in bringing the wealth-devouring beast of healthcare under control. It’s hard to disagree with their belief that both the US and Canadian healthcare systems need a healthy injection of incentive-based economics, competition, and behavioral modification. Thus far, neither country has made much progress in that regard.

For me, though, the key message of this book is that the future does not have to be a depressing choice between accepting sub-par growth or committing fiscal suicide. Canada’s experience emphatically demonstrates that replacing bad policies with good ones leads to dramatic and rapid improvement, with the shift to financial soundness restoring confidence and actually boosting long-term growth. Some forty years ago, then US President Richard Nixon famously remarked, “We’re all Keynesians now.” To fully channel his inner Keynes, Nixon needed to take us off the gold standard, which he did in 1971. The keys to the perpetual printing press had been found. Soon thereafter a new economic term was coined: stagflation. These days, at least when it comes to fiscal policy, a far wiser statement would be: “We’re all Canadians now.” If we want to right our nation’s financial ship, we might be well-advised to swallow our pride and follow the lead of a country that has long been in our shadow. This is likely to be far more effective than further pursuing failed economic policies from our distant past. Page 6 Evergreen Virtual Advisor (EVA) October 8, 2010

David Hay | Chief Investment Officer | Evergreen Capital Management, LLC

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.

 

Major Turning Point

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.

Today’s price action appears to have trumped the
deflation/reflation argument that has been building over the last month. Many
of the markets have been rallying on small speculative buying as seen in the portfolio
rebalancing by the major long only funds.

Looking at the Commitment of Traders reports over the last
few weeks, we can see an increase in the net long positions of small
speculators in the following markets:

Swiss Franc, Japanese Yen, Canadian Dollar, Unleaded Gas,
Wheat, Beans, Bean Oil and Meal, Corn, 10yr. Notes, Eurodollars, Live Cattle,
Hogs, Copper, Orange Juice, Coffee, Sugar and Dow Jones futures.

The commercial hedgers have gladly stepped in to take the
short side of these trades with their numbers building as we’ve neared the
October – November resistance in many of these markets. Obviously, the interest
rate sector is the exception, although, there is strong short hedging taking
place at these levels.

There are a few major reasons for the resistance at these
levels. First, the U.S. Dollar Index has a strong bias towards setting a high
or low for the coming year in the first two weeks of January. If the Dollar’s
trend is going to be higher, the global demand for American commodities will
decline. Secondly, portfolio rebalancing by the major index funds for 2009 is
going to balance smaller gold weighting against heavier crude oil weighting.
Today’s collapse in crude oil futures is an indication that they may have filled their
need for crude. This also helps explain Gold’s inability to rally through $900
even on weak U.S. Dollar days. Lastly, the economic numbers continue to get
worse with each release. Last week’s ISM numbers were the worst since 1980.
Unemployment this Friday should continue to rise and eventually head north of
8%.

This is a very brief outline of the weakness I’m expecting
in many markets in the near term. Please call with any questions.