Thursday 1 October 2009 www.blackswantrading.

com

Key News
 Oil Refiners May Violate Credit Agreements as U.S. Fuel Demand Sputters
(Bloomberg)
 IMF Raises 2010 Global Forecast to 3.1% From 2.5% as Asia Leads Recovery
(Bloomberg)
 Gold Tells You U.S. Bubble Hasn't Popped Yet: Alice Schroeder (Bloomberg)

Quotable
“Arbitrary power is most easily established on the ruins of liberty abused to
licentiousness.”

George Washington

FX Trading – Central Bankers Seek a Dollar Bottom; Bonds Favored Over Stocks?

The Bank of England last week made comments regarding some recent weakness in the
British pound. It was seen as a potential boost to the UK economy as they’d love to
resuscitate what external demand for their exports, albeit a relatively small portion of
their economy.

There seems to be ongoing concern from the Swiss National Bank that the value of the
franc is becoming too high, versus the buck and the euro. It has been stated that they
will use the franc to help guide monetary policy.

In Japan, it seems to be a teeter-totter of comments that may or may not mean the
Bank of Japan will take steps to stem the rise of the yen versus the US dollar.

And the latest among central bank intervention talk comes out of the EU, where
Eurozone finance ministers are set for this weekend to discuss appreciation of the euro
exchange rate.

The EU comments were icing on the cake and bring to light the concern among foreign
policy-makers that their currencies have become too strong in light of the US dollar’s
recent sharp decline.

Will that be enough to provide a bottom for the US dollar? Maybe in the short-term, at
least. It could prompt traders and investors to cover their short positions, which could
help to build some momentum to the upside.
Looking at the US dollar Index, 80 seems to be a good stopping point if this nascent
correction has any legs. That level is an area of past support and resistance ...

US Dollar Index, Weekly

Looking at global economic fundamentals, nothing has really changed to favor the US
dollar. Sure, we can draw on many of the same items that could eventually provide
some fuel for a dollar rally if it gets a major risk-aversion bid. But the signs pointing to
recovery continue to surface and lend credibility to optimists who are more than willing
to take on risk.

But this change in sentiment among policy-makers could induce the US dollar correction
that appears overdue. If this happens, then attention will turn to global market
sentiment ... looking for any obvious changes on the risk-appetite front.

Yves Lamoureux of Blackmont Capital Inc. seems to think too much emphasis is being
put on relatively minor shifts in risk appetite, specifically as it concerns the bond market.

At a time where Yves sees investment gurus shouting to steer clear of Treasuries and
move into stocks, he feels that investors are being misled; he does not roll over to the
common belief that stocks will outperform bonds from here as recent market and
economic developments have prompted a change in investor attitudes.

Yves Lamoureux – Blackmont Capital

Negative risk premium and return assumptions.

I had used to believe that stocks delivered superior returns compared to bonds.
I looked at the following graph and realized that long term Canadian bonds had
delivered twice the returns of Canadian stocks since 1987. It is particularly relevant since
the Canadian market had been on a tear the last few years because of commodities.

Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or
individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be
suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully
read Black Swan’s full disclaimer, which is available at http://www.blackswantrading.com/disclaimer
Most market participants today still expect a positive risk premium for stocks even if
extrapolating from recent past events results in confounding this expectation.

I expect bonds to deliver better or equal real returns with fewer risks than stocks going
forward. Negative risk premium is the new normal and new behavioral shifts strongly
underpin that case.

I had originally offered my case to buy the long bonds near the bottom of this cycle on
the 19th June. http://yelnick.typepad.com/yelnick/2009/06/yves-on-the-greenshootfed-
sacred-fed-bull-died-fat-and-happy.html
You create a spread of 4% or better between the Fed fund and the long bonds and in
turn that becomes a trading buy signal. We had such a signal and ran with it.

We continued to run with this message digging further and came up with the primary
dealers’ net treasury weekly positions graph in relations to bonds. What we found was
most unusual. After averaging a net short position of -60 billions on average over many
years, the primary dealers had suddenly turned bullish with net long treasury positions.
http://www.zerohedge.com/article/guest-post-observations-unusual-bond-deal-
behavior

In this next graph, I use TLT as a proxy for long term bonds and TIP as the proxy to
represent the Treasury inflation protected bonds. The recent recovery points to TLT
showing greater strength and the clear conclusion is one of deflation reasserting itself or
the lack of inflation thereof.

Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or
individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be
suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully
read Black Swan’s full disclaimer, which is available at http://www.blackswantrading.com/disclaimer
In a negative risk premium world you would expect to have bonds outperform stocks for
total return and the yellow line here (below) where bonds are compared to the S&P500
is definitely up.

Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or
individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be
suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully
read Black Swan’s full disclaimer, which is available at http://www.blackswantrading.com/disclaimer
From both charts long bonds are definitely turning up or have put in a good base from
which to launch upward.

In reference to behavior, it’s become clear that investors attitude are changing and the
new normal is not to invest one’s savings in stocks rather that money is flowing to
bonds. Recent data points to exactly this type of behavior and perhaps getting trounced
once is enough for a certain legion of investors but not all. As we had seen in 2000 in
every drop of stocks, we are slowly loosing participants to join in this exuberant party.
Investors who miss out this time are also assured of not feeling any party hangover.

Yves Lamoureux,
Investment Advisor,
Blackmont Capital Inc.

The opinions contained in this report are those of the author and are not necessarily
those of Blackmont Capital Inc.. Every effort has been made to ensure that the contents
of this document have been compiled or derived from sources believed to be reliable and
contains information and opinions which are accurate and complete. However, neither
the author nor BCI makes any representation or warranty, expressed or implied, in
respect thereof, or takes any responsibility for any errors or omissions which may be
contained herein or accepts any liability whatsoever for any loss arising from any use of
or reliance on this report or its contents. BCI is an independently owned subsidiary of CI
Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or
individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be
suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully
read Black Swan’s full disclaimer, which is available at http://www.blackswantrading.com/disclaimer
Financial. CI Financial is a Canadian owned diversified wealth management firm, publicly
traded on the TSX under the symbol CIX. Blackmont Capital Inc. is a member of CIPF and
IIROC.

John Ross Crooks III

Black Swan Capital LLC
www.blackswantrading.com

Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or
individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be
suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully
read Black Swan’s full disclaimer, which is available at http://www.blackswantrading.com/disclaimer