Trade Idea: Long Coffee, War in Columbia?

EES Trade Logic

Coffee will continue to be consumed regardless of market price. The average New Yorker spends $6 USD per day on coffee. Unstable political situation in Columbia can cause coffee price to temporarily skyrocket on the world market. Conflict is not imminent, but Venezuela is moving troops to the border. A freeze on Columbian coffee is enough to cause the price to explode. Here is our research:

http://www.researchwikis.com/Coffee_Market_Research

Background

Coffee is produced from roasted seeds or beans and is a widely consumed beverage. Coffee consumption of coffee was recorded in 9th century Ethiopia and spread from there through Africa to Egypt and then to Italy, from there being introduced to the rest of Europe.

Coffee beans are picked, processed, and dried. The major producing countries are in Asia, Africa and Latin America. Coffee seeds are roasted at a temperature of about 200 °C, allowing the sugars in the beans to caramelize. The bean changes color and flavor is drawn out. Next, the beans are roasted to a light, medium, or dark brown color depending on the desired flavor. After roasting, beans are ground and brewed in order to create the beverage coffee.

Effects on human health are continually debated. Some studies indicate that coffee may reduce the risk of certain diseases but a negative side effect, an increase of stress, due to excessive intake, is also noted.

Market Structure

Coffee is one of the most heavily traded commodities in the world and ranks sixth by value in the world. In 2000, the coffee trade was worth US $33 billion. Coffee demand dropped in 2001 to 2003, with growth falling to 1%. Small and medium sized producers suffered the most from this drop, while the growth in retail sales mitigated the effect on coffee retailers.
When prices of green coffee rise, producers make profits while the retailers lose margins. Conversely, when green coffee is relatively cheap, the distributors and retailers earn higher profits. Rarely do the large players financially integrate the two operations, that of production and retailing. There have been periodic attempts to regulate and better control the coffee trade but trade arrangements consistently fail and the trade is currently subject to market forces.
Commercially, two types of coffee banes are in highest demand - Coffee Arabica and Coffee Robusta, the latter of which has seen strong growth due to increase in instant coffee sales. Brazil and Vietnam are world's largest producers of robusta coffee.

Industry Definitions

• Caffeine: an alkaloid compound which acts as psychoactive stimulant. Various flavors have different amounts of caffeine, some of which are listed below:
  

Drip coffee: 115–175 mg

Espresso: 100 mg

Brewed: 80–135 mg

Instant: 65–100 mg

Decaf, brewed: 3–4 mg

Decaf, instant: 2–3 mg

• Café latte: espresso coffee with milk.
  
• Café Macchiato: espresso with small amount of steamed milk added to top.
  
• Cappuccino: made of equal parts of espresso and milk froth, occasionally garnished with spices or powdered cocoa.
  
• Americano: popular in the U.S., it is served as small shots topped with hot water to give a similar strength to drip-brewed coffee.
  
• Chocolate-like: an aroma reminiscent of the aroma and flavor of cocoa powder and chocolate (including dark chocolate and milk chocolate). Sometime referred to as sweet.
  
• Caramel: an aroma similar to the odor and flavor produced on caramelizing sugar, without burning it.
  
• Body: an attribute used to describe the physical properties of the beverage.
  
• Astringency: an attribute characteristic of an after-taste sensation very similar to a dry feeling in the mouth, undesirable in coffee.
  

Market Metrics

United States Exports and Imports

Total US imports for the 4th quarter 2006 totaled 5.773 million bags, down 7.4% from the 3rd quarter's 6.232 million bags. Compared with last year same quarter, US imports were up by 2.1% from 5.653 million bags.
Average retail prices in the 3rd quarter 2006 decreased by nearly one percent over the third quarter, decreasing to $3.14 per pound from $3.17. Compared to the year-ago period, prices were down by 19 cents or 5.7%. The United States consumes one-fifth of all the world's coffee, making it the world's largest consuming country.
World Market

The US Department of Agriculture's December estimate for 2006-007 was that world coffee production had increased to 128.6 million bags, up 4.9 million bags from its June 2006 estimate. Production in 2006-07 was estimated at 13% above the 2004-05 period.
World coffee exports totaled 7.75 million bags in July 2007, an increase of 1% compared with the volume of 7.67 million bags recorded in July last year. Total exports in the first 10 months of coffee year 2006-07 (Oct-06 to Jul-07) were up by 13.3% from the same period last year, totaling 81.52 million bags compared to 71.94 million bags in the prior year.
Total annual production of coffee was estimated at approximately 6.8 million tons in 2007. It is usually sold in bags of 60 kilograms.

The top global producers of coffee are as follows:

 

Country                   Annual Production

 

Brazil                35 million bags

Columbia            11 million bags

Vietnam                     11 million bags

Ethiopia            4.5 million bags

There are several other key producing countries. The following countries each produce more than 2 million bags annually:

• Costa Rica
  
• Guatemala
  
• Guinea
  
• Honduras
  
• India
  
• Indonesia
  
• Ivory Coast
  
• Mexico
  
• Peru
  
• Uganda
  

Colombia, traditionally, the second largest coffee exporter, slipped to second place in the early 2000s behind Vietnam. This country, a relative newcomer to the world coffee market, dramatically boosted production through the 1990s and by the early 2000s had overtaken Colombia.

But you can see from the following chart how the top 3 dominate everyone:

Industry Players

• Nestle
  

The market leader in coffee production with Nescafe as its flagship product. The company's chief markets are the United States, France, Germany, Brazil, the United Kingdom, Italy, and Japan. Popular coffee brands include Nescafé, Taster's Choice, Ricoré, and Ricoffy. Roasted and ground coffee brands include Nespresso, Bonka, Zogas, and Loumidis.

• Kraft Foods Inc
  

Philip Morris spun off Kraft Foods, one of the world's largest coffee producers, in June 2001, while retaining 84 percent ownership. Philip Morris first entered the coffee market by purchasing the world's largest coffee roaster, General Foods Corporation, in 1985. Kraft Foods' coffee brands in the United States included General Foods International Coffees, Gevalia, Maxim, Maxwell House, Sanka, Starbucks (under a licensing agreement), and Yuban. Its international brands included Carte Noire, Gevalia, Grand' Mère, Kaffee HAG, Jacobs Krönung, Jacobs Milea, Jacobs Monarch, Jacques Vabre, Saimaza, Kenco, Maxwell House and others.

• Sara Lee/DE
  

Formerly Sara Lee Coffee & Tea Worldwide, a business segment of Sara Lee. Caters to both the retail and the foodservice sectors around the world. Sara Lee's European coffee brand is Douwe Egberts and its South American brands are Caboclo, Cafe do Ponto, and Pilao. Its SENSEO coffee pod system, sold throughout Europe and in the United States, brews single servings of frothy-style coffee.

Trends and Recent Developments

Coffee prices in mid 2007 have slumped 15% from their recent peak in late 2006. Not surprisingly, retail coffee companies have not been passing along the savings to consumers.

http://www.researchwikis.com/Coffee_Market_Research

 

http://futures.tradingcharts.com/chart/CF/38

http://youtube.com/watch?v=MMXRjF7ERHQ Comerciales viejos Juan Valdez. Juan Valdez' Old Commercials

Summary: Venezuela is moving troops to the border with Colombia after a Colombian raid across the Ecuadorian border targeting Revolutionary Armed Forces of Colombia camps. Venezuelan President Hugo Chavez needs something to increase his stature at home, and a wave of anti-Colombianism in Venezuela could serve that purpose. However, Chavez cannot afford to turn this into a real fight.

http://www.stratfor.com/analysis/venezuela_chavezs_calculations_colombia

Ecuador, Venezuela, Colombia in war of words
CTV.ca, Canada - Mar 3, 2008
FARC has been in a state of civil war with Columbia since the 1960s. Both Canada and the United States consider it to be a terrorist organization that is ..

Wealthy Moving to Hedge Funds, NY no longer #1 for billionaires

Wealthy 'moving to hedge funds'

Largest denominations - £100 dollar bill and £50 note

The world's wealthiest want more stable returns, the study finds

The world's wealthiest private investors are planning to put more money into alternative investments over the next three years, a report says. http://news.bbc.co.uk/2/hi/business/7059631.stm

http://www.breitbart.com/article.php?id=080306001953.xvguehx7&show_article=1 Moscow: new world capital for billionaires

Forex Trading Channel #20

Gabcast! Forex Trading Channel #20

Oil Shakeup

Is Your Gift Card Suddenly Worthless?

OPEC set to snub Bush call for extra crude oil

UK banks write off record £6.8bn in household debt

Gulf investors may not save Citigroup, Dubai executive says

Hard times are on the menu at restaurants

US auto sales fall amid economic woes

Boom times for 'gently used' clothes

OPEC unlikely to raise output

U.S. Stocks Fall on Bernanke Plan, Oil's Retreat; Banks Decline U.S. stocks fell, led by financial and commodity shares, after Federal Reserve Chairman Ben S. Bernanke urged banks to forgive more late loans and oil, gold and copper prices dropped from records.

Bernanke Urges Banks to Forgive Portion of Mortgages (Update6) Federal Reserve Chairman Ben S. Bernanke, battling the worst housing recession in a quarter century, urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting.

There's a headline this morning that the government's "Loans program for coal plants suspended" which goes to the idea that because of global warming and tons of uncertainty, new technology coal plant development should be suspended.  This, after a lot of states including in our backyard here in East Texas, were out fighting tooth and nail to get nods for new coal-fired plants.

---

Curiously, the price of oil has not yet reacted, although it certainly seems possible.  Although oil took a dip on Monday, there's an OPEC meeting today which could see output held steady which wouldn't help the US economy any.  The US is pushing for higher production quotas in order to contain prices.

---

Meanwhile, the US has decided to back Colombia (read: no oil) over Venezuela (Read: Oil out of strict corpgov control) in the recently warming border skirmishes.

---

In the Middle East, stress is building because Syria is floating a proposal for a transitional government to lead to early parliamentary elections.  And in Iraq, the Oil Ministry has been given the green light to sell oil to key Western corporate customers.

 

 

Credit Crisis deepens

March 3 (Bloomberg) -- U.S. states and local governments may extend the worst slump in municipal bonds on record as they replace as much as $166 billion of auction-rate securities.

California, Boston's biggest hospital and Duke Energy Corp. are converting their bonds to other types of tax-exempt debt after auction failures drove rates as high as 20 percent. The potential supply equals almost 40 percent of the municipal securities sold last year, overwhelming a market that tumbled 4.9 percent last month, according to indexes maintained by Merrill Lynch & Co., which began compiling market data in 1989.

``When you've got many issuers representing hundreds of billions of dollars trying to restructure their bonds all at once, there's obviously a glut,'' said Paul Rosenstiel, California's deputy treasurer. ``It doesn't make for any easy solutions.''

http://www.bloomberg.com/apps/news?pid=20601010&sid=aJpRkYBhnffQ&refer=news

PAPER: Federal Reserve's rescue has failed...

Buffett: USA Essentially in Recession...

Grim News in Arizona State Budget and Sacramento City Budget

Buffett defends sovereign funds

Economic Armageddon

Iran shifts oil sales away from dollar

 

Sovereign Wealth Funds and Soaring commodities as Subprime Defaults spread to other markets

Oil money is coming - and there is little the west can do about it

A study by one of the biggest banks, HSBC, noted: "The owners of emerging SWFs look unlikely just to roll over. They are enjoying the boot being on the other foot after an awfully long time. The train wreck that was the 1990s, when they had to go cap-in-hand to the developed world, was bad enough.

"Going back further, western jibes about state capitalism would, perhaps, have more power had they themselves not ruled many of these countries for years via state-licensed companies."

Gerard Lyons, chief economist at Standard Chartered, said: "Sovereign wealth funds have existed since 1953 and are here to stay. Their size and influence is set to grow. Already valued at $2.2tn, on current trends they could reach $13.4tn in a decade.

http://www.guardian.co.uk/business/2008/mar/01/oil.globaleconomy1

Soaring cost of gold causes jewellery market pandemonium

By Ellen Kelleher

Published: March 1 2008 02:00 | Last updated: March 1 2008 02:00

The soaring cost of gold and platinum is causing pandemonium in the UK's jewellery market as retailers and private owners rush to reappraise the value of necklaces, brooches and rings.

Jewellers in London's Hatton Garden - the capital's jewellery quarter - are raising the price of wedding bands on a weekly basis, with less-expensive palladium rings now coming into vogue. And insurers are urging clients to get another assessment of the value of their jewellery collections in response to the rapid rise in the price of precious metals, sparked by investors seeking refuge from volatile stocks.

http://www.ft.com/cms/s/0b05b67c-e733-11dc-b5c3-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F0b05b67c-e733-11dc-b5c3-0000779fd2ac.html1&_i_referer=http%3A%2F%2Fwww.drudgereport.com%2F

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Ben Bernake on the hill, Russia sells oil in Rubles, Dollar reaches new lows

Key home price index shows record decline

Drop of 8.9 percent in late 2007 is largest in index's 20-year history.

 

Dollar dives to record euro low; oil and gold score record highs

In early European deals, the euro touched a record 1.5088 dollars, after smashing through the 1.50 barrier for the first ever time on Tuesday. It later stood at 1.5048 dollars, from 1.4979 dollars in New York late on Tuesday.

 

Manufactured goods orders plunge

Orders for big-ticket durable goods for January fall 5.3%, the largest amount in five months.... http://money.cnn.com/2008/02/27/news/economy/durable_goods.ap/index.htm?postversion=2008022709

 

February 27, 2008

Market Place

Russia Quietly Starts to Shift Its Oil Trade Into Rubles

By ANDREW E. KRAMER

MOSCOW — Americans surely found little to celebrate when the price of oil settled above $100 a barrel last week.

They could, though, be thankful that oil is still priced in dollars, making the milestone of triple-digit oil prices noteworthy at all.

Russia, the world's second-largest oil-exporting nation after Saudi Arabia, has been quietly preparing to switch trading in Russian Ural Blend oil, the country's primary export, to the ruble from the dollar. Industry analysts and officials, however, say that this change, if it comes, is still some time off.

The Russian effort began modestly this month, with trading in refined products for the domestic market.

Still, the effort to squeeze the dollar out of Russian oil sales is yet another project notable for swagger and ambition by the Kremlin, which has already wielded its energy wealth to assert influence in Eastern Europe and former Soviet states.

"They are serious," said Yaroslav Lissovolik, the chief economist at Deutsche Bank in Moscow. "This is something they are giving priority to."

Oil trading is nearly always denominated in dollars. When Middle Eastern oil is sold to Asia, for example, the price is set in dollars.

Similarly, Russia's large trade with Western Europe and the former Soviet states in crude oil and natural gas is conducted in dollar-denominated contracts. Gazprom, the natural gas monopoly, set the price of gas in Ukraine at $179 per 1,000 cubic meters in 2008, for example. There are no proposals yet to switch gas pricing away from dollars.

As a result, companies and countries that buy petroleum products are encouraged to hold dollar reserves to pay for their supplies, coincidentally helping the American economy support its trade deficit.

Russia would like to change this practice, at least among its customers, as a means of elevating the importance of the ruble, a new source of national pride after gaining 30 percent against the dollar during the current oil boom.

In a speech on economic policy this month, Dmitri A. Medvedev, a deputy prime minister and the likely successor to President Vladimir V. Putin in elections on March 2, said Russia should seize opportunities created by the weak dollar.

"Today, the global economy is going through uneasy times," Mr. Medvedev said. "The role of the key reserve currencies is under review. And we must take advantage of it." He asserted that "the ruble will de facto become one of the regional reserve currencies."

Other oil-exporting countries are also chafing at dealing in the weakening dollar.

Since 2005, Iran, the world's fourth-largest oil exporter, has tried to open a commodity exchange to trade oil in currencies other than the dollar. The Iranian ambassador to Russia said Iran might choose rubles to free his country from "dollar slavery."

To be sure, some economists have dismissed the project as improbable, given the exotic nature of a security — oil futures contracts denominated in rubles — that would blend currency risk with the dollar-based global oil market.

Ruble-denominated futures contracts for Ural Blend, the main Russian grade, would be attractive only if the dollar continues to depreciate, said Vitaly Y. Yermakov, research director for Russian and Caspian energy at Cambridge Energy Research Associates.

"There is a big distance between the desire to trade commodities for rubles and the ability to do so," he said.

All this has not stopped the Kremlin from trying.

In a sign of the government's seriousness, a new glass-and-marble high-rise home for a ruble-denominated commodity exchange is rising this spring in a prestigious district in St. Petersburg, Russia's second-largest city after Moscow. The exchange will occupy three floors of the 16-story tower on Vasilievsky Island, one of the islands that make up the historic city center.

The director of the St. Petersburg exchange, Viktor V. Nikolayev, said that the intention was to move slowly and gain market acceptance; the government will not strong-arm sellers or buyers onto the exchange, even in an industry dominated by the state.

Web-based trading for refined products like gasoline or diesel is being introduced in three phases for domestic customers, beginning with government buyers like the Russian navy or municipal bus companies. Private brokers will be allowed to trade in March; futures contracts will be introduced in April.

Mr. Nikolayev said no timeline had been established for trading for export on the exchange, which also handles grain, sugar, mineral fertilizer, cement and esoteric financial products like Russian government beef and pork import quotas — all in rubles.

"We are in Russia, and the currency is rubles, not euros, not dollars," he said. "We don't want to depend on the rise or fall of the dollar."

"We will trade in rubles, to strengthen the ruble," he said.

http://www.nytimes.com/2008/02/27/business/worldbusiness/27place.html?_r=2&oref=slogin&ref=world&pagewanted=print&oref=slogin

Bernanke Vision for Fed Evokes Investors' Frustration (Update1)

By Craig Torres

Feb. 27 (Bloomberg) -- In the second week of August, the short-term fixed-income sales team at JPMorgan Securities Inc. sat stunned as the trillion-dollar market for asset-backed commercial paper began to collapse.

In normal markets, JPMorgan sells $25 billion of short-term IOUs for clients daily. ``Within the span of six or seven business days, every single investor stopped buying asset-backed commercial paper tied to structured investment vehicles,'' said John Kodweis, a managing director at the New York bank.

How the Federal Reserve has responded to that credit debacle -- the worst since the savings and loan crisis of the early 1990s -- defines Chairman Ben S. Bernanke's reshaping of the world's most important central bank.

With its focus on building consensus around long-term goals and attempts to separate liquidity from broader monetary policy, Bernanke's approach evokes appreciation among some economists. He's also caused frustration among traders trying to discern his intentions.

``The chairman walked into a job that I can best describe as trial by fire,'' said Allen Sinai, president of New York- based Decision Economics Inc. Separating interest-rate policy from liquidity tools was ``absolutely brilliant,'' he said.

To critics, his failure to quickly recognize the economic impact of the market tumult exacerbated the slowdown and meant that when the Fed began cutting rates, reductions needed to be deeper and faster.

`Awfully Smug'

``It's hard to be democratic in a crisis when leadership and image are so key,'' said Karl Haeling, head of strategic debt distribution in New York at Landesbank Baden-Wuerttemberg, Germany's fourth-largest bank. ``The Fed seemed awfully smug until August that this subprime issue was not a big issue. Then, they had to come out with both barrels blasting.''

The 54-year-old Fed chairman is giving his semi-annual testimony to the House Financial Services Committee today. He pledged to act in a ``timely'' manner to help revive the economy. Inflation risks are greater than a month ago, he said.

In August, Bernanke defied traders' predictions of an immediate cut in the federal funds rate, which affects borrowing costs for consumers and businesses. Instead, as credit dried up, he responded with a $35 billion cash injection into banks Aug. 10. Seven days later, he lowered the cost for banks to borrow directly from the Fed.

Inflation Still Emphasized

Officials waited a month before lowering the federal funds rate. Even then, they said ``inflation risks remain,'' leading some on Wall Street to complain Bernanke was out of touch.

``They stepped on their message in the first five months,'' said Vincent Reinhart, former director of the Fed's Division of Monetary Affairs. ``They weren't willing to emphasize why, or how they arrived at that inflation risk.''

Meanwhile, the economy continued to weaken.

As mortgage delinquencies rose to a 20-year high in the third quarter, Fed officials cut the federal funds rate just a quarter-point in October and said they thought inflation risks ``roughly balance'' risks to growth. Coming after a half-point cut the previous month, the October action was seen by economists including Stephen Stanley as a signal that policy makers thought they had eased credit enough to sustain the economic expansion.

``It really kind of scares me that the Fed had no idea things were going to get worse,'' said Stanley, chief economist at RBS Greenwich Capital Markets Inc., and a former member of the Richmond Fed staff. ``They were totally blindsided by the deterioration in liquidity conditions after the October meeting.''

December Disappointment

By December, investors were expecting some promise of year- end liquidity following the Federal Open Market Committee's meeting on Dec. 11. They didn't get one. Instead, policy makers again cut the benchmark rate a quarter point and maintained their view that ``some inflation risks remain.''

Investors showed their disappointment, driving the Dow Jones Industrial Average down 2.1 percent. Markets were setting up for a panic.

The Fed again surprised Wall Street the following morning, announcing that the central bank would loan as much as $40 billion for 28 days through a facility that would let banks borrow directly from the Fed.

The Fed also arranged swap lines with the European Central Bank and the Swiss National Bank, allowing them to channel dollars into their markets.

`Credit for Trying'

The Fed's response to the credit squeeze ``wasn't handled with the aplomb you would have liked,'' said E. Craig Coats Jr., co-head of fixed income at Keefe Bruyette & Woods Inc. in New York. Still, ``it was actually pretty creative, and I give them credit for trying.''

Only after Fed officials saw the potential for higher unemployment and indicators such as retail sales declining did they have confidence that inflation risks were subsiding. They then cut the benchmark rate 1.25 percentage points in nine days in January, the fastest reduction in two decades.

Bernanke's goal of keeping policy trained on a medium-term forecast while flooding the banking system with short-term cash shows how the chairman has adopted some of the discipline of inflation-targeting central banks in the United Kingdom and Sweden.

``Good central banking is not a matter of magic touch,'' said Doug Elmendorf, a senior fellow at the Brookings Institution in Washington, and a former Fed staff economist under both Bernanke and former chairman Alan Greenspan. ``It is a matter of doing something systematically right.''

The Bernanke system also includes changes in governance and communication. Bernanke persuaded fellow members of the Federal Open Market Committee to publish their projections four times a year instead of two, and stretch out to a third year. The exercise transformed the undefined preferences of Greenspan into numeric priorities of an institution.

Last to Vote

Bernanke votes last in policy meetings, unlike Greenspan who argued his policy choice first. Bernanke calls it ``depersonalization.''

``It is commendable that they are implementing these changes in the midst of the most challenging environment for central banks in decades,'' said Angel Ubide, director of global economics in Washington at Tudor Investment Corp., a hedge fund.

Bernanke's scholarly work on the Great Depression also came into play as he retooled the Fed's function as lender of last resort to grapple with what NYU economist Nouriel Roubini calls ``the first crisis of financial globalization and securitization.''

Instead of bank depositors fleeing banks, as in the Depression, it was commercial paper investors who wanted safety. These investors were running from off-balance-sheet structured investment vehicles, which have some features of banks with none of the backstops.

`Frightening at Times'

Kodweis recalled how the normal din of ringing phones fell quiet inside JPMorgan's mid-town Manhattan trading room as credit markets dried up in early August. ``It was frightening at times,'' he said. ``It took longer to sell commercial paper, it was later in the day when we were done, and maturities were increasingly shorter.''

The rush by money market funds to securities not tied to mortgages or consumers created new problems for the Fed.

On Aug. 20, the three-month Treasury bill yield declined 0.66 percentage point in one day to 3.09 percent, the biggest fall in two decades, in a stampede to safety.

On Aug. 21, Bernanke, who had been holding twice-daily conference calls with the New York Fed, reached for another tool. The New York bank halved the fee for dealers borrowing securities from the central bank's portfolio.

New Challenge

By November, Fed officials faced a new challenge. ``Banks wouldn't lend to each other,'' said Haeling. ``There was enough liquidity in the system. The trouble was it wasn't getting to the right places.''

The price of three-month interbank dollar loans in London rose to an average 60 basis points over the federal funds rate in November, from 10 basis points in January to July.

By mid-February, the Fed had auctioned $130 billion in term reserves. The Libor to federal funds rate spread fell back.

Now, Fed officials have said they are considering making the facility permanent.

``He did creative intelligent things about the banking problem. He recognized that a central bank has two concerns -- the financial problem and the macroeconomic problem,'' said Allan Meltzer, a Fed historian and Carnegie Mellon University economist. ``He acted appropriately.''

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net .

Last Updated: February 27, 2008 10:02 EST

http://www.bloomberg.com/apps/news?pid=20601109&sid=a2OkOkjbG5.s&refer=home

Euro Breaks Key 1.50 – New FX Paradigm

The Euro Bull: The New paradigm of FOREX

 

As the EUR/USD breaks 1.50, investors should take another look at foreign exchange. 100/barrel oil, $1,000 gold, and $10/bushel wheat are not anomalies, nor is there a 'bull' market in commodities. The US dollar is losing its value and its relevance as a world reserve currency.

What determines the value of a dollar? The common belief is that purchasing power determines the value of money, which is partially correct, but that is not the entire story. In a world of floating currencies, money is also valued in terms of other money. Simply opening a bank account in Europe, and gaining a few % per annum interest, would have returned a US based investor over a 50% return in 5 years. There are a few ways to look at that, but they all point to the same conclusion: the value of the dollar is declining. The other logical observation is that by NOT investing in the Euro, an investor is actually LOSING 50%. This is a difficult mental leap for many to make as they don't see losses in their bank account, but as we see $4/gallon gas, $3/gallon milk and skyrocketing commodity prices, many are noticing. They only have to realize the simple fact: prices are not increasing the value of US Dollars is declining.

Who is not affected by a declining dollar? The poor, debtors, manual laborers, and tradesmen (because you can continue to perform your trade for dollars, pesos, or bananas if need be regardless of the continuing slide of the dollar – tomorrow you may charge twice as much but so what?) But if you have any wealth; a house or a stock portfolio, denominated in dollars, the declining US Dollar should be the most important issue to you because that portfolio is losing value as the dollar does. In the worst case scenario, the Fed can default making US Dollars worthless overnight.

Best case, although unlikely it should be mentioned, the Fed could raise rates to 10%, Bush could declare a flat tax, open the borders to foreign investors by deregulation and providing tax incentives, pull out US Military from all foreign engagements, and be the banker of the world. This would catapult the US economy and the US Dollar to currently unimaginable success, but this is a farfetched fantasy. In reality, we are increasing our Military presence around the world, cutting interest rates, and regulating US markets, forcing even homegrown companies to look abroad.

Let's examine why the dollar is declining and what can potentially stop the decline.

The largest player in the US Dollar is clearly the Fed, the sole issuer of the US Dollar. Investment Banks and Hedge Funds, at the end of the day, rely on the Fed for regulation, clearing, liquidity, and currency controls; they are distributors and traders of US Dollars not the manufacturer. It clearly states on the Fed's website that the Fed conducts foreign currency operations in the open market, and maintains US holdings of foreign currency and swaps. This would indicate the Fed has the ability to intervene in currency markets in order to protect the strength of the dollar, and although the Fed may have that ability, it states in the same article that:

1. US monetary policy actions influence exchange rates. The dollar's exchange value in terms of other currencies is therefore one of the channels through which U.S. monetary policy affects the U.S. economy. If Federal Reserve actions raised U.S. interest rates, for instance, the foreign exchange value of the dollar generally would rise. An increase in the foreign exchange value of the dollar, in turn, would raise the price in foreign currency of U.S. goods traded on world markets and lower the dollar price of goods imported into the United States. By restraining exports and boosting imports, these developments could lower output and price levels in the economy. In contrast, an increase in interest rates in a foreign country could raise worldwide demand for assets denominated in that country's currency and thereby reduce the dollar's value in terms of that currency. Other things being equal, U.S. output and price levels would tend to increase—just the opposite of what happens when U.S. interest rates rise.
   

   
    

   The Fed therefore officially controls exchange rates of the US Dollar through Monetary Policy. The Fed, in response to a weakening US economy and a Subprime crisis, has taken an aggressive policy of cutting interest rates, thus dropping the dollar.
   

   
    

   So we cannot expect the Fed to solve the weak dollar issue, because they are the creators of it! The Fed could start aggressively raising interest rates and we could see the dollar soar to new highs. But there is a low chance of that happening, as they have indicated the contrary. As the credit crisis unravels, we can expect the Fed to continue cutting rates. With a weak stock market, a weak real estate market, and a weak economy, we can expect more doom and gloom before we see the light at the end of the tunnel, and in the meantime the US Dollar can sink another 80% or more, as the Great British Pound did when it lost its status as reserve currency.
   

   
    

   Technically, once a downward spiral starts in currency, it is very difficult to stop. In stocks, an issuer can buy back shares in order to dry up liquidity and stabilize the price; a common practice among penny stocks listed on pink sheets. However if the US Dollar declines, the Fed would need Euros in order to 'buy back' US Dollars, and since the Fed is not an issuer of Euros, it would take a near act of God to convince the ECB to loan the trillions necessary to support the dollar in the event of a default or run on the banks. While the Fed does have some mechanisms in place to stabilize the markets, the act of supporting your own currency is like pulling yourself out of a sinkhole by your own hair. Once the selling starts, it could feed on itself and create a downward spiral – as the value goes down more large holders, worried about further losses, may panic and sell, thus adding fuel to the fire.
   

   It would be anything but capitalism if we didn't profit from this once in a lifetime opportunity of a declining dollar. On one hand, wealth will be wiped out en masse – on the other, it will be created. A transfer of paper wealth from USD to Euro and other currencies is inevitable; why be on the wrong side of the fence? Germans, Argentineans, Japanese, French, British, Italians, Turks, and many others, can attest to the events surrounding currency collapse and hyper inflation. They say it cannot happen to USA because of the TBTF Too Big to Fail Policy, a fallacious reasoning that came out of a Senate hearing on banking regulation.
   

   All the facts and economic data point to massive dollar sell-off – look at a USD/CHF chart and you can plainly see it has already started.
   

   FX as an asset class
   

   There are many ways to invest in FX as an asset, but this should be done only with the help of a qualified professional or someone with experience in FX. Everbank offers foreign currency CD's and foreign currency deposit accounts: https://www.everbank.com/ This will not excite most investors but at least you can have non-dollar denominated deposits insured by the FDIC.
   

   For a more versatile approach, CTA's offer FOREX Managed Accounts, usually with minimums starting at $10,000. These accounts are pure FX trading strategies, some are extremely conservative and others are extremely aggressive. Various strategies can be implemented on these accounts which vary from simple news and economic analysis by traders with 20 years experience, to fully automated quant systems.
   

   Funds such as the MERK hard currency fund offer FX specific returns as a mutual fund. From their website: http://www.merkfund.com/
   

   The Merk Hard Currency Fund (MERKX) is a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the U.S. dollar relative to other currencies. Many consumers are aware of the falling dollar but don't know how to protect their capital against its decline. Others are uncomfortable choosing specific foreign currencies to invest in or investing in currency derivatives. The Fund may serve as a valuable diversification component as it seeks to protect against a decline in the dollar while potentially mitigating stock market, credit and interest risks-with the ease of investing in a mutual fund. The Fund may be appropriate for you if you are pursuing a long-term goal with a hard currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market.
   

   Hedge Funds are another venue for FX investing, but they typically have a $1 Million minimum and employ risky strategies.
   

   FX Overlay
   

   If a business or portfolio has exposure to multiple currencies, a hedging program can be implemented that combines multiple strategies to deal with currency risk. Large corporations such as Intel may have their own treasury desks, but smaller companies or financial firms may not have the resources or knowledge in place to justify such programs, however there are many companies who offer this service, or it could be built using proven models from the ground up.
   

   FX as an industry
   

   Explosive growth opportunities exist in the FX industry as US based investors take notice. The real opportunity in FX is in marketing, because of the widespread lack of knowledge about FX. Sadly, you don't need to know much to make a fortune in this field, and it's the marketers that will ultimately make the most, as they introduce an uneducated and unenlightened public into the most significant market of our age. What will out of work real-estate developers do as the market continues to weaken?
   

   Beware FX Scams!
   

   Because FX is completely deregulated, FX attracts many criminals. The allure of a secretive market only traded by large banks makes a good pitch to unsuspecting suckers. However there are a few easy ways to determine scams from the real thing, such as the NFA, CFTC, SEC, or by dealing with only companies and individuals who associate themselves with large FX firms who are registered with the NFA. The fact that FX attracts criminals doesn't diminish the opportunities in FX any more than the movie "Boiler Room" proves that all stock brokers are cocaine snorting crooks.
   

   This article is by no means exhaustive nor is it intended to be. Regarding bias on the topic, considering we are in this business, the fact that these opportunities exist, and the fact that dollar is declining, is why we ARE in this business and not in stocks or bonds. A day may come where FX is the only significant market left in the world, as domestic exchanges are ravaged by reckless monetary policies and rogue political administrations. In the meantime, protect yourself against calamity and position yourself to capitalize on the opportunity of a lifetime.
   

   If you aren't familiar with Elite E Services, we recommended buying Gold at 279 and investing in New Zealand Dollars in 2002 when the NZD/USD was .39. George Soros made his fortune trading currencies, not selling stocks. In the mid-1990's, Intel made more money in FX than selling processors.
   

   February 26^th, 2008 - This day will be remembered by many as the last day of the Dollar's reserve status. May we remember the US Dollar well, in the good times.
   

   For more information please visit Elite E Services: www.startelite.com or sign up for our Fore Group: www.forexcoding.com
   

   
    

   Let your plans be dark and as impenetrable as night, and when you move, fall like a thunderbolt.

Bad US Data – Euro Breaks Key 1.50

Key home price index shows record decline

U.S. home prices dropped 8.9 percent in the final quarter of 2007 compared with a year ago, Standard & Poor's said Tuesday, the steepest decline in the 20-year history of its housing index.

After subprime debacle, U.S. wrestles with question of bank bailouts

Over the past two decades, few industries have lobbied more ferociously or effectively than banks to get the government out of its business and to obtain freer rein for "financial innovation."

Greenspan Urges Gulf States To Abandon Dollar

"It [de-pegging] is probably the most useful thing that can be done to stop the increasing influence of foreign assets on the monetary system and therefore the monetary base which is basically the major force in inflationary pressures," Greenspan told the Abu Dhabi Corporate Leadership Forum yesterday.

Foreclosures up 57 percent in the past year

The number of homes facing foreclosure jumped 57 percent in January compared to a year ago, with lenders increasingly forced to take possession of homes they couldn't unload at auctions, a mortgage research firm said Monday.

One in 10 Home Loans Under Water

And one in every five homes is in tax trouble.

World Grain Demand Straining U.S. Supply

Okay, so the global warming "cult" promised us all that if we turned food production farmland into ethanol production, that we would have a zero carbon footprint source of energy.

 

Dollar Falls to Record Low of $1.50 per Euro on Rate Outlook Feb. 27 (Bloomberg) -- The dollar fell to an all-time low of $1.50 per euro on speculation Federal Reserve Chairman Ben S. Bernanke today will indicate the U.S. central bank is prepared to keep lowering interest rates. The currency is headed for its second straight monthly decline versus the euro on expectations a government report today will show a drop in U.S. home sales, bolstering the Federal Reserve's case for cutting borrowing costs. ``It's crunch time for the dollar,'' said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, a unit of France's second-largest bank by market value. ``Bernanke may know that monetary policy alone cannot support the slowing U.S. economy.'' The U.S. currency touched $1.5047 per euro, the lowest since the European single currency was introduced in 1999, before trading at $1.5012 as of 8:17 a.m. in Tokyo from $1.4979 in late New York yesterday. It also was at 107.24 yen from 107.28. The U.S. currency may fall to $1.51 per euro and 106.80 yen today, Saito forecast. The U.S. dollar slid against 11 of the 16 most-active currencies after Fed Vice Chairman Donald Kohn said yesterday turmoil in credit markets and the possibility of slower economic growth pose a ``greater threat'' than inflation. http://www.bloomberg.com/apps/news?pid=20601087&sid=ayvv2bpptzZw&refer=home

Forex Trading Channel #19

Gabcast! Forex Trading Channel #19

Brewing Balkan War

"As regards the deal between Russia and Serbia, we can blame the EU for some of this," said Borut Grgic, an energy expert and director of the Institute for Strategic Studies in Ljubljana, Slovenia.

"There is a big political dimension to this," he added. "In all its negotiations with Serbia when dealing with the future status of Kosovo, the EU never brought up with Serbia the issue of energy security and how Serbia could play an important role for Europe.".... http://www.iht.com/articles/2008/01/22/europe/energy.php

That aim appeared to be gathering force Saturday as Serbs in northern Kosovo erected a metal container and hung Serbian flags on electrical posts on a main road between Zubin Potok, a Serbian town, and Mitrovica, a city divided between ethnic Albanians and Serbs. Meanwhile, there were increasing reports in Pristina that officers were deserting the multiethnic police force in Kosovo and pledging their allegiance to the government in Belgrade. http://www.iht.com/articles/2008/02/24/america/kosovo.php

BELGRADE, Feb 24 (Reuters) - Serbia was back on the offensive over Kosovo's independence on Sunday, blaming the United States for crisis in the Balkans while its ally Russia accused the Americans of destroying "world order".

Three days after young rioters in Belgrade embarrassed the country by attacking Western embassies and looting shops, Serbian Prime Minister Vojislav Kostunica said it is Washington that is threatening peace and stability.

In a strongly worded statement from Moscow, Russia also accused Washington of trampling on international law.... http://www.reuters.com/article/europeCrisis/idUSL24605875

Moscow slams Burns statement

MOSCOW -- A war of words over Kosovo is raging between Russia and the United States... http://www.b92.net/eng/news/politics-article.php?yyyy=2008&mm=02&dd=24&nav_id=47944

Indeed, dozens of armoured vehicles and tanks have been deployed at key points in the border region, after Belgrade officials announced that they would march into Kosovo in their thousands — albeit for peaceful rallies. "KFOR troops are trained and well-equipped to answer any challenges coming from inside or outside of Kosovo," a radio advertisement, paid for by KFOR, warns Serbian listeners... http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2008/02/24/wserbia124.xml

The US needs Croatia over an agreement between Iran and Serbia... http://www.nacional.hr/printable/articles/view/29168/

http://www.videocodezone.com/playyoutubevideo.php?v=s3IzAPBR5J4 Serbian Tanks on the Kosovo Border

Kosovo border police have reported Serb tanks are taking positions near the Kosovo-Serb border. http://www.google.com/search?q=serbian+tanks+move+to+kosovo&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a

Forex Trading Channel #18

Gabcast! Forex Trading Channel #18

Forex Trading Channel #17

Gabcast! Forex Trading Channel #17

Obama info

http://online.wsj.com/article/SB120269904120358135.html

Michelle Obama Solidifies
Her Role in the Election

 

Feb. 11 (Bloomberg) -- Europe's economy has caught the U.S.'s cold, and may be sick longer. http://www.bloomberg.com/apps/news?pid=20601087&sid=aJGI6v60AAx4&refer=home

Hedge Fund Implode o meter

http://hf-implode.com/ The Hedge Fund Implode-O-Meter (HFI) was created in mid-2007 amidst the ongoing collapse of the housing finance sector and a general credit crunch to track as hedge funds learn the double-edged-sword nature of the often-extreme leverage they use.

http://bankimplode.com/