A Very Easy Way to Give

In spite of a recent, rough economy, this is still the season of giving for many of us and I wanted to share a great experience with you. I used to just hate the amount of travel that I had to do as a consultant. The road makes you feel so isolated and sitting around in hotel rooms is boring. Anyone who tells you that they enjoy business travel is lying to you. 

So, I imagine how hard it would be to be deployed overseas, for months and months (and years and years!) at a time. That must be such a high level of isolation without the comforts of a Sheraton. The USO has a great program where you can order a care package for a deployed (or about to be deployed) member of the Armed Forces for a mere $25. They leverage your donation along with (what I assume to be) corporate sponsorships and send a random member of military your care package. I just had to fill out one form with my credit card info, selected the number of packages I wanted to send (I bought one on behalf of myself and one on my wife's behalf), and I received a tax-deductible receipt in my e-mail box within the hour. 

For your consideration, the link to the care packages is at: https://www.uso.org/donate/custom.aspx?id=565&

Weekly Stock Watch List for Investment Ideas

We realize that investors are always looking for different ideas on stocks to add to their portfolios. Starting next Friday, LIG Investment Advisers will start to publish a weekly "watch list" of NYSE, NASDAQ and AMES stocks that we are keeping an eye on and that have a potential for growth. These watch lists will not serve as official recommendations for stocks, but rather a list to broaden your current portfolio view and generate some new ideas. If you would like to be a part of this distribution list, please e-mail info@ligadvisers.com and you will receive the weekly watch list.

Search the White House Visitor's List

There is a new web site, White House Visitor Records, that gives you the ability to search the recently released White House visitor records. This database is completely independent of any political party, PAC or government agency. It simply provides US citizens simple access to search this data and it will be updated on a continual basis. If you're interested in searching this data, independently, feel free to check out http://www.whitehousevisitorrecords.com

The Fall of the British Pound

Today's Wall Street Journal includes a very interesting piece on the recent fall of the British Pound (GBP) against the US Dollar (USD). Indeed, as the article states, the GBP has hit a 4 month low against the USD and there are no signs of it stopping soon; the WSJ feels that this is a decline that could continue for the next few years. The article went on to talk about the different fundamental factors that have caused the fall, including things like the carry trade and other economic strategies.

 

What the article failed to mention, however, is that the fall of the GBP has been further exacerbated by the technical factors of trading. As you may already know, there are people that focus on the fundamental factors while others focus on the technicals (mostly price charts and price action). The key part that the article didn't mention is that 3 weeks ago, the GBPUSD hit a technical level that indicated that the price of the GBPUSD was due for a fall. This could be seen by strictly looking at charts and ignoring all other factors. These levels serve somewhat as both support & resistance and the current price level has definitely been a point of resistance for the GBPUSD.

 

In effect, we have reached a time when both the fundamental and technical traders have become bearish on the GBPUSD. Recall that within 2009, the GBPUSD has traded as low as the 1.4400 range which is a far cry from the current level. While I am not convinced that this will contnue for the rest of the year, it is unlikely that the current levels in the 1.5890 range are sustainable.

The Quiet Rise of the Australian Dollar

It's no secret that the last few weeks have not been kind to the US Dollar (USD). Quite frankly, the value of the USD has taken a beating against most of the other major currencies in the forex market, However, the USD has staged the ocassional rally to show some strength and where it will ultimately land is still to be determined.

 

But, in spite of these rallies, the USD has remained consistently weak against the Australian Dollar (AUD). The AUD has been slowly, but surely, strengthening against the USD since early 2009 and it is currently at levels not seen since mid 2008. The USD has been unsuccessful in daily rallies against the AUD and it is possible that this trend will continue.

 

The greater question is about the drivers behind this trend. There isn't a great deal of import/export business to speak of between the two countries and tourism, as a whole, is down worldwide. Neither government is an active participant in the Forex market and relations between the two countries are fine. So, you could draw a conclusion that this rise is purely the result of speculators against the USD. Whether that speculation is enough to keep the trend moving will be an interesting question to monitor in the last part of 2009.

The Changing Focus of the Japanese Yen

Today's Wall Street Journal had a very interesting, but short, article on the changing shift in the Japanese outlook towards the Yen. Having spent some time in Japan, I always take a special interest in the Yen and its Forex policies. As you may already be aware, Japan has undergone a significant, fundamental shift in the ruling party of its government. This change has also affected the focus of the Yen.

 

Keep in mind that the foreign currency exchange rate is always a fine balancing act. If the currency is too strong, then foreigners will not be able to purchase your exports and you won't be able to gain foreign tourists (it's too expensive to visit). If the currency is too weak, then your imports suffer and your people will not be able to have strong purchasing power or travel abroad. Previous Japanese goverments always err'd on the side of keeping the Yen artificially weak. The Japanese Central Bank was a very active participant in the Forex market and would actively buy up US Dollars while selling Japanese Yen. This would favor their exports (making Japanese exports very affordable in other countries) but hurt their imports. This is not necessarily a bad policy as long as the demand for Japanese exports remain high.

 

However, the new Japanese goverment has vowed to stop this intervention and let the Yen float more freely against all other currencies. The net result? The Yen has now hit levels of strength against the Dollar that has not been seen in years. And the Hatoyama government is showing no signs of intervening. To the Japanese this has a two-fold effect. One, exports by the Japanese have now become very expensive for foreigners. So you would expect the 2010 outlook for these companies to be dim (think Toyota, Honda, Sony, Panasonic, etc). Second, imports of desired goods, many of which were previously too expensive, have now become much cheaper for Japanese consumers. Luxury good companies like Louis Vuitton (LVMH) and maybe other companies like Ford (which has had a long Japanese presence) can now be more optimistic about their 2010 outlook in Japan.

 

The net result of all this is that the Japanese government has shifted its reliance on exports and foreign consumers (which is to say, in many respects, the American consumer) and is now betting on its cheaper imports and the spending power of the Japanese consumer. This is great policy, the Japanese are simply betting on themselves, nothing wrong with that. The Japanese are great consumers, but they're also great travelers. It's possible that this strategy might put more Yen in other countries than currently anticipated, but that remains to be seen. Either way, it will be an interesting year for Japan in 2010.

The Forex Investment Pairs and How To Understand Them

Investors that are new to the foreign currency exchange market, or the Forex market, can be easily confused with the different currency offerings. This can even be more confusing when you try to evaluate one set of currencies against another. This post will help you start training your mind to read the Forex charts and understand the quotations of the Forex market.

 

The first thing you need to understand is that the Forex market quotations are always presented in terms of currency pairs. These two currencies display a number of how they are priced against each other.

 

Here is an example of one of the most common currency pairs, the Euro and the U.S. Dollar. A common quotation would look like: EUR/USD = 1.2034

 

So, what is this telling us? The best way to think about it is that the quotation is telling you how many of the second currency you will need to spend in order to buy 1 unit of the first currency. If you take the above example and state it in this way, it would be, "I need 1.2034 US Dollars in order to buy 1 Euro". Simple, right?

 

What happens if, at another time, you see a quotation like EUR/USD = 1.1653 ? Using the same tip from above, you could say, "I need 1.1653 US Dollars in order to buy 1 Euro". In effect, this means that you now have to spend fewer Dollars to obtain the same number of Euros. Think about that for a second . . . even though the quotation you see in the newspaper is actually lower, you could still say, "The US Dollar has strengthened against the Euro". It has strengthened because your Dollars now buy more Euros than you could previously.

 

The reverse is also true. If you see a quotation like EUR/USD = 1.3189 you now need more U.S. Dollars to buy the same number of Euros (1 Euro). You could now say, "The US Dollar has weakend against the Euro". This means that your trip to Paris just became more expensive because you will have to spend more Dollars to obtain the Euros you need.

 

The most common question people ask at this point is, "What's the quotation for the USD/EUR?". Even thought the number exists, it's an inverse of the previous numbers, you should realize that there are standardized ways of quoting Forex prices. So, while you can compute the number, stick with pairs like the EUR/USD and the other major pairs and the order in which they are quoted.

 

Here's something else to think about. It's much easier to think about strengthening and weakening currencies rather than to think about charts and graphs like you would with most stocks. This is because the currency pairs are presented in different ways. Take the following two quotations for a Monday and Tuesday:

 

MONDAY

EUR/USD = 1.2644

USD/CAD = 1.4932

 

TUESDAY

EUR/USD = 1.3117

USD/CAD = 1.3878

 

We already know from our first example of working with the EUR/USD that the US Dollar has weakened against the Euro because we now have to spend more Dollars for 1 Euro. But in the second example, the USD/CAD, this is an example of how many Canadian Dollars you need to buy 1 US Dollar. If you were to chart out the EUR/USD, it would be an ascending line but if you were to chart out the USD/CAD, it would be a descending line. But in both cases, in spite of the graph lines, the US Dollar has actually weakened. You now need more US Dollars to buy the same 1 Euro and it is now cheaper for the Canadian Dollar to buy 1 US Dollar.

Bottom line - when looking at the Forex quotes, it's crucial to pay attention to the order in which the pair is being quoted and understand what the numbers are telling you.

Housing Recovery Forecasts and Why It Will Take A Long Time

This morning, Moody's published an excellent article on the forecast for home price recovery and put a long term view on when we will see home prices similar to those in the pre-2006 period. In hard hit states, like California, the Moody's forecast is put somewhere beyond 2023 and even as long as 2030.

 

While I enjoyed the spirit of the article, and I think we need more articles like this, I disagree with the conclusions because they are much too optimistic. I would like to present the possibility that we might never see the same home prices in the lifetime of this current generation.

 

Here's why:

 

There were many kinds of "toxic mortgages" out there, but one of the most basic was the interest-only loan. Basically, you never pay into the principal of your home, you merely paid the interest and would, in theory, do that for the rest of your life since the balance on your account (the amount you owed) never changed. Why would anyone do this?

 

Most people had to do this because the housing prices were so high to begin with and they simply couldn't afford the payments for both principal and interest. Let's do some basic maths: if you have a $500,000 USD home with a 5% interest rate (which, by any measure, is a wonderful interest rate), that means that the interest alone on your home would be $25,000 on a yearly basis. So you're already at a montly payment north of $2000 and when you add a payment to the principal of the loan (about $500), property taxes, insurance, etc, you are approaching $3,000. When you also factor in that a 5% interest rate wasn't available in 2006, then you have a monthly home payment of about $4,000. Finally, in a state like California, anyone will tell you that $500,000 didn't buy a very big house, this would have been, at best, a modest purchase; most likely a small, starter home or a condo. 

 

So, we now have a modest home and a $4,000 monthly mortgage. That means that the yearly housing expense would be $48,000. General financial planning guidelines recommend that your housing expenses should reflect about 25% - 30% of your gross income (many experts put a cap at 25% and feel that 30% is too high). With this, we can conclude that in order to purchase a $500,000 home, and still be comfortable in your budget, you would need to have a household income of anywhere from $144,000 to $192,000.

 

Guess how many pre-2006 buyers had that type of income? Guess how many buyers have that type of income right now?

 

And this is why I disagree with the conclusion of the Moody's article. There is a direct correlation between home prices and the average income. We, as a society, lost sight of this correlation and that's why we have so many foreclosures right now. Therefore, in order to believe that prices will recover that "quickly" you would need to assume that wages would also rise as quickly and I don't see that as being the case. Historically, there is a large difference between the number of households above and below the $150,000 mark.

 

In the short term, like the next 20 years, I think that you will see a recovery to a price level that appeals to a sub $150,000 household - home prices in the sub $400,000 range. That's certainly a recovery from right now, but definitely not nearly as high as pre-bust levels. Beyond that, like the next 50 years, I think it will still be a long, slow process to get to housing prices above $500,00 and prices in the $750,000+ category (which were frighteningly common in California) may never be seen again by this generation. 

No Labor Day for the Dollar

Traders of the U.S. Dollar (USD) came back from the Labor Day holiday only to see the USD take a beating during trading the early part of this week. There are a couple of reasons for this, one is fundamental, the other is . . . well, not.

On the fundamental side, the word "inflation" is starting to be whispered. There are many (mostly unfounded) fears that. as the US economy improves, it will lead to inflation and ultimately weaken the USD. This means that a lot of people are effectively "selling" the Dollar and buying other currencies. Guess what happens when you have too many sellers? That creates an over-supply which drive prices down.

On the non-technical side, it's still Summer time in many parts of the Northern Hemisphere. This means that many traders are still taking their late Summer vacations. This equates to slightly less liquidity than usual in the Forex markets. So a transaction from an otherwise "small" institution can now have a bigger effect than it would otherwise. It also means that it takes even less pessimism than usual to move the price of a currency. Unfortunately, the USD has had to bear the brunt of this effect.

LIG Web Site Grand Opening

Welcome to the "Grand Opening" of the web site for LIG Investment Advisers. The goals for the web site include:

• Provide insight and analysis into the Forex market as it happens. The Forex market is a very fast moving market that operates on a 24-hour basis, so the blog format is an effective way to post analysis on the market and provide some commentary.
• Serve as an education tool for all investors. As the web site matures, you will see more videos and charts being posted. These videos will provide some insight into how you can manage your portfolio more effectively and how to leverage some existing tools.
  

LIG Investment Advisers is a FINRA and CA State Registered Investment Adviser (RIA) and we specialize in the Forex market. We invite you to keep on coming back and learning more and more about investing in the Forex market and about our company.