Don’t look now, but history tends to repeat itself.

Also, consider the fundamental picture. We have rallied 48% from the March lows on the back of what? Good earnings? Good employment figures? Good spending figures? Expanding GDP? No.

We have rallied based on one of the largest and most concerted propaganda campaigns ever waged, supported by government stimulus. But no government can stimulate forever. The bottom line is this, if Americans do not return to work, THERE IS NO RECOVERY. Memorize this line. Post it on your refrigerator, your mirror, your dashboard – wherever!

So maybe now you’re asking yourself, “Aren’t the unemployment numbers getting better?”

Well, let’s see…

Verizon (NYSE:VZ) – 8,000 jobs cut
Motorola (NYSE:MOT) – 7,000
Microsoft (NASDAQ:MSFT) – 5,000
Untied Technologies (NYSE:UTX) – 8,000
HSBC (NYSE:HBC) – 6,100
Anglo American (LON:AAL) – 19,000
Avon (LON:AVON) – 2,500
Goodyear Tire (NYSE:GT) – 5,000
GM (NYSE:GRM) – 10,000
Nissan Motors – 20,000
Panasonic (NYSE:PC) – 15,000
PNC Bank (NYSE:PNC) – 5,800

Many of these will be released in the third and fourth quarters. No doubt there are plenty more we haven’t heard from yet. Frankly, I couldn’t list the thousands of companies and millions of jobs lost in this write-up. That’s just a sampling. But let’s get to some hard and fast figures.

According to Seeking Alpha, 13 million Americans will lose their benefits by years’ end. So if unemployment claims are falling, people must be getting back to work. Right?

WRONG!

They are exhausting their benefits. There are 30 million people in the United States on food stamps. There are only 200 million working-age Americans (age 15-64). Is there any wonder why the Administration is NOW saying they will have to raise taxes on the middle class to fund their programs?

Unemployment has been estimated by many good economists as being around 20%. Unfortunately for these people, their nanny-government lifeboats are slowly running out of air.

Those 3 million people who lost their jobs in the second half of last year? Once you factor in their dependants, that equals 10 million people who have no income and no savings.

And how about the other 4 million others who lost their jobs in the first half of this year? They will be next. The numbers get so depressing, I hate to even count them up.

As I have said before, unemployed people don’t spend money. They don’t buy technologies, or durables, or even pay their mortgage. Bankruptcies are up 600% in this recent downturn. And that includes the time after Congress affected new rules to make bankruptcy harder.

So who is going to pay for anything when they are struggling to buy groceries?

If the equity averages are already rallying on the back of these horrible stats, there is nowhere to go but down when the real truth sets in.

And we have seen this corollary frequently in recent months. When stocks and risk assets fall, so do the currencies, and the dollar rises. We are a long way from being out of the woods on this retracement.

So why do I cite all this doom and gloom about the United States? Believe me, there’s plenty more to go around. Because the fact of the matter is this: When these chickens do come home to roost, we will see another gut-wrenching breathtaking sell-off in equities, which will be followed by currencies. We have not seen the end of this yet.

While some are talking of a recovery, others are talking about a possible double-dip recession – and I’m reasonably sure we are in for a “multi-dip.” It is hard to be bullish on the dollar for any reason, but if the market drops again, which I believe it will, funds will rush right back to the dollar (and the yen).

So far, we have seen range-bound trading in the recent months as currencies search for direction. This week the big news was the US GDP. Risk currencies rallied on the back of it, but for 24 hours they have remained flat as there were no buyers to move it higher.

Also, the market got awfully jittery on the release of the consumer spending news yesterday. The manufacturing euphoria expended itself, and now we find out that personal income has dropped 1.4%, the biggest fall in four years. Inflation-adjusted spending fell 0.1%. The real dark spots in the economy have started showing back up. The stimulus has worked its way and done its best, but its effects are now negligible. Even though there are signs of a “recovery,” it isn’t going to be one without the consumer. If he’s exhausted his means of spending, or is just afraid to put out any money, the recovery trade will be doomed. And that means dollar strength once again.

But for now, we will have to trade with what we have. It is hard to argue with the markets, even with the most compelling of reasons. A person may as well try to stop an ocean wave from breaking onshore.

And as we look ahead, we must always be mindful of what may be. As numerous talking heads were saying on Tuesday of this week, “We have turned the corner… things are going to get better – if they don’t get worse!”

Regards,

Bill Jenkins

Source: Illogical Optimisim

They’re talking about the series of calculations that are used to determine the value of options. The calculations are designated by various letters of the Greek alphabet, from which they get their name.

On our agenda today is delta.

Best known as the fourth letter of the Greek alphabet (or seen in movies followed by the word “Force”), delta represents change. In options, that means the rate of change in the value of an option as related to the underlying instrument.

I know that seems like a mouthful, and it is, but bear with me and it’ll make a lot of sense shortly. (Plus you’ll sound like a genius among your friends.)

Every option, whether call or put, has a delta attached to it. Generally you can find this information on your broker’s Web site.

A call has a positive delta, and a put has a negative one.

If an option is at the money, usually the call option will be a delta of +.50 and the put option will be -.50.

Thus, if the GBP/USD is currently trading at 1.6400, the 1.64 call option has a delta of +.50 and the 1.64 August put option has a delta of -.50.

As the pair moves up in value (that is, the sterling appreciates against the dollar), the sterling calls will increase in value. As of this writing, they are trading at $2.51 x $2.63. With the delta at +.50, that tells us that for every penny the sterling increases in value (which would be measured as 100 pips), the option will increase 50 cents. Thus the delta is the measure of the rate of change in the value of the option as compared to the value of the underlying asset.

The reverse is also true. If the spot price fell 1 cent, or 100 pips, the value of the put option would increase by 50 cents.
We also have another inverse relationship to consider. If we are holding put options and the spot price increased, the value of the put option would FALL by 50 cents. Same is true of the call. A 100-pip or 1-cent decrease in the underlying spot price would make the option fall by 50 cents.

So if the pound is at 1.6400, and we are looking at the August 1.64 calls, let’s say we go ahead and we buy them right now at $2.63 ($263). We believe the sterling is going to rise and the options are going up in value. If the spot price goes to 1.6500, we can expect the call option to move up 50 cents in value to $3.01 x $3.13, giving us a return of 38 cents per position.

However, at that level, the delta has changed (actually it always changes as the price changes, but for the sake of simplicity we won’t go into that detail). At this point the delta is nearly +.60. So now for every cent the spot moves up, our option will increase by 60 cents. By the time that the call option is deep in the money, it will have a delta of 1.00. That means that for every 100 pips, or 1-cent move, in the spot, the option will move a corresponding 100 cents. The same is true for a deep in-the-money put. It will eventually reach its maximum delta of -1.00, at which point it will move in lockstep with the spot price.

How does this help us? Mainly in terms of entries and exits that we would like to plan in advance.

Planning Moves with Delta

Let’s go back to our British pound calls. When we last left them, we were at the purchase price of $2.63 ($263). We know that for the price to break even, we must see the underlying spot price move to 1.6663 by expiration. If it moves up, but less than $2.63, our position will be worth something, but it will still be a loss.

If we want our position to double, we can use delta to make the following calculation. A 1-cent move will increase our value by 50 cents to $3.13. Another 1-cent or 100-pip move will increase our option value by 60 cents to 3.73. That increases our delta to .65. Another 1-cent or 100-pip move will take us to $4.38.

That takes our spot to 1.6700. It is now 3 cents (or 300 pips) above our strike price and is valued with an additional $1.38 in time value to make up the whole price of $4.38.

If it never moves another pip or penny until expiration (where time value is zero), we would still have a 37 cent profit on the option – that’s simply taking the 3-cent or 300-pip move on the underlying spot and subtracting out our original $2.63 entry price.

But back to our example, we still have some time value and we are aiming for a double. Thus we need the option price to end at $5.26 ($526) or higher. At this point, our delta has reached +.70. Thus another 1-cent, 100-pip, move adds 70 cents to our $4.38 to make it $5.08. We are now only 18 cents shy of our target, and our delta has now risen to +.78, so we only need a move of 23 pips to get us to our target.

We have viewed a move of 423 pips (or approximately 4.25 cents) to produce it. But that isn’t all that goes into the equation. Time value has also deteriorated during this process and added some volatility.

Nevertheless, we can use delta to estimate our profit targets and keep them in line with current underlying movements of the market.

Hope that clears up some of the mystery about these Greek terms you hear tossed around.

Until next time,
Bill Jenkins

Source: Make Profitable Market Moves Using ‘Options Greeks’

When this rot began to be exposed, I often reported that things had been turned on their head in the currency world. Bad news for the U.S. economy became good news for the currency. Why?

Basically, risk aversion settled over the market. People and governments were fearful. And since currencies tend to be considered risky investments, investors avoided them. In short, the worse the news for the U.S. dollar was, the more money flowed into the it.

But you cannot, under any circumstances, run contrary to the law of supply and demand forever. It’s just impossible. Therefore, at some point, a return to fundamentals reverses the current perverted trends.

And as of last week, fundamentals have showed back up on the stage. For the first time in a long time, investors are treating bad news for the dollar as bad news for the dollar. So let’s take a peek here and see what we have.

Initial jobless claims rose again last week. This time to 637,000, which was higher than forecast, and the previous week’s number was revised upward. In addition, continuing claims for unemployment came in higher as well – 16 straight weeks of increases.

The Federal Open Market Committee also hung the markets out to dry. You see, the Fed heads discussed the weakened condition of the economy at their meeting. They also revised their economic projections for 2009 and 2010 lower.

Here was the key. They DID NOT PURCHASE as many Treasuries as the markets believed they would – part of the infamous quantitative easing. Now, at first blush, we would be happy about that. But once we lift the Feds’ curtain on this act, things are not what they seem. The market’s reaction assumed that a less-than-stellar bond purchase number portends that the Fed will have to purchase more later on.

At this point all factions are feeling the squeeze.

The Feds know they cannot continue to inflate as they have indicated. While runaway inflation remains a threat, the bigger problem is whether or not traders and investors (including the sovereign states who buy our debt and support our spending addiction) will pull the plug on the dollar.

If such massive selling occurs, that only leaves them the option of perpetually inflating the currency, since borrowing becomes out of the question.

Nobody wants to be the last one out the door once that begins. As of now, the Fed still has a little opportunity to actually control the hyper inflation scourge, but if they tip the scale just a bit too much and the selling begins full force, control will be out of their hands entirely.

Interestingly, the whole tenor of the minutes from the Fed meeting indicates that the worst is still ahead. Yet Ben Bernanke and company are still telling the public about “green shoots” – small signs that things are improving.

Bill Bonner shares a headline from Politico last week: “Obama Would Regulate New ‘Bubbles.’”

Oh, the sheer absurdity of it all! We have a government that doesn’t even seem to know where bubbles come from. They don’t know how they work. They don’t know why they keep inflating. They don’t understand why you can’t deflate them slowly. In short, an administration with a rudimentary understanding of economics is confident it can regulate the next bubble – whatever it might be.

But I suppose that is the plan of all governmental types. Whatever doesn’t work needs more regulation.

What we need is to be left alone. The market has been, and remains, the most efficient system for regulating itself. Is it perfect? Not in a moral or theological sense. Not even in a fairness sense. The market will make some men rich while impoverishing others. Many people do not consider that “fair.” But it doesn’t matter. The market does what it does, because it is the most efficient way to do things. Regulation be hanged, the market will undo regulation and tyranny, because free markets create free men. And on its way to undo the foolishness of men, it will cause great inequalities. Why? Because of the foolish restraints that governmental do-gooders have foisted upon it in the name of “fairness.”

The ironic thing is, bubbles are created by regulation. You can’t undo them with more of the same.

Since the government has had such a great track record with spending and credit, now they want to get their greedy little paws into the credit card business, too. Apparently, it’s not enough for them to control the major banks, or the once monstrous auto industry. The heady days of markets free from governmental interference are going the way of the dinosaur.

Our Senate, by an overwhelming majority, passed a new bill that would dramatically impinge on the credit card company’s policies to alter rates and fees.

Now, I am not going to bat for the credit card companies. Frankly, they have abused people for years. As a younger man, I, too, enjoyed the pleasures of free money being offered by these benevolent giants. Every time my wife and I got a new card, we treated it like a raise.

Before long, the handwriting was evident on the wall, and I didn’t like what it said. So we got out. Don’t get me wrong, I still use my credit cards. But they no longer own me. Yet the number of my friends and relatives who are slaves to these things is atrocious. In sum, I have no love loss for these companies and how they try to enslave people.

But I will stand and declare their right to do it as a free market entity as long as people will keep applying. The fact is, if and when the credit card companies get “out of hand,” the market will reign them in. We don’t need the government to do it. They won’t do it well anyway.

Meanwhile, the Federal Deposit Insurance Corporation (FDIC) suffered its biggest bank failure of 2009 last week. BankUnited FSB, Florida’s biggest regional lender, performed its final curtain call. Having over $20 billion in assets and deposits, it’s the biggest flop of the year, and the second biggest of the whole credit crunch (IndyMac still has that award).

BankUnited’s failure will take a $4.9 billion chunk out of the FDIC’s checkbook. It is the 34th bank to fail in the first five months of this year alone, compared to 25 for 12 months last year. A green shoot? Not hardly…

So on the edge of this knife, Big Ben and the Fed have to balance. That is, the Fed has to sell $3.25 trillion in Treasuries to fund this years’ obligations between now and September.

If the markets can absorb the U.S. issuance over the next 90-120 days…and if it is done without driving up interest rates…and if the economy begins to show signs of positive growth… then the stage is set for a wonderful second act. (And Bernanke might win an Oscar!) The dollar will return to strength. The market will continue, or resume, a climb to the top – sensing that “everything is coming up roses.” Refinancing will surge ahead. We may even see significant job creation into the end of the year.

At that point the Fed must begin to worry about inflation. Will the infantile recovery be strong enough to fight off a bout with interest rate increase flu?

I wouldn’t bet the farm on that.

On the other hand, if Treasury rates continue to rise as they already are, and the Fed is forced into extensive quantitative easing to contain them, then it may very well be curtains for the dollar. And the critic’s reviews won’t be kind.

Earlier this month, the dollar index fell below its 200 DMA for the first time since July 2008, and has been falling ever since. Not long after, the euro and sterling popped above their 200 DMA.

Of course, there’s probably a good reason why. The world is beginning to notice the U.S.’s monetary policies. Our rising deficits are eclipsing Mount Washington. Those deficits are going to need financing. And right now, the government doesn’t care – it’s still behaving recklessly because it thinks people will always be ready to buy its debt.

I wouldn’t be so sure. Consider the credit rating of Great Britain. Standard & Poor’s changed the outlook on the United Kingdom from stable to negative. Now, that’s not the same thing as a rating cut. But it does betray that the rating agency sees the nation on the wrong path. Continue on that path, and the outcome is guaranteed.

It doesn’t take an advanced degree in logic to apply the same principle to the United States. Indeed, I have wondered if all this was orchestrated for that purpose alone. It is far less damaging to downgrade a substantial nation like the United Kingdom than it is to downgrade the world’s reserve currency economy… the very definition of value.

But if it can happen in the United Kingdom, the United States had better be prepared. To that end, we heard Bill Gross, from PIMCO, the world’s largest and most influential bond trading firm, say that he believed the United States would eventually lose their AAA rating.

That’s scary stuff – but not all that surprising. After all, the administration is predicting a $1.8 trillion budget deficit. Perhaps more.

And where is GDP going? How much will it grow this year for all that fuel being added to the fire? It’s like adding a cast of thousands to a one-man show, just to try to give it a bigger billing. The expenses become monstrous, but no more people show up to pay the admission fee.

But the directors just want to keep adding more actors. At that point, the expenses of the show run absolutely in the opposite direction of the of the income. Until soon, the producers default on their lease, the curtain falls on the show and the affair is over.

When will the U.S. show be over?

Hard to say. But when your expenses are 650% of your income, it can’t go on for long. Not only is the curtain falling, the whole theater is collapsing around us. Better make sure you have a clear shot at the exit.

In fact, some U.S. businesses already are.

My home county has a few decent sized towns, but for the most part is still rural. Our biggest claim to fame is a section of famous U.S. Route 1 – the first route to run from New York to Miami along the East Coast. On our section of Rt. 1 has an abundance of auto dealers. But recently, the largest one put out one of those fancy electronic message boards. The advertisement read:

“NOW TAKING GOLD AND SILVER FOR YOUR VEHICLE DOWN PAYMENT.”

I’m pretty sure they’d be just as happy to take it for the entire payment as well. So who needs the U.S. dollar after all?

Regards,

Bill Jenkins

Source: The Almighty Dollar

Meanwhile, the currency markets are as are the most liquid, recession-proof market out there. And we’ve heard that one group of FX investors, led my master FX trader Bill Jenkins, has been making big wins lately. We’re talking gains of 42% in five days, 70% in four days, and 100% in one day.

Bill has been making these gains using currency options. They ensure strict minimum risk and require very little starting capital.

Right now, Bill is sending his FX profit-plays to a select group of test readers. He’ll tell you what the best play is and you decide whether to execute that play for maximum profits. Bill has agreed to allow Notes readers can join them risk-free. Follow  this link to  learn more.

And there are significant advantages which trading Forex, or FX, for short, can offer.  One is that there are no “commissions” as you generally think of with stock trading.  The broker is paid by means of the “spread” between the bid and ask prices.  This is really nice, because if you want to get started in FX trading, and you want to start small (which is an excellent idea), all you have to cover is the spread, rather than a spread and a commission.

Here’s how it works….

Because of the various opportunities for leverage and margin in the FX markets, you can start with a small account, say $1,000.00, and adjust your pip size to 10 cents/pip.

As a general rule, a pip is 1/100 of a cent.  That may seem unusually small for a trading amount, but believe me, it really adds up!

In a $1,000.00 account, you can set your lot size to leverage $1,000.00, on just a $100.00 margin.  Then, each time your currency pair moves 1 pip, you make (or lose) 10 cents.  Again, that doesn’t seem like much until you see that currency pairs move 100-300 pips per day!  That works out to be $10-$30 daily on a $100 margin, or 10%-30%.

I do not price my gains against my margin. Instead, I price them against my entire account.  That means I could be looking at gains of 1%-3% every single day.  And believe me, these steady gains can add up quickly!

Getting Started with FX Trading

I’m sure you’ve all seen the Forex advertisements claiming you could double your money every month.  And mathematically, that is true.

However, wise traders know the probability of that happening is very low.  Truthfully, 95% of all FX traders will run their account down to zero in just a matter of months.  That means 5% of all traders are collecting the money from the 95% who are losing!  The market is unbelievably lopsided, but that doesn’t mean that a small trader is out of luck.  With some patience and a good strategy, an FX trader can return 10% monthly over an extended time period.  (Good traders don’t measure their success on a daily time frame—that’s way too short.)

The problem with most novice FX traders is that they are more like gamblers…and they don’t stay in the business long enough to actually get a good return.  They blow out their accounts and figure the game was rigged, or that their broker was cheating them, or some other excuse….

The fact is, most traders jump into the deep end of the pool, and don’t know how to swim. That’s because the FX is a different animal from stocks and bonds and commodities…

Why I Am Short the Euro

Right now, there is a lot of activity in the FX markets.  Traders and Investors worldwide are trying to ascertain which currency is the most sound and stable, and which will produce the best return.  For my money, currently, I am short the Euro.  While a lot of people are bashing the U.S. Dollar (and believe me, there are plenty of reasons to do so) from an FX standpoint, the dollar appears to be in much better shape than the Euro.

As all currencies trade in pairs, which means that one trades against another, if I am short the Euro, I will be long the USD.  Currently the USD is trading about $1.30 to the Euro.  This means it costs $1.30 to buy one of the European currency.  I am looking for this to fall over the longer term down to what is called “parity” level.  This is where $1 USD will buy 1 Euro.  That would be a drop of 30 cents– or 3,000 pips.

If you are keeping score at home, that would equal $300.00 at 10 cents/pip, or 30% on a $1,000.00 investment.

However, a larger trader may size his pip to 10.00 each.  That would provide a return of $30,000.00. And all we are doing is trading against the disparities between the two currencies.

As with all markets, the FX does not move straight up or down, and there will likely be a lot of bumps in the road between here and parity.  But each one offers a new chance to enter as we sell the rallies.

Until next time…Happy Trading!

Source: The Truth About Forex Trading