Monthly Archives: March 2012

Month and quarter ends are always interesting times in the market, with all kinds of capital flows offering the potential to move markets. This time of year in particular we also have Japanese fiscal year end to add to the mix. As we near the finish this quarter, though, I’d like to take a look at what might be coming our way in the next one. Specifically, I want to take a look at the research I’ve done on forex seasonal trading patterns to see what’s ahead for the market.

April is not a very strong month for the USD. In fact, statistically it has been one of the worst. Looking at data back to the early 1980s, we can see that in general terms the dollar has fallen about 60% of the time and lost about 0.5% in value against the other major currencies (I’m not specifically using the USD Index here, but close). The pattern is even stronger since the introduction of the euro. Going back to 1998, the dollar has been down 61.5% of the time for an average annual loss of 0.72%. Only December has a more negative pattern.

One thing that is worth noting, though, is that we would expect to see a positive transition over the next few weeks. We can see that on the chart below, which looks at the 1-month forward returns on a week-by-week basis (measuring 7-day periods, not calendar weeks).

USD rolling returns chart

The featured area is the next 4 weeks, with week 14 representing April 1 to April 7. We can see we start April off in a period of strong negative indications for the dollar, a pattern which began a couple weeks ago. That shifts from negative to positive as we get into the middle part of April, though.

As for what to play on the other side, the pound is the major currency with the best April statistics. The GBP been up in general terms nearly 70% of the time during the month since the euro launch for an average 0.45% gain.

We would therefore expect GBP/USD to have a strong positive bias heading into April and that is indeed the case, as the weekly returns chart shows.

GBPUSD rolling returns chart

Notice here, though, that the pattern shift is much more swift, if also more abbreviated.

This seasonal bias information isn’t a suggestion to go out and get long GBP/USD, though. These biases are just that, biases. There are no sure things and even when the market does move in line with tendencies it can do so in a very choppy fashion. As such, you would likely be better off using this information to help shade your trading – like perhaps being more aggressive on trades you do in the direction of the bias and less so against it.

It’s all about putting the odds as far in your favor as possible. This sort of data, if used prudently, can help you do that.

Now, as to what this means for the global markets…

That’s a bit trickier now that we aren’t seeing the same market patterns that we were seeing in the past whereby the dollar and stocks and interest rates all had pretty well-defined relationships. As a result, we need to be aware of whether the market is in “risk” mode whereby stocks and commodities are rising and the dollar is falling, or in the recent mode whereby the dollar and US Treasury yields have moved together, mainly as a function of whether the market sees more QE coming from the Fed. I personally don’t expect anything like that, but Bernanke has done is best to keep the markets thinking he’s inclined to maintain an accommodative monetary policy and doesn’t want to see long-term rates rising too much.

 

 

There are many aspects to the euro-zone crisis but, the message from the EU’s policymakers remains the same – the turmoil was precipitated by fiscal profligacy on the part of peripheral nations including Greece, Ireland, Portugal and Spain.  This diagnosis means that the solution advocated by countries belonging to the single currency’s core is centred upon fiscal austerity and structural reforms.  But, is the standard European narrative supported by the facts?

The Germanic view, which has become the conventional line at European policy level, is not corroborated by the evidence however, and is an inaccurate representation of the facts at best, since the data suggests that unsustainable fiscal positions among the periphery were largely a result of the crisis and not its primary cause.  Indeed, following the adoption of the single currency and up until the crisis struck, the average fiscal deficit registered in the peripheral countries was below the Maastricht criteria of three per cent of GDP and not materially higher than the core countries’ average fiscal deficit until 2008.

Upon closer examination, the historical record reveals that only Greece can be truly accused of fiscal profligacy over the period in question with the country’s fiscal deficit exceeding the Maastricht criteria each year between 2001 and 2007, and averaging more than five-and-a-half per cent of GDP over that period.  The average deficit for the remaining peripheral countries however, was below two per cent each year until 2008, and lower than the German deficit between 2001 and 2006.

The evidence demonstrates that deficit spending was not prevalent among the periphery pre-crisis.   Indeed, Ireland managed to register a surplus through most of the period, and Spain recorded a surplus between 2005 and 2007.  Further, the facts also dispel the notion that Germany was a ‘paragon of virtue’ in the years leading up to the crisis, as the record shows the Germans posted a fiscal deficit in excess of the Maastricht criteria between 2002 and 2005.  This served to undermine the Stability and Growth Pact (SGP), and delivered a slap in the face to countries such as Austria and the Netherlands, who had taken difficult decisions to comply with its terms.

Gross government debt ratios before the onset of the crisis tell a similar story.  Greece proves to be an outlier once again, as it sported a public debt-to-GDP ratio of more than 100 per cent pre-crisis – well in excess of the Maastricht criteria of 60 per cent.  Meanwhile, the figures for Ireland and Spain looked remarkably healthy at 36 and 24 per cent respectively while, the figure for Portugal was 68 per cent, about the same as France and Germany at 64 and 65 per cent respectively.  Importantly, the periphery’s average public debt ratio was not significantly higher than either France or Germany at 68 per cent, though five of the seven countries including Germany, were not complying with the SGP.

It is quite clear that apart from Greece, the euro crisis cannot be attributed to reckless fiscal policy in the peripheral countries.  The truth of the matter is that the crisis has less to do with fiscal profligacy and more to do with the large and persistent intra-euro zone imbalances built up during the upswing.  The average current account deficit among the periphery increased from just four per cent of GDP in 2003 to almost eleven per cent by the time the crisis struck, which caused net foreign liabilities to rise to more than seventy per cent of GDP in Greece, Portugal and Spain.

External debt indicators all vastly exceeded levels that had previously triggered crises in developing countries, but the warning signs were ignored because the euro-zone itself was largely in balance with the rest of the world.  Further, the periphery’s deficits were financed through the flow of capital downhill from the high-income surplus countries, which caused some to argue that the imbalances were a normal part of the convergence process.

However, the current account deficits were not a function of higher investment rates that promised to deliver higher future income growth, but lower savings rates and excessive consumption driven by negative real interest rates alongside sharply rising asset prices in the case of Ireland and Spain.  The continued rise in net foreign liabilities was simply not sustainable, and the inevitable cessation of external lending precipitated both a government funding and banking crisis.

The surge in public debt-to-GDP ratios alongside the large jump in the yields on government debt prompted Europe’s policymakers to see unsound government finances as the problem and thus, the focus on fiscal austerity.  However, the primary cause of the crisis was unsustainable intra-regional imbalances, which ultimately gave way to a balance of payments crisis, as the cessation of private sector lending to the periphery alongside capital flight led to a deficit position on both the current and capital accounts, which has since been funded by official sources.

The bottom line is that fiscal adjustment in the troubled peripheral nations is not sufficient to end the crisis on its own, as a sharp turnaround in the current account is required to stabilise the level of net foreign liabilities.  However, without stimulus in the core countries such as Germany that prompts a narrowing of their surplus position, a reversal will only be achieved through a collapse in imports, which implies a contracting economy.  In this scenario, public and private sector debts will continue to rise.

Needless to say, the euro crisis is far from over.

Previously posted on www.charliefell.com

 

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Our Two Cents – Week of 3/26/12

While I spent much of last week in the U.K. for business—and enjoying a grilled ham and cheese with a fried egg—nothing beats catching up on all the financial headlines on a long flight across the pond.

In the U.S., economic confidence still resonates. A new Bloomberg survey finds U.S. economic optimism has hit an eight-year high. Nearly 35 percent of respondents in the monthly consumer expectations survey said the economy was improving—the largest jump since January 2004. These perspectives come on the heels of declining unemployment benefits, showing that the labor market is recovering. Unemployment claims dropped to 348,000, the lowest level since the financial crisis.

In the eurozone, the European Union proposed a heftier permanent bailout fund of 940 billion euros. While Greece had been in the news for much of its budget woes, it received a new commander for its monies when it named new finance minister Philippos Sachinidis. The week began with “Greek Deliverance Day” for bond payments, while the country also received the first 7.5 billion euros of aid from the new European Union/International Money Fund bailout. Next week is shaping up to be a busy one. Spain will present its full budget after ripping up its 2012 deficit target, and Italy will continue discussions about labor reforms, which will head to parliament.

Lastly, hedge fund investments posted an overall increase of 2.38 percent in February, according to the Barclay Hedge Fund Index.

 

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

The blogosphere was atwitter yesterday following Ben Bernanke’s class presentation at George Washington University. He did a hatchet job on the idea of the US ever going back on the gold standard, and the overall idea of having a gold standard period. This is obviously a major hot-button topic in both the markets and the broader world these days, so naturally there have been some heated reactions. I won’t wade into that particular battle, but did think it’s worth looking at how the metal is doing.

The chart below is the continuous front-month gold futures contract with open interest (green) and volume (purple) plotted below. There are some interesting things to be gleaned from the last two years of trading activity.

Gold Chart

Two things jump out at me.

First, notice the general downward slope in the peaks of Open Interest (OI). Ignore the sharp declines which are spaced through as that represents the futures roll-over period. Just look at the relative heights of the peaks and how they have been sloping lower since early in Q4 of 2010. That’s a sign of falling participation in the market, especially over the last several months following peak last year. This is a good explanation for why gold hasn’t been able to manage even a retest of that prior peak on the last couple of upswings.

The other observation, which is harder to specifically see the chart, is that we’ve seen a pattern shift in volume. Heading into the peak in August the volume spikes tended to be on moves higher. Since then, though, the major volume spikes have all come on big down days. That’s an indication of a change in psychology whereby the longs are no longer as secure in their positions as they were previously and are thus quicker to exit, and/or shorts are more eager to jump in.

I think gold is in trouble here and could easily fall back below 1500 on the next move down. That sort of thing would probably be indicative of support for the USD, but the correlations these days have become somewhat muddled, so it’s hard to be sure.

 

The seemingly never-ending Greek saga has weighed on market sentiment for more than two years, as investors increasingly questioned the troubled sovereign’s ability to repay its debt.  European policymakers insisted throughout that there was “no risk” of default, but the rhetoric ultimately proved long on hope, as the Hellenic Republic succumbed to the inevitable in recent weeks, and became the first developed country to default on its debt in six decades.

The largest sovereign default in history was greeted by investors with a mere shrug of the shoulders, a far cry from the violent reaction that policymakers long feared would bring the financial system to a standstill.  Simply put, the game has long since moved on, as investors relegated the Greek crisis to an uncomfortable but manageable sideshow, and the more pertinent question today is who’s next.

Policymakers argue that the Greek situation is a ‘unique and exceptional’ case, but such claims are certain to fall on deaf ears, given such rhetoric’s lack of credibility.  Indeed, investors have already placed Portugal firmly in their sights, and the beleaguered country’s sovereign debt has failed to participate in the meaningful downtick in euro-zone government bond yields precipitated by the first tranche of the ECB’s three-year long-term refinancing operation late last year.

Portuguese policymakers have expressed confusion at the debt market’s reaction to their seemingly heroic efforts to more-or-less meet the fiscal targets set-out by the troika in last year’s rescue package.  Indeed, the second review document published by the IMF last December revealed that the Lusitanian government managed to reduce the fiscal deficit by more than three percentage points of GDP last year to below six per cent, an impressive achievement against the background of a rapidly contracting economy.

Careful analysis however, suggests that the fiscal improvement is not as stellar as it might appear which will make it far more difficult to meet the targets for both this year and beyond.  In this regard, it is of concern to observe that last year’s effort would have fallen well short of target, but for the use of accounting cosmetics that masked the true magnitude of the underlying adjustment.

In fact, the reported deficit would have come in almost two percentage points below the desired level, but for a last-minute transfer of banking-sector pension funds to the government social security system.  This transfer accounted for almost sixty per cent of the fiscal adjustment in 2011, and removing this once-off item implies that the underlying improvement was actually 1.3 percentage points of GDP, considerably less than the ‘fudged’ reported number.

More importantly, the true fiscal position today reveals that the necessary adjustment to meet the target for 2012 is far greater than it appears in official documentation.  The deficit in 2011 – excluding the transfer of banking-sector funds – was 7.8 per cent rather than the 5.9 per cent reported, which means that the adjustment required to satisfy the 4.5 per cent target this year is more than three percentage points of GDP or two and a half times larger than the improvement implied by the unadjusted data.

The additional fiscal drag alongside an accelerating pace of domestic demand destruction and rapidly decelerating export growth means that this year’s economic contraction could well be much greater than the 3.3 per cent percentage point decline pencilled in official forecasts, which will make this year’s targets virtually unattainable.

Indeed, the year-on-year decline in domestic demand accelerated from below five per cent in last year’s third quarter to 9.5 per cent in the final three months of 2011, while export growth decelerated by more than three percentage points to below six per cent between the second and fourth quarter, as demand sagged in its major trading partners, most notably Spain.

Given the negative momentum, it is not difficult to construct a scenario in which the economy contracts by more than five per cent during the current year.  Given such an outcome, disappointing tax revenues alongside the strain on government expenditures could well see the fiscal deficit come in at seven per cent in 2012, while the level of outstanding public debt could jump to more than 120 per cent of GDP.

Needless to say, the notion that Portugal could return to the markets in the autumn of 2013 as currently envisaged under the rescue plan, would completely evaporate under such a scenario, while the pressure to restructure the Portuguese sovereign’s debt would likely prove insurmountable.

Further, it is important for investors to be aware that unlike Greece, the Portuguese crisis originally stemmed from excessive private-sector debts that currently amount to almost 200 per cent of GDP.  The large and persistent decline in the economy is certain to make a vast number of loans unserviceable, and the eventual losses incurred by the banking system could well become public debt.  In a nutshell, there could well be no option but to restructure Portugal’s sovereign debt in order to place its economy on a more sustainable path.

An ‘orderly’ debt default has been orchestrated in the case of Greece, but the insistence that it is a ‘unique and exceptional’ case looks empty as the spotlight turns to Portugal.  The negative momentum evident in the Lusitanian economy suggests that the restructuring of Portuguese sovereign debt could well prove unavoidable.  Investors should note that the euro crisis is far from over.

Previously posted on www.charliefell.com

 

 

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Our Two Cents – Week of 3/19/12

There’s nothing better than warm spring weather in Boston. It’s even better when the financial markets are performing just as upbeat as South Boston’s St. Patrick’s Day Parade.

In the U.S., fiscal optimism resounded as economic confidence hit a four-year high, according to a recent Gallup poll. The good news stemmed mostly from last week’s U.S. jobless claims, which adjusted to about 351,000. Other indexes—and commentary—illustrated the nation’s strengthening economy. The Thomson Reuters/University of Michigan’s Consumer Sentiment Index for February and the latest Consumer Confidence Index from the Conference Board both posted their highest readings in a year. U.S. Treasury secretary Timothy Geithner said the country’s economy continues to show signs of expansion.

In the eurozone, its current-account surplus surged in January to its highest level in almost five years. Greece’s Prime Minister Lucas Papademos said the country was more than halfway on the road to economy recovery, optimistic about achieving positive growth rates within less than two years. Officials also formally stamped Greece’s second bailout, hoping the 130-billion-euro package will provide the country with enough aid until 2014-15.

For hedge funds, investments saw healthy inflows as they advanced 2.10 percent in March, according to GlobeOp Financial Services. As inflows increased, the number of hedge funds last year swelled to the highest level since 2007. The number of new hedge funds totaled 1,113 in 2011, according to fund tracker Hedge Fund Research. Also, the RBC Hedge 250 Index returned 1.25 percent for the month of February, bringing its year-to-date return to 2.96 percent.

 

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Unless you’ve been comatose for the past week, it's likely news of the infamous Smith/Goldman love letter has permeated your conscious in some way or another. If, however, you have been out of service and missed out on all the excitement, here’s a quick recapitulation of the recent drama:

Greg Smith, former London-based executive director of Goldman Sachs US equity derivatives business, decided this past Wednesday he’d just about had it with the company. So, he did what any employee with pent up negative emotion would do and… went out with a bang. Upon resigning,  Smith composed one heck of a “tell ‘em how you really feel” letter that was published op-ed in the New York times. In it, he expressed how he felt the culture of the firm had grown increasingly “toxic” since his early days there.

After carrying on in great detail about how Goldman couldn’t care less for the well being of their clients, he mentions a few times the crippling effect this environment is likely having on the younger employees working at the firm. This got me thinking about a different aspect of the most recent Goldman media storm aftermath: what about those individuals at the organization who are working hard to conduct genuine business?

What about the people there who worked their tails off to hold a position at one of the worlds most illustrious investment banks, and continue to do so every day? Contrary to popular belief, these types do exist within the Goldman culture and they truly do care about their clients. Each day, they make advising them on how to manage money in a way that will help their future, as well as the future of their families, a priority. To them, this is a truly fulfilling career.

Now, after another Goldman media mess, I honestly feel for the good-at-heart employees that are left to deal with the wrath of nasty public scrutiny and defend a career they’ve worked hard to attain. It’s kind of bitter sweet to see this once highly revered institution who’s very name evoked thoughts of prestige and integrity, turn into something quite different thanks to a few bad decisions made by a few certain people.

It’s especially unfortunate for the junior analysts Smith references throughout his piece who’s most common question about derivatives is “how much did we make off that client?” as they observe those higher-ups discuss them as apathetically as they do.

Hopefully one day the recent college graduates who find themselves fortunate enough to successfully fight their way through the grueling interviews and land themselves a position at the firm, can once again be proud to say “I work at Goldman Sachs.”

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

U.S. stock prices continued their upward climb through the months of February and March, and the near 30 per cent gain in just five months has seen the major indices move above the levels that prevailed just weeks before the world’s capital markets descended into freefall during the autumn of 2008.

All too predictably, the sharp reversal in the equity market’s fortunes has prompted the perma-bulls to confidently declare that the path of least resistance is up.  There has rarely been a better time to buy stocks, they argue, given valuations that have seldom offered such high returns relative to Treasury bonds.  Could the soothsayers be right or is this just one more opportunity to lighten equity allocations in the face of the negative secular trend that has persisted for more than a decade?

It must be stressed that strategic allocation to equities should be consistent with the output of a properly-constructed valuation model that provides a relatively reliable estimate of potential future returns.  In this regard, it is unfortunate to observe that the industry appears to have learned little from the near-zero real returns earned from stocks over the past fourteen years, a disappointing outcome that stemmed in large part from overinflated valuations.

Indeed, far too many professionals continue to employ the very same techniques that failed to preserve capital so spectacularly through the two brutal market setbacks endured since the turn of the new millennium.  The inability to spot trouble ahead is typically blamed on unforeseeable events but, the plain truth of the matter is that reliable measures of valuation were pointing to meagre long-term return potential well before the markets completely exposed the industry-preferred methods that lacked theoretical substance.

The price/earnings multiple is the most widely employed valuation tool, but the standard calculation is deeply flawed given the use of single-point forward-looking projections of operating profits per share.  The denominator should reflect the market’s long-term earnings power and not a number that is unduly influenced by the stage of the business cycle.

In this regard, it is simply not reasonable to use an earnings estimate that incorporates profit margins that are at a multi-decade high, as is the case today, since the historical record demonstrates that this measure of profitability is one of the most mean-reverting of all corporate fundamentals.

Further, the traditional analysis calculates earnings before once-off items such as discontinued operations, extraordinary items, and the cumulative effect of accounting changes.  A top-down perspective suggests this practice is dubious, since asset write-downs and once-off charges are neither exceptional nor extraordinary in an economy-wide context, but an inevitable product of competitive rivalries, not to mention the ups and downs of the economic cycle.

The historical record since Standard & Poor’s first began compiling operating earnings data reveals that the level of once-off charges moves in tandem with the economic cycle.  Indeed, reported profits i.e. after write-offs, have moved to as high as 98 per cent of operating earnings during the past two economic expansions, only to drop to as little as 16 per cent during the subsequent downturn.  Simply put, bad investment decisions that seemed sensible during the boom are exposed during the bust that follows.

Those of a bottom-up persuasion argue that reported profits do not represent an accurate picture of a company’s ongoing earnings power, because the write-off truly is a once-off event.  However, if this argument had merit whereby one-off events are random, then one would reasonably expect the odds of a negative charge to be equal to the chance of a one-off gain.

The historical evidence however, paints a completely different picture.  In fact, there has only been eight quarters over the past 24 years in which reported profits have been greater than operating earnings, and only one quarter since the first three months of 1995.  Further, the gap between the two earnings measures has grown through time as the level of write-offs has increased at more rapid clip than operating profits.  Needless to say, the operating number is not a true and fair representation of the market’s long-term earnings power and should be discarded.

The price/earnings multiple popularised by Robert Shiller of Yale, uses ten-year average earnings as the denominator, and the historical data demonstrate that it has considerable predictive ability.  The current reading is close to 23 times, a level that has always been followed by lacklustre long-term real returns.  Indeed, investors could consider themselves fortunate if they go on to earn real returns of anything more than three per cent per annum over the next ten years given current valuations.

For those who doubt the message emanating from the Shiller price/earnings model, consider Tobin’s Q-ratio, which measures the market value of equity relative to its replacement cost.  The stock market is currently trading at more than 20 per cent above the long-term average, and as with Shiller’s measure, this technique suggests that investors can reasonably expect low real annual returns in the decade ahead.

The favourable stock market outlook espoused by the bulls is based not only on dubious absolute valuations, but also on the attractive yields relative to Treasury bonds.  However, several academics and practitioners have shown the comparison to be a form of money illusion with no ability to predict long-term stock returns.

The bulls are back in charge, but studied analysis shows their valuation arguments to be flawed and even dangerous.  As the late Humphrey Bancroft Neill, author of the 1954 classic, ‘The Art of Contrary Thinking’ observed “The crowd rides the trend and never gets off until it’s bumped off.”  Investors would do well to remember that it wasn’t raining when Noah built the Ark.

Previously posted on www.charliefell.com

 

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Have you been paying attention to the changing dynamics in the markets of late?

We’re no longer in a world where the dollar moves in the opposite direction from stocks on a consistent basis – the risk-on/risk-off pattern. Of late, in fact, stocks and the buck have moved in the same direction, as we can see in the chart below (USD Index in green, S&P 500 in black). For the last few weeks that direction has been higher.

S&P 500 Chart

As we can see from the weekly chart below, things have been pretty muddled all year long. The stock/dollar correlation (based on a 20-period calculation) has been a bit positive since December, though only slightly so. Basically, the two markets have been mainly uncorrelated, taking us back to a time when the financial markets mainly traded on their own factors.

Ahhhh…the gold old days. :-)

Weekly S&P 500 Chart

Right now the thing that has the two markets moving in unison is something that was actually part of the story even back during the financial crisis. The US markets are benefiting from the view that the US is well into recovery mode while the Europeans (the USD Index being heavily weighted in those currencies) still have a lot of stuff to work through to get themselves on track.

Now, the European problem has been in place for a while now, which is why if we look at the relative performance of the S&P 500 and the German DAX index below we can see that while US stocks have pushed above last year’s highs, German one still have a ways to go.

S&P 500 Chart

What’s changed of late where the dollar is concerned is the view on what the Fed will be doing – or more correctly, what it won’t be doing. The better US data has lessened the need for Bernanke & Co. to further loosen monetary policy by piling on new quantitative easing (QE) at some point, and statements out of the central bank have indicated that these figures aren’t being viewed as some kind of anomaly, but rather as part of a developing pattern. This reduces even further the odds of QE3, and as the chances of the Fed pumping more dollars into the system decline, the dollar is at least less pressured, if not outright supported from buying by those who expected QE3, especially in the face of the ECB dumping close to a trillion euros into the system via the LTROs.

So we’ve got improving economic data helping stocks and also helping reduce the chances of Fed action which would be negative for the dollar. That’s what’s causing the two markets to move in tandem of late. Just keep in mind, however, that the dollar tends not to do great when (all things being equal) when the US economy is very strong because of our increasing demand for imports. We’re not exactly in strong economy mode yet, but it’s something that will become a factor as things improve.

This past Wednesday, London based Goldman Sachs Executive Director Greg Smith stepped away from his 12 year relationship with the firm. Upon his departure, Smith composed a very personal and revealing resignation letter which was published Op-ed in the New York Times. In it, Smith expresses how deeply disheartened he’s grown with the direction the company’s carried itself throughout the years; particularly in the manner it’s clients are being treated.

“I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief,” Smith says in his letter.

In fact, it was this drastic change in Goldman’s culture that prompted him to sever ties to the establishment that gave him his start. When Smith first began as a summer intern while attending Stanford, the company’s morals centered around a completely different ideal: putting the interest and well being of the client before all else.

“It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients' trust for 143 years,” reflects Smith.

Today, he observes that not a trace of that culture exists in the firms current environment. A few key realizations culminated Smith’s opinions on Goldman, which essentially led him to his final decision. One of these revelations came when he reached the point where he could no longer look students in the eye and honestly tell them what a great place it was to work.

The next was when he watched the facet of Goldman advising that he was once proud to embody – directing clients in a way most beneficial to them – reach its untimely demise. Smith explains how the notion of counseling clients in such a way, even if it meant making less money for the firm, was quickly declining in popularity.

His final thought on the company revisits in depth the focal point of his piece, which is of course the former executive directors dismay with the way clients are treated.

“I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It's purely about how we can make the most possible money off of them,” Smith states.

He goes on to explain the way clients are currently regarded amongst the company’s inside culture and compares it to how it was when he began. During this time, Goldman advisers made it their job to get to know their clients, determine how they defined success, and work to help them achieve it.

One of Smith’s lines says it best: “If clients don't trust you they will eventually stop doing business with you. It doesn't matter how smart you are.”

This proves true in any business and Goldman Sachs apparently is no exception. Perhaps Smiths letter will contribute in some way to restoring the culture of one of the worlds leading investment banks back to what it once was.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.