Monthly Archives: August 2008

A classic long squeeze in oil; Has the news worm turned?; Obama’s acceptance of the Democrat nomination

When I was writing about trading oil yesterday I failed to mention the likelihood of a long squeeze. I had this at the back of my mind, which is why I advocated not trading until tonight. A long squeeze occurs when there is an extremely high probability of a certain factor having a high impact on a given market. This encourages lots of traders to take highly leveraged long positions with little margin. These positions are in their very nature extremely weak and can encourage large players to force them out by going the opposite way. As soon as stop losses are triggered in the weaker positions, this can have a snow balling effect and manifesting itself in a sharp movement in the opposite direction that everyone expects.

Yesterday we saw oil hit $120, then collapse back to $114.50. I went long at about $115. I was keeping an eye on this market and saw an opportunity to get in. I am still planning on taking on more positions tonight. Gustav is looking like it is going to be extremely nasty. Once it hits the Gulf of Mexico apparently it is going to hit a stream of warm water all the way to Louisiana. This will fuel the strength of the hurricane as it hits the Gulf’s drilling platforms and moves to the refineries.

This will probably cause at least a $5 spike, which I expect will be followed by a collapse to the range we have witnessed in the last month.

Has the news worm turned?

The economic news flow in US markets has been relatively positive this week. Of course I do mean relative to the apocalyptic series of stories and commentary we have grown accustomed to this year, but generally this turnaround is well-timed for the rally I am looking for.

Although the Dow is down about 90 points as of writing, this week has been very good for this index, the FTSE and the Nikkei.

Yesterday’s upward revision of US GDP data was extremely helpful as was news of signs of improvement in the US labour market. While we saw US personal spending take a heavy hit today, I feel this was offset somewhat by much better than expected manufacturing output data and confidence indicator in the Chicago PMI and Michigan Sentiment Review. If this mini-trend of positive surprises continues into next week’s Payrolls Data then this should help push the indices through their resistance points.

Thinking about the GDP data, I am fairly skeptical about this upward revision. A move of close to 1.5% is huge and well beyond what I would expect as normal statistical variance. A lot of this result was explained as being as a result of increased exports as a result of Dollar weakness. What I am suspicious about in this explanation is that the bulk of US exports is on a business to business basis. Anyone remotely familiar with running a company will know that changing suppliers is not an easy thing to do. It is difficult and risky to move such relationships. Typically businesses also have to run down inventory before moving over as well. I find it hard to believe that US exports have improved so quickly. One possible explanation is that existing purchasers of US goods have taken temporary advantage of Dollar weakness to build up inventory and improve future margins. Irrespective of this I will keep an eye on any future revisions for this figure.

Obama’s acceptance of the Democrat nomination

I have actually taken some time off this afternoon and took the opportunity to watch Barack Obama’s speech yesterday.

It is actually well worth watching. I have picked up on some commentary accusing him of hubris, but having seen the speech I actually think it is one of the boldest moves I have ever seen. This man oozes the kind of confidence we rarely see in our public figures. His rhetoric actually carries some weight and I hope that it turns out not to be just political spin. The message that Obama represents is one of change. As I wrote, on my return from America, this is exactly what the US needs to hear and seems to be desperate for.

I know that Obama’s lead in the poles isn’t that spectacular, but I still expect he will win by a landslide in November. McCain’s campaign already looks tired and too closely associated with the current Administration. We will have to see how well received McCain’s running mate is received (he has announced this afternoon that it will be Alaska Governor Sarah Palin) but I can’t see him arresting the decline. Budgets are going to play a massive part, as ever in the US politics, and Obama has a huge lead on that front.

We will have to see how things progress in the next few weeks, but if Obama opens up a lead in the polls, his message of change is likely to stir the market rally I am banking on.

Time for a breakout?

Although volumes have been extremely low in this week’s US and UK rallies, prices are now at critical levels. Ideally we need to see the Dow break through 11,800 and the FTSE through 5,650.I will write more today, but if watch out for a big pullback off today’s prices. This could spell bad news

An oil play; The Fed Minutes and the Dollar; Labour Day

I am increasingly hate trading oil, as it really is a dirty way to make money. It seems that whenever I go long, it is against the backdrop of something horrible happening somewhere.While oil is the lifeblood of the global economy, the price it extracts for this is extremely high environmentally, socially and in terms of global stability. I have touched on the moral hazard of trading the markets before and what I am about to write is a perfect example of this, so bear with me.If you have been watching the news headlines in the last few days then you will be aware of Tropical Storm Gustav. This tropical storm has the potential to turn into a powerful hurricane over the next few days and slam into the Gulf of Mexico.

Predicting the path of hurricanes still carries a fairly high margin of error, but there are certain factors, which indicate this could be bad.

Starting off with the likely progress it will take you can find this here You will notice that the projected path potentially takes it south of Cuba and through the Yucatan, where it could then turn North. If this happens, then the tropical storm is likely to strengthen to a hurricane. As tropical storms or hurricanes pass over land to sea, then the change in surface temperature leads them to strengthen. Katrina hit the US at almost exactly the same time, three years ago and took a similar path, so there is a seasonal precedent adding to the likelihood of this happening.Looking next at the timing of this storm, this could represent the trading opportunity. Over the course of this weekend, it will become clear when and where this storm is likely to hit and how strong it will be. Obviously the markets are closed over the weekend. Monday is then Labour Day. While it will still be possible to trade oil on that day, volumes are likely to be lighter given the US public holiday. These two factors together could lead to a massive surge in the oil price, if Gustav batters the Gulf of Mexico oil platforms.If you want to trade this event, then Friday evening is the time to do it, with extremely tight stops. I have to be honest and admit I am going to. Once Gustav has passed then fundamentals are almost certain to kick back in and we should see further falls in the price.

The Fed Minutes and the Dollar

The Fed released their minutes from August’s meeting on Tuesday. Market reaction was fairly muted but they did make interesting reading.

Where there was movement in the run-up to their release, was in the Dollar. It strengthened again.

I was clearly wrong in predicting further Dollar weakness over the course of the rest of the year. I expected Trichet and the ECB to maintain a hawkish stance to interest rates to combat inflation, but as the economic numbers in the Eurozone weaken, it is likely they might have to cut them. At the same time it is clear that the Fed’s next move will be up.

The August Minutes did nothing to diminish this view. It looks like August’s meeting was quite animated (at least as far as these things ever are!). There is obvious dissention in the ranks about what to do next. Concerns about inflation are in the ascendency and will soon override those about the fragile state of US economic growth. While the minutes left the statement about expecting inflationary risks to recede in the coming periods, as with the Bank of England, this really does seem to be forlorn hope.

I am still sticking to my view on the first Fed rate increase coming in March, but I am going to keep reviewing this. In the meantime, the Dollar probably will weaken again, but if it does, I am likely going to take this opportunity to go long against the Euro.

Labour Day

Volumes are still light in the stock indices. I wrote earlier in the week about the need for volume to pick up. Labour Day (and I know I am using the English vernacular!) is next Monday. While there have been some small rallies this week, next week is the big week.

We see the end of the holiday season and get the next Labour report on Friday. As you know I am already long the major indices and selected stocks. I have reasonable profit buffers so I am going to stick with it, unless anything changes massively!

Time for the indices to rally

We saw another big drop on the Dow today, on low volume. This was reflected in the other US indices. Apparently financials accounted for 25% of the declines, but a brief look over the group’s trading stats for the day also shows that their volume was very low. In the last few weeks we have seen big down days on low volume. There have been fewer large up days, but those there have been, have been on higher volume. So why aren’t indices rallying yet?

There is still a lot of negative sentiment out there, but the bad news isn’t getting any worse (at least for the time being). Fannie and Freddie are almost certainly weighing on the market and the rumours about Lehmann aren’t going away. Oil is still holding a pattern above $110 and inflationary pressure is increasing across the Globe.

Even so this bad news hasn’t led to a big sell-off in the last 6 weeks. When the Dow hit a retraction zone and reversed (at 11,800) it would have been fair to expect to see the rally fail. While the Dow hasn’t broken the 11,800, we have seen a succession of higher lows. If today’s pullback continues then this could be a bad sign, but the lack of volume suggests it won’t.

My short-term bullishness was also reinforced at the weekend by the announcement that Obama had picked his running mate. In choosing Joseph Biden I think this move could be the one that wins him the Presidency. Having read about Biden over the weekend, it is clear Obama has chosen a more experience man with a solid reputation and above all experience in foreign policy. The Democratic National Convention is happening at the moment and once Obama is confirmed, I think this could be the start of the election rally I am expecting.

Now that we are into the last week of August, I really need to see the Dow, FTSE and Nikkei start to move forward positively. I have quite a lot of exposure to these and also to several indvidual stocks. I am going to manage to my stops very carefully and above all keep a close eye on volume. The trouble is that if volume picks up here and forces stocks lower, given where prices are I will have very little time (if any) to react to this. If, on the other hand, volume rises and the Dow breaks through 11,800, then strap in as it should be an amazing ride!

Fannie, Freddie and the Fed

Fannie and Freddie both fell 25% yesterday on four times volume. Given how low the stock prices already were, this surely has to be the final admission from the market that shareholders are about to get nothing out of a Government bailout. They say that Americans always do things bigger and brasher than us Brits, but this really is Northern Rock with bells on!!!!

My only question at the moment is why has the Fed been so quite this week?

Although volume has been light Fannie and Freddie have been heavily weighing on sentiment. In similar situations this year, we have seen the Fed act aggressively and quickly. However in this instance they do not seem to be in such a hurry. The decline in Fannie and Freddie’s stock would indicate that institutional stock holders can see the writing on the wall, if they have not already been privately warned about it.

I actually take the lack of public comment from the Fed on this issue as a good sign. If they were unduly worried that this might be the trigger event for a broad market collapse, then we would surely have heard something official by now. The fact that we haven’t and that volume has been low this week could well signal that we are at a short term bottom.

Of course I could be totally wrong. The lack of official comment could be down to the fact that Fannie and Freddie are such a huge mess that policy makers and regulators have no idea what to do with them and are desperately trying to figure out what to do next. The lack of volume in the market could be explained by the fact it is the middle week of August and major market players are sunning themselves on their private yachts.

While I am alert to the counter argument to my position, I am sticking with my guns for now. I bought more of the Dow yesterday, when it dipped and expect news in the next few days on details of the bailout of Fannie and Freddie.

“We have to see more consolidation in the financial sector before this is over”

This quote came yesterday from Karl Rogoff, a former IMF Chief Economist. During his speech at a conference in Singapore he also warned that we are likely to see the failure of a major bank in the US in the next few months.Although these comments might seem to be unguarded, I actually take them as a good sign. The chances are that Rogoff is spot on in his assessment of the Credit Crisis. It is clear that we are not through the worst of it and certain financial are clearly cracking under the self-inflicted pressure exerted on their balance sheets, by several years of foolish trading. As I said the other day, weak economic fundamentals are likely to sound the death knell for at least one bank, if not several.

What I see as positive about this prognosis is that it is firmly grounded in reality. We saw a few months ago commentators the World over proclaiming that the March rally was the start of a new bull market. The commentary in the spring held that the Bear Stearns incident was the beginning of the end. It clearly wasn’t and the Dow promptly collapsed from 13,000 to just below 11,000.

Rogoff’s comments reflect a far more pragmatic, if somewhat gloomy outlook. Quite when his predictions come to pass, still remains to be seen, but it is clear this crisis has at least one more massive casualty left in it. My money is on it happening in the first half of 2009. It could well be the first major hurdle President Obama will have to contend with. I have written that a lot will depend on Obama’s Presidency and I am sticking by this (making a bold assumption that he will even win, but American politics is the best that money can buy and he certainly isn’t short of that!!!). If we see a strong response to the first economic emergency of 2009, then hopefully things will start to bottom out over the course of the rest of the year. If not then we could have major problems on our hands.

Inflation is still a major threat and I haven’t fully decided my position on this yet. If left unchecked it has the potential to cause havoc in the Global Economy. Actually Rogoff also addressed this in his speech yesterday. He was especially critical of the Fed’s aggressive rate cutting policy. I haven’t bashed Bernanke for a while, but this served as a poignant reminder of how reckless the Fed has been in pumping liquidity into a failed system. If they somehow manage to bring inflation under control in the next 12 months, then I will be the first to admit I am wrong. The problem is I just cannot see how they are going to do this, without totally unraveling their strategy of focusing on stimulating economic growth and preventing recession.

Moving back to the market this week, trading volume has been extremely light. Even today’s small rally did not have much weight behind it. While Fanny and Freddie have been smashed to 18 year lows on huge volume, this doesn’t seem to have been contagious in other financial stocks. I am still long Washington Mutual, but only just. It has been slipping, but volume hasn’t been great. While I can see further downward moves this week, I am expecting a stronger rally from next week onwards, if my Presidential Election play is to prove to be correct. If prices do fall further this week, then I am probably going to buy more, so long as volume remains low.

On that note we have decided that we are going to set up some sector views on this site, which will give you the opportunity to check daily volumes on the major US and UK indices. Watch this space for further announcements.

Why I’ve bought this dip and am still long term bearish

I wrote a few weeks ago about the dilemma facing US regulators concerning Fannie Mae and Freddie Mac. My basic point was that both banks were simply too big to fail, but nor could they likely be saved, preserving shareholder value.

Yesterday’s big selloff in both stocks, led to a big down day in the Dow. Headlines in all major news providers screamed that this demise was led by financials. On the face of it this was very bad news. However I have taken the opportunity to buy this pullback. Here’s why….

First off the “news” about Fannie and Freddie really isn’t new. These problems have been around for a long time and are recognised by power brokers on Wall Street. The outcome has to be clear. While it might lead to some short term jitters, if it were going to break this current rally, that would have happened already.

Second volume in all other financial stocks yesterday was between 50% and 65% of its 3-month MA. Big declines on small volume are generally a bullish sign.

Third overall volume on the Dow was 2/3 that of its 3-month MA….. no need to repeat myself there then!

I still have concerns about this week’s inflation data and the lurking Lehman, but overall I am happy to buy in again on the Dow at 11500. Even so the allure of regime change in the US still gives me optimism for a rally in the last few months of this year.

In the longer term I am still not too positive.

I heard some commentary this morning, which really summed up why I don’t believe the Credit Crisis is over (I have pinched this idea and would credit it, if I could remember the commentator’s name!!). Basically the point was made that the losses in the banking sector have so far been largely limited to the self-inflicted losses of their questionable lending practices and the huge counter party risk they were prepared to take, without proper risk management strategies or appropriate compensation packages. The information that comes out of the financial services sector is notoriously opaque. This makes it very difficult for investors to judge properly the risks of buying into banks at this point, even though the value appears to be there. What is clear, though, is that the banks haven’t yet announced losses usually associated with an economic downturn. Given that all the numbers are pointing down, this cannot be that far off. How well prepared certain banks are for such an outcome has to be questionable.

2009 is not looking like much fun…..

Implications of Dollar Strength for Japan; Gold falls; Lehman might report early

We went long the Nikkei 225 on Friday. There were two main reasons for this move.

First the Index was well below its March2008 Value Zone (13520:13533). Regular readers of this blog will know that I am medium/long term bullish on the prospects of Japan. While I can see further pain to come in US, UK and European markets, I think the low of March 17th in the Nikkei could well prove to be a bottom. We entered at 12950.

Second the US Dollar has continued to rally strongly. While this meant my Euro trade got stopped out (I should never have made it and worse still I should have ditched it and gone the other way!), it has started to give me a new view on the market. I still don’t think we are through the worst of the current economic travails and I still can see further Greenback weakness in 2009, but for the time being it looks like the Buck has turned into a Bull!!!

This strength has profound implications for Japan and Germany. As two of the World’s largest exporters Dollar strength has seriously hit their respective GDPs. Last week’s data confirmed this as in both cases it fell off a cliff. If the Dollar maintains the last fortnight’s positive moves, then we should start to see both Japan and Germany’s stock markets appreciate.

Of course such macro-moves can take time to filter through into results, but if this view is correct then I am feeling very confident with this entry point. I closed my last Nikkei trade, off the back of US short term weakness. I am likely to hold this one for longer.

Looking at the Gold market, I have been really encouraged by its fall below $800 on Friday. The Dollar’s strength has definitely contributed to this fall, but I am not sure if that is the only reason behind it. Gold has traditionally been a safe haven for investors. When things have looked bad, Gold has risen. Until August last year, Gold had hit pretty significant resistance at the $700 mark. Once it broke through this level, it really did act as a harbinger for a collapse in the Dollar and global stock markets.

While it is still well above the $700 mark, it is now over 20% off its high. Its elevated levels do still indicate a nervousness about prospects, but the pullback should give further sustinence to the US election rally that I am banking on.

Finally there were rumours at the weekend that Lehman is going to report early, thanks to its likely loss of $1.8billion. In particular their exposure to Alt-A mortgages (mortgages, which customers didn’t fully disclose their income) is looking increasingly toxic. It is no secret that Alt-A mortgages look increasingly like the next villain to smack the beleaguered financial sector.

If Lehman do report early (and the results are bad) then expect an immediate sell-off. This should, though, represent a good opportunity to buy the Dow. My reasoning behind this move would be that Lehman’s decision to announce early will be to avoid a sustained attack on its share price over the next two weeks as the rumour mill gets into full flow. From the Board’s point of view taking a short term painful hit, will be better than putting up with two weeks’ worth of attack. From the market’s point of view I don’t believe news from Lehman will be able to reverse the bullish pattern, which is settling in, as Lehman’s bad news has already been priced in.

Why we need an election in Britain.

It looks like I could be wrong about the Euro. While I am going to leave my position alone, the Dollar strength looks to be gaining momentum. If the Euro forms a base at this level, I could be alright, but I am certainly not going to chase a loss on this one. While watching the Euro continue to slide, it has actually been Sterling’s demise that has been most pronounced.

I wrote back in April about the collapse of Sterling and made the point that my commentary was pointless, because I hadn’t profited from an entirely predictable market movement. Before starting today’s blog I find myself having to make the same point and am kicking myself as much as I did 4 months ago.

The last 10 days has seen an absolute rout of the British Pound. What is frustrating about this is, you will remember, I was short GBP/USD about three weeks ago. While I made a profit, I could (and possibly should) have made five or six times the amount at least.

The macro-economic news in the UK has been getting progressively worse all year and talk of recession or the dark days of the early 1990’s dominates discussion. You only have to go shopping on a Saturday to see how badly consumer spending has been hit or compare local house prices to see steady falls there.

Yesterday was a particularly bad day for news.

First we heard that inflation hit 4.4% and is likely to creep above 5%. What was most comical about this was the announcement from the Bank of England that they expect inflation to retreat to their 2% target if they leave rates as they are. Remember that this was the same Bank that not that long ago was consistently down-playing the risks of inflationary pressure. Of course the BoE has not been helped by the Office of National Statistics (for that read the Government), who have continuously tinkered with and watered down the “official” means of measuring inflation. Now we find ourselves in the ridiculous position where the “official” inflation figures do not take into account energy, mortgage payments or Council Tax (the local tax based on property value). Talk to an average family and ask what their top five monthly costs are and these three will almost certainly figure. During this Government’s time in office they have consistently weakened the credibility of the ONS and this is something I strongly believe needs to be addressed by any new Government, though I doubt it will. It is expedient for politicians to manipulate the truth and it would be a brave Cabinet, who presents the genuine challenges this country faces.

The second bit of bad news was that unemployment continued to rise in the last period. In real terms this news was especially worrying as the BoE also announced that growth is likely to remain flat. If inflation remains at current levels then this means the economy is actually contracting in real terms. If growth reverses into recession then this cycle could well become prolonged and pronounced. Breaking out of it will be extremely tough, especially given the state of the Nation’s personal and public finances.

Before these two items we heard on Tuesday that more and more UK consumers are defaulting on credit card debts. At the weekend it was claimed that the Government’s attempts to leak yet another new policy initiative, removing stamp duty payments, had further hit home sales. Unsurprisingly home buyers have put on hold their planned purchases, in the hope of not paying stamp duty in the not too distant future. This last point was very disappointing as it would have been a far stronger move by the Government to have announced this rule change with immediate effect, rather than say this was an option they were examining.

As a rule I don’t want to become too political in my blog. Re-reading this one, I am not overly comfortable with its tone, but it is incredibly difficult to write anything about the UK, which does not reflect the weakness of Gordon Brown’s Government. They are clearly in terminal decline and I think the best thing they could do for the country is call an election. Their nerve failed last autumn. Fearing a battering at the polls they blinked at the last minute. Whether or not Labour won or lost, I think an election would have been in the best interests of the country.

My fear is now that if this Government limps through to May 2010, this could severely prolong the effects of an economic downturn. The mood of the Country is definitely one in need of change and I am afraid I cannot see this Government delivering that with the mandate they have.

More Banking Woes

You couldn’t have failed to notice the bad news yesterday around the global banking industry. UBS announced dire results (no surprise there), Jamie Dimon declared that trading conditions had deteriorated sharply since July (shocker!) and Wachovia were cutting an additional 600 jobs (probably a prudent step, but not that much of a revelation). The sell-off in stocks was predictable; however the numbers show something interesting.

Across the Dow, volume was still relatively low (about 2/3 the 3 Month Moving Average). While JPM, MS and GS all declined on volume between 30-50% higher than normal, the more troubled banks (WM, WB, FRE and FNM) all declined on notably less volume. I could be clutching at straws here, but I don’t think yesterday’s news will be enough to kill this rally.

My sense of this is heightened, by the lack of a pullback in the Dollar. I think the true reaction to yesterday’s news, was limited because the market is gearing up for a decent bear rally and there is enough momentum behind it now that the next move should be back towards 13,000 on the Dow.

Equally I am not yet confident enough to go long again just yet, as there are some key data sets still to come this week, which are bound not to be good (US inflation figures mainly). The sell-off could well extend into the rest of the week, but if we see another 100-150 point decline, then I am going in.

In terms of the longer term outlook, I do think yesterday’s news was very bad. The Fed started acting aggressively to prop up the financial system 8 months ago. If their plan had truly worked, things should be starting to show signs of improvement now. While an argument could be made about the rally in stocks represents this, as I have written before I think this will turn out to be a false dawn and will be driven by the Presidential Election.

For Jamie Dimon to come out and say publicly things are getting worse, then this is a very bearish signal. He is normally one of the Cheerleaders-in-Chief, dancing on the sidelines proclaiming all is well with the World. Of course, there is a chance he might be employing some kind of extremely sophisticated strategy, but I can’t see how he might benefit from suddenly changing his tone, unless he is preparing the way for next Quarter’s awful results.

With respect to UBS, this bank is clearly dead in the water. The sooner the Board accepts this and splits its three main divisions into separate trading units the better. The longer it continues to drag out its slow demise, the more delayed a recovery in the sector will be. UBS has been carrion for the financial press, decrying the prospects of the Global Economy. The affects of this chatter are surely having a self-reinforcing affect. The more we talk up the chances of recession/depression/financial collapse, then the more likely it is to happen. UBS has been one of the clearest signals of serious failures in global banking markets and it would be best for everyone if it simply bowed out. I don’t want to seem too hypocritical here, especially given the stance I have taken this year, but I would like to be able to start writing about signs of the beginning of the end.

After the holidays — Currencies, Oil and the Dow

I should start off with a review of my progress in the last few days. I got wrong-footed on Thursday. Trichet and the ECB did my Euro/USD position absolutely no good whatsoever!!

I took a pretty heavy loss as the Euro tumbled. Thankfully though, I was sitting on a good profit on my oil position, so I closed that. As the Euro plummeted there was a delayed reaction in a sell-off in oil, so I was able to close at the top. To be honest I should have shorted oil at that point, but didn’t.

Unfortunately I had some pretty significant work commitments on Thursday and was away on Friday on business. Lack of Internet access, meant I didn’t buy Thursday’s dip in the Dow, and boy did I miss a chance there.

Thankfully though I am long a couple of stocks (yes that’s right I don’t write about all the system picks!!!), so I did get to benefit from the upswing on Friday.

In terms of what happens next in the market, I think there are some excellent opportunities shaping up.

First I do not believe we have seen the end of Dollar weakness. The housing market is still collapsing, the credit crisis rumbles on, growth is slowing and the Fed is not really in a position to do much more. While I think the stock market is likely to rally thanks to the election, I am not so sure the currency will be subject to such relief.

However I am also mindful to watch the charts. We are approaching the end of holiday season when volume flows back into the market as the major players return from their private islands and homes in the Hamptons. Last week’s rally in the Dollar was so strong that it could well signal that it has reached its bottom.

Today’s Lex also pointed to the possible end of the carry trade as being further evidence of a likely Dollar strength (,Authorised=false.html? While this is a fairly convincing article, the lack of carry trade activity is surely a symptom of the credit crisis, rather than an end to this particular trade.

I have gone long the Euro, but I have fairly tight stops (200 points). If I am wrong and the Greenback continues to rally, at least the damage will be fairly minimal.

I could do with the system for further guidance here, but since it crashed in the spring, we haven’t been able to fix that part (new developers are working on it, so hopefully this won’t continue for long).

Oil is a bit trickier to call. While I have been fairly lucky in my long positions (and exiting them fairly promptly), prices are now nearly 30% of their highs. Given the speed this has happened at I am less keen to go long, but I still have faith in the system and do not believe that the bull market has ended in this yet. If we look at what is going on in Georgia at the moment, the World is extremely unstable at the moment. While the February 2008 Value Zone has been breached (11965:11982), the August 2007 value zone is still 10$ away at 10495:10521. I am going to watch prices for the time being, before doing anything.

Finally the rally in the Dow has been extremely pleasing, but I would like to see more volume. At the moment, daily volume of this rally has failed to break through the 3-Month Moving Average on the up days. I am not too concerned yet about this, as we are still mid-way through August. I think there could still be a pullback, at which point I will go long again, but I would like to see stronger performance on the rally as it approaches 12,000.

Something strange about Tuesday’s volume data on the Dow; Oil and the Euro

With yesterday’s Lonmin debacle, I didn’t get the chance to write about what I had planned to yesterday.First off I closed my Dow position on Tuesday night after the Fed announcement. I decided to lock some profits in, as I can see there being a pullback over the next week.

Tuesday’s run on the Dow was generally encouraging. I had kept a close eye on it over the day. While volume didn’t appear to be too spectacular, equally it wasn’t that bad. I was surprised to read therefore that volume was meant to have been quite light. I looked yesterday at the historical prices on the following sites;


You will see on both sites, that Tuesday’s volume was apparently miniscule (the lowest since Christmas Eve 2007). Quite simply I think this is wrong. As I said I kept a fairly close eye on the volume of the Dow over the course of the day and unless I have completely misremembered then there was no way it was so low. Equally I can’t really see how such low volume would have allowed a +300 point move.

Something is wrong. It could just be erroneous data by both Yahoo and Google, but if anyone out there can explain this problem I would really appreciate it.

Anyway getting back to the Dow I was happy to take profits, as I have my eye on today’s rate decision by the European Central Bank, which is followed by a speech from Jean Claude Trichet. Given recent statements, I would not be surprised to see a surprise rate increase in Europe. I know this is fairly unlikely, but it wouldn’t shock me.

What is more likely though is a hawkish statement from the ECB or from Trichet, or both. He has already surprised the market recently with anti-inflationary statements. Given the recent rally in the US$ I think the tail end of the week will see the Euro regain ground, which will push up oil price and in turn flatten stocks.

I am taking a very short term long position on the Euro vs. US$ and an October long contract on crude. With respect to the latter it is worth pointing out that its February 2008 Value Zone stands at 11956:11982. I bought at 11750. I know that the Value Zone wasn’t held, but this could be a decent level to go long. I know there is a lot of speculation that the bull market in oil is over, but I am looking at this trade largely from a system point of view. I am increasingly aware how little I understand the oil market, but historical conformance with Value Zones has been strong.

I can see further strength in oil caused by further weakness in the US$. The Fed next meet in September. I think it unlikely that they will raise rates at this point, given the parlous state of the housing market and the ongoing credit crisis. While the futures market is pricing a 25bp rise at roughly 2:1 these odds seem generous to me. The next meeting is in October, right before the Presidential election, followed by one in December. In both cases I can’t see them acting, for fear of accusations of political manipulation. It is possible that January 2009 will offer a chance to raise rates, but the new President will be less than a month into the job. If this logic holds true, then the most likely point of the next rate increase is March 2009. Of course if inflation continues to spiral out of control, then the Fed will be forced to act, but I can’t see it adopting a hawkish policy unless it absolutely has to.

I will keep revising my outlook on this issue, but for the time being I think it fair to say that we have not reached an end in the run on commodities or weakness of the US$


To say I am devastated by Lonmin, would be the biggest understatement of the summer!

I was up early this morning, only to be greeted by the news that Xstrata are indeed tabling an offer for Lonmin at £34.00. I simply cannot believe it. This morning the stock leapt 47% or 1100 points. I would have cleaned up if I stayed in (and I do mean cleaned up!).

The lessons from the horrible way in which I traded this stock just keep rolling.

My first decision is that I have decided not to dwell on this. Beyond writing this blog (and no doubt sharing a few laughs with some of you!), I am going to move on. I am not going to anchor myself in this exceptionally poor result, which could have been a massive victory. My decisions have generally been good recently, so I am sticking to my system.

Second I resolve to do more fundamental analysis on individual stock picks. I wrote about this last week and mean it.

Third I am going to commit to learning more about volume data.

This last point is especially important. The reason for this is that my usual metrics ditching this stock was the right move. It had failed to hold its April 2005 Value Zone and was falling pretty steeply on volume at least 60% about the 3-month moving average.

However, a rumour of this Xstrata bid broke first two weeks ago. It has turned out to be true. Given that this information obviously made it out into the market, why was this not reflected in the volume stats?! I find it very hard to believe that those well-known Moral Compasses in the City passed up on the opportunity to load up on this stock. Given that Xstrata’s bid was nearly 50% above the asking price; the temptation must have been great.

I must be missing something.

The system in the past has picked up on some of these insider trades, but it completely missed this one. We are going to start a new research phase on the system, in the next few months and this is going to be one of the areas we investigate. No doubt I will revisit this topic, so I will update you on anything we discover.

The difficulty of today’s rate decision; Reverse Globalisation; Northern Rock

Today is a big day in World Markets. In the last few days we have seen large falls in commodity markets, which have pulled many miners and energy companies into bear market territory. The US$ has also strengthened. In both instances I take this as clear signals that the Market is expecting the Fed today to set the scene for rises in the US base rate later on in the year. I would be shocked if they raised rates today, but given the general inflationary outlook, they surely are going to have little choice in combating this threat.

However in this decision there lie two serious dilemmas.

The first is widely recognised and has been commented on ad infinitum! If the Fed raises rates, then this could well push the economy into a fully fledged recession. Given the Fed’s earlier insistence that economic activity takes priority from a policy perspective, they could completely unravel their original strategy for solving the current problems by tightening rates too quickly.

The second major problem I can see that the Fed faces relates more to traditional economic thinking (and I am about to contradict myself here slightly). Most economic textbooks will tell you that in response to inflationary pressure, interest rates have to go up in order to dampen demand and therefore prices. While this might have been true historically, globalisation has weakened the overall influence of individual central banks. The Fed has been one of the first central banks to recognise this fact, bemoaning the lack of support (especially from Europe) earlier in the year, when others failed to follow their lead in relaxing rates.

There is now a massive sense of expectation that the Fed has to raise rates. The problem though is that it might not do any good. If we are to believe the likes of Jamie Dimon, CEO of JPM, then the huge rises in commodity markets have been largely driven by fundamental demand, not speculative trading. While I don’t buy this argument completely, there is some truth to it. The rise of the BRIC (Brazil, Russia, India, China) countries has certainly pushed up overall global consumption of basic materials.

Even if the Fed does raise rates, how much of an affect will this have on overall global consumption? I would suggest not as much as has been historically the case. When you factor in the speculative nature of many commodity markets at the moment then any Fed actions are further diluted.

Pointedly, the Reserve Bank of Australia is expected to reduce rates next week. As you will remember I had some successful trades on the USD/AUD pairing earlier in the year as the Australians maintained a hawkish policy. However they now seem to be adopting a dovish stance to revive a flagging domestic economy.

This evening’s statement from the Fed will be extremely interesting. I expect we will probably see an indication from them that a round of rate increases is coming. I doubt this will be until after the Presidential Election, but when they come, they will probably come quickly.

If these rate rises are done in the context of a globally coordinated effort from the major central banks, then they might have the desired affect. However if they are not, then this could not only weaken economic output and fail to curb inflationary pressure, but also increase protectionist policies, further exacerbating the global problems.

Reverse Globablisation

It is in this light that Alan Greenspan has written an article published in today’s FT —

“Reverse Globalisation” has been used in the past to describe the process whereby the BRIC countries especially (though it did apply to other developing countries), financed richer countries by deploying currency reserves they built up through exports in the developed countries’ financial markets. Bonds and equities have tended to be the major “beneficiaries” of this. Recently Sovereign Wealth Funds have been extremely noteworthy as another manifestation of this process.

In time however I think “Reverse Globalisation” could well take on a new meaning. If protectionism increases as problems worsen, then it is probable we will see a temporary unwinding of international trade. I say temporary as there is a certain inevitability of the global economy working more in harmony, but the process of achieving this could be extremely painful in the next few years.

Northern Rock

You couldn’t have failed to notice that Northern Rock announced a loss of £550million and cited worsening market conditions. Unsurprisingly much of the loss came from some of the more toxic products Northern Rock sold, such as the infamous 125% mortgage. While these were the headline items, looking a bit further into the announcement I saw some signs for encouragement.

First Northern Rock has repaid 1/3 of the loan from the Bank of England. This has been achieved at a faster than expected rate.

Second, Northern Rock’s loss ex-tax was much closer to £200million. While this is not great, it is also not dire.

Thirdly Northern Rock announced a pseudo-rights issue, whereby the Government will take on more share capital in the business, which in turn will repair some of the damage to its balance sheet. In the event of Northern Rock being re-privatised in the future, this could be quite a smart move.

Given how bad the situation could have been for the British Government, these results looked really quite positive to me and could be a further sign that we might be at the end of the beginning of the credit crisis.


I tightened my stops last week on Thursday, ahead of the US GDP data as a precaution and was very glad I did. The number came in at 1.9% for Q2, versus the 2.3% expected by economists and stocks fell a great deal. The interesting news was that Q4 of last year was revised to show a slight contraction in economic activity. A lot of this latest quarter’s activity has been attributed to the US tax rebate. Overall these figures did not paint a rosy picture and heightened my sense that the US is actually in recession, but that the Fed do not want to acknowledge this in the figures, for fear of making it worse.

I know this might sound like a bit of a conspiracy theory, but given the payrolls data on Friday (which showed another retraction in the job market and a higher than expected rise in the unemployment rate), the medium term fundamentals all point in this direction.

However I am still sticking to my guns on there being a bear rally inspired by the Presidential election race. Given that my entry point back into the Dow was now well below my target price of 11400, I took the risk of going long on a March contract ahead of the payrolls announcement on Friday. I went long at about 11300.

While the numbers weren’t that great, there was a lower than expected number of jobs lost, so markets rallied initially, but the Dow did close down 50 or so on the day. I am going to stick with my position, but the outlook is certainly worsening.

There was one final bit of bad news last week. Earnings season on the S&P 500 was the worst in 8 years and marked a fourth consecutive quarter of overall falling profitability. As unpalatable as it may be for policy makers, someone soon is probably going to have to acknowledge that the US is in a true recession (stripping out the tax rebate) and has been during the first half of 2008.