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My September of 2008 Monthly Investment Pick

Discussion in 'Felix Long Term Investment Pick Archive' started by Felix Homogratus, Sep 20, 2008.

  1. Felix Homogratus

    Felix Homogratus Commander in Chief

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    Hi there :)

    This is Felix writing. I hope you enjoyed our August’s monthly investment pick, which was done by a buddy of mine Chris Lori, who is managing BIG BUCKS with some major Swiss Banks.

    In essence, his pick was to sell GBP/USD, and as you saw, we saw the pound fall from around 1.97 to around 1.75 in the last few weeks (over 2,000 pips). I just met with Chris this week, and he himself was shocked by the speed that the GBP/USD fell. He expected such fall, but he thought that it will continue slowly over a period of around 6 months, but it all happened within 1 month :)

    I went ahead and pasted below, what Chris said about the GBP/USD on August 4th. This way you can refresh your memory, and perhaps make some sense of such rapid fall. I will continue the discussion about this month’s investment pick, below the bold text below…

    As I’d mentioned above, my trade considerations and perspectives are derived from economic growth and interest rates/spreads/differentials. It is clear that spreads have contributed to the current weakness of the USD today. We saw evidence of this shift in 05’ when rates were rising and USD rallying. I’ve been calling GBP/USD short to my members since 2.0800 in late Nov 07, for those who’ve had the patience. We are seeing a lagging response to UK housing deterioration in relation to the US as a result of the interest rate outlook for the UK, which has supported GBP vs. USD with bank rates currently at 5.00% vs. 2.00% respectively. This is likely to shift slowly (narrow) over the coming months.


    Let’s look at UK housing where UK consumers and institutions have excessive exposure yet to unravel:

    · Debt to disposable income for UK consumer is approximately 15% higher

    · Residential mortgage debt in the UK is 14% higher than the US and mortgage debt per capita 30% higher

    · Total RMBS exposure as a percentage of GDP is approximately 6.5% more than the US counterpart, although much smaller in terms of total capital

    · Since the mid 1990’s housing prices in the UK have tripled, while in the US prices have doubled, on average

    · It is possible we may see more Northern Rock like rescues with other mortgage lenders in the year to come

    · Just last week all data pointed down – Mortgage Approvals down 36K vs. 37K expected. Net Lending to Individuals m/m 4.0B vs. 5.0B expected. CBI Distributive Trades Realized -36 vs. -15 expected and -9 previous. GfK Consumer Confidence -39 vs. -37 exp. and -34 previous. Nationwide HPI m/m -1.7 vs. -1.2 exp and -0.8 previous. Manufacturing PMI 44.3 vs. 45.5 exp.


    The data from last week alone further supports economic slowdown in peripheral aspects of the UK economy, which points to a dovish view on rates and speculation for rate cuts. Last week saw a 30bp change of 2yr rate spreads between UK and US, meaning the markets are pricing in the potential for rate cuts in the UK, in simple terms.


    In summary, as there is a 3.00% differential between US and UK Central Bank Rates, the Pound is more vulnerable to deeper rate cuts and RMBS exposure. This hits our two primary factors affecting exchange rates; interest rates and economic growth, both of which are likely to be negatively affected vs. USD. A potentially good currency play is to sell GBP/USD (on rallies – DON’T CHASE!) over a 6-12 month timeframe.

    Okay, so let’s now talk about investment pick for September. In my opinion, the GBP/USD train is running out of steam. In my opinion, it doesn’t mean that you should go long on the pair, but it doesn’t mean that you should hold on to this position either. I don’t know what will happen to it, but at this point, there are much better pairs to focus on (in my opinion).

    I think that the best opportunity at this point is to go long on NZD/JPY, which is currently trading at around 70.20.

    First of all, if you check our free currency strength calculator, Forex Relative Currency Strength Calculator you will see that in 2008, thus far, the Yen gained 14.06% on average against all other major currencies, and New Zealand Dollar lost -11.98% on average against all other majors.

    As you probably have noticed, the major currencies are not stocks. They never fall and stay low, and they never gain and stay high. There is a constant sea-saw effect, where money shifts from one major currency into another. We saw the pound gain more than any other currency, and now it’s falling like a rock, we saw New Zealand dollar gain, then it fell like a rock, then it gained again, then it fell like a rock again.

    Of course, it’s never wise trying to catch a knife that’s falling. However, I feel that the current economic situation is a very good opportunity to go long on NZD/JPY. It may not be a perfect opportunity, but it’s a good opportunity, that I feel should overall make money in the next 3 to 6 months time frame.
    Basically, as you probably know, the New Zealand bank official Bollard, shocked everybody last week by dropping interest rate by half a point, and giving a very pessimistic outlook on New Zealand’s economy, talking about recession, and that he will have to cut rates again. In fact his comments were so pessimistic that there is basically no more room for pessimism. He has said the worst.

    Not everybody knows this, but after his official speech, he gave an interview to Bloomberg, and basically told them that if the New Zealand dollar drops rapidly, he may have to hold off on further cuts. He basically created a floor with that comment. If the New Zealand dollar does not drop, it’s good for us, because we are long NZD, but if it does drop further, Bollard may shift his policy and hold off on a cut, due to the falling NZD, and this would allow it to rebound.

    What about Japan? It’s probably the only major country right now, whose next step is more likely to be a hike than a cut. However, there are many rumors that Japan is also on a brink of recession (still not in a recession), but if they announce being in recession, that would be a surprise, and bad for the Yen. So I think that Japan’s position is overly positive at this point, and the Yen has gained SO MUCH over the last year. I don’t see that there is any room for any “positive” surprises for the Yen, but there is a lot of room for negative surprises.

    I don’t know that you remember this, but back in 2006, the NZD/JPY started falling like crazy. It fell from around 90.00 to 67.50, and everybody thought that the New Zealand dollar will disappears off the face of the Earth, lol :) But over the next year, it rebounded from the level of 67.50 to around 97.80, and then it started falling again. The interesting thing is that back in 2004, it also hit a low of around 67.20, and after that rebounded to 90.00.
    So basically, for the most part, most currency hedge fund managers don’t know what they are doing. They know very little about economy, and their main strategy is to do carry trades. They do not play with their money. They make nice salaries, and keep taking chunks of profit as their fund is making money. At the end of the day, most of these funds go bust, investors lose money, but the managers walk away with fat wallets of collected profits and salaries over the year or two. A lot of these funds went belly up, due to the carry trade unwinding over the last year, and I am sure these managers are getting hungry again, and in no time, since the carry trade has fallen so low, they’ll start gathering funds again, and getting on the train again. And last two times, in 2004 and 2006, this happened at exactly the same price on NZD/JPY as it is now.

    No matter how you spin it, New Zealand dollar at 7.50% is still the highest yielding currency, among the 8 majors. Yes they may cut again, but other countries such as Australia will probably cut also. And even after the major cuts out of New Zealand, it will still probably be the highest yielding currency, and now that the market has priced in basically a cut of as much as another 1.0% by the year’s end, there is a lot of room for positive surprises, in case they decide to hold.

    Obviously, I may be wrong about this prediction. I’ve been wrong before, but taking into considerations all the cards that I can see from the 8 major countries, I think that New Zealand dollar has the highest potential for growth, and Japanese Yen has the highest potential for fall, so I figured it makes sense to match the two, and go long on NZD/JPY.

    Thanks :)
    -Felix
     
  2. aly

    aly Recruit

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    any way

    god bless you dear:)
     
  3. alkhatarey

    alkhatarey Private

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    i have Question Felix ?

    Hallo Felix
    this is me if you remember me , i was contacting with u before u start to be famous :) and u was answering me , but now even when i ask inside the forum no one is answer me !!!!!!!!!!!!!!!!!!
    i have a qustion , before i asked u how i can learn Fundemental analyzing and u was send me some website books , and u told me read a book it called secret economic indicators, but then i couldnt contact u again!!
    could u please write down the books u was reading to learn how to analyze the market fundmentaly ????
    thanks so much for your help as i know u alwys
    Ahmed
     
  4. ephraim

    ephraim Recruit

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    diamond room subscription from nigeria

    hello felix,
    i had sent mail to you twice.i'm from nigeria and i want to subscribe for the diamond room.i have a mastercard but coukld not pay because nigeria is not listed as one of the countries available for this option!
    what other means can i use to pay.i dont think it is fair being denied from such opportunity.i have being getting your signal for running to a year and fell it will be best to be part of the diamond room live so as to enhance my tradind.
    please reply and let me know the option available for the payment.
    thanks and regards.
     
  5. mike_L

    mike_L Recruit

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    Thanks Felix.

    How about jpy correlation with DOW and demand for yen during risk avertion times? Do you consider stock markets going up?

    All the best.
     
  6. Teresa

    Teresa Private

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    Be careful - carry trade issues!

    Interesting idea, Felix. However, in the current extremely risk averse environment, which will last for quite a long time, what is left of the carry trade will keep unwinding, strengthening the yen for some time to come.

    You may think the carry trade guys have long since unwound or lost their shirts and left the markets. But as long as there is capitalism and you are not in a deep recession or crisis, there are capitalists taking risks, i.e. borrowing money, often from the cheapst source, which is yen. The current environment is worse than a credit crunch, it is a systemic failure that is starting to result in worldwide recession or worse. We are in a crisis that will become a deep recession for several years, if not a depression. This is serious. Businesses will no longer be borrowing and investing, they cannot get the capital. The public is pulling their money out of investments anyway. The fed will be intervening some more of course, but the situation is still drastic.

    That means death of the carry trade, down with Aussie and Kiwi, and the inevitable rise of the yen.
     
  7. acorn

    acorn Recruit

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    to: felix h:
    I do not know how to write you directly. Can you recommend 2 or 3 good fx brokers? I am interested in ones who have low spreads, have good ethics & no scams, open all fx trading hours, decent customer support, & do not use "stop hunting". Look forward to your reply. Thanks. -Acorn
     
  8. murpheytrader

    murpheytrader Private

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    let us know if you are still looking for a broker. Otherwise if you’ve found one, it’d be nice to know how you are doing there. That’s why forums are. Kevin M
     
  9. Clueless Hourglass

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    Nice Call

    Very Nice Call on the JPY pulling away!! ^..^
     
  10. finvik

    finvik Private

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    why dont you sare some of your ideas and ''your new broker here, we all would love to hear about it!
     

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