A lesson in International Finance

Attached is a chart of Symrise AG, based out of Germany and traded on the German exchanges. I apologize that the chart isn't near as clean as the stockcharts.com charts I usually use, but stockcharts.com doesn't have access to the European exchanges yet (just US and Canada). However, Tradestation is great for use with foreign currencies as will be shown.

I want to talk briefly about the difference between a US traded stock and a foreign stock trading thru its ADR (American Depository Receipt) on the US markets. The ADR for all intents and purposes is the share ownership of the underlying asset. However, the key difference is that the ADR must adjust for exchange rates between the ADR and the home country's security price. The chart above will show you how big a difference it can make!

The top chart is of the Symrise ADR traded in the States. The second chart is the price of the Euro. The 3rd chart is a nice ratio chart essentially converting the ADR back into its home country's currency. The final graph is that of the 20 trading day correlation (1 month).

The one thing I don't like about the tradestation platform for charting is the text which is a pain to use, but other than that it has some wonderful functionality such as the correlation graph that I don't have at stockcharts.com.

Ignoring the text for now, the ADR looks to have completed a 5 wave move up from its June lows and topped in November. Notice similar tops occurred on the spread chart. What is nice about the June top is that occurred at a time the Euro was weakening, so the move from Nov 2009 to May 2010 was actually stronger than the ADR would leave you to believe (as the spread chart helps show).

However the main thing I wanted to point out with this ADR (and likely many others) is the recent correlation. Notice the 20 day correlation is sitting at .60 and has been steadily climbing over the past year and a half. This means that more and more of the ADR's return is actually coming from changes in the exchange rate rather than changes in the company's performance. That is important to note so that you don't confuse the reasons for the stock's returns.

This blog heading's title above links to the German traded Symrise AG on bigcharts.com. I have also copied it below. This is helpful in seeing a longer time horizon of the company since the American ADR just started in late 2008. Notice that early '09 was the longer term price bottom. It also looks like a pretty good impulsive move up. The November top does indeed look like a completed 5 wave top assuming a May/June '09 2nd wave and May/June 2010 4th wave. If so then support could be found in the $20 ADR ($16 German exchange and spread chart) assuming a breakdown below $25 on the ADR.



One final point on the spread chart. Notice its current price of 20.05Euros. Compare this to the bigcharts.com German traded price of 20.14Euros...pretty close and lets us know that we did the conversion correctly. You can also go to this site to look up the German stocks...

http://deutsche-boerse.com/dbag/dispatch/en/isg/gdb_navigation/home?module=InOverview_Equi&wp=DE000SYM9999&foldertype=_Equi

Long Term Bond Prices

As the previous post highlighted, the long bond looks to be falling in price. The attached chart is a very long term strategy that will help show when the drop in price is more than just a simple pullback.



The chart has a moving average ribbon of 110, 115, and 120 months. Notice this moving average has provided support 3 times in the past in 1994, 2000, and 2007. Bond prices have not dropped below this moving average since the early 80s bottoming process. Also notice that bonds have dropped the last 6 months in a row. This is not unprecedented, but has rarely occurred in the rally of the past 30 years.

If the moving averages do not hold as support over the next few months, then the long term bond market may indeed be set to fall (yields rising).

These moving averages will become important as the year progresses!

The Long Bond

The long bond looks poised to rally once the next pullback ensues.

Looking at the chart, it seems we had a 5-3-5 move up off the ultimate '08 low to the June '09 high (in blue and red). This is not impulsive, but rather is corrective since it is only 3 moves to the upside. However, the move was huge and likely is the beginning of correcting the ~30 year downward move in yields. As the chart lays out, once that 5-3-5 completed in June of '09 a relatively long sideways retracement brought it back to its almost exact 61.8% retrace in August 2010. From there it has started to rally again in a 5 wave move which looks to be close to completion.

This next move should see the 30 yr topping for a short term (red 1) and pulling back in a 2nd wave retrace before a powerful 3rd wave up again (in red on right of chart). This move at least should take yields over the 5.1% at a minimum.

There is a chance that this chart is more bullish than I have labeled (if for instance the 2010 top was really where Black A should be labeled), but that won't matter for a year or so from now and both counts provide similar results.

In the meantime this means that the long bond yield's risk is to the upside and may mean to target shorter duration products and or take some profits on bonds.