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Julian Marchese
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Julian Marchese is an active Global Macro Trader that trades in stock, options, futures, foreign exchange, and various OTC markets. He has been trading since he was 11 years old, and has been interested in the markets from the age of 8. He has appeared on national television in Canada, on the... More
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Marchese Financial
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  • Gold: The Bullish Case

    Gold traders and investors have been extremely frustrated over the past year as the precious metal continues to trudge along in a choppy fashion. The price of gold has remained virtually unchanged since September of last year, and it begs the question, is gold offering any opportunity at these price levels?

    Where We Are Today

    With economic pressures around the globe, and an unstable financial environment over the last half-decade, investors have flocked to quality and safe-haven assets. With real interests rates below zero, investors found themselves having no choice but to allocate into gold. Recent monetary policy action by the Federal Reserve and central banks around the globe have further accentuated gold's meteoric rise (a gain of roughly 200%+ since 2005), as the fed stood by it's zero interest rate policy (ZIRP). Although extremely low interest rates should fuel purchasing in riskier assets, with current uncertain conditions, investors have preferred to keep their capital in zero-yielding assets, like gold.

    Gold now seems to have found a level of value among market participants, as the price of the metal has remained in a trading range from $1525-$1800/oz. for the past 9 months. Lingering global conditions however still warrant a bull market in gold (negative real interest rates, massive downside risks to the global economy). Given this outlook, I believe the shiny metal is offering a great opportunity for investment.

    Head-winds In The Short Run

    One factor that has been keeping gold depressed in recent times is no quantitative easing by the Federal Reserve. Quantitative easing and similar accomodative policies have been one of the main drivers of gold recently, and with no QE, there has been less demand for gold, further surpressing prices. The chart below displays the price of gold (black line) since mid-2008 (virtually since the Fed's ZIRP is in effect), with yellow highlights pointing out when QE1 and QE2 were in effect.

    (click to enlarge)

    Notice how gold outperformed during the two QE's yet underperformed (or remained flat) during times of no QE. The one exception to this observation is highlighted in pink, which was the gold's massive rise after the U.S. debt downgrade, and sharp global equity meltdowns. Should the above example hold true, if global economic conditions continue to grow worse, and further accomodative policy is needed, QE3 may start the beginning of a leg higher in the precious metal.

    On July the 11th, 2012, the much anticipated Fed minutes turned out to be a non-event, further confirming that QE3 is not in play for the short-term. This could be a negative for the price of gold in the short run.

    Bottom Line

    Gold remains a favorable investment given current global economic conditions, the federal reserves' ZIRP (negative real rates), and potential head-winds to the U.S. economy later this year, and early next year (Debt celing and fiscal cliff). Although I do see lower prices in gold for the short-term, I believe a discount would offer even better buying opportunities. I continue to be bullishly positioned in quality, through U.S. treasuries (NYSEARCA:TLT) and Gold (NYSEARCA:GLD).

    Disclosure: I am long GLD, TLT.

    Tags: GLD, Gold
    Jul 13 12:40 PM | Link | Comment!
  • World-Wide Slowdown…What's Next For Risk Assets

    The United States economy, European economy, and Asian economy are all slowing down. The United States' job picture is worsening, industrial and manufacturing output around the globe is contracting, China GDP (which is being released today at 10:00 EST) is declining (analysts are forecasting 7.7%QoY vs prev. 8.1%QoY), Europe's debt situation is far from being resolved, heavily consumed commodities including oil and copper are declining sharply…and yet U.S. stocks are holding up relatively well. Is this a market inefficiency that can be exploited, or is there a valid reason as to why equities remain firm.

    The Universal Answer: QE3

    I believe the majority of the premium we are seeing in equities is directly caused by expectations of further easing from the Federal Reserve. I personally do not see any other valid and strong reason to purchase equities at these levels, given the current economic conditions. As of writing this, the stock market has sold off roughly 1.3% since the Fed minutes yesterday, which was basically a non-event (no easing hinted). Gold has also sold off roughly the same amount, indicating traders have acknowledged the fact that it may be a while longer before any sort of QE3 is implemented.

    S&P 500 futures from Fed Minutes to present:

    Unless financial/economic conditions change and/or Fed easing is hinted at, I remain strongly bearish equity, oil, copper, gold, and long dollars and bonds.

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

    Jul 12 9:18 PM | Link | Comment!
  • What To Expect From The U.S. Economy Over The Medium Term

    Lately, U.S. economic reports have been lackluster at best, disregarding today's claims report, and Tuesday's ISM report. Join me as I go over some economic statistics and attempt to create a projection for the U.S. economy over the next couple of months, and how to best trade it.

    First let's take a look at a few basic economic indicators:

    GDP - Gross Domestic Product equals the total income of everyone in the economy or the total expenditure on the economy's goods and services. GDP includes only the value final goods and services. In other words, GDP gives us a tell as to whether the economy is growing, slowing or flat lining. This is clearly important to global macro traders as understanding where the economy is moving, or expected to move dictates sentiment in various markets. The latest release for GDP came in on April 27th, where the release was less than expected, with Advanced GDP q/q coming in at 2.2% vs. 2.6% estimates. The equity market faltered slightly when it was released but didn't sell of heavily as traders believed the drop off in GDP was simply fall out from the recent global fears. Let's take a look at GDP forecasts for the coming quarters, taken from leading economists expectations:

    As you can see, out of 72 analyst forecasts, the median forecast expects GDP to rise to 2.5% by the end of this year, and a rise to almost 3% by Q3 of 2013. Now obviously these are just forecasts and can drastically change over the coming months, but the bottom line is economists expect the U.S. economy to grow faster as the year continues on.

    Above shows GDP forecasts for the Chinese economy. It is important to watch the Chinese economy figures as they can give a great bellwether for global consumption and economic growth. Recently the Chinese economy has been hit due to a variety of reasons, but analysts expect their growth rate to remain steady to moving upwards. Once again, these figures can change drastically in the coming months.

    In summary, it appears as though analysts expect the global recovery in the United States to continue, due to a variety of reasons such as:

    -Low O/N interest rates
    -Jobs market appears to be recovering
    -Manufacturing appears to be coming back
    -Consumer confidence recovering
    -Backing by central banks and governments to prevent another liquidity crisis

    I personally believe we will see a flat to upwards movement in U.S GDP in the coming months. I believe the Federal Reserves support will limit any fears of another slowdown.

    Inflation - Inflation is a great measure on the health of an economy. Inflation is the change in prices of all goods and services purchased for consumption by urban households and is measured by the CPI index (Consumer Price Index). Typically positive but low inflation is good for an economy, rampant inflation is not good as that devalues a country's currency, and negative inflation (deflation) is not good because drops in prices cause a drop in production -> drop in demand -> economic slowdown.

    Currently the federal reserve targets an inflation rate of about 2% YoY. I believe higher inflation may be a better outcome for the economy right now as bonds are yielding extremely low rates and an increase in inflation should cause bond yields to rise. Higher inflation could be caused by the current liquidity injections the federal reserve has been implementing.

    This chart shows U.S. CPI YoY dating back to 1987. As you can see, the CPI index has been in a downwards channel, and is currently rising to the 10 year average of around 2%. The amount of money that has been injected in the U.S. financial system (and current debt problems) should cause inflation to move higher, thus causing equities to rise and bonds to fall.

    Given the support from the Federal Reserve through liquidity, I expect to see higher inflation in the coming years. I also believe an interest rate hike will be needed, most likely in 2013, as treasuries are unattractive to investors at these levels.

    The above chart is the 2 year U.S. treasury note yield. The 2 year is currently yielding .26% and is sitting at lows not seen since the 1950's. The effects of the federal reserves actions, in my opinion, should cause inflationary growth, sending notes lower and riskier assets such as U.S. equity and emerging markets higher.

    The main risks to this trade is obviously a slowdown in the U.S. economy, and a continuing crisis in Europe. However, the risk remains low as 2 year yields can't get much lower, and the U.S. equity market will be constantly supported by the federal reserve. My view is that we should see a pullback in equity soon, which should be a great opportunity to purchase risk on assets. A good hedge for now would be to purchase volatility through puts.

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

    May 03 8:06 PM | Link | Comment!
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    Jul 12, 2012
  • Medium-term bias to the downside, however we may see some sort of relief rally tomorrow or over the next couple of days.
    Jul 12, 2012
  • Everyone check out my new articles on market psychology here: http://seekingalpha.com/p/2n6f
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