Trading Diary

Consumer spending in the U.S. rose less than forecast in May and the Federal Reserve’s preferred inflation gauge has cooled down. Dow should shoot up up +135 level up to 2PM .After that one can expect wide swings with bulls and bear in battle with NZD camp winning at close.
I would like to introduce Mr Gary shilling. I am printing his outlook for the year.
Eight of them are likely to unfold this year while four will probably work but maybe not until later:
1. The housing bubble will burst. If so,
2. The Fed will ease; meanwhile, the yield curve will remain inverted
3. U.S. stock prices will fall, perhaps below the 2002 lows, in the midst of a major recession
4. China will suffer a hard landing due to domestic cooling measures and U.S. recession
5. Weakness in U.S. and China will spread globally, dragging down economies and stocks universally
6. Treasury bonds will rally
7. The dollar will rally, but not before the recession is global
8. Commodity prices will nosedive
9. Maybe global and chronic deflation will commence in 2007.
10. Maybe U.S. consumers will start a long-run saving spree, replacing their 25-year borrowing and spending binge
11. Maybe deflationary expectations will become widespread and robust
12. Speculative areas beyond housing may suffer in 2007

A. Gary Shilling has often been way ahead of the crowd in forecasting some of the recent significant trends in the economy and stocks .

Today NZDUSD is shooting up.It has reached a high of .774.The neagative correlation shown for NZD and DOW does not bring cheer on the face.

untill recently USD/JPY was the trade that everyone wanted to be in. While the Federal Reserve, struggling to control inflation, increased the price of money sixteen consecutive times, the Bank of Japan was fighting deflation by holding interest rates near zero. Consequently during 2006, the interest rate differential between US and Japan made long USD/JPY a one way bet. .  Even though the US dollar still has a positive interest rate differential against the Japanese yen, interest rate expectations are visibly favoring the Japanese yen, what makes the USD/JPY a bad carry trade for 2007.  .  Many traders are  currently hunting high yielding currencies like the Aussie and the kiwi at the cost of the US dollar.  Since the beginning of March, both the Australian and New Zealand dollars have surged over against the US dollar, .
Australia’s two year government bonds yield 5.48 percentage points more than similar Japanese bonds and have a 1.77 percent premium over U.S. As a result of this large differential, in just 12 months the Aussie climbed 15 percent against the Japanese yen, trading from a low of 82.07 on March 2006 to as high as 99.90 in April 2007, as Japanese investors bought Australia’s and newzealands higher yielding assets.

The May US Core PCE (Y/Y) is expected to come in at 1.9% down from 2.0% last time around. This could be very important to watch, as 2.0% is the top end of the FED’s Comfort Zone of 1.0% and 2.0%. It has remained at or above 2.0% since March 2004. The M/M figure is expected at 0.1%, unchanged from 0.1% last time around.

Dow has been struggling to get a hold as seen in the last few days. Every time it breaks out ,by 2PM it gets a big beating on its face.Dow has lot of energy left ,the key question is how it will manage the 2PM DOOR guarded by greedy foreign managers out to carry funds into yonder land.

Yesterday Newzealand dollar fell to its lowest in more than a week after the central bank said it may continue to sell the currency.New Zealand’s dollar gained 27 percent in the past year,Today the New Zealand dollar gained after reports showing a pick-up in housing and a narrowing current account deficit bolstered speculation the central bank will fail in any renewed attempts to halt the currency’s rally. The chart above explains  that NZD is negatively correlated with Dow for the past few days. The chart is between NZD and DOG (inverse of DIA).

New Zealand’s record 8 percent interest rate is the highest after Iceland making it an important pair in carry trade. Programme selling of US STOCKS AND BONDS by big foreign fund managers to divert to high yielding foreign currency and stock are going on which may explain the high rate of index swings at 2PM.

Time is 10.30 AM.Dow is -81.When Dow reaches -108 I am going to sell all my Remaining long position.I hope Dow wont touch -108 and a repeat of feb27 dont happen today.I wont steer my ship when i dont know from where the winds are blowing from!

I hope by sunday i will be ready with my post on 2PM effect and newzealand dollar.Basically it is about the turn in fortune in dow by 2PM observed for the last few days and about the rise in NZD dollar.Yield gap detween yen and NZD have risen to 7.5% boosting yield for investors in NZD.It is my contention that carry trade is shifting from yen dollar to yen NZD dollar and sale of US bonds to buy NZD investments is happening causing the volatality in the markets.I will post my guess estimate from next week when i hope to pinpoint the flowToday I think that initially dow will rally but after 2PM (?)………..

Yesterday $xbd index had a big decline.Decline of $xbd decline is always very bad.Before the great crash of feb 27 $xbd had a big decline.What is now worrying is the pinpointing of the cause.The 2 PM effect and newzealand (I will elobarate in a later post) is causing havoc.Yen carry trade is stable,economy reports are bullish,bond yield have become stable,but we could sense a warning.Today 2 hedge funds have collapsed. Today if market open lower and goes down for next 30 minutes I will sell 40% of my long position.

Mr Dow slowly woke up from his sleep.The sun was bright and shinning and a cool breeze stirred his eyes.”I slept for long” he said.He had indented only for a small nap,but the riqor for the last climb was too much for his body and he slept for 2 days..Mr dow slowly waked toward the small stream and cupped his hand into the pristine cold water and washed his face.He felt a surge of energy going into his veins.His hand went inside his pocket to look for his latest love,his nephew.He always carried the photo of his nephew in his pocket.His nephew is in japan and every month used to send mr dow yen to be converted to dollars so that dow can lead a life of joy.His other nephew who is in china also used to send him yuan,but last week he demanded his yuan back and poor Mr dow had to sell his bonds to give back the money.I dislike chinese and my nephew in china Mr dow had told everybody after last week.
Mr dow looked at the climb ahead and slowly started his climb up.
Today dow will end at +75 (range +110)

Housing’s reliability as a leading indicator and overall economic gauge are well known. Since World War II, weak housing data has accompanied every U.S. recession except for a brief period in 2001. Today’s National Association of Home Builders Index fell to a 16-year low, giving the housing sector a rough start for the week.
Builders broke ground on new houses at an annual rate of 1.474 million, down 2.1 percent from 1.502 million the prior month, the Commerce Department said today in Washington. Building permits rose 3 percent to 1.501 million from 1.457 million.

This report may kindle  a thin ray of hope for rate cutting by feds. After a negative opening i expect the dow to rise and end at +45. (Range -20 to +60) 

Hui/gold has breaken out of its 54 moving average. Now after a short correction which is due let us see what happens. If it rest on its 54 moving average and then break upwards then we can expect a bullish rally or if it breaks through its 54 average down then gold will trend down. Historically may june is negative month  for gold and then it it trends upward  october to november.Dollar is negatively correlated with gold . With dollar falling down the price of gold should spike upward. During last months shareholders conference Warren Buffet told his share holders that he expect dollar to fall .If dollar spike upward then silver will lead the rally.

After 3 days of climbing it is natural that Mr dow require some rest.Running down the slope had given some momentum for the last 3 day climb.The hillock on which Mr dow is standing is perfect for a rest. with no camps of important announcement nearby he can sleep in peace and face the two camps of housing stats and building permits tommarow. Today dow will end at +20. Range is +45 and -25