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Category Archives: Thoughts

This is where we share all our thoughts relating to the foreign exchange markets.

Oil has been touted as the culprit that has caused countries all over the world to experience slower economic growth and also why inflation simply cannot rise, but WHY?  Is oil truly the culprit?  I say, NO!

Remember post millennium, the period from 2002 to 2006 when the whole world was booming, what was the price of oil? You guessed it right, it was at an average of $40/- per barrel.  What happened next was that Wall Street through the derivative boys started to speculate on Black Gold, driving the prices higher up to the peak in July 2008 at $145/- just before the crash of Wall Street.  This created an opportunity for new producers to come online, including alternate oil sands and shale oil.  Though their cost of production was in the range of $45 to $70 per barrel, it was still profitable because Black Gold was up there in the $100/- per barrel price range.

Capital started moving into the oil and gas industry and the supporting industries including logistics, marine, steel, etc.  Cities in Alberta, Canada which was previously a sleepy city became the darling in Canada, people moved, property prices rose. The same thing happened in Texas and Florida, United States and also in Brazil.

Fundamentally, what also changed in the oil and gas industry is the way exploration was financed.  Traditionally, new exploration was usually financed with equity.  However, with the escalating oil prices, banks, capital markets and debt markets became more aggressive in financing new exploration with debt financing and lending based on future cash flow.  The amount of capital that went into the oil and gas industry from 2007 to 2014 was in excess of $1 Trillion.  The global market capitalization of O&G companies was above $6Trillion in June 2014 when oil was at $110/- per barrel.  Today, the market capitalization has fallen by more than  half to $2.48Trillion at today’s oil prices of $31/- per barrel.

More importantly, in the past 5 years of the total capital raised from the capital markets and debt markets to fund and fuel businesses, more than 50% of these capital went to the O&G sector.  In other words, we saw huge swings towards one sector and the concentration risk of capital and resources into the O&G sector.  This is not healthy for any economy to be highly depended on one sector.

To make matters worse, more and more businesses decided to get involved in the supply chain of Black Gold from EPC, to stainless steel factories, to marine engineering firms, to shipping lines, all wanting a piece of this lucrative pie.

Much like what happened in Australia during the mining boom, Perth became the sweetheart city in Australia with people flocking to live there because it was closer to the mines.  Capital and lending mostly went  to the mining sector.  Salaries were also double that of lawyers and general doctors.  When China slowed down what happened to western Australia and the mining industry?  Collapsed!  Today, Australia is going through a painful process of rebalancing its economy to go back to a more broad based economy.

So, it was no surprise when oil prices started to fall in 2015, especially, when it hit below $40/- that pain would be felt throughout the supply chain.  Did the price of oil fall because of poor economic growth globally? No!

Oil prices fell because the Middle Eastern, the largest Black Gold producers in the world was fed up with other countries taking away their rice bowl.  So, the Middle Eastern started flooding the market by increasing the supply in the marketplace.  This had the effect of driving the price of oil down significantly to its current levels.

Basically, the Middle Easterns wants to ‘kill’ the new oil producers, reduce the number of players in the global arena before they curtail supply and let prices rise again.  At the current price of crude oil, quite a significant number of producers will have to close down because of the negative carry and higher debt cost.  A number of them in the U.S., and Latin America have already collapsed.  Of course, that means everyone connected to the O&G sector is also going to get hurt including the supporting industries.  However, this is to be expected because the respective economies around the world which was previously, biased in O&G, now need to rebalance its economy to a more broad base one.

This is going to take time and the Middle Easterns are in no hurry as their cost of production is in the $6 to $8 per barrel range, so they are still making billions of dollars with oil prices at $38 per barrel.

 

 

 

 

 

The buzz in the media has started.  Some are saying that the FOMC event is fully priced in the marketplace and others are saying that high volatility is expected in this impending event.

Bernanke was interviewed last night and he was quoted saying that the Federal Reserve needs to entertain ‘negative interest rates’.

90% of all economists interviewed by Bloomberg and 95% of Wall Street all believe that Janet Yellen will pull the trigger at 3am Singapore time and 3pm NY time.

Will Janet pull out a surprise from her hat and not raise interest rates?!  She has every reason to raise interest rates and also every reason not to raise interest rates.

Wall Street is debating whether she is a traditional economist that needs empirical data to line up like the stars before she tightens monetary policy of will she act more from her ‘gut feel’ of where the economy is going.

The world today is different, inflation in many developed countries is almost non existent, way way below the 1% or low 1%.  We will not see 2% for a long time, simply because there is a real threat that the developed countries may go into a deflationary phase.  Oil below $40/- per barrel with fears that it will go to $20/- is unfounded.  The world was buzzing with strong economic growth in the late 90s and oil was at $20/- per barrel.  Demand will always be there no matter how much OPEC pumps out of the ground or Big Texas Oil.  The world has a fascination for the internal combustion engine for fast cars ,luxury cars and basic transportation.  Be it recession or not, people will fill up their petrol or diesel tanks and drive their vehicles proudly.

So why does a falling oil price be of such a concern?  Well, why did oil go up to $140/- per barrel in the first place?  I believe it was speculation, I believe it was more and more producers getting into the game and with high capex, they needed to sell it at the elevated prices, I believe it was oil sands or shale oil.  The cost of extracting oil went from $12/- per barrel to an average of $68/- per barrel.  Should Big Oil profiteer from the general public?

Real estate prices has been escalating in all developed countries from the UK to the US to Australia and Europe.  Every developed country is excluding food and real estate from the CPI basket, however, if you were to include real estate into the basket, then, we will not be looking at the current 1% inflation rate but something in the region of 10%.

So are we playing around with numbers?  Isn’t real estate or more appropriately, dwelling homes an important component to be included in the CPI basket as it affects the wallet of all consumers as in the ability to pay their mortgage payments and the fact that it is a long term financial commitment.

If we look at the EURUSD and the GBPUSD hourly charts with Fibonacci overlayed, it appears that the EUR is trading at its near high and GBP at its near bottom.

gbpusd_hourly

eurusd_hourly_fibo

If volatility is going to happen at the FOMC, will the two european currencies swing in opposite direction?

There so many permutations: –

Raise rates + dovish press conference

Raise rates + strong press conference

Rates stay put + dovish press conference

Rates stay put + strong press conference

In all 4 permutations, it can be argued for both a case of strong USD and a case for weak USD, why?  It is because the US is in a precarious economic position.  The truth is that the economy is not growing strong enough, moderate growth with some fragility, yes!

As time draws nearer, I am sure we will see more noise in the media.

Believing that this is a data is keenly watched by the market and BOE I decided to place my straddle 5 mins before 530pm

Expectations is 58.4. 

The details of my trade:-

Buy GBP, Stop if bid 1.5070

Sell GBP, Stop if offered 1.5030

Stop loss at spot 1.5050

As it turned out the reading came in much lower at 55.3. 

It triggered by 1.5030 level. Unfortunately it really didn’t go anywhere and finally I cut loss and bought back the GBP at 1.5037

So disappointing. 

Tonight ADP and JANET Yellen speaks?!

As the UK is also squarely looking at recovery and growth, data such as CPI, PPI and RPI becomes relevant on the radar screen.  CPI, PPI and RPI was schedule at 5:30pm Asia time.

I didn’t observe that much noise in the media but since it is a relevant data, I decided to place my straddle trade at 5:24pm with the following details: –

GBPUSD   –   1.5147   –   1.5167   –   1.5187

Spot was at 1.5167 and SLs at spot, Stop if Bid at 1.5187 and Stop if Offered at 1.5147

As it turned out CPI moved up slightly and market didn’t seem interested so at 6:18pm, I decided to square the position at 1.5210 for a trading profit of 23bps.

What the Superforecasters Say About When the Fed Will Lift Rates

Tom Redmond https//twitter.com/tomredmondjapan

You’ve asked everyone else about when the Federal Reserve will move on interest rates. Now try someone with a shot at getting it right.

They’re the prognosticators dubbed “superforecasters” by Philip Tetlock, the Toronto-born researcher who gained renown in 2005 by showing that almost everyone making predictions fails. The key word is “almost.” Tetlock’s new book finds that a few people actually have some skill when it comes to predicting the future.

So what do they say about the Fed? According to this group, which Tetlock describes as focusing on historically anchored “base cases” before delving into minutia, the first U.S. interest rate increase since 2006 probably isn’t going to happen this year.

“They say liftoff is more likely after January,” said Warren Hatch, the chief investment strategist at Catalpa Capital Advisors and one of the group. “My own personal view is that the markets are underpricing a liftoff at the December meeting. However, I’ve learned to trust the wisdom of my fellow superforecasters.”

After the first year of a “prediction tournament” organized by Tetlock, 59 people out of 2,800 emerged with a record of accuracy intact. The group outperformed the rest by more than 60 percent by the fourth year, and 70 percent of them kept their edge from one year to the next. Tetlock says they’re not geniuses and their skills can be learned.

Superforecasting the Fed

“There’s a Goldilocks zone, a moderate temporal distance, in which it’s possible to cultivate probabilistic foresight,” Tetlock, co-author of “Superforecasting: The Art & Science of Prediction” (Crown, 352 pages; $28), said in an interview. The book is about “correcting bias and improving judgment.”

So what’s the secret? Start with an “outside view,” says Hatch, who provided written responses to questions from Bloomberg on how he would tackle a Fed rate-rise projection. Expert analysts get bogged down in details, he said, like what the futures market is predicting, what the latest employment data are showing, and what Fed officials are saying.

Superforecasters “want to know the bigger picture,” Hatch said. “Under what circumstances has the Fed started raising rates in past cycles? How about other central banks around the world? That helps set an initial base rate on which to base their forecasts.”

Fine Tuning

Then they turn to details, adjusting from the base estimate to make predictions, but without overreacting to spot economic data, said Hatch. The conclusion of his fellow superforecasters — that the Fed will hold off until after January — aligns with what futures traders are predicting. The March meeting is the first with more than a 50 percent chance of an increase, the contracts show. The chance of an increase on Wednesday is 4 percent.

Superforecasters’ estimates are more precise, and they’re less prone to anchoring themselves to a misplaced gut reaction, according to Tetlock. He says weaker analysts often make one of three responses to a question: something is a certainty, it’s never going to happen, or that there’s a 50/50 chance. A superforecaster would be just as likely to cite a 49 percent probability, or any other number.

To get more accurate results, the best follow a strategy laid out by physicist Enrico Fermi, and break seemingly impossible questions into smaller parts, says Tetlock. For example, Fermi’s puzzle of how many piano tuners are there in Chicago can be approached by guessing how many pianos there are and the number one person can tune.

New Information

Others’ forecasts “rely on the nearest tools to hand, they tend to get updated infrequently, and — here’s a critical key to it all — they typically lack a clear way of consistently and systematically comparing those predictions to what actually happens,” Hatch said.

Superforecasters make better initial guesses and then press their advantage by updating predictions regularly, according to the book. While they have above-average intelligence and numeracy, much of superforecasting seems to be a state of mind. Its disciples are cautious and humble, and believe their craft can be improved.

The study is already being put to use. Good Judgment Inc., which grew out of the project, is offering consulting services based on its findings. Tetlock is looking ahead to his next project in a career that has highlighted the need to keep score. The superforecasting book appeared in the New York Times bestseller list for non-fiction this month.

“The thing that unites superforecasters, across ability levels and ideological points of view, is a shared view that probability estimation is a skill that can be cultivated,” Tetlock said.

Want to beat the market? Sell at 10 am, play golf

An old Wall Street maxim says the “dumb money” buys in the morning and the “smart money” buys late in the trading day. But statistics show the opposite is true.
According to Bespoke Investment group, the first half hour of the trading day is anything but “amateur hour.” In fact, it’s the best time to buy and sell.
Bespoke’s report shows that if an investor bought the S&P 500 at the previous day’s close and then sold it at 10 a.m., every single trading day since 1983, a $100 investment would be worth $949 today, making it the single best portion of the trading day.
(Bespoke counted 9:30 to 10 a.m. as a full hour so it could easily divide the day into hour-long trading periods.)
“One potential reason for the strong early performance could be related to mutual fund flows as well as foreign inflows,” said Bespoke co-founder Paul Hickey. “The 1980s and 1990s were where you had strong flows into mutual funds, and when managers got new funds they would just plow them into the market.”

This trend has held up during the current bull market. Since 1963, a $100 investment made every day before 10 a.m. netted $163 today.
After early morning trading, the next best time to buy on an intraday basis since 1983 was between 3 and 4 p.m., according to Bespoke.
So the so-called “smart money” didn’t do that badly, either.
The worst time to invest?
That’s between 10 a.m. to 11 a.m., when investors actually lost money.
Since 1983, buying at 10 a.m. and selling at 11 a.m. turned a $100 investment into $60.
And don’t even think about trading within that hour on a Monday.
Bespoke ran the numbers on days of the week and found that Monday was the worst day to trade. Buying every Friday at the close and selling every Monday at the close since 1983 turned a $100 investment into just $103.
“Black Monday in 1987 sticks out like a sore thumb for the Monday pattern,” Bespoke said in its report. The Dow Jones industrial average plummeted 508 points on that infamous Monday.
The best day of the week for the S&P 500 over the last 30 years was Tuesday.
To be sure, Bespoke cautioned that while this information is interesting, it’s not necessarily actionable.
“While it would have been nice to buy at 3 p.m. and sell at 10 a.m. every day since 1983, this kind of strategy is not practical for the large majority of investors out there,” stated the report.
But Wall Street loves historical statistics, and the data speak for themselves. As long as you wrap up your trades by 10 a.m., you’ll beat the market and still have time to get a round a golf in every day.

On October 9th, there wasn’t any noise about industrial production in the Euro area.

So to prove a point that ‘noise’ in the media creates volatility, I decided to place a EUR straddle trade as follows: –

EURUSD  –  1.1255   –   1.1285   –   1.1315

As it turned out industrial production numbers came out weaker but guess what, no one really cared.

The EURUSD hardly moved, so I withdrew the order.

The point I am making is that once we know where the economy if going then we need to follow the data that supports where the economy is going.  Couple with noise in the media nearing the release of the relevant data, then, the currency will potentially be volatile when the data is out.  Sounds reasonable?  Of course.

This week is going to be an interesting week, not just because it’s ADP and non farm payroll numbers come Wednesday and Friday, more importantly, it’s a ‘hazing’ week by the many FOMC members who will be talking in the media from Yellen, Fischer, Williams, Dudley, Evans, Bullard and Kocherlakota.

Since, we all know to be American is to be able to stay what you feel and think, there will ultimately be a confusion of views and opinions.  We already know that there are some FOMC members who are pushing for raising interest rates and there are those who want to push-off a rate hike till later.

Former Secretary of the Treasury, Larry Summers is advocating a rate hike only in 2016.

Earnings in corporate America is flat, equity prices fueled by high P/Es, thanks to cheap monies.  Same situation in China but only worse, why, because the government is fanning the bubble in the equity markets.

People are saying that Janet Yellen is being ‘wishy washy’ in her decision whether to raise interest rates or not.  Her recent remarks in the past FOMC rate decision showed that she is acknowledging the various economic problems faced by the many different countries all over the world.  More importantly, because the USD is the main economic trading currency, any hike in interest rates will make the corresponding currencies in South America, emerging Asian countries look like ‘banana’ monies.  As it is, Indonesian rupiah and Malaysian ringgit is trading at all time lows.  The Brazilian real has collapsed and is poised to fall further.

Trade flows and money flows around the world among countries are so intertwined that it is near impossible for the United States of America to ignore the implications of its monetary policy on global currency markets and trade countries.

Since post FOMC, the USD has been strengthening against all majors and is killing emerging currencies.  I attached the Fibonacci charts for GBP, EUR and AUD.

auusd_fibo

eurusd_fibo

gbpusd_fibo

Looks like the majors are all trading at their low ranges, below or about at the 23.6% level.  This could mean a possible bounce back up against the USD if there is any negative noise about the USD.  And with so many FOMC members talking this week, volatility could potentially rise.

Let’s see.

Let’s all stay on our toes, shall we?

Up to the last hour before 2am last Friday, noise was abundant in the media; CNN interviewed FIs and 76% said ‘no rate hike’, Bloomberg interviewed FIs and 78% said ‘rate hike’.  What perfect opposing views!

As we all know how, Janet Yellen decided not to hike rates.  So what does this mean for the USA?  What does it mean for the rest of the world?  What does it mean for the financial markets?

Granted Janet has been talking about a rate hike since May this year and respectfully, she has managed the financial markets very well through the past 4 months.  Of course, we had the great Greek distraction in the middle of the year, thanks to Tripras and the ECB and the EU and Merkel and Draghi.

In life I suppose there is always something to be said when a leader is a woman and when a leader is a man.  I am not trying to be a racist here, however, it is generally known that women are more prudent, then again, if you observe how Angela Merkel works and now Janet Yellen, it is clear that Prudence is a trademark of the fairer sex.  In the uncertain economic times we live in now and the divergent interest rate cycles of different economies around the world, Janet Yellen has the unenviable task of holding the stone and wondering whether she should through it into the pond and create ripples or tsunamis.

The world uses the US Dollar as a trading currency base or a settlement currency or a partial reserve currency, any rate hike in the US, will certainly have a large negative impact to Europe and other OECD countries.  More importantly, it may destroy smaller Asian emerging countries, and BRICs.

Globality means that the world has grown smaller, trade borders have evaporated, which means that financial impacts will become like tsunamis and not small ripples.  We saw it recently with the partial crash in the Shanghai and Shenzhen equity markets and how it affected the rest of the worlds’ financial markets.  We saw how the world didn’t take kindly to China’s central government interference with the equity markets, with the banking system and with the currency.

Frankly, if I was Janet Yellen and I was faced with two options; 1) do a rate hike and run the risk of choking the economy or 2) let the economy continue to gain more momentum in growth and jobs and inflation, then, hike rates then, as a strategy of reining in the economy before excesses begin.  Prudence would dictate that we should select option 2.

Let’s not forget we are talking about the United States of America, a very mature economy, highly domestic with little to export, a ballooning social welfare crisis, a runaway immigration problem and a widening wealth gap.  So, even on the best quarter, economic growth as spectacular as it cld be, can be, will never be higher than 3% p.a.  Since after the millennium or for that fact the past 10 years, the average growth rates has been below 2%, in the 70s and 80s, the average was about 3%.

So truly speaking, where is the concern that growth may run away and that we need to get ahead of the curve???

Noise has begun again with the media saying that Janet Yellen will raise interest rates in December.  Why?  Doesn’t the Chairman of the Federal Reserve know that, that is the worse time of the year do effect any interest rate decisions as liquidity is very low and volatility is very high.  Remember how George Soros broke the Bank of England in 1992……….Black Wednesday?!

Prudence will dictate that Janet Yellen will only make an interest rate liftoff in March 2016, that is, towards the end of winter.  Traditionally, in the U.S., jobs takes a significant dip during the winter and employment only starts picking up in spring.

What do I know?  This is just me sharing my thoughts with the world and to whomever is interested to read my trading blog.

 

What a surprise, what a surprise, I don’t think for a minute everyone including all Singaporeans and PAP expected such a huge winning margin, and then again, why not?

Since the embarrassing results for PAP back in 2011, it truly was a wake up call for PAP and woke up they did.  The national average of 69.86% (near 70%) compared to 60.14% in 2011 is a strong affirmation from Singaporeans that they recognized the good work done in the past 4 years by PAP.  In 2011, PAP was caught with one shoe off, when they realized that grassroots, RCs and Town Councils were not feeding back the concerns of Singaporeans in the respective constituencies.  Thank goodness, after 2011, PAP took concrete steps to rectify the lack of communication.

What has been significant in the past 4 years is the strong communication channels built up between Singaporeans and PAP, be it social media, internet websites, twitter, emails, today, we can reach our MPs and Ministers via IT.  In the old days, it was IMPOSSIBLE.  Think about it, today, we can even twitter our PM, Lee Hsien Loong, could we have done that with his father, No.  What this is saying is times are changing and have changed; the way the government interacts with its electorate and how Singaporeans communicate with our government, we are coming closer.

What I also like about the approach that our government has taken is, they now have a better SOP with regards to implementing policies.  PAP now takes more time to debate in Parliament, takes more time to explain the new policies, takes more time to disseminate the policies to Singaporeans, takes more time to help Singaporeans benefit from the policies by literally engaging them personally and to make sure they do secure the benefit.  An example of this is the pioneer package and I do congratulate PAP and our government for doing a great job of it.

More importantly, PAP has demonstrated when they have made a mistake, they would readily and expeditiously rectify the mistake.  Take for example, the immigration policy that allowed foreigners to come into Singapore to take up junior and middle level management positions and squeezing out Singaporeans from a job and career.  I am glad to see how quick PAP was in dealing with the matter, of course, we will see how PAP will continue to refine the immigration policies going forward to protect Singaporeans first.  Singapore should implement a policy to govern MNCs and corporates to consider hiring Singaporeans FIRST in junior and middle level positions before looking outside, otherwise, penalties will be enforced.  I appreciate that certain senior level positions still require it to be filled by foreigners because they have more global exposure than Singaporeans, however, as more and more Singaporeans take on regional jobs, global jobs, their experience will also accumulate through time.

A near 70% national average win is a strong acknowledgement by Singaporeans of the good work done by PAP in the past 4 years.  More importantly, it also means that Singaporeans have higher expectations of PAP to deliver more to the people in the next 5 years.

Some of the social media is saying that Singaporeans decided to be ‘kiasu’ because of many uncertainties; our economy, global economy and changing times, that is why they decided to go with the safer bet, that is, PAP.  There is also internet talk that new citizens have voted for PAP.  There are always two sides to a coin, whatever, the motivation of these kiasu Singaporeans to default back to PAP, proves that they believe that PAP is the stronger party and the more competent government to take Singapore through the impending uncertain times.

As we all now know, it’s the elderly and the younger generation that voted more for PAP.  It suggests that the elderly Singaporeans have renewed their faith in PAP.  As for the younger Gen Y of Singapore, I believe a significant number of the young have had positive experiences dealing with various government departments and entities.  My friend’s son who graduated from Temasek Polytechnic in IT, started up a company with a few friends and they were able to secure various funding from Spring Singapore.  I believe the fact that PAP is more engaging in social media and the internet also helped to foster a positive relationship with the younger electorate.

2015 is a lesson for the Opposition(s).  It’s nice to see more educated people making the decision to join the Opposition(s), however, a handful does not make a strong team and does not make a government.  My suggestion to the Opposition is that all of you should consider very seriously to come together as a coalition; capitalize on your joint strengths and minimize your common weaknesses, then and only then, will you be able to make a credible fight against PAP.  What is amazing is that virtually all the Opposition parties were banging away at the same topics; education, healthcare, old age and retirement, cost of living, wealth gap, etc.  So why couldn’t the Opposition parties come together?  The answer is simple; stupidity, ignorance, arrogance, lack of leadership and the lack of vision.  Looks like we will have 8 voices from the Opposition in Parliament for the next 5 years, let’s hope that they are more credible than in the past 4 years.  I have yet to see an Opposition propose a new policy or bill in Parliament, they always wait for PAP to come up with the policy and then they criticize, but never counter proposing with a better solution.  The fact that WP won Hougang with a lower percentage at 57.7% compared to 2011’s 64.1% is an enlightening moment!  Opposition, you are starting to lose credibility and if you don’t do something about it within the next 5 years, don’t blame anyone else except yourselves if you continue to lose percentages.

Let us all look forward to a better next 5 years, it is going to be difficult because of a number of strong headwinds; weak first world economies, weak China, weak emerging Asian markets, aging population and lower productivity.  We need to dig deep within ourselves and embrace the ‘iron’ resolve that Singaporeans are known for and defend our position as a successful first world country and economy.