Monday, April 30, 2007

Red Right-20 Bingo Cross

Sometimes it is possible to learn all kinds of things from the most unexpected charts. Above is a chart of a great play used by the 49ers in Super Bowl XIX. This play was developed to exploit a weakness found in the Miami Dolphin's defense. The idea was that the Dolphin's inside linebackers couldn't cover Roger Craig when he broke out on that pattern. Well in that game Roger ended up scoring 3 touchdowns and having 77 yards receiving and 58 yards rushing. This was not a result of some play drawn up at the spur of the moment on the sideline. It wasn't created in the heat of battle. It was the result of preparation and extreme attention to detail. This play just wasn't one future hall of fame player running a pattern. As can be seen in the diagram, every player's action was choreographed in order to draw defenders away from the play. (Who can name the 11 players on the field in this play during super bowl XIX--think you can? Click the contact button on the upper left and give me your answer).

This example is a great way to illustrate what can happen when hard work is applied and attention to detail is never overlooked. In February when China made comments about attempts to slow their economy, every market around the globe took a hit the next day. Most people woke up and had that feeling of fear in their stomach and sold. It is hard to make rational decisions in the heat of battle when there is not a great deal of preparation with attention paid to details and plans made for "what if".

One "what if" plan involves always keeping an eye on commodities. The above chart compares the Goldman Sachs Natural Resources Index to the S&P 500 Index. In the lower pane is the spread between the two. Buying commodities on weakness has been a profitable strategy over the past 3 years, but a day when China's market is down 9% it can be hard to pull the trigger on buying stocks unless you have a plan in place before it happens. Knowing that commodities had been the best performing group over the past few years is a clue on where to look in developing a strategy.

What two countries have a strong supply of commodities and have this as a large percent of their GDP? Two that come to mind are Canada and Australia. This strong commodity base gives a strong underlying fundamentals to the currency of these two countries and make both attractive compared to countries that are just the consumers. Below are 3 charts, the first two are of the Australia ETF(EWA) and the Canadian ETF(EWC), the third is a comparison between those two and our S&P 500 index.

Even though these two Exchange Traded Funds(ETF) don't seem as exciting as the S&P 500 or the NASDAQ, the performance shows that they have outperformed greatly since China sneezed in February. The S&P has gained 8.43% over this time span. EWC(Canada)and EWA(Australia) have come close to doubling that performance! Now these two ETFs are not something you put all your money into in this situation, but allocating a portion of what you trade or invest to foreign markets makes sense. The trade initiated was a buy of EWC and EWA, along with the purchase of put options on the S&P 500. This buying of puts acts as a hedge against further downside and gives the ability to hold the long positions in that time of uncertainty. This trade could not have been thought up and executed two minutes after the market opened. It had to be in the play book before the opening kick-off.

This is a chart of the Australian Dollar Index. It shows the strength their currency has as of late.

Below is the Canadian Dollar Index.

Both of these currencies have made some very nice moves, as the US Dollar is making new lows. Looking at currencies from countries with little or no national debt and a strong commodity base should show some great trading ideas as the world economy continues to grow. It is important to now keep an eye on global growth and global inflation, and not get stuck just looking at the US domestic numbers. Think outside the fishbowl!

Some Canadian Stocks--



Royal Bank of Canada-RY

Some Australian Stocks--

BHP Billiton-BHP

Alumina Limited-AWC

National Australia Bank-NAB

More plays in the next post...


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