Monthly Archives: March 2008

Oil and the S&P 500

I am out of everything at the moment. I am still looking at some long term buy and holds (BP, BT and Wagon to name three of my favourites), but I am doing more research into these.Last week’s oil trade was profitable. I set my limits at about the $107 level. There wasn’t any real science in deciding this point other than I felt personally happy to make 700 points. These limits were triggered (just) and the price has pulled back since. This week could be a very important one for the price of oil. If this market fails to make new highs (at around the $111 level), I can see it heading back to $90 or lower. As I have said before I believe that trading this market technically is the best way to profit from it in the current climate. Failure to hit a new high, will more than likely result in profit taking and then shorting. Given the economic outlook, fundamentals will probably also add to the downwards pressure.

Oil’s outer value zones are now 10095:10110 and 9146:9159. Going long at these points might be a good idea (and I probably will), but stops will need to be extremely tight. Oil’s tertiary value zone is 8302:8314. A pullback to this point will merit a heavily long position.

I took some time over the weekend to look more into the S&P 500. The price of the index has been falling since last Tuesday. The S&P’s mid-retraction zone is 1351:1358. Last Tuesday it closed at 1352. This is the 3rd time the index has pulled back from this retraction zone and is a very bearish sign. I wrote last week about the number of quality individual buying opportunities in the index and wondered why these weren’t being snapped up. Looking at the charts it really is clear that big money is staying on the sidelines and is not being tempted in. The S&P has been in an entrenched downwards move since last October and there can be little doubt that this index is now in the throws of a bear market. There is some encouragement when looking at volume flow, insofar as while it has dipped in the last six month it has not collapsed.

By way of comparison the French CAC40, volume flow has plummeted since December and the index didn’t hold its primary value zone (5029:5041). It now trades at about 4700 and there is simply no way I would be tempted to buy this one!

The support that volume flow is giving to the S&P500 could well mean that it holds the 1282:1289 value zone. The base of this dates back to March 2003. I did some further analysis on the index and discovered that it has an even longer term value zone, whose base is in January 1996. The price of this is 1219:1227. I am not quite ready to put my neck on the line and say we will see prices back at these levels, but if we do, that really could be the start of a bottom. Such a long term value zone simply has to present substantial buying opportunities. However (and there always is a caveat!), the last time this value zone was breached was during the 2001-2003 bear market when prices bottomed out at about 800.

Eye of the storm

The economic news in the US continues to be bad, but I can’t help but feel there is a sense of relative calm in stock markets at the moment. As of writing today US indices were down about 1% on the day. News like today’s two weeks ago would have seen a 3-4% fall. Of course there is still the rest of the day to come, but markets aren’t moving as frantically as they were. Earnings season begins properly quite soon and I don’t expect things to get much better from here on in.

However, this said there are some possible signs of recovery starting to show. I took sometime today to cycle through the S&P 500. We have just implemented a major upgrade to our trading system, which means that it now operates much more efficiently. Where cycling through the S&P used to fill me with dread, I now am quite excited about it! We are still having related data problems, so the charts I was looking at are a week out of date, but one thing that struck me in particular was the number of really quite tempting buying opportunities I saw.

Overall I counted about 35 stocks, which had pulled back to such an extent that other investors must surely be starting to look at these as good points to average into the stocks. It is worth mentioning that I am not talking about dross here, but prime companies, which have excellent track records, management teams and medium term prospects. This shouldn’t be too much of a surprise really, especially as I have written recently about the S&P 500 being in its long term primary value zone, which it has since rallied out of. What is a concern, however, is that the index hasn’t rallied stronger from this base. Given that individual components look on the face of it to be relatively cheap, why are these stocks not being snapped up?

I think the answer is fairly obvious. While a lot of bad news has already come out with respect to the credit/banking crisis, collapsing US$ and faltering economy, investors are obviously concerned that there is more to come. I would be very surprised if we saw another incident like the Bear Stearns collapsed, but equally I have learned to expect the unexpected in the current climate. The only hurricane I have experienced personally was when I was about 8 years old and I pretty much slept through the whole thing. Anyone who has a rudimentary knowledge of such storms will know that they have an eye, the space of calm between two sides of the storm as it passes over.

Applying this analogy to the market, I think we are in such a period now. As such I am not going to buy anything for the time being. I think we need to see several month’s worth of economic data and announcements from the investment banks, before we can really be confident enough to start entering the market in a big way.

In particular I have set up a watchlist on the stocks I mentioned above and am going to keep a close eye on them, to watch for signs of confidence creeping back into investor sentiment. Next week’s payroll numbers really are going to be important.

Oil, Indices and the US$

I have been off since Wednesday and have only kept a loose eye on the markets. However since I got back I have been looking through charts and we seem to be at interesting stage in several markets.Starting off with Oil, the price is hovering around the $100 mark.

You will remember from a recent article that this level is significant for more than just the obvious psychological reasons. Oil has an outer value zone at 10012:10025. The base of this is relatively short term, dating from Feb 6th, this year. I did write that going long at this level would be risky and a better entry point is at 9022:9036. However the longer that the price holds this level, the stronger the chances of it resuming it’s upwards pattern, poor economic prospects notwithstanding.

As I have also written, this market is exhibiting the characteristics of a speculative bull run, rather than a market being driven by any fundamentals. All commentary about the price being driven up or down by the price of the US$ needs to be taken with a pinch of salt. It is worth mentioning that we have been having some data problems recently, so the value zone might have shifted slightly, but no materially. I am going to keep watching this and might be tempted to trade ahead of the next weekly announcement on the Strategic Petroleum Reserve in the US.Global indices have all started the week strongly.

The Dow in particular has been very interesting. My short position last week went extremely well. Not only did the Dow retreat from the retraction zone I identified, it then bounced off the next value zone pretty much exactly. I had put my limits at this point. On reflection I should have put an order to open, to go long, but didn’t. For the record the Dow’s higher retraction zone is 12849:12858. I still don’t believe a bottom has been reached and if the Dow gets to this level in the next week, I am going to short again here. It is worth remembering that the economic numbers were poor again today and next week the monthly payroll numbers are released.

Finally I took my profits on the Yen and Euro short positions. I left these open when I went away with reasonably tight limits, both of which were triggered. I am going to stay out of currency for the rest of this week and am going to take stock this weekend

A rally in indices, US$, today’s trades & Garmin

I got extremely lucky today. I traded extremely poorly. One of the biggest risks I have found with the way I trade is that it is very easy to lose discipline, especially on a big data day. I have spent most of the day working on quite a big application. I had Bloomberg on in the background and kept increasing my exposure to the US$/Yen and Euro/US$ as the day went by. Before I really knew it, I had a ridiculous number of positions open, which were far too heavily leveraged. I was far too over committed and could have got seriously burned.Without even thinking about it or even noticing it, I had ignored my basic rule of the weak, which was to tread carefully and lightly.

As it turned out the Fed did cut by 75 basis points, less than was expected. This signaled a fall in the Euro and but the Yen rallied. While I took a thumping loss on the Euro, I made a decent profit on the Yen, which meant I came out slightly down on these trades (the S&P trade saved my day!). This really was by luck rather than by design and I am really disappointed with myself that I acted so rashly.

However I have set those emotions to one side and am starting to take some more medium term views in certain key markets.

Sticking with the US$ I can see there being a rally in this over the next few days. Several points lead me to this conclusion. First the Fed’s move was less than expected. This could well indicate increasing disagreement in the Federal Open Markets Committee about how much further rates should be cut. There also seem to be increasing concerns at the Dollar’s implosion and the rising spectre of inflation. Secondly the moves last week and this seemed to be driven in part by an expectation of a higher rise. Thirdly any markets that move as strongly as the Dollar has fallen in the last few days, have to take a break at some time and regroup as investors bank profits. I can see the Euro heading back to 15000 and the Yen back above 10000 in the next few days.

I have opened some short term positions with this in mind, which I expect to keep for the rest of the week.

The Dow and S&P 500
Today was the second massive day for both indices in just over a week. The Dow has now seen its 4th and 5th largest moves ever, in the last 6 trading days. As I mentioned last week, such moves were last seen in July 2002. What I also said last week, is that the 2002 moves did not mark the end of the last bear market. I think the same is true this time, but such heavy buying is a sign of serious players starting to creep back into the market.Interestingly the Dow’s current mid retraction zone is 12385:12394. It closed at 12392. When thinking about today’s blog I was going to write that this was my target to start shorting again. With earnings season now starting this might not be such a bad idea, but I think the likelihood is corporate profits aren’t going to be hit until the next quarter as the US economy slows.

For the record the Dow’s higher retraction zone is 12849:12861, so if there is a rally I expect it to go that high at least. I am esteemed company on this one as Barton Biggs (ex-chief economist of Morgan Stanley and a bit of a hero of mine) talked of a 1000 point rally in the Dow last week!

Also today’s announcements by Goldman Sachs (GS) and Lehman Brothers (LEH) surpassed expectations. JPM is still to announce, but after their Bear coup, no matter what they say I can’t really see results knocking the stock. The one dark horse is Morgan Stanley (MS). So far MS has announced $3billion in write downs thanks to subprime and has also had to make use of some of the Fed’s emergency facilities, so the news could be bad. I think I am going to show some faith in the system and open a small short position with 150 points room. To be frank I don’t expect much to come of this as I think the chances are we are going to see more of a rally in the next month.

However I made a similar play on the S&P500 yesterday and am glad I did (as in I showed faith in the system, even though I didn’t like the signs). I banked all my profit on the S&P trade as this was a classic bounce out of the primary value zone (1284:1289). The S&P’s mid retraction zone is 1357:1362, so I possibly should have been a little braver and rode this position to that level, instead of taking my money off the table. After my currency debacle it was important to me to come out ahead on the day.

Garmin

Finally I have seen commentary pumping Garmin today. I noticed that the price rose to 6109, having put on $3.80. GRMN’s primary value zone is 5846:5857, so it has rallied off this again. However volume flow has surged out of the stock. This indicates that institutional investors have been dumping it. Of course this view is not enough on its own and further research is needed, but volume flow is a pretty decent indicator of the sentiment surrounding a stock. For me though this is still one to avoid buying for the time being.

Bear Stearns & an unlikely bottom for the S&P 500 & currency trades for tomorrow

In the last few days my focus has been away from the system, while I digested the magnitude of what has happened with Bear Stearns. I felt quite wrong footed by this event, especially after I wrote last week about the likelihood of the rumours not being true, after the comments of Bear’s Chief Executive, Alan Schwartz that everything was OK.

I did make the point that after other recent notable corporate failures and the likelihood of prosecution for delivering misleading information and was vindicated to hear this afternoon, that legal challenges have already been brought against the Bear board for fraud. What has happened in the last few days was always going to come out in the fullness of time, but under the glare of a legal case, this is likely to happen a lot faster.

What I am especially keen to find out, is why on Earth Bear accepted such a low offer? The simplistic answer is it was that or bankruptcy. This does not fully explain how this situation came to pass. Worse still, if things were that bad at Bear then what is going to be next?

The fact that the large investment banks have been allowed access to the discount market surely has to be a worrying signal.

The market has been rife with rumours today, particularly about Lehman and UBS. Unsurprisingly JPM rallied extremely strongly after their coup.

Interestingly the Bear Stearns debacle has coincided with the S&P 500 hovering around its long term Primary Value Zone (1279:1289). The root of this zone is March 2003.

Under different circumstances I would possibly see the events of the last few days occurring at such a significant time as a possible bottom.

However….. as you will remember I wrote last week about a reckoning time for banks. The current systemic problems facing the financial markets are still to unwind and I fear much worse to come.

After much thought at the weekend I think this current liquidity crisis will have three distinct phases:
Phase 1 The infection of the financial system reaches a point of no return
Phase 2 A purge occurs of the weaker and more exposed financial institutions, which have adopted extremely high risk, unwise or excessively greedy business models
Phase 3 A bottom is found and things start to improve

Of course there is much more going on in the wider World than just the liquidity crisis, but in time I am sure that this week will come to be seen as the start of the real problems, when the process of purging the financial system really began. With major earnings announcements due to come from the likes of Goldman Sachs, Morgan Stanley and Lehman Brothers, who knows what they are going to come out and admit. The Fed’s arsenal of fiscal measures is also rapidly depleting, if it even ever had the power to alleviate the current woes.

There is a chance that the news from these firms will not be so bad and the Fed rate cut will give UK stocks a real boost. I think I am going to open a short term long S&P500 position, but this is not something I am likely to keep for a while. I am probably kite flying with this trade, but I am a firm believer in the significance of long term Primary Value Zones and am going to back that, no matter my personal doubts.

I have ditched my Sterling position against the US$ at a loss as the movement on this instrument was clearly going the wrong way. I didn’t reverse it as I definitely don’t want to be long the Greenback in anything at the moment. I am going to hang onto the Aussie trade. Although it is showing a loss I can see a rally overnight and tomorrow.

I have also just opened Euro/US$ and US$/Yen contracts both against the Dollar. While these are not system trades the sheer weight of downward pressure, make selling the Dollar a bit a no brainer. I will almost certainly leave these positions over the Fed announcement, but will take profits very quickly (assuming I am in the right direction).

I don’t really have any firm targets for any trades at the moment, which is not ideal, but I think is appropriate for the climate. My next medium term positions will almost certainly be shorting indices and individual stocks, but I doubt that will be this week.

Why you can’t short this oil market

Today Oil set an intraday record price fall. Although it recovered at one point it was down over $6.30. It is nigh on impossible and extremely risky to try and call a top of a market like oil. The level of speculative trading in such a market takes on a special set of characteristics. While the price is not being driven by fundamentals it gains a great deal of momentum behind it. As the price advances, traders become more and more concerned about locking in profits and increasingly tighten stops.The longer the rise continues the more speculators are attracted to the market, who in turn operate tighter and tighter stops. These conditions lead to extremely volatile price swings. As positions get stopped out the price can fall a great deal, only to attract in more buyers seeking to profit from the momentum.

There then comes a point (possibly like today), when fundamentals start to have more of an impact and real sellers start to enter the market. Massive price drops will be followed by strong rallies. Eventually a technical pullback will occur and the next phase of the bull market begins.
For the brave the next buying opportunity comes at 9984:9993, according to the system. A more reliable buying opportunity is 9012:9029. It is worth mentioning that both of these are fringe value zones and so not normally are trading opportunities. A global economic slow down will more than likely dampen demand, but the speculative characteristics of this market and the fact it has broken the $100 level will probably mean this will be worth a shot at.

The unconditional surrender of the US$

I didn’t get much sleep last night and was up really early this morning. Watching the charts was fascinating. We are in a truly unique environment right now.

Bernanke’s stewardship of the Fed is surely going to be looked back on as one of the weakest in its history. I believe (and have done last September) that all of his fiscal moves have been designed to bail out his buddies on Wall Street rather than follow a policy which benefits the wider economy. One of the big questions I asked myself last night, was why Bear wasn’t simply allowed to go out of business? The other banks would have picked up what remained of the good business, leaving the rest to default. Given how bad the latter had been, frankly the counter parties of those deals deserve to lose their money.

I generally view conspiracy theories in about as high regard as superstitions (not very high), but I am seriously left wondering if yesterday’s move to save Bear had anything to do with Bear’s board, investment managers, traders and the like holding onto their January bonuses? If Bear had gone bankrupt then these would have been rescinded. Given the bank has been “bought”, these are actually now safe. Of course we will have to see if this view is picked up, but if these people do get away with that I will be disgusted (whilst filling up on JPM stock, before I get too moral – as an aside it would be very interesting to start writing on the moral hazard of trading the markets, but more of this for another time).

For my money, I am betting on a massive 150 basis point cut of rates tomorrow. Given the Fed’s policy I really cannot see what else they can (will) do. This might mean short term relief for stocks, but I get the impression that panic has finally set in, in the markets and the weight of selling is going to increase in the coming months.

Where I think tomorrow’s move is going to be most felt, is in the currency markets. I am not exactly putting forward a revolutionary view here, but if the Fed does move so drastically, they might as well remove the Stars and Stripes from outside and run up a white flag.

Last night the Greenback went as low as 9600 against the Yen, whilst the Euro rose just above 15900 against it. How much more can the US$ fall?

One of the key pillars of the banking system is confidence. As IKB of Germany, Northern Rock and Bear Stearns have all shown, once confidence has been lost, it is near impossible to regain. Last night’s global market reaction to the Fed’s move is surely signals trust evaporating in Bernanke’s regime to lead the financial system through this crisis. While Bernanke is in charge, I think there is no limit to how much the US$ can fall.

I am now short the US$ against the Aussie and Sterling. These both fell against the US$ last night. I am increasingly less bullish on the Aussie and quite bearish on Sterling, but I think there is much worse to come for the US$ this week, so I have bought the dips. I am going to look for pullbacks against the Euro and Yen before going in, but can’t see that happening.

JPM steal Bear Stearns and the week ahead

What did I say on Friday?! JPM could have pulled off the deal of the decade with their “bailout” of Bear Stearns. According to news just across the wires they have bought the bank for a little over $2 a share! Did I say “bought”, I should have said “stolen”.

On top of that the Fed are going to underwrite the $30billion of Bear’s high risk liabilities!

This is an incredible deal for JPM and while I don’t like a lot of what happens in the market, I can tell you now I am going to load up on JPM stock, once the current crisis shows serious signs of abating.

In terms of pure shareholder value, JPM are going to clean up as result of this deal. Essentially they have bought what was the USA’s 5th largest investment bank for about $265,000,000 and they have got the Fed to take away the vast majority of the risk.

Before I forget the Fed also cut the discount rate again, in an unscheduled move!

I first heard about the JPM/Bear Stearns deal on the radio at about 9.30pm this evening, when futures markets were starting to open. I went long and have made a great profit. I have closed out now and am going to leave it for the moment. While I see a lot of upward momentum in the next few days, I want to see the main Asian reaction, before committing anymore funds into the market.

In terms of the rest of the week, I would tread carefully this week. The rise in the Gold price to $1000 last week, is very significant and betrays the underlying nervousness in global markets. In terms of currency moves, the time to go long against the US$ was probably last week. While there might be some short terms opportunities, I wouldn’t be at all surprised to see a bout of profit taking after the Fed’s meeting on Tuesday. I am not suggesting going short, as I think this would be incredibly risky, but the moves we saw last week have a hint of speculation about them, ahead of Tuesday.

I am intending to be up very early tomorrow and I will try to write again ahead of making any moves

Is the unthinkable really going to happen?! Is Bear Stearns going under?! What is next?!

I have written a couple of times recently about Bear Stearns. I was going to write about the company today anyway. My line of argument was going to be that I thought I was wrong in my original feeling about the extent to which it was in trouble. I was going to base this on the lack of buying of the bank’s stock at the levels it is at now and make the assertion, that people of influence, with far more insider knowledge than I could ever hope to have, were not seeing it as a bargain, but rather something to be avoided like the plague. I was even going to suggest shorting. I had got round to writing this blog this morning, I would have been quite pleased with myself!! J

However the news hit the wires about an hour or so ago, that JP Morgan Chase and the Fed are going to provide Bear with emergency funds to shore up its balance sheet. Bear has tumbled 45% as of writing this. I am shocked by this.

I am also equally glad (relieved), that I learnt from my Northern Rock experience to expect the unexpected, which is why I didn’t buy Bear Stearns.

For what it’s worth I think this bailout is going to turn out to mean nothing and Bear Stearns is, well, screwed (to use the technical term).

The notion of one Wall Street bank helping out another is about as comforting a thought as being stranded in the desert, with no water and vultures circling above. These people live in a total moral vacuum, where standard human notions of compassion and kindness are taken as signs of weakness and to be rejected at all cost. I wouldn’t be at all surprised if JPM’s involvement is nothing more than a predatory, scavenging attack, picking over the bones of a once proud institution.

I have drawn parallels between the current travails facing the market and the collapse of Long Term Capital Management a decade ago. The bail out of that, so the “rescuers” (and I use the term so lightly), so them take 90% of the funds holdings, which I believe I am right in saying, they all profited from massively.

Of course there is the argument that the problems of LTCM and Bear Stearns are all self inflicted. I certainly have very, very little sympathy for them and agree with this totally. The point I am trying to make is that we should take absolutely no comfort whatsoever from this “bail out”.

Assuming nothing more horrendous happens today, just take stock this weekend and wonder at the scale of what has happened today. It truly is momentous.

I dread to think what is coming next week in terms of the banks’ results. I had a conversation with a business colleague yesterday (who also loves the market by the way!), about the prospects of Fannie Mae and Freddie Mac actually being insolvent. I had a hard time processing this conversation, but if he is on the money on this one, then we are facing a crisis of epic proportions. (in case you didn’t know Fannie and Freddie are the USA’s two largest providers of mortgages, not just subprime)

Who knows, perhaps the Fed will throw a $trillion (Yes, I did mean a $trillion) at the market on Monday. In the current climate, I refuse to be surprised by anything that happens.

A real Dollar crisis?

If you have been watching (or even better trading!) the US$ in the last six months you cannot have failed to see it hit either all time lows or breaking levels not seen in the last 20 years against currencies all over the world. Today was particularly bad. The Dollar broke through the 1.56 level against the Euro, but, more significantly, breached the 100Yen barrier, albeit fairly briefly.

This trend has been a great one, especially as it has been so clearly signaled. The Fed’s rate cutting policy has pulled the rug from underneath the Dollar in a spectacular style. The only excuse for losing money on the currency markets at the moment is….. errrrrrr……. well actually I can’t think of one. This has been a guilt-edged opportunity and it doesn’t show any sign of slowing.

While a lot of attention is on the liquidity crisis, slowing economic growth (or even increasing retraction) and inflation, not much has been said about the almighty game of chicken the Fed is playing with the Bank of Japan and the People’s bank of China. These two institutions are probably the global leaders in terms of the amount of Greenbacks they both hold. In Japan’s case this has been a situation, which has developed over decades, as their powerhouse export economy has pumped products into the US. In China’s case, it is largely for the same reason, though in a much shorter period of time and to an arguably greater extent. Until recently a lot had been made of the support both Japan and China have given to the Dollar. The Bank of Japan had apparently pursued an interventionist policy, whilst the Renminbi’s peg to the Dollar has kept their relative values artificially low. While exports have been strong both countries have had a vested interest to maintain the status quo. This now looks like it is changing.

As the systemic problems continue to increase in scale I see three factors, which have the potential to feed one another and could lead to a situation where both Japan and China start to ditch the Dollar:The fall in the Dollar, obviously means a fall in the value of their reserves Both economies are especially vulnerable to rising inflation, given one’s relatively poor workforce and the other’s lack of natural resources A US recession will close their major export market, causing a lot of domestic economic damage. While the Fed pursues an essentially inflationary policy, trying to quell the liquidity crisis and a slowing economy, they seem to have given up on defending the Dollar.

As I have mentioned before, a bi-product of this policy will be a reduction in the trade deficit, which has largely built up as a result of the China and Japan’s exports. The longer the Fed continues not to make an effort at defending its currency, the more the likelihood that central bankers, across the World, will grow sick of subsidising US growth at the expense of their own domestic economic health. If this happens there will be only one result; the Dollar will no longer be the reserve currency of choice. If China and/or Japan do decide to withdraw their support then we could see the kind of currency shock (and possibly even hyper inflation), not seen in a developed economies for decades.

The fact that US$/Yen is trading near the 100 level is possibly the first signal of this happening. Over the next few months, the Dollar/Yen and Dollar/Renminbi pairings are going to be on my critical watch list to assess the prospects of a global meltdown occurring. I really hope I am wrong about this one…………..

The Fed move is not likely to be a bottom

One point I forgot to make in the last blog, was that I do not think yesterday’s move by the Fed will provide a bottom for the market. I read one interesting piece of commentary, which pointed out that yesterday’s move was the largest one day move since July 2002. The latest bull market didn’t start until March 2003, so just bear that in mind (no pun intended, honestly!!!!) J

I am still looking for the Dow to get to about 11100, before things turnaround.

Fed liquidity boost, Chinese Inflation and reducing Australian confidence; Position Update

My plan had been to write a blog today about the budget. Work commitments however have meant that I didn’t have the time. I was also more interested by events yesterday and overnight in terms of the affects on my medium term outlook. I keep promising to write about the UK economy and doing this ahead of the budget would have been a good time. As an aside, I was pretty underwhelmed by what I have seen so far from the Chancellor, but I expected that.What I didn’t expect was yesterday’s move by the Fed to boost short term liquidity in markets. I have to be honest I was very impressed with this action. While I have been highly critical of a lot of what the Fed has done, I do think that credit needs to be given to yesterday’s innovative solution to some of the structural issues facing the market. Apart from anything else this is a clear signal of the Fed’s determination to end the liquidity crisis. I still don’t think I agree with this approach entirely, but I can see the argument for need to bring this under control, no matter how self-inflicted it might be.

US stocks rallied accordingly, with the Dow notching a massive 400 point move on highest volume in six weeks. My recent comments about entering an “end of the beginning phase” could well be well timed.

There is, however, a massive caveat to this view. Solving the global credit crunch and boosting economic activity are two of the greatest challenges facing the Fed. The third great challenge is to keep inflation under control. Now, I do not hold a doctorate in economics, but surely one of the basic causes of inflation is the oversupply of money. So far the Fed’s strategy to solving the first two problems has been to throw almost unprecedented amounts of money at them. Will this help cause an entrenched inflationary period?

Judging by what else is going on in the World, I think the answer is probably yes.

I only have to scan over commodity prices to see them at inflation adjusted record highs to see that this is a big problem. While it might not have filtered yet into more advanced economies, this can only be a matter of time. China today announced inflation at a massive 8.7% up from 7.1% in January. China has essentially been exporting deflation for the last decade to the Global Economy. Once this dampening influence is removed, there is surely only one way prices can go.

I read a piece recently about spending in the Chinese armed forces (http://news.bbc.co.uk/1/hi/world/asia-pacific/7276277.stm) going up by 18% this year. This article was framed more in the geo-political rather than economic context. However the fact that most of this rise is reported to accommodate rising salary costs and the price of oil, has to be a barometer of what is happening in the wider Chinese economy. According to one estimate I found China has 2.2million deployed personnel. This ranks them as being one of the World’s largest employers. If they are feeling pressure from increased wage demands, then the same must surely be true for the general economy.

While much has been made of the Chinese economic revolution, we must remember that it is still a poor country, when looking at GDP per capita. Massive rises in basic goods (food, fuel etc.) are going to be felt more acutely and more quickly amongst the general population as opposed to in the more developed countries.

The logical conclusion to this is that Chinese inflation figures will rise ahead of those in the West. There is an additional delay mechanism in place as exporters will try to bear rising costs for as long as possible, to maintain competitive positions. Eventually, though, they will be forced to raise prices. This will likely be a gradual process, which we barely notice at the start, but which will gain momentum, until it becomes an irresistible force. I don’t know if I see a return to the inflation of the Seventies. I am too young to remember that, but I do recognise the dangers inflation poses as an ultimate destroyer of wealth.

As an interesting aside, I had lunch with my Mum last week and she told me her state pension had gone up by 7% recently. I haven’t seen an official announcement about pensions going up this month (it might be in the detail of the budget, but I haven’t had time to look), but this anecdote could well point to Government concerns about inflation and their affect on the elderly (i.e. people who lack the ability to earn more) – more of this another time though!

And in Australia…..With inflationary warning signs all around the Reserve Bank of Australia has, as we all know, been raising interest rates. This has led to a solid (and for me profitable!) rise in the Australian Dollar. The last rate rise was last week.

This week, however, yesterday’s data has caused me to start to think about changing my position on the direction of the Aussie. Yesterday it was announced that Australian consumer confidence was at its lowest sine 1993. This is against the backdrop of falling economic activity. If the Australian economy is starting to slow, then the likelihood of further rate cuts will become increasingly unlikely (unnecessary even!). Given that Aussie base rates are at 7.25%, this makes them high relative to other developed economies.

While I am still bullish the Aussie, the 9500 level might prove to be towards the top.

This is one to watch in the coming weeks and I think I will trade it again, if there is a pullback ahead of next week’s US Fed meeting.

Position updateTo finish I should update on my various positions. This week has been simply brilliant. My limits were hit on the Hang Seng and S&P. I had a long position on the FTSE yesterday and booked more profits on daily trades on the Aussie and NZ$ today.

I am now short the Yen against the US$, though am likely to take my profits soon.

I am also still long the Nikkei, though this is not moving as I would like. I saw a headline that that there are problems over the choice of the new Governor of the Bank of Japan. I don’t know the ins and outs of this, but such uncertainty is bound to hold markets back, so I think I am going to take my profits.

I closed Gold at a slight profit, mainly because oil seems to be where all the action is and Gold has halted at its current levels. I am going to start watching this commodity more closely and look for a pullback to get back in on. My main reason for the trade was a possible market reaction to uncertainty, but this has not happened this week, so I thought it best to ditch the position.

Time of reckoning for the US banks

Following on from the blog I wrote late last night on Bear Stearns, I spent some (too much!) time looking at the major US investment banks as well as selected others. Yesterday was not only a terrible day for Bear Stearns, but also UBS and the much troubled IKB, of Germany. UBS announced further substantial write downs as a result of the subprime meltdown and IKB was sued by the Financial Guaranty Insurance Company. Both shares fell. Blackstone, the provider of numerous financial services, also announced that their full year earnings had been decimated, although their share price rose.

I have written in previous blogs that I did not pay much creed to the announcements from many of the banks about the liabilities they were carrying as a result of subprime. I felt that the products they had traded were far too complex and they didn’t know yet the scale of defaults. They also didn’t know whether or not subprime would spill over to other, better, borrowing, or even other asset classes.

Next week, earnings season kicks off with the Investment Banks. This will provide them with the opportunity to come clean over further losses sustained. Given how much bad news has already come out, and the momentum it has gathered, next week really could be “the end of the beginning” to quote Churchill’s famous wartime speech. I wouldn’t like to call a bottom in this current crisis, but I do wonder how much worse can things actually get. I still think the economy is in for a rough ride, but I do believe that when things turn around, as they surely must, the investment banks will provide some leadership back to growth.

Some dates to note are:
Goldman Sachs 18th March, Morgan Stanley 19th March, Bear Stearns 20th MarchOf course these results will more than likely be set against the backdrop of a Fed rate cut. Given the likely volatility I think I am going to trade very nimbly next week. If I have profits by the end of this week I am going to bank them.Moving forward, I think next week’s results are more than likely to be extremely bad and also I think shares will continue to go down. If things are going to start to improve towards the end of 2008, I would like to see the declines lose some of their momentum and stocks and indices hold their value zones. The Dow’s is today at 11083:11094, so we still need a 7% decline to reach that level. Given the weighting of investment banks in this index, I do think this is an important one to follow.

Trading the Aus$ and NZ$

Ahead of the Trade Deficit announcement in an hour or so, I have come out of the Aussie and NZ$, having made a slight profit. To be frank I haven’t traded either particularly well. I jumped the gun, going in on Sunday night, given both pairings relative proximity to value zones. Both pulled back yesterday and have rallied strongly today. Once the US data is out, I am going to trade both again, either today or tomorrow.

Dare you buy Bear Stearns? Part II & an early rate cut?

I wrote a month ago about the possibility of buying Bear Stearns. Thankfully I finished the blog by saying that before doing anything would require a lot more research. Well I didn’t have time to research it and boy am I glad I didn’t!!!!

Today there were simply incredible rumours that Bear Stearns is on the brink of a collapse thanks to its lack of internal liquidity. The stock fell $7.78 or 11% in the day, having started late as market makers kept it closed, while the rumours were checked. Such a move by market makers isn’t unparalleled but it is surely significant. The stock is now down to March 2003 levels having falling nearly 65% in the last year.

I don’t know enough about Bear’s business to understand what might cause a run on the bank. I did underestimate the significance of the Northern Rock fiasco at first, but I simply cannot believe that things are so bad that Bear Stearns is seriously facing the prospect of going out of business. While the stock totally failed to hold its primary value zone, I do think there are some positive points to take out of today.

First, after the initial immediate drops, there was a lot of buying, which caused the stock to rally quite strongly. Although this was followed by selling for the rest of the day, the level the stock closed at really could start to tempt investors back in.

Second the board of directors was unequivocal in their denial of the rumours which spread. There are strict rules about what information has to be disclosed to the market. Such an adamant denial, if not true, would surely bring criminal prosecutions. The manner in which the Enron board was pursued, surely has to be a warning sign for any other publicly quoted companies misleading the market or committing fraud.

Third the market makers did allow Bear Stearns to open today. If there were any truth to the rumours, surely the stock would have been suspended?!

Of course, unless you are part of the Wall Street cabal you never truly know what is happening behind closed doors. However for my money I think today’s mass selling was a knee jerk reaction and symptomatic of wider unease. There is the risk that such a move becomes self perpetuating and will lead to the ultimate collapse of the bank, but if I had spare capital at the moment, I would now consider buying and holding some stock.

The other speculation today was that the Fed would cut early. This stemmed from a note from two Goldman Sachs analysts. When I first heard this I thought this was a case of two young guns trying to make names for themselves. However after the falls of today, which have so far followed into Asia and Oceana, there might well be some truth to this. I am hanging onto my positions for now……

Quick update on system targets and trades

As of writing this, the first hour into London’s trading day, the FTSE100 is down 0.75% at 5651. I thought I should update my estimates on where I think the FTSE100 and Dow are going to end up settling. Our system, which we built, updates itself on a daily basis after respective markets close. Looking at Friday’s closes the system is projecting the primary value zone for the FTSE at 5296:5304. The launch of this value zone dates back to March 2003 (the start of the current bull market) and therefore is hugely significant.

Whether or not the FTSE reaches this in the next few weeks is debatable, given that the market is now starting to expect a 100 basis point cut in US rates next week. With respect to the Dow, the March 2003 launched primary value zone currently stands at 11084:11093. This week I am now long gold. This is more of a speculative trade based on market uncertainty and the expectation of it hitting $1000 quite soon.

I am also long the Nikkei, as it is near its January low, even though it did not hold its primary value zone. I am long the Aussie and NZ$ against the US$. Again these are not trades based on the system, but rather an interest rate trade.I am also long the S&P500 and Hang Seng. These are two system based trades with the indices being at their primary and tertiary value zones respectively. With all my trades I am using leverage and taking on appropriate stops in line with current market risk. I am also quite conservative on my limits, seeking to take profits once they appear.

Looking at global indices

I did a cycle today through the system looking at global indices and was surprised at how low prices were across the board. I have focussed a lot recently on the FTSE and the Dow.

I think following the basic line that the US economy leads the global economy is still a sensible one to take. The notion of economic decoupling, with emerging nations in particular, has now surely been disproved.

I also still believe that there is not much doubt that we are in a bear market and that this is going to continue for most of the rest of 2008 at the very least.

In particular several major global indices are now at the primary value zone. Multiple failures of the following to hold current levels, is bound to lead to further widespread problems.

Starting with the S&P 500, it closed at about 1293 on Friday. Its primary value zone is 1285:1294. I am sorely tempted to go long on this. While there is a raft of data out next week, I think the prospect of a Fed rate cut the following week might well give this index sufficient support for a short term rally. Of this week’s data sets, I expect the inflation data to show rising costs and the economic indicators, falling activity. However I think there is potential for a positive surprise in the US trade balance on Tuesday. One of the benefits of a falling dollar is that this gives the US economy a cheap means of paring down the outflows of capital, to the Far East especially. There is an argument that the Fed has even engineered the falling dollar with this end in mind. While I am not sure I fully buy into this point of view, I do think that there will be substantial trading opportunities once certain countries (notably China and Japan) decide that they no longer are willing to subsidise the US economy by holding vast reserves of worthless Greenbacks – more of this another time though…..

So I expect to see follow through selling on the S&P on Monday, but I think I might go long on Tuesday. I will try and write ahead of doing anything, but can’t promise.

Moving to the Nikkei225 this closed at 12782 on Friday. Looking at the charts if this rallies, this could form the beginning of a double bottom, which would be a very bullish pattern. However the Nikkei’s primary value zone is at 14115:14129. Since January it has twice approached this level, but reversed before it. This kind of pattern has the potential to be extremely bearish. This is not helped by the fact the mid-retraction zone is at 13885:13894. A financial instrument, which is not able to hold the primary value zone and then fails to retake it, looks to be in a lot of trouble. This said there is 10% between the current price and the value zone. I am not sure if I want to go long on this one short term, but I might. If the index does raise again, then I will look to short it.

Finally looking at the Swiss market, the SSMI closed at 7174 on Friday right in the middle of the primary value zone (7171:7177). I don’t really know much about the SSMI, but the chart was an interesting one, as this has honoured the primary value zone since January, but has then failed to break out back past the secondary value zone (7854:7893). I wouldn’t trade this, based on not knowing much about it, but I think it helps further illustrate the problems facing global markets.

There is a lot more I could write about numerous other markets, but suffice to say the Hang Seng, Tokyo Topix, Australian Ordinary, Dutch AEX and CAC 40 are all either in long term value zones or have breached their primary value zones.

Given all these market broadly started their bull runs in March 2003, I think we all seriously have to face up to the possibility of heading back to these levels, if things don’t start to improve quite soon. For the record I am not that bearish……….. yet!

Yesterday’s big news

OK so the big news yesterday was the second consecutive decline in the US employment market. This was compounded by the downwards revision of January’s number. Yes this is very bad, but was it really unexpected?

I certainly didn’t think so, although the vast amount of negative commentary on financial media channels would make you think it was.While this news is undoubtedly bad (and is likely to get worse before better) this was not the big story for me yesterday. I was appalled at the actions of the Fed. The monthly non-farm payrolls report is one of the most heavily traded data sets in the world. It is scheduled 12 months in advance, usually has a big impact on stock and currency markets and is released at 8.30am ET. Everyone knows this. Why on earth then did the Fed decide to release their news of increasing next month’s auctions at 8.15am ET yesterday?! This was unscheduled and obviously caused chaos in all futures markets.

By way of example in the 10 minutes before the payrolls number came out, the Dow oscillated in a massive 100 point range. I am sure the reason for this, was the reaction to the initial reaction, which then caused traders on margin to cover their positions. I lost money as this was going on as my position was stopped out. Thankfully I had the presence of mind to reopen a short contract on the Dow (I had also taken my profits on all my currency trades earlier on, which was lucky). When the payrolls number came out, the Dow plummeted and I made a slight profit on the day on that trade (at least enough to by a round of drinks, so I suppose every cloud……)

The sort of action from the Fed really smacks of total panic to me. Releasing such an important, unscheduled announcement at such a sensitive time, is not a quality I would expect to see in trustworthy financial leadership. The sense of uncertainty in the market yesterday was palpable as stocks traded extremely choppily. With a clear lack of leadership at the top, my bearish feeling for 2008 is reinforced.I opened a long gold position yesterday evening, as I expect to see a flight to gold next week, as the uncertainty manifests itself more strongly. While this is not a system trade I think it could finally break that $1000 level.
As I have written in previous columns, financial instruments, breaking the 10,100 and 1000 levels is extremely bullish; see the recent move in oil as an example of this.
I am also going to short the US$, probably in the second half of the week. In particular I am going to look for pullback in the NZ$, Aussie$ and Euro.

Getting it wrong, yesterday’s trades and currency plays today

I woke up yesterday morning and decided that I was wrong.

My Sterling position was taking a nasty hit and I was also thinking carefully about the outlook for the next few weeks. Yesterday the British and European central banks were due to announce on rates. While I knew I wouldn’t have time during the day to track this, I was also certain that they were going to leave rates on hold. Earlier in the week I hadn’t really thought about that too much and the implications. With US rates heading down this was bound to have an affect on the value of the US$ against both pairings. The US$ was going to weaken.

Also the payrolls data was due out today. Given that the US economic data has been almost universally bad, the likelihood is that today’s number is going to be awful. Ahead of the announcement; the US$ was going to weaken (probably beyond that as well). Finally Oil is surging past its real all time high. The implications on this for the US are profound. While there is an argument that the falling Dollar contributes more to the rise in price of Oil than the other way round, I do believe that both contribute to each other’s relative rises and declines. The US$ was going to weaken.

So quite simply I got out of my own head, closed the short Sterling position, took a reasonable loss, tripled my leverage and went the other way. I did that first thing in the morning and I am so glad I did that. I caught the majority of yesterday’s move and made quite a sizable profit. This has carried through to this morning. I have now closed my Sterling positions, but my Aussie ones are riding high. I have tightened my stops on the latter and am going to leave them out over the announcements (at 1.30pm GMT). I know this is risky, but I can afford to take that risk at the moment as the rewards are potentially so great.

Another lesson I think I have learned from this week, is a lesson more for you than me. If you regularly read this column and don’t think I talk a load of rubbish, please don’t just follow me blindly. There will be times when I change a view on a trade or position really quickly and won’t necessarily have time to write about it until after the event.
For the record I am still medium term bearish about Sterling and I love the price it has moved up to. Given I can see it rising further with the upwards momentum of poor US data and Fed rate cuts, I am going to ride it up a bit further and then look for signs of it retreating again. I am going to keep a close eye on UK economic announcements.

A critical few days for the Dow and US Dollar

I have not had a chance to write a blog this week, but I have been trading.

You will not be surprised to hear that I bought the Aussie when it pulled back. I went in at the level that was about at the previous record high (9254 on the spot price). While this is not a decision based on the system I do believe the momentum of the market is behind this one.I have also taken a short position in Sterling. This one I am less sure about. I went in at 19890, which was just below the levels I wrote about last week. I placed my stop at 20070, which is just above the higher retraction zone.

While I am bearish on the USA’s prospects I am also bearish on those of the UK. While it is true we haven’t seen a housing meltdown on this side of the pond, events in the States have shown how quickly these problems can escalate. I really believe that Sterling at the $2 level will prove to be a historical oddity rather than a true value of the currency’s relative worth. When I have some time I am going to write more of my thoughts about the UK’s prospects, but the more I see and hear the less I like.

Finally I had an order to open on the Dow yesterday at 12124, which is in the value zone. While the intra-day price went below this, it then rallied strongly. I set my limit at 100 points and so made a tidy short term profit. This kind of play is risky, but I have seen time and again indices rally out of value zones no matter the type of market. As things stand today’s DJI chart is looking really bearish. It was up in the first few hours of trading, but the ADP job survey (which can be unreliable and subject to revision) showed private sector employers let staff go last month. Unsurprisingly the Dow lost its gains, but recovered at the end of the day. Given its proximity to the value zone (12121:12132) the next few days are quite critical for stocks. With the proper payroll numbers on Friday if the Dow fails to hold above current levels, then I expect the move to 11,000 to commence straight away, rate cuts or not. If however stocks do hold this level and Friday’s numbers are not so bad, then a rally back to 12700 has to be expected. The rate cuts are the week after next so keep looking for a short term liquidity boost to this flagging market.

Update on eBay, Garmin, AUS$, BP, BT, index trades

eBay
While eBay did disappoint a month or so ago the share price has levelled off recently just below the secondary value zone, which lies at 2753:2765. I am not intending to do anything about this stock yet, but it is worth keeping an eye on.

Garmin
Yesterday GRMN closed right in the primary value zone. Its primary value zone is at 5855:5873. This has been honoured before and might represent a short term, long trading opportunity, in light of the likely Fed rate cut in a few weeks. If going in, certainly be careful.

Aussie Dollar
The Aussie reversed just below the 9500 level. If it pulls back some more from its current spot price of 9307, this could be an excellent trade ahead of the US Fed decision (going long obviously). BPBP also reversed this week from about 570. It is now at 546, which is inside its secondary value zone (541:548). I think this is going to be a difficult week for stocks, so I am going to wait until it gets back to the primary value zone (503:509) before buying any. My plan is to by some actual stock of this one and hold for the long term.

BT
BT also halted in its primary value zone yesterday. It closed at 227 (primary value zone 224:229). This is extremely tempting to buy and hold. What is encouraging about this stock is that it seems to be forming a base at this level, which could indicate there is not my further for it to fall, in the event of a market turn down. I am going to see what happens with the stock this week, but I think I might also buy some stock to buy and hold.

Index Trades
I closed both of my index trades yesterday and made a really decent profit. I am very bearish about next week’s prospects. Employment reports, the Fed’s Beige book and a flurry of other economic reports are likely to be pretty negative. However I think there could be a bounce on Monday after last week’s selling at the end. If I am right I am going to short again. If not I might leave it until Friday and trade the employment reports. I know this is risky, but I can see a lot of downside potential in this market. This should be an interesting week coming up and I am expecting quite a lot of action. I am sitting on a decent cash pile now and will more than likely seek to make some short trades, if I can get some decent prices