Tags: carry | trades

Life Returning to Carry Trades

By    |   Monday, 08 Dec 2008 10:17 AM

Last week was a blood bath in the economic data for the United States. Yet, the stock market still ended up for the week.

When bad economic data continues to come out, yet the market seems to turn its head and ignores it, it usually means that every possible bad thing that could be priced into a stock has been. That's a good sign.

We know the recession isn’t ending any time soon, so the data will continue to pour in on the downside for a bit longer. However, towards the latter stages of a recession, stocks preemptively rally in anticipation of the recovery.

In other words, big institutions buy up beaten down stocks while they're still at bargain basement prices and before everyone realizes we will be pulling out of the recession soon. Probably within three to six months.

Experts estimate we’ve already been in a recession for a year. The average recession tends to last between eight and 12 months, with rare ones lasting two to three years.

Since the Fed and Treasury have been working on the economy for a while now and interest rates have remained low for quite some time, it shouln't be long before their efforts start to have an effect.

We wish economies turned like speed boats but the fact still remains that they do not.

However, what was fascinating about last week was that the ISM manufacturing number came in at 36.2. Once it crosses above 50, we enter an expansion in the manufacturing sector. So last week's report was disappointing. The ISM non-manufacturing (services) number was 37.3. Again, bad news.

Then the ADP employment report came out and showed 250,000 jobs lost in November. Then the weekly jobless claims number came in at 509,000 claims for unemployment that week. That was topped by Labor Department figures that showed 533,000 jobs lost for the month of November, the most in 15 years.

With every report showing a bleeding manufacturing and services sector and bleeding employment/unemployment reports, you should get a further sell-off in stocks. The fact that you didn’t tells me that the end is near for the bear market in stocks.

What about currencies? They have followed the lead of stocks downward. All of them have perished except for the yen and the U.S. dollar. They served as defensive plays as money ran to these badly beaten up and bruised currencies as somewhat of a safe haven.

Since stocks have begun to stabilize lately, so have the carry trades. Now, remember, a carry trade is where you buy a higher-yielding currency against a lower-yielding currency. The idea is to gain the difference between the two countries' interest-rate yields over time. This strategy works great in stable-to-upward trending stock markets.

However, they get absolutely slaughtered when stocks head south. Just as investors don’t want to take on risks in stocks, they don’t want to take on risks in commodities or currencies either. So, they collectively run for the defensive plays in each market.

With the recent stabilization in stocks though, we’ve seen many of the carry trades begin the stabilization process too. But, what is amazing to me is that there is one clear leader right now among the carry trades. It’s the EUR/CHF pair. That’s the euro vs. the Swiss franc.

It’s one of the few financial instruments in the world right now making higher lows and higher highs. Anything that’s going up right about now should be taken seriously.

So, not only should investors look to buy into this pair on pull-backs, but they also should watch other common carry trading pairs that could turn up in the second wave of upturns. These could very well be pairs like EUR/JPY, AUD/CAD, or AUD/JPY. These all have stabilized along with stocks, but like stocks they have not quite turned upward yet.

You should take a look at the carry trades now for the first time in well over a year. They’ve declined so much in the past year and a quarter that they’ve literally erased seven to10 years of gains in many instances.

If you wish you had bought into carry trades seven to 10 years ago but didn’t know what the they were, now’s your chance to get your eye on them because it may not be long before the whole group of them turn up.

But for now, look to EUR/CHF’s leadership and enjoy the beaten down euro vs. the Swiss franc.

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SeanHyman
Last week was a blood bath in the economic data for the United States. Yet, the stock market still ended up for the week.When bad economic data continues to come out, yet the market seems to turn its head and ignores it, it usually means that every possible bad thing that...
carry,trades
743
2008-17-08
Monday, 08 Dec 2008 10:17 AM
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