Mr Brown's day of reckoning?

Inter-market Technical Analysis using algorithmic pattern detection

THURSDAY APRIL 29, 2010       06:17 ET

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The sovereign credit crisis is producing a variation on the normal flight to safety dynamics that have been witnessed during the structured products crisis. The US currency and Treasuries are certainly seeing a firmer tone as asset managers seek out that normal safe haven, but this time the yen is weakening - still above 94 as I write this - and gold which normally moves inversely to the dollar is poised at the $1170 level which I drew attention to here earlier this week.

The chart for spot gold, with the notable cup/handle formation looks uncannily like the one that preceded the big breakout last October and it would not take much to trigger a substantial breakaway move.

I think it is fair to say that traders in this market are ready to push the buy trigger at any more signs of an unravelling of the EZ.

On that topic I shall amplify something which I commented earlier today on my Twitter account

The irony of the current plight of the EZ is that the evolution of the entire European Union project has been largely in the hands of process driven elitist intellectuals and yet they missed the obvious - which is that it is proving impossible to keep a currency union together where is no centralized fiscal authority to impose taxes on EZ citizens to perform the customary bailout.




The Shanghai exchange fell again today and closed at its lowest level since last October. As noted on the chart the index has dropped more than 10% during April alone.
A move towards a re-test of the low of 2640 seen on September 1st 2009 could well be an intermediate term target.



GBP/USD has almost broken below the cloud formation on the daily chart - readers may recall that I prefer to stand aside when assets are within cloud patterns - and I suspect that there could be a validation of this downward directional bias - as soon as during Asian trading on Friday. Targets of around $1.48 are still on my radar during the next week or so.

The last edition of the X Factor election debates takes place tonight in the UK and Gordon Brown is vulnerable not only for his comments to a voter yesterday - which is a relatively minor offence - but which is all over the UK newspapers today - but for the much more serious accusation that should and probably will be made, that he has systematically mismanaged the UK’s economy for many years.

It never ceases to surprise me how memes can get planted in the public psyche and then be perpetuated without really being subject to critical scrutiny. The notion that Brown is best positioned to handle the economic difficulties moving forward, because of his mastery of economics (?), is quite astounding given the fact that he has presided over the public finances demise for the past 13 years.

Please do not take this as political partisanship since I only have one view of the current selection of candidates - which is that none of them are telling the truth about the austerity measures to come and none of them have clear ideas on how to tackle the structural public deficit which is near to being beyond repair.

Euro hanging on by its fingertips

Inter-market Technical Analysis using algorithmic pattern detection

WEDNESDAY APRIL 28, 2010       05:59 ET

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Readers of my commentary yesterday may have detected a certain amount of exasperation in my comments on the relentless ascent of the S&P 500 and the apparent absence within the fund management community of any concerns about the fact that the second most traded currency in the world - in which trillions of euros of assets are denominated - could be fighting for its very survival.

As suggested here yesterday, traditional tools from TA - such as MACD, RSI and other indicators of dissonance had been pointing to the fact that global equity markets had become unsustainably complacent, and that the expectations for a sharp correction were considered by most to be minimal.

The chart below tells you almost all you need to know about the way that this complacency was shaken severely yesterday. Notice how the VIX reached right to the top of the cloud formation - with a 30% jump - illustrating just how useful Ichimoku formations can be for money management and setting targets/stops.



Here is my comment from yesterday on $EURUSD

Once again the euro is under severe pressure in European trading and we appear headed for yet another test of the $1.3275 level.
According to one estimate from Goldman Sachs the cost for bailing out Greece could reach 150 billion euros which will not sit well with Angela Merkel’s coalition partners in Berlin.
If the currency breaks decisively below the previous support level around $1.3275 then the $1.30 level seems to be the next obvious target.

I did have a very profitable session yesterday but would have had even more satisfaction by benefiting from the wild movements in the sovereign CDS markets as rates on all Club Med countries surged. Portugal is now being lined up for the next attack - and the UK can only be thankful that it declined the opportunity to join the eurozone. As I intimated above - the currency union experiment lacks the architecture and heritage to deal with the problems of Greek government debt which now has junk status, and it is not a stretch of the imagination to contemplate that policy-makers in Berlin must be seriously looking at Germany exiting the EZ and re-establishing the D-mark before it all goes pear shaped.



One of the great fascinations that the markets have for me is the manner in which risk appetite expands so that all kinds of exciting opportunities seem feasible, and then the events of the last 24 hours suddenly sees many fund managers scurrying back to the safety of US Treasuries, the dollar and chucking out the more adventurous securities that seemed such a good idea at the time.
The chart for the Brazilian index shows that this market dropped precipitously and has broken a clear uptrend line since February.
Using Ichimoku as a cue there would seem to be support at the base of the cloud and there could be quite a bounce, but the dynamics seem a lot less bullish than they were before the credit ratings agencies could no longer avoid the obvious conclusion that many sovereign credits need downgrading - with several in risk of moving below investment grade. This is not a small issue since in so doing Greek government "securities" (if that is not an oxymoron) can no longer be held by most mainstream fund managers and pose real problems for the ECB which has accepted them as collateral in repo agreements.
The ECB looks to be between a rock and a hard place over current developments and there is no mechanism - as in the US and UK - to provide them with easy ways to grab EU taxpayer money to bail out basket case economies - of which there are many within the enlarged EU.

Readers are advised that TradeWithForm is now offering a premium subscription service which will provide daily alerts to a variety of technical patterns including many based on Ichimoku analysis. You can find out more about the TWF algorithmic pattern analysis by visiting the following link .



The CAC-40 in France plunged during the latter part of the trading day in Europe - not only in sympathy with most other European markets but additionally because its banks have the largest exposure to Greece.
I am not aware of any ETF which allows one to short the French market - perhaps readers may know of one and can let me know- but this is a territory where the woes of Club Med are going to be felt more severely than many others.

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TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY APRIL 28, 2010

The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions.
None of these setups should be seen as specifically opportune for the current trading session.
For a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm

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BIK  SPDR S and P BRIC 40  

I thought it would be good to have a look at how many of the suggestions made here recently have performed.
BIK - a play on the BRIC economies - has revealed that the bear flag formation - especially following a heavy volume plunge - still acts as a reasonably reliable precursor of trouble ahead.




EWA  iShares MSCI Australia Index  

Here is a comment from Monday's column

The sector fund for Australian equities, EWA, is on my list this week as a short candidate.

This market is especially vulnerable to further tightening in the Chinese economy - and the PBOC cannot be feeling too clever about their currency diversification strategies which have seen them switch away some of their US dollar holdings to having greater exposure to the euro. Let's hope that they have bought credit protection on their holdings of southern European sovereign debt.




EZA  iShares MSCI South Africa Index  

Also discussed here recently were the growing negative divergences for EZA which tracks South African equities.
The actual targets suggested have been realized and I have highlighted the last three sessions which is a textbook example of an evening star candlestick pattern.
Further downside is to be expected.




IAI  iShares Dow Jones US Broker-Dealers  

IAI was also a feature sector fund last week and again the bear flag formation is in evidence.
On a related matter the Senate/GS hearing provided fascinating television yesterday and showed that the company, which is undoubtedly staffed by some of the brightest people on the planet, just cannot help itself from being predatory.
The argument that Goldman always puts its customers' interest first was made to look laughable by the evidence presented. Having said that I shall repeat something from my recent blog on the company.

For the so called "sophisticated investors" (a misnomer to be sure - but their hubris will promulgate that self delusion), who are the clients of Goldman, the intense focus that has now been brought to bear on the company will only underline and reinforce their conviction that it is best to be with the most ruthless predator in the shark infested eco-system known as Wall Street.

TBT  Ultra Short Lehman 20 Plus ProShares  

Sometimes it's important to know when to step aside and readers may recall that I discussed the chart for yields on the US 10 year Treasury. I said that the Ichimoku charts were send a confusing message and that it was a good time to stay on the sidelines - anticipating that there might be a flight to safety issue.

TBT which moves in line with yields on the long end of the Treasury spectrum shows that the advice to step aside was only partly right - it would have been better to have been short TBT or long the IEF fund - but at least going short Treasuries - which some highly respected analysts were claiming was the no-brainer trade of the year - was avoided.




XLP  Consumer Staples Select Sector SPDR  

XLP dropped far more than XLY yesterday breaking key trend-line support and I have marked where this sector fund which represents consumer staples may be headed.
As part of a book which I am currently writing on inter-market technical analysis I have examined the manner in which many patterns/correlations are breaking down in the new normal. XLP is usually considered to be a more defensive play than XLY - which is for consumer discretionary stocks - but the greater vulnerability of the staples now reflects the growing chasm between those who have had a good recession - the professional classes who have plenty of discretionary income - and those who have lost homes, jobs and are no longer buying branded staples but generics and at a reduced level.

Credentials and the imperious mindset

Here is a proposed definition of the growing constituency in a modern technocracy which suffers from the greatest hubris and which is, at the same time, the greatest menace:

Those who are so deluded by the gravity of their credentials that they have an imperious opinion about every complex problem facing the world that is confidently held, intellectually flawed, elitist and dangerously wrong.

Just a few candidates to put on the list (in no particular order):

• Lawrence Summers
  
• Robert Rubin
  
• Alan Greenspan
  
• Lloyd Blankfein
  
• Bob Diamond
  
• Jim O'Neill
  
• Ed Balls
  
• Peter Mandelson
  
• Harriet Harman
  
• Oliver Letwin
  
• Ken Clarke
  

Suggestions for additions would be welcome.

Conflicts of interest and the myth of Chinese walls

I have just finished reading The Big Short by Michael Lewis. In what is a very good account of the complete amorality of the practices of many on Wall Street the most telling few sentences of the book for me came in a footnote on page 205

Wall Street firms like to say they build Chinese walls to keep information about customer trading from leaking to their own proprietary traders. Vincent Daniel of Front Point Partners offered the most most succinct response to this pretense: "When I hear "Chinese wall", I think, You're a fucking liar."

How many more Goldman e-mail leaks are there to come?

The only thing to add to this piece from the Observer newspaper is that while many who have taken the time to read around the story will not find this at all shocking, those who are only casually acquainted with Goldman's antics will find this repugnant

The beleaguered Wall Street bank Goldman Sachs boasted that it was making tens of millions of dollars of profits daily by betting against its own clients' investments, according to internal emails released yesterday by a US senator.

The annual report of the bank, which is currently facing fraud charges in the US, denied that it had generated enormous revenues by wagering on the US housing crisis. Yet an email apparently from chief executive Lloyd Blankfein to his colleagues says: "Of course we didn't dodge the mortgage mess. We lost money, then we made more than we lost because of 'shorts' [bets that the market would get even worse]."

The damning material from the senate's permanent subcommittee on investigations, which is reviewing the role of Wall Street banks in the financial crisis, was posted on the website of its chairman, Senator Carl Levin. It will be used in what promises to be an incendiary public hearing on Tuesday when Blankfein is scheduled to testify in front of the subcommittee.

In a statement, Goldman stood by earlier claims that it never made significant profits out of the housing market and said that the emails proved nothing.

To add to the potential fallout for the bank the UK's FSA are getting in on the act as well according to this article from Sky's website. Sky's City Editor opines as follows:

"If the knives were out for Goldman Sachs before today, they're now hovering perilously close to the Wall Street bank's throat - and Adair Turner, chairman of the Financial Services Authority, is likely to be paying particularly close interest."

Also cited in the article are comments from Lucas van Praag, the spin doctor for Goldman Sachs, who is quoted as saying that the Senate panel had "cherry-picked" the most negative e-mails from millions submitted. Question is of course, to change the metaphor slightly, have all of the "rotten apple" e-mails been revealed yet?

As commented here before the leaking of such documents is not helpful to the public persona of Goldman, but unless the SEC and US senators have more damning evidence against the firm the antipathy towards the firm is likely to recede in the public imagination as the media spotlight moves back to more important issues involving the sex lives of celebrities and the Punch and Judy show of daily politics.

The Chinese yuan and leveling the playing field

Just how big a problem is the under-valuation of the Chinese yuan?

There is an article written by Peter Schiff which seems to reflect a growing consensus - even though he is part of the maverick fringe - amongst US policy strategists that this is right at the top of the list of structural problems facing the global economy.

However I would like to add a couple of dissenting observations, as I believe the RMB/USD issue is largely a red herring which can only confound the belief that the US - and other very indebted nations - will have to export their way out of their current malaises with products and services other than relying, as they have in the past, on their financial engineering skills.

The best export that the US (and UK for that matter) have come up with since the 1980's is a casino based financial system which is only tangentially connected to the real economy. The return on capital of companies like JPM, GS, Barclays etc far exceeds the equivalents of any new manufacturing companies that would be the beneficiaries if the renminbi was allowed to appreciate against the US dollar.

The Chinese may whinge about the state of the public finances in the US and the mismanagement of budgets but where else are they going to invest their massive surpluses other than in the US Treasury/government agency market?

They have been burned on investments in the Eurozone (and almost certainly will get even more so), and there is only so much they can plough into the Canadian/Australian economies; moreover the hugely indebted Japanese economy could well be the next volcano to erupt.

The new mantra emanating following a series of epiphany moments apparently experienced by politicians in the US, UK and the Club Med countries of Europe is that they all have to adjust their economic policies so that they can export their way back to prosperity.

Not all countries can succeed from boosting their exports and rebuilding their capital reserves - it has some of the qualities of a zero sum game. Furthermore the idea of rampant consumerism from the BRIC nations would be incredibly onerous on the global supply of resources, clean water and air we can all breathe.
Even more poignantly it will lead to the kind of cost push inflation that will make the debt burdens of the "advanced" economies totally unsustainable.

The current focus on requiring China to revalue its currency in order to solve all of the global systemic problems reminds of the famous saying - "For every complex problem, there is an answer that is clear, simple--and wrong."

Has Goldman Sachs suffered reputation damage from the SEC charges?

The simple answer is no. For the so called "sophisticated investors" (a misnomer to be sure - but their hubris will promulgate that self delusion), who are the clients of Goldman, the intense focus that has now been brought to bear on the company will only underline and reinforce their conviction that it is best to be with the most ruthless predator in the shark infested eco-system known as Wall Street.

Peaceful ashes

As someone who lives about 20 miles from Heathrow Airport the last 48 hours have been unusually tranquil

Goldman's white knight

Maybe Mr Buffet, just as he had to with Salomon Bros, will be the white knight who rides to the rescue after Blankfein gets his platinum parachute.

A Pyrrhic victory for the SEC in its charges against Goldman Sachs?

Henry Blodget has an interesting take on why the SEC decided to move against Goldman Sachs yesterday, apparently without giving the firm any prior notice of its intention, and on a Friday during market hours when there would undoubtedly be a risk of severe market turbulence.

In this posting he suggests that the move was designed to distract from some even more potentially troublesome news which the SEC disclosed yesterday as well.

To quote from Blodget's piece

Yesterday, amid the Goldman fraud outrage, the results of another investigation into the SEC's failure to spot Allen Stanford's ponzi scheme were published. They were devastating:

The Securities and Exchange Commission suspected Texas financier R. Allen Stanford of running a Ponzi scheme as early as 1997 but took more than a decade to pursue him seriously, according to a report further tarring the agency that missed Bernard Madoff's huge fraud.

The report by the SEC's inspector general says SEC examiners concluded four times between 1997 and 2004 that Mr. Stanford's businesses were fraudulent, but each time decided not to go further. It singles out the former head of the SEC's enforcement office in Fort Worth, Texas, accusing him of repeatedly quashing Stanford probes and then trying to represent Mr. Stanford as a lawyer in private practice.

The former SEC official, Spencer Barasch, is now a partner at law firm Andrews Kurth LLP. He couldn't be reached for comment, but Andrews Kurth managing partner Bob Jewell said the firm believes Mr. Barasch acted properly. The inspector general referred Mr. Barasch for possible disbarment from practicing law.

That sounds bad. Very bad. If the SEC hadn't charged Goldman with fraud yesterday morning, THAT story would have dominated the day's headlines. As it is, the story got nary a mention.

While it is certainly true that the SEC's failure to address the blatant examples of Stanford's Ponzi scheming, and, of course, the numerous documented allegations about Madoff, is indicative of a watch dog that doesn't even know how to bark, there is a danger that the SEC may have opened an even bigger can of worms with the GS charges.

Perhaps it will all be settled with a large fine for the folks at Goldman and allow the Administration to look tough, but there is a danger that - just to take one example - UK taxpayers who, owing to the massive ineptitude of Royal Bank of Scotland which allegedly lost about $800 million on the deal that the SEC has drawn attention to, may be encouraged to explore a class action lawsuit.

Moreover there could be plenty of other deals in which the taxpayers of other jurisdictions ended up as on the wrong side of deals with the characters discussed in Micheal Lewis' well written book on the winners in the CDO fiasco.

In its haste to bury bad news with a distraction, the SEC could end up with a Pyrrhic victory.

Emerging Asian market currencies about to be revalued?

While the S&P 500 seems no longer to have a reverse gear, Asian markets fell back in trading on Friday (April 16th) as concerns are mounting about the growing threat of inflation, and signs of speculative excesses in Chindia.

Somewhat overlooked in the last 24 hours was the decision by the Singaporean government to revalue its dollar against the USD. The graphic above shows on the right hand side the recent drop of the US currency out of a fairly well "managed" range against the Singaporean dollar. A plausible reason for this decision to revalue by the authorities, which is equally applicable to all fast growing economies which consume large amounts of US dollar denominated commodities, is the evidence of cost inflation arising from having a pegged exchange rate to the US dollar.

I do not see this as so pivotal for the Japanese market which is a more mature, assembly based economy, and because of its debt/GDP dynamics there is a better case for policy based yen weakness, which is supported by the technical patterns as well.

Risk on gauge getting close to peak - if not already there

From a longer term macro perspective I do believe that there is too much risk appetite at present and one of the gauges of that is AUD/CHF which is now very close to where it was before the July 2007 meltdown in the FX carry trade began.
Recent candlestick formations on the weekly chart are, I believe, alerting an imminent inflection point on this cross rate.

Ancient proverb

Those who know, do not speak. Those who speak, do not know.
Lao Tzu