March 18, 2008

Tap, tap....tap, tap...

Well I'm tapping my fingers, waiting for the Fed, short Euro/$ with a just now tightened guaranteed stop @ 1.585 to enable me to sell again higher.

My forecast:

33% chance of 1% (100 basis point) rate cut -----> expected -------> some noise then down within a few days.

33% chance of > 1% -------> goes to $1.60+ very fast then the confirmation gets heavily sold within days or hours.

33% chance of < 1% -------> Euro down today, possibly hard down.

tap,tap...tap,tap..

Update: Well it was a 75bp cut, but so far the Euro/$ level is about unchanged....I'd expected the Euro to be sold off.
Oh well, tight stop....75 points before it's hit.
I'd love to be in at the start of a major $ rally.

Update2: Some Euro weakness showing now as the Dow recovers fast from the smaller than expected rate cut. Of course what I'd like to do is stand up on my surfboard at the crest of an incipient $ wave. A long way to shore yet. The market's been so hurt by the dollar for years that it's taking a while to get the courage to be long it. My position is essentially another catch a falling knife trade like the NYT trade I lucked out with recently. Children, do not try this at home.

Update3 at the close: Today's Euro/$ range was 136.35 - 138.33, closing at the low. A good start. For my gamble that we're at the turning point of a 7-year trend to be correct we need to see a complete mindset change back towards the USA as the ultimate store of value. It's long odds against this as that turning point. Aesthetically I'd expect to see $1.60 first, but the Bear Stearns collapse may have signalled capitulation in a lot of markets as the underlying psychology gets wrenched around. Another day, another dollar.

Exchange with a bearish banker

Email exchange this morning - I'll leave in the jargon for flavour:

Me: I've shorted Euro/$ here ahead of the Fed for the possibility of a gap down if very aggressive rate cut expectations aren't met. Also I feel the Goldman Sachs' results are somewhat calming and may encourage the Fed to stay calm.

He: This is just the financial scare as a result of initial writedowns, real problem will be when the data turns bad. If you get payrolls print at -200k then you'll get some panic, more defaults, more writedowns, lowerequities etc etc. I don't see how this could end here.

Me: Well, calling the bottom is foolish, but there are plenty of positive signs:

-Bear Stearns handled swiftly without caving in to moral hazard.
-GS and others bouncing off long-term technical supports.
-McCain looking stronger in the polls - this factor is too little weighed in the conscious market. A big government left-winger is the last thing the markets need.
-Euro way overvalued for PPP* (tho I accept other reasons why Euro has/may appreciate).
-Gold at $1,000 / Oil at $110 / Euro at $1.58 /Yen < 100 / CHF and loonie reached $ parity.

In other words there's tremendous amount of $ and market bearishness priced in.

Dangerous to extend the trend at this point. If the Fed cuts a mere 75bp today the Euro might drop and the market might leap on the basis that the Fed's confident and the credit crisis is getting fixed. Once the credit market starts moving there'll be a buying frenzy.

Stay nimble. A banker can get bamboozled by knowing too much.

*PPP = purchasing power parity

He: Give them job losses and recession, which is surely where the numbers will say we are next month, then you'll see the real panic.

The problem is if the fed does 75, then next week there's a lack of confidence and the market sells off, the fed's run out of ammo. Then you get panic..

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Bonnabel Wood