The Biggest Trap of European QE

The cat is out of the bag. The ECB will buy up to euro60 billion a month from March 2015 to September 2016. Purchased assets will include government bonds, debt securities by European institutions and private-sector bonds.

Why? Eurozone inflation is negative. Deflation is bad news, and pumping money (QE) into financial markets is hoped to fight deflation and spark inflation.

Inflation, by definition, erodes the value of a currency. The obvious conclusion; eurozone QE should send the euro lower.

But if something is too obvious, it can obviously wrong.

Let’s take a look at what U.S. QE did for the U.S. dollar.

The chart below plots the U.S. Dollar Index against the various QE programs.

QE1 saw wild dollar swings, but no discernable down side bias. In fact, the dollar rallied when QE fist started.

QE2 didn’t sink the dollar either and the greenback actually rallied during QE3/4.

Headlines like ‘Why quantitative easing is likely to trigger a collapse of the U.S. Dollar’ proved incorrect.

The euro lost 18% since May 2014. This is one of the most pronounced declines in recent history.

In 2008 the euro lost 23.1% before bouncing back, in 2009/10 21.5%. Technical support for the euro is not far below current trade, so shorting the euro is akin to picking up pennies in front of a train.

Contrary to conventional wisdom, investors should put the CurrencyShares Euro ETF (NYSEArca: FXE) on their shopping list and start exiting the PowerShares DB US Dollar Bullish ETF (NYSEArca: UUP).

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Advertisements

Smart Money is Buying Euro and Selling Dollar

The euro has been more or less in freefall mode since May 2014. Downside momentum increased even more this week.

Nevertheless, commercial traders, industry experts with deep pockets, have been buying the euro.

The chart below plots the euro against net long positions (as percentage of open interest) by commercial traders (data source: Commitment of Traders Report).

As the red lines illustrate, commercial traders are often early, but eventually proven correct. Sentiment is favorable to look for a euro bottom.

The EUR/USD chart shows the currency slicing through support levels like a knife through butter.

Despite the euro’s renewed freefall since the beginning of 2015, RSI has not confirmed the new lows.

There are a couple of support levels around 1.18, so based on sentiment and technicals it is possible that the euro will carve out a low and stage a significant multi-month retracement rally.

ETFs that benefit from a change of trend are the CurrencyShares Euro ETF (NYSEArca: FXE) or PowerShares DB US Dollar Bearish ETF (NYSEArca: UDN).

Leveraged ETFs are available, but are thinly traded.

A euro rally will obviously affect commodities like oil, gold and silver.

Continued updates will be provided via the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

One Indicator Pegs U.S. Economy at Worst Level since 1959

Many economies predict 2014 to be the year of the economic recovery. Some economic indicators and surveys support this view, but this powerful common sense indicator shows the economy at its worst state since 1959.

Money velocity is the frequency at which one dollar changes hands and is used to buy goods and services within a given period of time.

To illustrate we’ll look at two simplified mock economies:

The Federal Reserve prints $100 to buy Treasuries from banks (NYSEArca: XLF). The bank invests the $100 in stocks.

A consumer withdraws $100 from his bank account to pay his mechanic. The mechanic takes his wife out for a nice dinner and the restaurant uses the money to pay its staff and buy new equipment. After receiving her pay check the waitress goes out and buys a new watch.

The original $100 in the second mock economy changed hands four times (high velocity) and helped support three additional individuals/businesses once  in circulation.

The conclusion is obvious: The higher the velocity, the healthier the economy.

Below is a chart of the U.S. money velocity. The St. Louis Fed money velocity data goes back as far as 1959. Current money velocity is at an all-time low.

This can’t be good for the economy and one would think that low money velocity couldn’t be good for the stock market either. Is that so?

Rather than assume, here are the facts.

The second chart plots the S&P 500 (SNP: ^GSPC) against the money velocity of M2 money stock.

The S&P 500 is charted on a log scale to enhance the major up and downs of the past 55 years.

Low money velocity preceded a bear market in 1973 and lower prices in 1977. Low money velocity was also seen about a year before the 1987 crash, which sent the S&P 500 and Dow Jones spiraling.

But there were other instances that had no effect, or no immediate effect, on the S&P 500 (NYSEArca: SPY) and Dow Jones (NYSEArca: DIA).

The current wave of velocity anemia is as unprecedented as the Fed’s liquidity machinations. Both events are likely connected (for every action there’s a reaction).

At very best, money velocity (and lack thereof) may serve as a very blunt warning signal.

Fortunately, there are better warning signals. One of them is discussed here. In fact, it is so effective, I call it insider trading. How Insider Trading Just Became Legal

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

‘Lazy Money’ – The Biggest Bear Market You’re Not Hearing About

Money isn’t created equal, just as economic growth isn’t created equal. There’s real organic growth and there’s artificial growth. The same is true for money. Although the system is flush with money, it’s lazy money.

What is ‘lazy money?’

Lazy money doesn’t move. It keeps to itself and doesn’t spread the love. Lazy money is like a couch potato, it plops itself down and stays down.

Today’s U.S. money supply is lazy, it has no motility or (to use Wall Street jargon) velocity.

What is money velocity?

The velocity of money is the frequency at which one unit of currency is used to purchase domestically produced goods and services within a given time period.

In simple terms, money velocity measures how often one dollar is used to buy goods and services. Decreasing money velocity means that there are fewer transactions between individuals in an economy.

Lower money velocity means that each dollar is touching fewer lives. To illustrate:

A dollar earned by an employee, spent in a restaurant, paid in wages to a waiter, who uses it to buy an iPod does more for the economy than a bailout dollar given to banks (NYSEArca: KBE), where it’s kept as a stagnant number on the balance sheet or dumped into stocks (NYSEArca: VTI).

What’s the velocity of money right now or how lazy is the dollar?

The chart below plots the S&P 500 against velocity of M2 money stock. M2 velocity data goes back to 1959, so does the chart.

The S&P 500 ETF (NYSEArca: SPY) is obviously at an all-time high, but M2 Money velocity has been in a bear market since 1998 and has never been lower.

Here’s my theory. The Federal Reserve prints money and gives it to select financial institutions (NYSEArca: XLF), which park it in stocks and reap fat returns. Banks no longer need to lend. The stock market is where money goes to grow and velocity goes to die.

The conclusion is one you’ve heard before: QE benefits stocks more than the real economy and Fed-printed money isn’t benefiting the economy as much as ‘organic’ money.

If you were to liken the different ‘types of money’ to food; QE money would be considered junk food. Wasn’t there a documentary (Super Size Me) that showed what a diet of junk food does to a human body?

Bernanke likes Wall Street Fat Cats and we won’t have to deal with artery-clogging side effects of the QE junk diet. This will be up to Janet Yellen, Bernanke’s successor to be.

Based on the market’s reaction, investors believe that Janet Yellen will continue Bernanke’s legacy of QE junk food (there are even rumors she’ll super size the banks’ portion).

President Obama went out of his way to praise his nominee’s financial acumen.

In fact, best case scenario the President spread his praise on too thick, worst case scenario he flat out lied about Yellen’s ability.

You can read the glaring conflict between fact and the President’s misleading praise right here: Did Obama Lie About Yellen?

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.

 

Europe’s ECB Warden Draghi is Alarmed … For the Wrong Reason

Like Bernanke, ECB President Draghi is famous for flooding the European financial system with cheap money. The European QE (LTRO) has brought forth some side effects that have Draghi worried, although for the wrong reasons.

This came in from Germany’s Handelsblatt newspaper:

European Central Bank (ECB) President Mario Draghi is concerned about the European banking system and is ready to unleash more emergency loans.

His concern however is over the ‘wrong reason.’ What’s the wrong reason?

Excess liquidity in the European financial system has dropped from 800 billion euro to euro 225 billion.

This sounds like bad news, but it’s not.

Liquidity has dried up because European banks are paying back their 3-year LTRO loans sooner than necessary.

Here’s a brief refresher on LTRO, which stands for Long-term refinancing operations. LTRO is essentially the European counter part to QE.

There were two tranches, LTRO I and LTRO II.

  • Via LTRO I (December 21, 2011) the ECB provided euro 489 billion worth of 1%, 3-year loans to 523 banks.
  • Via LTRO II (February 29, 2012) the ECB provided euro 529.5 billion worth of 1%, 3-year loans to 800 banks.

Good News, Bad News – All Good News

This is a good news/bad news kind of scenario.

The good news is that banks are doing well enough to repay their loans sooner.

The bad news is that shrinking liquidity has resulted in higher interest rates for bank-to-bank lending.

This development threatens to choke the economic recovery in the euro zone.

“We will watch this development very carefully,” says Draghi.

No doubt they will. How dare a natural side effect of an artificial medicine challenge the EU spin doctor.

What it Means for Investors

In theory more euro loans would be bad for the euro (NYSEArca: FXE) and good for the dollar (NYSEArca: UUP). In reality, technical analysis is likely a better indicator if you are trying to figure out what’s next for the euro and dollar.

How will it affect European stocks? If European stocks (NYSEArca: VGK) respond to liquidity like US stocks (NYSEArca: SPY), we can assume that good news is good for European stocks (NYSEArca: FEZ) and that bad news is good for stocks, as long as the ECB keeps the money going.

To assure just that, Draghi confirmed that banks will have access to cheap money for years to come.

Below is a small selection of news featured in German newspapers (translated into English). You’ll find that German news sometimes brings out facets omitted domestically or simply offer a different take.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.

 

Can The Dollar/Stock Correlation Predict The Next Move?

A rising dollar has spelled trouble for stocks for much of the 21st century. Right now the US dollar is sitting right above important long-term support. The odds of a dollar rally are above average. Does that mean lower stock prices? Here’s a detailed look at the correlation between the dollar and stocks.

Everybody (including me) is trying to get a handle on the market they follow, but not ‘all roads lead to Rome’ when it comes to market forecasting.

Some roads (aka market forecasting approaches) are simply dead ends.

Correlations between asset classes and currencies are a legitimate tool to estimate future moves.

One of those relationships is the correlation between stocks and the US dollar.

Theoretically a falling dollar is good for US stocks. Why? A falling dollar makes US products cheaper in foreign countries, which in turn is good for US profits and stocks.

Does the theory hold up in real life?

The first chart below plots the S&P 500 against the PowerShares US Dollar Bullish ETF (NYSEArca: UUP), a proxy of the US dollar.

Obviously, the correlation is an inverse one and somewhat difficult for the untrained eye to detect.

The second chart plots the S&P 500 (NYSEArca: SPY) against an inverted UUP. This makes the correlation a bit more apparent. In fact, comparing the S&P 500 (NYSEArca: IVV) to the inverse dollar is almost like comparing it to the euro (NYSEArca: FXE).

The correlation held up for much of July 2008 to November 2011. What happened in November 2011? Operation Twist was reintroduced, but I’m not sure if that’s enough to upset the correlation.

Regardless of the cause, since November 2011 investors haven’t been able to count on the US dollar/stock correlation to predict future moves for either stocks or the dollar.

Still, it is interesting to note that the dollar is close to important long-term support with above average odds of rallying from here. The red boxes in the first chart shows that recent dollar rallies usually turned into speed bumps for stocks.

So, there’s reason in not ignoring the dollars effect on stocks entirely.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

 

Could a Strengthening Dollar Sink Stocks?

On a walk down memory lane, we discover bold statements like this one – “Nobody wants toxic US dollar” – made in April 2011. Today the dollar trades 8% higher. In fact, the dollar is right above key support. Will it hold and potentially sink stocks?

According to analysts, the US dollar has been doomed ever since the Federal Reserve started QE back in 2008. Every new round of QE draws the dollar doomsday crowd out of their den. To wit, I’ve included a few headlines below:

April 8, 2011: Toxic Dollar: Why Nobody Wants US Currency – CNBC
June 15, 2011: Dollar Doomed to Drop – UBS Technical Analyst
July 28, 2011: U.S. Dollar Poised for a Plunge – Peter Schiff

But nearly five years later, the greenback is holding its ground.

It may not be the strongest currency of the global currency basket, but the US dollar today – and that may be hard to believe – is trading exactly where it was back in 2004 (dashed purple line).

Albeit choppy, since August 2011 the dollar has consistently climbed from higher lows to higher highs.

Connecting the recent lows creates obvious support (green trend line).

The US Dollar Index came within striking distance of this trend line last week.

Will Support Hold?

A trend line is called a trend line because it delineates a trend. In this case an up trend. The trend remains up as long as price stays above the trend line.

Being aware of such trend line support is important for at least two reasons:

1) The trend line makes it clear that the dollar is at a key inflection point. Key support is like a rung on a ladder. If the rung breaks, you fall. If support fails, the dollar falls. If support holds, the dollar should ‘climb up.’

2) Dollar strength or weakness is not just a currency story; it’s also an equity event. There is a correlation (see below) between movements of the US dollar and stocks. A US dollar rally may lead to falling stocks. Why?

A falling dollar is good for exports and corporate profits and therefore good for broad US indexes like the S&P 500 (SNP: ^GSPC). A rising dollar is generally bad for corporate US profits.

Based on my assessment, the odds of a sustained dollar rally are currently greater than the odds for a decline.

The PowerShares DB US Dollar ETF (NYSEArca: UUP) provides long US dollar exposure. If support fails, it may be time to look at the PowerShares DB US Dollar Bearish ETF (NYSEArca: UDN) or CurrencyShares Euro Trust (NYSEArca: FXE).

Exactly how strong is the correlation between stocks and the S&P 500 (NYSEArca: SPY)? Could a US dollar rally sink stocks?

This article about the US Dollar/Stock Correlation shows exactly what a strengthening dollar would mean for US stocks.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF