Monday, November 09, 2009

CARRY TRADES and, well, CARRY TRADES...

Tonight on my radio show; Trend Success (www.chataboutit.com), I talked a little bit about the carry trade. It's become quite obvious that the main thing now carrying this market is the Carry TRADE.

So, what is a Carry Trade? Basically it's when you can borrow money at very low (now zero) interest, and then use it to invest/buy and leverage in to a vehicle that pays a higher rate. Kinda like borrowing from Peter to pay Paul, except Paul ultimately pays off a whole lot better then Peter could ever have imagined.

It's one of the main reasons that the big powerful investment houses (GS, MS) have made huge hoards of cash trading this market since the bailouts by taxpayers. Basically, they have taken the Fed/Taxpayer money and leveraged it (the same risk trades that got us into this mess to begin with in some cases, though thats oversimplified) and made massive profits which they then pay themselves billions with.

It's basically double taxation all around. At some point people will realize that we've been screwed, but it ain't now. Banks borrow OUR money at next to 0% and then loan it back to US at 6% or higher. When they start taxing US for the money we loaned that is being loaned back at higher rates maybe the Rat isn't in Denmark after all.

Meanwhile, futures are down as I write this. This is a TOUGH market. I am cutting back my lot size because of it. I'd love a nice pullback here so we can ramp into year end, but I'm not counting on it.

So, let's just carry ourselves and keep things hugging the vest, meaning take it a day at a time. Keep an eye on GOOG and AAPL here, they should make new highs shortly and will either reject them or plow through and that should tip the markets hand. Of course, you can probably use S & P and Nasdaq highs same way. A gap down has to be buyable for a fade, but we've been trending both ways seemingly every day.

So...in times like this I try to pick my spots and trade lighter then normal.

I will say, as I said on my show tonight, once that carry trade unwinds we are going to get the mother of all selloffs.

RULE

Michael "Waxie" Parness

It's pretty ingenious and basically the taxpayer is the tool in the end cause we'll be "carried" to the ER with heart attacks when our taxes go through the roof.

So, as long as the US DOllar stays weak then the carry trade could conceivably stay in effect. Think of it this way, would you rather have your money in US currency, or in a rising stock market? Maybe the stock market will go down - MAYBE - but we KNOW the US Dollar is tank city in the long and probably short haul.

So, that's why when people ask me how high we can go, I have no idea, seriously. I thought we'd pull back last week post FOMC, and clearly I was wrong and got slammed because of it. Hey, shat happens, it's part of the game, even I ain't always right, no shot, no one is.

Having said that, today's move was all off the G20 saying that they are going to keep the printing presses rolling and as long as that happens, you have a carry trade going.

Having said that, there are signs that this rally is waning even as we made new highs today on the year on the DOW. Volume has gone down over the last few days trading as we continue to rise.

1 comment:

PavewayIII said...

Great show last week, Mike. Not able to call tonight (time diff - work) so I'm hoping you have some insight on this aspect of the carry trade tonight:

Isn't the U.S. government motivated to keep the dollar (artificially) weakening against other major currencies for some time in order to continue selling bonds? You could effectively match and beat Australia's higher interest rate by some reasonable assurance of the dollar strengthening against other currencies in the next year or two. Clinton could suggest that (secretly, of course) to the Chinese - their dollar-denominated bonds will appreciate maybe 10-20% in the next year or two when the U.S. stops holding down the dollar? That's way better than the Aussies' 4% rate! Your effective rate (if holding in AUD) would actaully be negative vs. the USD.

Wouldn't the U.S. government have the means and motivation to gradually force the dollar lower for this purpose? If so, then wouldn't they back off in an orderly manner as well?

I'm not suggesting that the carry trade will not eventually unwind, just that it will happen so gradually that there's little trading opportunity in it directly.

Am I missing something? Most of the commentary I've read seems to suggest that the dollar's weakness is fragile, and that traders and speculators could force a reversal. If the U.S. government is 'facilitating' USD weakness to sell bonds, I can't imagine that they would give up control so easily or at all. They need to be able to sell a lot of bonds in the next few months.

[You might want to post the link to your show's recording for later time-zones.}