The report truly brought mixed news. While employers are still not beefing up their payrolls, the Labor Department’s survey of households found major employment gains. The results were altogether better than many were expecting. “All in all, we see encouraging signs of progress in labor market conditions and expect to see much better payroll performance … in coming months,” Morgan Stanley economists Ted Wieseman and David Greenlaw wrote in a morning note.

Where is the hiring? For one thing, the Labor Department reports that the number of people in part-time jobs who want full-time work but can’t find it or had their hours cut, fell from 9.2 million to 8.3 million. Not surprisingly, the average number of hours worked in a week rose 0.1 hour to 33.3 hours. These are good indications that demand is picking up and employers are responding by paying their employees to work more hours, which may be a first step, before they begin hiring new workers.

Perhaps the strongest indicator that employers are testing the hiring waters is the continuing increase in temporary help services jobs. In January, employers added 52,000 temp jobs, bringing the total number of temp jobs added since September to 247,000. Many economists consider temp services a leading indicator for permanent hires, but some are cautious. “Whether this is a harbinger of stronger gains in permanent employment or a reflection of many businesses still not being convinced that they need to pull the trigger on permanent hires remains to be seen,” says Joshua Shapiro, chief U.S. economist at MFR.

The retail sector also saw job growth, adding 42,000 jobs last month. The biggest gains were in food stores and clothing stores. Healthcare continued to expand its payrolls, and the federal government added 33,000 jobs, 9,000 of which are temporary positions for the census. State and local governments, wrestling with major budget woes thanks to a double whammy of higher recessionary expenses and lower tax revenues, continued to lose jobs.

Who’s seeing some benefit? This recession has been coined the “man-cession,” because of the massive job losses in the construction and manufacturing industries, which traditionally employ disproportionately high percentages of men. Indeed, last month, women made up an astounding 49.9 percent employed workers. When the recession began in 2007, 48.8 percent of nonfarm payroll employment was made up of women. Last month the unemployment rate for women fell to 7.9 percent, compared with a steady 10 percent unemployment rate among men.

A major bright spot in the report was the significant decline in the percentage of under-employed workers–the job-seeking unemployed plus those who are working part-time but want full time work; the unemployed who are not looking for work because they are in school or have other obligations; as well as those who have simply lost hope in finding work. In January, the under-employed made up 16.5 percent of the workforce, down 0.8 percentage point from December.

Who’s still hurting? There’s no question that the workers struggling most now are those who have been out of work the longest. The number of unemployed who have been out of work for 27 weeks or more reached 6.3 million in January. The average duration of unemployment among the jobless reached 30.2 weeks. That means more than 40 percent of the unemployed have been looking for work for about seven months or more.

That may in part be because the recession continues to hammer specific sectors. Construction employment fell by another 75,000 in January. Most of the job losses were in non-residential specialty trade construction. The sector has now lost 1.9 million jobs since the start of the recession. Also last month, 19,000 transportation and warehousing jobs were cut, driven by a big loss in courier and messenger jobs.

This week the National Employment Law Project reported nearly 1.2 million unemployed will become ineligible for federal jobless benefits in March, and by June, 5 million would become ineligible. “The continued high rate of long term unemployment reflected in January’s jobs report underscores the urgent need for action from Congress to maintain the lifeline of jobless benefits for millions of unemployed workers caught in the undertow of this recession,” says Christine Owens, executive director of NELP.

Will the job market keep improving? No one knows what this recovery will look like, although most economists believe that jobs will take some time to recover. The Labor Department revised its earlier job loss and gain figures to show that 64,000 jobs were added in November, rather than the 4,000 originally reported. While that gain sounds pretty good, the figures for December were revised to show 150,000 jobs were slashed from payrolls, instead of the 85,000 job cuts first reported. Nobody expects a smooth trend, but these numbers make it very difficult to know what future months will hold.

Morgan Stanley’s Wieseman and Greenlaw said they are getting “closer to calling the peak in the unemployment rate.” Still, the unemployment rate could bounce higher again if workers who dropped out of the job hunt are encouraged enough to jump back in. In the meantime, expect the Senate to move forward with a jobs bill aimed at small businesses, infrastructure investment, and green energy. “While today’s report shows positive signs that the economy is moving in the right direction, the numbers underscore that we still have work to do to get Americans back to work,” Labor Secretary Hilda Solis said in a statement. “The president has made it clear that job creation is our number one focus in 2010.”

Related Posting:

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Is This Rally Out of Sync with the Economy?

British Pound Continues to Retrace the Decline From December, Euro Remains Supported by 200-Day SMA

The British Pound crossed back above the 50-Day SMA (1.6338) during the overnight trade to reach a high of 1.6381, and the GBP/USD may continue to retrace the decline from December as market participants raise their appetite for risk. Meanwhile, Ernst & Young’s Item Club held a cautious outlook for the U.K. and said that the region faces a “challenging” year as households face a weakening labor market paired with tightening credit conditions, and forecasts the growth rate to increase at an annual pace of 1.0% in 2010 as the expansion in monetary and fiscal policy continues to feed through the real economy.

At the same time, the Rightmove home price index gained 0.4% in January after tumbling 2.2% during the previous month, while the annualized rate increased 4.1% from the previous year after rising 1.7% in December to mark the fourth consecutive rise. The breakdown of the report showed home prices in six of the ten regions increased during the month as “limited supply of sellers is being outstripped by buyer demand,” and conditions are likely to improve going forward as the economy emerges from the worst recession since the post-war period. Nevertheless, the slew of U.K. data scheduled for this week is likely to stoke increased volatility in the exchange rate, and we may see a major breakout following the Bank of England meeting minutes due out on Wednesday at 9:30 GMT as investors weigh the outlook for future policy.

The Euro tipped lower against the greenback for the third day, with the exchange rate slipping to a low of 1.4333, and the EUR/USD may continue to trend sideways over the week as the pair remains supported by the 200-Day SMA at 1.4283. Nevertheless, the European Central Bank announced it will discontinue swap operations with the Swiss National Bank “against the background of declining demand and improved conditions in the funding markets,” and the central bank may continue to normalize policy over the coming months as the Governing Council holds an improved outlook for the region. Moreover, the Bundesbank said that the economic recovery in Germany remains ‘fundamentally intact,’ but went onto say that the pace of expansion was significantly slower in the fourth quarter of 2009 as activity in the domestic economy remains weak.

U.S. dollar price action was mixed across the board, with the USD/JPY extending the decline from the previous week to reach a low of 90.65, and risk trends are likely to dictate price action going into the North American trade as the economic calendar remains fairly light for Monday. U.S. equity futures are slightly higher on the day, led by a 0.12% rise in the S&P 500, and a rise in risk appetite is likely to weigh on the greenback as it remains the most popular funding-currency next to the Japanese Yen.

At the same time the Usd was the one of weakest currencies in global trade. However, since Dec. 3 and the last U.S. non-farm payroll report, gold has declined by more than $150 (-12%) in just three weeks, as shown on this chart.

The three-week gold move has fed off very strong down-side momentum, and a freshly broken trend-line suggests that this may be a near-term, first leg, of something larger to follow. The Elliott Wave team at the TheLFB.com will monitor gold weakness and Usd strength in the first part of 2010.

One of the pairs that reflects the sentiment for Usd based moves is Usd/Chf, since it is linked to interest rate differential based trade and does tend to signal Usd momentum swings better than most currencies. On the long side of swissy, the trade team is watching for signals of a long move, possibly up towards the 1.100 zone, while gold may fall back towards $1000 per ounce.

Elliott wave view: Usd/Chf

Swissy reached new 2009 lows on Nov. 26, at a point that the market saw a Usd bear market reversal. Overall we are looking at two long-term wave count, and what is important to note is that both of the wave counts signal for Usd strength within the next couple of months.

Wave count No.1: You will see a long-term bullish wave count following a Short blue wave B), that may already be completed somewhere above the 0.9634 support area. Traders may be looking for a higher impulse wave C) move. Impulse moves mean a five wave structure, which is bullish in our case.

At the same time the Usd was the one of weakest currencies in global trade. However, since Dec. 3 and the last U.S. non-farm payroll report, gold has declined by more than $150 (-12%) in just three weeks, as shown on this chart

The three-week gold move has fed off very strong down-side momentum, and a freshly broken trend-line suggests that this may be a near-term, first leg, of something larger to follow. The Elliott Wave team at the TheLFB.com will monitor gold weakness and Usd strength in the first part of 2010.

One of the pairs that reflects the sentiment for Usd based moves is Usd/Chf, since it is linked to interest rate differential based trade and does tend to signal Usd momentum swings better than most currencies. On the long side of swissy, the trade team is watching for signals of a long move, possibly up towards the 1.100 zone, while gold may fall back towards $1000 per ounce.

Elliott wave view: Usd/Chf

Swissy reached new 2009 lows on Nov. 26, at a point that the market saw a Usd bear market reversal. Overall we are looking at two long-term wave count, and what is important to note is that both of the wave counts signal for Usd strength within the next couple of months.

Wave count No.1: You will see a long-term bullish wave count following a Short blue wave B), that may already be completed somewhere above the 0.9634 support area. Traders may be looking for a higher impulse wave C) move. Impulse moves mean a five wave structure, which is bullish in our case.

Usd/Chf Weekly Elliott Wave View

Wave count No.2: The second wave count is long-term bearish, since we came out with a completed black wave B leg around the 1.2400 top. We counted a move up from the wave A lows to the wave B highs as a double zig-zag pattern, separated by a wave (X). After that, the market made a very sharp decline in a blue wave 1) followed by a sharp reversal in blue wave 2), before prices fell into a down-trend channel with a five wave move.

If this wave count is correct, the market should make three waves of retracement into a Long wave II pull-back over the coming weeks and months, since we can count five completed waves down in our red wave I. Elliott wave traders will always look for a three waves of a reversal once a five wave pattern is complete.

Usd/Chf weekly Elliott Wave view

Above are two of three charts posted on this currency to members each day, that make up 30 charts in total that cover six major currency pairs, equity futures, oil, gold, and the dollar index.

]]> http://www.forexyellowpages.com/2010/01/07/gold-enjoys-big-move-in-2009/feed/ 0 http://www.forexyellowpages.com/2009/12/19/forex-trading-margin-and-leverage/ http://www.forexyellowpages.com/2009/12/19/forex-trading-margin-and-leverage/#comments Sat, 19 Dec 2009 00:03:35 +0000 paul http://www.forexyellowpages.com/?p=745 Additionally, Forex trading with us is done on a margin system, essentially using a free short-term credit allowance used to purchase an amount of currency that greatly exceeds the traders account value

Understanding the Margin System
Trading currencies on margin lets you increase your buying power. Here’s a simplified example: If you have $2,000 cash in a forex margin account that allows 1:100 leverage, you could purchase up to $200,000 worth of currency-because you only have to post 1% of the purchase price as collateral. Another way of saying this is that you have $200,000 in buying power.

You are probably wondering how a small investor can trade such large amounts of money. Think of your broker as a bank who basically fronts you $100,000 to buy currencies and all he asks from you is that you give him $1,000 as a good faith deposit, which he will hold you for but not necessarily keep. Sounds too good to be true? Well this is how forex trading using leverage works.

For example, for every $1,000 you have, you can trade 1 lot of $100,000. So if you have $5,000 you can trade up to $500,000 of Forex.

In the example above, it is used a one percent margin. This means that for every $100,000 traded, the forex broker wants $1,000 as a depost on the position.

What is a Margin Call?
In the event that money in your account falls below margin requirements (usable margin), your account will close some or all open positions. This prevents your account from falling into a negative balance, even in a highly volatile, fast moving market.

Example #1
Let’s say you open a regular Forex account with $2,000. You open 1 lot of the USD/JPY, with a margin requirement of $1000. Usable Margin is the money available to open new positions or sustain trading losses. Since you started with $2,000, your usable margin is $2,000. But when you opened 1 lot, which requires a margin requirement of $1,000, your usable margin is now $1,000.

If your losses exceed your usable margin of $1,000 you will get a margin call.

Example #2
Let’s say you open a regular Forex account with $10,000. You open 1 lot of the USD/JPY, with a margin requirement is $1000. Remember, usable margin is the money you have available to open new positions or sustain trading losses. So prior to opening 1 lot, you have a usable margin of $10,000. After you open the trade, you now have $9,000 usable margain and $1,000 of used margin.

If your losses exceed your usable margin of $9,000, you will get a margin call.

Make sure you know the difference between usable margin and used margin.

If the equity (the value of your account) falls below your usable margin due to trading losses, you will either have to deposit more money or the system will close your position to limit your risk. As a result, you can never lose more than you deposit.

Leverage Ratio and Margin Percentage
The simple relationship between the two terms are:

Leverage = 100 / Margin Percent
Margin Percent = 100 / Leverage

Leverage is conventionally displayed as a ratio, such 1:100

Margin Trading: Stocks vs Forex

The word “margin” means something very different in forex than it does in stocks.

With stocks, trading on margin means that a trader can borrow up to 50% of a stock’s value to buy that stock. This can be a costly move because the investor must pay interest to the brokerage firm on the amount borrowed. This is not the case in forex trading.

For example: at $400/share, 100 shares of Google are valued at $40,000 ($400 x 100 shares). To trade this stock on margin, the money required for the trade is 50%, or $20,000. The remaining $20,000 is borrowed and interest must be paid on that amount. Margin interest is different from broker to broker, but a good rule of thumb is typically Prime plus 1-3% or more.

In forex, margin is the minimum required balance to place a trade. When you open a forex trading account, the money you deposit acts as collateral for your trades. This deposit, called margin, is typically 1% of the value of the position.

For example: if you want to purchase $100,000 of USD/JPY at 1:100 leverage, the money required is 1%, or $1000. The other $99,000 is collateralized with your remaining account balance. You pay no interest.

It is very important to remember that leverage magnifies your profits AND your losses. You should monitor your account balance on a regular basis and utilize stop-loss orders on every open position to limit downside risk.

However, leverage is an exceptionally good tool that can be utilized to increase your buying power and return on capital, as long as you have a solid risk management plan in place.

But the dollar isn’t an asset — it’s a vehicle through which investments are made. And the fact that investors around the world are buying more and more non-U.S. assets suggests that the dollar will keep falling.

There are, of course, plenty of reasons here at home that the dollar is faltering. Among them: rising deficits; low interest rates paid out by our bonds; and rising inflation fears.

But the dollar is also weaker because “investors think there are better places to put their money to work than in the U.S.,” says Jack Ablin, chief investment officer for Harris Private Bank.

Indeed, the 37% drop in the dollar’s value against a basket of other currencies since 2001 coincides with an unprecedented demand for the assets of other economies, especially shares of companies in fast-growing places such as China and Latin America.

A decade ago, U.S. stocks comprised 54% of the world’s stock market value; today they represent only a third. As investors shift out of the U.S. market, they exchange dollars for the currencies of countries where they’re doing their buying, reducing demand for the buck.

Safety isn’t enough

To be sure, the dollar is still the world’s “safe haven” currency, says Jeffrey Kleintop, chief market strategist for LPL Financial. The dollar’s value spiked after the 9/11 terrorist attacks and again last year during the global credit freeze.

In both instances investors rushed into Treasury bonds, which required the purchase of dollars. So there will be occasions when the buck bucks its long-term trend. But that’s not the same as holding back the tide.

Expand your horizons

This doesn’t mean that the U.S. economy is crumbling. The strength of a nation’s currency is never a pure reflection of economic might. The yen gained on the dollar this year even though Japan’s economy shrank twice as fast as this country’s did.

Nor does it mean you should be dumping U.S. stocks. Keep in mind that nearly half of all revenue for companies in the S&P 500 index comes from outside the U.S., up from 32% at the start of this decade. And the falling buck makes dollar-based goods look attractive to foreign buyers. A jump in U.S. exports is already starting to help, as third-quarter S&P 500 earnings are coming in ahead of analyst estimates.

But the dollar’s long-term decline does argue for keeping a sizable portion of your stock portfolio — at least 25% and up to 50% — in foreign shares. Their value will rise simply based on the currency exchange. Meanwhile, you’ll be taking advantage of the opportunities that await you overseas.

Exchange traded funds (ETFs)  are listed on an exchange and can be traded intraday. Investors can buy or sell shares in the collective performance of an entire stock or bond portfolio as a single security. Exchange traded funds add the flexibility, ease, and liquidity of stock trading to the benefits of traditional index fund investing.

Exchange-traded funds (ETFs) are increasing in popularity, as they are often responsible for approximately 50% of the daily trade volume on the American Stock Exchange (AMEX). ETFs are passive funds that track their related index and have the flexibility of trading like a security. They are managed by professionals and provide the investor with diversification, cost and tax efficiency, liquidity, marginability, are useful for hedging, have the ability to go long and short, and some even provide quarterly dividends.

ETFs are unit investment trusts (UITs) that have two markets. The primary market is where institutions swap “creation units” in block-multiples of 50,000 shares for in-kind securities and cash in the form of dividends. The secondary market is where individual investors can trade as little as a single share during trading hours on the exchange. This is different from open-end mutual funds that are traded after hours once the net asset value (NAV) is calculated.

The most widely traded and well-known ETF is the SPDR (pronounced spider, Standard and Poor’s Depository Receipt). Other ETFs include Diamonds (Dow Jones Industrial Average), Qubes (Nasdaq-100 Index Tracking Stock) named after the ticker, QQQ, and Webs (World Equity Benchmark Shares). Webs mirror indices in foreign equity markets. There are currently 30 ETFs available on the AMEX and they include 17 Webs, 11 SPDRs (includes sectors), and one Qube and one Diamond.

The American Stock Exchange lists ETFs on more than 100 broad stock market, stock industry sector, international stock, and U.S. Treasury, and corporate bond indexes, providing a wide array of investment opportunities. ETFs provide a simple and effective way to invest in equity markets worldwide and the U.S. bond market. Investors can establish long-term investments in the market performance of the leading companies in the leading industries in the United States or abroad, or tailor asset allocations using diversified investments in stocks in particular industries or countries or in U.S. bonds.

Exchange-Traded Funds, or ETFs, are index funds that trade just like stocks on major stock exchanges. Want to invest in the market quickly and cheaply? ETFs are the most practical vehicle. They help the investor focus on what is most important, choice of asset classes.

All the major stock indexes have ETFs based on them, including:

• Dow Jones Industrial Average
• Standard & Poor’s 500 Index
• NASDAQ Composite

There are ETFs for large US companies, small ones, real estate investment trusts, international stocks, bonds, and even gold. Pick an asset class that is publicly available and there is a good bet that it is represented by an ETF or will be soon.

ETFs differ fundamentally from traditional mutual funds, which do not trade midday. Traditional mutual funds take orders during Wall Street trading hours, but the transactions actually occur at the close of the market. The price they receive is the sum of the closing day prices of all the stocks contained in the fund. Not so for ETFs, which trade instantaneously all day long and allow an investor to lock in a price for the underlying stocks immediately.

ETFs are economical to buy and especially to maintain over the long-run, making them especially attractive for the typical buy-and-hold investor. Annual fees are as low as .09% of assets, which is breathtakingly low compared to the average mutual fund fees of 1.4%. Although investors must pay a brokerage transaction to purchase them, with discount brokers this becomes negligible with sizable trades. There are a few easy-to-avoid pitfalls to watch out for. Tax effects are also not to be ignored, and ETFs perform well after-tax. They can be margined, and options based on them allow for various defensive (or speculative) investing strategies.

Their safety as a securities instrument (considered separately from the safety of any particular asset class they might represent) is considered the same as stock certificates themselves. Internally, ETFs are far more complex entities than mutual funds. A fascinating combination of players, including brokers, money managers and market specialists combine to make them run smoothly. Legally, ETFs are a class of mutual fund as they fall under many of the same Securities Exchange Commission rules that traditional mutual funds do. But their different structure means that the SEC has imposed different requirements from traditional mutual funds in how they are bought and sold.

ETFs are index funds at heart, so investors are encouraged to study the philosophy of index investing which downplays stock picking in favor of buying the market. But unlike most traditional index funds, investors need not take a passive, buy-and-hold approach. ETFs are also becoming favorites of hedge funds and day traders who like to pull the trigger frequently. Both types of investors may coexist and in fact strengthen each other by lowering overall transaction costs.

ETFs, like index funds in general, tend to offer greater tax benefits because they generate fewer capital gains due to low turnover of the securities that comprise the portfolio. Generally, an ETF only sells securities to reflect changes in its underlying index. Exchange trading of ETFs further enhances their tax efficiency. Investors who want to liquidate shares in an ETF simply sell them to other investors through exchange trading. Because of this unique structure, ETFs are not required to sell securities to meet investor cash redemptions, potentially generating capital gains tax liability for remaining investors. Keep in mind that the sale of an ETF will generate capital gains/losses for the investor liquidating shares.

As luck would have it ETFs are also quite tax-efficient. Because of the way they are created and redeemed, they allow an investor to pay most of his capital gains upon final sale of the ETF, delaying it until the very end. There is no way to avoid capital gains, but delaying it is valuable because the amount that would have been paid to taxes can continue to accumulate wealth. Exactly how much an investor benefits after-tax depends on their marginal tax rate, the return of the investment, and how long they hold the investment. Overall, ETFs are similar to tax managed index mutual funds, slightly more efficient than standard mutual funds, and significantly more efficient than actively managed mutual funds.

Traditional mutual funds accumulate unrealized capital gains liabilities for stocks that have risen in value. Upon sale of these stocks the fund calculates and periodically distributes the capital gains to its investors in proportion to their ownership. The following table illustrates a comparison of ETFs versus standard index mutual funds:

Most open-end index funds can be purchased directly from their distributors without a transaction fee. Those bought through the discount brokers like Charles Schwab or E*Trade usually include a transaction charge of $15-$30 or more. Exchange-traded funds, on the other hand, are subject to regular brokerage commissions on all purchases and sales. An additional cost to investors in ETFs is the “spread” between the bid and ask price. This can amount to over 1% of the purchase or sale price.

Expense ratios (ER) are very similar among ETFs and open-end index funds. However, there is often an additional cost of ownership to holding ETFs. SPDRs, for example, pay dividends quarterly directly to investors. An open-end index fund like the Vanguard 500 Index reinvests dividends into new shares as they are paid. The delay of dividend reinvestment with ETFs is often referred to as “dividend drag.”

* 0.18% after expense reimbursement by fund manager.

Source: Index funds

Exchanged-trade index funds offer investors even greater flexibility than open-end index funds and may offer cost and tax advantages. Investors should be aware, however, that the unique advantages of ETFs, such as greater trading flexibility and the ability to sell short, might turn out to be very costly features in the long run. Investors are still wise to avoid the temptation of market timing and use ETFs as part of a diversified, long-term investment strategy

Because they are exchange traded, ETFs can be:

ü bought and sold at intraday market prices
ü purchased on margin
ü sold short, even on a downtick (unlike common stocks)
ü traded using stop orders and limit orders, which allow investors to specify the price points at which they are willing to trade

ETFs are priced and traded throughout the day, and are not restricted to once-a-day trading at the end of the day. And because the pricing of ETFs is continuous during trading hours, investors will always be able to obtain up-to-the-minute share prices from their broker or financial adviser.

Because each ETF is comprised of a basket of securities, it inherently provides diversification across an entire index. Additionally, the expanding universe of ETFs available offers exposure to a diverse variety of markets, including:

ü broad-based equity indexes (such as total market, large-cap growth, and small-cap value)
ü broad-based international and country-specific equity indexes (such as Europe, EAFE, and Japan)
ü industry sector-specific equity indexes (such as healthcare, energy, and real estate)
ü U.S. bond indexes (such as long-term Treasury bonds and corporate bonds)

Dividends paid by companies and interest paid on bonds held in an ETF are distributed to ETF holders, less expenses, on a pro rata basis. Of course, not all companies will pay dividends. Based on past performance, few, if any, distributions can be expected from certain ETFs. There may also be opportunities for reinvestment of distributions.

Investors can capitalize on the convenience and flexibility of ETFs to pursue a wide variety of investment strategies.

Investors can use ETFs as a core investment for their portfolio. The purchase of shares in a single ETF can provide broad market exposure of a portfolio of stocks or bonds for long-term holding that is easy to establish, easy to track, inexpensive, and tax efficient.

Portfolio diversification—ETFs cover virtually every segment of the equity market and several segments of the U.S. bond market, providing an easy and convenient way to adjust the investment mix of a core portfolio.

Hedging—Exchange traded funds can be purchased on margin and sold short (even on a downtick), which has opened up risk management strategies for individual investors that were once available only to large institutions. For example, ETFs can be sold short to hedge a core stock portfolio or interest rate fluctuations. This allows investors to keep their portfolio intact while protecting them from market losses. In a declining stock market or rising interest rate environment, profits from a short position can offset some of the losses in a portfolio. (Investors are required to make arrangements to borrow securities before selling short.) Listed options, available on some ETFs, also offer opportunities for additional hedging or to increase income. Investors should contact their broker regarding initial and maintenance margin requirements.

Cash management—ETFs have often been used to “equitize” cash, providing a way for investors to put cash to work in the market or maintain allocation targets while determining where to invest for the longer term.

Rebalancing—Investors can adjust ETF positions at any time throughout the trading day, without redemption fees or short-term restrictions. Again, usual brokerage commissions will apply.

Tax loss strategy—An investor can sell a security that is underperforming and claim a tax loss but retain exposure to its sector by investing in an ETF. Consult a tax advisor about a tax loss strategy.

Risks and other considerations ETF shareholders are subject to risks similar to those of holders of other diversified portfolios. A primary consideration is that the general level of stock or bond prices may decline, thus affecting the value of an equity or fixed income exchange traded fund, respectively. This is because an equity (or bond) ETF represents interest in a portfolio of stocks (or bonds). When interest rates rise, bond prices generally will decline, which will adversely affect the value of fixed income ETFs. Moreover, the overall depth and liquidity of the secondary market may also fluctuate.

An exchange traded sector fund may also be adversely affected by the performance of that specific sector or group of industries on which it is based.

International investments may involve risk of capital loss from unfavorable fluctuations in currency values, differences in generally accepted accounting principles, or economic, political instability in other nations.

Although exchange traded funds are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the trusts may not be able to exactly replicate the performance of the indexes because of trust expenses and other factors.

There are some  common misconception on exchange-traded fund liquidity .

It is common for  investors to believe that the liquidity of an ETF is dependent on the fund’s average trading volume, or the number of shares traded per day. However, this is not the case. Rather, a better measure of ETF liquidity is the liquidity of the underlying stocks in the index. Understanding this fact requires a brief look into how ETFs function on a basic level.

All ETFs trade like stocks where market makers ordered the creation and redemption of ETF shares. Market makers build an ETF share from the shares of the companies in the underlying index. They create or redeem shares depending on the market demand for the ETF shares.

It should also be noted that market makers and specialists can create and redeem shares to arbitrage premiums or discounts to the underlying net asset value (NAV). This activity is beneficial to ETF investors because it keeps the price of the fund in line with the NAV and prevents specialists from making unfair markets. Think of it as a mechanism that ensures retail investors like us will get a fair price as the market makers step all over each other trying to make a buck.

Large brokerage houses such as Morgan Stanley and Salomon Smith Barney also occasionally act as authorized participants when a client makes a large order. Based on their ability to purchase the underlying stocks in the ETF, they can create a huge number of ETF shares instantly with little difficulty in a liquid index like the S&P 500. In essence, there is enormous liquidity in ETFs based on popular indexes – the AP just has to turn on the hose.

Not surprisingly, ETFs based on indexes that also have derivatives tied to them have even slimmer bid-ask spreads. The reason is that there is heightened interaction between the specialists, market makers, and arbitrageurs. In other words, ETF shareholders benefit from this increased competition because it narrows spreads. For example, State Street Global Advisors recently reported that the average bid-ask spread calculated over 160 days on SPDR 500 (AMEX:SPY – News) was 0.09%. More firms are researching ETF bid-ask spreads, and the results confirm that ETFs tied to liquid indexes have very small spreads.

In non-U.S. dollar terms, gold also climbed, hitting multi-month highs when priced in the euro, sterling and the Australian dollar.

Spot gold hit a high of $1,147.45 and was at $1,146.05 an ounce at 0948 GMT, against $1,141.50 late in New York on Tuesday.

U.S. gold futures for December delivery on the COMEX division of the New York Mercantile Exchange also hit a record $1,148.10 and were later up $7.10 at $1,146.40 an ounce.

“Yesterday the market took a breather and tested below $1,130 very quickly, (but) a few physical related bargain hunters were lined up to grab the dip,” said Afshin Nabavi, head of trading at MKS Finance in Geneva.

The market is being underpinned by fresh interest in gold from the official sector, he said, after a recent major bullion acquisition from India and smaller buys by the central banks of Mauritius and Sri Lanka.

The acquisitions underlined gold’s appeal as a portfolio diversifier, especially in an environment where further dollar weakness was expected, analysts said.

The dollar eased back on Wednesday from its biggest rise in three weeks in the previous session, as traders awaited U.S. inflation data due at 1330 GMT.

The dollar index, which measures the U.S. currency’s performance against a basket of six others, was down 0.37 percent, while the euro/dollar exchange rate firmed.

Other commodities also climbed, with oil rising back toward $80 a barrel and copper to 13-1/3 month highs near $7,000 a tonne. Both are being lifted by the weak dollar.

INFLATION EYED

Gold traders are awaiting key U.S. consumer price index numbers later in the day for clues as to the next direction of trade, both due to its effect on the currency markets and on bullion itself, which is often seen as an inflation hedge.

“Low inflation pressures are traditionally a negative for gold prices,” said HSBC analyst James Steel in a note.

“If, however, weak inflation data are seen as allowing the Fed to continue to pursue easy monetary policies, this may be seen as supportive of gold.”

Gold rose in currencies other than the U.S. currencies, reaching its highest since late February in euro terms, since early March in sterling terms, and since early May when priced in the Australian dollar.

The physical market was quiet, however, with India’s gold demand abating as prices struck fresh record highs after offtake picked up slightly in the previous two sessions, while scrap flow eased on hopes for higher prices.

Gold’s strength also lifted other precious metals, with silver hitting a 16-month high at $18.66 an ounce and platinum reaching a peak of $1,462, its highest since September 2008.

Later silver was bid at $18.63 an ounce against $18.40, while platinum was at $1,455.50 an ounce against $1,453 and palladium was at $374 against $370.

“Given the bullish tone in the rest of the complex and increasing investment demand, both metals are likely to test higher in the coming sessions with resistance above pegged at $1,490 and $400,” said TheBullionDesk.com analyst James Moore.

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Major markets across Asia rose between 1 percent and 2 percent as the foundering dollar led investors to pour more money into commodities and shares of resource companies. Gold broke above $1,130 for the first time and oil traded higher around $77.

Encouraging quarterly reports Friday from large U.S. retail chains, as well as The Walt Disney Co., helped ease investor worries about American consumer spending, long a major source of growth for Asia’s export-oriented economies.

“The data is improving, the news is on the upswing, and first and foremost this helps boost confidence,” said Lorraine Tan, director of equities research at Standard & Poor’s in Singapore.

Also on investors’ minds was President Barack Obama’s first visit to China, where issues of trade, the economic recovery and the two countries’ currencies were likely to figure in meetings with Beijing’s leaders.

As trading opened in Europe, benchmarks in Britain, Germany and France gained nearly 1 percent each. Meanwhile, Wall Street futures augured a stronger open in the U.S. Monday, with Dow futures up 0.6 percent and S&P futures adding around 0.7 percent.

In Japan, the Nikkei 225 stock average closed up 20.87 points, or 0.2 percent, to 9,791.18. But investors largely brushed off news that Japan’s economy expanded at an annual pace of 4.8 percent in the third quarter, marking a second straight quarter of expansion and the strongest surge in gross domestic product since 2007.

In greater China, Hong Kong’s Hang Seng rose 390.35, 1.7 percent, to 22,943.98, and Shanghai’s benchmark surged 87.40 points, or 2.7 percent, to 3,275.05.

Markets in South Korea, Taiwan, India, Singapore and Australia rose between 1 percent and 2 percent.

Tan and other analysts point to the weakening dollar and record low interest rates as key reason for the continuing advance in global equities, as well as commodities. With bonds and savings accounts yielding so little these days, investors big and small have been looking for bets with higher payoffs.

“What that means is people are going to favor investments like equities,” Tan said. “There just aren’t that many alternatives if you want returns.”

Friday on Wall Street, the Dow rose 73.00, or 0.7 percent, to 10,270.47.

The broader Standard & Poor’s 500 index rose 6.24, or 0.6 percent, to 1,093.48. The Nasdaq composite index rose 18.86, or 0.9 percent, to 2,167.88.

Oil prices rose in Asia amid a weaker U.S. dollar and an improving global crude demand outlook next year. Benchmark crude for December delivery was up $1 to $77.35 a barrel; the contract settled down 59 cents at $76.35 on Friday.

The flailing greenback also lifted gold, seen as a hedge against a lower U.S. currency. Gold prices gained $12.7 at $1,129.4 after touching a new high of $1,130.6.

In currencies, the dollar was flat at 89.52 yen. The euro gained to $1.4974 from $1.4923.

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Dissecting the Deal

Buffett’s firm, Berkshire Hathaway (NYSE: BRK-A – News), agreed to buy Burlington Northern Santa Fe Corp. (NYSE: BNI – News) for $100 a share valuing the deal at $44 billion.

Over the past year, Burlington’s stock price has lagged the performance of its peer benchmark, the Dow Jones Transportation Average (NYSEArca: IYT – News).

How much did Buffett pay?

The analysts surveyed by Bloomberg, say he paid 18.2 times Burlington’s 2010 estimated earnings, which is higher than the S&P 500’s multiple according to the same analysts. Not very Buffett like, especially considering he rarely pays a premium when putting new capital to work. The only other plausible explanation is that Buffett sees hidden value in Burlington.

A Consummate Contrarian

As a contrarian to the bone, Buffett decided to pull the trigger on a company within an ailing industry sector. Through the November 2nd market close, transportation stocks have lagged the entire U.S. stock market (NYSEArca: VTI – News) by a substantial margin of 15.94%.

The recent activity of rail traffic is depressed. This is a key barometer of economic health.

The Association of American Railroads reported that for the week ending October 10th, 2009, rail traffic declined 17.2% compared to the same week in 2008. The report also shows weak demand for the transportation of goods throughout the entire U.S. On the East coast, carloads were down by 19.7% and in the West they were off by 15.4%.

Interpreting the Deal

As an insurance executive, Buffett knows a thing or two about betting. And over the years most of his bets (at least the important ones) have paid off handsomely. Some, however, did not.

In the early 1990s, Buffett’s $358 million investment in U.S. Airways was virtually wiped out. In a letter to shareholders he quipped, ‘How do you become a millionaire? First, you become a billionaire then you invest in an airlines company.’

With this latest deal, even Buffett himself admits that the Burlington deal is a gamble.

‘It’s an all-in wager on the economic future of the United States,’ he said.

Conclusion

No doubt, analysts, fund managers and others with a bullish bias have already begun misinterpreting Buffett’s $44 billion gamble as a sure sign the worst is over. It’s time to break out the champagne!

A bedazzling 80% of economists now believe the worst economic recession of our generation is over. And around 100% of them never saw the recession coming.

Even though Warren Buffett’s latest buy may be viewed as an act of genius, it may not necessarily signal that a market bottom has been reached. This was recently covered in ‘What’s Next- Minor Correction or Major Collapse.‘

Regardless, the belief that Warren Buffett can do no wrong is an investment myth that won’t die soon. His billions prove that he’s always right, right?

It calls to mind the wonderful lyrics in a song from Fiddler on the Roof.

‘When you’re rich, they think you really know.’

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]]> http://www.forexyellowpages.com/2009/11/09/does-buffetts-big-acquisition-signal-a-market-bottom/feed/ 1 http://www.forexyellowpages.com/2009/11/02/u-s-economy-back-in-positive-territory/ http://www.forexyellowpages.com/2009/11/02/u-s-economy-back-in-positive-territory/#comments Mon, 02 Nov 2009 04:34:44 +0000 paul http://www.forexyellowpages.com/?p=721 The U.S. economy got to play “trick or treat” early and ahead of the Halloween festivities with several economic indicators.  New home sales and consumer confidence clearly were tricks with numbers being very disappointing. But equity investors got a treat on Thursday as real GDP posted a stronger-than-expected 3.5 percent annualized gain for the quarter.  The relatively strong number sent the “equities-are-in-correction” traders scurrying for cover—or rather short covering for the day.  Nonetheless, the question remains—how strong is the recovery and is there reason to believe equities are a little ahead of where economic growth is really headed?

Recap of US Markets

STOCKS

Equities fell significantly this past week, with small caps and techs taking the biggest hits.  Economic reports played the bigger role in moving stocks but company news also came into play.  A drop in consumer confidence on Tuesday bumped equities down. At midweek, an unexpected drop in new home sales led to a sell-off of equities—especially for homebuilders and small caps.  The big positive for the week was a rebound in stocks with a better-than-expected third quarter GDP gain. The 3.5 percent GDP number led to brief market euphoria.  Also, traders holding short positions (many had downgraded their forecast for GDP) had to cover quickly, helping to boost prices.

But a sluggish personal income report and monthly dip in consumer sentiment reminded markets how weak the consumer sector is, resulting in the bears taking over again and stocks dropping despite a positive Chicago PMI at week end.  Also, knocking down stocks were fears of a Citigroup bankruptcy after an analyst announced the possibility that Citigroup might be taking a $10 billion write down on taxable assets.  Also, a boost in the dollar undercut the oil patch and other commodity producers.  Finally, the end of October is the end of the fiscal year for many mutual funds, leading to end of quarter portfolio cleaning.  But the bottom line is that stocks were in a broad-based retreat at close of the week with traders wondering whether the downtrend will pick up on Monday where it left of on Friday.

Equities were down this past week. The Dow was down 2.6 percent; the S&P 500, down 4.0 percent; the Nasdaq, down 5.1 percent; and the Russell 2000, down 6.3 percent.

For October, major indexes are mixed as follows: the Dow, unchanged (up fractionally but flat after rounding); the S&P 500, down 2.0 percent; the Nasdaq, down 3.6 percent; and the Russell 2000, down 6.9 percent.

For the year-to-date, major indexes are up as follows: the Dow, up 10.7 percent; the S&P 500, up 14.7 percent; the Nasdaq, up 29.7 percent; and the Russell 2000, up 12.7 percent.

BONDS

The Treasury Department probably was the biggest beneficiary of this past week’s net negative economic data. Just when you thought ballooning supply would boost yields, the economy shows signs of sputtering and investors head to the safety of U.S. government debt.

Even though the Treasury Department sold $125 billion of T-notes in four separate auctions this week, yields were down for the week. At the auctions, demand was strong except for Thursday’s sale of 7-year notes which was the last of the week’s auctions.

During the week, Treasury yields generally followed the economic data and the stock market.  The largest decline in rates was on Tuesday with the sharp decline in consumer confidence.  Weak new home sales helped eased yields at mid-week.  Rates were up on Thursday’s relatively strong GDP number.  Yields fell at week end on flight to safety as equities plunged on Friday.  Basically, rates were down net for the week on the view that the economy is not as strong as believed and on investor nervousness about how to protect capital.

For this past week Treasury rates were down as follows: 3-month T-bill, down 1 basis point; the 2-year note, down 12 basis points; the 5-year note, down 13 basis points; the 7-year note, down 12 basis points; the 10-year bond, down 10 basis points; and the 30-year bond, down 6 basis points.

OIL PRICES

Spot prices for crude oil dipped net somewhat under $3 per barrel, largely on weak economic data and higher inventories.  The biggest moves downward during the past week were on an unexpected drop in new home sales and higher oil inventories on Wednesday and on sluggish personal income and consumer sentiment on Friday.  A boost in the dollar also weighed on oil prices at week end.  However, unexpectedly strong third quarter GDP did interrupt the drop in crude as spot West Texas Intermediate jumped over $2 per barrel on Thursday.  But net for the week, mostly negative economic news pulled down prices for crude.

Net for the week, spot prices for West Texas Intermediate fell $2.78 per barrel to settle at $77.

Looking ahead, we are going to have to expand what we track in the oil markets. This past week, Saudi Arabia announced that starting in January 2010, it would stop using West Texas Intermediate as its benchmark for pricing its oil.  This is a huge concern for the NYMEX as the oil futures contract is the main contract traded on NYMEX.

Both Saudi Arabia and many of its refinery customers have become unhappy with the WTI benchmark since it began to diverge from global oil prices this year.

The new benchmark to be used by Saudi Arabia will be the Argus Sour Crude Index which will be based on a physical market basket of U.S. Gulf coast crudes. This index is being developed by Argus, a London-based oil pricing company.  These crudes have been growing in importance in terms of both production and trading activity.  However, the WTI benchmark is likely to remain quite important as the delivery point for much refining in the U.S.

The Economy

Even though third quarter GDP came in strong than expected, other economic news left the week a net negative

Third quarter GDP points to better-than-expected recovery for now.

Third quarter GDP growth came in stronger than expected with a 3.5 percent gain, following a 0.7 percent dip in the prior quarter.  The third quarter boost was the first positive GDP number since a 1.5 percent increase for the second quarter of 2008. While the third quarter gain provided a lift to investor spirits and stock prices, the real question is whether the latest GDP report points toward rising forward momentum or a possible stall.  The detail is mixed on that issue.

The improvement in real GDP in the third quarter primarily reflected upturns in personal consumption, inventory investment, exports, and residential fixed investment and a smaller decrease in nonresidential fixed investment that were partly offset by a rise in imports, a downturn in state and local government spending, and a deceleration in federal government spending.

Indeed, some of the component numbers were encouraging at least at face value.  PCEs rose an annualized 3.4 percent, led by durables with a 22.3 percent jump. While the latest numbers reflect an average for the quarter, a key issue is where forward momentum is.  According to the latest personal income report (below), personal spending lost much of its momentum late in the quarter.

Residential investment made a partial rebound of 23.4 percent—the first gain since a 2.6 percent rise in the second quarter of 2006.  The boost in housing clearly is a positive.  But it has a very low base, resulting in a big percentage change, and growth in housing sales is stalling—meaning starts and housing investment will likely slow in coming months

Inventories did add to third quarter growth but the “increase” was actually less of a decline in the change in inventories.  Businesses are still facing lean inventories and any rise in demand could boost production for inventories.  However, consumer spending appears to be soft after cash-for-clunkers is discounted.

Both exports and imports were up after a string of negative quarters for both.  Growth in global demand is a good thing and we are likely to see moderate gains in both exports and imports in coming months.  Exports will be benefitting from a low dollar.

Cash for clunkers did add substantially to third quarter growth as motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change.  We will not be seeing this boost to production again.

Overall, the advance report for third quarter GDP was a positive—but probably not one with as much forward momentum as hoped.   Other recent indicators on consumer and housing sectors also suggest that real GDP growth in the next couple of quarters will be very sluggish.

Econoday Senior Writer Mark Pender contributed to this article.