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A Euro Collapse At Last!

European Central Bank president Mario Draghi pulled the rug out from under the Euro (FXE), (EUO) this morning, announcing a surprise cut in interest rate and substantially adding to its program of quantitative easing.

The action caused the beleaguered currency to immediately gap down two full cents against the dollar, the ETF hitting a 15 month low of $127.40.

Surprise, that is, to everyone except a handful of strategists, including myself. Apparently, I was one of 4 out of 47 economists polled who saw the move coming, beating on my drum out of the coming collapse of the euro for the past six months.

I put my money where my mouth was, slamming out Trade Alerts to sell the Euro short, and sometimes even running a double position.

Of course, it helps that I just spent two months on the continent splurging at 90% off sales, and afterwards feasting on $10 Big Macs and $20 ice cream cones. Europe was practically begging for a weaker currency. Shorting the Euro against the greenback appeared to be a no-brainer.

A number of key economic indicators conspired to force Draghi?s hand this time around. August Eurozone inflation fell to a feeble 0.3%. France cut its 2014 GDP estimate at the knees, from 1.0% to 0.5%. Unemployment hovers at a gut wrenching 11.5%. To the continent?s leaders it all looked like a deflationary lost decade was unfolding, much like we saw in Japan.

Call the move an hour late, and a dollar short. Or more like 43,800 hours late and $4 trillion short. The US Federal Reserve started its own aggressive quantitative easing five years ago. The fruits of Ben Bernanke?s bold move are only just now being felt.

A major reason for the delay is that having a new currency, Europe lacks the breadth and depth of financial instruments in which it can maneuver. The Euro will soon be approaching its 15^th birthday. Uncle Buck has been around since 1782.

The ECB?s move is bold when compared to its recent half hearted efforts to stimulate its economy. Its overnight lending rate has been cut from 0.15% to 0.05%, the lowest in history. Deposit rates have been pushed further into negative territory, from -0.10% to -0.20%. Yes, you have to pay banks to take your money! A QE program will lead to the purchase of 400 billion Euros worth of securities.

Am I selling more Euros here?

Nope.

I covered the last of my shorts last week, after catching the move in the (FXE) from $136 down to $130. That?s a major reason why my model trading portfolio is up a blistering 30% so far this year.

At $127, we are bang on my intermediate downside target. But get me a nice two or three cent short covering rally, and I?ll be back in there in a heartbeat. My next downside targets are $120, $117, and eventually $100. My European vacations are getting cheaper by the day.

To review my recent posting on the coming collapse of the Euro, please click here ?The Euro Breaks Down, here ?Unloading More Euros? and here for ?The Time to Dump the Euro is Here?.

It?s All a Learning Process

Taking Profits on My Euro Shorts

Newsletter

It looks like the (FXE) gave us the double top at $133 which I predicted in my August 28 webinar, which very conveniently, was the lower strike of my Currency Shares Euro Trust (FXE) September, 2013 $133-$135 bear put spread. We have since backed off $3, and lower levels beckon.

I originally wrote this Trade Alert on July 18 while on the express train from Berlin to Frankfurt. I had to wait until we stopped at a station before I could send it on my iPhone. My friends in the German government had just painted a picture of the European economy which approximated Hieronymus Bosch?s vision of hell. My later discussions with European central bankers and CEO?s confirmed the worse.

Since then the Euro has appreciated against the dollar almost everyday, slowly draining profits from my model-trading portfolio. Lugging this position in the baggage of my summer vacation was no fun. That abruptly ended last week when traders returning from vacation, well rested and feeling their oats, decided collectively to take another run at the beleaguered European currency.

As of this morning, the market priced our spread at $1.92, just eight cents short of its maximum potential profit. That leaves 77% of the profit for us. So I am going to take the money and run. This reduces our risk for the month of September, when we are threatened by Syria and the regional contagion that will follow, the debt ceiling crisis, the taper, the identity of Ben Bernanke?s replacement, and a giant asteroid destroying the earth.

Since I sold short the Euro, almost every continental economic data point has been positive. Just this morning, we learned that the August Eurozone PMI Index rose from 50.5 to 51.5, a two year high. The UK August Business Activities Index leapt from 60.2 to 60.5, a six and a half year peak, no doubt in part due to the wad of money I dropped there a few weeks ago. The trend is your friend here, and like a giant supertanker slowly turning, the information flow is gradually turning from red to green.

If anything, I am now inclined to start examining European equity markets, which may bounce back stronger than those in the US. On the short list will be Germany (EWG), which is already in a solid uptrend, and Italy (EWI) for a turnaround play. Greece (GREK) has already made its move, nearly tripling off the bottom.

On to the next trade.

Things Weren?t So Bad After All

The Race to the Bottom for Currencies Means a Race to the Top for Stocks

Diary, Newsletter

Even the Old Hands, like myself, are somewhat amazed by the strength of the global equity markets this month. The S&P 500 has risen 11 out of the last 12 trading days, and is up almost every day this month. It has been the best January in 18 years.

The first week saw the biggest inflows to equity mutual funds in 10 years. Yet, the market went up so fast, most of the largest investors were left at the starting gate, with the bulk of their new money yet to go into the market. If you weren?t as fast on the trigger as I was, you were left to read about it in the Wall Street Journal, and on your way to the Tombstone career cemetery. Hint to market strategists: that money is still out there trying to get in.

It appears that the race to the bottom for currencies is the race to the top for equities. The reality is that in such a competition, everyone wins. Since the mid November low, the (SPX) has risen by 12%. But Germany (EWG), which has had to carry the dead weight of an appreciating Euro, is up 29%. Japan, where the yen has plunged 16%, has seen the currency hedged equity ETF (DWJ) soar by 31%. My own Trade Alert Service tacked on 21%. For investors, this is a ?heads I win, tails you lose? market.

Certainly, the data flow has been there in abundance to justify such ebullience. Everywhere I look, I see improving PMI?s, increasing orders, rising real estate prices. Some 70% of American companies have, so far, beat earnings expectations.

In the US, business is running on all 12 cylinders (or all 80 kw of lithium ion battery power in my world), with the housing, energy, and auto industries all kicking in at once. Yesterday, weekly jobless claims hit a five year low at 335,000, and this morning the HKSB private Chinese PMI rose to a healthy 51.9.

The new Japanese stimulus efforts are so Godzilla like in proportions that the country?s GDP growth could flip from -3.5% to +3% in a mere two quarters. Do I hear the words ?global synchronized expansion?, anyone? Yikes. It makes the (SPX) at 1,500, and the (IWM) at $89 look positively cheap. Even the Federal Reserve?s own dividend discount valuation model says that the (SPX) should be worth 1,750 here.

Hedge funds are getting creamed, as usual, because their shorts are rising much faster than their longs. Look no further than Netflix (NFLX), which had a jaw dropping open short interest of 45%, but soared by a staggering 71% in two days after their earnings announcement. The pain trade is on. That?s why I have been going commando, without any shorts at all, save in the Japanese yen. Thank goodness I?m not in that business anymore. It is sooo last year?s game.

It is, in fact, a one stock market. But this time, there is only a single stock going down, Apple (AAPL), while everything else rises. A close friend whose market timing I respect told me on Tuesday, when the stock traded at $514, that it would hit a final bottom at $438 in three months. Three days later, and here we are at $437.

When the company announced an increase in cash on the balance sheet of $23 billion, the market took $100 billion off its market capitalization, depriving it of its vaunted ?largest company in the world? status. Go figure. This is truly a classic falling knife scenario, which is better observed from afar.

If you had asked me in September, when Apple was trading at $700, where would the (SPX) be if it fell to $437, I would have answered 1,000. Yet, here we are at 1,500. Here?s an intriguing thought, what if my friend is at least partly right, and Apple goes up from here? My own target of the (SPX) at 1,600 becomes a chip shot, possibly by March. Hey, if Ben Bernanke wants me to pile into risk assets, who am I to argue? I?ve always been a team player.

I think I?ll buy more stocks (SPY), (IWM), sell more yen (FXY), (YCS), and drive the Tesla around the mountain one more time. Maybe I can get the clock up to 500 miles.

In this Market, You are Either Very Fast, or Very Dead.

The Weekly Jobless Claims Blockbuster

Diary

Traders were taken aback this morning when the Department of Labor announced a 50,000 drop in weekly jobless claims to 352,000. The street had been expecting a decline of only 19,000. It was the lowest report in almost three years, and the sharpest weekly decline in seven years.

I tell people that, if stranded on a desert island, this is the one weekly report I would want to call the direction of the economy. So I am up every Thursday morning at 5:30 am PST like an eager beaver awaiting the announcement with baited breath.

The impact will not be as great as the headline number suggests. Nearly half of the figure represents a take back of the 24,000 increase in claims for the previous week. But there is no doubt that it represents an upside surprise for the economy. And you have to put this in the context of a long steady stream of modestly positive economic data that has been printing since the summer.

The release was only able to elicit a small double digit response from the stock market. That?s because we are now up nine out of eleven days, taking the S&P 500 up 4.5% on the year, a far more blistering performance than many expected. That takes us right up to the level of 1,312, which many analysts predicted would be the high for the year.

Break this on substantial volume, and we could reach my own upside limit of 1,370. If you believe that we are trading to the top of a 300 point range from 1,070 to 1,370, as I do, then there is not a lot you want to do here when you are 81% into that move, unless you want to day trade.

At this point, I would like to refer you to my October 30, 2011 piece, ?The Stock Market?s Dream Scenario? by clicking here. Since then, two of my three predicted ?black swans? have occurred, progress on the European sovereign debt problem and the first interest rate cut by the People?s Bank of China in three years. The third, a multi trillion dollars budget and tax compromise in Washington, was dead on arrival. But hey, calling two out of three black swans is not bad!

Arriving on Schedule

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