How About that Bond Market!

[adios]

Decent rally in treasuries after they bottomed in price-topped in yield shortly after the 4/1/04 jobs report. Looks like Greenie's "in a box" and will have to hike the Fed funds rate next week. A slow recovery in employment but a recovery nonetheless. Equities getting clobbered. Multiples on tech stocks seem high to me still though. High oil prices should persist IMO although many are predicting a moderation in oil prices short term.

[playerfl]

u.s. dollar bonds look pretty scary to me, at least longer term. you long bonds or interest rate futures ?

[adios]

No just interest rate sensitive stuff.

[Ray Zee]

i would think betting on dollar movements might be easier than picking interest rates.

[MMMMMM]

I like the idea of trying to guess currency better than the idea of trying to guess interest rates.

I did like long USD, especially long USD/JPY, until recently when it crashed due to the payroll report. Still kinda like it short-term, but betting on USD is very risky right now.

So I started looking for another way to bet against JPY (since it suffers so much due to high oil, and since BOJ has a zero interest rate policy).

Almost a week ago I came up with the idea of long EUR/JPY as the best-looking spread for the purpose of shorting JPY.
Then a few days ago I read that long EUR/JPY is considered the new "oil currency", which was surprising and gratifying and kinda fun since I picked that spread on my own for that very purpose.

While typing this, EUR/JPY has risen by 26 pips (pips in forex are like ticks or 1/100ths of a basis point). At 20-1 leverage that is nice, though my account is small as I am just learning and I'm not rich like some folks around here;-).

I paid a tuition a few weeks ago screwing around with this stuff this as I attempted to get a handle on what was going on, and learning how to identify good entry/exit points. Another mistake was overbetting which caused me to react instead of being able to play it cool and detached. Sort of like playing too high in poker that way.

Over the last few weeks I picked the right direction on most trades but due to jumping in and out and picking poor entry/exit points, I actually lost money overall on most of those trades. If I had just sat tight I would have done very well on those directional trades. Live and learn.

The spread and commission didn't kill me as it would have years ago because the spread is only like 3 pips on entry, and no commission; and any size account or position can be traded, even very very small. During high volatility times (like approaching news market data releases, or weekends), they do raise the spread substantially, though. They will no doubt greatly widen the spreads shortly before and after the FOMC rate announcement this afternoon. The site I am learning/trading small on is www.oanda.com (http://www.oanda.com)

I have spent too much time studying and playing with this stuff the last few weeeks and need to get back to the poker grind full-time again for a while.

I am still stuck overall but I can identify at least twenty specific errors I made, just as if if I were watching a newbie play poker. That is important. In the last few days I have reduced my losses of the last few weeks by about 70%, by being long EUR/JPY. Of course there is still a great deal to learn.

The forex has recently become increasingly dominated by hedge funds and institutional players, making it a tougher game than it was years ago. Still I think one could catch a trend or two and do well, if one only bets when all things line up.

Fascinating stuff, really.

[MMMMMM]

"Then a few days ago I read that long EUR/JPY is considered the new "oil currency","

Make that "EUR/JPY" not "long EUR/JPY" is considered the new "oil currency".


Interestingly, just a few minutes ago I read that this morning, a large U.S. investment house was aggressively buying EUR/JPY at 136.10

Last night I read that Warren Buffett had bet 19 Billion against the U.S. dollar in the first quarter of 2004 using a selection of 5 major currencies. 19 Billion! Could it be BerkHath was buying EUR/JPY this AM at 136.10?

It seems Buffett has been doing a lot more than just buying stocks lately;-)

According to the article, Buffett's net worth has risen to 42.9 billion; he was in second place on Forbes list after Gates. I do not recall if BerkHath is up or down this year so far though.

[adios]

Yeah treasury rates are inherently volatile. From my perspective the market has built in this bias that longer term rates have to rise due to the growing economy. However, my perception is that growth in the economy is decelerating due to higher energy prices. Natural gas has not followed suit with oil prices to be fair. Here's a take that I thought was interesting about natural gas that I read today:

<< Some market observers blame a lack of sufficient storage capacity that will keep supplies tight in the winter. "Even if we have storage completely full," says Andy Weissman, an energy hedge-fund manager, "it may well not be adequate." >>

bingo !

storage of NG has been static at just over 3tcf since the mid 1990's .......... our population has grown about 50mm over that time , our economy really has expanded as well and new home building over that period of time has been done at a torrid pace (with NG heating getting the lion's share of new construction) ............ never mind the dozens of NG burning power plants built over the same period .

why would we ever assume that total 3tcf storage of the mid 1990's was adequate today ?


along with the fact that the summer of 2004 is looking to be one of the coolest in many years (poor Al Gore , another spike to the head of the global warming folks) , we also have a greatly ramped up NG exploration business in USA the last 12-18 months as predictions of NG shortages have been headline news for ages even drawing in Al Greenspan comments .........

thus with heavy focus on finding more NG , we ignored oil assuming we could buy all we needed from various foreign sorces only to run into huge demand spikes from China ruining our plans .........

thus plentiful / cheaper NG vs record high oil being the exact opposite of what the experts (and me , to be fair) would have expected a year ago .........

as an aside , i see AECO NG plunged yesterday to $4.66 USD .....lowest in 3+ months ....... i'd think you see noticeable differences between oil heavy CanRoys and NG heavy CanRoys in Q3 ........... just musing aloud .

ironically , if NG falls to say $5 on NYMEX , it will lose the focus of the markets obsessed with oil and if we have a colder than normal winter to accompany the cold summer of 2004 , we'll get caught off guard again .......

Anyway I see a lot of risks to economic growth with the biggest being high energy prices. I think that the market is anticipating a 90's style economic expansion again, one that was prolonged and very strong with lot's of jobs being created resulting in low unemployment rates resulting in strong consummer demand. Thus the bond market IMO has overreacted to some economic data like some of the non farm payroll reports that showed a spike in jobs growth. Could definitely be wrong though about that. I think for many reasons that the 90's expansion was abnormal rather than normal. Now the Fed is raising short term interest rates at the "measured pace" they stated towards a "neutral" and monetary postion from "accomodative" and if businesses aren't creating new jobs, looks like at best very modest economic growth to me. Doesn't seem like an environment for higher long term rates to me.

[adios]

So what's your take on what will impact the value of the US $ ? I assume the US $ sold off against the Euro and the Yen due to the prospect that the Fed may not be as aggressive in raising short term rates as many had thought.

As an aside I've found the financial markets to be fascinating and challenging. From my perspective gaining knowledge about fundamentals is marginally helpful but essential i.e. knowledge of fundamentals won't guarantee success but is more or less essential for success. Each bit of knowledge is marginally helpful. Kind of like adding a plays to your poker playing repetoire FWIW. Each indivual play adds slightly to your EV but in the aggregate your EV is increased a lot if that makes any sense. Definitely post what your take on the markets you're following.

[playerfl]

Globalization is evening out wealth and per capita income around the world, as it was designed to do from the beginning.

NO country has ever consistently endured the types of trade/current account/government deficits that the U.S. has without a significant drop in the currency.

[nicky g]

"So I started looking for another way to bet against JPY (since it suffers so much due to high oil, and since BOJ has a zero interest rate policy). "

M, I don;t know much about this kind of thing but wouldn;t conventional economics tell you that this kind of thing should already be priced into the yen? I mean, Japan;s had zero interest rates for a long time; people aren;t going to start selling now because of it. Further more, Japanese interest rates have only one way to go - up. Thoughts?

[adios]

[ QUOTE ]
Globalization is evening out wealth and per capita income around the world, as it was designed to do from the beginning.

[/ QUOTE ]

Data points you're using?

[ QUOTE ]
NO country has ever consistently endured the types of trade/current account/government deficits that the U.S. has without a significant drop in the currency.

[/ QUOTE ]

Historical example? From the onset of the recession in 2001 I believe the US $ has dropped something like around 40% against the other major currencies. During that time interest rates fell precipitously. Also when comparing historical data that data being compared should be normalized. For example when people state that the U.S. budget deficit is tha highest in history that's true in absolute $ terms but not true at all when normalized for GDP. I'm not saying you're not doing this but saying that many people don't do this when making comparisons and they should.

[playerfl]

Look at brazil , argentina, many others for currency drops. Look at India and China for personal income and GDP growth, look at the stagnation of U.S. wages and drop in the dollar. The proof is all around you.

I consider a 40% drop in a currency in a few years to be a major drop, sorry if you don't. If you would have sold every financial asset you had and bought swiss franks and let it sit in a savings acct. you would have beaten every U.S. equity or bond index by a mile. Think about that.

[playerfl]

Look at brazil , argentina, many others for currency drops. Look at India and China for personal income and GDP growth vs. the rest of the world. As for deficits, i wasn't just talking about federal budgets, i was talking about trade deficits and balance of payments deficits which have been huge and sustained.

I consider a 40% drop in a currency in a few years to be a major drop. When you consider that we are talking about the $US, considered one of the reserve currencies of the world, its a HUGE drop.

Historically the dow has risen about 10% a year. Lets say the stock market had risen 10% per year from 2000 to 2004 instead of dropping. The real return of putting your money in a risk free savings acct. in a swiss bank in swiss franks would have beaten the stock market even if the market didn't drop.

[MMMMMM]

Things get priced into the market to some extent but since they are not yet certainties they cannot be fully priced in.

Example:

The Federal Reserve Board intends to continue raising the U.S. discount rate at a measured pace through year's end. The Bank of Japan intends to maintain its zero interest rate policy for the foreseeable future.

It would not make sense to think that as future rate increass come for the USD, that that will not help the USD vs. the Yen. Higher interest rates attract capital. Not every investor who may be buying U.S. securities later this year has already done so. Some will not do so until interest rates are higher.When they do, that affects the market.

It is a myth that everything is automatically and quickly and fully priced into the markets. If that were so you would not be able to look at charts and so often see long trends.

If other currencies' interest rates move up vis-a-vis the Yen, that helps draw money away from the Yen and into those other currencies. Of course many other factors come into play too but the market can never fully price in anything.

Right now the danger of a terrorist attack is no doubt somewhat priced into the U.S. stock market and USD. If however one happens there will be massive market shocks.

I think people take the phrase "efficient market hypothesis" and expand it to mean "fully efficient", which I don't believe is the case.

Even when all factors are being considered and priced in, different participants weight those factors differently. Much of the price movements we see are the market's gradual attempts to reconcile those varying viewpoints. Thius is also combined with fundamental pressures and with crowd psychology. Also, large positions are being traded by sophisticated investment houses and hedge funds. Many of them have differing views and strategies.

[BadBoyBenny]

Player, I know this is nitpicky but...

[ QUOTE ]
The real return of putting your money in a risk free savings acct. in a swiss bank in swiss franks would have beaten the stock market even if the market didn't drop.


[/ QUOTE ]

If you are converting from dollars to franks with the intention of holding for a period of time and converting back to dollars it is not risk free. Nothing is risk free in a fiat economy.

Just think of the Swiss man who put his Franks in a risk free US savings account.

[nicky g]

OK but the reason you gave is that Japan has interest rates approaching zero. What you mean is the spread between US interest rates and Japanese ones is likely to increase. That's not quite the same thing (if Us interest rates fell for example it would decrease, while Japanese rates remained zero) - the first is certainly priced in whether you believe in the efficient market hypothesis or not. I find it amusing that given you libertarian/free-market tendencies you don;t. I agree with you to an extent but I think given the massive amounts of money focused on interest rate changes etc, the likelihood that US interest rates will rise is. That doesn't mean the full rise is already priced in; but a percentage of it approximating to the likelihood it will happen should be (so in teh long run you shouldn't be able to beat it; yes you'll make money when it rises, but you'll lose enough to wipe these gains out the odd time something goes wrong and it doesn;t). Same with the terrorist attack scenario - of course there would be a massive shock if it happened; that doesn't mean the risk of it happening isn't priced in.

[MMMMMM]

"OK but the reason you gave is that Japan has interest rates approaching zero. What you mean is the spread between US interest rates and Japanese ones is likely to increase."

I thought that was implied or presumed but now I see I should have been more specific.


"That's not quite the same thing (if Us interest rates fell for example it would decrease, while Japanese rates remained zero) - the first is certainly priced in whether you believe in the efficient market hypothesis or not."

Right, again I thought that was implied or presumed but I should have more fully explained.


"I find it amusing that given you libertarian/free-market tendencies you don;t."

You seem to be looking at this in black/white terms, i.e., efficient market hyothesis either yes or no. That's not all what I am arguing; I'm saying the market is not *instantaneously and fully* efficient. An equilibrium price is slowly arrived at in most cases through much trial-and-error of the market pricing mechanism. If the markets were both instantly and fully effcient, there would be no point looking for inequities, or even in looking for superior stock purchases of one stock over another.


"I agree with you to an extent but I think given the massive amounts of money focused on interest rate changes etc, the likelihood that US interest rates will rise is. That doesn't mean the full rise is already priced in; but a percentage of it approximating to the likelihood it will happen should be (so in teh long run you shouldn't be able to beat it; yes you'll make money when it rises, but you'll lose enough to wipe these gains out the odd time something goes wrong and it doesn;t)."

Not so because you aren't forced to stick with a position that is slowly losing, whereas you can stick with a position that is slowly winning.

Again, long-term trends occur more often than pure chance would dictate; just look at a bunch long-term charts to see that this is so.


"Same with the terrorist attack scenario - of course there would be a massive shock if it happened; that doesn't mean the risk of it happening isn't priced in."

Yes, and should we presume that it is even remotely acurately priced in?

[MMMMMM]

I will post more of my thoughts but they keep changing;-) so when I get a better summary together I will post it.

The EUR/JPY reversed largely on Saudi promises to increase capacity and I got stopped out at a profit on the trade (since I raised my stops before going to sleep).

Right now I especially like short AUD/NZD. The Kiwi is very strong fundamentally, even more so than the AUD appears to be, and on the long-term chart there appears to be a very clear bear flag. I grabbed some last night and it is doing very well as of today. Right now I am leery on trades involving the USD or JPY, but this AM almost immediately after the 8:30 EST data release I grabbed some short EUR/USD just after the chart spiked down on the news. It broke through support levels and is doing quite well now. Interestingly in the few instants before or during the news it spiked the other way first and as I was trading straight off the chart I got caught for 14 pips in the wrong direction and closed then reversed. Now ahead an average of 23 pips on a larger position.

I really really like the short AUD/NZD for chart reasons and of course it helps that the fundamentals are behind it as well. If you look at the long-term chart you wil see what I mean. I read recently that flags/pennants are among the most reliable of continuation patterns and this trade is just chugging along nice and smooth and is currently ahead 52 pips from last night.

Of course I still have a lot of learning to do but I feel I am starting to get a handle on it. I am slowly making up my earlier losses though still making some less than ideal plays. Thank goodness Oanda allows accounts of any small size with no required minimum on either account or trade size, else I would not have been able to experiment while learning like this. This is not an endorsemewnt for Oanda so much as just explaining how mice it is for a guy with limited funds to be able to trade very small and learn while trading. I did learn a tough lesson the day of the payroll report: the market basically gapped right through my stops so I got like 78 pips slippage buit that's what can happen when the market moves 200 pips in 2 seconds and nearly all liquidity is removed from the market. Some sites purportedly guarantee no slippage but from reading the forums on Oanda I believe this cannot be an ironclad guarantee in the most volatile market conditions, else those companies would get killed by anyone who adopted the strategy of merely placing bi-directional limit trades on big data news events with reasonable stops. Someone said Refco would flag your account if you did this. These firms charge higher spreads on all trades during normal market conditions so they make up for the "guarantee" somewhat in this way. Still I would guess it might be good for a pop or two especially if you did the two trades at different firms. It would be very important to place the limit orders and stops well, though, else you could get killed on the volatility that often accompanies these important data releases.

[nicky g]

" An equilibrium price is slowly arrived at in most cases through much trial-and-error of the market pricing mechanism. If the markets were both instantly and fully effcient, there would be no point looking for inequities, or even in looking for superior stock purchases of one stock over another. "

Well, there are quite a lot of people who would argue that, unless you have inside information, that's the case. Don;t people often argue that randomly picked stocks perform just as well as those tipped in the long run?

"Not so because you aren't forced to stick with a position that is slowly losing, whereas you can stick with a position that is slowly winning. "

Yeah but you don;t know it's slowly losing; if it drops a little you don;t know that it will continue to drop.

I'm really arguing with you just because I find it interesting; I don;t believe that the price of a stock (or whatver) genuinely always reflects all the information about it. However, I would doubt that a small time investor can really beat the currency market, especially given the costs involved. But the very best of luck.

[MMMMMM]

Markets don't work like a series of spins on the roulette wheel where each spin is fully independent. The underlying casuses of market price moves are generally not immediately dissipated once the price moves, and I don't agree that everything is fully priced in very well. Market pricing mechanism is a very inexact process that continually self-corrects. It is the best way of determining the truest price of something, but even in this system vast inefficiencies exist. Also, different players have different opinions, sort of like in poker. Just because all the information is available to everyone doesn't mean everyone will make the best use of it, so the better players can win, even with a house rake, as long as the rake is not unreasonable.

As for transaction costs, trading most major currency spreads with this site has a 2-3 pip spread which is their house rake. The less traded currency pairs have higher spreads and spreads may be raised on any pair during times of unusually high volatility. There are no other commission. So it costs 3 cents to buy and sell $100 worth of USD/JPY (the round-turn cost is 3 cents). EYR/USD and EUR/GBP are currently trading with 2 and 3 pip spreads respectively.

Example: Buy $1000 USD/JPY at 110.90/93, which is the current price as I write this. If you were to buy it you would buy it at 110.93 (which means the rate is 110.93 yen to the dollar). If you then turn around and sell it without the price having moved at all you would be selling it at 110.90. Hence a net cost of 30 cents. To trade a "mini"-contract size of $10000 would cost you $3.00, and to trade a $100000 lot would cost $30 round-turn. So I don't see how the commission is really even as bad as the rake in poker on a relative scale.

Since high leverage is available in the forex markets, for a margin of $2000 you can trade a full $100000 lot using 50-1 leverage (if you want to go that high for leverage; of course you can trade less leveraged if you wish). That means that a 1% move in the underlying spread of USD/JPY would either increase your $2000 margin equity to $3000 or reduce it to $1000, depending on which way the market moved. I doubt that 3/100ths of one percent is a spread that cannot be overcome by a good player. In the last 5 hours the USD/JPY has moved about 30 pips net downward, although the peak vs. valley was a bit more than that. The swings over the last 12 hours have been considerably greater, more like 70 pips (or 7/10ths of one percent) from high to low.

Of course the big trick is to become a good player. That's what I am currently working on;-)--and will no doubt be working on for much time yet to come.

If you can get a look at some charts of the major currencies over about a year time period, you will clearly see what I mean about long-term trends. No way could a long series of coin flips produce results like these.