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Wretched Excess Filters Through to the Dollar

The weak US dollar does not come as a surprise to anyone who trades FX or watches the economic barometers that have been flagging trouble for a few years. The wretched excesses of the consumer, aided and securitized by the banks and nurtured by successive US governments are finally coming home to roost. George Soros said at the World Economic Forum that this is "basically the end of a 60-year period of continuing credit expansion based on the dollar as the world's reserve currency."
For a while there a perky (some say too perky) stock market was the placebo. But when the dollar started creeping lower again reality hit. The gigantic budget deficit, the US Treasury printing money, and a general slowdown in FX trading are all contributing to the lack of support. (Data from six of the world's FX committees showed average daily FX turnover down nearly 25% from Apr 2008 to Apr 2009, according to Profit & Loss Magazine.) Secret meetings among oil-producing and consuming nations to try and figure out a new reserve currency have been widely reported. The almighty dollar's dominance is under threat. But I have a trick that anyone is welcome to use in trading or hedging the dollar. With alarming regularity the dollar seems to hit its yearly lows when I am abroad. I had the deeply unpleasant experience of paying $1.80 for a euro in April 2008 in Paris (the print was at about $1.60 at the time). I am planning a trip to London early in November, so expect the dollar to be hammered down further at that point. Only to rebound when I am back in the USA.
BTW, I was way off on Phibro. It went to Occidental in the end, which is a good fit - E&P meets trading and speculation. Oxy only paid a bit more than 1X net earnings for Phibro, which I found odd. But as a source pointed out Phibro owns nothing but bums on seats. And brains, hopefully. Maybe Andy Hall is having the staff unpack?

The Duh Factor

Call me gobsmacked. The SEC has just now called for access to real-time data for OTC swaps and derivatives. The SEC said that the absence of this data "hampered its efforts to investigate potential fraud and market manipulation in OTC derivatives markets" during last year's crisis, according to Securities Industry News. Big Duh. There has been a massive gap in coverage for OTC derivatives for quite some time. Services such as Markit and Reuters were trying to close some of the gap by offering derived or calculated prices, but so many instruments were customized and one-offs that it would be impossible to get data on them. One of the ways to get better access to OTC prices and deals would be to automate them and send them through a clearing house. This was going to be one of the major foundations of new post-crisis regulation. But wait... Barney Frank, the chairman of the U.S. House of Representatives Financial Services Committee said Wednesday he does not expect Congress will require all end-users of OTC derivatives to use central clearinghouses. He said that anyone using derivatives for 'risk management' purposes should be exempt. This means no one WON'T be exempt. CFTC Chairman Gary Gensler told reporters after Wednesday's hearing: “As just about all swaps could be defined as being used for risk management purposes, we’re concerned that unintentionally the category of ‘major swap participant’ could have been narrowed so significantly, or even to a null set." Banks 1, US Government 0.  The pressure from the banks' lobbyists must have been more than Mr. Frank could handle. If anyone was in any doubt who really runs this country, doubt no more.

Prophesizing Phibro's Future

The Financial Times today clinches what many industry-watchers have foreseen: that Citi is trying to sell its oil-trading unit Phibro. It is no surprise given the clamor that arose when CEO Andy Hall's pay packet was revealed. Although a $100m bonus seems ludicrous to most people, it seems Hall deserves it. Phibro has made Citi around $2bn in profits over the last five years, using little of the bank's cash for leverage. Trading and hedging physical oil is not for the faint-hearted, nor for the inexperienced - especially in the oil price climate we have witnessed over the past two years. Hall has not lost money in over 15 years, sources tell me, which is pretty good going in any business. So, after reading some of the blogs on Hall and talking to my favorite oil biz source, here are my predictions. 1.) Trafigura or Glencore will buy Phibro. They have stacks of cash, no fear of doing business in - ahem - sensitive countries, and retain the maverick spirit that Phibro had pre-Salomon Smith Barney/Citi. OR: 2.) Andy Hall is hired by one of the above or another high-roller trading company or hedge fund. Why buy the cow when you can buy just the milk supply? Fox Business News (that paragon of quality financial markets information) said in August that Hall had already told his CT household staff to pack up for London. I have doubts that Hall would move to London, however, in the midst of the FSA's crack down on executive compensation. My bet is Geneva.

There is no 'V' in Recovery

Economist Nouriel Roubini told CNBC today that the recovery is not going to be 'V' shaped, rather a long, slow 'U' shape. He hinted that the "wall of liquidity"created by the government's stimulus package is causing a run on assets and boosting the stock market. The danger in this is that it may also be boosting food commodities and oil prices. It is clear to most interested onlookers that the massive infusion into the financial services companies gave them the opportunity to make some fast cash. What is less clear is whether the 'virtual recovery' caused by the stimulus is strong enough to weather the storm. (Fox News even suggests that there is talk of a third stimulus package.) Oil prices seem stuck at or around $70 bbl fuelled in part by an increase in consumer spending in August and in part by glowing, bullish reports from certain investment banks that seem to miraculously appear  when the prices dip. My take on consumer spending - at least in New England - is that the weather was so awful until August that no one went on vacation until then. When they did, it was sunny and gorgeous and it was a crime not to buy lobster rolls when they were so cheap. Vacations aside, there is little indication that Americans are rushing back to their profligate ways. The latest Dilenschneider Group report put it this way: "Regardless of when the downturn ends, expect the recovery to be very slow." Both Dilenschneider and Roubini are concerned that unemployment will prove to be the straw that breaks the camel's-back of the recovery. Throw in higher oil prices as investors grow increasingly exhuberant and you could see a double dip after all.

Heads I Lose Tails You Win

Looking at the financial press this week has been like trying to talk to a schizophrenic with two equally dominant personalities. The bearish side is absolutely convinced that the 50% market rally since March is about to implode, leaving Grandma even more destitute that she was a year ago. The bullish side quotes 'money on the sidelines' and V-shaped recoveries as evidence that the worst is over. The Financial Times today has a bearish article about Q3 earnings right next to a column saying that we are now in recovery from the recession. Now, as I have said, I am a terrible trader. But there is one thing I am pretty sure of having noticed it a few times in the past 30 years. That is: when a majority of brokers and traders agree on the market direction the market is sure to turn and do the opposite. And YouDevise's Trade Idea Monitor (TIM) weekly report says that total new long ideas (as a percentage of all new ideas sent this past week to investment managers in real time through TIM) increased 3.50 points to a bullish 65.55% .  (Over 50 is bullish; 50 is neutral; under 50 is bearish.)  A year ago the TIM was 66.95% - also a year ago the DJIA was at 10,831. It then plummeted over the next 6 months to around 6,500. How bullish is that? 

Hormones Versus Bonuses

Women and middle-aged men might make better traders than testorone-fueled younger men, says an article in this week's Securities Industry News. It seems the presence of too much of the male hormone leads to excessive risk-taking on the trading floor. John Coates, a research fellow at the University of Cambridge, has done a couple of studies on the subject. Coates tells Securities Industry News that having more women on the trading floor might limit market swings, as women tend to be more risk averse. (I am not so sure that being risk averse makes a good trader, though. I am pretty risk-averse and can honestly say that I am one of the worst traders I know.)  I wonder if Coates and others (the MBA students at U. Chicago and Northwestern are also looking at the role testerone plays in business) have looked at the correlation between bonuses and risk taking. Because even the most risk-averse, hormone-lite woman or middle-aged man might just make a major punt in the market if they thought they could take home a multi-million dollar bonus. However, the news that the UK is going to curtail bonuses along G20 guidelines might bode well for women and older men getting trading jobs. Today's Financial Times says that these guidelines require that a "substantial portion... such as 40-60%" of bonuses be paid over a three year period or more. This may appeal more to risk-averse traders than to the testerone-rich crowd.