Back from vacation - Monday Sept 29, 2008

Folks,
While I am back from vacation, I am currently focused on writing an article on the current state of the economic affairs and need some extra time to do justice to the article.
I should hopefully be done in the next couple of days.

In the meantime I have recorded a video on using Fibonacci, SMA, Support and Resistance and Candlestick Patterns for Forex Trading.

Financial meltdown and basic economics

How did we get into this mess (without the technical financial details of mortage securities instruments).
1. The price of oil went through the roof
2. This alone led to inflationary pressures. As we started going to alternative fuels (ethanol etc) it resulted in higher commodity prices and resulting increase in food prices resulting in inflationary signs. But the underlying cause was price of oil, let's not forget.
3. This reduced the purchasing power of the people already on the threos of a depressed economy due to jobs cuts in the manufacturing sector and outsourcing of jobs overseas. (Nothing wrong in outsourcing but off-shoring needs to be done carefully with the broader economic impact in mind).
4.This reduced the purchasing power of people as they did not have enough money to meet their basic necessities.
5. The Feds raise interest rates on numerous times to keep inflation in check further reducing money supply and increasing the hardship on the middle class.
6. As adjustable rate mortgages readjust to higher rates, folks already strapped for cash suffer further leading to increased foreclosures. To compound it home values fall as foreclosures and job losses increase. This results in a domino effect on sub-prime mortgages and sub-prime lending as people who do not have equity in their homes start to walk away from their obligations (remember the willy nilly lending upto 125% of the home values by the greedy lenders charging high fees and pre-payment penalties).
7. The effect then spills over to the prime market as home values continue to decline and oil continues to shoot thru the roof. The big three automotive start teetering resulting in even greater job losses and resulting decline in home values.
8. Continued decline in home values and increasing foreclosures finally take their toll on the mortgage securities and the financial meltdown begins.
9. The USD continues to be strong inspite of weak economic data as oil now continues to fall.

Now they want to cut rates, increase money supply and all the other kinds of things that economics 101 talks about, still however not keeping the basics in mind.

Broadly I think the basics of economics and how they affect the so called "Free Market" and its impact on currencies, stocks and the economy in general needs to be better explained than what most commentators have done on CNN, MSNBC, Fox etc. Each has its own spin based on party affiliation and political leanings.

I am neither a Republican nor a Democrat and neither extreme left nor extra conservative. I am a moderate.

Let's lay some ground work first as my intent is not to offend anyone or their beliefs and hence will back my statements with examples as to why I hold these beliefs. I am open to correction if you can back your opinions with correct factual empirically verifiable data.

The basics need to be explained in terms of the following:

1. Theory of Diminishing Marginal Utility

According to this basic economic theory the satisfaction or utility you derive by consumption of first unit of any item (eg donut if you are hungry) is greater than subsequent units of consumption. When your needs are met and you are satiated (satisfied) then you do not derive any satisfaction from consumption of additional units. Accordingly the marginal utility or satisfaction you derive from consuming every additional unit is less than the satisfaction you derived from consuming the prior unit. What this really means eg is when you are lets say hungry the satisfaction you derive will progressively decrease with each additional morsel of food you consume as your hunger will be lessen.

2. Why money, wealth and other collectibles are an exeception to this theory (inspite of what anyone may say to the contrary).

This is because of the basic greed, ego and other traits of humans. eg pride .... it is difficult to remain humble when you are successful and the more recognition bestowed the more an indivdual may seek feeding their need for pride and ego. Lots of great people in history and current times are full of these who have risen to the occasion and then have had great falls .... from politicians to actors to ordinary people in your own communities.

Similarly, Greed is again one of the exceptions for many humans (not all) as the more they have the more they want. Very few wealthy are willing to give up what they have and then do charity work in the remainder of their lifetimes (like Bill Gates has decided to do).

3. Relevance of Keynesian economics more so his statement that Extreme Capitalism and Extreme Socialism in the long run will both be dead.

Anything in extreme leads to corruption and fanaticism eg extreme power, extreme religion, extreme greed etc. One needs to be moderate as anything in excess is poison. The current Wall Street meltdown is an example of extreme greed and so is the excessive executive compensation without regard to long term vision and performance to be demanded in return. Similarly fall of dicatators and other autocrats throughout history Hitler included are examples of extremes.

4. Why Progressive Taxes are relevant and do not tantamount to redistribution of wealth and income as most extreme conservatives would have us believe

Your propensity (ability) to save is directly proportional to your income. The more you make the more you will have left over to save, once your needs, wants and luxuries are met. What this means really is you need a basic amount of money to meet your most basic needs of food, clothing, shelter and depending whether you are part of an advanced citizenship like the USA then transportation is also a basic need. No matter who you are and how much you make this remains a constant as everyone needs to have these basic needs just to survive. Accordingly comes the concept of the poverty line and the median income.

As to what is the amount one needs to make to ensure that the basic needs of that family are met, is based on the society they are a part of. eg a family in the USA will need to have more income to meet the basic needs compared to say a family in Bangladesh or Pakistan as the cost of living and standard of living will differ from society to society and country to country.

Therefore, until you have met your basic needs you cannot even think of saving let alone meeting your wants and your luxuries. (Televisions are a luxury for some in this world while in the USA a family may have Five in just one household).

Therefore, if one has to compete and come up in life to live their American Dream, there has to be hope and the possibility of saving. $100/- to a person making $1000/- per month is much more valuable compared to $ 100/- to a person making $100,000/- per month.

Further 10% of one's income is the same way eg 10% of a person making 40,000/- is more valuable to that person compared to 10% of say $1000,000/- even though is it $100,000/- vs $4000/- . The person making $40,000/- has probably not yet met his wants and luxuries while the person making $1,000,000/- has probably not only met his needs, wants, luxuries but is possibly having toys and still has money left over to save, invest and anything else he may want. Of course he will feel it is not enough (exception to the theory of diminishing marginal utility) as at this stage he is now comparing himself to a person making a Billion dollars.

Accordingly there is nothing wrong to expect a person making significantly more than the average person to pay significantly more as they do have spare change and some more. (I will touch upon this again later). In fact there is nothing wrong in saying that upto the poverty level income you do not pay any taxes at all. For let me say this, if we do not take care of the weak and poor there will be rampant crime and other social ills and we will as a society pay for this one way or another. That's the reason why we have Medicare, social security, unemployment benefits etc. These are social safety nets not a way of propagating welfare. But we need to have a pathway from welfare to work (Bill Clinton was amongst the few that really made this a reality). I am not a proponent of welfare, but life happens and people do fall on hard times. The safety nets available in a society are depend upon the society you are in. eg in third world or developing nations there will barely be any safety nets eg they do not have unemployment benefits etc like one has in developed nations. Same goes for Health care, and the list goes on. We need to temper the safety nets and link them to a pathway to a productive life. That's one of the roles of good government.

It was ironic that John McCain mentioned during the first Presedential Debate that volunteerism was more from the middle class compared to the wealthy as the middle class tends to give more than the rich. Greed running rampant? Why do the likes of Paris Hilton, Britney etc not spend more time doing community work instead of clubbing? Who am I to judge, its their life and this is a democracy. However Princess Diana alone did a lot more than most in Hollywood combined. So did Mother Theresa. Now I am not suggesting that they need to change their lifestyle nor dictating how they live, but come on, there comes a time when one should aspire to be role models and give back to society. After all giving is the cornerstone of all philosophies ....

5. Why the Theory / Philosophy of Trickle Down Economics (Reaganomics) needs to be modernised in the new Global Economy - (Trickle out = "Outsourcing")

This theory propounded by Reagan and religiously adopted by the conservatives and expounded in the face of all Americans (almost abused and bastardized in arguments) basically states that if you give Tax Breaks to the rich and powerful then they will use this money to create jobs which will fuel growth and abundance for the rest.

Two problems with this:

1. this propogates the haves and have nots and the rich keep getting all the breaks. One assumes they will create jobs and not use it for their luxuries and toys (spa treatments in luxury resorts like AIG executives did after getting a bailout from the Federal Government). After all with all the tax breaks to the oil companies most of it is spent on dividends to the stockholders, fat compensation to their executives, lavish lifestyles (including having sex with government officials as recently reported) and only a fraction of this goes actually towards research and development, alternative fuel technologies (is it really in their best interest to do so??), or even truly modernizing their own infrastructure (we still have the same issues year after year with shortages during hurricane season) etc.

CNN Article on Easy Money

The more they have the more they want and only a fraction trickles down if at all. Now please do not get me wrong, there are a lot of great companies and corporations that have acted responsibly while making profits and do a lot for the socities they serve. That's the spirit of true capitalism.

2. In today's Global economy the money does NOT TRICKLE DOWN to the not so rich and the general population but TRICKLES OUT, with all the Outsourcing occuring to countries like China, India etc. This once again leads to super profits for the rich leaving the poor average American broke. The downfall of our manufacturing and industrial base is an outstanding example of outsourcing in all its glory. I would rather these companies negotiate a lower pay right here within the USA and keep the jobs and related techonolgies within our shores instead of shipping them willy nilly overseas. Would a new graduate rather work for $10/- per hour at McDonald's or would one be ok to make $12/- per hour in a start up job with a technology company? These massive corporations need to work out sensible tax breaks with the local and federal governments to be innovative in cost reduction keep the national interest in mind first. Yes they should negotiate better contracts with the Unions instead of being afraid of them and using Outsourcing as a threat.

Over the years by outsourcing we have made other countries economically strong and if some temperance in not brought to play we Americans could possibly regret it at some point in the future.

We need a strong middle class for the rich to make even more money else who will they make money off of?

5. Why social responsibility does not amount to socialism

It was the rampant abuse of power without regard to society that has brought the environmentalists, gun-control etc groups into existence. It becomes our responsibility as good citizens to give back and take care of those from whom we take. That after all is the universal law of balance and harmony. A touch of eastern philosophy adoption in our way of life will go a long way to be grateful for what we have and in being humbled for all the abundance we enjoy.

6. Relevance of the "Free Markets" and formation of society and civilization (society formed to protect the weak and to overcome the law of the jungle where the mightiest wins)

The whole notion of forming a society and the springing of civilization stems from protecting the weak and not the mightiest winning. Free Markets without any regard to regulation and control is tantamount to the laws of the jungle where the mightiest win. I do not believe true capitalism is meant to be that. Capitalism thrives and brings the best in us when we temper it with justice and fair play with true rewards for innovation and entrepreunership. That's why we have Anti-trust and Monopoly laws. While many conservaties in the current financial meltdown continue to believe that the free markets should be allowed to take its course and there should be no bailout or workout from the government, let me say this to them : The blood bath that will follow for the middleclass and others who are not rich will be so devastating that our society will pay more than its worth. Crime will be rampant and we will have a social mess on our hands. Of course the mightiest will remain steadfast as they have abundance (remember propensity to save as they have so much left over even after splurging on toys etc). We cannot allow such an economic and social bloodbath in America as we are a just nation that does good for the world that we would not do so for our own. We need to take care of the people within our own country before we consider helping other nations.

While most of us have had our 401(k)'s and other retirement assets evaporate into oblivion the rich do not even need retirement accounts as they have enough wealth to last generations.

Christmas Shopping for the affluent

That's why the rich do not give a hoot to tax cuts for the middle class but when it comes to taxing wealth they are up in arms because that's the only time it hurts them. But it's ok for it to hurt the average Joe. I do not mind paying my fair share of taxes if I make more.

While I am not an economist, I did study economics as one of my majors. I also do believe in Free Markets with appropriate oversight and Government intervention, Entrepruenership, Democracy tempered with personal accountability and social responsibility.

Role of Govenment and the Legislature:

Govenment needs to help bring about Agricultural independance, Industrial Independance, Energy Independance amongst others and becoming a net exporter as a nation. We need a 1, 3, 5, & 10 year plan that our congressmen work on without letting partisan politics and lobbying dollars divert their attention.

We need sensible trade policies that have a level playing field for the American interests and not one stacked up against us to start out.

How do we address the meltdown in the Financial markets and Wall Street?

Keynesisan Theory of Economics is still relevant a must read as relevant today as during the Great Depression during the 1930's. Please read this to fully comprehend what I am going to explain.

While I am not saying I have all the right answers, but then most of our leaders are equally clueless about what's occuring in the markets and the economy. They say one thing one day and contradict themselves a few days later. At least that is the public posture they have for us.

The $700 billion or so propouded to be used to increase money supply in the economy and breathe fresh life in the credit availability needs to be used sensibly (hopefully will not be used to buy speculative mortage securities as we had planned).

McCain now wants to have the bad mortgages refinanced at current market values and have the government buy the difference. I say why, that's the loss the lenders and banks need to eat and then the banks that will not make it should be rescued. The ones that will be able to eat the losses should and make more sensible lending choices in the future. Believe me it was not just the consumers who were making poor choices, but money and loans were shoved in people's faces enticing them with all kinds of programs. The builders, mortgage brokers, lenders et all have had a field day.

I hope the government and the next president (be it John McCain or Barack Obama) will bring some sense to the markets and both the parties will keep their ideological differences aside and be moderate and work as one to help the nation come out of this economic mess.

I hope they remember "Cash is King" we need a surplus in our budget. We started with one and have a record defecit. We need to work to bring the surplus back.

Once again I do not mean to offend anyone's ideology but without differences there will be no positive progress and great ideas will not bear fruit and propel one into action.

Trades for the Week beginning Sunday Sept 14 2008

Hello folks,
This week I am on vacation and will probably not be updating my blog (unless I get bored and decide to trade).
However this is my take :
The economy is in dire shape as I have maintained all along. This is what Alan Greenspan had to say:
http://money.cnn.com/2008/09/14/news/economy/greenspan/index.htm?cnn=yes

Wall Street is in jitters thanks to Lehman Brothers:
http://money.cnn.com/2008/09/14/news/companies/lehman_brothers/index.htm?cnn=yes

I continue to maintain we need a full one point reduction in long term mortgage rates to help stablilze the housing market and the economy.

The Hurricane Ike has caused significant damage and gas prices have shot thru the roof regardless of supply and demand in many areas of the USA. Midwest that does not rely on oil from the Gulf has still seen unprecedented oil prices above the $4.00 per gallon range inspite of cost per barrel has dropped below $100/-.
If this is not speculation and price gouging do not know what would be !!

I would be bearish on the USD this week if you do decide to place trades.

Good luck trading and hope you are profitable.

Trades for Tonight - Sept 9 2008 9:30 PM EST

Click on the image below to see the trades for tonight and then hit the browser back button when done:

Good Luck trading....

(sorry I have been busy this week to write details on my posts, due to school week starting )

Trades for Tonight - Sept 8 2008 10:00 PM EST

Click on image below to see the orders for tonight and then hit the browser back button when done.
Today we have mulitple lots for the AUD/USD and USD/CHF. One of the lots has no limit at the moment.

The take over of the Freddie's by the US Govt. has now resulted in lower long term mortgage rates (I have favored lowering long term mortgage rates by a full one point) which should act as a slight stimulus. However the basic fundamentals of the US economy still remain weak.
On the other hand a weak USD results in a higher Oil price which leads to a global recession that the world can ill afford.
There is talk of the OPEC possibly cutting production to increase prices and also the winter is coming up. What effect if at all this will have remains to be seen given the unsustainable oil prices already.
The Hurricane Ilk seems to be under control and hopefully we will not have any major disruptions. Given all this in the short term we should see the USD rising higher. There is still a lot of room to grow back for the USD.
I will create a short video later during the week explaining my analysis.

Good luck trading and God Speed....

Trades for Tonight - Sunday Sept 7 2008 - Video included

I have included a video showing chart analysis today .... hopefully you enjoy it.
Let me know if this format is better and more informative in which case I can definitely try to put these out more frequently.

No trades for tonight due to reasons stated in the video.

Please post your feedback ....

Trades and Results as of Sept 4 2008

Click on image below and then hit the browser back button when done:

As you can see this month so far I am up approx 280 pips. My AUD/USD and NZD/USD trades closed for a loss and then the market turned and hit my original targets. Thanks to news annoucements the prices fluctuated wildly.
Of course GBP/USD and EUR/USD closed today for the full profits.

No trades for tonight as tomorrow is the Non-Farm Payroll announcement and the market will likely fluctuate unpredictably.

So good luck till Sunday night when I will post new trades.

Currency Trades for Tonight - Tues Sept 2 2008 10:00 pm EST

You can view the orders for tonight by clicking the image below and then hit the browser back button when done:

If your orders have not executed by morning please cancel them. Further if you are in the positive then feel free to close them if you so desire.

I will comment on the market movement due to oil (continuation to my earlier post on my feelings towards the reasons why the oil prices are still a product of speculative activities rather than any economic fundamentals) till some time later during the week.

Sorry about not posting last night and posting a bit late tonight. Have been busy with the back to school week for the kids....

I have added free forex training videos and live news feed at the top....please provide me feedback on whether you like them or want me to discontinue them.

Good Luck Trading and God Speed....please enjoy your trading activties...

Results, Charts and Analysis - Sept 1 2008 - 10:00 AM EST

I totally forgot today was Monday and that yesterday was Sunday. Given the labor day weekend, I did not place additional trades last night (did not realize the markets were open as I thought it was Saturday). Anyhow, from this month there will be a slight change in direction. I may start trading more than 1 lot at a time.
To summarize the last 2 weeks we are about 70 pips in the negative.
The USD/CHF head and shoulders pattern did not complete the full formation and reversed stopping me out for a loss of 120 pips.
However the GBP / USD held true and in fact I had moved my limit to capture 200 pips which I have (see screenshots below). My intent was to continue to move my limit and go for higher profits, but since I did not check my account yesterday, did not get a chance to move the limits. My trade got closed for a 200 pip profit.

Head and shoulders did not complete and hold true. This will happen at times and that's just how trading goes. You take your losses and enjoy your profits. One does not have a crystal ball as to how the markets will go.

The GBP / USD made stellar returns for me. I wanted to add additional lots but the weekend was not a good opportunity and the price has already moved. However tonight I shall place additional trades

Will post my trades tonight. Once again sorry about my confusion over the days ... I was busy enjoying the weekend, but was good to get back to a closed profitable trade of 200 pips !!