Until the recent financial crisis broke, there was a trend in world markets towards free market principles and a light touch regulatory regime. Political, social and economic factors had been leading to the creation of a world currency.
A devaluation of currency has occurred in what has been for many years the base currency for the entire world, the U.S. dollar. Because of the spread of American culture throughout the globe, this drop in the dollar may be a major step towards a globalized currency.
This becomes visible by looking at complex elements present in our financial markets, mainly through global equity indexes and leading companies within them. When compared, the outcomes of this combination of indicators tells us a lot about what is going to be happening in the future.
How to use it?
We use a set of modulating algorithms that forecast various elements of the market in different times. These forecasting models, when traded individually, consistently produce large returns for the investor who applies them to their trading regime, but when taken from a macro perspective, lead to a closer understanding of the position of the dollar and the movement toward a global currency.
As a portfolio manager, the two most important factors in watching the markets globalize and converge are watching volume and volatility, both macro and micro-economically. We implement this theory by charting the major volume movers on each major world exchange, and watching the volatility of those markets, and then comparing them to each other. For instance, the Hong Kong Market (HSI) tends to bounce back and forth between leading and lagging as compared to the Dow Jones Industrial Average and Nasdaq 100. However, major issues on the exchange tend to trade in tandem when sector volumes are compared. Technology and communications companies traded on HSI tend to have similar volume to communications companies traded on Nasdaq. Noticing this, we delve more deeply into the communications sector and find out what companies on the Nasdaq do business with companies in the same sector on the HSI or other foreign markets. Watching these patterns can give us a clearer idea of where money is moving. Watching the volatility of these companies gives us the idea of how much trade is occurring between the currencies of the trade.
This is true in the alternative energy sector, and is exemplified when examining companies that are foreign-based, but trade in domestic markets, or companies that trade both internationally and domestically. Examples of this are Sun Tech Power Holdings (STP) and Yingli Green Energy Holdings (YGE), companies that are traded on U.S. exchanges but have international exposure. Looking at the “Energy across borders,” you can see how these companies fare against both U.S. and international markets. It is important to monitor the volume to see how money has moved with these companies in tandem with movement in indexes.
These foreign-based solar companies have exposure to both markets, but trade domestically. When you research these companies and find out what raw materials they are using to produce their products, there is additional globalization.
This is consistent throughout the most voluminous and volatile markets throughout the world. Other examples of companies correlated with global indexes were found simply by doing research on the largest percentage gainers over a one-year period of time that fit our sector screen parameters, then comparing them to the HSI market. Overall, we can notice that sector leaders tend to follow the market indexes worldwide.
We can make money on this kind of analysis by placing trades in either the raw commodities that are being consumed by the most voluminous companies in the most volatile sectors, or by making sector-wide trades in the most voluminous or volatile sectors as compared market-to-market. An additional way to play this analysis is to trade index futures based on the market-to-market comparisons where the dollar is the denomination currency between the majority of the most voluminous or volatile companies within the markets.
Or compare FedEx to indexes (see “Follow the leader”). FedEx is a domestic company with strong brand recognition, regular high volume and volatility, and extensive international exposure that also is dependant upon jet fuel, which is tied directly to oil.
The chart shows that there are tight ties to sector leaders, indexes and even the raw materials used by the leader. For the most part, we find that the most voluminous and volatile sector leaders correlate with major indexes. Another thing to notice is how closely the major markets of the world have moved together (see “New world order”).
Applications of this theory have produced positive results and can be applied to almost any trading or
investing program.
BEHAVIOR AS AN INDICATOR
People tend to consume and spend in patterns which can be influenced. As people continue to spend, behavioral patterns are shaped by many factors, which in turn shape the markets that coincide with the products or services that correlate. For example, in America, technology markets are shaped by marketing and advertising. American consumers tend to consume according to the most frequent, most actively marketed products. This is true throughout most countries. People tend to go with the majority and try what is most prominently displayed in front of them at any given moment. This is often displayed prominently by watching which companies are the most voluminous and volatile in any given sector, on any given market. Comparing the similarities between these companies market-to-market strengthens the theory and its application to investment philosophy.
It is possible to find comparable theories of behavior, which correlate to consistent patterns exemplified in global financial markets, which can be translated into trading methods.
Relative to this effect, we can look for patterns that occur within the demographic of the consuming majority to find consistencies within sectors. Once we do this, we can see clearly where money is moving, and then understand where the power of our American dollar really lies and where the weaknesses are.
Comparing sectors across markets is an invaluable tool for managers because it allows us to see a broader spectrum of movement that is lost in the normal modes of day-to-day analysis. We can see movement of money on a global scale by comparing sectors to each other and diving into the most voluminous and volatile companies in those sectors, then cross-referencing them with other companies or commodities traded on other markets. This opens up an entirely new method of investing. Sector plays across markets can yield both short-term and long-term opportunities, which are often played out in the news and can be monitored for movement triggers by watching global developments.
The dollar is spread out all over the world. Our mortgages are mostly owned by the Middle East through money infused to save dying mortgage companies. Our real estate is mostly owned by China in the form of T-bills and bonds. Our labor is being outsourced. Our debt in general is held by other countries who have purchased it with the desire to be paid back with interest.
And right now, America is really cheap relative to everywhere else. And the world knows it, and so they are buying. When they’re buying, they’re buying in dollars. The currencies are being converted, so now when you have all of these different world currencies coming together and making claim to different aspects of our economy, you realize that the money that has been invested here in America is going to stay here. This is because of the fact that when the dollar does finally turn around, and it will, it will be advantageous to have the dollar, and converting it back to the native currency will have lost its luster because the strength of the dollar will make it more attractive to keep.
And like pouring cream into coffee, a world currency dilution will occur, one that will take other currencies off the table and more and more countries will accept the dollar again as their preferred currency. Have you been on a trip to Mexico in the last 30 years? You can pay for things in dollars down there because the dollar has more power than the peso. That same relationship will start to emerge in other countries around the world, and when it does, you better be ready.
These patterns, these decisions, these observations of human activity can all be incorporated into your trading and investment plan. That means investing in a diversified portfolio of equities that represent the sectors that are seeing the most money flow, as well as commodities that are seeing the most money flow.
By watching these patterns and identifying the major sectors that are seeing the most activity, forecasts can be made that resemble the direction that each of these markets is going to be taking. When these directions are played both individually and in a relational play between markets, investors can truly diversify their portfolios and make what likely will be larger profits than if investing or trading on a more micro level.
Along the path to the global currency, those who hold the dollar will continue to increase their wealth relative to the rest of the world, and the continual observation of and analysis of index futures is one of the best ways to take advantage of this.
Investors and money managers should pay close attention to markets and companies that have a prominent position in their sector; show a keen use of marketing and advertising; have more cash than debt on their books; and have a presence in multiple international markets.
Yiorgo Aretos is the CEO and founder of The TMP Group LLC, a Commodity Trading Advisor. Contact him at yiorgo@theTMPProject.com, TwitterName: TMPDyno.
