Monthly Archives: October 2008

The Bradley Effect in 2008….

While stock markets surged today (though not on spectacular volume, so let’s not get too excited yet), I was pondering the Bradley Effect. A lot has been written recently about how this might have an adverse effect on the upcoming Presidential Election. For those who don’t know the Bradley Effect is named after the 1982 Californian election for Governor when the black Tom Bradley was beaten by the white George Deukmejian, despite all polls pointing to a Bradley victory. This “freak” result was attributed to a reluctance of white Americans to vote for a black man.

Fast forward to 2008 and a lot of commentators (stirred up by McCain’s “private” polls) maintain that this election is far from won as the potential influence of this factor cannot be ignored. While I am sure that a lot of Rednecks out there, still fighting the Civil War, I don’t believe these people are seriously representative of mainstream America.

It wasn’t that long ago that Obama was hitting the headlines for the vast amount of money he raised from individuals, through the web. With an average donation of $140, several million Americans have already cast their vote. McCain can’t even begin to compete in this respect.

Next week has to be a landslide. I know I said I am going to stay out of the market until December, but I might well have a little tickle on Election Day!

Another day, another sell off

I have sat down several times in the last four or five days to write a blog and really haven’t seen much point. The news everywhere is just so dire.

I took a brief look at the Nikkei when I saw it was at a 26 year low. It is at 7,000 as of writing.

I then saw that Sterling had fallen another 500 points against the Greenback. It is hovering at the 15300 level. Oil is at $62 and Gold is at $700. Hedge funds are collapsing by the day as investors pull money and pretty much everything else has had the stuffing knocked out of it.

I had thought that 8,000 on the Dow might form the basis of a bottom. Another rally off this level today though, proved short-lived as all the gains were given up in the final hour of trading. Although volume was light, this was yet another bearish signal.

Yet still the sun is shining, people are walking about the streets going about their daily lives and there is loads of crap on the telly. As far as Armageddon goes this really is pretty mundane.

Perhaps we might move back to 0. Just imagine – a complete revaluation of all that we have come to hold dear. Now that would be exciting.

Of course it is not going to happen. All the talk of market-ideology being vanquished is simply nonsense.

Have the populations of China, India, Brazil and Russia hugely contradicted and those that remain have given up their ambitions for modernisation? Have we discovered vast swathes of previously untapped natural resources or new land? Have greed and self-interest disappeared along with all our wealth, the value of our houses, our Icelandic bank accounts and the 0% balance transfer offers?!

The answer to all of these is questions is a resounding “NO”. While we are bound to experience some pretty great change in the way business is conducted, how much we spend and what spend it on, the basic trends will revert to type. It might take a couple of years but it will happen (I hope!).

We really need an Obama landslide.

Recession in the UK

It is very rare that moves in the currency markets make headline news in the UK. When they do it is normally because something pretty bad has happened. Today was no exception.

The rout of Sterling looks to be near complete as it fell to 5 year lows against a basket of currencies. Today it fell a massive 7 cents against the US Dollar (I really couldn’t have timed my trip to America any better!!).

This collapse was caused by a speech from Mervyn King in which he acknowledged that the UK was probably in recession. However fear not!!! According to Mervyn this will be short-lived and will only last a few quarters. Phew!!!!

Given how well the Bank of England, the FSA and the Treasury have managed the last three years you will forgive me if I am not exactly filled with hope.

As an aside I read an interesting blog on bbc.co.uk, which is well worth reading http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/10/what_mervyn_didnt_say.html. I especially loved the comment in the update – “At a time when some have questioned whether central banks have lost their power, Mervyn King still moves markets”.

King’s comments last night were then followed by a tempestuous Prime Minister’s Questions. Brown also used the dread “R” word, but rather than take the opportunity to spell out his vision for how he is going to lead us out of this he resorted to some pretty petty name-calling aimed at the Conservatives. While he was provoked I am more and more concerned at the lack of a clear strategy for solving the economic problems we all face.

The sound bites I have heard, give me absolutely no confidence whatsoever. There are no new ideas or serious suggestions. It is almost as if the problem is now so big all we can do is strap in and survive the ride

Bankrupt Britain

It can sometimes be difficult to filter through official UK statistics. If we compare the quality of information and its presentation between that of the US and our own beloved Office for National Statistics then our lot often looks like a ramshackle bunch.

Much criticism has been made of the politicisation of the ONS by successive Governments. It is of course our (UK nationals’) fault that we have allowed this to happen, but given the general state of financial awareness in the country it is no surprise.

Announcements from the ONS can often be impenetrable and subject to revision. Trying to make a comparison between today’s unemployment figures and those of previous decades is nigh on impossible given all the alterations in measuring standards and the number of exemptions, which now apply.

However the gravity of today’s announcement from the ONS concerning the level of governmental debt could not be hidden.

The announcement that public sector debt is at levels akin to 1946 is extremely worrying. I simply could not believe this, when I heard it on the radio. In 1946 this country was just recovering from shattering conflict. In 2008 we have apparently had one of the most “stable” periods of economic growth ever. In time the stability of this “growth” is going to prove to be a mirage, based on excessive borrowing, financial mismanagement and gross overspending on an inefficient public sector bureaucracy.

In the meantime there was more cause for concern, in an announcement from Brown that there are going to be no cuts in public sector spending. We are already taxed to the limit as a nation and the economy looks like it is about to nosedive. This is going to cause serious problems on the revenue side of the Treasury’s books.

Given the state of UK finances and the ongoing Credit Crisis it is hard to see how the Government is going to be able to raise much more debt through money markets to sustain current spending.

With a General Election due in the next 18 months, the politics of the situation mean that this Labour Government is going to find it extremely difficult to make cuts, without upsetting a whole swathe of supporters and undermining their strategy of the last 10 years. Equally if they don’t make cuts they will only make an extremely bad situation far, far worse.

What next for stocks?

As I kept half an eye on another roller coaster day in markets all over the World a horrible thought struck me.

I have been struggling in the last few months trying to determine differences and similarities between 1929/1987 and 2008. I have missed something glaringly obvious and so it seems have most other commentators.

The collapses in 1929 and 1987 occurred at the top of markets.

In 2008 the collapse happened, during what was already a pretty severe bear market. I haven’t fully thought through the implications of this, but my first impression is that this is extremely significant. After all stock prices have well and truly had the stuffing knocked out of them this year. If this is an indicator of what is to come it doesn’t bear thinking about!

There are two possible outcomes.

The first is that the panic that has settled into the market has caused a huge over-correction to the negative side. It is worth remembering that based on historical P/Es, prices in stocks look extremely tempting at the moment. There appears to be a lot of value out there. Of course this “value” is more than likely a mirage. What forward P/Es are at the moment is simply anyone’s guess.

The second scenario is the Armageddon I wrote about the week Lehman failed. I played this down at the time as I couldn’t believe what was about to happen was a serious possibility (and I still wish I had traded it!). The brutality of the last fortnight’s traumatic sell-off has the potential to leave extremely deep scars on the psyche of international investors. It could take a very, very long time before stocks recover.

When we think about all the actions that have been taken over the course of 2008 to avoid this outcome, the whole strategy looks like it has failed. Worse still Governments across the developed World are now highly leveraged and extremely exposed to any further deterioration in financial markets and the real economy. Short of something even more spectacular (and by this I mean a wholesale change of the international financial system) there simply can’t be much more else that they can do to arrest this decline.

I dread to think what October’s economic data is going to look like next month, but watch out for a dreadful number in US payrolls on November 7th. The Presidential election is bound to take precedence that week, but I am sure this data set will be a stark reminder to the winner of the poll, exactly how momentous a set of challenges he faces. Quite why anyone would want that job is simply beyond me!!!

Staying out of the market has been an excellent decision. As it rockets up and down I am sure some people are making pots of money trading the volatility, but I am looking for my next medium term campaign. At the moment I am more than happy to sit this out until the next earnings season.

Why we all need to watch Iceland

As markets fall again and the news flow out of the UK and the States continues to worsen, I am much more concerned about what is going on in Iceland.I have read quite a lot in the last few days about how the economy has imploded in a very short period of time. We have all heard stories of UK savers’, universities’ and even councils’ exposure to the collapse of two of Iceland’s banks, but there is even worse news behind the headlines.

I did used to wonder how a country with a population the size of Coventry had been able to “purchase” so many overseas assets. While this country had the highest per-capita income of any other in the World, it didn’t feel intuitively correct. I didn’t really take any time to look into this, but it is no secret now that the Icelandic Government and financial institutions borrowed to the hilt to fund the miracle expansion.

I saw an item this morning that the Icelandic Government has promised not to default on any of its treasury debt, but I wonder how they can possibly avoid this? After all this is a country, whose currency has collapsed so quickly that its students overseas now find themselves stranded with worthless grants.

For a Western nation to default on debt is almost unimaginable. The reaction to the failure of Lehman was bad enough, but this will pale into insignificance to that of a Western Government becoming bankrupt.

There has been increased talk of the formation of a modern day version of Bretton Woods (the Wikipedia article on Bretton Woods gives excellent background http://en.wikipedia.org/wiki/Bretton_Woods_system). I have been saying for a while that World Leaders have to become more proactive in dealing with this crisis of confidence and that we are in desperate need of new system of international finance.

While I am not convinced that a souped-up version of the IMF is the answer to our problems, if what is going on in Iceland is any indicator of the risks facing over-leveraged Governments in developed countries, then the time for action is now. Of course we are not likely to see anything until the new US President is sworn, but I hope this will be at the top of his action list. With this in mind it is hard to see any direction but down for markets for the rest of the year.

Whatever the outcome, any positive steps forward will likely be too late for Iceland. Whether or not they are too late for other developed countries remains to be seen. Ireland, Greece and Spain have to be on any watchlist of possible defaulters and to be honest, so does the UK. This might seem hard to believe but all the bailouts and underwritings of debt simply have to extract a heavy price.

What a day yesterday was!

Before we all get too carried away and proclaim the end of the Credit Crisis there were a couple of salutary warnings in yesterday’s news and in the moves. While I should have been long (especially given the terrible couple of weeks I have had), I am not buying into this rally.In the UK we saw £50billion pumped into Lloyds, HBOS and Royal Bank of Scotland. The nationalisation of these banks has been an unfortunate necessity. At the moment I am broadly in favour of this move, but I was concerned to hear that as part of the rescue package, the banks will be encouraged to bring lending back to 2007 levels. Surely this was what caused the mess in the first place?!

The last thing that we need now is to return to any of the profligate practices of the last decade. The credit-driven boom is now over and it is going to take time for the economy to overcome this. For the Global Economy to start growing again, new financial models and markets will need to be established. Returning to anything is out of the question and it is disheartening that politicians are talking in this way. The dialogue needs to move forward and point to a better future. I still believe this will happen, just not yet.

The second note of caution in yesterday’s record rallies in the US was that volume on the major indices was not spectacularly high. Given the sharpness of the rise it is likely that we saw an incredible short-squeeze, where those shorting the market were forced to cover tight positions, so as to bank profits after last week’s collapse. This is not too uncommon a feature of this type of market.

While markets are up again today, I would be at all surprised to see them reverse. There is still a great deal of fear in the market.

For my money I have decided I am going to stay out of the market for the next month, while I plan my next campaign. While it is true I need to lick my wounds, I also don’t like the volatile nature of this market. I tried to be too clever last week and want to return back to basics. I think we could well see the Dow head back above 10,000 between now and November, but I would be surprised if it stays above this level going into the New Year. All the problems are still there and while we might well see a temporary respite, we all have a New World to get used to.

The G7 meets, but doesn’t show the leadership I talked about yesterday, yet still I feel more positive

This morning I woke to listen to a debate on Radio 4 about yesterday’s G7 meeting and the resulting 5 point plan that was issued. In summary the “plan” provided the following promises;

  • 1. Pledge to save key banks from collapse
  • 2. Action to free-up credit and money markets by providing ample amounts of liquidity from central banks
  • 3. Support for the part-nationalisation of banks and other institutions by the taxpayer purchase of shares
  • 4. Stronger deposit protection schemes to reassure savers their money is safe
  • 5. Force banks to disclose the true state of their losses

Frankly there is nothing new here and this is certainly not going to end the crisis engulfing us all now. On a day when stock markets plummeted to levels not seen since spring 2003, this was not the clarion call we all desperately need.

In one way or another all of the measures above have already been tried and have done nothing to alleviate the seizure of credit markets.

If anything things have got much worse.

In time the failure of Lehman will probably come to be viewed as the watershed. Whether or not history views this as the critical mistake, which tipped us over the edge, remains to be seen, but for my part I actually think the critical mistake was made much earlier. In underwriting the bailout of Bear Stearns in March, the Fed sent out what proved to be a fatally unrealistic message to markets that they would act as lender of last resort for all financial institutions. Given the size and severity of the problems facing financial markets, they were never going to be able to meet this implicit commitment in the event of the situation worsening.

As it turned out the Fed and US Treasury compounded this mistake by not preparing a proper bailout plan. That, which was recently passed, was clearly thrown together extremely quickly and rushed through Congress. Looking back now I am pleased it hit so much opposition. While I burned myself in the markets, trading the bailout, this was totally my fault. Had I stuck to my bearishness earlier in the year and used the system properly, I would have cleaned up. However now that I am mentally over the losses I am starting to look forward again and I wonder whether or not the entire bailout will go through. After all there are provisions for providing the money in tranches, based on successful completion of preceding stages.

In particular the US bailout does not allow for the US Government (read taxpayer) to take equity stakes in the institutions they bailed. The risk/reward ratio is nowhere near enough in favour of those shouldering the exposure of the bailout not working. An extremely pertinent reminder of how much risk US tax payers have taken on was the news that the debt clock on Time Square now needs an extra digit! http://news.bbc.co.uk/1/hi/business/7660409.stm

I have to give Gordon Brown credit in that his plans for the UK bailout, while not the complete solution, has made provision for the State to take some ownership. (It was quite tragic listening to John Humphries criticise Alastair Darling for taking Preference Shares as opposed to Ordinary Shares, as these were not “voting” – he totally missed the point that Preference Shares get first call on dividends!!!)

However it is not the prospects of the bailouts, which are causing me to feel more positive.

A good friend of mine, who can only be described as an ultra-bear, predicted Dow 8,000. While I have to tip my hat to his providence, even he did not expect the pace of decline. It has been simply staggering, unprecedented (there’s that word again!), mind-blowing, insane and any number of other superlatives you can think of.

In fact it is the speed at which events have unfolded that gives me hope for the future. 2009 is bound to be extremely difficult, but I would expect now that we can feel somewhat confident a bottom will be found during the year. This will lead to a period of consolidation, then giving way to growth.

I have written ad nauseam that Society has changed manifestly since the 1930′s. In particular modern technology and communications mean that we have grown accustomed to things happening much faster.

While we are going to need something along the lines of Roosevelt’s “New Deal” to see us through this, circumstances are conspiring that this is going to be forced on the next generation of political leadership.

Who’s up for Obama’s “Great Plan”?…………

A moratorium on credit card interest

As the panic reverberates around the Globe and stock prices are slashed I have found myself thinking about ways out of this mess.

So far Central Banks and Governments have been reactive trying to plug holes in the shaky damn that our financial system has come to be. Now that the damn has broken it is time for policy makers to become more proactive in devising solutions to help us all out of this mess.

One idea I have had is a temporary suspension of interest on credit card debts. Broadly speaking this scheme would work as follows:

All interest charges are suspended on all credit card debts for a fixed period e.g. 12 months

  1. This would be a voluntary scheme that individual consumers apply for.
  2. All consumers who apply for protection of this scheme will not be allowed to take on anymore debt (including loans and mortgages), while benefiting from it
  3. The consumers will agree to repayment plans over the period of time. If they default on payments then interest will start to accrue again
  4. The scheme will be extended to store cards as well

The reason I would focus on credit card debts is that these are the most dangerous to the economy at the moment. We have been through an unprecedented explosion of consumer debt, of which credit card debt is one of the highest proportions. Given average rates range from 13% – 18% I am sure that a lot of people are struggling to pay down the capital. As the economy worsens and people start to lose their jobs, then we are bound to see a substantial increase in bankruptcies and defaults. This has horrible potential to make a bad situation so much worse.

While there is bound to be opposition to such a move from lenders, I actually think that this scheme will be in their interests as well. It has to be commonly accepted that profits in the banking sector are likely to be non-existent for the next few years. Given that the vast majority of banking losses stem from defaults in one way or another, surely it has to make sense that following policies, which reduce the number of these, will help their situation a great deal.

I understand that this proposal is quite radical, but desperate times and all that….

However while central bankers and politicians have shown a great deal of willingness to adopt extremely innovative and flexible solutions this year, I can’t help but fear that this is because it has been forced on them. Their natural tendencies have traditionally been cautious, even defensive. Now that the worst has happened and the stock market has collapsed will they revert to type?

Sadly the chances are they will. After all they can now blame market forces and pass the buck. If this happens and we see more protectionist policies, then this will compound the severity of any economic meltdown.

Even so my hope is that we will see some courageous political leadership, but it is so difficult to be optimistic this week.

Capitulation!

This week could well be the worst market ever witnessed and I can only begin to imagine its implications.

To be honest I am tempted to stop writing here, but there are some thoughts that have struck me whilst watching this dreadful week unfold.

It feels like a lifetime ago I was questioning whether or not we are about to go into a Depression. Articles such as this one http://online.wsj.com/article/SB122342462353813461.html?mod=googlenews_wsj have some very convincing arguments, which I agree with.

However what we cannot ignore is what has occurred this week in the market. It is difficult to imagine anything other some extremely dark economic times facing us. The liquidity crisis is clearly about to bite home and I think we are on the cusp of watching whole swathes of the economy simply go out of business for lack of access to capital. As some anecdotal evidence of quite how severely things have dried up a friend of mine had a small business loan accepted last Friday. Today it got revoked, before he could complete, with no explanation other than HSBC are suspending small business lending.

Capital lending is the oil, which greases the economic engine. Without it the engine will seize up and cost a fortune to repair. I fear we are all about to discover quite how dear the price will be.

A sell-off of this kind happens once a Century. If the after-effects of the 1930′s Crash are anything to go by then we could be about to enter a period of the most incredible change. When you throw in the geo-political pressures we face, climate change, modern technology and dwindling resources it could be really nasty.

What really annoys me about all of this is that it seems to be that the intransigence of banks to start lending to one another has caused this meltdown. Given they sowed the seeds for crisis in the first place, in administering the coup de grace of the last few weeks I really can’t understand how a lot of these “executives” can live with themselves. Sure they probably sleep on piles of money, but it really is time a lot of these idiots went to jail. Your average street mugger can expect to go away for a year or two. While they might not have broken any laws, when you consider the collective harm the bankers have caused, surely something can (and has to) be done.

Whatever happens I hope I break out of the exceptionally pessimistic mood I find myself in tonight.

As an aside I have actually gone long the Dow tonight with a 200 point stop. My main reason for doing this is that the talking heads on Bloomberg have predicted further falls tomorrow. Given they have predicted a rally every other day I think I am playing the numbers quite nicely here! I certainly wouldn’t advise following me on this trade, but it certainly has potential to be amusing.

As a further aside, if you are sitting on any cash at the moment and can afford to sit out the likely turmoil of the next few years look for bargains and add to your portfolio.

Are we facing a Depression? And the unlikely Harbingers of Doom from Iceland!

When I got up this morning and went to look at how the market was reacting to the UK bailout of its banking system, I felt sick to my stomach. Given I don’t have any money in the market at the moment, the Lord knows how I might have felt were I an active participant!

Overnight things have gotten even worse. At the moment it is really hard to see where this rout might even stop. Even luminaries such as Anthony Bolton are wrong-footed by the current mood of the market — http://www.ft.com/cms/s/0/3cbbcafe-916e-11dd-b5cd-0000779fd18c.html?nclick_check=1

Japan suffered its worse drop since Black Monday and its third time worst performance. Hong Kong, Australia, New Zealand and other Asian countries faired little better. The Hong Kong authorities even dropped rates by 1% and Australia pumped yet more money into the system, but this failed to have any sort of short term relief.

For the first time, I am actually worried that we are facing a 30′s style Depression. If things don’t start to improve soon (or at the very least form a bottom), then it might be time to pack in the day job, head off to the hills and wait for the revolution!

OK so I am over-egging things, but this market collapse of prices is not a good portent. Even as I write, markets have fallen another 1% around the World!

Logic would tell me that now is the time to start buying stocks, but the sheer weight of negative emotion makes such a play extremely difficult. Buffet and Bolton’s activity is a positive sign and if you can bear to stick out more short-term pain, then this represents something of a buying opportunity.

However if we are facing a long, drawn-out, global recession, then who really wants to be anywhere but cash?!

But even cash might not be as safe as most people think.

One item, which was buried amongst the coverage of the market collapse, was the announcement that the Icelandic Government was going to renege on its commitment to underwrite the deposits of the failed bank, Landsbanki. Landsbanki was Iceland’s second largest bank and, somewhat surprisingly, 100,000 British Citizens had savings with them. While Alastair Darling announced this morning his intention to step in and underwrite British deposits in this bank, such a move by the Icelandic Government amounts to little more than a default.

Although this is not as serious as a default on treasury debt it is a very real warning sign of the exposure of Governments to the Credit Crisis. I am sure that this action has had a great, if little recognised, impact on markets.

I am extremely worried about the Irish commitments and to be honest increasingly concerned for those closer to home. How the Treasury can afford this latest bailout package is beyond me. Given the level of indebtedness this Government has already incurred during its 10 years in power, the last thing the UK can afford is for the banking crisis to worsen.

These are extremely worrying times and I can’t wait for the weekend. Hopefully next week will be better!!!!

Surveying the wreckage and planning my next campaign

I started writing this blog this afternoon, just after the London Stock Exchange closed. I finished it tonight as I wanted to see how the rest of the US session would play out.

Yesterday’s collapse was really interesting (and boy was I glad I was out of the market!). Given the extent of the falls and the point they started from I would have expected volume to be much higher during the day. Then an hour from the close of the US market stocks surged and volume shot up. For commentators this was a very positive sign, but I really wasn’t so sure. The logic held that the powerful rally off the session lows, on about 40% of the day’s volume indicated institutional accumulation.

While there might have been a lot of truth to this, the simple fact is that the Dow finished below 10,000 for the first time in 4 years. Under no circumstances underestimate the psychological impact of this. For institutional holders (especially those who sold out at the top) averaging into the market at this stage makes sense. However this should not be taken as the start of a bottom. The fear factor is rightly off the scale at the moment.

I had decided to stay out of the market, while I was out of town and after last week’s personal collapse. I have taken the opportunity to re-read “Reminiscences of a Stock Operator”. If you haven’t read it recently, I urge you to do so.

Taking a brutally honest view of how I am feeling at the moment, it is my pride that has taken the biggest hit. I have been touting this Presidential Rally for a while now. I was wrong and it has cost me quite a lot of money. While a rally might still come I really have tried to fight against the tide and compounded this by not accepting that I was wrong quickly enough.

Reading “Reminiscences” has given me some extremely timely lessons that I will hold onto dearly. They have been expensive, but will no doubt benefit me in the long run.

One of the biggest mistakes I made was not recognising the impact of the failure of Lehman. Although I wrote about what a huge deal it was, I got so blind-sided by the Bailout that I underestimated its likely impact. When the bailout looked in trouble and then meekly limped through it should have been obvious that this was not going to restore the confidence Bernanke and Paulson hoped for. What is worse is that I even wrote words to this affect. The movement of prices in stocks warned me what was coming, but my pride meant I hung on.

Monetary conditions are horrendous and will probably remain so for some time to come.

Earlier in the year I took an extremely bearish stance. If I had just stuck with this, I would have cleaned up in the last 5 months. A key message of “Reminiscences” is that a successful speculator looks at the general, basic conditions and forms a strategy around those. I managed to talk myself out of an outlook built on firm foundations and moved to one built on quicksand. What is worse is that the system was absolutely spot on and clearly showed where the Dow should have been shorted six weeks ago!!!!

I am going to be sticking with this theme closely in the next few weeks as I plan out my next market moves.

In the meantime we are more than likely to see the Fed, ECB, Bank of England and other Central Banks cut rates aggressively. This might even happen in the next 24 hours. While this might bring some temporary relief I doubt it will turn the tide of selling.

*** Having just watched the final hour of today’s US trade the action was truly horrific and Alcoa have just kicked of earnings’ season with a huge miss, but the stock has rallied in after-hours! The Dow closed below 9,500 and the S&P 500 below 1,000. If you have a portfolio of stocks at the moment then this must be quite sickening. However if you have cash and are looking to buy and hold (for a long time!), levels look extremely tempting.

I am still out of the market and am staying so until I have a clear view on what I believe the next medium term move will be.

What next?

To be frank I have been so wrong about the market recently, that I would take this blog with an extreme pinch of salt (I am not quite sure exactly what constitutes an “extreme pinch”, but you get my drift!).I stuck to my plan last week and went quite heavily long the market, ahead of the vote in Congress. As I thought the Payrolls number was awful, but it didn’t knock the stock market too seriously. It really did seem like the market had started to find a floor. The vote then came in, with the Bill being passed with a substantial majority. Markets across the World rallied, but in the final two hours collapsed.

Overnight Asian trade has worsened as did the news flow over the weekend.

My short/medium term plan of trading a Presidential rally surely has to be dead. Having faced my own personal capitulation I simply have to accept that I was wrong. I am going to keep an eye on what happens for the rest of the week, but I need to put some distance between myself and the market while I take stock. As the Dow plummets towards 10,000 if it does fall below this level, who knows how far it will fall.

There is just so much fear in the market at the moment that, somewhat counter-intuitively, it might actually be the time to buy. We really shouldn’t underestimate the sheer size of this US-led bailout. However I am equally conscious that the longer I say “buy” and the further the market falls, while I will eventually be “correct”, it will be an extremely expensive “good” call!

A few days off is definitely in order….

Lonmin deal fails and what to look out for this week

News broke this morning that Xstrata were giving up on their bid for Lonmin, citing problems in the credit markets as the reason. Given the size of the bid and the fact that it was hostile, there is a fair likelihood that this is true. I am not going to start buying Lonmin again yet, but it is certainly a stock that is back on my radar. I will update with any new information I find out.

In the meantime, we are likely to see extremely volatile trading for the rest of the week. There is a vote in the Senate tonight on Monday’s bill (with some populist add-ons), Congress could well vote again tomorrow on a re-worked plan and on Friday we see the next US jobs report and the temporary ban on short-selling of financial stocks comes to an end. Next to nothing is being said about these last two events at the moment.

I must admit I am surprised that the Securities Exchange Commission (the SEC) hasn’t announced an extension to this, given the fragile state of financials. I could have missed something (which is possible), but I certainly haven’t come across any news to the effect. If the bailout doesn’t pass and the bears can start shorting financials again, then we could well see even more of a calamity in the next week.

This aside, this week’s non-farm payrolls number is a critical one. Last month we saw a horrible downward revision on previous months. The likelihood is this trend will continue and this could well add to the weight on sentiment. Watch out for these numbers in particular as they should influence any medium term moves.

Of course if the bailout passes before then expect some serious short-lived euphoria, but if there is a rally I will probably use this as an opportunity to go short. I still think we could see a rally in October ahead of the election, but I have been extremely wrong about this so far. It all depends on what happens in Washington for the next few days.