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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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  • COMING WEEK MARKET MOVERS: EARNINGS, ECONOMIC REALITIES, OVERRIDING STIMULUS OPTIMISM?

    The top 10 likely market movers to watch this week- a strategy guide for the coming week

    Last week markets remained within their tight trading ranges of the past month, the only difference being that they pulled back towards the lower end of that range, as exemplified by the bellwether S&P 500's over 2% drop.

    While it's possible that last week's drop was just another gyration within that trading range, here are reasons we believe that next week is more likely to bring a more extended pullback.

    1. Q3 EARNINGS SEASON: CATALYST FOR A PULLBACK?

    As noted in our review of last week's top market movers, PRIOR WEEK MARKET MOVERS: Q3 EARNINGS, DATA, OVERCOMING CENTRAL BANK MANIPULATION? (see here), the big take-away lesson was that a poor Q3 earnings season may be what ends the prevailing notion that risk assets can continue to rise despite:

    • Global growth slowing
    • An increasingly poorer Western consumer that has been the foundation of both developed world and BRIC export economies
    • Potentially catastrophic threats to the largest consumer economies from the EU solvency crisis and US fiscal cliff

    Of course, all of the above have been with us for some time and markets have still either continued higher or held their ground. The only big change last week was that Q3 earnings season began, and thus far indeed looks like it may be the worst in years. Until last week, bulls waved off these concerns by saying that the weaker season was already anticipated and hence priced in.

    Last week' ~2% drop in US indices suggests that's not the case. However the first week of earnings season is relatively light.

    Earnings season is most influential on markets in its second and third week.

    This second week is the first 'big' week for earnings season, with hundreds of firms reporting and a huge chunk of the big names that tend to get attention and move markets, as detailed in the above mentioned post. If these announcements continue the downbeat tone of last week, and markets continue to pull back without the help of major bearish news elsewhere, then Q3 earnings may prove to be the final evidence that the disconnect between rising asset prices and deteriorating economic fundamentals may be over, regardless of the current money printing from the Fed, ECB, BoJ, PBoC, etc.

    Note that we must watch more next week than just bottom line earning beats or misses. Markets will also be watching:

    • Future guidance for Q4 2012 and beyond: Some, like Citi's Jason Shoup, feel these are still too optimistic, thus leaving us vulnerable to downward revisions
    • Top line revenues: As costs have already been pared, sales growth will be key to growing future earnings.
    2-5. EU EVENTS

    The EU has remained relatively quiet for weeks as an actual market mover (though it continues to produce headlines and drama). However there are simply too many sources of market crises for that to continue. In the past week's we've repeatedly reminded readers of reports that Washington wants quiet on the EU crisis front until after the elections, and it appears that the EU is doing its utmost to comply, despite:

    Greece seeking additional cash that by all logic it doesn't deserve because it has shown few signs of good faith in meeting its bailout agreements, and even fewer signs that it might actually repay its current debts, never mind additional ones. Greece will run out of cash within the month without another handout.

    Spain showing every sign that it's going the same way as Greece (ongoing bank runs, political instability, budgets based on unrealistically optimistic growth projections, etc)

    2. EU Summit

    Per the recent European Finance Ministers meeting, Greece may well get its cash anyway, be it due to Washington's request for quiet or simply the belief that the resulting contagion risk is too high and would cost far more than the 'loan'/handout to Greece. Few expect any meaningful action on Spain, which is avoiding any moves on a bailout until after October 21 regional elections, and in general is trying to avoid a bailout with conditions that would prove politically unpopular, like tax increases, spending cuts, or other steps needed for repaying its debts in a timely manner.

    3-4. French, Spain Bond Auctions, Other Events

    Spain has a key auction of benchmark 10 year bonds, and France also has a bond sale this week. Thus the ECB typically makes sure all looks well, so any problem with spiking yields or weak demand can make markets nervous.

    In addition to Spain's bond auction, Spain also has regional elections in Catalonia and Galicia, and there's the threat of a credit ratings review from Moody's that could push Spanish bonds into the junk category. Last week's downgrade was seen as bullish, because supposedly it moved Spain closer to a bailout. However that assumes Spain will submit to EU conditions before doubts of its solvency bring yet another market crisis. We suspect that a market scare is more likely than a smooth transition to bailout, particularly once US elections have passed.

    France also has a bond sale this week. France has remained off the radar thus far, but few expect it to remain so. One bad auction is all it takes to get markets focused on France's worrisome data and puzzling policies to improve its debt and growth situation.

    5. UK Events

    In addition to UK inflation, jobs, and consumer spending data, the big UK event this week is the BoE meeting minutes release, because it could show if the BoE is moving closer to following the Fed, ECB, BoJ, PBoC, and others into easing.

    6. US RETAIL SALES

    In addition to Q3 earnings, the big event for the US will be retail sales, which will either confirm the latest improved jobs figures or refute them. In the end, the significance of improving jobs is improving spending, given that US GDP (and thus job growth) depends mostly on improving consumer spending.

    7-8. CHINA, AUSTRALIA DATA, SIGNS OF MORE EASING

    There 's a batch of data due from China, including September trade balance numbers, consumer and producer prices, industrial production, retail sales, and 3Q GDP. If these worsen, markets could either react negatively, or, as is happening more frequently in these times of stimulus being the last hope for bulls, positively if the data is bad enough to raise hopes for more stimulus. Recent comments from PBoC Governor Zhou have fed hopes that more easing is coming, and that's kept Chinese markets in relatively good shape, and also supported the AUD, given the close link between Aussie and Chinese GDP.

    The RBA will release its latest meeting minutes, and these too could move markets if they yield hints about whether more easing is coming or not.

    9. TECHNICAL WEAKNESS COULD BECOME SELF-FULFILLING

    Many have noted that the S&P 500 is dangerously close to its 50-day moving average, risking a cross below it (aka an 'iron cross or 'death cross') that sends a strong technical signal of further downside ahead. In the absence of positive news, such widely followed technical signals can become self-fulfilling prophecies.

    10. OTHER CALENDAR EVENTS

    Other top calendar events not mentioned above include the following:

    • Tuesday: German ZEW economic sentiment
    • Thursday: US Philly Fed Mfg Index
    • Friday: US Existing Home Sales

    See any good economic calendar for further details

    PARTING THOUGHTS: OBVIOUS PROTECTION IN UNCERTAIN TIMES

    While the coming week could play out in a number of ways, what is virtually certain in the longer term is that the leading central banks remain committed to printing money, even if their currencies fall and drag down the value of anything denominated in them.

    That means if you're based in USD, EUR, JPY and other currencies subject to central banks in easing mode, you need to start increasing your exposure to more responsibly managed currencies or assets linked to them.

    Until recently, most people have had a hard time finding solutions to this need for currency diversification. Most forex guides focus on methods that are too demanding and risky for mainstream investors, and most foreign investing guides focus on the fundamentals of specific assets without considering the quality of the currency to which they're linked.

    I've got a new book out full of solutions. It's the only forex book I know of that's written for those seeking safer, simpler ways to do that than generally found in forex or international investing guides.

    So consider the book, The Sensible Guide To Forex: Safer, Smarter Ways To Survive and Prosper From The Start (Wiley & Sons, 2012).

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Oct 13 10:19 PM | Link | Comment!
  • COMING WEEK'S 4 TOP MARKET MOVERS, FRIDAY’S BIG LESSONS

    A key reminder from Friday for the coming week

    Here's a quick rundown of the likely market movers for the coming week, and a very important lesson from Friday's price action.

    1. Delayed Reaction To Us Jobs Report

    While its understood that Asian markets won't have have a chance to react to the US jobs reports until Monday, at times the weekend produces a new take on the Friday reports in Europe and the US too.

    Given the potential influence on the US elections, expect to hear ongoing debate on whether the better than expected unemployment rate was a real or temporary improvement.

    Preliminary evidence suggests much of the improvement was the result of a bump in temporary and part-time jobs rather than in 'real' jobs that provide both steadier incomes and benefits.

    On the other hand, pro-Obama commentators have noted that the pickup in car sales in September implies that the improvement in jobs is real. I've a few problems with that idea.

    1. The past month's improvement was not huge, and remains within the upper range of monthly results for 2012, as shown below.

    (click to enlarge)

    02 oct 06 2219

    Perhaps the most compelling evidence against this month's figures indicating a material turnaround in employment comes from those who should know best, the US Federal Reserve. It's dramatic, unlimited new QE 3 suggests that the central bank remains pessimistic about the US employment situation.

    It's worth noting that while a good jobs report typically is enough to spark a rally, US markets closed essentially flat, because the optimism was negated by a WSJ report that "European Central Bank executive board member, Joerg Asmussen, said it isn't certain that Greece would receive an aid payment in November."

    This leads us to our next likely market mover to watch next week.

    2. Speculation On Spain, Greece

    One the one hand there are plenty of reasons to be concerned about near term volatility from EU crisis issues.

    -Spain is unlikely to submit to EU conditions until a crisis forces the issue. It had hoped that its recent budget proposal would satisfy the EU and prevent it from demanding more austerity. However the budget appears to be based on growth assumptions that are far too optimistic and have undermined the budget's credibility with the EU.

    -Greece simply isn't holding to its agreements and wants cash anyway. It claims it will be insolvent by November (and could drag the EU and beyond down with it) if the EU doesn't pay up.

    On the other hand, Per a recent Reuters report, Washington wants quiet in the EU until after the November 6th elections, and EU forbearance with Greek fiscal misbehavior thus far suggests that Obama will probably get it.

    However as we note above, that doesn't mean we can rule out EU drama as a market driver, even if we're likely to avoid a crisis in the coming month. As we saw Friday, it took nothing more than a comment from a senior EU official to reverse what would have been a rally in US markets Friday.

    3. Speculation About US Earnings Season & Reaction To Early Announcements

    Recent pessimism has lead to lowered guidance, though these may be just part of the game we've seen in the past, when these low-balled estimates are then beaten and the 'surprise' provides an excuse for a rally. US earnings season officially kicks off with Alcoa on Tuesday October 9th. Here's a list of the top names announcing next week.

    Tuesday: AA, YUM

    Wednesday: COST

    Friday: WFC, JPM

    Other Scheduled Calendar Events

    Tuesday

    EU: ECB head Draghi speaks, ECOFIN MEETINGS

    Thursday

    G7 meetings

    Friday

    US PPI, UoM Consumer sentiment

    Saturday

    China trade balance

    Conclusions

    We want to keep this post short, so just a few brief conclusions to take into the coming week.

    Don't Forget the EU

    Again, the big lesson from the prior week appears to be Friday's big reminder to us all: that the current EU quiet is deceiving. Just one comment was able to negate a seemingly very positive result from the monthly US jobs report, one of the most important reports of the month.

    If Your Assets Are Mostly in USD, EUR, or JPY….

    For USD based investors, we got another important reminder on Thursday in an article from Reuters, China mounts challenge to dollar's hegemony, about the consequences of Fed policy and the importance of diversifying out of USD denominated assets if too much of your wealth is denominated in or linked to it.

    For those based in Euros, the situation in the EU, and the ECB's responses to it (print Euros like crazy, to buy dubious GIIPS bonds, etc) should be reason enough to be concerned that in the best case scenario, the Euro's long term down trend is likely to continue for the foreseeable future.

    While on the topic, what discussion of currencies being debased by unprecedented money printing would be complete without mentioning the JPY? Winner of the award for the most important (and disturbing) article on the Yen in recent weeks goes to Wolf Richter, who recently wrote about Japan's quiet admission that it too may well default on its debt when the need arises. See here for the full post.

    Everyone accepts the need to diversify by asset and sector type, yet few take the needed steps to diversify currency exposure. Yet one can do so without excessive risk or effort.

    Today everyone needs to diversify their holdings by currency just as they do by asset and sector type. See here for the best guide to show mainstream lay investors safer, simpler ways to do that than generally available from forex trading or international investing advisors. It's suitable for both beginners and experienced investors. There's even a free no obligation course available to help you better assimilate the book's lessons, courtesy of Caesartrade.com. See here for details.

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Oct 06 6:19 PM | Link | Comment!
  • PRIOR WEEK MARKET MOVERS: IT'S WASHINGTON, NOT THE EU, THAT REALLY COUNTS-[Uncut Version]

    A weekly global financial markets review and analysis for traders of all global markets, stocks, forex, commodities, etc., with special attention to the growing threat of currency devaluation and ways to cope with it

    If we look only at how markets moved with the big news items, here are the prior week's top market movers.

    1. The Spain Thing Was The Main Thing

    The biggest concern this past week was whether Spain would be able to secure a bailout before it once again threatened to default and spark a new EU and global crisis.

    Markets fretted about Spain Monday through Wednesday, and rebounded on Thursday's much anticipated Spanish budget release, which led investors to believe Spain will do what's necessary to get its bailout and so at least defer a Spanish default and market crisis.

    However by Friday many analysts were already pointing out that the budget was based on unrealistically optimistic assumptions that Spain's GDP will only decline by 0.5% in 2013.

    In other words, Spain's budget proposal is just another deception, and if that conclusion becomes the consensus option, we're right back where we were at the start of the week - with markets pressured by rising risk of a new EU crisis (again, probably unavoidable as it's a prerequisite needed to force a deal).

    Thus we expect to see more pain from Spain in the weeks ahead until we first hit a crisis (size and duration unknown) that forces a deal). As we discuss below, however, a deal is expected, at least one that keeps things calm through early November. President Obama insists on it.

    EU Vs. Spain In Game Of Chicken Scaring Markets

    The big worry is that Europe's fourth largest economy might ultimately not accept the EU bailout, or do so only after other unintended damage is done. Although it probably will, Spain and the EU's ongoing game of chicken risks crashing markets because market may anticipate that Spain won't yield until the situation reaches crisis levels and Spain is at risk of default.

    Why the standoff?

    The Spanish government is torn between conflicting demands of:

    • The EU for more austerity measures to cut its deficit. Without these, there will be no EU aid, which Spain must have to avoid insolvency for both the government and its banking system. Thus far austerity measures have only made things worse for the GIIPS, but austerity remains the price for further aid.
    • Popular and Political Opposition: Spain's voters have seen nothing but suffering from the past 3 rounds of austerity in 9 months, and fear of another one has brought unrest and opposition that could bring new elections. Meanwhile, Spanish leaders fear not only the wrath of voters, but also the scrutiny of Troika auditors, who are likely to find untold amounts of hidden debt in Spain's notoriously cooked books.

    Thus, in theory, there remains a real chance that Spain and the EU might not reach a bailout deal before markets start to dive on fear of a Spain default.

    The Balance of Bargaining Power: Spain Vs. The EU

    It's not clear how this will end, at least on a superficial level.

    • On the one hand, there's no question that Spain needs the bailout. The ECB is the only real buyer for its bonds, and unless Spain cooperates, the ECB could simply stop buying them and consign Spain to default. The EU's biggest ally may well be Spanish depositors, who continue to withdraw funds from Spanish banks and keep up pressure for a deal before Spain's banks are bled dry by their own depositors.
    • On the other, the default of the EU's 4th largest economy could crash the EU and probably global markets as well, so the EU cannot simply dictate terms, because at some point Spain can credibly threaten to drag the world down with it.

    If you want proof of how much the EU wants to avoid any default risk that could spark a contagion of sovereign and bank insolvencies, look how the EU has yet to enforce bailout commitments with Greece. If Europe can't accept the consequences of a Greek default, how much more so it fears a much larger Spanish default. Indeed, according to Reuters, two German magazines have reported that despite its noncompliance with prior aid agreements and lack of progress in making reforms, Greece will in fact get the next tranche of 31 bln euros before the next Eurogroup finance ministers meeting on October 8th.

    Per one anonymous senior EU official, the fear of a domino effect in the EZ is too great to not release the funds.

    However, if you accept this reason, then the bailouts must keep coming indefinitely, and the agreements on which they're based are unenforceable.

    It's hard to see the funding nations accepting this situation of being obligated to endless bailouts and money printing. So what's really happening?

    2. The Real Top Market Mover Coming From Washington: US Request To Keep EU Quiet

    As I wrote last week, sometimes the biggest market mover is that which prevents what would have been dramatic events from happening.

    Washington To Brussels: Keep Quiet

    On the surface, the EU's reluctance to get tough with Greece is surprising. Its default is not considered a fatal risk, and so it makes sense that the EU set an example with Greece in order to encourage compliance from the rest of the bailout bunch. Otherwise, EU credibility is shot with both debtor nations and, more dangerously, global financial markets. If the EU can't enforce reform agreements, how can it survive?

    The EU is creating a classic moral hazard by tolerating Greece's non-compliance.

    So why does the EU risk moral hazard and let Greece flout EU agreements?

    The only good explanation for this behavior is the one I gave in last week's post, JUST 2 THINGS REALLY MATTER THIS WEEK-BOTH FROM WASHINGTON: that the Obama administration has kindly requested that the EU maintain quiet until after the US elections. A crisis and market plunge could be fatal for Obama's reelection chances.

    The big take away point is that for all the EU drama, Europe's leadership will do its utmost to see that none of it gets serious enough to rattle markets until after early November. This theory explains the EU's indulgence of Greek failures better than anything else.

    More importantly, it also suggests the rest of the GIIPS, including Spain and Italy, will get what's needed to keep markets calm. So even Europhobes like me can be a bit calmer in the coming weeks.

    Granted, that could get expensive for the EU, though its leadership seems to think the investment is worthwhile.

    The implied payoff is that a grateful reelected President Obama will graciously volunteer US taxpayers to help continue funding the failing currency union.

    Even if we accept that the EU will do all it can to keep a lid on things until after the US elections, that's no guarantee that Spain can be stabilized. For example:

    • There's risk of a no confidence vote in Spain bringing new elections and delays to any bailout scheme
    • If secessionists in the Catalonia region take control (a possibility), we could see a standoff with the central government that also paralyzes Spain's ability to close a bailout deal.
    3. New China Stimulus

    The other big market mover was speculation about and the announcement of a new $28.5 bln China stimulus program. As usual, markets ignored the fundamentally bad news that China must resort to stimulus, and instead investors bid risk assets higher in anticipation of a short term rally.

    The PBoC became the 4th major central bank in four weeks to announce new liquidity injections. While the prior three from the ECB, Fed, and BoJ have yet to even produce a sustained rally, the initial reaction to China's move was positive. Combined with the Spain budget announcement, the new, relatively modest (QE 2 was $600 bln) China stimulus sparked the first broad based rally in 12 sessions.

    4. Other

    There were a few other events that briefly moved markets.

    • German Ifo business confidence survey missed expectations
    • Heavy equipment maker Catapillar's earnings miss was seen as a negative sign for the sector

    Data was otherwise mixed and of no major influence

    Lessons & Ramifications: Dealing With Money Printing Is The Key Theme

    We expect Washington's "maintain quiet" to continue to be the big stealth market mover in the coming weeks, as it will keep an otherwise volatile EU situation from scaring markets. So short term traders may use the occasional scary headlines about imminent default s as opportunities for establishing long positions that can be closed when the moment of reckoning is deferred and markets bounce in relief.

    As for longer term traders and investors….

    So what do you do? Where do you run? Where do you hide?

    It's not the time to go long risk assets. A combination of slowing global growth and pricey risk asset markets (still pumped up from correctly anticipated stimulus over the past months) suggests that this is not the time to take new long positions in risk asses.

    But it's too early to short them, given that key global indices have signaled any technical breakdown, and once stimulus programs get going they could inflate asset prices higher.

    Gold has momentum, but only another 5% move higher brings it back to all time highs and the QE news driving it is already out. We'd reconsider gold on a breakout past historical highs or a retreat back to multi-month support of 1560.

    Yields on classic safe havens like AAA bonds are low.

    A look at the charts for the EURUSD and USD index show neither currency presents a tempting technical picture, with both in long term down trends. Moreover, both currencies have deep fundamental problems:

    The EUR: At best it's due for a period of money printing that will likely ultimately devalue it. At worst the monetary union has genuine existential threats and could break up.

    The USD: Also is due for a prolonged period of pressure from unlimited monetary expansion, and also has the coming fiscal cliff issues (likely to be deferred yet again with resulting higher US debt and money printing - 2 long term factors eroding the USD's value).

    There's no shortage of speculation and free advice online about what markets may do in the coming weeks and beyond.

    So I'll focus for now on doing what no one else is doing: reminding everyone to avoid the most common, least mentioned investor mistake: failing to hedge their currency risk.

    Just like any prudent investor diversifies their holdings by sector and asset class, they must also diversify their currency exposure to avoid the likely loss of purchasing power to come from what's becoming unlimited money printing.

    Everyone's Currency Risk Dilemma: Can't Live With Forex, Can't Live Without It

    With most leading central banks either actively expanding their money supply or preparing to do so, they are likely to end up devaluing their respective currencies. So the need for this is obvious for anyone whose wealth is mostly denominated in the USD, EUR, or JPY, the three most widely held currencies (as well as for those based in currencies of export based economies that may devalue their currencies in order to keep their exports competitive.

    While forex markets may seem like the obvious address, the usual forex trading methods are often too risky and demanding for most people. Much of the mainstream financial media rejects forex altogether for this reason.

    So on one hand everyone needs to diversify currency exposure, but on the other the most commonly known forex trading methods aren't right for most people. Per CFTC reports, about 70% of traders aren't profitable.

    It doesn't have to be that way. Forex is far too valuable a baby to toss out with the bathwater based on the wrong information and methods.

    There Are Solutions

    Fortunately, whether you're a trader or long term investor with no interest in trading, there are numerous safer, simpler ways to get this must-have diversification without excessive risk or time commitments. Seehere for details on the only forex book written for mainstream investors and risk averse traders, and here for more info on a free course based on the book.

    One Example of A Safe, Simple Approach for Non-Traders

    Here's one brief example of a relatively simple, low risk approach for those not even interested in trading currencies. If you have cash you don't need in the coming years, seek solid Canadian, Australian, and Norwegian dividend paying stocks. They'll provide not only steady income but do so in currencies likely to hold their value or appreciate versus most other major currencies. Unlike other nations with solid balance sheets (like Switzerland) they aren't actively trying to drive their currencies lower. I get into this topic in greater depth in the book.

    Of course plenty of advisors recommend foreign dividend stocks. However few ever consider the critical currency component, which can turn a winner into a loser or vice versa.

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.

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    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Sep 30 5:32 AM | Link | Comment!
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