Broker to Trading

Can we assume that forex references economic conditions in a relatively precise way ? Early in the blog a conjecture was raised that EUR was referencing since the crisis its role in the housing bubble, like a system memory and its rise and fall was not so much risk on/risk off as referencing the rise and fall of the attempts to resurrect this.

Remember economic conditions then were highly predicated then on Fed and ECB action and some continuation of this has occurred in the aftermath of the crisis.

Note the recent bounce from the low referenced the rise of the economy during the housing bubble. I am suggesting perhaps conditions then were too controlled by central banks policy and there have been attempts to resurrect this which the market seems to be rejecting.

Now whether it was the intention of the Fed to do this is another matter, but the blog has noted some possible causal mechanisms by which this was possibly done.

In the aftermath of the crisis the need was to stop the credit markets from melting down. Then it was the attempt to restore asset values sunken by the recession. As this blog noted, the way companies were affected by the crisis is terms of share prices could be broadly grouped into different categories. But even very very very good companies saw falls of 33% - 50%, an astonishing loss of equity.

This blog has examined some of these companies, if you remember I made a list before the crisis of crash companies to watch what would happen if that crash happened. In a way though, the crash did not exactly happen.

A huge surge of money flowed out of stocks, driven into that spike low this blog mentioned by margin calls on hedge funds and so on, but the creative output of strong US companies continued almost unabated. The question I asked myself before the crash is, was this event going to damage the structure of companies.

This blog has examined some and noted that they have really tightened up their balance sheets, in the manner US companies do and I even conjectured that they would be stronger in a company led recovery.

An examination of the share prices of powerful companies has revealed that the crisis seems only to have changed the slope of the trend line (as happens in a market correction). Now for those holding financial companies this crisis is a crash of epic proportions.

But in a way, it is just a move by the market to correctly value these companies as some of their value was predicated on a housing bubble which popped.

Now whether these companies are correctly valued in another matter. At a guess and it is only a guess, in an economic recovery they are not. Thus the aftermath of the crisis reveals a mixed economic landscape, but not necessarily a disaster by any means.

Perhaps a better term for all this is a valuation crisis consequent on use of target rates to simulate an economy (note 'simulate'). Thus could we say forex references economic structures rather than data points.

© 2010 Guy Barry - All Rights Reserved.

The problem with risk on/risk off analysis is it becomes like trying to call the market, a random event with therefore no information content. What happened today in the market was perhaps even predictable. It was showing in USD/JPY, as I tweeted over the weekend, based on the analysis this blog discussed in earlier posts.

Money flow simplifies. Essentially forex is focused on what this valuation of Yen forced by the Fed refusal to value dollar implies about central bank inputs. Yen is at a critical level of valuation, reaching back to a probe in the 90s. I believe this makes it appear that EUR/USD and USD/JPY and markets are in sync, but they are not really.

The action of the Fed on Friday restored USD/JPY as an indication of money flow ebbs, until the Japanese central bank spoke on Sunday. Now this blog does not believe in predictability thus why am I saying this. Well, the market itself is not predictable, but the markets reaction to very powerful inputs is reasonably predictable. It is how you can make money in news trading. The powerful input was the Fed.

Now for me, as this blog discussed, this was good news, not because of more liquidity, but because the Fed now believes strongly in a recovery. But the market reacted with a huge surge of money flow partly as a relief that economic collapse is not about to happen but more precisely because it seems the source of money flow is being maintained.

The Fed has been very able at managing liquidity, but this is not a positive source of liquidity in an economy. But a closer reading of the Fed would suggest perhaps they believe a recovery will be able to take over from them as a source and management of liquidity, in the not too distant future.

There is no better source and management of liquidity in an economy than companies earning revenue from selling quality goods in a competitive market and employing people to do so, that is the very core of a successful economy and makes logical sense of service industries, banks and Fed policy.

There has been a long term issue of America's ability at selling overseas, but it is true the way technology companies work, is redefining this issue probably positively for America. A belief has been expressed by many economists that reducing the deficit will effectively make more traditional industries more competitive and Obama has expressed his intention to do so.

The effect of a Federal government not pulling in vast amounts of cash would probably be vast and beneficial. From a forex perspective it would allow $ to find a valuation less focused on money flow and more focused on the competitive power of the United States, which is not in question.

Its capacity to print money and the consequences of keeping dollar cheap on the other hand is being questioned in the forex and stocks markets and probably was this Monday, notwithstanding the Yen issue. The decay of the conduit is probably showing in EUR. In all events, money flow rallies tend to ebb.

© 2010 Guy Barry - All Rights Reserved.

The question can be asked, what is a fair valuation of the Dow. Well, look at the valuation found in the depths of the crisis: Dow Jones MSN Chart. Set it to candlesticks charts and look at 10 year.

In markets spike valuations are probes, but the valuations seem to have more validity than what they sound, a spike. They seem to have a computational reference which may continue over time and this property may be strongest in forex. It does seem like the equity market was most like a forex market during the crisis as this blog has noted.

My feeling about the forex market is it references true economic value of countries, which is one reason governments can fear it, not to to mention everybody else, nobody can control this market.

Currencies can be pushed up and down, just like stocks, but at extremes the computational structure of the market itself seems to be at work and this seems to have a hard reference. The fractal nature of this market means those extremes are everywhere.

That is one reason why markets cannot be controlled. At a certain stage a valuation is reached which may be hard for the trader to predict (mostly impossible), but which makes sense in the market over time. That really is the fundamental problem with forex, currency prices changes direction at times which at some stage nobody can predict, but are obvious afterwards.

That suggests precision and structure but as well a functionality which is hidden from the methods used to analyze the forex market. One gets lucky, thus it is not really a matter of prediction. In investing in a working market one can buy a company with good financial structure which is cheap and expect it to grow, assuming the market does not react to assets inflation as it did in 2008.

However there are pricing pressures in forex which are outside of this computational structure and that is order flow, it is the basis for the trade on 8/26 I mentioned where a trend upwards for USD/JPY was temporarily reversed by a figure which will tend to have orders which reverse the order flow (.e. .50). This trend re-started when it hit a figure which tends to allow for this in terms of order flow.

However it is unlikely the Fed will let that valuation probe in the Dow be found again, the question one must ask thought can the Fed and other central banks stop this. And even if they do, can they stop the market from undoing this at a later stage.

Let us hope the recovery is what it can be, then the dependence on money flow lessens. The market tends to reject forced valuations, like what happens when traders try to push a currency up or assets are inflated by housing bubbles.

The point is have economic conditions changed since the crisis to make higher true valuations of the Dow valid. A real recovery happening is a positive change (and this blog believes in this), but cheap money being pushed into assets was not a recovery.

The government needs to encourage the creative heart of the US economy this blog has noted. Such technologies may find resistance from established companies, but they are the future.

© 2010 Guy Barry - All Rights Reserved.

Are the methods used by the Fed harming the real recovery ? All they really can do is add more liquidity to the system and indirectly or directly value $ (and hence every other currency in the world, such is the power of the Fed). Is it just the eternal problem, government money does not seem to get used efficiently ?

Yet from what I can see TARP money was used in a spectacularly efficient way. I do not think one can underestimate the trouble major banks were in during the crisis and the effect one going under would have had on the world economy. Now whether this trouble has gone away is another matter, but the point of TARP was not to solve those problems.

The Fed operated most efficiently as a normal bank with a heart providing emergency loans and liquidity. That is why Friday cheered me up, because they do this well and they feel the economy may be reaching a stage where this may be necessary.

But I most certainly agree with them about the recovery being alive, I have been saying this for months. It is just the fundamental question can deep recessions be avoided, and if they are avoided do they simply come back even harder. That does seem to be what happened in 2008. Let's get technical.

Look at the Dow chart over its lifetime (e.g. on MSN Investing: Dow on MSN). If one looks at the linear scale then it looks like the Dow is charting a head and shoulders. However that is computationally less likely. Why, well it would have to plunge down to values which the Fed simply won't let happen, and which would make great companies so undervalued, they would bounce way up again (look at what happened to EME, for example, in the crisis).

If it didn't happen when the credit markets froze and the hedge funds were hit by margin calls in 2008, then it is unlikely to happen now. The log scale gives a better perspective and here we see something encouraging. Just a bump on the road, not the end of the capacity of the Dow to compute value upwards. This blog has discussed this at length and concluded that capacity is alive and well, using specific examples of the financial statements of quality companies, like JEC, JOSB.

If you want to put this in historical perspective and assume that the Dow does have structures which reference events in the past, then look what the real problem is. Look at the problems Dow had at 1000. It is experiencing similar problems at 10,000. This is a huge technical level.

One can discount this by saying that is all it is. But there is evidence for the fact that this level has a real significance, a significance related to the way the market grows as a complex referential system. How could this be, it is just a number ? It isn't for investors, market makers, traders and programs who use it as a price reference for everything, from stocks to options.

That is an input into a system and the system is based on inputs. The market works when it is given inputs, they structure it and feed into its functionality and thus produce its behavior.

This blog has also offered explanations of market behavior right now, the way the market slides back after being pushed up by cheap dollars. During this process I believed this was providing a cushion to let the recovery happen, so despair would not produce toxic valuations of assets. The money went back into sunken assets, but those companies at the forefront of US company creativity or those companies with superb balance sheets do not seem to be harmed.

All this gives backing to a possible belief that this is a computational interregnum and one which will not last for too long.  Looking at that data as the effects of a program, one could conclude that major technical levels become less of a barrier as they are hit. That seems to be a feature of the market.

Thus we can optimistically conclude that the Fed may simply be trying to shorten this interregnum. So far nobody could conclude it has lengthened it. Basically a debt economy ran out of capacity to produce meaningful inputs to the market.

A new investing economy or at least an economy where assets grow, rather than being pumped up by money flow may be on the horizon. This may be the economic spring, but it has been a long cold winter. Remember the Dow has not merely been tested at 10,000, it already went well over it, the epic high in 2007.

That was an extraordinary event as it occurred after the crash had really started. That suggested to me the market had other things on its mind, things to do with growth for the future.

The behavior of oil in that time period is to me further evidence supporting this belief. That valuation and the Dow's looked to me like the process this blog noted in tech, that the market finds a valuation that is a marker for future growth after a retrenchment.

The point of concern I have is the same one expressed in this blog, the effect of Fed policy on the value of $ and its value relative to other currencies (creating conduits which encourage money flow). If there is a way to raise interest rates then the Fed should, but maybe the economy will provide a way.

© 2010 Guy Barry - All Rights Reserved.

I do agree that a rescue was needed, else asset values would probably find valuations which equal a depression. Arguably we may be in a depression, but one which contains the seeds of a mighty surge upwards and the regeneration of the US economy.

The point is a depression may be the way the economic system acquires new ways to grow, as some have speculated. The difference this time is the use of sophisticated dynamic systemic engineering methods to alleviate the pain. The question this blog has asked is, are these methods disturbing the gain.

The government is arguably trying to avoid a re-run of 1974, which resulted in a decade of malaise. The problem is the restoration of liquidity then resulted in a series of economic processes which resulted in the present crisis, as some argue convincingly.

One comparison between now and the 70s, is that is where the new economic strength of America was born. Those mighty PC computer companies, arose then, from the creative cauldron of Xerox PARC. The present companies are being born or growing in the Internet itself, more or less.

It could be argued that keeping a money flow of liquidity cushioned America from that process, where the new begins in the death of the old. That seems to be a feature of systemic change, the chaotic shocks to the system. It is how a system without intentionality re-writes itself. Sufficient structure is preserved, but much is destroyed (like a less destructive big bang, assuming information can be carried through a singularity).

Basically the government is trying something different, instead of cushioning the economy (this does not work the system shocks become more severe, like the crisis) it *seems* to be trying to re-program the system. When I write about conduits I marvel at the financial engineering which put them there.

Now whether this is intentional or not I do not know. The problem is that there are probably mechanism within the program known as the market for rewriting attempts to re-write it. This blog has noted what seems to be structural adaptation in the forex market. This is what the recent slide back down might indicate, the decay of the conduit and the revaluation of assets seems to have origins in forex.

How does one deal with this ? One needs to be adaptive, because these kinds of processes are usually and seem in this case, to be adaptive. Perhaps what is what the Fed was doing today. During the crisis and after the crisis, the Fed was adaptive and impressive, perhaps it needs to do this again.

The point is the tone and sense of confidence today is like the way it was in the crisis, and this more than anything is what the market needs. Avoidance of the despair is worth trillions, literally and causes no problems to the system at all.

© 2010 Guy Barry - All Rights Reserved.

There has been concern raised about whether the USA will become like Japan. Remember Japan in the 80s ? It was going to overtake the USA and was beating it everywhere and buying up its real estate and companies.

Well, that did not happen. It didn't happen because the wealth, the money flow, was just that easy cash from inflation, namely the price of real estate. Maybe a lot of economic problems could be solved, if a devaluation was attached to cash got from inflated assets. Instead the reverse seems to happen.

The example of Japan is the pointlessness of trying to reflate assets with interest rates. The currency markets have essentially ignored the BOJs valuation of Yen. There are signs that the Fed valuations of $ are being ignored as well (what I alluded to in terms of the conduit unwinding).

So perhaps do not continue down this path. Believe in a recovery, perhaps even the cold economic fact that sunken assets in the US and Japan are correctly valued it is why they will not reflate.

Logically a bubble is not a true valuation and when it bursts, it is on a journey to find a true valuation. There is the systemic analogy that deflated assets find a value that is too low and need be encouraged by financial engineering to move up. Japan seems to have proved that this is not the case.

Complex valuation systems like the market are finding complex valuations in complex ways. This can mean for example, that behavior one sees in forex, where a currency bases then spurts up, may be paralleled in an economy.

That is, unexpectedly, house prices start bursting up again. But it does not seem something you can control with interest rates. This is one argument which could absolve the Fed of causing the housing bubble and crash. It had its own complex momentum and Fed input while it was a factor was essentially a parallel activity. Such are complex valuation systems.

Raise interest rates and you raise the value of $. That is the market at work and it casts a cold eye on the past. Meaning, this does not reflate sunken assets, unless there is a belief they are undervalued, because it is real money on the line, not money made artificially cheap to borrow. But it is so much more efficient. The core of the US economy is sound, there is something there for the market to value up and up.

© 2010 Guy Barry - All Rights Reserved.

Let's say the recovery happens, but without easy credit. Perhaps that is what is happening right now. I have noted that a return to the old economic ways is accompanied by a rise in EUR and a fall in $. Now the reason this is not happening presently now may be because the dollar had to bounce against JPY and EUR's rise was partly technical from a structural low.

It may partly be what the post yesterday was suggesting, the conduit to reflate is structurally failing. EUR/USD on 1 month fell at the bottom of Raghee Horner's 34 EMA. On the weekly it fell at the top. To me this suggest strength in that move upwards. On daily it has come back to the 55 day simple moving average. That allows either a move down or a move up.

The structure I called the conduit still exists, but it is like a magnet losing magnetism. What this may mean in the medium term is there can be no return to those old ways.

It was essentially the premise of the rescue started by the previous government that it was necessary to relfate assets deflated by the crisis and they did so, in a remarkable piece of financial engineering, directing money back into delfated assets by making a conduit to them, using a forced valuation of the dollar, by Fed Funds target rates being essentially removed from the system

I can rephrase the routes through all this this blog has delineated, in this technical way, either the present conduit must be reinforced, a new structure must be found to do this, or those setting economic policy should (or must) go with a new direction the economy is mapping for them. That is an investing economy led by the creative output of the Americans, which is already here.

It is the remarkable dichotomy of the economy right now, the strength in information engineering and the weakness elsewhere and it is such strength, it is like that dynamo this blog has delineated at the heart of the US economy, in action.

The technologies GOOG, for example, keeps on rolling out are so far ahead of anything else but more than this they fulfill needs you didn't even think you could have. It is like they are by appointment to those driving the creative economy (that is not a few, it is the many, it is stunningly democratic). In this sense, there are no problems, only opportunities.

When myspace rolls out beautiful and expressive new HCIs, which it is doing right now, it is a similar thing. They create spaces literally which get used in creative ways, which add value to the economy. It is those points of creativity, millions of them which create the new economy itself. It is that dream of the tech boom, in action. Remember in the dark economic days, great thing begin, continue and create great wealth.

© 2010 Guy Barry - All Rights Reserved.

Developed economies manufacture and they provide services. The EU consists of companies which provide services and one real manufacturing economy (Germany). The UK provides financial services.

The economy of the EU is sunk because services need manufacturing economies to service, they need a source of money flow and are biased towards creating a system based on money flow. They made a lot of money servicing the US, that was the source of the economic growth which deflated in Europe.

What I mean is they took some of that flow created by housing related asset inflation, sometimes directly by having banks selling mortgages, which then got into a huge amount of trouble, when those assets collapsed to their true values.

That has gone, but Europe still get support from the US by Fed fund rates being kept under ECB target rates (it makes euro assets more attractive and directs money flow to them). By doing this they are supporting as well an economic structure which disappeared and won't resurrect. This is a money flow economy predicated on house prices, which connected the US and the EU.

However the US is a special kind of economy. It does manufacture durable goods (how well it does this is unclear right now, but it has regenerated itself in the past), but it has an unparalleled command of information technology. Is this manufacturing. Not really. But it is not a service either. Now the question is, is there any kind of recovery in the US. The US needs to look not at home sales figures, which are the actual cause of this present recession.

It needs to look at its companies and in particular its information engineering companies (this includes facebook, google, myspace, microsoft, apple). Are they experiencing any serious problems. Not really. Even YHOO was showing some positive signs. Does the US have any competition in this ares. Nope.

Is there any area which generates such revenue. Well oil companies. Is there a more important industry for both the present and future ? It is in the economic interests of the US not to resurrect asset inflation, they fundamentally do not need to. They need to raise interest rates. Not a huge amount, so they hurt those with loans, but enough so they are slightly above ECB rates.

As I write this I am keeping an eye of USD/JPY 30 min. The price is alarmingly close to that low in 1995. Money flow economics. The pricing of the dollar is probably not inherently correct. It is artificially correct, to the extent that it can be, it needs to be re-priced by the Fed. EUR/USD has been falling since around 8/08. And USD/JPY has accompanied this, gradually.

It is not about risk at all, it is now about a sea of unstructured cash without anywhere to go (the EUR/USD conduit unwinds). Flow needs a direction to work properly and it worked for months after the crash, pumping up asset values and the stock market. There is a lack of clarity now about what is and is not risk, if there ever was clarity.

The conduit exists but, like the BP well, it just pumps cash into the sea. Manufacturing companies are not so affected by this, and least affected seem to be those predicated on creative action, like the software technology companies. This is because they generate cash from large numbers of sales or ad clicks. Now the success of the conduit, is the crisis did not destroy the system which supports money flowing in smaller amounts to things which add value to the economy. That is all it needed to do. It did it.

What is the difference between providing services and durable goods. Well services are pretty value neutral, financial services could be provided to structure mortgage pools for example and generate revenue, even thought the assets were themselves debts. But isn't selling a smart phone to somebody using social networking putting it on their credit card like that.

That argument would be one which said the credit economy is itself a problem. That is the belief that a lot of credit is as ill founded as those mortgage pools. But it is positive if it is going to advanced technology companies. Credit does create structured liquidity in an economy as long as there is real wealth creation (from an investing economy) to back it up, that implicit insurance I talked about yesterday.

The systemic argument is that such systems are not biased towards money flow in the same way as pure service providing is. One could even conjecture that such a system is more natural to and more supportive of the nature of the US economy.

© 2010 Guy Barry - All Rights Reserved.

This is a very personal analysis of these sites, based on my experience with them, others may have radically different experiences. A company which of course was a prime exemplar of the tech bubble is YHOO. If you want to worry about financial asset values ever being restored, then look at Yahoo's lifetime chart.

YHOO is a good company, but it seemed to have problems showing in its share price. Why is this though. It is maybe because of the way ads work on the Internet. As a technology though YHOO is still innovative and admirable, they are always more liquid then the rest.

But that is the problem for ads, there wasn't a character to hold onto to make you say this is a YHOO ad, it was too liquid in that sense. This is a problem myspace has to a lesser extent, and facebook, despite criticisms of its revenue, does not have. I click on facebook ads, they have this element of facebook respectability (which is worth so much to anyone wanting to value it correctly).

This respectability reflects back onto the advertisers as well. Myspace is still exciting and sexy and has become exclusive in a certain way, it probably needs to use this in its ads. But facebook increasingly has the excitement as well.

I have used YHOO since the 90s. I always go back to it, it is like the place to find yourself online again. If you look at YHOO right now they give you everything in terms of HCI technologies and those ads are looking glossy again.

But GOOG has moved to a place where they do not need to worry if the user thinks this is a google ad, and if that helps or hinders the advertisers, because their technology adapts and is given to those who take the ads on their sites to adapt, with the huge incentive of what a successful adaptation means.

GOOG has taken a bottom up approach, while the other networks still rely on their brand to encourage the user to click. Of course GOOG is a search engine, which is where YHOO came from. And of course it is now moving into social networking.

What has YHOO done exactly ? It has taken its brand, which is essentially the sense that you can do what you like and are given the tools to do so and made a slimmed down yet rich social networking site out if this. This differentiates itself from facebook and myspace.

Myspace used to be: do what you like within your own private profile. This changed, possibly from the barrage of criticism they faced, but there are signs that as always listening to criticism can be bad for your financial health, and they seem to be moving back to their model. But they have done it, having gone sufficiently in the other direction, that the culture of myspace changed to the extent users became more self-regulated, like facebook users have to an extent to be.

But YHOO needs to have a sense of: I cannot do without it, the MOAT for facebook and myspace is to an extent the fact they are myspace and facebook. For some reason users do not seem to like freedom all that much. Facebook is arguably the most restrictive of all the sites, yet it is the most successful.

But there are users who want freedom and perhaps YHOO is attracting them again. There are possible signs of this nascent MOAT on the year on year income statement. To be honest it look functionally better than last time I looked at it, before the crisis. Functionally better does not mean more income necessarily, it is a reflection on the income statement in conjunction with the statement of cash flow. Is everything flowing well, essentially.

If you use multiple social networking sites, one tends to have one as ones favorite for a time. Perhaps YHOO can fill the space, be like its messenger software and be the site you want there all the time. My personal feeling is that GOOG will be challenging this. My initial look at Orkut, suggests a very clear HCI, that crisp differentiation GOOG specializes in, with things you need, for me, like finance. The shopping integration is exciting as well.

The MOAT for GOOG is innovations and quality you expect it to work and be effective and innovative. Anytime GOOG comes out with something there is the assumption it will be these things and more. That is an extraordinary moat to be constructing. It will be interesting to see what this means for social networking success.

That said YHOO has the fluidity and it seems to have found a way to express this is social networking communication, rather than simply making profiles and chatting on messenger. That is a MOAT for YHOO, because it always has been. MOATS need to be moved into new spaces technology creates.

Mostly companies do not have to do this, but they do in Internet technology, where innovation proceeds at breakneck speed. It is one reason why it is hard to analyze tech in traditional ways. This is US creative innovation, in front of your eyes. Hopefully that may be showing where all MOATS show, the financial statements of YHOO.

© 2010 Guy Barry - All Rights Reserved.

What would a Fed which biased monetary policy towards an investing economy do, would it do what it is doing now ? The problem with now is the emergency situation which happened in 2008. The Fed has been blamed for that emergency, by fostering a housing bubble. But really, this was not the fault of the Fed.

The Fed simply did what it does, it accommodated monetary policy towards the reality of the US economy. That is partly a tendency to favor money flow at the expense of investing which has its roots partly in the 80s. But it is something really good as well.

There was a large flow of money within the economy in the run up to the crisis from cash generated from loans predicated on house values amongst other sources. A number of elements supported these calculations. The sheer numbers and dynamic (new ones added) involved made the aggregation of these valuations self supportable for a while. The valuations were referenced to themselves.

This was expressed but not created in instruments which aggregated these valuations. The reference decayed as always when the valuations were no longer supported by rising values and new ones added (a similar dynamic was seen in the tech bubble). Like in the markets they then had to reference fundamentals.

But unlike assets in the market they could not simply deflate. What they did was deflate currencies and the market itself. Remember they were expressed in tradable instruments which made the aggregates reference not themselves but the market, that was how risk was moved away from them.

If one wants to blame Wall Street for the crash one can ask did these instruments really support these valuations or did they accelerate the decay of self-supportability. Remember at the time nearly everybody felt these valuations could sustain or increase forever, essentially. That was the premise of these aggregations.

Their risk was precisely the time decay factor in self-supportability, one might speculate the instruments delayed this, whether they magnified it or not is another matter. Using physical systems to model this kind of system behavior is problematic (a criticism made by both Buffett and Volcker) because the market is not precisely a physical system as this blog has noted and the market is where valuations come home to roost.

However I believe the policy of getting mortgages to as many as possible is correct. I believe as well, restrictions, high barriers to mortgages are themselves risky, and what happens is the market adapts itself to this, making a resulting fall even worse. Now that is food for thought, the crisis was inevitable, but was a lot less severe than it could have been.

One could conjecture, because this did not work there is some inherent flaw in the system or the system worked, or this was simply a stage in the evolution of a system. This system would be a democratization of credit. It does seem that the US has to have such a system. It is difficult to see how the US could have a system such as Canada's where the barrier to mortgages is high.

What I am saying is, the nature of the US necessitates the people having access to credit and real credit, not simply a card, the ability to use your house as a generator of large sums of cash. So how do you do this over a sustainable period of time ?

Well, you can do exactly what has been done and deal with the revaluation. Or you can prevent the markets from revaluing or you can make the consequences of this revaluation a systemic property. It could be asked is that the point of the 'too big to fail' concept.

The basic problem is money flow. Sloshing money about the economy produces asset rises in and of itself. And it is still being done. Slosh cheap dollar derived cash about the market and you get a miraculous rise despite an economic nightmare.

But a rise which starts to get revalued down. The solution to all this is an investing economy (restricting the valuations of the market is not a good idea). It is exactly what the US is good at, because the US has what an investing economy needs, creative people.

At the heart of an investing economy is people turning ideas into efficient forms, which can be inputted into the economy. If I were to pick the process which results in the miracle of the US economy, it is this.

But what does this derive from, the equality of opportunity and that is what giving mortgages to the people is all about. The US innovates ideas themselves. The ideas of the Constitution took time and wars to make efficient.

Credit to the people is one of them. Hiding risk is not a bad thing per se, especially if it one step towards dealing with it, efficiently. That is to say, the markets process this democratic idea, not wars or even congress. And we are going through such a processing, perhaps with the help of the Fed.

Systems like the market are structural. This differentiates them from natural systems (whose structure is essentially undefinable), but does not seem to differentiate them from the processes underlying natural systems, the structure of matter and time itself.

That is why physical models are used to model the market. But as this blog has suggested the input of minds and its creative output does change this system and makes it unlike even such structures. It's that creative intentionality expressed in markets.

So what is the solution. An investing economy will generate sufficient wealth to effectively insure another attempt to give credit to the people. This provides a moral incentive for the way Americans do capitalism. That was the problem with the most recent attempt as many pointed out, real incomes were not rising during the housing bubble. Well, fix that.

That is not up to Fed Funds target rates, but it could be argued an investing economy needs to have that conduit targeting funds away from dollar assets removed. In all events, what happened thus becomes a structure which the economy can process, like it did with the concept in Internet tech in the late 90s.

Yes it crashed, but Internet tech is a major and growing dynamic in the economy now. Democratic credit may be such a possibility as well.

© 2010 Guy Barry - All Rights Reserved.

This follows on from my comments about RSI. If RSI smoothing and re-scaling works against the nature of the forex market as a computational system, where is it helpful ? Well, in extremes, because it finds accuracy now matter what smoothing may have been done to its data.

But let's look at RSI on USD/JPY 1 min, the most recent data up till market close on Friday. Now everyone who has looked at RSI thinks omg, all I need to do it trade on those spikes up (i.e. put an order counter to the trend).

It is true that RSI spikes tend seem to be more accurate than Stochastic spikes, which tend to move horizontally in the extremes. The problem is RSI is much less accurate, thus a move down from a spike can easily be a continuation of the trend.

So what else can you get from it. Well let's say spikes = direction, well where the RSI is in relation to 50 = momentum. So basically RSI is compressing information for you, about direction and momentum. That is what it means for me. It becomes part of that heuristic trading I talked about. It is like a news flash.

Let's look at what happened at 14:20pm on Friday USD/JPY 1 min. Spike, yet you really would not have wanted to go short on that. Moves into extremes are used by the computers, so whenever that happens, program sell or buy orders are being triggered. But these take time to clear. It is like hitting barrier options when a currency first goes to a major price level (e.g. EUR/USD 1.5). That is what is at the heart of the momentum.

The other thing to note about that is 'look to the left', it is clear of structure, it can keep on going. But there is structure at exactly where there is another spike and where you should have gone short. The RSI cleared opposing orders, in the move to that peak, and this shows as it went down slightly as prices continued up. A bearish divergence between prices and RSI ensued. But look at the cause, the price reference to the left, and the clearing of orders.

The MACD histogram was misleading as well, it showed a peak. But for me, as I said crosses are paramount in MACD, and there was a bullish cross above the zero line referencing what was happening here. That said to me, there is action still to come, but be careful.

© 2010 Guy Barry - All Rights Reserved.

I have noted the precision of forex. I have also noted that this may be a reference not merely to former support and resistance (but what exactly is that, forex is filled with analysis which stops at labels) but also the economy (which is presently awash with cheap dollars which are finding less and less places to get quick returns).

The possibility this may be a precise reference to the economy is interesting. This precision suggests to me the problem with moving averages and oscillators in forex. They remove this precision (it may be Raghee Horner's 34 EMA brings it back to an extent). One gets it back by looking at raw chart data, as this blog had done.

It may be you can get away with removing precision in the Dow because there is that more significant structure that the blog has talked about, which structural indicators like RSI reveal to an extent.

But it may be that is what there is in forex and smoothing data or creating limits to it and compressing, removes exactly what you want. I might conjecture if it were the case that oscillators were as accurate in forex as in equities then forex would not be such an easy way to lose money. Anyway what might it be that forex is referencing and is the Dow referencing it as well.

The blog noted the recent reference of USD/JPY to structure deep in the late 90s. One might say that this reference is the stark fact that the economy may not really have changed much since then. It was inflated deflated and then inflated and deflated again. In the heart of the revaluation depths of the crisis, the Dow referenced levels from, well, the mid-late 90s. When most like the forex market, it behaved like it as well.

However there is a core of the economy which has thrived despite these monetary games, which have a political cause, as credit derived inflation brings easy money in all sense of the words (and then an almighty crash). This core has been noted by this blog, and it is the creative engine of the US economy.

The US seems to have an extraordinary concentration of creative people and it seems to provide an environment for them to create. This is across industries, from advanced tech, to hip-hop to Hollywood.

In terms of economic effect, one creative person may have enormous and unpredictable economic impact (one reason why it may be a mistake for a governments to try and bring people in to a country based on measured skills and presumed needs for them etc., if you want success attract the creative or create a conducive environment for them within the country). So what does this mean for companies.

Well, typically a great company has one creative person whom the company tries to keep with it at all costs (Jobs, Buffett, for example). This blog talked about intentional action and how it might show in the financial statements. But creativity is a special form of intentionality. So can the actions of these people show in the financial statements.

Now, it is all very well looking at AAPL, but of course what you want is to see signs of this before it happens. For some, this is a Holy Grail, the capacity to see quality tech stocks before they take off. It is extremely hard to do this, and many simply stay away from them, but these companies are where the enormous growth is coming from, and the salvation of the US economy.

What is it the creative tend to do, well they tend to formalize strong ideas and make them effective in whatever medium they are in. That discussion of WFR was designed to look and see if it is showing in the structure of working capital and this blog will probably continue this examination.

Anyway if USD/JPY is referencing the economy now, then its recent slight rise may be referencing the real growth in the economy, that real recovery I have talked about, as this blog suggested. But of course this recovery is masked by oceans of money flow this blog has talked about and this shows in the currency data as well, the fragility of the rise and its structuring in a range.

© 2010 Guy Barry - All Rights Reserved.

When academics say a certain market has evidence of chaotic processes what are they looking for. Chaotic systems have certain attributes, one of which is strange attractors, these give rise to cyclical processes. But unique to chaotic systems is the fact these attractors have non-integer dimensions (there is a tool, based on correlation dimension for measuring the dimension of strange attractors).

The blog has talked about this structure before. It is a feature of the natural world, the natural world does not seem to have perfect forms Plato saw in his mind.

However certain ideas of Penrose and others suggest they may have an existence in the natural world. But not the natural world as you experience it, which is supremely fractal, but with that which you experience it, your mind interacting with the world. The computation of the mind itself may be connected with the world of Plato.

The fractal non-periodic cycles in a chaotic system produce some of the effects one sees in financial markets. That sense of being able to see structure very clearly, after the effect, because predicting the effect is impossible.

Those cycles in markets except perhaps in commodities do not come from the natural world they probably come from the action of attractors, which are computational processes, with no predictability. That issue is the problem of prediction based on structural analysis working sometimes and not others.

But the markets may be a bridge between the natural world and the world of Plato. The processes Penrose talks about may be connected with certain technologies in the mind, and thus consciousness itself. The market is the intense application of the mind in an incredibly focused manner, the focus provided by $$$. If it is anything in this world, then it is there.

One could explain crashes in the market by this feature of chaotic systems: that disorders happen when changes are accumulated to a certain point. The market has chaos in it, there is no question of it, but there are minds in it as well.

The determinism in chaotic system, is a kind of negative determinism, the system will act as it acts until it has to reorder itself. But the mind has intentionality. This is a kind of theoretical back up for the ideas of revaluation this blog has been discussed.

The revaluations of the crisis were not chaotic they were accurate, once it was clear that the millions of mortgages underlying asset values were in fact debt not assets. It could be conjectured the actions of minds triggered a chaotic re-organization. Intentionality uses processes, it is just the market may to an extent be a way for the mind to use chaotic processes.

Everything matters in investing, every intentional creative act in society. But one does not need to take account of these, one just needs to look at the financial statement, because they show up there. The economy itself is referenced in working capital and more broadly in revenue (but reference this to cash, particularly working capital, to more precisely value revenue).

But one needs to look at what is actually happening in the economy, how money flow is being used to float those assets values and how the market has been rejecting this.

But what else could it do, it is there to correctly value and it is incredibly precise and accurate at doing this. This is partly the reason why some investors have got incredibly rich by their ability to pick these companies before the market gets to value them. The *market* never really predicts that is why those companies are there to value.

It is true projections get made, but these tend to be inaccurate and get discounted as they are made, thus their effect dissipates (another source of the time decay this blog has talked about). They tend to be least discounted at market tops, which is why they are market tops.

But this is when they should be most discounted. It calms the view of the market to say there is no predictability, because there cannot be. One does not need to worry about whether the mind can predict or not, one can say the market does not have the structure to allow this. So you must take account of what is happening now, it is one reason why the year on year comparisons in the financial statements are so powerful.

Why should you do this, well the analysis of financial statements has produced this great wealth. What this is really saying is those intentional processes are showing in the financial statements.

© 2010 Guy Barry - All Rights Reserved.

Before the crisis, in the days of 2007 when the market was still to make highs, I looked at solar companies. Solar I like for many reasons, but like all cleaner energy technologies it cannot presently compete with the amount of energy one gets from burning the compacted remains of ancient forests, but if it had support behind it, this is even more so now. At the time I felt they seemed overpriced, so I looked at those who were at the forefront of advancing the technology.

The way solar companies were hit by the crisis, suggests to me that what happened was not totally a crash, but what this blog has been calling it, partly a revaluation. One of the ones which interested me at the time was WFR. Let's look at it and see why it might have been overpriced. BTW remember the market computes value different ways. One of the ways is a future projection. This tends to reach its peak at market tops.

However please note the projections about Internet technology in the late 90s seem to have been essentially correct, if not correct on the details (how could they be though). This makes one think about the future performance of solar companies does it not. The other way the market values is a drastic revaluation to present financial data.

It may be this kind of process is necessary to compute real value over time, it is that time decay this blog has noted across markets. In all events a company who can keep its sales up, will be protected in this kind of revaluation.

WFR's revenue was hit in 2009 by the crisis, it was almost halved. Its expenses were not halved, they in fact went up. This put its bottom line into the red. However it kept its COA in the black. What does this suggest. It suggests perhaps the company is functionally strong. This seems to be showing this year. That all important year on year comparison shows its COA and its net change in cash are both now in the black. Its revenue year on year is up and its bottom line is back in the black. All these factors tentatively suggest a recovery within the company and within the economy, to me.

The question to ask about solar, is now that share prices are at lower levels, is where will future revenue come from. Will it accrue to companies making the technology or will it accrue somewhere else, if it does accrue. Look at the difference between FSLR's balance sheet through the crisis and the WFR. It is the question one can ask in retrospect about the tech boom. Where did the projected revenue go in the end, well it went into companies like GOOG and AAPL.

Again a technologies which have found enormous reach. But the point of this is sales is all important, it generates the balance sheet.

The more a company is sales oriented in its product the better placed it is to sell. That is something to think about with Solar technology companies, over the long term. One can make money by having many sales, or from smaller numbers of bigger sales, or a few huge sales (like defense companies).

That is why I believe they were overpriced, their reach has not been defined yet, and it wasn't in 2007. It was a future projection not so much of revenue but of reach, like the tech boom. The crisis forced a more precise look at their reach as revenue faded. The market does not like a lack of clarity, if it accompanied by a drying up of revenue. But what is the possible signs of strength in WFR about ?

Look where its share price is on its long term chart, it is not back in the place it rose from. Look carefully and you will see it is above it, the spike down from the fall was a rejection of that valuation. The question now will it rise or will it slowly trend back down below that spike. It is the question this blog has asked on other occasions. Is that spike a probe for that valuation future or a rejection of that valuation future.

Here we have seen fundamental support for a rejection, despite what the long term chart may be saying, but only time will tell. It could be noted that the chart pattern since the fall looks a lot like that chart pattern in forex before a surge upwards. But as always chart patterns are only clear, after the event. So which companies will remain in the doldrums and which will rise ?

To make the assumption that they will rise one has to ask simply is solar energy something which will generate significant revenue increases into the future. The market thought so in 2007 just at it thought the same about the Internet in 1999 and there is support for this in company data now. But which kind of company will benefit from this ? In tech it seems like those company which can integrate tech and sales and indeed make sales tech, win (FSLR seems to have done this).

But the tech is one assumes not fully developed (part of its reach) thus the more tech focused companies within this industry are still important. The prize is still there for the taking, that may ultimately be the source of the valuations. Of course those companies which sell well, have cash to take over...

(edited 7/24/14 4:31pm)

© 2010 Guy Barry - All Rights Reserved.

The rally today had signs of a money flow rally, the ebb at the end, but I still see signs of that real recovery within it. Let's look at forex charts again. When I am analyzing forex charts I apply a number of methods. One of the clearest methods I know for getting a precise sense of structure is the 34 EMA of Raghee Horner (in her books). I use this sometimes along with RSI and MACD. For RSI I am looking at where it is in relation to extremes and 50, and for MACD I am looking for crosses.

Predictability is another matter, but this blog has discussed this issue in forex. If you put the Dave Wave on the weekly EUR/USD chart one sees EUR/USD reversed at the top of the wave. Typically this can indicate a trend down still in operation, but forex can recompute this kind of directionality.

On the monthly chart, the technicals, RSI and MACD are pointing towards a possible continuation of the rise, if the correction can be overcome. The top of the Dave Wave here has caused a bounce, that is bearish, but the candle suggests indecision (as you go deep into the charts on lower time frames, you see this indecision reflected in a loss of momentum). The Dave Wave on daily suggests this continuation possibility as well.

It must be said the structure of the RSI is pretty bearish still, it needs to convincingly get above 50. RSI on weekly reveals more precisely what is happening, the bearish momentum has caused a correction at 50. When trading the 1 min, there is usually a correction at 50 and similarly here.

It is those precision valuations I talked about yesterday, precision at 1 min cascades up to monthly. But it is a precision whose information content degrades over time. This means as you look deeper into charts from multi-time frames there is a sense of information degradation, but everything seems still so precise.

That is the benefit of a fractal structure, which forex purely is. It is just not a connected matrix, the fractality is free floating (another way of putting, how patterns can be so hard to call in forex, they are only obvious after the fact and then stunningly so), hence the signal degradation. In the Dow and perhaps oil, it is a connected matrix, connected by the growth factor I discussed. Information is restored in this conceptual framework.

This makes it less precise but more predictable, a phenomenon found in nature but not really the natural world, more in fundamental structure. This may come from the input of minds into investing and commodities (price setting etc.) versus the input of machines into forex. The problem is the money flow is making the Dow pretty free floating, subject to random surges and corrections, just like forex.

So what does this analysis suggest, as always anything can happen, that it the truth in forex. For me, I am mindful of the comments I made in this blog, that USD/JPY hit major long term structural valuations at its recent low. Fundamentals are something to hold onto in forex, it is why the EUR did not continue its rise but at least corrected, something this blog was suggesting as well.

It is just fundamentals do not have as much hold on the forex market as they *normally* do in equities. This blog believes as well there is something more in forex, a kind of computation which references economic growth and this maybe what the USD/JPY low is referencing. That is a positive sign.

If it does fall back down that is not so positive (can China be the source of this revaluation ?), there are other forces beside company growth at work in this economy as this blog has pointed out. Remember as always these are comments on long term charts (for oil as well) and these things take time to play out.

© 2010 Guy Barry - All Rights Reserved.

Why would somebody with a lot of money invest in oil stocks right now (re: the MSN story today). Investing in those big quality companies hit during the crisis was a very sound decision, but at the time it looked very risky, that is one possible reason, strong companies temporarily cheapened. What I would say as well is look at crude oil's long term chart.

It has been noted in this blog that some research has indicated commodities do seem to have specific computations like the Dow within them. The long term chart is finding support at the levels where it retraced slightly to find the huge highs in 07/08. These highs made any company even small ones with an asset link to oil, very sensitive.

How is this different from the way USD/JPY references earlier behavior this blog noted. Because in forex it is a reference to a valuation. One can say the oil chart, like the Dow is referencing itself, making assumptions about the kind of computation happening. What this means is the fact it broke up through the resistance that caused it problems in 2006 after its steep fall is not referencing a valuation is it referencing an ability to grow.

This is a subtle but powerful difference from forex, because it makes for the possibility of a kind of predictability, in a similar way as one can do this with stocks, but not with forex. In the case of stocks the computation is probably qualitatively different. That would be my possible justification for going with oil stocks, if I were doing this. Obviously if that real recovery happens, it will be good for oil as well. But one could expect a double dip to produce similar effects as the first.

© 2010 Guy Barry All Rights Reserved

There are calls now and then for renewed currency controls. The idea is speculators push currencies up and down. The problem is finding a way to value a currency. It could be argued leaving target rates in the hands of central banks is a cause of the present recession (this values currencies, but the blog has noted there is a practical justification for doing this). The essential problem is, money flow brings controllable quick returns, investing does not.

It could be argued monetary policy as well, is a cause of currency volatility. Money flow is essentially this, it is flow and it is unstable, investing is a stable process. But send flow money into assets and their value goes up. Invest in assets and you depend on the ability of those engaged in creative action with those assets to grow them using this money (but the US can do precisely this).

It might be expected an investing economy would have more stable currency valuations. Because money flow valuations are prone to drastic revaluations and slides (there is a time decay to their effectiveness, which seems inherent and unavoidable). The drastic revaluation was the crash in 2008, the slide was the recent slide back down we have been witnessing in stocks.

Investing moves are amazing, they have that self boosting mechanism this blog noted, they have a firm foundation and an inherent valuation. It is the difference between a note and piece of gold, yes, except the notes can be as strongly valued as the gold if they are backed by an investing economy.

© 2010 Guy Barry - All Rights Reserved.

When I went through Processed and Packaged Goods on Yahoo Finance in early July 2008, one of the companies which interested me at the time was SNAK. I noted its long term debt (on balance sheet), but happily it stabilized (those interest expenses on the income statement, operating or non-operating, can in some cases be a problem).

I always look at changes in working capital (on cash flow) it is something the market loves to latch onto but as well it contains data about the interface of the company with the economy, which reflects as well on the company's functionality.

I always look at the present quarter versus the quarter a year ago, as this is where a lot of near term share changes derive from. I won't comment further than this, since you should consult a professional for that kind of data analysis, but I would take account of the data elements here but as well note the positive COA and its sources.

The reason I am interested in this company is because of the patterns on its chart. Look at its lifetime chart, monthly intervals using candles. It slopes down, spikes down finds support a few times and then surges up. Note as well the volume has supported the rise.

The pattern seen on the chart is typical of a computer driven trade in forex as well. These happen within a day trade (I am saying patterns are not necessarily the point, it is what is within them). They tend to point towards a trend, for example the pattern this blog noted on USD/JPY. The point is there is an apparent mapping between the short term trades on forex and longer term investing decisions on stocks, if these are investing decisions. Typically those patterns have three flags in forex.

The reference in the present flag may be because of issues in the economy and/or the company's immediate interface with it (working capital) or because it is finding resistance at a whole number ($4) and found spike support at $3. But that resistance in early May at $4 exactly references the resistance in 2001. Again a phenomenon of the forex market this blog has explored. That resulted in a fall, but it referenced economic conditions.

Technically and in terms of the wider economy this is worth watching to see what happens next. This is most certainly neither a recommendation to buy or sell nor to hold, this blog does not make such recommendations, consult your broker.

This blog is interested in companies as computational elements in the market. The particular interest here is a comparison of chart data in stocks with forex, because of the precise way a company future performance can be measured. Remember chart patterns is about prediction. But is it predicting a state of the market influenced by the forex market and money flow or the company. This is another test of the effect of the conduit.

It does seem possible that good companies can break free of this gravity well, which is what the conduit is making the market (the constraint on share values slopes seen across a variety of companies). That capacity I might tentatively suggest may be signs of that real recovery.

© 2010 Guy Barry - All Rights Reserved.

Is there a difference between money flow and investing. Right now the market is heavy on the money flow and lighter on the investing (that is not a bad thing for investors), the causes of this have been investigated in this blog. The question is really, has there been a long term bias in money flow against investing.

Of course, that is the criticism which has been levelled against the US economy. But the US economy is itself a creation of money flow, because the $ is still the world reserve currency and US assets are of a particularly high quality, the reason for this, this blog has examined as well.

The US economy combines investing with money flow but the two tend to be in oppositon. They should not be, in theory, one should fill the gaps of the other. Investing is not about flow, it is about stasis with bursts of flow (that is the very definition of a policy of finding good shares cheap selling high and buying back, when the money flow itself ebbs).

The problem has been decades long inflation of assets using the Fed Funds target to create a conduit, to boost assets whether they be house prices or shares, using the attractiveness of the US to money flow. Now boosting house prices was a good idea, it was a piece of unusual bottom up boosting this blog has talked about, unusual for the US. It could have worked except money flow boosts do not seems to have that capacity to self boost.

This is a complex point and it part of the mechanism in the Dow which grows share values, and shows its computational shadows in such things as Fibonacci levels. Money flow does not do this, it inflates. It needs a conduit such as an interest rate differential and then viola money flows. But the money does not flow into the places investing money goes to. There is an overlap, of course but in effect the two are different.

What all this means is once the flow stops the asset values crash. Now the asset values of good companies did not crash, they sure fell, the best companies, excluding oil companies fell about 33% - 50% at the depth of the crash, that is a huge revaluation, but nothing compared to those companies which had booked revenue on money flow/conduit induced asset inflation. I am implying that conduit existed before the crash.

What I am saying is the nature of the Dow to grow, that compounding magic which creates real wealth, must be protected. Money flow does not go the highest quality. Investing does, that is its very point. If interest rates are raised it will bias flow into quality assets, because the money to be borrowed will be more expensive. The more expensive something is the higher its value is, and the higher its bais towards higher quality assets.

Not that this is going to happen now, but this is for the long term and it resonates with Obama's call for a restoration of the US economy towards one of investing, rather than money flow (in effect). Raising interest rates will also bring that money going into EUR assets back into the US.

The US should maybe not depend solely on its inherent attractiveness to money flow, that brings problems when sovereign funds talk about divesting from $, with money made partly from the US disinclination to invest (easy credit goes into money flow).

The US does not need to be dependent on this source, there was endless criticism of this during the past expansion. It has all the power it needs in its people and the creative things they do.

© 2010 Guy Barry - All Rights Reserved.

I made a number of lists before the crash. One was in Feb. 2008, it was a list called 'CRASH', i.e. high quality companies which would be devalued by the crash and made cheap. I have already given you one of the refinements on this. But another one from the list is HEW. These are on my mind because of the fact the attempts to pump up asset values by cheap dollars seems to have hit a little roadblock.

HEW was a star performer though crash or no crash, like JOSB. From 2008 - 2009 its revenue is down but it got its cost of revenue down. This is symptomatic of what happened with good companies in the aftermath of the crisis.

Increasing sales was a problem so they cut costs. This is exactly what I mean by the way US companies flourish in tight fiscal environments. They do not slump, they become leaner and meaner, but more precisely their balance sheets tighten up.

This is highly important because this is exactly what the market computes on, when it isn't ebbing and flowing with easy cash. It could be argued the market likes precision (computer programs are exactly this) and a precise tight balance sheet is especially favored. Its year on year is interesting as well (especially COA).

The question is what will happen in an improved economy, the issue is what is happening with the market now. Again this not an analysis, please consult a professional and this is a very complex market environment.

© 2010 Guy Barry - All Rights Reserved.

What intrigued me about the direction of EUR/USD from yesterday till now was that spurt downwards at 2:14-2:15 I noted yesterday. As I said that initial reaction has been accurate in predicting what will happen after the initial reaction. The computational structure nested within the news reaction.

Why would this be the case in forex ? If you trade in forex you get a sense of tight precision mixed with a kind of looseness. It can make trading frustrating, but it may be the source of structure in the market which can make trading successful.

The looseness from a retail traders perspective is not looseness at all, it is major players taking positions against your trade because they can withstand the move against them. It is the great divide in forex, those with deep pockets/credit lines etc. and those without.

Schlossberg makes an intriguing argument where he says the retracements are a result of this. Read his book for a full explanation of this. But remember these are the best traders as well and their precisions is what you want to be aware of.

But how do you trade like them ? Well, you cannot, you cannot withstand the moves against you unless you trade micro lots with a fair amount of capital. Retail traders handicap themselves against these players by trading larger sizes without sufficient capital.

Have you ever called a market turn and got stopped out before it turned, that is the difference between the small and the big in forex. They can handle the moves against them before a turn.

For the small in forex, think small, that is one's advantage, look for those niches which are precise to you. But bear in mind you may be a lot more right than you think. On the much happier field of stocks, another company I liked and kept a watch on during the crisis is SMSI, it is showing some positive signs in its balance sheets, that year on year move I like.

But again this is not an analysis, consult professionals for this, there is the huge issue of the present and future state of the market to think about. Keeping an eye on stocks is a safe option right now.

© 2010 Guy Barry - All Rights Reserved.

Let's go through FOMC EUR/USD, play by play. First things first, there was a channel and you could have placed a position either side. One could figure this was dangerous given the uncertainty.

So one could have taken a position as near as possible to 2:15 but not too near as the volatility always happens just before. One may have found in the past the direction near 2:15 is the direction it will go. This was true in this case.

The problem was what happened at 2:14-2:15. The market moved downwards. Look at the 1 minute chart. That I find computationally interesting. I have seen time and time again the very initial reaction is important for the medium term direction (let's define medium term in this fast case as the session +).

A possible reason for this were big sales to willing buyers stacking the sell orders momentarily. But as always there seem to be market information in this as well. In all events it was a stop hunt whether intended or not for those who had positioned themselves close.

Now you either did not have a stop, positioned yourself even earlier, had a stop at the channel, or were stopped out. If you were in the categories who were in, you got lucky. Assuming you went with EUR going up, but logically the Fed were not going to hit liquidity, the longer term consequences are another matter. However one might have felt this was going to go up and up and one might have waited for a possible reaction back.

However those multiple tests of support on 1 min suggested it was not going to reverse. So one might have taken another *buy* position, and exited very luckily when it hit its ceiling, with a relatively long spike. The rationale for this is the structure to the left on the chart providing resistance, which is where the spike hit. Remember what was in this blog, go to the left and look for structure to provide support or resistance.

One might conjecture for a fast move like this close structure is most important. Getting through that usually needs real fundamental backing. In all events it would have provided a good rationale for exiting. And remember with FOMC, either the instrument sharply reverses soon, or else all momentum is spent and it is just going to range for a while, like a very quick Elliott Wave.

The information I was trying to get from all this was: if there is a way of seeing whether the instrument will reverse in these conditions and to me it seemed like it is possible to garner information by eye. This is a much overlooked way of dealing with forex - simply use your brain to deduce structure, direction and momentum, it works in fast conditions, but as soon as conditions slow you need to reference earlier structure with RSI etc. (except they are not as accurate as the brain). But this was a condition where the reference was right beside you (that big candle).

© 2010 Guy Barry - All Rights Reserved.

When one looks at economic data one sees figures. Some of these are the consequence of mass behavior, some of are controlled exactly by central banks. Those that are controlled by central banks either directly or as targets, are qualitatively different from those consequential on mass behavior.

This is because one is bottom up and one is top down. The qualities of the bottom up figures is at least they reflect (making many assumptions about the quality of the data).

The imposed figures do not reflect anything except a belief that what they are is effective. What I mean by this is when the Fed keeps Fed Funds rates at near zero for a long time they do it because they believe it relieves the ongoing economic crisis. Their behavior during this crisis has exactly supported the belief this is a top-down imposition.

They do this because they believe this causality (presumably): if $ is cheap to borrow, it will be borrowed and put back into the economy as one of those bottom up inputs. The problem is historically these top down inputs seem to have caused enormous financial crises. However controlling the bottom up inputs is not the answer it just causes a phenomenal crisis (the soviet economic mess etc.). Put simply the system does not like to be controlled.

Western governments have put more and more of these controls out of their hands and into the system itself (the market). What this has resulted in, is the crisis happening in the market itself. Is the systemic collapse from the crisis better than a soviet style collapse.

Well, it brought down the government, but it it did not bring down the system (though in the depths of the crisis there were unusual calls for a new system, if one remembers). But one control not in the hands of the market is the control which may have caused the system collapse, the Fed Funds rate.

The central bank sets this figure for a very good reason, in the same sense a retail bank sets its rates (though it is highly constrained in this, partly by the Fed Funds rate). It is money held at the Fed which banks are lending to each other. My argument is not that the market should set this rate.

This could be logically unsound (from a systemic basis, or the limits of knowledge of it), my argument is rather this rate is set from systemic considerations rather than as a tool to stimulate or cool the credit markets.

Pumping liquidity into the system seems to have resulted in a kind of go to the lowest point mentality, the money has not gone to productive uses, it has gone to try and re-inflate assets which arguably are or were correctly priced. Let the system itself reflect into this decision, rather then an imposition into the system. There is a big difference.

The problem with this is the system is ill understood there are a lot of recursions involved in any attempt to do this. What one might suggest is the forex market does reflect this system, but governments seem to want to fight with it rather than come to terms with it.

© 2010 Guy Barry - All Rights Reserved.

The move towards further quantitative easing and statements about continuing the Fed Funds target rate at near zero for a long time seem welcome right now, because the market seems to need calming. Right now the inflexion point is this, *if* that real recovery is bubbling under then the market is correctly valued. What do I mean by this. When working properly, the market does not value now, it values into a future.

Those calculations of share values on estimated income streams are a fading persistence projected into time. That is their inherent structure (as computations) they resonate with the way the market is computing value now. They may not truly capture this, but they do resonate with it.

The problem is the market is so distorted by asset inflation/deflation, rescue conduits etc. one can question whether it does function, even if one had the chutzpah to start projecting future income streams right now.

But some things I have seen suggests the distortions are not causing malfunctions they are causing mis-functions. The fabric of the market may not be damaged if I can put it like that. I should note though this is a bit like looking at the surface of the Sun from the earth and deducing activity therein.

Those wild days in the crisis when trillions disappeared in front of one's eyes, well you know what it wasn't internally panic. It was the process we saw with CROX on a massive scale, the collapse of future valuations into the cold hard light of reality. It was seen that those asset valuations were built on the end of 'Raiders of the Lost Arc' - put the backstops on those insurances where they won't see the light of day - well they did when Lehman collapsed.

But it has *already* happened, it was decades worth of re-computation at high speed boosted by the hedge funds. The reality of at least a decade of the market was there right in front of your eyes, it was astonishing (we were in the Sun) it was exactly like the forex market. The inflation and market structures from cheap dollar (the recent rescue) wasn't as big a deal, it was just an emergency measure.

Why I think we may not be back to where we started is because something has been happening, the market has maybe started the process of healing itself. Partly because companies can handle this and can indeed thrive in these circumstances, partly because of what lies within those structures in the Dow. There is a suggestion as well what happened was necessary for this restoration to happen.

There is a little bit of that dark feeling right now during the crisis, anything can happen (or nothing). Anyway the point is if the market is functioning again then it may include future valuations, rather than the messy present. In that case quantitative easing and Fed Funds target rate near zero can be just calming words and not a grim future.

The other way of looking at the calming words of the Fed is that they simply want more cheap money pushed into stocks. Do they or do they not believe the market will recover by and of itself ? That is the grim future, they do not and it will not and all that exists is to find ways of creating conduits to inflate asset values. Computationally, I believe that is less likely.

Note: It might be expected that countries like Canada and Australia would be hit by this new downturn. It could be argued that their protection was directly linked to the initial success of sustaining that asset inflation. But one might expect Canada to have a protection if the real recovery starts in the US.

© 2010 Guy Barry - All Rights Reserved.

There are many different ways of investing, but it is well known, for example if you want to go with one of the major schools of financial analysis, it is a good idea to read Benjamin Graham (everything) and textbooks on accountancy, financial analysis and the analysis of financial statements, in that order.

I would add read Phil Town's "Rule Number One", first, to give you a method you can use and then adapt as you wish and then later the Frank J. Fabozzi series to give you a knowledge of market dynamics. I would read as well "The Essays of Warren Buffett: Lessons for Corporate America" and "The Investment Zoo" by Stephen Jarislowsky, it brings focus to the interpretation of financial statements.

But what on earth do you do for forex ? There isn't any clear methodology. What you see is endless methods and great disagreement over which one is the best. From an information engineering perspective this looks like a situation where there is no explanatory paradigm, because there is no underlying causal description, in a sense no semantics, just loads of syntax.

Why this is has been discussed in this blog. There is an underlying causal description in big liquid long lasting equity markets (or at least the Dow) there is a semantics, the way the market deals with well run companies which find a niche to sell. That mechanism is itself unclear but it does seem to exist and it can even be seen nesting in high peaks and fat tails of the distribution of returns over the lifetime of the Dow.

But we have noted there does not seem to be anything like this in the forex market. It is my belief though there is something and that something is what some experienced traders use as a semantics. Put it this way, if it's there they will probably connect with it.

For me, these three books convey the primary methods used. There are Raghee Horner's book, "Forex Trading for Maximum Profit", Kathy Lien's book "Day Trading the Currency Market" and Boris Schlossberg's book, "Technical Analysis of the Currency Market".

My very personal interpretation of these books is like this: Kathy Lien's book is about using market structure, with technical tools as a way of doing this. Boris Schlossberg's book is about using technical tools in a sophisticated way to try and get an edge on the market. There is a distinction. One is market driven and one is tool driven, one is about structure the other about function. Would one say Lien's method is better, let the market guide you.

Well, the problem is the lack of a semantics, it is impossible to know what the market is doing, but Lien's methods are those of a bank, with enough power to assert a structure into the market and financial capacity to deal with the other banks and funds ability to do this as well. Explanatory methodologies need structure, function and one more thing.

Horner's book is different, it is like asking how does one make money and not lose too much, it is trading driven, for those who have to deal with the market as it is. It is an optimization on the huge problem most traders face, which is one does not have credit lines behind one, if one loses it's straight from one's bank account. And if one wins it's into one's bank account. This optimization produces a tight and detailed sense of market behavior (the third element of explanation).

It is relatively stripped down in term of technical tools, but it is detailed and intricate because she primarily looks for support and resistance with Fibonacci levels and the related 34 EMA moving average and uses the CCI to confirm breakouts. Behind the Dave wave and they way she looks for support and resistance with Fib levels is something reflective of the complexity of forex computation. It needs detail, precision and flexibility.

It is partly the precise input of computer programs mixed with an infusion of complexity from chaos from the equity markets that makes the forex market like trying to find the end of the rainbow. Order and structure, persistence and precision coming and going like fireflies. But if you were to be inside an advanced computer program you would find similar processes. The problem is nobody has the program...

© 2010 Guy Barry - All Rights Reserved.

There it was, good figures hidden in the headline gloom. Really good figures. This may not be the dusk, it may be the morning light. It is friday, let us go over this conjecture again. The figures are a precise and clear reflection of the economic political reality and management of the economy.

There was a huge and unparalleled deflation from the crisis, the magnitude of this cannot be overestimated. This was decades of economic flotation, started by the policies of Volcker (the tragedy is the US economy does not need this kind of stimulus) drained away almost in a moment. Do you remember what the market was like during the crisis ? That was deflation.

A coordinated financial engineering exercise (not unprecedented, but unprecedented in its sophistication) was called into play to alleviate this and it worked, as much as it could. That ocean which disappeared was refilled to an extent from a reservoir, but one from the future (where the costs of super cheap $ are). I assume this was done to shorten the interregnum to a real recovery.

One might even say draining this ocean was necessary for a real recovery. This flotation had distorted the economy and market (I have been examining the extent of this distortion, whether is caused mis or mal-functions in the market in this blog, simply put whether the market is damaged).

Keeping dollar cheap has resulted not in productive investment, but in new bubbles, in the stock and housing market. That worries me, not the stock market because it is already bursting (the news today), but the housing bubble, becuase if that gets reignited we are back into this mess again. But maybe the figures today will help ensure this does not happen.

In all events US companies do not need this kind of help, they flourish without easy credit (I have discussed this as well). This cash did go into stocks, but it was sloshed from sector to setor, until the realities of the market intervened. It triggered overbought readings on RSI and other (analysis were warning about this for months).

This triggered the inevitable slide back. It would have been better if it went into good investmeents, such surges tend to be more sustainable. Short of banning RSI there was nothing which could have been done to stop this.

Read my post yesterday about why I saw optimism in the figures before NFP and you can see why I see optimism in the NFP figures. They suggest the beginnings of real growth in the economy the kind of thing which triggers huge sustainable surges in the Dow.

But I or anybody else can be optimistic until the cows come home but it does not stop a hard rough deep recession (what else can they do to reflate ?) unless the market feel this way as well.

But, something today supported this optimism, the floor under stocks and USD. Note how both rose together in the afternoon, resonating one hopes with the real job creation in those figures. The morning light, but the hard light of computational science...

UPDATE COMMENTARY 03/05/11: I should not that the performance of the Dow since this post has led some support to the ideas above. There has indeed been a recovery in industrial jobs and the market has kept rising, so far, with money flow bumps along the way.

© 2010 Guy Barry - All Rights Reserved.

It has been a conjecture in this blog that there is a real US recovery very gradually building, showing in USD, taking over from asset bubbles, a revolution when combined with Obama's promise of fiscal probity. If you look into the detail of the various employment reports there is some support for this.

This is a trading belief as well by the way, it is a conjecture which may be proved wrong. In either case having it give you a basis to make a move. I note the ADP figures of a growth in small business hires, plus the growth in ISM. An economic revolution tends to sweep away or change big businesses, but it begins at a fine grain of economic activity (small firms etc.). Just before the crisis I felt the hot stocks for the future would be Internet content.

It was very hard to define what this is, but the new technologies in content elaboration being developed by Google and small start ups are fascinating. Perhaps the content is just up to the users of the Internet, and that would be a revolution. That was the promises a decade ago, during the dot.com surge, but as I said true promises take time to enable. There is certainly quality activity in this area, at a fine grain view of the economy, but led by a major player as well possibly being changed itself by this activity.

Monster fell as did temporary workers, but those figures are not really about that recovery. Monster is about jobs which are as fluffy in a way as temporary jobs, jobs like those which an asset inflated economy gives. They are temporary as well, because they disappear when the assets deflate.

Remember we have just been through an asset inflation exercise, enabled by keeping $ cheap, the problems with that *is* the double dip, there was no real recovery, there was just a re-inflation of assets and an economy sunk by the crisis. I have been saying either a new way to reflate needs to be found (possibly from a housing bubble predicted on cheap $ for an extended period) or a real recovery happens. It is signs of that which I have been searching for.

Why is this important for forex ? Because very simply the fluff is for Euro and the recovery jobs are for USD. Assets inflation and emergency conduits are attractive for governments because they create jobs, but not good ones. I would add to this the comment what exactly does the euro zone have to be economically optimistic about, apart from Germany (as always) ?.

Update 8/6: I am just going on Dow Jones data, will look closely later, but those figures are good for a real recovery, asset inflation jobs have gone into oblivion !

© 2010 Guy Barry All Rights Reserved

I have mentioned what is called a long memory process in the market, but what is this. To me there are three great scientific works of recent time, special relativity, Godel's work on computability and Hurst's work. Of these Hurst is probably least known, but his work has most relevance to life.

Einstein's work is only relevant in extremes you simply will not experience in ordinary life (that is part of its brilliance, his deduction of the extraordinary from the ordinary). Godel's work is incredibly precise, but it is unclear what it actually means for computation as we experience it. But Hurst's work is relevant.

Hurst looked at data from the flow of the Nile and found correlations between recent data and past data. The structure of this as a process is a fading persistence (or long memory, but it is really a consequence of cyclical dynamic processes in nature). The question is, does this exist in the markets.

There is conflicting evidence for the stock market and stronger evidence it does not exist for forex. Hurst's work is tied up with chaos theory as the structure by which fading persistence is described is fractional in its dimensionality, it is like the structure in nature. But the strongest evidence for this kind of structure has been in commodities.

This is not entirely surprising. Commodities are highly valued by external factors, and subject to all sorts of inputs from nature (like seasonality). So this finding may not be saying anything at all. It is merely reflecting on inputs. What I am really saying here, is this kind of structure will not help you make any kind of predictive inference.

I have noted that the markets are to an extent not a product of nature, it is something new. Of these three markets, one can order them: commodities, stocks, forex in terms of the influence of nature in their structure. Why do I see it like this, normally people are seen as part of nature.

This is true in terms of our effect on nature and where we comes from, but it is the possibility we have a new kind of technology given by a process making natural structure, evolution (a fractal process itself). This is the work Penrose found intriguing.

This technology seems to give a capacity to lift ourselves away from natural computational processes, by virtue of the fact it is a different kind of computation, reflective of where Einstein saw beauty to the end of time rather than Godel or Hurst saw the fading beauty of the natural world or the limits of algorithms. It seems not unreasonable to me to assume that is in the markets.

What about Non Farm Payrolls ? Well, this one maybe is going to tell us whether the recovery is actually happening, strong enough to remove the possibility of a double dip recession. I believe the double dip is really only a figment of that conduit, it is the growing impossibility (the slide) to keep the illusion of asset deflation at bay.

But as I have said a recovery will clear all that. On the long term charts, USD/JPY, the bell-weather of a real recovery, has been testing that major support, but look at that movement up (on 15 min), that is a classic pattern of a computer driven surge trade.

Such a surge can have longer term significance as well, if the fundamentals support it or at least do not turn it off (it is saying well, let's go, USD is way too undervalued, but what fundamental support will it get on friday ?). A rise in USD has to work against the conduit, though, that is an issue until US interest rates rise and it disappears and that is what ECB is all about tomorrow (if $ interest rates are going to rise given a recovery, will ECB keep their rates above and maintain the conduit anyway ?).

From 1 min data behavior applied to long term charts USD/JPY is at crossroads, but the issue is has it just crossed it. Anyway that is one reason why forex is not like nature, because today the computer programs made a technical decision about USD. So does this mean stocks are more like the brain. My feeling is yes, but the possible advanced technology is more in forex.

Update: 8/5: Computer driven surges have a tendency to fizzle out, meaning popping to the top of RSI then drifting down. Presently USD/JPY has hit the bottom of RSI, it will be interesting to see what happens next.

© 2010 Guy Barry All Rights Reserved

As we have seen before, conduit driven surges slide back. This one slid back quite quickly. But note money went into SAI, pushing it over 17. Whole numbers are always important especially in day trading, just like in forex. I have seen this a lot in the aftermath of the crisis, when the money flow conduit surge falls back, money goes into companies which are interesting investing choices.

That has been a frustrating feature of the market post-crisis, and one whose causes I have been elaborating here. It is where though the computational action of the market is nesting. It is like subtle evidence of a real recovery in amongst the mess of conduit driven money flows and their limitations.

The cause of the hope/despair is precisely the conduit created to give an illusion of hope. But I have been saying is the fall-backs are actually the hope, but real hope, where the market gets its computational teeth into stocks.

An interesting question for me is to what extent is the stock day trading time frame is like a forex market. The chart pattern of SAI suggests a breakout (look at it with candles), but like the patterns in forex there is resistance being provided by the long term tight range it is stuck in. There is a problem with companies which fall from heights, it is hard for them to get back there, to put it mildly. That is the probable cause of those twin spikes.

The problem for SAI is its early promise fell into flat revenue growth. This brought the projections for future revenue built into its high valuations back down to earth (a slightly similar story was seen with that bell-weather of the past, CROX, its fall marked for me the real end of that rise).

But those revenue growth figures look good to me, especially in the recent economic environment and its COA looks fine. This is not an investing analysis of the company, I am looking for structures for the market to potentially computationally hang onto (there are other issues in its balance sheet, but that is something for an analyst to discuss).

© 2010 Guy Barry All Rights Reserved