USDINR: Rupee meets first target, next ...65.5/67.5

As forecast in previous post, USDINR has crossed first target of 63.5. Trend is still up and it may rise further to 65.5/67.5.

USDINR: Rupee can depreciate to 63.5/67

USDINR has broken above 61.5 and may rise to 63.5. The trend is bullish and if 63.5 is broken, it may rise to 67.

Free Portfolio Service: 85.8% Returns till this weekend (since launch in April, 2014)

The Free Portfolio Service started by me in April this year has now generated 85.8% returns as on today.  

It can be accessed via my Facebook page - "India Investors" at https://www.facebook.com/trikaalcapital. 

One can get the portfolio updates on the above mentioned page. 

Use it, like it, share it ... and earn profits & protect losses. It is for public and fully transparent.

Please feel free to contact me for any query. All suggestions, criticisms, and contributions are welcome. 

Free Portfolio Service: 90.01% Returns till this weekend (since launch in April, 2014)

The Free Portfolio Service started by me in April this year has now generated 90.01% returns as on today.  

It can be accessed via my Facebook page - "India Investors" at https://www.facebook.com/trikaalcapital. 

One can get the portfolio updates on the above mentioned page. 

Use it, like it, share it ... and earn profits & protect losses. It is for public and fully transparent.

Please feel free to contact me for any query. All suggestions, criticisms, and contributions are welcome. 

UPDATE: Dow Jones – no retreat, 19000 by September 2015

In my last alert, I expected end of its six year rally on certain conditions (see http://trikaaltrading.blogspot.in/2014/08/big-alert-exit-dow-jones-it-may-retreat.html), those conditions were not met and DJI bounced back and is now set for further rise.

If DJI sustains above 17000, which it should, it may rise to 161.8% Fibonacci level near 19000. If it remains within its Andrew’s Pitch Fork, it may reach 19000 by September 2015.

Free Portfolio Service: 82.1% Returns till this weekend (since launch in April, 2014)

I had started a free portfolio service initially at my company's website (http://www.rrfinance.com/Reserch/ResearchHome.aspx ) on 3rd April 2014. It is still there but then I started a more accessible service through Facebook - "India Investors" at https://www.facebook.com/trikaalcapital to help people to invest profitably in stocks. 

At the end of first week of its sixth month, my portfolio has now given 82.1% absolute return. 

You can get daily updates on the above mentioned page. Use it, like it, share it ... and earn profits & protect losses. 

Please feel free to contact me for any query. All suggestions and contributions are welcome. It is for public and fully transparent.

EURUSD Long Term View: Target achieved.

It was posted on 30, May 2014 here (http://trikaaltrading.blogspot.in/2014_05_01_archive.html ) that "The downside target for current fall is 1.314 within one year.", and EURUSD was 1.363 at that time. 

The currency pair achieved my yearly target in a rather short time of three months. On 28th August, the closing for EURUSD was 1.3132. 

And After ECB's Draghi's rate cut today, EURUSD has now crashed to 1.3044. 

I am closing this call here, and will not be tracking it further.

Free Portfolio Service: 74.6% return in five months

I had started a free portfolio service "India Investors" at https://www.facebook.com/trikaalcapital to help people to invest profitably in stocks. Today on completing 5 months' time, my portfolio has given 74.6% return. 

You can get daily updates on the above mentioned page. Use it, like it, share it ... and earn profits & protect losses. 

Please feel free to contact me for any query. All suggestions are welcome.

Free Portfolio Service for Community

Started a free service "India Investors" at https://www.facebook.com/trikaalcapital to help people to invest profitably in stocks. In last about 5 months' time, my portfolio has given over 62% return, and now I am sharing it with people on Facebook. 

You can get daily updates on the above mentioned page. Use it, like it, share it ... and earn profits & protect losses. 

Please feel free to contact me for any query. All suggestions are welcome.

GLOBAL MONEY – The Great Bonds Bubble

SUMMARY: Bonds have seen a three decade bull market which will collapse if the interest rates start rising. Signs are emerging that the six years of unprecedented low interest rate regime will end now. And when that happens, Bond prices may collapse. Current yield on 10 year US Treasury was 2.5% that is 2.5% above the Fed rate of 0%. When the Fed moves rates higher in 2016 to its target 2.25%, it puts the 10 year Treasury yield at near 4.75% - and it will lead to an approximate loss of 16% in Bond values. A long term Fed target rate of 4% puts the yield near 6.5% and loss near 29%. Losses can be higher for longer duration bonds.

For bond markets which have an average historical return of 5.2% p.a., losses of more than 20% are disastrous.  

US looses both ways – if inflation (and interest rates) does not rise, it faces risk of deflation that can lead to depression. If inflation (and interest rates) rises, it leads to asset bubbles – and eventual burst.

For years now, experts have been saying that there is a bubble – this article explains the issue in factual and logical sequence.

• Is Inflation Rising?
• What will trigger rise of inflation – personal spending, bank lending, or Fed buying even more debt?
• How big is the bubble? 
• What happens when bubble bursts?
• When can it burst?

Is Inflation Rising?   

Though there has been concern that the stimulus would lead to a surge in inflation but core personal inflation has averaged only 1.4 per cent since the recession ended in June 2009.
Recently the inflation as measured by the Federal Reserve's preferred price index surged in the second quarter to the highest annual rate in three years, potentially making the central's bank effort at managing the U.S. recovery more difficult. The PCE index rose at a 2.3% annual rate in the April-to-June period, compared to 1.4% in the first quarter. That's the fastest pace since the second quarter of 2011. And the core PCE that excludes food and energy climbed at a 2% clip, up from 1.2%.
The PCE index rose 1.6 percent on monthly basis in June from a year earlier. “Core” inflation, which excludes volatile food and energy prices, was 1.5 percent.

What will trigger rise of inflation?

a. Personal spending will trigger rise in inflation?

Real disposable personal income has been rising though not very strongly, and may be the reason for rise in personal consumption expenditure and inflation. An alternative to spend more is to reduce savings, and the chart below shows that recently, the personal savings figure has been falling.

Apart from a weak rise in per capita income and falling savings, the main driver of economy – employment growth, has not been showing any significant turnaround. In absolute term the employment has reached near the pre 2008 levels but as a ratio of Employment to Population, it is nowhere near its pre recession levels (see the graph below).

Even the economic confidence level in country as indicated by Gallup’s Economic Confidence Index shows a serious drop in confidence (see the chart below).

In summary, economic growth, employment, and incomes do not seem to have strength to trigger a strong rise in inflation.

b. Bank lending will trigger rise in inflation?

This issue was discussed in previous post also (Global Money – Bubbles in Stocks, Bonds, and Real Estate) which showed that as of now the commercial lending is not rising substantially. Banks are skeptical of repaying capacity of businesses. But banks are sitting on trillions of Dollars, part of which is lying with Fed as excess reserves which is earning them a meager 0.25%. Excess reserves are dollars that banks now hold that are in excess of what they need to have on hand to satisfy reserve requirements.

Excess reserves have now reached $2.6 trillion. When the banks start using this money for lending, it is unimaginable what will be the effect of this epic amount of liquidity on inflation!

c. Fed debt buying will trigger rise in inflation?

Fed is tapering its bond buying program (QE) which is expected to end in October this year, and according to Fed, it will keep the rates low for a considerable period of time after QE ends. How long would be that time?
In May this year, the current Fed Chair Ben Bernanke mentioned his intent to begin to taper, that is, reduce the amount of QE.  The stock and bond markets on Wall Street threw a tantrum.  The Fed panicked and executed a fast retreat.  Is the Fed trapped in this dodgy venture?
The Fed seems to be cornered. It has to wind down QE3 and has to raise interest rates. As soon as it will announce that, markets will panic. Under pressure it may again resort to more bond buying – QE4. This will further inflate the bubble. Many believe the economy will suffer the mother of all bond market selloffs as these steps unfold.

How big is this bubble?

The US bond market has roughly doubled from year 2000 to $39 trillion. This is more than twice the size of US economy.

What happens when bubble bursts?

Bond owners face huge default risk, huge interest rate risk, and huge inflation risk. When the bond bubble ends this means that bonds will decline rapidly in price pushing interest rates markedly higher – think Spain or Itally.

• Bond prices will fall (as mentioned in beginning)
• The QE is an attempt to push interest lowers to support the economy.  Low rates were supposed to boost economy.  Sharply rising rates will immediately curtail that growth as rising borrowing costs slows consumption.
• The Fed is now world’s largest hedge fund with over $4 Trillion in assets.  LTCM (Long Term Capital Management) which managed only $100 billion at the time nearly brought the economy to its knees when rising interest rates caused it to collapse.  The Fed is 30x the size and growing.
• Housing market will collapse when rates rise.  People have to make higher payments when rates rise.
• Higher interest rates are negative for industrial growth. They take fewer loans at higher rates. 
• When rates are low, people borrow and invest in stocks, bonds, and real estate.  When rates rise they will sell the assets, causing a panic crash in prices of all assets.
• The massive derivatives market will collapse as interest rate spread derivatives go bust.
• As rates increase consumers will have to pay more on their variable rate loans. Stagnant wages and increased taxes will lead to a rapid contraction in income and rising defaults.
• Rising defaults will dent banks’ profitability and even sustainability.
• Commodity prices may plunge as the global economy weakens
• Rising rates will mean Fed has to pay more on its debt and may default
• Fed’s action to survive will lead to currency wars

When can this bubble burst?

The trend in economy has been different from that of in markets for quite some time now. And it may continue for some time.
But when do we expect the bubble to burst?

Next…

BIG ALERT: Exit Dow Jones – it may retreat to 13000 by end of 2015

End of Rally: Four technical indicators are pointing towards end of its six year rally –

1. RSI divergence in monthly chart is very clearly indicating a distribution phase in DJI which may lead to a long term downtrend
2. Failure to cross 261.8% level at 16900 indicates DJI may retreat from here. DJI strongly dropped below this level in July, and now in August it seems difficult that DJI will be able to close above it
3. DJI will breach support of Andrew’s Pitch Fork if August closing is below 16600, indicating end of this up trend
4. Cycle indicator has indicated short term down trend

There is an immediate 61.8% Fibonacci support at 16450, if Dow closes below it then exit from long positions. It may retreat to near 13000 by the end of 2015 from its current level of 16430. Hold investments if Dow sustains above it. If Dow bounces above 16730, it may try to resume its uptrend. There may be a rally up to 17000 but uptrend will resume only if DJI can sustain above that level decisively.

Global Money – Bubbles in Stocks, Bonds, and Real Estate

Extreme RISKS Exist in global markets:  

These risks can cause highly volatile movements in all financial markets (stocks, bonds, derivatives, currencies). The impact of these risks can be sharp and extremely long lasting which would be many times more severe than the Great Recession. The impact may be seen in 2014, or it may be 2015, but whenever it happens you need to be aware of consequences and be protected.

We are mentioning below the top 4 risks that can critically affect financial markets and have high probability of occurring in near future –
1. Financial asset bubbles created by QE
2. Structurally high unemployment/ underemployment
3. Severe income inequality in developed as well as developing countries
4. Sovereign default and contagion

In this issue we are discussing the first risk.

RISK #1 Financial Asset Bubbles created by QE

Why QE?

US Federal Reserve started an unconventional monetary policy of Quantitative Easing (QE or printing money out of thin air) in November 2008 to stimulate the national economy when conventional monetary policy became ineffective. It has till now printed $3.6 trillion in QE.
The aim of QE was to reduce interest rate and make easy money available in the system that would lead to more consumption demand, growth in loans, increase in production, and thus creating a virtuous growth cycle.
Risks included the policy being more effective than intended, spurring hyperinflation, or the risk of not being effective enough, if banks opt simply to pocket the additional cash in order to increase their capital reserves in a climate of increasing defaults in their present loan portfolio.

Has QE been effective?

If the QE was effective, it would have resulted into the following –
a. Higher consumption demand and higher inflation
b. More loans by banks
c. More jobs

a. Higher Demand and Higher Inflation: 
Almost zero rates should have spurred borrowing by households and consumption spending leading to rise in demand. A rise in demand should have increased the consumer inflation but so far there’s no sign of that. Annualized consumer price increases haven’t exceeded 3% since 2008, and have trended steadily downward since 2011.

Headline and Core Personal Consumption Expenditures (PCE) Inflation

QE has failed to create demand and raise inflation.

b. More loans by banks:
Why the inflation did not rise? One reason could be that the recipients of all this thin-air money could just sit on it and do nothing.  No loans would be made, which means no new deposits would be made, which means the economy would not simply grow.
And that's exactly what has happened.
As the chart below shows, the loans are nearly at the same level where they were in 2009.
 

Leading US banks have been giving lower loans compared to their deposits.  

February 21, 2013: Bloomberg reported the biggest U.S. banks including JPMorgan Chase & Co. and Citigroup Inc. are lending the smallest portion of their deposits in five years.
The reports cites data compiled by Credit Suisse Group AG which shows the average loan-to-deposit ratio for the top eight commercial banks fell to 84% in the fourth quarter from 87% a year earlier and 101% in 2007. Lending as a proportion of deposits dropped at five of the banks and was unchanged at two, the data show.
According to the report, consumers and companies are reluctant to take on risk until they see more signs that business is improving, despite the fact that the Federal Reserve maintains near-record low interest rates designed to fuel growth.  Additionally, the report states bankers are also holding back as regulators and investors pressure them to curtail risks that fueled the 2008 global credit crisis.
JPMorgan, the biggest U.S. bank by assets, had the lowest year-end ratio in the group at 61%, down from 66% in 2011. Citigroup’s ratio fell to 70% from 76% last year and Bank of America Corp. slid to 84% from 92% the previous year, a five-year low at both firms. SunTrust Banks Inc. decreased to 94% from 96%.

QE has failed to spur lending activity. The reasons are –
1. Demand for credit remains weak due to economic uncertainty
2. Regulatory uncertainty and tighter capital requirements are preventing banks from extending more credit
3. Exceptionally low rates make lending unprofitable
4. Banks are running unusually large excess reserve positions with the Fed that are “crowding out” lending.  These reserves are effectively “loans” to the Fed paying 25bp, funded with bank deposits that pay near zero, creating riskless profits with zero regulatory capital requirement

c. More jobs:
Majority of jobs that are being created in US are temporary jobs. These jobs are created when companies are uncertain of future economic growth. The chart below shows how the temporary job growth out shadows total nonfarm jobs since 2009.

One crucial fact is missed by most of the economic reporters that while jobs are created from one month to the next, the working age population is also growing. Since 2009, as shown in the chart below, employment has grown by a cumulative total of 7.8 million while the working age population (individuals between the ages of 16-54) has grown by over 12.3 million. It results in fewer jobs for the working age population. It is best reflected by ratio of full time employees to total working age population.

While employment has indeed returned to levels seen just before the financial crisis (chart above), there is clearly an issue between the Fed's view of full employment versus the "real" economy. The next chart shows the ratio of total employment versus the working age population. It clearly shows the real employment is nowhere near the pre recession levels.

This data suggests that the "real" economy is far from achieving actual full-employment levels that absorb the excess "slack" in the labor force, increase wages and lead to organic economic growth.

QE has failed to create enough jobs for the Americans.

Risk of bubbles in Stocks, Bonds, and Real Estate and Inflation Breakout

Lending has not improved, consumer demand has not picked up, and inflation is still low – so where is the Fed money going?
Since banks don’t believe in repayment ability of small American businesses and households, they are not lending to them but are more than willingly giving it to its big corporate sector and investing it on their own account into bonds, stocks, and real estate. Borrowing cost is almost zero and returns from these assets are far much higher leading to super normal profits.
Big corporates are not investing in business but are using this money for stock buy-backs, M&A, and raising dividends. The usually conservative savers and investors are also lured to high returns of risky stock markets as the ultra low interest rates generate paltry returns from their savings accounts. This massive pumping of money in financial assets has caused uninterrupted raging bull markets in stocks and bonds. Stock indices have climbed to new highs shaking off all reasons for pessimism as well as the warnings of skeptics.

The result is — asset value inflation (bubbles). 

Summary:

• The Fed's money-printing actions are simply creating new unsustainable bubbles in certain assets, like stocks
• QE-created huge excess reserves on banks' balance sheets will trigger explosive inflation
• The Fed is extremely unlikely to be able to unwind its QE efforts in a controlled way
• Things WILL correct, and when they do, the lack of an exit strategy will result in a massive financial dislocation

To summarize, we are living through the largest and most outlandish monetary experiment ever conducted by humans upon themselves.  The mainstream media is trying its best to convince us that a rising stock market or a rebounding housing market are indications of an improving US economy, but realty is quite opposite.

The Fed is in uncharted territory, having created a monster it can no longer control.  In the process, it is blowing new asset bubbles that are benefitting those with first access to the newly-printed money (banks and corporations) at the expense of savers, pensioners, and anyone exercising fiscal prudence.

When this misadventure in monetary policy ends, as history says it must, it will be messy, uncontrolled, and very painful for holders of just about every sort of financial instrument out there (stocks, bonds, derivatives, currencies etc).

One needs to stay informed and watch out for early warning signals.

EURUSD: Short Term View

As mentioned in previous post, Euro bounced up to 1.3587 but came down from there. If it is unable to remain above 1.358, it will resume its downtrend, may break support of 1.35 and fall further as mentioned in long term view. Right now the target is 1.3525 if it remains below 1.3587. [CMP 1.355]

EURUSD: Short Term View

As mentioned in previous post, Euro short met its target of 1.353 and now it is in a pullback mode which can take it upwards up to 1.364/ 1.367. [CMP 1.3527]

Portfolio crossed 50% ROI yesterday

Portfolio link

EURUSD: Short Term View

Sell signal generated on yesterday's closing of 1.3592, expected near 1.353

EURUSD: Short Term View

Last view was "EURUSD is trending down and may fall up to 1.347 within few weeks", and within a week it fell near target to 1.3503 yesterday. Short term downtrend is over, pullback is taking place which may take it up to 1.38, and before that it faces strong resistance at 1.3700. 
Above 1.388, it will become long term bullish. 

EURUSD: Long Term View

EURUSD had been in a strong uptrend since 2002 till 2008 and after that it has been swinging wildly between 1.5 and 1.2.

In its recent upswing, it has been rising since 2012 but has failed to sustain above 61.8% level of its current swing. It has also made an RSI divergence which indicates end of the current rally. The downside target for current fall is 1.314 within one year.

There are indications that EURUSD may breach a very critical 38.1% level of 1.30 and the last line support of speed resistance lines. In this scenario, it will enter a long term downtrend and may fall up to 1.140 by end of year 2015. In next few years Euro may fall back to sub 1.00 levels.