The sleepy days of summer seem to finally be behind us. There is no shortage of markets making some really interesting moves. It is at time like this that you need extra vigilant against trading on emotion.
Overnight Australia reported some surprisingly strong employment numbers which caused the Aussie dollar to rally strongly. The Australian economy added 121,000 jobs in August which was significantly higher than the expected 15,000 addition. This release was the most jobs added in a single month since the addition of 103,000 jobs in August of 1991.
But even with this barnburner of an employment report, the relentless US dollar bull market overwhelmed the Australian news. By the time European markets opened, the Aussie dollar had given up all of its gains. As we open in NY, it is actually down on the day.
The US dollar bull market continues to weigh heavily on commodities. Gold and silver are both testing big support levels this morning.
Silver has broken $19 and is looking especially weak.
I am doing my best to sit on my hands when it comes to the precious metals. I have no dog in the race, but long term I am looking to accumulate a position at these lower levels. I would like to see some true capitulation on the part of the last remaining bulls. For now I am going to stick to my plan of letting silver first decisively break the big support level.
Getting flat US dollars
I was early to the US dollar bull camp, and although I could have traded it better, for the most part I have been on the right side of this move. But yesterday I covered the last of my CAD short.
I get the sense that the US dollar bull move is getting a little too crowded. My feeling is that we are going to get a shake out to test the resolve of all these newly minted US dollar bulls.
I am by no means getting bearish on the US dollar, but I am heading to the sidelines for a little bit.
This is probably one of my biggest weaknesses when it comes to my trading. I can’t stand to be part of the herd and I all too often abandon positions just as they are starting to work. So you might want to take any change in my view with a big grain of salt.
The violence of the AUD move overnight definitely demonstrates the strength of the upward trend in the US dollar. Whether this sort of volatility is a precursor to a change in trend or simply a sign of the strength of the US dollar bull run, we will have to wait to see…
There is no free lunch
Last night President Obama delivered an address to the American public outlining his new plan for dealing with the ISIS terrorists. I really don’t want to comment on the politics of this decision as I am sure you are all fed up of hearing from another guy on the internet with an opinion about what America is doing right or wrong. I understand that there are no good answers to this problem.
But I do want to talk about the market implications of this decision.
There is no doubt that the American public is rightfully tired of sending their sons and daughters half way around the world to die. Therefore the decision to bomb ISIS is a relatively easy one for President Obama. Whether it is bombing by airplanes or drones, it is a safe operation for American soldiers. The costs appear to be very low.
However, I would like to suggest that the economic lesson of “no free lunch” might apply.
Let me explain what I mean. But before I do, let me tell you about a movie that I saw a couple of days ago. Toronto is lucky enough to host one of the biggest movie festivals in the world. My wife has always been a fan of TIFF (Toronto International Film Festival). Before we had kids, my little sister and her managed to finagle tickets to the premiere of Seven Years in Tibet where they somehow ended up at the after party with Brad Pitt. My wife was bitten by the festival bug. Well, that was 15 years and three kids ago. In that time, we haven’t had a lot of time to get to TIFF. However now that the kids can somewhat care for themselves, she has decided it is time for us to get back out on the town. So she bought us a festival package. Although much to her chagrin she didn’t get the Channing Tatum movie, we did get tickets to a movie called “Good Kill.” The movie’s story centres around the difficulties faced by a US drone pilot.
The movie was actually pretty boring – I guess it is tough to make playing a video game exciting. But it did do a good job at highlighting the real problems with this sort of warfare.
Although there are no risks to the drone pilots who bomb targets 7,000 miles away, there are issues about the effectiveness of these operations. The collateral damage from these bombings is immense. Civilians die all the time. And it is not just in the movies.
Due to the fact that President Obama has dramatically increased the use of drones as opposed to boots on the ground, the amount of civilians killed under his watch has dramatically escalated.
I don’t want to judge this decision made by Obama. I suspect that you have your own opinion and that I am not going to change it anyway.
It will be interesting to see how this movie “Good Kill” plays in the media once it is released in the United States. Will it change the public’s attitude towards these drone strikes? Or will it simply be dismissed as a left leaning Hollywood fluff piece?
But let’s bring this back to the markets. The markets are not reacting to President Obama’s overnight address. They simply don’t care. To most Westerners all it is going to mean is a few extra tax dollars are going to be spent bombing some dusty place in the mid-east. However, I am not sure that the cost of these bombings is going to be measured only in dollars.
Again, let me stress – I don’t have any answers. I honestly don’t know what I would do if I were Obama. But I do know that it is not quite as simple as authorizing the continued bombing of targets in some other nation. There are always unanticipated consequences.
I do not expect the market to plunge 10% because of Obama’s speech. However, for those that say it is a “non-event”, I will take the other side of that trade. There will be costs to this policy, we just don’t know them yet. The world is becoming a more and more scary place. Last night’s Obama speech is just another sign of the geopolitical problems that the market has so far chosen to ignore.
In the movie, the US drone pilot tries to ignore the emotional toll of his job with an endless river of booze. But eventually his problems cannot be ignored, and he snaps. My suspicion is that for now the market is being soothed over by the Central Bank liquidity flood. It is having a calming influence on the markets. However, like alcohol it is merely masking the real problem, not fixing it.
Bears throwing the towel, cont…
Yesterday I wrote about the litany of bears who were waving the white flag. I missed a couple and I wanted to just highlight them.
Barry Ritholz wrote about Morgan Stanley’s Adam Parker:
“Until not so long ago, Morgan Stanley’s Adam Parker was one of the most bearish analysts on the street. Following last year’s 30% S&P 500 rally, he has had a change of heart. He now has a 3000 upside target for the S&P 500.”
And how about this picture from a CNBC vid?
My personal favourite was not a bear throwing in a towel, but an article written by Bloomberg reported Cordell Eddings. The title of the article was “You Missed $1 Trillion Return Agreeing With Fed Naysayers.” The article basically rubs the bears’ noses in the massive amounts of gains that they missed during the 5 year rally. Again, this is not the sort of article you see at bottoms… I am keeping this one filed away to review in a couple of years. I suspect it will be good for a hearty laugh.