Monday, June 7, 2010

Australian Dollar -FXA/WIP ETF/BMY/BP/Fear Trade Now and After Lehman Bankruptcy

1. BP: The The Center for Public Integrity claims that two BP refineries account for 97% of the flagrant violations in the entire refining industry over the past three years.

2. Bristol-Myers (BMY)(owned): The market reacted positively to the trial results from Bristol's melanoma drug released over the weekend. BMY rose $1.42 in trading today. I mentioned in a post from last Thursday that the market did not appear to me to be pricing into BMY's share price any positive results for ipilimumab. Bought 50 BMY at 22.95 Goldman Sachs raised BMY to buy today based in part on ipilimumab driving meaningful upside to current revenue and margin estimates. MarketWatch While the drug does have some side effects, it did prolong the life expectancy of those with advanced melanoma by an average of four months. Melanoma causes the majority of skin cancer related deaths worldwide, with about 160,000 cases dianosed worldwide each year. Another favorable view of the stock can be found at

BMY is also a component of PPH, which is also owned, with 100 shares of PPH representing an indirect ownership of 18 shares of BMY. PPH is an ETF: Pharmaceutical

3. WIP: I sold my position in WIP when I viewed the risks to outweigh the potential rewards. That decision was made in November 2009 based on this analysis:

"Sometimes, I just act on instinct and an assessment of risk/reward. The ETF WIP contains inflation protected bonds issued by foreign governments, and it has enjoyed a good run based primarily on the fall of the U.S. dollar. The price has moved from around $43 in early March to $58 yesterday. Chart I mentioned in a post a few days ago that currency fluctuations would overwhelm any benefit to the inflation protection of those bonds. I also viewed this ETF to be primarily a currency bet against the dollar, with negligible income generation through dividends. (see Item # 4: Foreign Bond ETFs). Given the low dividend yield, and the substantial appreciation based on the recent movement of the dollar, the risk/reward on this ETF tilted toward risk at its current price. At current levels against most major foreign currencies, I am not willing to bet on a continued decline in the dollar." Sold all of WIP ETF-View Risks Now Outweighing Potential Reward

At that time, sovereign risk was not a material consideration. It is material now. I checked the holdings of WIP over the weekend and noted that Greece accounted for 3.09% of WIP's holdings and the bonds were long term: WIP_All_Holdings.csv The ETF also had a 4.71% exposure to Italy and 4.78% to Turkey. SPDR DB International Government Inflation-Protected Bond ETF I was looking at WIP against since I view the currency risk of foreign bonds to be swinging back into my favor. However, even though WIP has fallen about 11% from $57.98, the liquidation price of my holdings, the sovereign risk, coupled with the low dividend yield still make it an unattractive investment to me. I am more inclined to consider buying an international corporate bond ETF rather than WIP, when I become more comfortable about the currency risk. My main issues with SPDR Barclays Capital International Corporate Bond ETF are its large weighting in European financials and its low volume coupled with frequently large bid/ask spreads. This may bring me back to BWX, the foreign government bond ETF, by default. BWX is currently trading around $52 and change. My last shares were sold at $59.38 last November: Item # 8 Sold BWX at 59.38

4. FXA: I sold my last batch of the currency ETF for the Australian Dollar,FXA, just 30 shares, at $91.62 last October. Item # 3 Sold FXA I had managed to make several profitable trades in FXA in 2008 and those 30 shares were all that remained from that trading activity. Like a lot of trades, the sell of those 30 shares was too early, but not by much. FXA closed at $93.42 on 11/25/2009 which was the high after the Australian dollar started its bull move after hitting a low of $62.92 on March 2, 2009: FXA: Historical Prices Hedge funds are such lemmings. The trade now is the same fear trade that existed after Lehman's demise in September 2008, which is to sell virtually all currencies and to buy the Yen and the USD, sell stocks and buy U.S. treasury bonds, and sell commodities. The Australian dollar becomes a bit player in the mindless swagger of the hedge fund Masters of Disaster.

{I would hasten to add that there are two noticeable changes in the post-Lehman fear trade and the one now. Gold did not perform well in the weeks and months after Lehman declared bankruptcy: GLD: Historical Prices for SPDR Gold Trust Initially, there was a move to $85.46 on 9/17/2008 from the prior close of $76.79. GLD then drifted back into the 70s during November. By mid-April 2009, it had rallied back up into the mid to high 80s. Since April 27, 2010, GLD has moved from a close of $114.63 to $121.49 as of the close today. The difference is that GLD is showing no signs of retreating which it soon did after the initial pop after the Lehman filing in September 2008. The other difference is that investment grade corporate bonds are doing well so far in this stock selloff, whereas they declined in the pandemonium after the Lehman bankruptcy as the spread between treasuries and investment grade corporates expanded to historic type levels. You can see this by looking at the price action of LQD starting in mid-September 2008}

I am going to add FXA to the very short list of possible buys that were discussed in my last post: Underlying Cause of the Current Long Term Bear Market is Too Much Debt I would prefer to buy FXA than Australian dollars directly. I pay a fee for converting USD into AUD which would probably be more than the expenses charged yearly by the manager of FXA. And, I will be paid some dividends on FXA whereas currency purchases earn nothing in my brokerage account. So, it just makes more sense for me to buy a currency ETF rather than the currency directly when I am placing a short or intermediate term bet on the direction of currency exchange. It does not matter whether my timing is on the mark for several reasons. I would be easing into a 100 share position in three buys. Each buy would have to be an average down. Once the 100 shares is accumulated, I would start reinvesting the dividends. Then, when FXA recovers, the first shares sold would be the higher cost shares bought first. If I was not able to average down with the two subsequent purchases, I would just keep the first purchase until FXA when back over $90 and then sell all of them.

While I view FXA to be undervalued versus the USD at today's price, these downdrafts have a way to build up momentum based on the madness of crowds, group think, and the usual herd behavior. It really becomes a question of feel when to make the initial 30 share purchase, keeping in mind that I am holding most of firepower which would be two subsequent buys of 30 and 40 shares on further weakness. So it may be necessary to bring back the RB as Head Trader. The RB said that it did not feel right today.

I really can not look at a five year chart and pick a spot other than the $65 bottom: FXA ETF Chart A negative is that the fifty day line is crossing the 200 day moving average line, as both move down. Moving Averages - ChartSchool - (see discussion under "double crossovers). I believe that technicians call this pattern a "death cross", as distinguished from a "golden cross" when the short moving average crosses the longer one to the upside. If the OG was still at the trading desk, this would be enough to keep him on the sidelines, but the LB is in charge now. And the LB knows no fear. LB looks at the FXA chart, and sees a long pattern since October 2009 of movement between $90 to $93 which brings the 50 and 200 day averages closer together. It is not surprising that a fast and sharp break in price would create all kinds of havoc and damage using only technical analysis.

5. Hours Worked Per Week: I mentioned in an earlier post that the increase in hours worked per week was one of the few bright spots from the recent jobs report. JOBS The hours worked per week rose from 34.1 to 34.2. This does not sound like much but I heard Steve Liesman say that extra tenth was equivalent to 400,000 new jobs. Under the circumstances, which includes uncertainty about the sustainability of the recovery and the additional costs associated with new hires which will soon include health care benefits for many small businesses, increasing the work hours of existing employees makes sense. However, a longer work week is of no consolation to 45% of the unemployed who have been out of work for more than 27 weeks, a staggering number from a historical perspective as shown in the graphs in this Washington Post article. The total number of long term unemployed stood at 6.8 million in May: Table A-12. Unemployed persons by duration of unemployment The number of discouraged workers, those who have just given up trying to find a job, surged for the first time to over one million. CNBC

With the decline in the stock market, I have started to change the dividend option on more securities to reinvestment in additional shares from payment in cash. It would not be surprising to see a strong counter-move to the prevailing down trend. If that occurred, I would not sell into it, but would instead be looking for another double short to buy as a hedge. I have already done most of the selling that I intend to do.

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