Finance spur

Rates to consider: Opening

DJIA 17440.59  -127.94 

10-Yr T note  2.228 +12/32

Oil  47.39 -.79

Euro  1.1090

Yen  123.25

Beijing Stumbles as Stocks Sag Anew: by 

Chinese government is struggling to contain the collapse of a stock-market rally it helped engineer. Chinese shares suffered their biggest one-day percentage drop in over eight years on Monday. This whipped out the hundreds of billions of dollars of market value and putting an end to a three-week period of stability Beijing had achieved through stock purchases.

A spokesman for China’s top securities regulator said late Monday night that the government will increase its buying of stocks in a bid to stabilize the market.

 Implications/Comments:

What is frightening about the Chinese government right now is the lack of understanding they have on the psychology of trading.  There are a few things that need to be noted about traders:

1.       Traders value liquidity – meaning that even if the market were to falter, traders need to be able to get on or off a position quickly. 

2.       (educated) Traders understand risks when they get on a position and they will have to live with the consequences of their trade.

3.       Traders are opportunistic individuals – they will look at reports or any kind of information they can get their hands on and exploit trading opportunities.  

Now a few things need to be cleared up.  There was a surge of pseudo investors called ‘stir-fries’ that entered the market which accounted for 80% of all traders. With the Chinese government encouraging margin trading, these pseudo traders entered overly leveraged positions and increased the value of stocks that created the bubble.  Also note that even though 80% of traders are pseudo traders the other 20% still holds a great deal of power because the other 80% are leverage to the point that if the 20% are to move out of the market a margin call will be initiated and a down ward spiral will  occur.

The first reason- with the Chinese freezing trading activities traders, the notion of liquidity in the market was destroyed. Why stay in a market where the government has a clear way of manipulation the value of stocks?

Summary:  by Tom Randall

According to the article confidence in oil prices was based on four premises and if these four scenarios occur then oil prices will surge.

1.       Demand will rise: check

a.       The crash in prices should prompt a rise in demand – despite the slowdown in China, global demand has increased to 1.6 million barrels a day relative to last year’s report

2.       Spending on new oil will fall: check

a.       Lower prices means lower spending on new oil supplies and cost of drilling and pumping should decline – since October the # of rigs actively drilling for new oil around the world as declined by 42% and in 2015 oil companies have cut about $129 billion in capital expenditures

3.       Stock prices remain low: check

a.       While rebalancing of oil market is taking place, stock prices of oil companies should remain cheap, setting a stage for a strong rebound – oil majors are trading near 35 year lows, using two different methods of valuation

4.       Oil supply will drop: Uh-oh

a.       With strong demand for oil and less money for drilling and exploration, the global oil glut should diminish – the opposite has happened, OPEC production surges in 2015 amidst low oil prices.  

Implication/Comments:  #4 explained  - 2 reasons.

I think what the article failed to mention is that there are two fundamental reasons why oil supply did not drop.

1.       Each country that is in OPEC or that relies heavily on oil for its governmental spending created budgets to accommodate the surge in oil prices. The surplus created from $100.00 per barrel increased the budget of each respective country.  As a result, with the contraction of oil prices, these countries budget have a deficit in their budgets. In this case, twice the deficit $100.00 à$50.00                

a.       Pumping oil from existing oil rigs cost these countries little overhead and it is relatively ‘cheap.’ With prices down to half of what it was last year increasing their production to twice as much as the year before is logical to meet deficits created by lower oil prices.

2.       If a country was to lower its production then other suppliers will take over their market, this might eventually increase oil prices due to lower supply, but which country would lower its production and lose its revenue stream? Also, knowing that if they did it, it will be taken over by another supplier and benefit that other country in the processes and might even lose their current clients – which country would take the hit?  

a.       USA drillers are also in the same tight spot. Most of the shale drillers and other energy suppliers that were created between 2007 – 2014 borrowed their money to begin their rig/operation. They created their budget forecast to pay off lenders with a $100.00 per barrel price at a certain production level with maybe a few dollars to accommodate for risk. But it was never predicted to go decrease to as low as $50.00 per barrel, therefore budget forecasts created to pay off loans, operations and profits based on a certain production level is completely wrong and the only way to correct their forecast is to either renegotiate their loan obligation and tighten up their cost of operation or increase output to twice the amount in order to hit objectives.

July 22, 2015 

Rates to consider: current  

DJIA  17919.29 -181.12

10-YR T-note 2.317 +4/32

Oil 50.13 -.02

Euro 1.09

Yen 123.79

Posted July 16th 2015 -

Trades:

Foreign exchange rate trade is the best way to leverage this information. With an increase in rates, the US economy is showing a strong economy.

·         Either shorts the Yen and the Euros and/or long a put on USD relative to other currencies.

Now let us see if this view point will keep up amidst oil prices being depress and a risk of deflation is high.

As noted above on July 16th 2015, there would be a rally for the USD due to rate increase Janet Yellen confirmed that day coupled with positive labor reports. Both news were strong trade indicator to long USD or short the Euros and the yen.  

July 16th Euro – 1.122 – July 22nd 1.09 = .032 difference relative to USD

July 16th Yen –  123.58 – July 22nd 123.79 = .21 difference

Depending on your strategy make sure to see what impact low oil prices will be on each respective currency. Deflation is a huge threat since the FED, EU and the Japanese all have exhausted most strategies to combat deflation such as:

Lowering the interest rate (rates are near zero %, so this is not a tool the FED, EU and Japanese bank are able to use)

Buying bonds with low interest rates effectively increase monetary circulation therefore devalues the currency (all three governments mentioned above have participated  stimulus packages and it would be a folly if they continue on doing so, since inflation is very low even with huge bond buy backs)

Obama Girds for Battle on Iran Deal:

Summary:

President Barrack Obama is in it for the win. He is opposing the Republican Party and promised to veto any law to keep the sanctions in place against Iran.

 Implications/Comments:

The Republican Party is opposed to the deal that will lift the sanctions against Iran, citing that the deal currently in place is a security concern.  (The real reason the Republican Party is opposed to lifting the sanction is because there would be an increase in oil supply in the market – this will result in further pull of oil prices down).

 Summary 

Fed Chairman Janet Yellen that turbulence in Greece, China and elsewhere overseas isn’t threatening the US economy for it to not raise rate later this year.

She indicated that it is better to raise the rates now and do it slowly than to wait and raise the rates more rapidly in the future which can lead to unforeseen complication

 Implications/Comments:

DJIA is back to 18000s and the 10-Year T-note is at 2.348%. Those rates shows a contradiction implying that the market is confused whether it is a bull or bearish market.

As noted before an increase in rates prematurely might lead to a deflation which will lead to the slowing the US economy.  

(Deflation will cause an increase in USD value which in turn will increase our imports and decrease exports. Also, investors will horde their capital till the increase and not buy bonds, because an increase in rates will lead to devaluing of bonds and treasuries.)

Trades:

Foreign exchange rate trade is the best way to leverage this information. With an increase in rates, the US economy is showing a strong economy.

·         Either shorts the Yen and the Euros and/or long a put on USD relative to other currencies.

DJIA 17760.41 +30.30      10 YR. T-note 2.415% -6/32          Oil 52.74 +4.19   Euro 1.1156         Yen 122.78

Jubilation Turns to Confusion in Greece: An agreement has been reached for a more strict austerity plan compared to the one Greece rejected a week ago. Greek citizens are confused because they were led to believe that rejecting that last austerity measure would give the Greece government leverage for a better deal. Contrary to popular beliefs they are at a more strict position.

 Published July 6th: A quick turnaround will come once the market sees that the Greek economy has a little impact to the EU market or if a negotiation takes place. Either way, the trend will last only a week or a little bit more. Trades: Go short for a few days, and catch the turnaround, still be able to catch the bearish market on the T-notes by going long and shorting the US market, then do a reversal once the technical and fundamental analysis shows otherwise.

______________________________________________________________

Greed and Speculation –

·         CNN

o   China’s stock market crash is now on its third week. Share prices in Shanghai have lost 1/3 of their value since mid-June.

o   Grandmas, cab drivers and college kids were all making bets to the market and winning. Similar to the house market bubble in 2007, many investors and pseudo investors were sucked in to make a bet in a market that they didn’t understand.

Similarities between housing crisis and the stock bubble in China.

Although similar to the housing bubble market in that investors and pseudo investors bet their fortunes on the market, one key difference between the two is the magnitude in which the Chinese stocks bubble grew and how many it affected. The accessibility of stocks to the population is the key.

Almost everyone was able to purchase stocks and create a margin account (Margin account- offered by brokerages that allows investors to borrow money to buy securities).  By offering margin accounts to investors, their leverage increases – meaning the opportunity to win or lose is doubled.

As more and more people participated in the market, the value of stocks increased and pseudo/real investors gained phenomenal amount of fortune. They tell their friends of their fortune and the cycle goes on resulting in a bubble.

Since many investors are in a margin account, a few points down on the stock market would usually require a margin call (demand by a broker that an investor deposit further cash or securities to cover possible losses). If an investor is unable to provide the required amount of funds, then the brokerage firm will sell the investor’s position at the asking price to mitigate its loses.

Now, supposed a few hundred people were wiped out at the top and the brokerage firm sold their shares. This in effect will push the stock down because the brokerage firm will increase the amount of supply to the market and therefore decrease the price of the stocks. This results in more investors being forced to a margin call to which they either put more money to their stocks or closed out their position.

The scenario mentioned above is an example of an unstable equilibrium. Where the damage will escalate if no outside force intervenes – on this case governments and governmental banks intervene to fix the unstable equilibrium.

As mentioned yesterday, the People’s Bank of China will inject an uncapped amount of capital into the market to stabilize the bubble and today the government introduced a new policy that effectively lowers interest rates. Both policies are similar to what USA implemented on 2007 to mitigate the problem.

Implication/Comments: China’s Greed and Speculation

Facts about China:

Top imports:  Import value 1.41 Trillion dollars

·         Crude Petroleum 14%

·         Integrated Circuits 7.6%

·         Iron Ore 5.3%

·         Gold 3.6%

·         Cars 2.9%

With a governmental intervention to the market through decrease in interest rate and an uncaped money supply to the market. à The Yuan will decrease in value; therefore there will be an increase in export and decrease in import. (Meaning more supply less demand for its top export/imports)

One of the biggest things that will be impacted is the energy sector. With China being the second largest consumer of energy, the slowing down of their economy will drive oil prices down.  

**Noted a few days ago that the USA’s inflation has a strong correlation between Oil prices and inflation rate. With a decrease in oil prices inflation, rate should go down and it might even do a reverse and become a deflation, which is something the government is trying to avoid.

A deflation will cause the value of the USD to increase. This is bad because it will slow down the economy. With an ever increasing value of USD, investors/consumers will hold on to their capital in hopes that their money will further gain in value. Export will decrease, because foreign countries will hesitate to buy from USA due to high prices and import will increase due to cheaper goods being available.

·         More goods bought outside of USA will decrease money circulations

Europe Sets New Deadline for Greek Deal:

Summary:

·         Eurozone leaders set Greece a Sunday deadline to come up with new and even tougher economic measures for a chance to bailed out this July 20th on its debt to the ECB

·         Greece expected they would have leverage to a new packaged deal – wrong, Germany’s government shows resentment towards Greece for their vote last Sunday.

·         Greece is hoping for a short-term financing in order to avoid default on the July 20th.

Implication/comments

Greece will try to stay in the Union for as long as possible till they cannot be stomached by the EU anymore. Short-term financing will likely occur.  à Greek news is dwarfed by China’s stock crash and the plunged in oil prices.

Explaining the rates Important rates to consider: Opening DJIA 17776.91 +93.33 10-YR T-notes 2.231 +14/32 Oil 52.33 -.2 Euro 1.1012 Yen 122.53

Names/        Current rates as of 12:12 p.m. DJIA /17,567.8 10-YR T-notes /2.22% Oil/  51.43 Euro/  1.10818 Yen /120.63

DJIA – As noted above, the DJIA opened up higher and it is now on a bearish move. The trend is mostly a reflection on China’s stock collapse. Investors fear that the collapse will affect the market in America – seeing China’s stock collapse as systematic risk or AKA un-diversifiable risk.  Leaving stocks for a more secured investment is often the best course of action. 

Government Bonds – Also, flight to quality phenomena is observed. Since there is fear in the market, investors tends to flock to high liquidity low risk investments. In this case, T-notes, bills and bonds are a safe haven for investors to put their money in. As a result, these financial vehicles mentioned above have lowered their yields to 2.22% (this might seem counter intuitive that as investors flock to the 10 year t-note, one would generally expect the rates to go up, but it is actually the opposite. As more investors go into the 10-Year T-note the yield goes down by pushing the prices up) – email me for more explanation if needed. 

China is readying to insert a huge amount of money to try to reverse the country’s worst share selloff in years.

Under the plan, china’s bank will indirectly help investors borrow to buy shares in a market that had already seen a rapid buildup in debt from margin financing.  

The market has declined by $2.4 trillion in value in three weeks.

The funds will go to China Securities Finance Corp. à this is the first time funds from the central bank will be directed to institutions other than banks.

The amount expected to be injected has no upper limit.  

The government hopes that the money injected will increase investor’s confidence toward government policies.

Implications/Comments:

China’s Yuan will decrease in value as money is pumped into the market à increase in export, decrease in imports

Hold on the foreign currency and even short the Yuan. Write calls and buy puts.  

Defiant Greeks Rebuff Europe:

·         Greece voted ‘no’ to on the austerity measures and overhauls.  (61% - no, 39% - yes)

 Geek citizen believes negotiation will take place for a better deal.

Prime Minister Tsipras promised Greece it is in a better position for bargaining and the country will not leave the EU.

 Greece expects a new round of negotiations to take place.

 Angela Merkal is in a tough position – giving in would upset her supporters, not negotiating will throw the Euro in the unknown.

Implication/Comments:

Euro will weaken against the dollar à increase in export, decrease in imports

There is a Flight to quality, the 10-year T-note went down in value to 2.33% as of 11:55 a.m. à a short on this last week would have yielded a good return.

Dow as of 11:55 a.m. is at 17,688 and continues to go on a bullish trend.

Greece still believes they will be able to negotiate with the EU and the referendum will give its government leverage for a better deal.  The American market and the EU market are in disarray. I predict that the market will keep on being Bearish for at least a week and at most one month.

A quick turnaround will come once the market sees that the Greek economy has a little impact to the EU market or if a negotiation takes place. Either way, the trend will last only a week or a little bit more.

Trades:

Summary: Greece is the first developed country to default on the International Monetary Fund. The country failed to transfer 1.55 billion Euros, the largest default in the IMF’s history. Right before the default, Prime Minister Tsipras asked for a rescue program (the third in five years) to pay off that immediate 1.55 billion Euros and the remaining 29 billion debts that is spread throughout 2015 - 2017. 

Implication/Comments:

I give Greece 69.23% voting ‘no’ this weekend. The percentage is calculated by assigning a number between one and five to each situation and it is ranked by importance; higher numbers signifies importance.  (Subjective numbers)

Facts:

·         Sryiza ministers made it clear that the government would campaign for a “no” vote.  +3

·         Although not expressed explicitly, the Greece government is likely working with the Russians à this assumption comes from the deal that took place June 19th 2015 that creates a pipeline connecting Greece and Russia through the Black Sea. (2.3Billion) project.   +2

·         The five year Greece saga has left many people emotionally and mentally drained à it is likely for the citizens of Greece to choose the easier way out and bail on responsibilities.  + 4  

·         28% unemployment à the austerity proposed will further push Greece into a recession.  +5

·         The European provides stability and predictability to Greece. -5

·         Greece’s identity as part of Europe is in jeopardy if the leave the EU. -3

·         Greek debt is at 323 billion Euros with a reported 241.71 billion Euros on GDP, and the Tradingeconomics.com reported a 177.1 debt to GDP ratio as of 2015.  +4

·         DJIA and other markets were affected slightly.  0

No vote 18/26   69.23%                                          Yes vote 8/32   30.77%

Summary: The PBOC’s effort to kick start the economy of China has backfired instead.  A parallel is drawn up between current China market and the “Black Monday” of Oct 19, 1987. Right after “Black Monday,” the Fed encouraged banks to continue to lend to one another on their usual terms, which boosted investors confidence in the central bank’s ability to clam sever market downturns.  

In contrast, PBOC’s effort to increase liquidity to encourage the money circulation was not achieved. Instead of lending to companies and stimulate growth, Chinese banks channeled their money to brokers; a more profitable lending practice. These brokers, in turn, financed investors’ stock purchases and increase the value of stocks superficially.

One year bench mark at 4.85% and deposit rate at 2%, both at a year low.

Summary: Greece shut down its banking system to prevent money from flooding out of the country for six days. This is cause by the referendum announced by Prime Minister Tsipras voting for economic terms last week , which prompted citizens of Greece to pull out their savings from Greek banks. The Referendum, is essentially giving the citizens the final say on whether to accept the creditors’ austerity condition or not.  

Implications/Comments

The vote will head towards Greece leaving the EU.  Here are the facts:

·         Sryiza ministers made it clear that the government would campaign for a “no” vote

·         Although not expressed explicitly, the Greece government is likely working with the Russians à this assumption comes from the deal that took place June 19th 2015 that creates a pipeline connecting Greece and Russia through the Black Sea. (2.3Billion) project.

·         The five year Greece saga has left many people emotionally and mentally drained à it is likely for the citizens of Greece to choose the easier way out and bail on responsibilities.

I put a 75% chance of Greece leaving the EU tomorrow. As a result, these are the possible trade opportunities.

Summary:  Brazil’s Central bank issued two economically bad news; sharply increase in inflation outlook and cutting its growth forecast. Bank predicted a contraction of 1.1% in 2015, compared with its earlier forecast of .5% decline. The current inflation forecast is 9% and it was predicted that by 2015 it would halt at 7.9%. Currently it is at 8.47%. 

Implication/Comments:

Facts about Brazil:

-->Main Exports: GDP is 2.246 Trillion Dollars

o   Iron Ore 13%

o   Crude Petro 8.4%

o   Soy Beans 7%

o   Raw Sugar 5.3%

-->Main Export Partners:

o   China 17%

o   US 11%

o   Argentina 7.2%

o   Netherlands 5.4%

What can Brazil do to correct their rampant inflation? One thing Brazil is able to do to cool off its inflation rate, is to increase their interest rate, similar to what was done in USA in 1977-1980 by Paul Volcker. It curbed the inflation rate of 9% by increasing the interest rate from around 10% to a new high of 20%. The increase did push the inflation back to normal levels, but it also pushed the US to an economic recession. Question is, is the increase in interest rate of already 13.75% to newer heights worth it to rein in inflation rate and cause a recession or is it better to explore other alternatives and risk for a better result or an even worth recession.

Investment opportunities: Since the inflation rate is increasing at such a rapid pace and the devaluing of the real is taking place. There should be an increase in supply of export from Brazil.  What trading strategies can be implemented?

Since 13% of Brazil’s 2.246 Trillion Dollars export value derives it from Iron Ore, all else equal, there should be a surge of Iron Ore in the market. à Short on the Iron Ore

Summary: Negotiation is not proceeding as smoothly as anticipated. 

Implication/Comments: 

As noted on the 23th of June, there is a negative correlation between the 10 year t-note and the rest of the market.  With today’s news, the possibly Greco-exit is still very plausible and it is scaring the market. It can be interpreted that there will be further surge on the 10-YR T notes till a deal with Greece is stabilized.

Now depending on what kind of statistics you want to employ, there are two possible outcomes for a good trade.

·         If the analysis points to Greece defaulting and leaving the EU, then a long on the 10 YR t-note and/or a short for the DJIA, S&P and NASDAQ

·         If the analysis yielded on Greece avoiding the exit and making a compromise, then a long on the market and/or short on the 10 YR T-notes