Bounced as promised

Fidelity Emirates Managed Eq. Portfolio: 16.61 (18 May close)
MLIM Emirates Managed Eq. Portfolio: 15.46 (18 May close)

For the week, the Fidelity equities fell 2.65% and the MLIM equities fell 1.68%.

As per my sell signal, I went to 50% cash in the Fidelity equities @ 16.86 and 50% to cash in the MLIM equities @ 15.81.

Also as per my previous post, the market is trying to set in place a floor around the 241-244 area on the DJW index PNF chart as below (click to enlarge):



It bounced off of an oversold condition last week as I indicated it would.

The daily line chart shows a solid line of support that the index bounced off of this week:



As per my post last week, until a break of the 241 level on the DJW index I will maintain my 50% position in equities and 25% in the Euro, 25% in the Aussie dollar.

I must stress the markets are at a HUGE decision point and that is the reason we have seen such a dramatic drop in the indexes over the past 2 weeks.

Central to the market confusion is whether inflation is of a concern in the U.S. or not. If it is, the bond market will be crushed along with stocks as the Fed will be forced to raise rates to combat inflation. Currencies (ie, the USD) will do well if the Fed has no other choice but to continue to raise interest rates. Interestingly along with that gold might also reverse it's recent slide and move concurrent with the dollar (which is counter-intuitive to the way it normally trades).

Alternately, if the Fed begins to see a slowdown in economic activity it will signal a pause in interest rate hikes. This will be good for bonds and stocks (and very bad for the USD).

Of great interest to me this week is an early indication of a positive reversal in the USD as per the following chart:



It generated a buy signal early in the week but it is premature at this point to call for a buy on the USD. But none the less it is worth watching.

As the data currently coming out is indicating a little of both (some for inflation, some for a slowdown), the next 3-4 weeks will be critical to the future of stocks. I will be watching the charts closely and signal my moves accordingly.

Confirmed Sell Signal

Fidelity Emirates Managed Equities Portfolio-16.61 (18 May close)
MLIM Emirates Managed Equities Portfolio-15.46 (18 May close)


The daily PNF chart I use gave a confirmed sell signal on May 18 when the price broke through 251 (click on chart to view and expand).




I switched to 1/2 equities and 1/2 cash as per my post on May 17.

I have yet to switch entirely to cash at this time as the markets are very oversold at this point and a bounce can reasonably be expected. If you look at the PNF chart you can see a fair amount of previous price action in the 241-244 area (which was a previous level of resistance which was broken to the upside). This now serves as a possible area of support so I am going to be patient over the next day or two and see if this level holds.

If the DJW closes below 241 I will be exiting to 100% cash as it would indicate the possibility of a much more severe correction (possibly down to the 196 level which is a good area of support on the traditional PNF or 181 which is the blue trendline support on the 1 box chart) .

The other possibility is this might reverse and give us a buy signal as it did back in Oct/2005 when it broke 223 (sell signal), got down to 216, reversed and broke 226 (buy signal). The difference this time is Oct is usually a good bottom in the market (see previous post on seasonality) but now we are in May and seasonally May-Oct is the weakest time in the markets. As such, I'm giving this a low probability of occurring and hence my more defensive stance.

Switched Half to Cash

This morning I have switched half my portfolio from 50% Fidelity/50% MLIM to 25%Fidelity, 25% MLIM, 25% Euro cash, 25% Australian dollar cash. I base this move on the following chart (click the chart to enlarge):




The key thing to note is that the DJW is now in decline in all currencies (including the USD) and all the declines seem to have come at almost exactly the same ratio.

I have not sold all equites yet as the PNF charts I use have not issued an official sell signal. As such there is still the possibility of more upside in international equites so I have somewhat hedged my position.

As to the choice of currencies, both the Euro and Aussie dollar have shown similar strength. My rational is that as more central banks diversify their holdings and move out of the USD the currency of choice will be the Euro. However, if commodities continue to do well the Aussie dollar will also do well. Hence my decision to split my investment in two componants.

Switching Details

For those of you who might want to do a switch and have not done so before, the procedure is as follows:

1) Complete the A/B (and C if you also use the C account) swiching form from the Provident fund booklet or downloaded off the Planviewer website,

2) Fax the form to Shankar (EGHQ). Fax # 295 4782.

Please note the forms must reach him before 10:00 a.m. DXB time to have the trade actioned that day. Also note Wednesday would be the last trade day before the following Monday as EGHQ is closed on Thur/Fri and the markets are closed on Sat/Sun.

On the verge of a sell signal

Fidelity Emirates Managed Equities Fund: $17.69 (11 May)
MLIM Emirates Managed Equities Fund: $16.33 (11 May)

For the week the mixed portfolio was up with the Fidelity fund up 2.43% and the MLIM fund up 1.49%. HOWEVER the big news of the week was the Fed increasing rates to 5% (another 1/4 point hike) which spooked the US markets on Thursday and Friday.

It is very important to note that 10 year US treasury rates are increasing and approaching a very important downtrend line:



The rates have already moved above the 50 month moving average. The last time this happened was the summer of 1999 which led to the bear market starting in Jan 2000. The downtrend line from 1990 intersects with strong resistance at approx 5.45%. Any push above these levels will be a huge negative for the market.

Will we get there.....I have my doubts. From what I can see the current rates are already having a slowdown effect on the US economy. The housing bubble will now start to deflate and along with it many US construction jobs (and the real possibility of a recession in the U.S.). I think the Fed might go one more rise and then pause to let the increases already in the system work their way through and see how the housing bubble, US dollar and the economy respond. A lot depends on inflation and whether it is contained with the current interest rate levels.

As for the stockmarket, here is the daily PNF chart I use extensively:



As you can see, a new row of "O's" has formed (these form with a 3-box reversal or $3.00 price change on the chart). 3-box reversals are a normal process as the market bobs and weaves it's way both higher and lower. From a technical perspective it would take a closing price of $250 or below to trigger a sell indication as it currently stands. Alternately if the price were to reverse $3.00 it would trigger a new row of "X's" which would still leave us in a bullish condition. As such, it is too soon on a purely technical level to issue a sell signal yet.

These next 2-3 days will be critical for the markets. I will post daily over the next 3 days to keep you updated. Hold your positions for now but get ready for a possible switch out of equities and into cash (DO NOT TAKE ANY POSITIONS IN BOND FUNDS).

As I said previous, if/when I make a move I will post here and tell you where I have put my money. The charts up until the past 2 days have been leaning heavily towards the Euro and Aussie dollar but the US dollar is at a critical point where a sudden (and unexpecteD) move to the upside might occur. I will post the charts and my analysis when the event occurs.

Troubling Chart for those not from the US/UAE

Fidelity Emirates Managed Equites Portfolio: $17.27 (04 May)
MLIM Emirates Managed Equites Portfolio: $16.09 (04 May)

The markets enjoyed another week of gains with Fidelity gaining +0.82% and MILM gaining +2.09%.....BUT the U.S. dollar has been getting a kicking the past 2 weeks. This has me looking at the following chart VERY carefully (if you click on the chart it will expand and you will be able to see it clearly):





As you can see, it appears that while the DJW index is continuing to enjoy gains in USD terms, in the Euro, Aussie dollar and British pound it is actually in the early stages of a decline.

Based on what I'm seeing, I am looking to move 50% of my portfolio out of equities next week and put them into cash. Which currency I have not decided yet but will publish when I make the move and where it has gone.

The remainder will stay with the equities for now (half in Fidelity and half in MLIM) but as soon as the charts indicate a trend change in the DJW index I will be moving into 100% cash.

Livin' On A Prayer

Fidelity Emirates Managed Equities Portfolio-$17.13 (27 Apr)
MLIM Emirates Managed Equities Portfolio-$15.76 (27 Apr)

The worlds markets remained in a very tight pattern the past week with very little price action. The Fidelity fund gained 0.29% and the MLIM fund lost 0.88%. The market internals in the U.S. continue to deteriorate. This along with the seasonal tendency I commented on previous has me looking very closely at the charts. I suspect a correction of significance is forthcoming very soon but until the reversal takes place it would be premature to jump the gun and switch into cash.

What might turn the markets? No one knows but here is an interesting article taken from an Iranian website:

Iran oil bourse next week
Apr 26, 2006

Oil Minister Kazem Vaziri Hamaneh said on Wednesday that the establishment of Oil Stock Exchange is in its final stage and the bourse will be launched in Iran in the next week.

He told reporters, upon arrival from Qatar where he attended the 10th General Assembly of International Energy Agency and consultations with OPEC member states, that registration of the Oil Stock Exchange is underway and the entity will operate after being approved by by Council of Stock Exchange.

He rejected a statement attributed to him saying that Oil Stock Exchange will bring to the ground the US economy and said, "I don't know who has speculated that I've not talked about US economy." Asked about conference on energy in Doha, he said that more than 60 countries and 30 oil companies and consultants took part in the conference.

Vaziri Hamaneh said that serious discussions were held including security of supply and demand, security of investment in energy and environment issues.

"The best method for security of demand in the oil sector is that consumers should be given opportunity to enter into partnership with the suppliers in investment in oil industry."

He said that the conference called for diversifying energy resources and cooperation of the developed states with the countries possessing oil and gas resources.

Asked about the oil price rise, Vaziri-Hamaneh said that oil price is being influenced by political situation, whereas it should be freed from political impacts and economic and technical fundamentals should determine the oil prices.

"As long as political impacts dominate the oil market, price hike will continue," he concluded.


Couple this with the following from the Business Telegraph dated 23 April 2006:

The threat to a fistful of petrodollars
By Liam Halligan (Filed: 23/04/2006)


From Russia, you might say, with love. This weekend, Alexei Kudrin, Russia's finance minister, dropped a bombshell in Washington.

Attending the annual meetings of the World Bank and International Monetary Fund, Kudrin caused his American hosts discomfort by openly questioning the dollar's pre-eminence as the world's "absolute" reserve currency.

The greenback's recent volatility and the yawning US trade deficit, "are definitely causing concern with regard to its reserve currency status," he said. "The international community can hardly be satisfied with this instability."

Kudrin's intervention coincided with another meeting, also in Washington, of finance ministers and central bankers from the Group of Seven - which doesn't include Russia.

Top of the agenda: the effect of ever-rising oil prices on inflation and interest rates.

G7 countries are worried the spiraling price of crude - which closed at $72.79 a barrel on Friday and which has now trebled in three years - could inflict real economic damage. The US Federal Reserve, in particular, has been forced to take drastic action - raising interest rates 15 times since June 2004 to keep inflation in check.

Given that fragility, it is significant that Kudrin is now wondering aloud if the long-standing dollar hegemony can last. For him to do so is to highlight that America is vulnerable should that status be lost. That's because Russia, with its awesome oil and gas reserves, could kick-start a challenge to the dollar's supremacy.

Most nations stockpile their foreign exchange holdings in dollars. The US currency accounts for more than two thirds of all central bank reserves worldwide.

This reserve status means that the dollar is constantly in demand, whatever the underlying strength of the US economy.

And now, with massive trade and budget deficits to finance, America is increasingly reliant on that status. The unprecedented weight of US liabilities means a threat to the dollar's dominance could result in a currency collapse, plunging the world's largest economy into recession.

That won't happen immediately. The dollar has sat astride the globe for some time now - in fact, for most of the last century. But this statement from Russia - a country of growing financial and strategic significance - still caused the dollar to slide. It also fuelled speculation that central banks could increasingly diversify their holdings away from dollars.

Kudrin's statement followed news that Sweden has cut its dollar holdings, from 37 per cent of central bank reserves to 20 per cent, with the euro's share rising to 50 per cent. Central banks in some Gulf states have also lately mooted a shift into the euro. Such sentiments helped push the dollar to a seven-month low against the single currency last week.

But Russia's intervention will have raised eyebrows in Washington because the backbone of the dollar's reserve currency status - the main guarantee that status continues -is the fact that oil is traded in dollars. And that is something the likes of Kudrin can directly affect.

For historic reasons, the dollar remains the world's "petrocurrency" - the only currency for the settlement of oil contracts on world markets. That makes the EU and Russia dependent on it. But with central banks switching to euros, the logical next step would be for fuel-exporting countries to start quoting oil prices in euros too.

The EU is Russia's main trading partner. More than two thirds of Russia's oil and gas is exported to the EU. That makes Russia a strong candidate to become the first major oil exporter to start trading in euros. Such a scenario, in recent years, has become theoretically possible. But now, with these latest comments, Kudrin has thrust that possibility into the open.

The G7 meeting was dominated, of course, by concern over Iran's nuclear programme. The threat of military action against Iran, itself a major crude exporter, is one reason oil prices are now testing record highs.

It is worth noting that Tehran has ongoing plans to set up an oil trading exchange to compete with New York's NYMEX and with London's International Petroleum Exchange. In the light of Kudrin's comments, it is significant that the Iranians want to run their oil bourse in euros, not dollars.

Were the Iranians to establish a Middle-East based euro-only oil exchange, the dollar's unique petrocurrency status could unravel. That, in turn, would threaten its broader dominance - which, given America's groaning twin deficit, could seriously hurt the US economy.

Some cite this as the real reason the US wants to attack Iran: to protect the dollar's unique position. I wouldn't go that far, but the prospect of a non-dollar oil exchange in Tehran is certainly an aggravating factor.

The opening of Iran's new oil exchange has recently been delayed. But, having spoken with numerous officials in Tehran, and western consultants who've been working with the Iranians for several years, I think it will go ahead. The exchange entity has already been legally incorporated in Iran and a site purchased to house administrative and regulatory staff.

The reality is that as long as most of Opec's oil - read Saudi Arabia - is priced in dollars, the US currency will retain its hegemony. But the opening of an oil bourse in Tehran, which now looks likely, will signal at least tacit Saudi consent for euro-based oil trading. The US knows this, which is why it is nervous about the dollar's status being questioned.

From the G7's fringe, Kudrin has now touched this raw nerve. This weekend's meetings have been dominated by questions of global financial imbalance - in particular, America's huge deficits.

Kudrin's missive comes as central bankers, and currency dealers, start to conclude the only way to resolve the massive US external deficit is a somewhat weaker US currency. As the IMF itself warned yesterday, a "substantial" dollar decline may be needed.

One way to bring that about would be for the euro to enter the global oil trading system. This is unlikely to happen soon. It might not happen at all. But the idea is now not only realistic but firmly on the table in Washington. Perhaps not with love, but it was placed there by the Russians.