Trade Team Update

Two words can be used to describe today's market action... ill-liquidity and risk. While it seemed many traders were scratching their heads to figure out what the problem was today, we're basically just seeing a repeat perfomance of yesterday with even less liquidty and more risk aversion behaviors.

Whenever the market begins to confuse me or I see disjointed price behavior between the EUR/USD and the market correlated variables the very first place I turn for answers is the bond market. I don't know any bond traders but I think I'd like to meet a few because these market participants are usually very fundamentally sound and being in the bond market means they are typically a step ahead of the herd.

The price action of Treasuries is one of the best tools I can use as a trader to help me make smart decisions about the euro. As always, interest rates (bond yields) will give the first clues. At one point today we saw the yield on the 10-year plunge over 18bps. Does it get any more clear what little liquidity are in the global markets are flooding into Treasuries?

That move right there in Treasuries is enough to signal extreme risk aversion which means the euro will be dead in the water, the dollar will be supported, and that it likely won't matter much if gold and crude go up because of what's happening with Treasuries and their yields/prices and the way money-flows are moving through the markets.

I was watching the euro's price action for hours on end looking for trades. As I mentioned last night I didn't feel comfortable shorting it down around the 1.3300 level but I also didn't feel comfortable buying. Finally a few hours after London opened I saw the potential for Treasuries to get bought up today which gave me a euro short bias and by just after 0800 EST my confirmations were in and I started shorting at the 1.3200 level.

I don't offer this example to brag but to explain a technique that was successfully used to get clarity on how to trade the euro under these extreme conditions. I've heard a few traders so they can't possibly make money under these conditions and I just do not feel that way at all. Yes it's a 100 times more difficult to make money while we're under the worst financial crisis since the 1930s but I think if traders step up their game and really look at the market instead of the up-and-down painted lines on a candlechart they will see where the money's hiding.

EUR/USD:

Today's CDS event has proven to be a mostly non-event as we expected. I'm sure market participants safe-havened their way into the dollar today, which certainly didn't help the euro, cable, and a few other majors. Once again we have almost no new data tomorrow. The only key piece of data is Crude Inventories.

Crude is just a flatout mess right now. Crude lost more than $3 today and if it's barely hanging on to the $70 level. The strength of the USD Index and the dramatically reduced to demand for crude and gas products will keep the downside pressure on crude at least in the short-term in my view.

Yesterday the talk was about a bottom being in on equities and strong USD fundamentals. I got so bored with CNBC and Bloomberg I didn't even watch them today. I have no idea what the "flavor of the day" is but I don't buy into the idea of a bottom being put in on anything... Dow, S&P, USD, EUR, crude, gold, you name it... I think it can all go lower because markets are still re-pricing assets and the re-valuation process will continue as markets re-price.

Any talk of USD fundamentals getting stronger is the stupidest stuff I think I've heard yet. They are getting worse. Three months ago we said they would get worse in Q3 and Q4 and this is playing out as expected. We're going to see a round of layoffs that will bring the US employment and consumer sector to its knees.

I think between now and December 31st we could see as many as 100,000 or more total layoffs across the board in all major sectors in the US. I expect the unemployment rate to hit 7.0% or better in the beginning of Q1 of 2009. I expect we see between 6.5% and 6.8% by the end of this year.

Let me give you an example... Ticketmaster just announced another round of layoffs. They are letting 1,000 employees go. So let's connect some dots on this one... if the US's largest entertainment and event ticket company is laying off workers what does this mean for the sports, music, and the general entertainment/amusement industry? That's all a multi-billion dollar industry. During most recessions the entertainment industry is usually mostly unaffected but this recession is so painful already that even the once immune are sick.

Sears, a major US retailer just announced they are closing four stores. KMart, whic is a discount consumer retailer like Wal-Mart just announced they are closing eight stores. Both Sears and KMart mostly serve middle-class shoppers and people looking for bargains on clothes, food, and general consumer goods. I cannot understand how some analysts are saying the US fundamentals are getting better when I see discount retails have to close their stores during a season when the discounters are the only businesses getting the consumer's cash right now. Only a crackhead analyst would say things are getting better.

As far as the euro goes, for now it seems all bets are off. To think of taking a euro short in the 1.3000's sounds crazy but after the way I played things this morning I'm prepared to do what seems crazy because that's what's been profitible for me under these extreme conditions.

I remember two years ago when I was just starting to come up through the ranks the euro was in the 1.2400's and then it went on a bull run against the dollar. Then in the middle of February of 2007 it was at the 1.3000 level and that's where it started another bull run against the dollar. I don't see any bull run happening but I'm also not going super heavy short down here mostly for the fact of what time of year it is and what's happening with the amount of USD being flooded into the markets. At some point the sheer volume of USD flooding the markets will have to be reckoned with.

I can't predict what tomorrow will bring for the EUR/USD. But I'm prepared to see more downside and more pain for the euro. I do believe the price action will largely depend on what we see with equities and how money-flows are affecting Treasuries. There's really no news. If the risk aversion gets set aside and market participants decide to grow a pair the euro may find support tomorrow.

Some levels to keep an eye on between now and Frankfurt would be 1.3042, 1.3004, and 1.2967 on the downside. On the upside 1.3098, 1.3121, and 1.3144. Trading conditions are at their most risky and extreme right now. The liquidity has just about completely evaporated. I see no evidence at all of major market participants trading currencies right now. That's why we can see the euro move 500+ points so far this week.

Trade Team Update

The only word I can use to describe today's market activity is weird... maybe it's just me but nothing really made a whole of sense today... oil is up, gold is mostly stable, global equities rallied, overnight LIBOR rates eased, money-flows have been light going into Treasuries... add to that Bernanke's idiotic speech and rhetoric and you have all EUR+ factors yet the euro gets hammered by the dollar.

Could it be market participants are starting to think about the fundamentals of Europe now that other sectors of the global markets are showing signs of stability? I think it's too soon to make that call but it's certainly an issue I'm considering.

I think Bernanke was mostly responsible for sending Wall St. up today. These comments are what did it:

"With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate." And then... "If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, home buyers, businesses and other borrowers. Such actions might be particularly effective at promoting economic growth and job creation."

Well... more rate cuts, more government bailouts, more debt, more pressure on the deficit, more foreign funding needed, more manipulated growth data, more inflation, and more cheap money. Sounds like a brilliant plan to me. If there was a law against stupidity, Bernanke would be getting a body cavity search right now before being introduced to his cell mate Bubba.

Crude showed some gains today as OPEC continued to put out the production cut rhetoric. I'm sure at their emergency meeting they will all agree to cut crude production by a million or more barrels a day and then pledge to further reductions in the near-term. Beware though... the market could be buying the rumor only to sell the news on this one...

Tomorrow:

Your guess is as good as mine for tomorrow... we have absolutely no euro or dollar data and there are no Fed speeches scheduled between London and NY. We have no bigname Eurozone speakers tomorrow. I think the market will remain disjointed tomorrow.

We do have that big CDS event tomorrow. I cannot even begin to predict how that will go or what affect it may have on the market. My personal feeling is that it's most likely going to be a non-event. Several traders have asked me to explain the CDS (credit default swap) situation.

Lets pretend my home's mortgage was sold to me by Bank of Earth. And lets pretend Bank of Earth sold mortgages to 500 other families in the community. Well, Bank of Earth packages up those mortgages and created a debt instrument, a security, and this security is sold as an investment product, rated as AAA debt, given an attractive yield.

Now lets pretend Bank of Earth sold this mortgage debt product to the Bank of Jupiter. Well, as good investors, these banks want to purchase insurance on the mortgage security. Here's where we run into a problem... Bank of Jupiter is the holder of the mortgage security but because this insurance aspect is unregulated in the open market Bank of Saturn, Bank of Mars, Bank of Venus, and Bank of Mercury buy insurance (CDS) on Bank of Jupiter's mortgage security.

I think you can see the issue there... again, I'm not sure how tomorrow's CDS event will affect the markets but be prepared for some shenanigans just in case.

EUR/USD:

At this early point in the week I still have no bias on the EUR/USD. The way the euro behaved was not orderly or proper based on how the market correlated variables were behaving today. I have an extremely low risk appetite for the market right now. The liquidity is almost non-existent and the market's overall appetite for risk seems muted.

As far as trading goes, I did buy at 1.3307 this morning but the euro just seems stalled right now and is looking to make another run at the 1.3280 level. There will be stops sitting around the 1.3260 and 1.3220-1.3200 levels. It's possible we may see Asia take a run at the stops... I'm open to this possibility playing out. The afternoon euro range has been extremely tight and we've been failing around the 1.3335 level as of the writing of this update.

Based on what I saw the euro do today I cannot even say with a high degree of probability that lower LIBOR, higher equities, and supported commodities are going to help the euro this week. It's still early, however, and we may get a better idea when London opens on Tuesday whether or not we'll have another disjointed market on Tuesday.

I have to mention that the third week in October, during the past two years, has marked the beginning of a euro bull run against the dollar. It happened last year between Halloween and Thanksgiving and it happened the year before that. Will these past price action patterns emerge and play out yet again?

I can't say for sure but part of my trade plan absolutely involves buying the euro on these dips like we took today. If we make a 200+ point drop, I'm buying the euro. I will take risk buying the dips in the event the market does what it has done in the past. If we do make a bull run back to the 1.3800 level or better, I certainly do not want to be stuck short down here at these levels.

I wish I had some really exciting crap to say about the euro but I really have nothing else at this point in the week. Risk management is imperative, especially between 1700 EST and 1900 EST today... the liquidity will be eerily low.

Be smart with your risk and money.

EUR/USD Weekly Outlook 10/19 thru 10/24 2008

Guess what? This weekend I did something I almost never do. I was stuck at home with a bad cold and as I was going stir crazy I decided to do some research to see how other analysts, gurus, and traders are viewing the markets presently. I was mostly interested on their views for this week. Fundamentally there’s just not much on the books. The only big fundamentals out of Europe this week are manufacturing and those should be terrible. The only big events out of the US this week are a speech by Bernanke, Existing Home Sales, and Initial Claims.

The vibe I’m getting from the analysts is that this week will be orderly, the credit markets will flow nicely, and these issues we’ve been dealing with for the past few weeks will miraculously disappear. I’m going to take the contrarian view as I approach this week’s trading with an understanding the risks will be enormous and the volatility will be chaotic at times.

The fundamentals will absolutely come into play this week but not the “textbook” definition of fundamentals. First, Wall St. will get earnings reports this week from major US corporations like Caterpillar, Google, Intel, 3M, Microsoft, Boeing, McDonalds, and Amazon just to name a few. Why does any of that matter to EUR/USD traders? Reason being is because Wall St. money-flows are a major determining factor in the daily trends of the EUR/USD and I do not see this correlation going away this week.

If poor earnings or shocks on Wall St. lead equities lower and Treasuries higher the dollar will be the likely beneficiary of this move and the euro will be punished. That has been the clear correlation and I see no reason why this correlation evaporates this week. This week I will be watching the S&P 500 more closely to give me direction indication for the euro.

The reason I’ll be focusing more on the S&P 500 is because of the issue we still have within the credit markets. As a value weighted index, the S&P 500 has more connection to the credit market and to credit flows as compared to the Dow. While the Dow is a great overall indicator, right now I’m seeing more of an important correlation with the S&P 500. The thing you have to remember about correlations is that they should not be considered as constants. Real-time market conditions dictate the relative overall strength or weakness of a market correlated variable’s pull on the EUR/USD.

Interest rates will absolutely factor into this week’s trading. Towards the end of last week we finally saw overnight dollar LIBOR rates ease. While this didn’t send the euro rocketing back up I believe the easing of dollar LIBOR rates helped keep the euro from sustaining a break of the 1.3400 level as we closed out the week. While it’s encouraging to see LIBOR cooperating with the EUR/USD, I do not think we’ve been given a guarantee the credit markets have to operate in an orderly fashion this week just because they did last Thursday and Friday.

Its true Wall St. made a nice comeback at the end of the week which brought more talk of a bottom in equities. I do not subscribe to this kind of thinking. The fundamentals of the US economy will keep deteriorating. Our forecast on this has been clear and has been proven to be a reality. I do not see how it’s possible for equities to truly bottom when some of the worst is yet to come, especially in housing. I find it hard to believe market participants cured themselves of their panic, knee-jerk behaviors.

How this all ties into trading is quite clear in my view… should Wall St. find stability this week and equities make consistent gains I believe this will take downside pressure off the euro and will give the euro a fighting chance. But the same must hold true for interest rates. If we have a bank failure situation in Europe or more troubles on Wall St. this could send dollar LIBOR rates back up which would benefit the dollar against the euro.

Consumers and Global Economies:

For the past month I’ve been focusing a lot of commentary on the US consumer because I believe the consumer sector is a fundamental area putting an extreme amount of downside pressure on the economy and on growth. I stand by the forecast that the consumer will bring the economy to its knees during Q4 and Q1 of 2009.

Over the weekend I asked a friend who is very observant and detail-oriented to do some field research for me. I asked her to go to the top two upscale, high-end malls in Nashville and then to hit the two lowest-end malls. The task was to observe traffic, get an idea of how many bags were in shopper’s hands, what stores they were from, and which mall was “performing” the best.

Green Hills Mall, the most upscale in Nashville had the least amount of shopper traffic, the highest amount of “window shoppers” and the lowest amount of purchases per shopper as compared to the other three malls. The lowest-end mall had the most traffic and the most purchases per shopper. When classifying a mall as “low-end” I’m specifically referring to retailers who offer products that are priced for middle-class and poorer consumers… it’s like the difference of spending $58 for a shirt at Abercrombie compared to $14.99 at Old Navy.

Nashville serves as a great consumer indicator because our region has been largely unaffected by the recession. Nashville is the financial center of the South and is a major player in the healthcare and entertainment industries. When I see a mostly recession-proof economy like that of Nashville getting hit I can only come to the conclusion that areas of the country nailed by foreclosures, plunging home prices, job losses, and recession are suffering terribly.

In the US we have these things called food stamps. Food stamps are subsidized by the government and are available to individuals and families that are below a certain poverty level. According to government statistics, the number of individuals receiving food stamps has jumped by over 2 million between May and October of this year. Those are staggering numbers and further prove the state of the US consumer is abysmal and families are in serious financial jeopardy.

In any welfare state you will have a certain segment milking the system, this is what lazy and dishonest people do but I believe a good number of those 2 million new individuals receiving government subsidized food assistance did so out of dire necessity. The US consumer can no longer use their home as an ATM machine, the credit cards are maxed out, the easy access to lines of credit are all gone, and the entire mindset of the average US consumer will have to change, it simply cannot be any other way.

Under normal circumstances this situation with the US consumer would absolutely hammer the dollar into the ground. While I do believe at some point the dollar will have to pay for the dramatic decline of the consumer, the affects of this intense consumer/retail slowdown will be felt by the global economies as a whole. Under normal circumstances the euro would obviously benefit from a weaker dollar caused by a weaker consumer but the fundamental situation in Europe does not necessarily make this a possibility.

The US consumer will lead economies in Asia, South America, Latin America, and the Middle East to even lower points. I have not heard much talk at all about the stronger dollar’s negative affect on US exports, on the Trade Balance, and on big players like Caterpillar, John Deere, Boeing, etc. And what about all those savvy European and Asian carmakers who pulled up stakes in their own countries and set up shop in America to benefit from the weaker dollar and high consumer demand?

The lure of the worthless dollar brought giants like BMW, VW, Nissan, and Toyota to set up manufacturing plants in the US, mostly here in the South where taxes are low, land is cheap, and economic conditions are favorable (were favorable). That’s just one of many examples of how wide-ranging an affect the beaten-down US consumer is going to have on global economies.

Crude:

Crude has been a mess and the unwinding of crude has no doubt benefited the dollar. Now I see a new potential factor arising if crude is allowed to stay to the downside. I’m talking civil unrest in oil producing nations. Oil producing nations budget a barrel of crude at a specific level and they use this targeted price to determine how much to budget towards three things specifically:

1. Infrastructure and expansion
2. Sovereign wealth fund capital
3. Government subsidies (human control)

Based on my limited understanding of how crude plays a roll in the budgets of OPEC nations and other oil producing nations, I’m seeing that if crude sustains a break of between the $68 and $65 levels and stays below there for even a brief period of time that this will dramatically alter the spending plans of oil producing nations. They basically cannot have oil stay at or below $65 a barrel for the foreseeable future.

The first areas that will get hit are subsidies and expansion projects. This is where the civil unrest part can play a role. Again, I am not an expert on precisely how oil-producing nations handle their politics but I do know they use oil money as a way to subsidize the citizenry in order to wield a certain level of control and power. In nations such as India and China and certain parts of the Middle East the poorer classes have risen into a middle-class lifestyle almost overnight. This global economic slowdown put those folks in jeopardy of returning back to where they came from. They may not want to get downgraded without putting up a fight. I wouldn’t.

Add to that the taking away of government subsidies and programs funded with oil money and you have a decent recipe for a good civil uprising. This type of geo-political event would absolutely cause a tremendous amount of chaos and volatility in not only the crude market but also for the EUR/USD. This type of event won’t happen in the blink of an eye but it’s an issue we need to keep monitoring so long as crude stays at these lower levels.

EUR/USD:

As I said I expect trading conditions to remain frustrating, chaotic, volatile, and erratic this week. I see no reason for this to change. As far as trading goes I would like to offer a suggestion for traders who are serious about risk and money management… do yourself a favor and consider staying out of the market this evening and wait for the overnight dollar LIBOR rates to come out between 0630 EST and 0700 EST on Monday morning.

If you can be patient enough to wait for this fundamental interest rate data from LIBOR it may serve to give some clearer direction for the trade day. If we see a drop in overnight dollar LIBOR rates this will be a good indicator the euro at least has a fighting chance on Monday. The next indicator will be how equities are responding.

At this point on Sunday afternoon I have absolutely no bias for the dollar or the euro. I don’t even really need a bias because my trade plan will mostly depend on what the market correlated variables are showing me and what the euro price action is showing me. These conditions call for taking quick hits on the market, banking the profits, and getting out while you wait for the next trade opportunity to emerge.

Lets be real here… trying to pick a perfect bottom on the EUR/USD is just a complete waste of time and energy under present market conditions. It must not be forgotten that Europe’s banking system is as much a mess as the US banking system, if not more.

At least at the start of the week some important levels to keep an eye on are 1.3382, 1.3317, and 1.3263 on the downside. Topside levels to be aware of are 1.3584, 1.3648, and 1.3737. After the market opens and we get a few hours under our belt it may provide a clearer view of how market conditions may go.

Overall I’m going to say the euro does have a fighting chance to make some gains this week. This means I will be much more cautious with adding euro shorts unless I see the market give me the clear green light to keep shorting the euro, otherwise I will take risks buying the euro this week.

Risk and money management is imperative for all traders this week. I cannot stress this enough. Be smart with your trades and do not be greedy this week. Greed is an enemy that only the most disciplined and focused trader can beat. Please practice strict risk management!

Trade Team Update

I'm not sure how great today's update will turn out... I got hit with a nasty cold early this morning and have not been very active in the market today, but there's a few key issues I want to cover...

Overall I'd say today's swings should not have come by any surprise. For weeks I've been talking about the re-pricing and re-valuing process taking place in the markets and this morning we saw more evidence of this process wielding its affect on the EUR/USD.

This morning several hedge funds were forced to liquidate and unwind heavy gold positions. Due to the already ill-liquid conditions in all markets, the hedge fund unwinding caused an intense amount of downside pressure on gold as it fell over $55 almost as soon as the gold liquidations began. At the very same moment the hedge funds were unwinding their positions and bringing gold down Treasury yields went up.

From this we see money flows stream out of commodities and into Treasuries. Then later in the afternoon I observed Treasury yields begin to rise while the Dow was beginning to rise. As this event was taking place, the euro was putting in a bottom at the 1.3380 level to eventually wind up pushing towards the 1.3500 level.

So as we look at today's events to make sense of why the markets did what they did, we simply connect the money-flow dots and its makes perfect sense why the markets behaved the way they did... as the money flows came out of commodities and equities, the euro dropped and stayed under downside pressure. Once the liquidation process with the hedge funds was over and those money-flows made their way back into equities, benefiting the Dow and S&P, this helped bring the euro back up.

These are the correlations of the market right now... they've been clear and will remain this way as long as market participants decide to respond this way during the re-pricing process. This doesn't exactly make trading easy because of the ill-liquidity and volatility but at least it makes sense.

Fundamentals:

Well I was wrong -- on Sunday I gave an opinion that I believed the fundamentals would take a bigger role in the market this week. This is not the case at all. Today's USD data was some of the worst seen since the 1970s. My overall forecast for worsening USD fundamentals is playing out but we are not seeing any punishment being given to the dollar.

Industrial Production fell a staggering 2.8% which is the worst drop since 1974. The Philly Fed Index printed at -37.5. It hasn't printed that low since 1990. The NAHB housing index printed its lowest number ever in the history of the index. The numbering of continuing jobless claims reached its highest level in five years. And we still have Wall St. Wonderboy Hank Paulson telling the world the fundamentals of the US are strong.

CPI printed flat... no rise in price pressures month-over-month. In this data we see further evidence of massive and rapid deflation... speaking of deflation, look at the gas pumps. The price of fuel is tumbling around the nation. Here in Nashville gas has dropped a $1 a gallon from its summer highs. That is a big deal to a lot of people here in my town!

I can already see the affect of fuel deflation -- the social establishments are more crowded now that fuel is cheaper. I see more people in restaurants and bars and in the tourist areas of town. These are very good things during times of recession and potential depression.

At some point the dollar will have to pay for these abysmal fundamentals because the negative affects will be seen in the deficit, Trade Balance, Current Account, TIC, and GDP data.

EUR/USD:

Tomorrow we get key housing and building data along with the important Michigan Sentiment. I'm forecasting all three pieces of data to print USD-. If that's how it plays out the bad could downward pressure on the Dow which would put downward pressure on the euro heading into the weekend.

Trading conditions tomorrow could be classified as schizophrenic... what I expect for tomorrow is terribly low amount of liquidity, a good deal of book squaring, and few bigger players with a little bit of liquidity to play with throw their weight around to make some end-of-week profits to satisfy whatever needs at the moment.

If the Dow can somehow manage to perform in the green I would expect the euro to find support against the dollar. Once again dollar LIBOR rates eased and during London the euro found support and strength to move up... it's a very simple process -- if LIBOR continues to ease the euro will be given more breathing room to gain against the dollar.

The hedge funds may do more liquidating tomorrow and this will cause some wild price swings. Crude remains a mess along with gold. I cannot even begin to predict what those two will do tomorrow, they could be brutalized again.

I got a report today from a company called TrimTabs. When I first heard the name I thought they were pushing diet pills or something but it turns out they do market intell. In one of their reports they showed over $43 billion was liquidated within the hedge funds in September. That is a monumental amount to evaporate from the markets. Margin call city...

In that report on the hedge funds we see proof that these markets are terribly ill-liquid and easy to push around, causing the violent and chaotic price swings. Trading tomorrow will carry an extremely high level of risk so please understand this before you decide to pull the trigger.

Trade Team Update

Yet again we have another day of brutal US economic and financial data, panic on Wall St., and somehow the dollar comes out smelling like a rose. While it doesn't come as a surprise it's certainly frustrating... as I indicated last night and this morning, the Dow would likely come under pressure and take a hit which would pull the euro down with it.

We did see this scenario play out today as the Dow plunged 500 points by early afternoon, dragging the euro back into the mud. Crude has remained an unstoppable mess and for good reason. Crude demand fell a staggering 6.2% in September in just the US alone. I haven't had the time to even see what kind of demand decreases there are for the other industrialized nations and emerging markets but I can't imagine the news is good.

O/N dollar LIBOR rates continued to ease albeit slightly. But we can clearly see the benefit of this slight easing because the euro has been gaining ground on the dollar after London opens and especially after the LIBOR rates are fixed and released. The euro runs into problems when Wall St. enters the game.

Overall, interest rates continue to remain at the forefront of the markets... the MBA reported the rate on 30-year fixed mortgages rose a whopping 40bps in just one week. Remember when we said rate cuts and bailouts won't fix the issues facing the housing market? Is the Fed so nieve to think that rate cuts would really help the housing market?

What the rate cuts and what the US fundamental data is doing is affecting money flows into Treasuries in a very negative way. If bond yields go up mortage rates have to go up, it simply cannot be any other way. The 10-year bond is the key Treasury to watch as it relates to mortgage rates. Money flows have sent Treasury yields soaring the past week and this is only going to serve to put added pressure on mortgage interest rates which is going to keep housing and re-fi's under pressure.

Fundamentally, we received some of the worst US retail and manufacturing data in years. It's abysmal. I forecasted a nasty retail number and it even exceeded how bad I thought it was going to be. Retail sales plunged 1.2% in September which is the worst print in over three years. For weeks I've been talking about the non-functioning consumer and today we have our first good evidence of this. The consumer will entrench further as the year drags on. Retail sales will come under more downside pressure as the job losses continue, the bills pile up, and the discretionary spending dwindles to almost nil.

I believe this is going to be an extremely rough winter in the US and likely around the world. In the early 1990's I think the US had some sort of a recession. My dad a decent job in the financial industry back then. He lost his job when the company downsized and eventually went out of business. I seem to recall him saying he lost his job due to the recession.

I was still fairly young and nieve and I didn't understand anything about recessions and economics in those days. I remember my dad lost his job right before school let out for the summer. By winter things were really bad at home financially. The next few years we were flatout poor. Times were tough for our family and many families in our community. I remember during the worst winter we were so poor we couldn't afford to heat our house in the evenings and it got so cold in my room that the frost was on the inside of the window.

I see these types of situations playing out this winter for many families. The sheer number of unemployed people, coupled with high consumer staple prices, families taking substantial investment losses, and mounting debt obligations makes for a recipe of hardships for millions of families who are already on the edge, just barely scraping each day.

I'm not trying to hit anybody with the doom and gloom stuff but this is what I see likely happening over the next few months. What this means for us as traders is more volatility, more ill-liquidity in the markets, more price swings, more government interventions... all the good stuff we've been dealing with since July...

The worst has not been seen or felt yet.

Tomorrow:

Once again we get some extremely key fundamentals tomorrow... CPI, TIC, Industrial Production, Philly Fed, and Crude Inventories. Fundamentals are clearly taking a backseat to the other market correlated variables like equities and commodities but this data is important nonetheless because at some point it will matter and the dollar will be punished for this madness.

Today's Eurozone inflation data printed as expected but next month could certainly print to the downside. There is certainly cause for concern with the Eurozone inflation data. The ECB has clearly swtiched gears to a more balanced growth/inflation stance in light of the financial crisis. That policy shift has served to put the euro under a considerable amount of pressure.

Should US CPI print below forecast this could put an added dose of downside pressure on the euro. Typically, weak inflation data would be bad for the dollar but the markets are treating the fundamentals in a different kind of way while we're operating under this chaotic conditions.

The TIC data may not be as USD- as some are expecting. Don't forget this data is two months behind and as the financial crisis was kicking into high gear we saw heavy money flows pour into Treasuries. What we don't know is how much of that was foreign. A decent print on the TIC data shouldn't negate the fact that the US debt situation is on shaky ground.

With the $1 trillion+ of newly printed money flooded into the money supply and with the clear recessionary affects being seen in the economy, what would motivate foreign investors to buy US debt? I cannot see or understand how US debt would be attractive right now. And this presents a problem because the US will need more foreign buyers of US debt than ever before. The US deficit is skyrocketing. At this point it's not even sustainable. This is all just a terribly USD- situation but only the markets can decide when to punish the dollar for this.

I'm fully expecting the fundamental "battle of worsts" between the euro and dollar to rage on as we close out 2008.

EUR/USD:

The euro remains at the mercy of the market correlated variables -- equities, commodities, and money-market interest rates. Any idea of "dollar strength" is purely a myth. The fundamentals of the USD are in their worst shape since 2001 and will only get worse. But as I've explained a dozen or more times, the dollar has to remain supported under these types of recessionary conditions.

As of the writing of this commentary I see that the 1.3508 downside key level has put up a considerable fight in the midst of all the pressure on the euro. It's possible we see a clean break of this level during the Asian session. But it's been tested for hours on end now and is miracuously holding steady.

On Sunday I talked about downside testing for the euro and I'm still not rulling out another test of the 1.3320-1.3280 levels before the week comes to a close. If crude continues to plunge along with the Dow it's quite probable those levels will be tested. I gave some downside levels on Tuesday for crude of $75-$72 and I'm not ruling out a possible break of the $70 level as long as these conditions persist.

Gold seems to be stuck in some sort of state of confusion. I really don't have much to say about gold because it's behaving strange and I just don't care to deal with it right now, there are other factors moving these markets and they have zero to do with gold.

I can list several reasons the euro should find support and move up but at this point I believe the euro's health will remain largely dependant upon LIBOR, equities, and how money-flows are moving through the markets.

As far as trading goes the clear and safest game plan is just to wait for a euro rise and then to grab a short. I've tried buying the euro and it just doesn't work right now. It's much easier path to profits by sticking with the short game plan, take quick hits on the market and then getting out with your profits.

I cannot even begin to stress the value and dependability of the EUR/USD 30-minute price patterns. Even in the thick of the worst financial crisis since the 1930s the old euro price patterns continue to pay out time and time and time again. To be honest, the only time a trade has gone against me this week is when I've ignored the 30-minute price action data thinking I could sneak out a quick 20 or 50 pips. I highly encourage all traders who are taking risks in this market to stick to the proven and tested 30-minute EUR/USD price patterns.

The 1.3508 downside key level is critical and continues to hold as of right now (1546 EST). Be smart with your trades and be vigilent with your risk and money management.

Trade Team Update

As Sarah Palin would say, I'm feeling pretty dog-gone, gee-golly, aw-shucks good today... not because the global financial crisis is fixed and not because Jessica Biel returned my phone call... in my opinion I believe we saw the very first positive and potentially productive step towards stabilizing the markets and towards liquifying the markets in order to bring a return to order and functionality.

What I'm talking about is the move being made in Europe to stabilize the interbank lending market by providing liquid capital and loan guarantees. The Germans have offered €400 billion in loan guarantees and €80 billion in accessible liquid capital. France said it would guarantee up to €320 billion worth of liquid for European banks.

On the back of this news over €1.1 trillion in new loans were approved within the European money markets. That's what I like to see -- instant positive reaction to a plan that actually can accomplish the goal of unfreezing the credit market and easing LIBOR. The markets needed a confidence boost and I believe the interbank plan not only provides that boost but also provides the resources for these banks to ease their way back into the lending and credit process.

Tomorrow will be this plan's first test -- now I need to see follow through. I need to see consistency. I need to see dollar LIBOR rates come down tomorrow morning. I need to see the euro hold ground against the dollar that it normally would have lost due to high USD interest rates. I need to see some of this newfound confidence sustain in Europe. If we can see these liquidity measures do what they are intended to do the euro may have half a chance against the dollar this week. So, let me say I'm cautiously optimistic about what I've been seeing today.

Equities have been on fire today as just about all global markets are rallying on the latest offerings from the central banks. Once again, I need to see some follow through and sustainability with these moves. It's great to see the Dow go up over 700 points but if it gives back all those gains tomorrow, we go back to square one again.

Commodities sit in an interesting spot, especially gold. I see the $830-$820 as an important testing zone along with $75-$72 on crude. If crude and gold can find some support and bring out the buyers this would certainly help support the euro. Money flows out of Treasuries should also help the euro and I'll be watching for evidence of this.

EUR/USD:

The euro's first fundamental test is tomorrow with ZEW and Industrial Production. I cannot call ZEW EUR+ at this point. I think the panic that has been running through Europe the past two months is going to weigh heavy on ZEW and I would expect to see a downside print. The key will be seeing how strongly the market wants to react against the EUR should we get a downside number.

Trichet will be in NYC to deliver a speech and I'm sure he will refer to monetary policy as it relates to the financial crisis. I will be listening for any clues or signs on future rate moves. The markets are speculating on Trichet's next move on rates... will be another cut or a hold? That is the burning question right now. I believe if the European banking plan finds some success it will give Trichet a reason to keep rates steady.

As far as trading goes, I'm working through a different risk strategy right now that is more negative on the dollar and slightly more positive on the euro. My appetite to keep buying the dollar has eased back today. Believe me, I've not turned into a euro bull but I have growing concerns with the dollar, mostly with the sheer number of dollars that have been pumped into the money markets and money supply.

We're talking well over $1 trillion in hot-off-the-presses greenbacks flooding the market. I'm trusting that at some point in the near future market participants are going to finally wake up and realize the depriciative affects of an additional $1 trillion+ of USD being flooded into the global financial system. That is just a terribly USD- thing in my view. Eventually I believe the dollar will have to pay for Bernanke and Paulson's transgressions.

I'm also thinking that low rates + access to credit + high money supply = strong gains for equities. The printing of money creates inflation and the equities market loves inflation... a season of loose monetary policy and inflationary conditions created by a more liquified monetary base should send Wall St. soaring again.

Now if equities go up because of the cheap interest rates and easier access to credit that should mean that Treasury prices should go down and yields would go up. Money flows would come out of Treasuries and back into equities as risk aversion would be set aside. And in this scenario it should be good for the euro and bad for the dollar. If we can add to this scenario weak TIC data and that my friends is a nice little recipe for a good 'ole fashioned USD butt-kicking.

The USD fundamentals are not going to turn around this year, we will see weaker data as the year rolls along, that I am very sure of. There's also new talk of another US economic stimulus plan that is even bigger than the $160 billion plan from earlier this year. Lets see... the last plan didn't do much, it's had no longterm positive results, it created more debt, more inflation, and we want to do it all over again and do it bigger? Yeah, that's going to be real great for the dollar... there's very little that shocks me and yet somehow I still get shocked by the stupidity in DC.

The other factor that is giving me caution against buying the dollar is the seasonal price patterns of the EUR/USD. The prior two years the euro begins to make strong gains against the dollar starting around the third week in October and lasting at least through to the end of November. If this old price pattern returns I do not want to be stuck with euro shorts down here at these levels.

The fundamentals, of course, are different this year compared to last year and the year before. The euro is clearly in trouble and has severe fundamental issues to deal with. But I have to forecast some very weak dollar fundamentals in Q4. The Q3 growth, retail, and consumer data should be abysmal and I'm forecasting a nightmare holiday shopping season.

I think retailers will be at the mercy of a terrified consumer who won't bust out the credit card unless they see some serious discounts. I see the retailers and consumers having a battle of wills... the consumers holding out for the sales and the retailers holding out for the consumer to bend and begin to buy. Overall I see a very USD- scenario here.

The realist, idealist, and optimist side of me is thinking along these lines as it relates to trading the EUR/USD. At this point I'm not willing to take too many risks on the euro but I certainly do not want to be stuck in low euro shorts should market participants finally wake up and see what a mess the dollar is and why this smoke-and-mirrors strength cannot sustain over the longterm view.

In terms of where to put risk, my trade plan calls for taking risk on the euro unless the market shows me otherwise. I still may short the rises but as I said, I'm getting cautious with euro shorts at these levels. I don't think the euro is all healed up and back in the fight but if we can get some of these factors working I believe the dollar comes under selling pressure.

Right now we need the credit markets to stabilize and confidence to return to market participants in addition to dollar LIBOR easing. Tomorrow will be our first real test to see if this is actually possible.

Please be smart with how you handle your risk and money under these evolving conditions. Don't listen to me, take everything into consideration and mostly trust your gut and what you're seeing in the markets. The risks are enormous right now and most on the retail side should be sitting out until the markets stabilize.

The end-of-day surge in the Dow gave the euro a real nice boost in late afternoon... keep an eye on how Tokyo decides to respond to what Wall St. did today. If market conditions allow, I will post some key levels later on this evening. Overall, keep an eye on the 1.3720-50 level on the upside and the 1.3540-1.3480 level on the downside during Tokyo.

EUR/USD Weekly Outlook 10/12 thur 10/17 2008

Once again we start the week with more questions than answers, more unknowns, more speculation, and more save-the-world rhetoric from the world’s top central bankers, finance ministers and politicians.

One thing I will not do in today’s update is regale you with numbers, facts, and figures. There’s an art and science to analyzing and trading markets. As I’ve said in the past, I am not the “science” of the market, I’m more the “art” of the market. If you want the “science” part (facts, figures, and technical views) I suggest you read John Mauldin’s latest commentaries. Mauldin is the only market analyst I trust these days and the only market participant I will endorse.

Overall, here’s what the markets will be dealing with this week… reaction to the G7, reaction to rhetoric and moves made by the central banks, reactions to moves made on the global equities and commodities market, and yes, we will see a return of the fundamentals this week. The fundamentals have largely taken a back to the other issues market participants have been responding to but this week we have key inflation, growth, retail, consumer, and foreign investment data. I am certain the fundamentals will play a bigger role this week as compared to weeks past.

G7:

Over the weekend central bankers and finance ministers were led by the IMF in a series of meetings designed to give the global markets a decisive plan to not only calm all world markets but also to instill confidence in the banking system, to unfreeze the credit markets and to stabilize the rapidly declining asset values of investors.

I’m thrilled to report the G7 accomplished none of this. The G7 communiqué is a joke. In the midst of the worst financial crisis since the Great Depression of the 1930s the best the G7 could come up with is a plan filled with more empty rhetoric. There is no exact and definitive plan of attack given in the communiqué. There is no step-by-step course of action. I wouldn’t even line the bottom of a birdcage with that piece of trash.

Reading the communiqué made me dumber, I think. At the risk of making you dumber, I’m going to cut and paste a few gems from the communiqué just so you can get an understanding of how this G7 plan offers absolutely nothing to the global markets:

Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.

Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.

Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.

Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits.

Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.

That’s it… those five points right there is how the G7 intends to fix the markets. In there we read rhetoric that says “take action” and “take steps” and “programs”. Gee that’s great but what are these programs and what are these actions? When do they begin? What will they cost? What segment of the market will be tackled first? Will the US get the G7’s help first or will Europe? Why are the Asian market participants so quiet?

Those were just a few questions I thought of within the first 30-seconds of reading that garbage. The central banks of the world are playing a game with the markets and I do not believe this game will work. These central banks are using monetary action and monetary policy as a form of psychotherapy on the markets.

But what these brilliant men do not understand is that the markets are using psychotherapy on the central banks. It’s what you call getting the tables turned on you. All participants involved know it’s nothing but a lose-lose situation… during this painful and violent re-pricing and re-valuing process the majority loses and a small minority of smart players come out unharmed.

The central bankers think they are in control but they are not. The markets have the central bankers by the throat and they won’t let go until they’re ready. The markets wanted lower rates and they got lower rates. Of course this didn’t fix anything, but hey, at least money is cheaper now. The central bankers of the world are getting played by the numbers they see on Bloomberg and read in the Financial Times. They are being pressured by the publically-traded and privately-owned banks they have undisclosed relationships with.

Bernanke, Trichet, and Paulson are behaving like children in their responses to this financial crisis. These are grown adult men who are clearly powerless to stop the runaway freight train of the re-pricing process. When I read between the lines of this communiqué I read nothing but disagreements and uncertainty between the world’s financial leaders.

I shouldn’t even call these men leaders because they are followers. They are leading nothing and I think it’s painfully obvious these men do not even believe the G7 plan will work or that any plan will work. Central bank monetary policy is the catalyst for financial booms and busts. Surely these educated men of economics understand these events happen at their hand.

I’ve watched a few clips of the central bankers and finance ministers at the G7 meeting. I was observing how they were interacting with each other. After studying the G7 communiqué, watching images from their meetings, and then reading their comments it struck me that these men have no common plan of attack and it would likely take weeks or months for this group to get on the same page for how to solve the issues faced by the global markets.

I grew up in the Southern Baptist church. That won’t mean much to our friends here from other countries, but when I was growing up we had a lot of preachers talking about the New World Order – a one-world government, the rise of the anti-Christ, war with Russia… all kinds of doom and gloom they could conjure up out of the book of Revelation.

I’ve sat through a few old timey Southern Baptist tent meetings hearing how the governments of the world would band together to form a single government entity with the goal of controlling all peoples of the world so the anti-Christ could rule. Now I’m not saying that won’t happen but the point is, after what I observed with this G7 meeting in regards to the utter lack of agreement, I can’t imagine how the governments of the world are going to be able to unify in a way to solve the issues facing the financial markets let alone create a one-world government.

My opinion – the G7 accomplishes only one thing – adding more confusion and volatility in the markets.

Fundamentals:

Unlike the past few weeks, some of the fundamental data we get this week will weigh on the market in my opinion. Of course all speeches by Trichet, Bernanke, and officials from the Fed and ECB can and will move the market this week. But in addition to that we get extremely key inflation data out of Europe and the US. CPI and PPI are critical right now.

If Eurozone CPI prints at or below expected you can be sure this will put downside pressure on the euro because it will cause the markets to believe the ECB has room to cut rates even lower. Trichet has clearly backed away from his over-the-top hawkishness on inflation. The same may also be true for the US if Core CPI comes in cooler than expected. Many believe Bernanke is willing to take rates down to 1%.

Retail Sales is another key piece of data we get this week. I am forecasting a USD- print on this data. My preliminary research shows a very sharp pullback from the consumer in the month of September. The US consumer is basically non-existent at the moment and will likely remain as such throughout the rest of 2008.

We also get the Treasury International data this week. TIC data is two months behind but last month’s print showed a dramatic pullback in foreign investment. My forecast is for more USD- TIC data. The print may come in as expected. Reason being is because we have seen heavy money-flows into Treasuries the past two months and this may help the print but overall it’s still going to be very bad for the US deficit.

In addition we also get manufacturing, production, and consumer sentiment data. I have to remain extremely bearish on both the US and European economies and I believe their fundamentals reflect the weakness these nations are suffering from. Many regions in Europe are a flat out mess. I don’t know any other way to put it.

EUR/USD:

As of the writing of this update the euro was at 1.3518 during weekend trading but it may open lower than that. I am certainly not ruling out another test of the 1.3320 to 1.3280 level sometime this week. I am still very bearish on the euro and will use more caution buying the dips. That being said I’m not at all bullish on the dollar either.

In my opinion the EUR/USD will remain correlated with equities this week in addition to more of a correlation with commodities. Some of those key fundamentals will come back into play this week. LIBOR will also be a factor in this week’s trading. If dollar LIBOR rates manage to come down this may take some pressure off of the euro.

Crude is a disaster. Crude closed down 17% last week and while I do not believe we’ll see another massive loss like that, I do think crude can go lower which would put more downside pressure on the euro. If crude goes much lower I expect OPEC to start stepping up the rhetoric. A break of the $70 level on crude could cause an emergency OPEC meeting and a large supply cut. There’s only so much of a hit OPEC is willing to take before they decide to manipulate the crude market.

Rate cuts will continue to be speculated on this week. Over the weekend ECB Almunia basically said there’s more room to cut rates. He says:

“Supported by the easing of commodity prices, the presently high inflation is on a downward trend and long-term inflation expectations are stabilizing at a lower level consistent with price stability, if confirmed, these new developments could justify some monetary easing in the near-term”.

That is a very cut-n-dry statement right there. There is also speculation that the Fed will cut rates again on October 29th. I think rate cuts are possible for both banks if the financial crisis drags on because rate cuts are what these bankers think will help solve the problems.

The rate cuts will supply the markets with cheap money. The central banks want market participants to start buying equities with cheap money. This isn’t happening. So, what the central banks do next is cut rates lower and then they print more money in addition to keeping loose monetary policy. There’s all this cheap money and quite an abundance of it in the monetary base. This is inflation.

The cheap money, the abundance of money, and the inflation are the exact three things needed to re-inflate equities. Equities thrive when there’s tons of cheap money and high prices (inflation). The central bankers answer is to pump up the equities markets therefore restoring confidence to investors and all market players.

As far as trading goes, expect more chaos, more volatility, more price swings, more choppy and confusing price action and no real slowdown in the crisis-conditions. The markets will remain extremely ill-liquid this week. These are purely speculative markets. The risks of trading this market are astronomical. Whatever you decide to risk in the market this week you should be prepared to lose because violent price swings could happen at any moment.

Don’t forget US banks are closed on Monday which means the liquidity will be almost nothing and that can give certain market players who might be slightly more liquid than the rest the ability to move the market whichever direction they desire. I’m just bearish, bearish on anything and everything. I think I could make money shorting anything right now. The worst has not been seen in my opinion.

After the market is open for a few hours I hope to see some signs of direction and to get a better idea of how the market may want to respond after London opens. The Frankfurt and London openings will be key. The euro typically benefits from G7 meetings, so I will be looking for signs of possible euro strength.

Be smart with your trades and do not take any unnecessary risks. We could see some very violent moves this week that you do not want to be caught on the wrong side of. Risk and money management is imperative under these extreme conditions.