Monthly Archives: February 2008

US Recession 2008

Today the US GDP figure was released and showed growth of just 0.6% in the last quarter. This was below economists projections, but was in line with the earlier estimation released by the Fed.

While this is not official recognition of negative growth, economic numbers have been declining across the board for the last few months. Given the delay mechanism in the official GDP figure and the monthly/weekly reports I believe that the next GDP report will show that the US is in recession today. The trend for all the numbers is down and it is hard to see any near term relief.

I really think the best we can hope for now is for the next US President to be voted in with a large majority and therefore strong mandate to lead the country out of the current macro-economic and geo-political problems it faces. A fractious election campaign, which is close to call will not be good for the States and therefore will not be good for the global economy.

An Obama vs. McCain contest might not be that bloody, but I can’t see either winning a large majority over the other. McCain vs Clinton however could be a very messy affair, which I believe McCain would triumph in. The Clintons have an amazing ability to send Republicans mad, to such an extent that they might put their reservations about McCain to one side and vote for him in droves. At the same time, McCain is a sufficiently anti-establishment figure that he might actually appeal to Democrat voters (possibly ex-Obama supporters), who yearn for a change.

Whatever the case 2008 does not look great, here’s to a better 2009!

Currency updates, Aussie, Cable, Euro vs. the Greenback

The last couple of days has seen some major weakness in the US$, largely due to poor economic data.

Starting with Sterling, the system puts the higher retraction zone at 20029:20043. However the 19900 level seems to form a significant barrier. Today Sterling hit that briefly and retreated from just above that level. I was considering shorting at this stage, but I am taking some pain on my other short positions and want to keep focussed on those for the time being. The main reason I was tempted to short Sterling at this level is that the problems faced in the US are surely mirrored here. Sterling has appreciated in the last 18 months against the USD but I am increasingly medium term bearish about Sterling’s prospects. When I have some time I am going to write a more detailed review of the pros and cons of my position. This has been an interesting topic of discussion in our share club and I was swayed by some of the opinions fellow members put forward. However I think I am reverting to my original position and think that Sterling unwinding could be an excellent trend to follow over the coming years. Even at 19840 (as of writing) I do think this is tempting, but I am going to give my index plays a few days before making any move.

The Aussie breached the 9400 level today. I am really pleased with this move. It really has shown how powerful the system can be, when going long and applying decent fundamental analysis. I think the boat has sailed on this one for the time being and it is too late to go long. A decent pullback ahead of the US Fed meeting on March 18th might represent a buying opportunity. The tertiary value zone is 8675:8685. A short term outer value zone is at 8964:8973, but it is too soon to trust this completely. I might well take a long position at the start of the week of the 17th, or at the end of the preceding week, but I will decide nearer the time.

Finally the Euro has surpassed my expectations and surged through the 15100 level. Where it has struggled to break through 14900 before, it now looks like it might well go higher. Although this was not a system pick you may remember I suggested this as a long trade a few weeks ago given its proximity to the value zone. I am caught in two minds about this pairing at the moment. While I wouldn’t go long just yet, I also wouldn’t short. I think it could well appreciate in the coming weeks. A move back to the outer value zone of 14374:14382 would probably justify a long position. I am going to keep an eye on European announcements in the coming months.

Selling this rally

Sometimes I really despair of the market. In fact sometimes I just hate it (but in a loving sort of way). It frustrates the heck out of me.

Today consumer confidence in the States plummeted to its lowest level since March 2003 and PPI sky rocketed. I am normally the first to laugh at facile cliches, but I do love the commentary about the US economy facing a perfect storm of rising inflation and slowing economic activity (it should be set to dramatic music for its full affects). The data just keeps getting worse and worse and shows no real sign of decelerating.

The Dow should have tanked today. OK so IBM have announced a huge increase, but does this really justify a 120 rise? (as it stands as of writing this blog)

I am getting punished in my short positions, but I am going to hang on to them for the moment. At some point people are surely going to realise that now is not a time to buy stocks. Whether or not I can afford to last until that point is an entirely different matter! Of course I could be wrong, but I seem to be backed by all the data. I know there is an argument that people do not buy stocks based on current data but future prospects, but are the future prospects (9 – 12 months) really that good? I don’t think so.

At the very least I think the housing bubble has to unwind and the subprime crisis be resolved before we can even start to think about a bottom. Foreclosures in the US in January were at their highest level in a long time.

Hopefully some sense will set in before the close of play today

On another note the Aussie hit 9319 today. This has been a great wave to ride. I think now is the time to take profits, but I am going to keep some exposure for the next month at least. If it pulls back again I will buy more ahead of further US rate cuts.

Shorting the Dow and FTSE & Inflation

I am now short both the FTSE100 and DJI. My FTSE position is taking a bit of a beating and I am slightly down on my Dow position. I opened the Dow position in the immediate aftermath of the rally based on the news of Standard & Poor’s credit advice on the bond insurers.

I was watching Bloomberg at the time and one of their commentators made the point that this could be the beginning of a bottom as a major factor in the liquidity crisis has been the problems facing the insurers and their refusal to underwrite new issues as a result. I do see some strength in this argument, but yesterday’s action on the Dow showed there is still a lot of selling pressure out there. Friday’s late rally followed through in the first few hours of trading but then reversed sharply. There is a raft of data coming out this week in the US on inflation. If any of these come in above expectations, then watch for a mass ditching of stocks. The PPI data comes out at 1.30 GMT and Consumer Confidence at 3 GMT. I am holding my positions ahead of these. I know that trading over data announcements is risky, but I am sticking with both trades.

While talking about inflation I heard a very insightful comment from Donald Cox of BMO Capital Markets. He was talking about rising prices in soft commodities and made the point that “the same people who brought you $100 oil are bringing you $20 wheat”. While we might feel quite insulated in the West from rising food prices, we must remember how much of an affect these can have on the inflationary cycle. One consequence will be that rising wages in India and China will be required for their populaces to maintain a standard of life as they faced rising prices for their basic living requirements. The affects of this might not be felt immediately in increased prices for our electronics, furniture, household goods and all the other things that we purchase, but I am sure we are at the beginning of an inflationary trend.

LTCM

I made a reference in a blog the other week to the situation of Long Term Capital Management and the comparison with the current global credit crunch. I do think that the current situation is worse, but it is not going to be the end of the financial system as we know it.

If you have the time (or inclination) have a read of “When Genius Failed: The Rise and Fall of Long Term Capital Management” by Roger Lowenstein. It was published in 2002, but I do think has relevance to today. Alternatively have a look at Wikipedia: http://en.wikipedia.org/wiki/Long-Term_Capital_Management

In particular note the reaction of the Fed and their willingness to make up for the mistakes of greedy Wall Street executives. There is an argument that the Fed at the end of the last Century did not do enough to curb excesses of the financial system and allowed the dotcom bubble to continue to inflate, which led to a protracted and deep bear market.

If I am right and the parallels between today and 10 years ago are there, then we could well see a sharp upwards move in stocks, followed by long period of pain.

As I have said I am still assessing the situation daily before taking any medium term positions.

FTSE and DJI directions

On Friday I didn’t get my act together and short the FTSE. When I came to look at the close of the UK market I was pretty disappointed. The Dow was also tanking. Then 45 minutes before the close of the US market stocks surged on news of the Ambac Financial Group bailout. The FTSE rallied strongly and this morning was back up 6000, just outside a mid-retraction zone.

I have now opened a short FTSE position opening at 5970.

I have to be honest and admit that over the weekend I started to doubt some of my medium term bearish views. Last week the Dow didn’t complete the head and shoulders pattern I was looking for (largely because of the end of day surge). While economic news is almost invariably negative (bailouts are negative in my mind), major indices do seem to be finding their footings. With the almost certainty of another Fed half point rate cut to come later this month and indices at 52 week lows could we have reached a bottom?

My instinct still tells me no and I would like to see the FTSE back to 5400 and the Dow to just over 11000, before starting to buy again. This said both the FTSE and Dow have been honouring their respective value zones in recent weeks.

My current plan is to short the FTSE to the value zone, go long to the retraction zone and then short again. I think this pattern will us past the next set of rate cuts and might even last to the next earnings season. If we are to go into a proper recession I expect it will be formally recognised at that point. Once it is recognised, I think this is the point to start being optimistic again, but I need to clarify and test these thoughts further before writing anything.

FTSE100 view pre-market

Yesterday the FTSE closed just inside a mid retraction zone 5931:5940. The FTSE has been stuck bouncing between the retraction zone and the secondary value zone since mid January. But where is it going? Until the next Fed rate cut I expect it to stick to this pattern and I am going to open a short position and aim to make a 100 points or so. Assuming it goes back to the value zone I expect I might be tempted for a short term long position. In the event of a rate-cut inspired rally I will then aim to sell again. I really do believe that we need to see the FTSE hit the primary value zone (5293:5301) before any bear market is over

Garmin announces and thoughts on oil

GRMN
Garmin announced pretty decent results yesterday, but the share price took a beating closing at $64.47. While the stock has rallied out of the Primary Value Zone, I still don’t think this one is a buy. Reading commentary surrounding reaction to the news, the common theme for the cause of the selling was increased pricing pressure as a result of a more competitive environment. I first wrote about Garmin on January 18th and the latest reaction to the announcement has confirmed my first thoughts. The current P/E of 19.42 isn’t overly excessive, but I think there is better value to be had elsewhere.

If you are tempted to go long this stock the Primary Value Zone stands at 5836:5854. I do expect it to test this level again, but am sure I will not trade it.

Oil
Oil has reached $100 again. Tim has been following this closely and I don’t want to steal his thunder, but there is one point I would like to make. When Oil first hit $100 over the Christmas period, I said at the time (though not in a blog unfortunately as we hadn’t started them at that point), that I thought the price had been driven up by speculation, on light holiday volume and was likely to pull back. This happened, but we saw it hold its Outer Value Zone in early February. While we don’t normally go in on trades in the Outer Value Zone, such is the entrenched bull market in Oil and the fact it is near a critical psychological level that it is still one we track very closely.

However, this is not the point I want to make. Rather I want to talk about a lot of the commentary I see on Oil week in week out. A lot of what you read is total rubbish and I would urge caution in paying heed to it. In the last month I have seen the price fall explained by apparent fears for US growth, but now apparently the price has surged in response to the Fed’s reduced outlook and fears of inflation. Rubbish, rubbish, rubbish.

The simple truth is that the oil market at the best of times is an exceptionally difficult beast to call, driven as it often is by politics, emotion and speculation. This said, it seems to me, to display a lot of technical characteristics, which present decent buying or selling opportunities. This combined with the basic premise that there is less and less of it, in increasingly difficult places to reach, with an insatiable global demand for energy does allow for the occasional superb opportunity to make substantial profits. As Tim has written recently now is not one of those times, but do look out for the next technical pull back. I know I will be .

Aussie and Euro moving up, Dow rallying

The day job is proving to be extremely demanding at the moment, so I am afraid I won’t be able to blog much this week. As much as I love the market, it has to come second at the moment (although I do seriously think about changing my priorities sometimes!).I am happy to be a passive observer for the time being, watching the Dow and some currency moves. There is a fair amount of data out tomorrow, not least the minutes of the last Fed meeting. I can’t see there being too many negative shocks in the housing numbers, as the worst has surely happened. There might be some unpleasantness in the US inflation data, but other than that I see it being a fairly tame week data wise.

The Dow is up so far on the week, so my head and shoulders prediction is not looking so hot at the moment, but it is only Tuesday.

On the plus side I just logged into my brokerage account and the system for the first time in a few days and was pleased to see the Aussie has moved to 9200. It stopped just short of the all time high but I am encouraged that it has finally moved off its base. If you have been following this trade (or even acted on it) this has been a fantastic example of the system calling a move spot on (with a little sprinkling of fundamental analysis!).

The Euro has also advanced to 14750 since my February 7th blog. While this was just outside the value zone when I picked it, I still think this was a trading opportunity I let slip away. Looking at a standard chart (not a system pick) the Euro seems to be hitting resistance at the 14890 level. Given the likelihood of a further US rate cut I think it probable it will break through this, but do keep alert to potential shorting opportunities.

As a final thought (and I have not had time to look into this) the system has been throwing up an increasing number of FTSE 250 alerts. If I get a chance to look into this more, I think this might be a topic for a blog later in the week. We have been having problems with the FTSE 250 index data, so hopefully this blog will motivate our techies to get their acts together and fix that please….. :)

Reserve bank of Austrailia raises rates

Last night (or during the day if you live on the other side of the World!), the Reserve Bank of Australia raised their baseline rate to 7% saying “recent information points to significant inflation pressures”. Do they know something the Fed doesn’t?

The Aussie rallied on this news. It now needs to move 200 points to breach a new record. After this point the sky is the limit and I wonder now whether or not it is a flight of fancy to see the Aussie reaching parity with the US$. Further US rate cuts really could spur this.

Attention should now turn to the Bank of England’s decision this week. I think it likely that the Bank is going to cut by 0.25%.

While I have definite concerns about inflation, local information suggests that the housing bubble is unwinding thanks to the global liquidity crises and more people being knocked back for mortgages. As a small business owner, I am conscious that money is getting increasingly tight and our customers are taking longer to pay.

And while this is purely annecdotal evidence, I do think there is something to be said for the general mood in the country. As long as the Bank eases gently and keeps rates above 5% they should be able to balance economic stimulation with dampening inflation. In my mind this allows for two 25 basis point cuts in the coming months. Following the hari-kiri of the Fed will be in the interests of no-one and I don’t believe that the Bank will do this, given all their recent pronouncements.

That said given current events in the market, nothing will surprise me. Stay long the Aussie for the time being.

Dow head and shoulders pattern

I believe the Dow looks like it is going to complete a substantial head and shoulders pattern in the next few days. While our system is our primary tool for assessing trading opportunities we do look for other factors. A head and shoulders pattern is a classic bearish signal for a reversal of a bull market. If the Dow continues to retreat next week below the 12125:12109 value zone, then expect it to retreat a lot further.

In the event of this I am standing by my Dow 11,000 target.

The Dow has now rallied twice out of the tertiary value zone since January 22nd. In the same period it has tested but retreated from its current mid-retraction zone. This is the sign of an index struggling. Further Fed rate cuts notwithstanding I really can’t see what is going to lift stocks for most of the rest of the year. I think it time now to batten down the hatches and hope for a wave of optimism when the new President gets elected.

For any optimists left out there, watch your backs for the time being, as I think I hear the bear is getting ready to strike

BT in primary value zone

BT closed today at 231. Last week I suggested the stock would come down to this level after their poor announcement. Encouragingly the stock has held this level for the last 4 days and could be forming something of a base.

As I said before if you are looking for a stock to buy and hold I think this one offers excellent value, but the near term downside risks still remain

Australian All Ordinary Index

Taking a keener interest in the Australian economy I have been looking into more of the economic challenges it faces. I have been frustrated at the Aussie’s failure to break through the 9050 level against the US$. While it is back up at this level now, it is still not showing signs yet of being able to break through.

Today the AORD (the Australian All Ordinary Index) was in a Fringe Value Zone of 5651:5669. Buying Value Zones is generally inadvisable and I think now is no exception.

Since March 2003 the AORD has been on a proper bull run. In May 2004 it successfully breached new highs and didn’t look back. Once it surpassed 3450, it peaked in November last year at 6873.6. However since this point it has sharply and on 22nd of January closed at 5222. The index price ploughed through both Fringe Value Zones which had formed. This pretty much represents a 30% decline and while such a move through Fringe Value Zones is not surprising it is nevertheless a very bearish sign. Admittedly the 5222 level was just outside the Tertiary Value Zone and it has rallied strongly since.

The prospect of a global slowdown and rising domestic interest rates add further downwards pressure to Australian stocks.

The AORD’s Higher Retraction Zone is 6201:6214 and its current Mid Retraction Zone at 5981:5997. These two are within 5% of each other so any long positions taken in this index should be with a very short term view, with stops somewhere between the two. If the AORD does continue to rise, then shorting opportunities exist at these levels.

In terms of my views on the Aussie$ I am sticking to my guns on this one for the time being. The prospect of further rate increases, while not so good for stocks, should still lend support to the currency. This said I would really like to see it break through 9100 in the not too distant future.

Dare you buy Bear Stearns?

Today Bear Stearns (BSC) is in the Primary Value Zone 79.83:80.17, which dates back to October 1990!

In normal conditions this would be an exceptional trading opportunity and I would be screaming to all who would listen to load up!

Since January last year the stock has halved in value on massive negative volume flow. It closed at a 3 year low on 8th January this year of $71.17. It rallied but on the 18th of January it closed at $72.39, having pulled back. After this the stock rallied strongly. The points on 8th and 18th January might well prove to be a double bottom (a bullish signal).

However, the rally continued until 1st February at $92.89, which fell just outside a mid-retraction zone. This was the 4th time in the last twelve months that the stock had reversed at a retraction zone (a very bearish signal).

While volume flow reversed strongly positively from the 8th Jan low, it has now reversed negatively since 1st Feb, albeit not so sharply. The Primary Value Zone and Mid Retraction Zone are starting to converge, which can be a difficult signal to read. If the company is in serious trouble (i.e. faces likely total failure) then the Value Zone is meaningless. Equally if the stock has been oversold and shows signs of being able to drag itself out of its current troubles, then this could be another sign of an impending bottom.

I can understand why BSC failed to break through the mid retraction zone in the current climate, but I do wonder whether or not buying this stock now for the long term might be a good bet. I definitely wouldn’t suggest going overboard, but this really might well be one for the long term.

I think a key question is do we think Bear Stearns will fail. There is certainly precedent in the UK, with the Northern Rock fiasco, and in Germany, with the collapse of IKB, but I can’t help but feel that Bear is better insulated. While there are certainly more downside risks to the banking sector as a whole, I don’t believe things are so bad that the likes of Bear will go to the wall. If I do go in on this, it will definitely be for buying and holding and I certainly will not use any leveraged contracts. Before doing so, this will require a lot more research.

A possible turning point in markets?

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…………

However…

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.

Further Aussie strength

Today the Reserve Bank of Australia announced the likelihood of further rate increases. Unsurprisingly the Aussie rallied against the US$ back above 9000. As I have consistently predicted over the last few weeks this level represents significant resistance to progress of the currency, but the more evidence we gather the stronger the case becomes for this pairing to reach an all time high. If the Aussie can remain above its current level, then this should form the basis of a decent bull rally.

To be honest I am even starting to revise my estimations upwards. Could the Aussie$ reach parity with the US$? This would be a massively significant move, but the weight of momentum seems to be driving towards that end.

Is it even possible that the Aussie might become an increasingly important reserve currency for the World’s Central Banks? This might seem like a total flight of fancy at the moment, but if the Australian Reserve have rightly foreseen inflation as the worse of two evils (against recession of course!) then their reputation for strong monetary policy and macroeconomic management, could well increase to the extent that we see the Aussie grow in importance in global terms.

The US Fed is next due to announce on March 21st, while the Reserve Bank meets on March 4th and April 1st. I am not sure if the next rise in Australia will come as soon as March 4th, equally I am not entirely certain if the Fed will wait until March 21st for their next cut.

To read the full Australian statement click this link: http://www.rba.gov.au/PublicationsAndResearch/StatementsOnMonetaryPolicy/statement_on_monetary_0208.html

BT Group, DJI, US$

Yesterday, BT Group reached a 52 week low, with the share price falling 9.8% during the day on 3 times normal volume. Quite simply this was a huge amount of selling. The stock itself is down just over 25% in the last year, having peaked at 338p. Yesterday it closed at 237p, although this morning it opened up 3p at the start of trading.

It was not that long ago that BT’s strategy for penetrating the domestic internet and on-demand television market was drawing rave reviews. This pulled the stock out of its three year substantial decline, which had been caused by a series of mishaps, and sent it on something of a bull run. So what has changed?

First of all BT has missed two sets of revenue targets, casting doubt on its new strategy. But this is not the major problem. At the moment the market has justifiable, deep concerns about BT’s pension liabilities. The board of directors believes it has a Crown Guarantee for pre-privatisation pensions, but the Government disagrees with this. In the current economic and political climate I think it highly unlikely that the Government will either be able or be willing to bail out another member of the FTSE 100. If this matter continues to worsen, which it looks like it will, then it is highly probable that lengthy litigation will be a major distraction for the company, taking its focus away from its core business.

The Primary Value Zone for BT is between 224 and 229p, but I am not sure how much faith I will have in this. Since November last year (the last time earnings were announced) the stock has ploughed through the Secondary and Tertiary Value Zones (284:288 and 248:252 respectively) with little sign of honouring either. This is a very bearish sign. As a dedicated reader of this column, you will know the importance of the Primary Value Zone, but I can see further downside risks to this stock in the near term.

DJI
Yesterday’s action on the Dow was extremely choppy. The charts displayed both bearish and bullish patterns. At some points the index had achieved a one day reversal, but closed on something of a high note, with an end of day rally; bearish and bullish! While the Dow was in the Value Zone yesterday (12099:12130) and rallied out of it to close at 12247, I think it prudent still to be extremely careful if going long. For the record I am not, I am totally out of this market.

US$
Something I missed yesterday (and I am not sure how really!!!), were some comments from the Fed that the chance of a US recession were diminishing thanks to the stimulus package. This was in part responsible for the strengthening of the US$. I still don’t buy this and I think a recession is a near certainty and is actually to be welcomed. The market is giving a further rate cut of 50bp an 88% chance at the next Fed meeting.

Currency fluctuations

Today has been an interesting day on the currency markets but they have left me a little unclear on their relative directions.

The causes for today’s fluctuations were the decisions of the Bank of England and the European Central Bank, who cut rates by 25bp and left rates unchanged respectively. Both Central Banks signalled their concerns about rising inflation, but while the BoE cut rates to help the ailing UK PLC, the ECB gave less priority to the Eurostat report, which put business and consumer confidence levels at their lowest in two years. Both currencies fell. If you have been following this blog recently you will not be at all surprised at the Aussie strengthening against Sterling.

To be honest I have missed a bit of a trick here. Where I have been advocating going long Aussie$ versus US$ and also correctly called a UK 0.25% rate cut (although I can’t claim much credit for this, as it was the overwhelming consensus) I didn’t make the personal connection between the two. I guess this sort of thing happens when you concentrate too hard on a particular currency pairing. The New Zealand Dollar (the other high yielding currency) also rallied strongly against the Euro and Sterling. Now I am not at all surprised by Sterling’s weakness. My only regret is not shorting it last week, when I talked about it in the blog.

I don’t think the system has let me down too badly here. While it did point to a level just above $2 as the optimal entry point, I didn’t factor in the significance of the $2 barrier and also today’s decision. Had I done that, then last week would have been a great point to short sterling at about the $1.98500 level.

As I have already written, the UK economy really is between a rock (and not just the Northern kind!) and a hard place at the moment as rising inflation and falling economic activity both start to hit home. The big question for me now is has Sterling peaked? If it has then we could see it depreciate in value for several years to come. If it hasn’t when is the best time to go long. Interesting that the Primary Value Zone for Sterling/US$ is in the range 18790 and 18850. Sterling would need to fall about 600 points from the current level to hit this. The Secondary Value Zone is between 19580 and 19620. Obviously it ploughed through this on today’s news.

I am not advocating a position on Sterling yet, as I am really not sure what is going to happen next. The figures I note above are to help frame the context of my future thoughts. I have a strong feeling this subject is going to be a leitmotif in the coming months :)

I think the Euro presents a slightly easier case, although there some equally compelling evidence that this might have peaked as well. Sticking with the trans-Atlantic theme for the moment the Euro has been stuck in the Outer Value Zone and a high of 14850 against the US$ since November last year.

As a general rule of thumb any financial instrument which fails to make a new high is one which looks like the potential for movement has switched to the downside. Following the commentary on today’s ECB announcement I must have read the word “stagflation” in about 8 or 9 different articles. Now while it is certainly true that lazy journalists just love to trot out the term “stagflation” as it makes them sound “ahead of the curve” (whilst “thinking outside the box”), they might actually have a point this time. I am generally pro-European, but am anti-big Government. I am worried that the great European Project is being ruined by bureaucrats, with little connection to what is actually happening on the ground in member states. The problem I can see this causing in a macro sense, is I can’t for the life of me see how the ECB is going to be able to create a unified monetary policy to the benefit of all members. The Eurozone includes 15 members, who historically have only been able to agree when teaming up to invade one of the other member states!!! To be frank though, I haven’t researched this basic concern enough to be able to write any more detail on this at the moment without resorting to the jingoism of a Sun journalist.

At the same time, while I am fairly pessimistic about some of the prospects of the Euro, I am equally optimistic about its potential. Recently I have even followed some commentary, which foretells the Euro becoming the reserve currency for the World’s Central Banks and commodities, such as Oil, being re-priced in Euros. Some US pop-stars and celebrities are even demanding to be paid in Euros! One day (not in my lifetime) I believe there will be a global currency and I also believe that the Euro will be seen as the pre-cursor to this. I am aware that some people believe it is destined to fail, but I think the project is too big and the politics too powerful for this to happen. I remember when it launched it was widely predicted to fail in a year and fell a great deal. It then reversed and started to approach parity with the US$. It then overtook it and now stands at all time highs. The question is though, where is it heading now?!

The Outer Value Zone for the Euro/US$ is between 14390 and 14415. This is only 50 points from where it stands now. This zone was tested and honoured in December and I think represents a decent trading opportunity in spite of some of the wider concerns. Further US rate cuts at the very least should strengthen it.

One day I am actually going to read my own blog

The Dow dropped 370 points today, apparently based on the data which announced that the services sector contracted. I should have sold last night when I last wrote. To be honest I probably still should. I am looking for a 50-100 point rise in the futures and then I am going in.

Reserve Bank of Australia raises rates

Last night (or during the day if you live on the other side of the World!), the Reserve Bank of Australia raised their baseline rate to 7% saying “recent information points to significant inflation pressures”. Do they know something the Fed doesn’t? The Aussie ralied on this news. It now needs to move 200 points to breach a new record. After this point the sky is the limit and I wonder now whether or not it is a flight of fancy to see the Aussie reaching parity with the US$. Further US rate cuts really could spur this.

Attention should now turn to the Bank of England’s decision this week. I think it likely that the Bank is going to cut by 0.25%. While I have definite concerns about inflation, local information suggests that the housing bubble is unwinding thanks to the global liquidity crises and more people being knocked back for mortgages. As a small business owner and I am conscious that money is getting increasingly tight and our customers are taking longer to pay. While this is purely anecdotal evidence, I do think there is something to be said for the general mood in the country. As long as the Bank eases gently and keeps rates above 5% they should be able to balance economic stimulation with dampening inflation. In my mind this allows for two 25 basis point cuts in the coming months. Following the hari-kiri of the Fed will be in the interests of no-one and I don’t believe that the Bank will do this, given all their recent pronouncements. That said given current events in the market, nothing will surprise me.

Stay long the Aussie for the time being

Watch closely now…

Last week was the best week for stocks in 4 years! The Fed is going to hose the market with short term cash! US interest rates are about to move into negative real territory! Let’s all pile into stocks!

Or not…….

Today we saw a reasonable pullback and while I was wrong footed on Friday, I am still medium term bearish. While I am very aware of “not fighting the Fed” I do believe that wider economic forces are at play, over which they have very little control. One big problem I have with their current policies is that they are actually trying to underwrite incredible financial irresponsibility both by large institutions and those consumers who have overburdened themselves with too much debt. Just what kind of message does this send out?! They are so desperate for the spending to carry on that they are leaving all sense by the wayside.
When the crunch comes, as it surely must (unless you subscribe to some form of new paradigm cult), it is surely going to be worse, the longer the current excesses are allowed to continue.
I have nice profits from Friday and am probably going to short the Dow now. I haven’t yet, as I have a feeling it could still push the 13,000 mark. Sitting on the fence might cost me, but I am still going to give it a little while.

Garmin
I wrote about Garmin a few weeks ago and lo and behold it bounced 20% out of a primary value zone. While this is yet another sign of the veracity of the system from a technical point of view, I am still quite bearish on the company for the reasons I wrote about. The announcement is due on the 20th of February, so I will write more nearer the time.

Aussie $
The Aussie is holding its own about the 9000 mark. If you are in on this it is looking good. With an announcement due, we could see a new record high against the US$ this week or next. One still to follow…

Immediate post payroll thoughts

The payroll numbers just came out, announcing a contraction of 17,000 in January.

While there is no real way of telling the veracity of this figure, I expect there to be a widespread dumping of stock today. Even though I didn’t have a clear steer on the outcome I went short prior to the announcement, based largely on the fact that futures had risen so much on the Microsoft bid for Yahoo. While this bid is significant, I think the macro-economic numbers are far more so. That said I wouldn’t be at all surprised if these payroll figures are revised upwards next month. It is really quite convenient that this number is as weak as it is, to give the Fed a chance of claiming to be back “ahead of the curve”!

There is still the ISM number to come in at 10am ET, but after this there is not much in terms of announcements next week. Given that the Dow is at a mid-retraction zone, I see there being a lot of downside risk in this market. The market opens in 10 minutes, so hold on to your hats, today is going to be fun!