Top Gun FP Client Note: The Risk Trade

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NOTE: Every week I write a Client Note for my clients.  For a limited time, I am allowing non-clients to sign up and receive the Client Note.  You can sign up at the top right hand corner of the website.  I will also be posting the notes on my blog with a 24-48 hour delay from time to time.  Here is this week’s.
When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.
– John Maynard Keynes
Last Friday’s better than expected November Jobs Report has triggered some interesting market action.  On the face of it, the jobs report, which showed a loss of only 11,000 jobs in November compared to expectations for more than 100,000, should be bullish for stocks.  And, in fact, stocks first move Friday morning was to surge upward.
But it wasn’t long before the stock rally reversed itself.  The cause was the strengthening dollar.  So much of the strength in financial markets over the last six months has been predicated on the massive liquidity coming from the Fed and the concomitant weak dollar.  The stronger than expected jobs report, paradoxically, raises the prospect of Fed tightening.  That caused the dollar to strengthen and the so called “risk trade” to unwind.
This kind of market action is suggestive.  It goes to show how much of the rally in risky assets is the result of easy money rather than improving fundamentals.  The good jobs report was outweighed by the prospect of Fed tightening.
Tuesday was interesting as well.  Following in the wake of the debt repayment standstill out of Dubai, Fitch cut its credit rating on Greece one notch to BBB+.  This caused a similar unwind of the risk trade.  The dollar, considered a safe haven, rallied while stocks, especially emerging market stocks, and commodities sold off.
Oil is off $5 a barrel in the last four trading days and gold has plummeted $90 an ounce over the same period.
Late this morning a financial newsletter writer called me to ask about a new currency ETN (exchange traded note).  The ETN has an 18 month period and returns about 200% a basket of the Australian Dollar, Canadian Dollar and Brazilian Real versus the Japanese Yen.
These currencies, along with their respective stock markets, have been extraordinarily strong during the current market run.  That’s because their economies are commodities based and closely correlated with the growth of the developing world.  They are key players in the “risk trade”.
Market action the last few days, I told her, has to be a concern for participants in this trade.  If risk aversion returns, as it did earlier this year and last fall, these currencies and their respective stock markets will take the brunt of the beating.  The dollar and yen, by contrast, should perform well as safe haven currencies.
The key thing to watch is the dollar.  If the dollar continues to strengthen, it’s probably all over for the risk trade and the incredible rally we’ve witnessed over the last 9 months.
Greg Feirman
Founder & CEO
Top Gun Financial (
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay CA 95746
(916) 224-0113

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