If you did go long on the Dow from between 12099 and 12130, as the system called, well done! This was a nice trading set up, which I thought about yesterday, but didn’t do anything about. If you look at yesterday’s charts you would have had about an hour between 2.30pm and 3.30pm GMT to make this trade.
I didn’t publish the FTSE100’s secondary value zone and should have done. This stood at 5686:5708. I know this is after the fact, but if you look at the chart it has honoured this and rallied strongly off it.
In normal circumstances the Dow and FTSE100 rallying out of tertiary and secondary value zones is generally a good sign…………
I read a book last year, called “The Final Crash: Addictive Debt and the Deformation of the World Economy” by Hugo Bouleau, which pretty much exactly called the current economic environment and the systematic problems the US and UK economies face, thanks in large part to their addiction to all manner of debt products. This book has been really influential on my current perspective towards the market, however I felt it underemphasised one critical point. While Bouleau laid out a very well constructed doomsday view, I felt he underestimated the political will Governments and Central Banks to support debt laden consumers and corporations.
Today news leaked of yet another Fed initiative to help alleviate the subprime disaster and therefore the global credit crunch. Project Lifeline, as it is reported to be called, will bring help to all types of mortgage borrowers (notably not just subprime) who have run into difficulties (i.e. are three months behind repayments). This is quite a significant step, but I still find it hard to move away from the notion that such politically motivated action plans are not going to be able to stop the various endemic excesses in the financial system from unraveling.
What we must not forget, is that the problems are all self inflicted. People have borrowed recklessly and banks have lent far too gladly. Irresponsible behaviour should not be rewarded or condoned, as all that will serve to do is reinforce what is harmful and remove all the disincentives for such action.
I accept this is quite a moral line to take, but it makes fundamental sense to me.
Pumping cash into the system through rate cuts or auctions; cutting taxes and providing other fiscal stimulus; bailing out individuals and corporations, who have left themselves exposed; These will all undoubtedly provide short term sustinance to the macro economic problems; But will such measures solve the underlying problems? I really think not (and if I am honest hope not).
I have noticed a recent upturn in the amount of commentary, citing credit cards as the next subprime. Have a read of Bouleau and you will no doubt agree with this. From personal experience I have always found it crazy how credit card companies have been allowed to increase people’s credit limits, without even being asked to. This just puts temptation in the way. Combine that with overly aggressive marketing and balance transfer offers and we now find that people are over-burdened with expensive debt. If you followed the recent move by Egg effectively to cancel 160,000 accounts this could well be a harbinger of worse to come.
Reading this blog you might wonder why I titled it “A possible turning points in markets?” Well I am being facetious.
The other news out today was that Credit Suisse have reduced their estimates of exposure from 3.9 billion Swiss Francs to 1.6 Billion. Also Warren Buffet has offered to reinsure $800 billion in municipal bonds from of Ambac Financial Group Inc., MBIA Inc. and Financial Guaranty Insurance Co., known as FGIC.
And lo the Dow rallied 200 points in the first two hours of trading! The FTSE closed up over 200 points.
Two points though seem to have been missed.
First Credit Suisse’s estimate is exactly that, an estimate. The truth is they have no real idea exactly what their exposure is to subprime thanks to the complexity of the transactions. If the credit problems spread wider, then subprime is going to be the least of their (and our) worries.
Secondly Buffet’s offer was not for any subprime related bonds. Ever the predator, Buffet seems to scent advantage in the wider weakness for loading up on higher quality debt products at low prices. It is reported that one insurer has already rejected his offer, so the firesale is not on, for now at least! I have a vast amount of respect for Buffet (who wouldn’t?!), but I see an interesting parallel here between this situation his offer to bail out Long Term Capital Management, when that episode shock global financial markets to their core ten years ago.
So for all the widespread expressions of joy today, I think it too early to call a bottom.