# Fundamental Trades



## waza1960 (17 May 2009)

I would like to hear from others experiences regarding Trades based mainly on fundamentals .One example of  a trade which I think shows a good risk/reward  would be shorting the dow using some of support/resistance lines for stops.Time frame would be a few days to a few weeks.


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## CanOz (17 May 2009)

So let me get this straight Waza, your thinking behind this is that the macro economies fundamentals are poor right now so your going to short the index or indexs? You can use DOG to do this, its an ultrashort ETF for the DOW. Or you can short the financials with SKF.

Personally I've taken a 3 year view on commodities and added three commodity US ETFs to my first fundamental portfolio, DBA, DBB, and DBC. I have a level that i will sell if I'm wrong and i will add to positions once a strong trend gets into place.

I can post a couple of charts if anyone is interested.

Cheers,


CanOz


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## MRC & Co (17 May 2009)

Yeh, I would be interested Can.  Interesting your adding ETF commodity longs I gather?  Out of interest, what do those ETF's comprise?  Are they mainly energy, base metals, precious metals, softs?  

Your making some great posts at the moment, and seem to really be coming into your own as a trader, it's great to watch!  

Thx.


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## beamstas (17 May 2009)

Interesting
When did support and resistance become f/a?


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## CanOz (17 May 2009)

MRC & Co said:


> Yeh, I would be interested Can.  Interesting your adding ETF commodity longs I gather?  Out of interest, what do those ETF's comprise?  Are they mainly energy, base metals, precious metals, softs?
> 
> Thx.




Hiya Mr.C

DBA is Agriculture
DBB is Base metals
DBC is a Commodity index

I suspect that we may see some retracement in these short term if risk aversion sets in and the flight to treasuries becomes the scene again. Long term (3 yrs) i will hold these as inflation sets in and the US dollar collapses.

If I'm wrong, then I'll bail out sooner. These are weekly charts.


Cheers,


CanOz


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## MRC & Co (18 May 2009)

Interesting Can, thx.


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## MS+Tradesim (18 May 2009)

Can,

I like your picks. That's the kind of play I'm looking to setup but probably direct into shares. But those charts look nice at the moment.


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## waza1960 (18 May 2009)

> beamstas Re: Fundamental Trades
> 
> --------------------------------------------------------------------------------
> Interesting
> When did support and resistance become f/a?



                          I said mainly F/A would still use T/A for stops/confirmation .                                                                                            That is my thinking Can and I like the idea of using EFT's


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## sammy84 (18 May 2009)

Good thread here. MS and Can OZ I always thought that you all were purely T/A traders, with an awareness of the economic situation for debating purposes. How do find fundamental fits in with you tech analysis? Do you keep your fundamental and TA trades totally distinct? I have tried  previously to emulate darvas's only investing in growth areas idea within my T/A however things just got too discretionary.


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## MS+Tradesim (19 May 2009)

Sammy,

I have a range of strategies. Currently, I've been focusing on day and short term trading which is just price and volume.

But longer term I will be returning to trend trading based on fundamentals. I have two approaches. One is mechanical in which I take signals that have good fundamentals or high potential. The other is discretionary in which I form an idea about what is likely to do well and then search for companies which fit what I'm looking for. Medium to long term I'm focused on China and am looking for candidates to buy that fit my views. I then use charts to look for entries and exits.

My expectation is still for at least one more major leg down though so on the long term horizon I'm waiting until that occurs before taking fundamental trades. However, I'm prepared to take small positions in the meantime if it looks like the market is bottoming. 

Soros is my inspiration for this style of trading and it is the most comfortable fit with my personality.


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## CanOz (19 May 2009)

MS+Tradesim said:


> Can,
> 
> I like your picks. That's the kind of play I'm looking to setup but probably direct into shares. But those charts look nice at the moment.




That post is gold MS, i like the way you think. My thoughts are not totally original, but living here certainly helps to develop original thoughts on emerging market growth and the potential for investors. I also like Jim Rogers and Soros and try to read everything i can get my hands on from them as well as Faber.

Nick put me onto Donald Dony, an analyst from Canada that puts out The Technical Speculator, a broad market based newsletter. I use his thoughts and analysis for the basis of most of my longer term decisions. 

I also like the emerging markets, especially Taiwan and China and am awaiting a pullback for those ETFs, as well as a switch in my Super, as they've run hard lately.

This should be a good time to start accumulating some key longer term investments, other than just equities.

Sammy, i trust this answers some of your query?

Cheers,


CanOz


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## MRC & Co (19 May 2009)

MS+Tradesim said:


> Sammy,
> 
> I have a range of strategies. Currently, I've been focusing on day and short term trading which is just price and volume.
> 
> ...




LOL.

That's very very similar to how I do it.  

Short-term, price and volume are the main drivers, along with occasional news that comes out to interupt this and changes the flow.  

Long-term, deviations from my percieved fundamental value, using charts to aid entry and exit......

I've actually made money using both, but not nearly enough........yet 

_Perhaps we should use this thread (or create another) for a discussion of any longer-term fundamental views and areas to potentially exploit?_  There are discussions on such things on individual threads, such as gold, oil, agribusiness, but it would be a lot easier to combine information *only relative to what is fundamentally under or over-valued*, due to overdone positive or negative feedback loops (reflexivity) or whatever you wish to use.......might surprise ourselves and it will help keep out all the short-term price movement noise that isn't really as relative to a longer-term view........


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## MRC & Co (19 May 2009)

Thought I would get this thread started by posting your post to the forum Tradeism:

_I initially sent this as PM to MR but for the record I'll share my unsophisticated thoughts in the open....

Up front, I'm not that economically inclined. I don't really know the ins and outs but I do know how people think and that's what I'm betting on.

China recently made some comments about having the IMF special drawing rights become the reserve currency. I don't know if I see that happening, or certainly not soon, because the USA will take a protectionist policy stance. They won't give up their position lightly. 

However, China understands what most of us know - the US dollar has got big problems. They're inflating the crap out of the dollar with the amount of debt they're issuing in order to pump back into the system to try and support their already debt-based economy. We know that can't end well. Debt supporting debt. That's how the current crisis originated. It's beyond credulity to think it will be the solution, yet that's the play of Western govts. It's my belief that the US dollar will eventually lose its reserve status and that's when their chickens will really come home to roost. 

I believe that will be informing Chinese policy as they shore up gold reserves, base metals etc in order to deplete their US dollar reserves and have something more tangible backing their wealth reserves. 

So I'm just thinking out loud there to say I completely agree with you. China has to wind back their reliance on exports and the safest way for them to do that is to internally provoke consumption demand. How they will do that from a policy perspective I have no idea. But I do know human nature and the way I see it, the Chinese are getting a taste of Western consumerism and they like it. The growing middle class are enjoying their new found 'luxuries', especially those who are children of the revolution that endured a quite spartan lifestyle for decades. They're not going to just sit back and wait for the USA to start filling Chinese coffers again.

Further, unpegging their currency will increase their own foreign purchasing power. What can we expect to result from that? Given they currently have the market cornered on cheap manufacturing what are they likely to want to buy from other countries? Apart from raw materials, I don't know yet but I'll be doing some more thinking on that to look for opportunity. Possibly food. Will some countries basically become farms to feed China? Fertiliser companies to increase farm productivity? Wool for clothing? etc etc. Like I say, I don't know but there is a large domino play here which will prove very lucrative for those who get it right.

I don't know the timeframe this will play out over. I'm not banking on it in the near-term to profit off in the next week, or month or 6 months.

As a side-note, one long-shot that might unfold is America becoming the next China....massive unemployment, debt-distressed economy, rising Asian and Chinese affluence....perhaps the future of the USA is cheap manufacturing. 

Just some of the thoughts I'm ruminating on these days._



I'm going to go through some of my old textbooks for my Uni days (funnily enough, I did an Economics degree and used my other degree to major and minor in all the various economics electives to cover everything economics and still I only remember tiny bits)  

Will give the memory a refresh and try add some thoughts to yours, think a lot of what you said rings true, except for the part about the US becoming a cheap manufacturing economy.  Also have to remember all the fundamental inputs into what actually moves a currency and the implications of a floating V fixed exchange rate (know they differ completely in relation to monetary and fiscal policy (later is not as effective with a floating exchange rate and former is not as effective with a fixed exchnage rate).  

Anyways, I'll get back to this.

Cheers


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## MS+Tradesim (19 May 2009)

This should be good. Look forward to other views.

As I said, the bit about the US is a very long shot. While I don't think it will happen, in reality, nearly anything can happen.  Black swans are why we're here now.


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## MS+Tradesim (19 May 2009)

Lol. I was just thinking about oil in relation to China and then I ran across this.

I think oil is a fairly obvious long term play. Not only for energy but also plastics and synthetic fibres. Expanding middle class = more demand for computers, electronics and toys (all require plastic). Portable consumer electronics also equals demand for power, significantly lithium. (I was cheesed beyond description when ADY offloaded their massive Li resource to a private company).


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## doogie_goes_off (19 May 2009)

Lead and Zinc are performing well, TRO (tailings resource and in ground resources) have not moved that hard & if lead and zinc run, these guys will already on the blocks although they may be handicapped at 15m they may just run harder when the gun goes. There are already plenty punting on those already jogging on the spot. I hold and and I am looking forward to the end of the week... I think. DYOR, I don't believe the chart.


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## doogie_goes_off (19 May 2009)

The long target would be around $0.22 but I'd need to recheck my figures to be sure. DYOF too.


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## MRC & Co (20 May 2009)

Still researching and I think I am even more confused now than when I began!    Still waiting for my lightbulb moment, but I think that will take months, if not years of more research and discussion into fundamentals and an understanding of the complexities of the international financial markets!

Still, I see agribusiness having the biggest potential, with surely a move in developing economies to more grain intensive diets and towards education, as opposed to traditional farming careers.  I have also read, that imports in such products in China are on the rise, upto 6 times faster than other products on the Chinese import list.  

I cannot see already developed economies reverting back to food production (or that of primary products) unless the 'price is right', and areas such as Africa just do not have the natural landscapes to compete in food production as a competitive advantage in trade.  

This would also suit traditional theory, both on the supply side of the Heckscher-Ohlin model and on the demand side of Staffan Burenstam Linders' 'Linder Theory'.  The ultimate cause would be a price rise in agribusiness products due to an increasing demand and a supply restriction in that the nations this task would be passed onto in the 'flying geese model' would be without the factor endowments to produce at a competitive cost, leaving such production back in the hands of the exorbitant West, who would only come to the supply party if it was viable in a monetary perspective.

Add in an ever growing global population, natural disasters decimating plantations (perhaps due to global warming), and that last part itself a cause perhaps of greater continued demand for bio-fuels, yet another demand positive.  

It really only leaves me with one view, but it just seems too obvious..............?  The thing with this is, even though it is 'known' and believed by most, how many do you know who are invested in agribusiness?  I myself am not.  So it is not until this idea is actually acted upon (perhaps it will be after the fallout of this crisis, currently being held down by all the de-leveraging and moves towards cash and risk management), that price will actually rise and the positive feedback loop will kick in.

On another note, does anyone know a way to short residential housing prices in Australia without using the ASX listed Property Trusts which have already taken a battering and prior to those housing futures being released at a later date?  

The bubble just looks over-done to me and this looks like a perfect storm of 'reflexivity', where perceptions have changed fundamentals, which in turn, have altered perceptions.  What could change these perceptions and move price back to an 'equilibrium'?  A period of potential wage deflation, immigration cuts, unemployment and particularly an ageing population, could perhaps do so?  

Anyways, there are some quick thoughts, back to the research.


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## questionall_42 (20 May 2009)

Interesting thread which raises a whole gamut of thoughts about how our economic and financial systems may change. Couple of over-riding thoughts (well, ramblings rather):

1) If the USD collapses due to hyper-inflation in a sea of debt, what will be the reserve currency or commodity that will replace it? Or will it be a financial system that is decentralised with all currencies, commodities exchanged freely without one that is dominant? If you can pick what that may be (e.g. gold, another currency), then you most of your LT trading strategy can be set.  Or else just short the heck out of the USD.

2) Currency fluctuations may become more volatile if the USD is not the reserve currency of the world.  Trade it, or live outside the system.  Where you live in the world will have great repurcussions in this new order.

3) What are the consequences of hyper-inflation, particularly if you have debt? Scary stuff... ... How much can the government intervene to help out? Solution for yourself - Get rid of debt.  Own property outright as it is a tangible asset.  

4) Shorter-term, if an inflationary environment takes hold, "stuff" will be more valuable. As MR&C said, agribusiness will be critical. Hard commodities too.  Is China already stockpiling metals now with the understanding that their $B in US T bonds will fall in value? 

5) Climate change. Any discussion about fundamental trades MUST consider the ramifications of how the earth is changing.  No rants about tempatures rising 2c will result in blah blah.  Just look at land degradation coupled with an increasing population, less arable land etc.  That is what I mean by climate change. Of course, legislation will be a key driver in this space, but innovation in renewable fuels, alternative modes of transport CAN take place without a friendly regulatory framework.

One aspect with this that makes it bloody hard is time - what are the time-frames that we are talking with this? The balance between short and long term perspectives is often schizophrenic, and at the very least, difficult to navigate.  So all of the above means little without a clear time-frame for action.


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## MRC & Co (20 May 2009)

All good points questionall.

It is an interesting topic, as there is a lot of talk about fundamentals all over various blogs, forums, but there is very very little on it's application and actual effects on price, and as you say, time horizons.  

Personally, I believe each individual trade has to be taken, with some kind of wide or logical stop encase you are wrong (either price or time stop), and has to be constantly re-evaluated.  For me, long-term means anything 12+ months.

As to your points, yes, I believe the Chinese probably are stockpiling metals now, US T bonds will surely fall, with the constant raising of money and the fact that if we do infact hit inflation (an idea of Soros), then the rising interest rates will diminish the value of current bonds held.

However, if we go as far as to see the USD collapse, there will HAVE to be a reserve currency, as pegged exchange rates will need something to mirror and thus, will need to keep excess reserves to maintain the peg.  Or, could we possibly revert back to the gold standard, and have paper currencies pegged to gold?  

Out of interest, does anybody know the time horizon of trades of Soros?  I just read nearly half his current portfolio is in energy!  Very interesting, and that he has also recently started accumulating more agribusiness stocks (namely Potash Corp), buying into it's recent dip.


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## kam75 (20 May 2009)

waza1960 said:


> I would like to hear from others experiences regarding Trades based mainly on fundamentals .One example of  a trade which I think shows a good risk/reward  would be shorting the dow using some of support/resistance lines for stops.Time frame would be a few days to a few weeks.




I'm curious to ask, why would you want to do a trade based 'mainly on fundamentals'?   If you know the fundamentals, why not combine this with technical analysis to get your entry timing right?  After all, you never can know for sure what a market will do.  It's about managing your risk.  I don't know a better way to manage risk than using technical analysis and a bit of maths.


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## questionall_42 (20 May 2009)

MRC & Co said:


> ...
> It is an interesting topic, as there is a lot of talk about fundamentals all over various blogs, forums, but there is very very little on it's application and actual effects on price, and as you say, time horizons.
> 
> Personally, I believe each individual trade has to be taken, with some kind of wide or logical stop encase you are wrong (either price or time stop), and has to be constantly re-evaluated. For me, long-term means anything 12+ months.




I am with you on that MRC. I think that the very nature of the term "fundamental" has some stability inherently implicit in the term so that it can lull you into a false sense of  security... but "fundamentals" change, and change frequently, and after a passive buy and hold (and hope) strategy during the bull years, long term for me is beyond 12 months, but not much further, rather than a 5 year guess. But this has ramifications for the bigger picture issues and developments and how it affects choice, in this case investment choices. Over time I have become more active in my investing/trading because the "fundamentals" change and, as you say, the effect on price can be dramatic and swift when fundamentals change or are in the process of changing. 



MRC & Co said:


> ...
> However, if we go as far as to see the USD collapse, there will HAVE to be a reserve currency, as pegged exchange rates will need something to mirror and thus, will need to keep excess reserves to maintain the peg.  Or, could we possibly revert back to the gold standard, and have paper currencies pegged to gold?




This is something that I am struggling with. Given that there is a real possibility that the fundamental rules will change (e.g. Roosevelt, Nixon), does it necessarily mean there has to be a reserve currency, or a standard, globally?  Is it possible for regional or direct trade-related pegs or reserves. Therefore there could be many different "mirrors" in existence depending on what you were wanting to exchange.  Would this result in more volatility?  Any suggested further reading on this would be welcome.


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## MRC & Co (21 May 2009)

Good points again, and to be honest, I am not exactly sure, the area of exchnage rates and currencies is one I am a complete and utter novice in, hence, my recent attemps to try and understand:

1)  how changes in a given countries fundamentals, will impact on it's currency and that of it's trading partners, and:
2)  what impact changes in these currencies will have on other currencies.  

With a clear understanding of these 2 points, it would be a lot easier to understand the flow on effects.

The questions you asked, are in a different basket all-together, but I imagine it would create greater volatility.

Anyone game to try and understand and explain any of this?

As to your first point, not only do fundamentals change and this can alter price, but this change in price, can then feedback and further alter fundamentals.  It is these extremes I am most interested in trading.


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## waza1960 (21 May 2009)

> I'm curious to ask, why would you want to do a trade based 'mainly on fundamentals'? If you know the fundamentals, why not combine this with technical analysis to get your entry timing right? After all, you never can know for sure what a market will do. It's about managing your risk. I don't know a better way to manage risk than using technical analysis and a bit of maths.



I agree that you need a balance of T/A and F/A in your trades however I think there is room for some trades with minimal T/A


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## Cartman (21 May 2009)

waza1960 said:


> I agree that you need a balance of T/A and F/A in your trades however I think there is room for some trades with minimal T/A





good thread Wazza (plus one zed)  and good input from the boyz ---

in my humble opinion, fundamentals represent the broader market and are where we will end up in "real terms" *in time* ---------- T/A is simply an example of traders doing their job to manipulate/distort/create subterfuge/extract money from weaker hands/ etc etc  ------ 

this game is all about money --- greed is an unfortunate bi-product of what drives human beings ---- markets will never reflect true fundamentals while ever there are deep pockets who have the ability to manipulate proceedings ----- trading successfully is more about thinking like a deep pocket trader and how they might perceive to extract maximum benefit out of a given market ---- if we can decipher just* one market*, all the riches in the world become available ------- (that still wont make you happy long term though  --- its just a game  !!  treat it like a game and you'll most likely be a lot better at it


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## ceasar73 (22 May 2009)

Cartman said:


> good thread Wazza (plus one zed)  and good input from the boyz ---
> 
> in my humble opinion, fundamentals represent the broader market and are where we will end up in "real terms" *in time* ---------- T/A is simply an example of traders doing their job to manipulate/distort/create subterfuge/extract money from weaker hands/ etc etc  ------
> 
> this game is all about money --- greed is an unfortunate bi-product of what drives human beings ---- markets will never reflect true fundamentals while ever there are deep pockets who have the ability to manipulate proceedings ----- trading successfully is more about thinking like a deep pocket trader and how they might perceive to extract maximum benefit out of a given market ---- if we can decipher just* one market*, all the riches in the world become available ------- (that still wont make you happy long term though  --- its just a game  !!  treat it like a game and you'll most likely be a lot better at it




its not greed..its envy.


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## haunting (22 May 2009)

Most of the big money based their investment on FA, working out the fundamental value of a stock or a company they are interested in, while TA serves a very unscientific approach in gauging the market sentiment. If apply "properly" they can complement each other. For example, currently the fundamental issue to watch out for is debt over-leveraging, high cost of refi or borrowing, scarcity of capital - causing many companies to offer great discount to their share price just to get instos backing for their capital raising.  BBG for example has to mark down their share price to 7.50 in order to get their debt refi-ed, a hefty discount. More company will be following suit, it therefore makes sense to keep an eye on companies that have large debt, high debt/equity ratio but are yet to announce any plan in dealing with their debt.

This kind of fundamental information/deduction is useful whether you are trading or investing, as It makes sense to avoid such company. Moving forward, a bigger issue facing ASX and the many small to mid size companies is the scarcity of capital and the high cost in obtaining such capital. Many companies and miners will be going bust and many mining projects will be closing down due to the lack of funding. Again, ask yourself if it is advantageous to know which of them has the necessary financial backing?

Corollary, knowing which company does not have issue of debt and has done its capital raising would naturally provide a layer of "comfort" and price support since a potential risk factor due to capital raising has been removed. If safety with your capital is a priority, this bit of fundamental info may be what you want to know?


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## MS+Tradesim (22 May 2009)

US inflation likely to become policy?

Strengthens the case for China winding down more of its USD reserves. Watch their metal stockpiles continue to grow. I think it's all but inevitable they will unpeg the yuan from the USD. And I think another commodity bull market could unfold out of Asian recovery - for two reasons (1) the big miners have mothballed new projects, (2) China hoarding metals. Both = lower supply once global demand resumes. Will depend on how much of their future demand is accounted for in their stockpile. That could be positive for Aussie miners and the AUD.

Ps. All of this supports a very bearish case for the USD.

Very simple broad brush strokes here but everything I'm reading supports the way I see China's future unfolding.


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## MRC & Co (23 May 2009)

Cartman said:


> in my humble opinion, fundamentals represent the broader market and are where we will end up in "real terms" *in time*




Yes, this is what I once believed after my first introduction to the writings of Buffett and in most cases, an oscillation around some form of 'equilibrium' is probably the case.

However, my recent endeavours to understand Soros, have me really re-inventing my views on some scenarios.  Perceptions (and therefore prices), influencing fundamentals, influencing perceptions and a feedback loop really makes sense on occassions.

Tradeism, I agree completey with you and have actually changed my views of a deflationary period.  Funnily enough, you can add Soros to that list of experts, talking of inflation in the not so distant future, and you can also see what is expected insofar as the current yield curve, which is rather steep IMO, pricing in higher interest rates (obviously targeting a higher rate of inflation into the future and some kind of recovery).

All spells doom for the USD and makes the unpegging of the yuan more likely and that potential over-shoot of gold Explod has been waiting for much more likely.

I also agree on the potential for another commodity bull, which will probably hold up the Australian market, but I still expect to see this off-set by falling prices of bank stocks, particularly as we enter into a downturn in the housing market and moves come in from the Political arena to force banks to pass on rate cuts resulting in a decrease in their dividend yields.  

All interesting times and I have a sneaky suspicion that a real coup could be enjoyed here for those positioned right (as you already mentioned earlier).

Keep the opinions coming guys.

Right now, we have long base metals, agribusiness, energy, precious metals, short USD.  I would also add in short Australian House Price Index (particularly if we get the derivative contract come along in August) and short Australian bank equities.

Another sector I am moving in to study is that of the bio-techs in the US.  They seem to be on a great run lately, but I want to investigate the reasons behind the general run of the sector and particularly, any fault in that logic.

As I type, I'm in the process of analysing the previous currency questions I posed earlier.

Cheers


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## MRC & Co (23 May 2009)

haunting said:


> For example, currently the fundamental issue to watch out for is debt over-leveraging, high cost of refi or borrowing, scarcity of capital - causing many companies to offer great discount to their share price just to get instos backing for their capital raising.  BBG for example has to mark down their share price to 7.50 in order to get their debt refi-ed, a hefty discount. More company will be following suit, it therefore makes sense to keep an eye on companies that have large debt, high debt/equity ratio but are yet to announce any plan in dealing with their debt.




A good point haunting, and ones without a great cashflow outlook could be real shorting opportunities perhaps?

Have any stocks in mind in this kind of situation?


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## MRC & Co (23 May 2009)

MRC & Co said:


> Another sector I am moving in to study is that of the bio-techs in the US.  They seem to be on a great run lately, but I want to investigate the reasons behind the general run of the sector and particularly, any fault in that logic.




  Scrap that idea.  I thought I saw a chart earlier with a booming sector, perhaps I just saw the chart of an individual bio stock.


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## MS+Tradesim (27 May 2009)

Marc Faber on the potential for hyperinflation in the USA.

http://www.bloomberg.com/apps/news?pid=20601057&sid=avgZDYM6mTFA&refer=futures

I have no particular comment. My thinking on it is already reflected in prior posts.


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## MRC & Co (28 May 2009)

Just had a couple thoughts which I posted in the gold thread:

Any further downturn in the US economy or simply a fall of the USD could see decreasing demand for Chinese exports out of the States, slowing the Chinese economy and a ultimately causing a reduction in the demand for commodities, all potentially possible and would have a negative affect on commody prices.  Thoughts?  

Another theory I have, is to short long-term bonds, as the general public will probably buy these now for the greater yield. However, to combat what is probably going to be impending inflation due to additional liquidity being added as a stimulant, rates will probably rise in the medium-term and push down bond prices. Counter-intuitive and disclaimer: I am no expert in the bond markets.  Thoughts?

A very different angle on the longer-term commodity bull.  Only way out I can see would be for the Chinese to internally stimulate their own consumer demand as per Tradeisms thoughts..........?


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## MS+Tradesim (28 May 2009)

MRC,

I have no experience with bonds. I agree with the rest of your comments. They're risks to watch for.

What I don't have a clue about is what kind of policy China might adopt to stimulate internal growth. Still keeping an eye out for clues and ideas.


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## MRC & Co (29 May 2009)

Tradism, I would imagine their policy would simply be a massive fiscal expansion.  Budget deficit.  

Canaussie, one thought, have you hedged your long US ETF's with a short on the USD?  Maybe something to consider, considering the AUD strength.


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## CanOz (29 May 2009)

MRC & Co said:


> Canaussie, one thought, have you hedged your long US ETF's with a short on the USD?  Maybe something to consider, considering the AUD strength.




No, good point though. I am looking at Canadian ETF's now, which will offset USD weakness, but it will complicate things somewhat because they will be purchased with AUD.

There is a USD ETF i believe....the futs contract on the DX would be too much exposure.

Also, now looking at an entry on FXI, the China 25 index ETF.

CanOz


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## CanOz (29 May 2009)

MS+Tradesim said:


> What I don't have a clue about is what kind of policy China might adopt to stimulate internal growth. Still keeping an eye out for clues and ideas.




You mean other than easy credit and the current stimulus based on infrastructure investment?

I can tell you that since the earth has thawed out here and the temperature has improved the construction here and in Xi'an is booming. Everywhere you look there are once again more and more sky cranes and roadworks, subway works, and sewer works in progress.

Cheers,


CanOz


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## MRC & Co (29 May 2009)

Short USD index ETF is UDN I believe.  Could use that to hedge (but if you short, you would still need to use USD's to actually go short the US ETF right)?  So maybe one like DXDDX, which is 2.5x short.

Can, what is the diff between credit and liquidity?  Since China is pegged, they cannot actually alter liquidity as they have no monetary policy.


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## CanOz (29 May 2009)

MRC & Co said:


> Can, what is the diff between credit and liquidity?  Since China is pegged, they cannot actually alter liquidity as they have no monetary policy.




Whoa, you got me there MRC, they can adjust interest rates to make borrowing cheaper, that's monetary policy to me....

This could go pretty deep, and well beyond my knowledge of macro economics. 

These guys have plenty of currency reserves, of the depreciating sort...and they're spending it on assets, causing asset appreciation....what does this mean for them???

I need some help here I'm afraid.

CanOz


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## CanOz (29 May 2009)

For those interested:

CDN Dollar ETFs:

- Claymore Global Agriculture-COW
- Claymore Natural Gas-GAS
- Claymore Oil Sands Units-CLO
- Claymore Global Mining-CMW
- Horizon Beta Bull Oil-HOU
- Horizon Beta Bull Agriculture-HAU
- iShares Energy-XEG
- iShares Materials-XMA
- iShares Comex Gold Fund-IGT
- iShares Gold Fund-XGD

I got these from my other newsletter that i just love: The Technical Speculator, but a list of ETFs is available on IB's website.

CanOz


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## MRC & Co (29 May 2009)

CanOz said:


> Whoa, you got me there MRC, they can adjust interest rates to make borrowing cheaper, that's monetary policy to me....
> 
> This could go pretty deep, and well beyond my knowledge of macro economics.
> 
> ...




lol, yes, it goes beyond my macro economic skills too (and to think I was once an economomist, unfortunately, not in this area).  Someone like Dhukka or Uncle Festivus would be a real help now............?  Any of you reading and interested to explain..........

An alteration of interest rates, is effectively monetary policy, and as the Yuan is pegged, they cannot adjust rates (from my understanding).  Therefore, they only have one option, fiscal policy, a budget deficit.  Borrowing from the world to spend and stimulate their own economy.  I gather this is credit, as liquidity relates to money supply and hence, interest rates...........?  Perhaps I am wrong, but this is my understanding.  

Personally, I am going to learn this myself, as I believe it's a vital area in trying to predict global economic relationships.   Bonds, currencies, commodities and equities all go hand in hand, and all are influenced by both fiscal and monetary policy and all influence eachother.  So..........much........information! 

But a good thread to start the learning curve in.


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## julius (30 May 2009)

China imposes controls on foreign in flows and out flows of capital -- this allows them to adjust internal interest rates while still maintaining the pegged yuan.


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## mazzatelli1000 (30 May 2009)

MRC & Co said:


> Personally, I am going to learn this myself, as I believe it's a vital area in trying to predict global economic relationships.   Bonds, currencies, commodities and equities all go hand in hand, and all are influenced by both fiscal and monetary policy and all influence eachother.  So..........much........information!




The information is overwhelming and those 4 areas you have mentioned tend to loop and affect each other. The other issue I have noticed is that once you have developed a model taking into account the movements, there is issue of quantifying lagging effects of one intermakret relationship to the other. 

It is causing me headaches as well


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## MRC & Co (30 May 2009)

julius said:


> China imposes controls on foreign in flows and out flows of capital -- this allows them to adjust internal interest rates while still maintaining the pegged yuan.




So by allowing less in flows of capital relative to out flows, they can increase the internal money supply by the net difference?

Mazza completely agree, a tough gig.   But all trading is I guess.


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## MS+Tradesim (30 May 2009)

MRC & Co said:


> Therefore, they only have one option, fiscal policy, a budget deficit.  Borrowing from the world to spend and stimulate their own economy.




I don't know about the economics you're getting into there. It's beyond me. But China have vast forex reserves. Why would they need to get into debt when they can just spend out of what they're holding?


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## haunting (30 May 2009)

Here is a write up by Henry Liu that might provide a partial explanation on quantitative easing (QE), liquidity and its impact on inflation and the overall economy.

_The conventional terms of inflation and deflation are no longer adequate for describing the overall monetary effect of excess liquidity recently released by the US Federal Reserve, the nation's central bank, to deal with the year-long credit crunch.

This is because the approach adopted by the Treasury and the Fed to deal with a financial crisis of unsustainable debt created by excess liquidity is to inject more liquidity in the form of both new public debt and newly created money into the economy and to channel it to debt-laden institutions to reflate a burst debt-driven asset price bubble.

The Treasury does not have any power to create new money. It has to borrow from the credit market, thus shifting private debt into public debt. The Fed has the authority to create new money. Unfortunately, the Fed's new money has not been going to consumers in the form of full employment with rising wages to restore fallen demand, but instead is going only to debt-infested distressed institutions to allow them to deleverage from toxic debt. Thus deflation in the equity market (falling share prices) has been cushioned by newly issued money, while aggregate wage income continues to fall to further reduce aggregate demand.

Falling demand deflates commodity prices, but not enough to restore demand because aggregate wages are falling faster. When financial institutions deleverage with free money from the central bank, the creditors receive the money while the Fed assumes the toxic liability by expanding its balance sheet. Deleverage reduces financial costs while increasing cash flow to allow zombie financial institutions to return to nominal profitability with unearned income and while laying off workers to cut operational cost. Thus we have financial profit inflation with price deflation in a shrinking economy.

What we will have going forward is not Weimar Republic-type price hyperinflation, but a financial profit inflation in which zombie financial institutions turn nominally profitable in a collapsing economy. The danger is that this unearned nominal financial profit is mistaken as a sign of economic recovery, inducing the public to invest what remaining wealth they still hold, only to lose more of it at the next market meltdown, which will come when the profit bubble bursts.

Hyperinflation is fatal because hedging against it causes market failures to destroy wealth. Normally, when markets are functioning, unhedged inflation favors debtors by reducing the value of liabilities they owe to creditors. Instead of destroying wealth, unhedged inflation merely transfers wealth from creditors to debtors. But with government intervention in the financial market, both debtors and creditors are the taxpayers. In such circumstances, even moderate inflation destroys wealth because there are no winning parties.

Debt denominated in fiat currency is borrowed wealth to be repaid later with wealth stored in money protected by monetary policy. Bank deleveraging with Fed new money cancels private debt at full face value with money that has not been earned by anyone, that is with no stored wealth. That kind of money is toxic in that the more valuable it is (with increased purchasing power to buy more as prices deflate), the more it degrades wealth because no wealth has been put into the money to be stored, thus negating the fundamental prerequisite of money as a storer of value.

This is not demand destruction because decline in demand is temporarily slowed by the new money. Rather, it is money destruction as a restorer of value while it produces a misleading and confusing effect on aggregate demand.

Thinking about the value of any real asset (gold, oil, and so forth) in money (dollar) terms is misleading. The correct way is to think about the value of the money (dollars) in asset (gold, oil) terms, because assets (gold, oil, and so on) are wealth. The Fed can create money, but it cannot create wealth...more. _

Who is Henry Liu?

Articles by Henry Liu


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## CanOz (7 June 2009)

Great link Haunting. I particularly like his remedy:



> All the stimulus spending by all governments perpetuates this dysfunctionality. There will be no recovery from this dysfunctional financial system. Only reform toward full employment with rising wages will save this severely impaired economy.
> 
> How can that be done? Simple. Make the cost of wage increases deductible from corporate income tax and make the savings from layoffs taxable as corporate income.




....and you know what, only China could make something like that succeed, because they don't need to get re-elected. 

Not only will this crisis show us the flaws in the financial systems, but also the political systems.



CanOz


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