Monthly Archives: April 2008

Collapse of the Sterling and the last Fed rate cut

The obvious thing to write about now is tonight’s likely ¼ point Fed rate cut. Commentary on this is abundant as well as the likelihood of this being the last cut for quite a while. US GDP figures surprised me today showing anemic growth of 0.6%. I was fairly sure we would see the first official retraction in economic output, signaling a recession. These were admittedly the advance figures, but a 0.61% variance is highly unlikely (though not impossible).

US stocks have rallied, but the FTSE 100 has stayed fairly flat. I am short the FTSE and the Dow, having traded their retraction zones. I only have a very light position on the DJI, as this is more of a tester, keeping my focus on the movement of the ticker.

My plan is to short the index quite heavily tonight, after the decision, or during the day tomorrow.
The payroll numbers are due out on Friday and I am sure we are going to see yet more signs of a weakening labour market. With not much data out next week and May time market weakness in recent years, if the Dow hits 13,000 I think this is a great level to get in.

One thing I did do today, which I should have done a while ago, is look more closely at Sterling. I follow Sterling/Dollar quite closely and this is still at around the 19800 level. However against nearly all other pairing Sterling is down roughly 20%. I am really quite shocked by this, but also disappointed that I have caught this as a trading opportunity.

Sterling weakness is really quite obvious when you think about it and this trend was clearly signaled before it began properly last August. The system doesn’t really cover that many currency pairings and I have been really focused on using that since last summer. This is quite disappointing as Sterling weakness has been something I have been talking about for quite a while. Of course this is totally meaningless if I haven’t profited from it!!!!

The UK housing market & banking sector woes

The system is only just coming back to life after a two week outage. There is quite a lesson here for us about the need for proper back-ups, if we are ever to release this thing, but one point I have really noticed is how reliant I have become on it for formulating trading strategies.

It will still be a few days until it is fully operational as there is a mountain of historical data it needs to crunch through, so I expect to remain fairly quite until then.

One index I have been able to look at this morning is the FTSE 100. As you know I am keen to start shorting this, but had lost my bearings on the current retraction zone. It now stands at 6119:6126. The index last traded at 6120.5. I am going short. A lot of economic data is due to come out this week, which I think is going to dispel a lot of the recent optimism that a bottom has been reached. Non-farm payrolls on Friday in particular are likely to be bad.

In the UK we had a very bad week last week. First there was the announcement that successful mortgage applications were down 15% on the previous month’s figures. I also read another stat that 1.4million fixed rate mortgages are due to come to an end over the next 2 years. I read similar proportional stats in the States last summer and I expect the reaction over here to be much the same, if not worse.

While the British Government announced their bailout package for the banking industry, it was no surprise to see the bankers snatch this and then not pass on the rate cut to mortgage borrowers. This behaviour really puts the Treasury in an impossible position. While I don’t agree with their arguments for bailing out the banking industry, I can see some rational lines of thought in it. The Government is working on the principal that the financial services sector is one of the most important features of the British economy. For this to implode would be disastrous for an ailing UK economy.

However hosing the people, who created this mess, with money, is surely not going to be a strategy that stands any real chance of working. These people presided over a series of flawed business models, based on short term greed and reckless money management. These people all deserve to go to the wall. The likelihood is that they will, in spite of any bailouts. The fact that the UK’s major lenders are refusing to pass on any of the public sector support to their customers signals serious concerns they obviously have about the health of their respective businesses.

Politically the Government probably had to do something, as they were under a great deal of pressure from across the Atlantic and also did not want to appear to be economically impotent at home (ala the previous Tory regime at the time of Black Wednesday). My interpretation of what I read last week is that the commitment to lenders is essentially open ended. The £50billion figure was what lenders “expected” they would need. I have not read any statement that there is a ceiling on the amount of support being offered. When combined with the exposure of the Northern Rock debacle, the UK tax payer is now heavily exposed to an inherently risky mortgage market.

If the situation continues to worsen then it surely cannot be long before this transmits into the wider economy. My overriding sense is that the Government is really fighting the tide at the moment. Sell the rally.

Tempting levels on the Dow and FTSE

Bad news has continued to come out of the financial sector in the last week. Today Bank of America announced further losses and concerns about the prospects of US consumers. In addition I read at the weekend that BOA are intending to sell part of their 9% stake in China Construction Bank and Royal Bank of Scotland are considering offloading Churchill and Direct Line, whilst also raising additional money from shareholders. These are clear signals of ongoing problems in the sector as two major players are essentially selling part of their family heirlooms to shore up their balance sheets. Both businesses have obvious short term problems, which require solving, at the expense of long term prospects.The fact that the Bank of England has confirmed £50 billion of additional support to the banking system is further proof of the ongoing systemic concerns.

As of writing this Dow futures are down about 60 points and the FTSE100 is down about 30 points. In the last earnings season such news would have punished shares and I am surprised that we have not seen a more negative reaction today.

Following the commentary there seems to be a general sense of a bottom having been reached.

I still don’t buy this. I haven’t shorted the market yet, as I can see there being more near term upwards pressure. However I expect this to be short lived. The general economic numbers in the UK and US continue to disappoint. This will take some time to manifest in the figures reported by quoted companies, but prospects are looking as bad as they were at the start of the year.

With respect to the system, we are having some ongoing server issues, so haven’t been able to use it since last week. However the last time I looked the FTSE’s higher retraction zone was at about 6000 and the Dow’s was at about 12750 (from memory!!). Given both markets are trading just above this level these are tempting points to get in.

Back in January I wrote about the Dow heading to 11000. A lot of the Central Bank Interventions have averted this happening by this point. If they hadn’t acted I am sure that we would have seen this level tested by now. The increased liquidity in the financial system is having an obvious affect, but has it solved the flaws? For my money I seriously doubt it.

Once the system is back up and running I am going to look carefully at the Dow and FTSE value and retraction zones and form a plan for the rest of the year.

As ever I will keep you posted!

Finding a sense of direction

I am starting to get a feel of markets again.OK so the Euro topped 15950 against the US$, making an excellent new high. When I talked about this pairing looking toppy yesterday, it looks like I am out of sync.

However on other fronts I am starting to feel more confident.

Oil went past $11500 for the first time. While I would not want to short this market for the same reasons I have talked about before (mainly it being on a highly speculative bull run) the system is showing a value zone at 10115:10132. When a pullback occurs I am looking for this as an entry point. Although the foot of this zone is only 3 months old, it has been honoured twice and we have seen new highs reached after bounces off it.
Stocks surged today in the US and UK. The FTSE finished at 6,046 and the Dow at 12,619. The FTSE is above its retraction zone (6008:6017) and the Dow is just below its (12712:12729). Upbeat earnings from JPM and IBM helped drive a lot of this, but so too did news in the UK that the Government is about to step in with a new set of bonds for banks to free up capital for struggling mortgage holders. While I am not short the market yet, I still am sure we are in the throws of a bear rally. Apart from these earnings (and some other surprises) the economic data is still highly negative. Moves by Governments to shore up credit markets are still clear signals of people in the know being extremely concerned at what is happening.

I remember a story in “Reminiscences of a Stock Operator” about how bear rallies were caused by those participants, with power to move the market, wishing to ditch long term positions, but being scared of causing a rout. Rather than start selling, they would start buying. They would sustain prices, until other buyers were tempted in. As soon as the rally gained its own speed these market players would start to sell. Selling into a market rally was the least risky way of reducing market exposure. I don’t have stats to back this up as occurring at the moment, but it is worth noting that the S&P500 is still struggling to break through 1365, the Dow has stopped at 12750 in the last few months. Until today the FTSE struggled at 6000. The next few weeks are going to be very interesting, but if we see more of a rally I am going to short (and not just talk about it this time!!!!) On a final note I heard today that Chinese food prices rose at their fastest pace in the first three months of this year. The Inflation Beast lurks.

Rising food inflation and the US$

In December I caught an interesting report that Japan’s leading milk producer was putting prices up for the first time in 30 years. The more I looked into rising food prices the more it concerned me.The implications of food inflation cannot be overstated.

One site I found, while looking into this more, was While this takes a fairly hard line ecological view I do agree with it, that as a source of global instability rising food prices has to be one of the most serious threats facing the planet. Rising prices are a clear sign of supply not keeping up with demand. Historically food shortages have led to massive social upheaval and population shifts. In January wheat topped $15. In the last few months there have been increasing reports of food riots from the Philippines to Mexico, from Haiti to Nepal.

Perhaps most worryingly (in the context of fundamentalism) is that Egypt is also experiencing serious unrest. At the weekend the World Bank issued a warning of 100million people being at threat from starvation. Tonight news came over the wires that food prices rose in the USA at their fastest rate in 17 years. With other commodities at all time highs, or approaching all time highs, we are in a deeply entrenched bull market.

From a trading point of view if this continues there is surely going to come a point when interest rates around the World start to rise. We have already seen rallies in the Aussie and New Zealand Dollars as a result of their respective central banks following fairly tight monetary policies. Economic numbers are still poor (and worsening) but if economies fall into the inflation trap this is going to be far harder to extricate themselves from.

For what it is worth the US$ is starting to look toppy against the Euro. It seems to be holding the 15800 level. As you know a market at its highs does not form retraction zones, so it is too early to start to assess this pairing in this context. I am still out of step with market commentary at the moment, so I am unsure of the next likely Fed move in interest rates, but it does not look like there is much left to cut!

A missed opportunity

I am still not really that focused on markets at the moment, the day job is really pretty demanding. I wrote earlier in the week about putting my money where my mouth is and shorting the Dow and FTSE100 if they hit their retraction zones again. So far the Dow hasn’t, but I noticed this morning that the FTSE had.

I really should have opened my position when I saw the daily price at 6005. This really is a key level. I saw Tim at about 10.30am and pointed this out to him. Ever alert to an opportunity he went straight in. I went into a meeting and didn’t trade. I came out an hour later to see GE had posted dire results and the FTSE is trading at about 5895 as of writing. Essentially I have put Tim’s money where my mouth is. As an alternative risk management strategy, this is not a bad one, but I am disappointed that I missed my key level.

At some point I am going to learn the value of setting orders to open. The system can be used in a variety of ways, but I am increasingly convinced that quarterly futures plays on the spread-betting markets are an extremely profitable tactic. Obviously we have to be careful using leverage, but with proper position management, I am sure this is a great way forward. I’ll spare you anymore doom and gloom after GE’s announcement as we have heard more than enough of this recently.

Watch for more selling next week.

Oil rebounds, the credit crunch starts to bit harder and a bear rally in markets

I have really felt out of sync with markets at the moment. While indices are rallying all over the World, I am really not convinced this is the start of a recovery. The problems facing the global economy are just too complex, entrenched and serious.

One market, which has confounded me in the last week, has been oil. If you bought it, congratulations! Today I saw the May contract top 109. Oil has bounced perfectly out of its value zone again. Now is not the time to buy more but the chances of a repeat performance have to be high. Keep watching for 10096:10103 for the next entry point.

I started researching my UK prospects blog and was really surprised by quite how much bad news there is, everywhere. In the last two weeks we have seen major mortgage providers pull out entirely of the lending market (including HSBC-owned First Direct), news that Northern Rock is not going to renew 400,000 mortgages, house prices fall at their fastest level in 12 years, the International Monetary Fund give a dire prognosis on the World economy and political leaders from many countries call for action to avert a meltdown of the financial system.

One email I received, from, yesterday was very interesting. Fool is running a series at the moment on “Cracking the Credit Crunch”. If you aren’t signed up to this service, you should do, it’s free and very insightful. In the latest instalment of this series some statistics are given on the state of the UK housing market:

- Over the next 12 months 1.4million fixed rate mortgages are due to come to an end.
- 1% extra on a mortgage costs the average borrower £80-£90 a month. This has serious implications for consumer spending.
- UK mortgage lending in February was down to £24billion, 6% down on February last year and the lowest since July 1995.

This is a clear indicator of the lack of confidence in the financial services sector about the prospectsThere really are startling parallels between today’s economy and the start of the Great Depression not least that one of its primary causes was the credit fueled growth of the 1920’s. The notion that we are through the worst of the troubles is nonsense. It is surely going to take a long time for the systemic problems to be solved and for a recovery to take hold. Unless you are averaging into the market with a view to buying and holding, I just cannot understand why people are buying stocks.

Sticking with the Dow and the FTSE100 for the moment their upper retraction zones are 12798:12807 and 6031:6040 respectively. The FTSE stopped yesterday just below this and has reversed since. The Dow is 100 points below its zone. To be honest I think I should have shorted the FTSE yesterday, but I missed it. I am going to watch these both closely over the rest of the week and if prices rise slightly I am going to put my money where my mouth is and start shorting.

Post data report & US recession

I have got to be honest and I love trading the payrolls data. It is so exciting. In my mind it is little better than gambling, but it is so much fun. I have learned to be careful over the years and rarely risk much ahead of an announcement. Such massive volatility in such short periods of time is a great buzz though.

Today the numbers were with me. The US economy lost 80,000 jobs last month and unemployment hit 5.1%. We have now seen three straight months of job losses and any speculation about the US economy being in recession has now to be redundant. I have closed out everything and am sitting on a nice profit for the day. However putting the enjoyment of the last half hour to one side, today’s news is terrible.

I run my own small company and I am increasingly concerned about the likely affects of an icy wind blowing across the Atlantic and hammering our own fragile economy. These numbers are really, really bad news. Recession can be a good thing, as it can provide a catalyst for innovation and the platform for the next period of growth, but in the current climate it is extremely worrying.

The credit crisis and the inevitability of inflation (currently manifesting in high commodity prices, but soon sure to translate into the end of Chinese deflation) are more than likely to compound and also feed into one another. I have to be honest, at the moment I cannot see what the solution is going to be in the next few years. In the UK we are also heavily exposed to a Government which is borrowed to the hilt and has spent money like it’s been going out of fashion (and of course North Sea oil is dwindling and the property market is showing the first signs of crashing).

I have been promising for a while to write about the UK’s prospects and I think now is the right time. I will do so in the next few days. I am amazed that the index futures and European indices have rallied from their initial pullbacks. I just cannot understand why people would buy stocks at the moment. I am glad I am out of this market, but if it keeps rising I am going to start shorting. Watch for entry points at 6033:6041 for the FTSE and 12803:12821 for the Dow. These levels are both higher retraction zones.

A quick blog ahead of Payrolls

I have to be quick as the data comes out in 10 minutes. I am still going to go short today on the Dow (in about 5 minutes) on a very short term contract, highly leveraged contract.However the movement of the Dow’s ticker is telling me I am wrong. We have seen big rises this week and as of writing the Dow Futures are up 79 points! This is extremely strange on a day when economists are predicting a retraction of 70,000 in the labour market.

I think today has potential to be a strange day and I am therefore not going to risk too much.Anyone for a game of coin-flipping?!

Fighting against the wind

Poor Ben Bernanke cut a very forlorn figure in front of the Joint Economic Committee of Congress yesterday. I am very interested in studying people’s body language and this was not a man who looked in control of the situation he finds himself in. He certainly did not instil the sense of confidence that he is the person to lead the World’s largest economy out of its current problems.

Personally I think it is time for him to go. I think I am right in saying (those please do correct me if I am wrong), that he is due to stay as Chairman until at least 2010. What we all need now is strong leadership. Things are generally in a real mess and we need a heavyweight to drag us out of this, not a pliable academic, who is Wall Street’s patsy. It is certainly true that Bernanke did not create the current crisis, but in propagating the “Greenspan Put”, I believe that in time we will come to recognise his actions as fanning the flames. There is a chance that the aggressive rate cuts and billions of extra dollars that have been pumped into the system might well provide some economic sustenance, but weren’t the current problems caused largely by US rates at 1% at the turn of the Century?!

In saving Bear Stearns (for that read profiting JPM) Bernanke has set his stall out as the lender of last resort for the investment banks, no matter the unprincipled practices they might engage in. At the same time millions of Americans have been left to lose their homes (or are facing doing so).

Now I am not sure where I stand in terms of whether or not homeowners should or should not be supported by central banks, but my point is rather if a central bank does decide to perform such a role is it right that they give such preferential treatment to one bank? To say that the Bear Stearns action was to preserve the “integrity and viability of the American financial system” is ludicrous. It is surely the integrity of the American financial system which is in question.

The credit crisis is totally self-inflicted. Those firms which caused it deserve to go the wall. While this would have been an extremely painful process, a new, better system would surely have come out of it. In supporting and prolonging the status quo my fear is that all the Fed will achieve is delaying the inevitable, so that when these problems do finally manifest in a crash of some description the pain will be far worse and last far longer. As an aside I am sure that the collapse of a bank would have provided the political impetus for systemic change. The current fudge of a solution gives no such imperative.

There is some talk amongst the Bush Administration of an overhaul of financial regulation, not seen since the 1930s, but Bush is now a lame duck president. When battling against the powerful lobbying groups of the financial services sector he will lack the financial muscle to push anything through (if he would even have tried in the first place). When the new President takes office, he or she will have bigger political issues to contend with, not least Iraq and a flagging economy. Sadly, to voters a new financial regulatory system will be one of their lower priorities.

Of course these musings are meaningless speculation at the moment, but I am still too comfortable on my high horse to decide on some appropriate trading strategies to protect against these long term fears (other than buy gold when it pulls back). After Friday’s payroll numbers are released I am going to take stock on what to do over the coming quarter!

Strong rallies all over the world and why I am not buying them and oil

Global indices surged yesterday, apparently on the feeling that the worst of the credit crisis might be over. UBS announced $19billion of write downs and Lehman raised $4billion to shore up their balance sheet. A couple of weeks ago, the first set of investment bank results came in above expectations and there haven’t been any more financial melt-downs since. I can understand why there might be a sense of optimism in light of all this, but I am not going to buy into it. I really think this optimism is premature and misguided.

On Friday we get the next set of employment numbers. Given the last two months have seen retractions in the labour market, a 3rd consecutive fall is surely going to be a further signal to the difficulty the US economy is in. The majority of other fundamental economic data has been consistently bad, so the likelihood of further bad news surely has to be high. OK, so the credit crisis might be coming to an end (I am not so sure even about that), but this is by no means the only challenge facing markets. Slowing economic growth or recession is still a very clear danger, which it is difficult to see any easy answers to (and I haven’t even mentioned the threat of inflation or the destruction of the US$).

It will be interesting to see if yesterday’s moves are followed with extra buying today. As of writing European markets are down slightly as are the US futures. If yesterday’s gains are not held onto, I am fairly certain I am going to short the market on Friday. I will do this on a very short-term basis, by using extremely tight stops ahead of the data. I know this is inherently risky, but I still see a lot of downside potential to this market.

On another note you probably will have noticed on Monday that Oil fell over $6 in intra-day trading. This was after my blog (though I doubt that caused the selling!!!), but has confirmed some of my thoughts about this market. It is now holding the $101 and was up to $102 this morning. The Strategic Petroleum Reserve numbers are due to come out this week, but I would not be surprised to see the employment numbers having a big affect. I wrote on Monday about the technical characteristics of this market. In my mind it now looks like it has failed to make a new high, so there is likely to be more sentiment for profit taking. Fundamental pressure (slowing economic growth/recession) will likely amplify this affect.

I am not going long again at current levels. I am pleased with last week’s profits and am happy to sit out for the time being.