Morning

Vaguely flat, after a pause in the rally yesterday. Gold still going up, other commods likewise. Equities flat (though Nasdaq still hitting all time highs). Bonds flat, but given the risk-off feeling of the day, it feels like they should be on their way down. Wolf sees inflation, even in bombed-out sectors.

Where is the dollar going?

Michael Howell sees China pivoting to holding European bonds in place of US Treasury bonds. He concludes that the dollar must go down, and the Euro up. Certainly, the ECB is issuing a lot of debt, and I guess “Eurobonds” (jointly issued bonds for all Eurozone treasuries) will eventually arrive but I think that the Eurozone needs to sort out some deep seated problems before China takes the plunge. I sort of feel bearish on the dollar, but it still has a lot going for it. But it’s certainly right that Chinese purchases of dollar assets are dropping and will continue to drop: China is simply not exporting so much stuff (net) to USD denominated economies any longer. I’m not sure where Russia fits into all this (although I’m sure that the Ruble is not about to turn into the Swiss Franc).

Personally, I think that the dollar will remain strong until inflation gets so strong that all the eighteen (?) indexes of it that the Fed looks at are clearly shouting that it’s out of control. But by then, we will truly be in a different world. The problem is that, as this post points out, unemployment is probably going to go through the roof. Either Bill Phillips was totally deluded, or we’re going to see subdued inflation for a long time. Or maybe we’re going to win 10 bonus points for spotting a rare economic phenomenon: stagflation.

Trading Strategies

Writing calls and puts can be a cheap way of getting into a position. Say you are bullish about a stock, but you think it’s trading about 10% above where you’d prefer to buy it. If you write puts at a strike 10% out of the money, then either the stock price goes up (in which case it’s even more above the price you would be comfortable opening the position) or it goes down and the option is exercised “against you.” In fact, all that has happened is that you got the stock for 10% less than when you first thought about buying it and you’ve received the premium for giving someone the option of selling to you at a discount. Win-win! Of course, you need to evaluation what the stock is “really” worth to you. If it pays a heavy yield, then maybe it doesn’t matter if the price continues to sink. This is not an original thought, but it’s another way of looking at writing options. Obviously, never do this if you don’t have the liquidity to take assignment: i.e. pay for the stock. Of course, it doesn’t need to be a stock. It works just as well with bond (futures), currencies, commodities etc. But it does depend on you having a clear understanding of why you want to hold the underlying.

This all works in reverse if you want to short a stock, but you’d prefer to open your position at a price above where it’s trading right now, so you get more “bang for your buck” when your plan pans out and you see the issuer go bankrupt as soon as you’ve established your position(!) In this case, you just write the call.

Here endeth today’s lesson in option trading. Please remember that this isn’t investment advice and you simply should not do this with funds you can’t afford to lose.

House Prices

The owners of the Case-Shiller house price index point out that the event of a lot of people becoming unemployed is going to be negative for house prices. Clearly, unemployment will shift the demand schedule for housing. Not rocket science, but a major player is saying it.

Wrap

Chinese stocks continue to do well, after the pump from the PRC yesterday. Generally, stockmarket rallied, risk concerned faded.