May 2009


snoopytyping_800x600

With regard to the maintainance of a balance of payments, if a country wishes to import more, they must export more. If they cannot export more manufactured, semi-manufactured goods or services, then they must export common shares, bonds, and various other securities.

What happens though if the number of notes [fiat currency] is increased by one or both of the contracting [trading] partners?

The prices of the commodities and hence, the balance of payments must adjust. Assume that the US, wanting via WalMart, to import Chinese manufactured goods, refused to increase the notes in circulation. Then, either the price of US exports must drop, or the difference be made up via securities. Now, if the price of US exports drops in relation to Chinese manufactured goods, then a greater quantity of goods will be required to balance the payments. Less goods are available to sell in domestic markets.

That the US tends to produce higher value goods, with higher technology etc, you had the interesting problem of China, a developing economy, not being able to afford US production, and to lower the price might have incurred economic losses.

Increase the notes in circulation. Through this artifice, the balance of payments could be balanced. By increasing the notes in circulation, the goods held for sale, become cheaper, thus a greater volume are demanded.

Paradoxically it was China who increased their note circulation. China printed Yuan in receipt of dollars from their exporters, and purchased with the dollars, US securities. Thus the balance of payments, balanced.

Essentially China entered a credit transaction with the US, foregoing present consumption for future consumption. The products that the Chinese desired, were in point of fact dollars, foreign reserves. The Asian debacle of 1997 and the collapse of the Tiger economies was a currency collapse driven by a lack of foreign reserves against US dollar direct and indirect investments.

Thus, to purchase more dollars, the Chinese had to sell more manufactured items. Thus, drop the price of manufactured goods, or increase the money supply. The money supply was increased, and the purchase of US dollars and assets increased.

snoopytyping_800x600

“Today the Federal Reserve printed $7 billion dollars and used it to buy an equivalent amount of 7 and 10 year Treasury bonds. As I publicly asked before, if Mr. Fed can’t rig the price of an asset by buying it with printed money, why should anyone else buy it?”

10yr

The 10yr Note, is the rate that the mortgage market watches. Thus, any increase in interest rates, will be passed onto new buyers, and existing holders of a mortgage who are on a variable rate. It, means falling prices in the real estate markets.

Obviously, investors are selling the 10yr Note. Why?

The answer is not simple, and I have already started the basis of an answer via the Balance of Payments posts, which will continue.

snoopytyping_800x600

The Tobins Q-ratio, has, in the past signalled the bottom of equity bear markets. The following chart is an average of the Q-ratio.

150509121342

So while the current [as of Dec 2008] ratio = 0.62, which is higher than previous lows of 0.34, nonetheless it seemed pretty low. When however plotted as a ratio of itself, the signal is less optimistic.

Thus, before this equity bear market is over, if, the Q-ratio is the valid signal of undervaluations, and hence the time to buy, we will see the lows of 666 on the SPX breached, and new lows established.

snoopytyping_800x600

Current economics, assigns a positive credit rating on countries possessing a credit balance of payments. A country with a debit balance of payments by contrast is either unwilling, or, unable, to stabilise the value of it’s money.

The confutation of this assertion lies within Greshams Law which states; that any circulating currency consisting of both “good” and “bad” money (both forms required to be accepted at equal value under legal tender law) quickly becomes dominated by the “bad” money. This is because people spending money will hand over the “bad” coins rather than the “good” ones, keeping the “good” ones for themselves.

The second reason being the Quantity Theory of money, which states; In economics, the quantity theory of money is a theory emphasizing the positive relationship of overall prices or the nominal value of expenditures to the quantity of money. The increase in the quantity of money within the economic system can have two outcomes; increase in output or increase in prices. Theorists assert the latter, arguing that fluctuations of the money supply is more likely to cause changes in the price level as the economic system has reached it’s capacity and cannot facilitate further growth.

Taking money based on Gold [Silver] as the first example. If, imports are favoured over domestic production [for any reason] the outwards flow of money will reduce the quantity of money available for use, viz. in circulation. Thus the demand for money, remaining constant [assumption] the value will rise. This is effect the same as falling commodity prices. Falling commodity prices, encourage exports, thus, money flows back into the country.

In the second example, where a fiat currency predominates, we have a different outcome.

snoopytyping_800x600

Closed @ $32.47

ntes

snoopytyping_800x600

NTES @ $32.08 LONG for an exit tomorrow

ntes

snoopytyping_800x600

Gold jumping around a bit, but still looks reasonable to $100.00 After that [if reached] who knows…

gld

snoopytyping_800x600

Is the United States in as dire a position as is commonly claimed? Is China, ready to take it’s place at the head of the table, US hegemony washed up?

The Balance of Payments, seems to confuse, more than elucidate. It is however a simple accounting measure of international flows. Trade between countries, is at it’s base, no different than between two individuals.

The accounting equation:

Assets + Expenses = Liabilities + Equity + Income
Dr…….+…..Dr…………Cr…….+……..Cr….+…Cr

Debits [Dr] = Credits [Cr]
Thus, the export of goods involves the receipt of cash [credit] which represents a claim on on another country [debit] By definition, the Balance of payments must balance, debits must equal credits.

Removing the element of money and time for simplification: if we exchanged 10 Bushels of wheat for one barrel of oil, the Balance of Payments are equal.

Things get increasingly complicated when money, time and services, as opposed to pure commodity products are introduced. One side of the transaction is treated as a Current flow, the other side of the transaction is a Capital flow, arithmetically, Current flows = Capital Flows.

The Current account covers trade in goods and services, income and transfers. Non-mechandise items [services] are known as invisibles. All other flows are recorded in the Capital and financial account. The Capital and Financial accounts include:

*Capital Transfers
*Aquisition/disposal non-produced, non-financial assets [patents etc]

Financial Transfers
*Direct investment
*Portfolio investment
*Other investment

snoopytyping_800x600

There seems to be a general concensus amongst hindsight traders to take offence whenever they are referred to as hindsight traders, going ad hominem, an almost pure sign of the accuracy of the diagnosis. Take this rebuttal post from ChartAddict.

Blank Box™ trading a technique that I’ve developed over my career. It is very simple, as is everything that I do. Basically, it’s adding space for the next day (or days/weeks) to estimate a stock’s future anticipated time frame and move. It will help you make quick decisions on breakouts and help you “hold the line” during times of consolidation. This method works for all time frames and all stocks and markets. It also works with all technical patterns, such as neutral channels, symmetrical/ascending/descending triangles, flags, pennants, wedges, tops, bottoms, etc. I will cover long-only patterns in this article.

Some people say that technical analysis is “hindsight”, and that my blog posts are also “hindsight”. Bullshit. Those people are the dumbest box of Pet Rocks (le Duc, et. al.) that obviously have no trading foresight whatsoever. This kind of thinking also demonstrates a lack of experience and tactical strategy. True, technical analysis looks at past price performance to determine future movement, but why do patterns work and why are they so reliable and repetitive?

The answer is because the markets are driven by human behavior, so as long as humans are still trading, it won’t change. Humans are emotional creatures. It is not about hindsight, it’s about looking into the future. After all, aren’t all styles of trading about looking into the future and attempting to get in prior to a move? Take a look into my crystal ball:

Why do I accuse him of hindsight trading? Simple really, because, that is what he has provided.

When you claim on Thursday a stock trading @ $50, that you entered on Tuesday @ $40, and you are now exiting and taking profits, and that you are up 300% year-to-date, that to my mind, constitutes hindsight trading what would you call it?

ChartAddict offers his SPY Blank Box as evidence for his non-hindsight trading.

The market hit the 880 level, which was the final support level in my book yesterday. The end of the day, which was met with some serious buying (and not just short covering), was encouraging. Today’s action plan is simple, and it is all drawn out on the 3-day chart below. I added a “blank day” so you can use it intra-day to see where the market is located. I do this everyday, and it is a method that I highly recommend.

fck3qc1

The red box is “today”. The green zone is your support level and the purple zone is your resistance level. The two blue lines in between are minor support and/or resistance levels. That’s it. Don’t make it any more complicated than this.

First off, identifying support/resistance, is simply identifying support/resistance levels. You would need a further qualification. At support level “X” I will buy, or at resistance level “Y” I would sell.

The reason being that support/resistance levels are psychological marks in the sand…sometimes they work, sometimes they don’t. If you look at enough examples, you’ll likely find about a 50/50 success/failure rate.

How did it work out? Very well actually.

fck4q1

We have a further example [1 of a couple actually]

Let’s take a look at a real-time, and not a “hindsight” example, of PCU, currently trading at $19.46:

Below is a 45-day of PCU. I have also added 2 weeks of “blank days” to nearly complete the apex of the symmetrical triangle. It is important to note that the box remains constant, but price does not. If a breakout were to occur on Tuesday, I would be looking at the gap up to start at around ~$20.70. Likewise, a breakdown would be indicated by a gap down below ~$18.30. If the consolidation continues, the box becomes more narrow as each day passes and may morph from a ~$2.50 range to a ~$1.25 range.

cph

So is this real-time trading? Well, yes, and no.

While it’s not hindsight trading, viz. claiming profitable trades after the fact, it’s not exactly real-time trading either. No trade is claimed, viz. long at price “X” or short at price “Y”

We know, everyone knows, that price will fluctuate. The Blank Box, rather conveniently covers all possibilities. Thus, it exactly worthless. It becomes worthwhile, if, and when, based on experience, analysis, luck, the traders states an entry taken…now we have a trade on.

Is it better than the blatent hindsight trades previously offered? Unquestionably…however, still needs to actually make a trade call.

snoopytyping_800x600

Technical analysts calling for a likeness to the 1938 Bear market

1938-barrons-yamada-20090522

« Previous PageNext Page »