Monthly Archives: November 2008

Could somebody please explain to me exactly why Citi Group need bailing out?

I was shocked by the news over the weekend by the scale and speed of the latest bailout of a major international bank. In some ways this is the largest of them all and comes at probably the worst time. For those who missed the news, it is explained well here http://www.time.com/time/business/article/0,8599,1861904,00.html?imw=Y.However what this article, and many others out there, have not fully managed to explain is exactly why this has happened so quickly and why it is required at all. It was only a week or so ago that Paulson was defending the change in tactics for use of the TARP and told us all that he did not expect to have to use the remaining half until next year. Now all of a sudden we have the kind of bailout Lehman required, being pulled out of the bag in an exceptionally quick time.

In time I am looking forward to the explanation as to why Lehman was allowed to fail, while valiant attempts were made to save the rest, but in the meantime I really want to understand exactly what is going on to justify and require such a move by the Fed/US Treasury. One could argue that they are now so used to dealing with this kind of massive mess, that they are able to pull together such a rescue package on a whim.

OK, so this argument is tongue in cheek, but there is probably some truth to it.

However what is more worrisome is that the bailout of Citi was even required. Don’t forget this was the World’s largest bank. Also remember that we have seen repeated “unprecedented” monetary action after “unprecedented” fiscal action this year all over the World. Yet this latest plundering of TARP is surely the clearest sign that nothing has worked. If anything, things are getting worse.

What are the official numbers not telling us?

Are we on the verge of the entire financial system collapsing?

Until this weekend I had thought that this was only an outside chance, but I find myself now pondering a World without money. I know this may seem extreme, but none of the interventions seem to be working. What will 2009 hold for us all?

Debt got us into this mess, but will it get us out?

I should really be writing about Citi Group today, but somehow it feels more appropriate to stick with matters closer to home.

In what has to be one of the most trailed Pre Budget Reports ever, Alastair Darling laid out the Government’s plan for helping a beleaguered Britain out of the current crisis. Thanks to all the spin at the weekend, there weren’t really any surprises, but I am afraid this is going to prove to be the worst kind of electioneering by the Government.

Thanks to years of public sector borrowing/overspending the National Debt is already at dangerous levels. Thanks to today’s spending plans this will rise even further, with the total forecast to rise to 53% of GDP by 2012.

In terms of the plan I can’t really see how it is going to turn the tide. It just doesn’t strike me as being large enough. A 2.5% temporary cut in VAT, while welcome, is surely not going to lead to a flood of consumer spending at Christmas (if it does then people only have themselves to blame!).

My biggest problem with today’s PRB was that it singularly failed to deal with the serious issue at the heart of our current problems. We all owe too much money. It is not going to be possible to spend our way out. Pretending that we can, strikes me as being irresponsible, bordering on negligent. We lack manufacturing, lack natural resources, now have a weak currency, are overly dependent on financial services for private sector jobs and have a Government that seems determined to tell us that all will be OK with the short term spending boost. And that is without mentioning the gross inefficiency in public sector spending…Nick Cohen wrote brilliantly about this at the weekend http://www.guardian.co.uk/commentisfree/2008/nov/23/gordon-brown-nhs-executive-pay

Overall I think the only winners from today will be the Tories. Last week George Osborne was spot on with his comments on our predicament. For Government spokespeople then to have the brass tacks to accuse him of talking down the Pound was hilarious.

Some commentators have criticised the Conservatives for not landing any serious blows on Labour, when the time would appear perfect to do so. It could even be argued that their response to today was consistent, but muted. However I actually think they are playing a better game than they are receiving credit for. They don’t need to strike any blows, as circumstances will conspire to do so on their behalf. All the while things get worse, they will be able to claim the moral high-ground, endlessly repeating the mantra of Government recklessness, mismanagement and waste.

In the run-up to their 1997 election victory and through their first two terms, all we heard from the Government was what a shocking job the Tories had done managing the economy. By the time the next election comes round it will be the Tories turn to make hay.

In the meantime it looks like there might be a short-term relief rally in UK stocks and Sterling. Whilst I was surprised by the initial reaction, I am planning to short both as I fear today’s plan is destined to fail. I will have to keep a close eye on what happens in America, but I believe things will be worse here in 12 months than they are now. This puts the FTSE 100 below 3,500 and Sterling below £1.50 to the US$ and closer to parity with the Euro.

A little reported, but horrible indicator.

The obvious bad news on equity markets today was that they all closed below critical technical support levels on relatively high volume. Worse still there were widespread collapses in final hours of trading, across Europe and in the States, reflecting the general fear. I am more concerned by something else.It wasn’t long ago that much was being made of Warren Buffet and Anthony Bolton both starting to make big investments. Buffet and Bolton are the respective kings of value investing in America and on this side of the Atlantic. I know I was part of the “let’s start to average in” crowd, but I caught a news item yesterday, which has caused me to start to rethink.

Berkshire Hathaway is the company Warren Buffet created over forty years ago. Over the decades he made billions of Dollars for himself and his investors, by investing into cash generative, traditional businesses, most notably insurance. Although he has come to be regarded as the ultimate value investor the stock price of Berkshire Hathaway’s has lost 35% since the start of October http://finance.yahoo.com/echarts?s=BRK-A#chart1:symbol=brk-a;range=3m;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

But this wasn’t the bad news…

…In the same time as its stock price has plummeted, its insurance costs have trebled. Yes that’s right…. trebled!!!……. in 2 months. What’s next? A downgrade?!

This rise in insurance costs is an awful, awful indicator.

If you look at the year to date chart of Berkshire Hathaway you’ll see the share price had weathered a lot of the financial storm. When you consider the core of their business is insurance, if you contrast this performance to the likes of AIG, it was nothing short of spectacular. The stock price then spiked at the point Buffet invested into Goldman Sachs. Since then the price has been savaged.

The bankruptcy of Lehman shattered confidence in the system, but to see the market turn so viciously on one of its prodigies is a humbling experience.

Of course the last time Berkshire was remorselessly hammered was in the run-up to the Götterdämmerung of the dotcom boom (up to February 2000). Then Buffet was proved right and most of the market, terribly wrong. I do wonder about this time…..

Some regular readers have been writing to me, repeating doom and gloom prophecies of 2008 being the beginning of a severe, prolonged, economic Depression. I have resisted these calls and tried to maintain a semblance of optimism, but the longer this year lasts the more the data stacks up against this view.

As well as being a major player in global insurance markets, Berkshire also has an enormous portfolio of shares in blue chip companies, domestic and foreign. Berkshire’s increased insurance overhead, is the clearest sign that the market believes we are going to see corporate failures in 2009. Why else would costs rise so much? Where else could Berkshire Hathaway potentially lose so much money, that it requires treble protection?

Let’s hope that the Sage of Omaha preserves his status as one of the most prescient investors ever to have lived. If he’s wrong in his recent investments, as the market believes, then 2009 is going to be dreadful.

A tale of two bailouts

Bailouts have been back on the agenda in the last few days. Henry Paulson’s announcement on Friday (which he has since followed up with confirmation) that he did not intend to rush into applying for the second half of the $700billion TARP really took the wind out of Thursday’s rally. As of writing, equity markets across the World are bumping around 52 week lows.Overall I think Paulson’s change in direction is entirely sensible. Having committed the first half of the TARP to purchasing equity in struggling banks and insurance company AIG, he is absolutely right to want hold back in reserve, what will surely have to be a measure of last resort for the Fed. With the incredible amount of money that has already been sunk into the financial system this year there has to come a point, when no more is available. What has to be most worrying for policy makers is that in spite of all the extreme measures they have taken, the signs are at the moment that they have not had anywhere near the sort of impact hoped for. In fact it is arguable that they have made the situation worse, by trying to prop up an endemically flawed financial system, leaving little in reserve for helping the true economy (e.g. homeowners, pension holders, savers, businesses etc.).

I expect that Paulson is counting the days to Obama’s inauguration, when he can get out of a job that has clearly aged him by years.

Over in Detroit, meanwhile, the three large US carmakers are angling for a bailout of their industry. Another problem with the action of the Fed this year is that it has created the precedence that the US Government will underpin failed or failing business models. The bailout of the financial industry has been bad enough for capitalism’s image, but I just can’t begin to imagine what bailing out carmakers will do for those of us who believe free markets have any kind of future.

Admittedly my faith in Smith’s “guiding hand” has been severely battered this year, but this new bailout is a step too far. I understand the arguments about the number of potential job losses, which will occur in the event of the likes of Ford or Chrysler going under, but the harsh reality is that these companies dogmatically stuck to the creed of the gas-guzzler, when the market was clearly changing. They paid no regard to the impact their products were having on the environment and I find it very hard to have much sympathy for these companies. It is no surprise that Japanese carmakers have fared better, when they have made better strategic decisions.

It may sound harsh, but I hope the carmaker bailout doesn’t go through. I expect it will, but I think it clearly sends out the wrong message. We don’t live in a World of no consequences, so why should policy initiatives attempt to convince us that we do?

Why we can’t afford the collapse of Sterling and China’s growth rate

As Thursday’s rally in equity markets failed on Friday, I was more interested in what was happening to Sterling.

This has been yet another terrible week for our currency and signals much worse times to come.

The shadow chancellor, George Osborne, is right on the money (excuse the pun!) as far as I am concerned. In an article in today’s Times he has warned of recent falls in Sterling, turning into a run. http://www.timesonline.co.uk/tol/news/politics/article5158548.ece

Unsurprisingly such comments from a senior member of the Opposition have prompted a wave of response in the media. Osborne has phrased his attack on the Government’s attitude towards borrowing in a typically partisan manner, but there is one critical point, which I think he could have made more of.

As a nation, we are wholly dependent on imports. We run a huge trade deficit. We live in one of the most populated areas of the World and manufacturing accounts for less than 13% of GDP. I can’t find the statistics, but a walk around the average supermarket will reveal we import a large proportion of our food, if not the majority. As for natural resources, those that we do have are declining rapidly.

I understand why a lot of recent commentary has focused on solutions to the recession, but the destruction of our currency is not the answer. The long-term consequences of such action are severe. If we lose our ability to trade effectively with international partners then this is going to have serious internal social implications. While we might not reach the point of food riots, when a people is unable to afford to maintain basic standards of life, then this can form the basis of serious domestic dissent.

A theme of my blogs this year has been that the pace of modern society and our collective access to technology provide key differentiators with past crises; however the fundamental human reaction to poverty and disenfranchisement still results in extreme or improbable outcomes. Some commentators have been saying that the fall in Sterling in the past has been good for the economy, as this has allowed increased exports and direct foreign investment. While we don’t really have the manufacturing basis to profit from the former I think the latter is unlikely as our country looks increasingly isolated.

If we are at the beginning of a long-term crisis in Sterling, then I think this could well be event that forces us into the Euro.

I am not coming down on either side of this argument (yet), but I am sure that we cannot afford to have a weak, isolated currency. The simple fact is we just don’t have the economic means to sustain it.

Moving to the other side of the Globe, I didn’t get a chance to blog on Monday, but had I, I would have written about China’s $586billion fiscal stimulus package. While this was generally well received in the media, what I haven’t been able to work out is why a country, which is still growing at 9% year, needs a fiscal stimulus package of this size.

I haven’t talked about China for a while, but it wasn’t that long ago that the inflationary outlook was pretty dire as commodity prices skyrocketed and there were food riots around the World. China in particular looked especially exposed to this trend and there were warning signs of this starting to have a serious impact domestically.

This article, in the Washington Times, is not uncommon, presenting the Chinese authorities as being blessed with an economic prescience, lacking in Western leaders. http://washingtontimes.com/news/2008/nov/14/chinas-stimulus-package-a-lesson-for-us-to-learn/

Personally, I am not in the group, fawning over the Chinese “economic miracle”.

A country, which is growing at 9%, simply should not need a fiscal stimulus package. I suspect the official statistics to be opaque, but this is certainly a situation to keep an eye on. China is undoubtedly going to be hugely influential over the course of the 21st Century. If we are to avoid a Global Depression, then the purchasing power of the Chinese is going to be a significant contributor to that. However if the they are suffering under the strain of the slowdown to the extent of requiring a $586billion bailout, then I wonder whether or not they are in a position to provide that.

Could this seriously be a bottom?!

In a year of incredible moves on the stock market today’s took some beating. I started writing today’s blog in a horrible state of mind. Any optimism I had for a relatively early resolution to our current travails (within 18 months), had been thrashed out of me, when I saw the Dow below 8,000, US unemployment at a 7 year high and the S&P at 5 year lows. Volume was pretty high and this looked like yet another disastrous week for equities.

I had started to ask whether or not money had any value anymore, in light of the likely bailout of the US auto-industry. I had started to question where on earth all this money was going to come from. I had started to contrast the attitude of Henry Paulson versus Mervyn King and how much I feared for Britain’s prospects. Perhaps I faced my own personal capitulation, but then the market rallied. And boy did it fly.

3 hours from the end of the close in the US we were roughly 5% down on the day. Equities then rocketed and closed up in the region of 6.5% and the emphasis of my blog turned on its head!

I am a market technician at heart and today’s rally was a classic one day reversal on massive volume. A one day reversal occurs when a market moves from positive to negative within a trading day or vice versa. Dependent on which direction it moves this is either a bullish or bearish signal. High volume reinforces the underlying interpretation of the strength of the move. The fact that the rally occurred off 52 week lows is another extremely bullish signal. This could start to form the beginning of a double bottom pattern, which is another bullish sign (more of this in a moment)…. you can surely start to appreciate why I might be starting to get excited again.

Sticking with the Dow, it touched 7,965 and closed at 8,838. Its 52-week low is 7,882. Volume was roughly 50% higher than the three month moving average. This moving average, of course, covers a period of extremely high volume.

Quite simply this is an incredibly bullish move, which is quite shocking when we consider the economic data piling up. If today is followed by more positive moves, my only interpretation on why this has happened is that this is some form of reaction to Obama’s victory. Remember that market moves can tend to happen 7 to 10 weeks or 3 to 5 days prior to a major event. We are roughly 10 weeks away from Obama’s inauguration.

You might be asking yourself “didn’t we see a similar 900 point rally only 2 weeks ago?” The answer of course to this is yes, but there is one critical difference. That rally started in the pre-market and grew in strength over the course of the day. This indicated a short-squeeze, when market participants, who had been shorting the market on one day, were caught out by a positive move overnight and were forced to cover positions.

While there will inevitably have been some short-covering today, the pattern of buying looked far more like professional accumulation. If this is the case and major market players are being tempted back based on valuations, then we could see a surprisingly positive end to the year.

So is this a bottom?

I haven’t talked about the system for quite a while now, as there has been little point, but now seems a good opportunity.

According to the system, the Dow’s September 2008 Retraction Zone is 9723:9735. I wouldn’t normally advocate using such a short-term analysis point, but given the importance of events since September I think this gives us a good base to start analysing the market again.

If the Dow breaks through the 9723:9735 barrier, then the next move could and should be back up beyond >11,000. Such a move would complete the double-bottom I mentioned earlier and the market should break out to the upside. As ever volume will be essential.

I can’t believe I am about to say this, but I really think this could be on the cards.

Short-term relief is desperately needed for the global economy. I talked on Tuesday about the danger of even more serious long-term damage being caused if markets continued to fall, so a rally into the last few weeks of the year will be a big help. Although I believe this relief will prove to be temporary it will hopefully mark the middle period of the Credit Crisis.

Let’s see what tomorrow brings, but fingers crossed there will be more buying.

P.S. I am sure I will return to my gloomy analysis in the not too distant future!

Yet more bad news, the lack of a plan and the improbability of a British solution

As expected the economic news on both side of the Atlantic gets worse and worse. Jobs are being culled, house prices continue to fall, consumer confidence is at record lows, factories are suspending production, companies are going into liquidation, currencies have collapsed and the outlook has deteriorated further.

The immediate rally we saw, in reaction to Obama’s victory, failed and retreated and I am afraid equity markets look set for further falls, below their recent lows.

I set several indicators I was intending to watch for, for the rest of the year. It was fairly pleasing to see one of these met within 24 hours as Obama announced several key appointments, but this positive reaction was short-lived. At the weekend, while visiting the White House, he followed up by saying he intends to make no further proclamations until his inauguration in January.

I understand that this move is in line with convention, but I do think it is a mistake. The pace at which the global economy has unwound is nothing short of spectacular. The only hope we can cling onto for a relatively quick cessation to the declines is through strong political leadership and the commitment to a wholesale restructuring of the financial system. My fear is that the longer the situation remains unchecked, the greater the risk of mortal wounds being struck on all markets. The main problem will come in the form of job losses. As more and more people are put out of work, the more difficult it will be for economies to recover.

We need a grand plan. Perhaps something will come out of Davos at the end of January. I certainly hope so.

In the meantime we have more to look forward to from the British Government. Calls at the weekend for a reduction of VAT by 5% haven’t been met with any other official response than a TV interview from Brown in which he gave the vaguest of hints to tax cuts or further public sector spending.

I can’t really see how either are going to be possible. While I do think we pay far too much tax in this country, the public sector accounts for a huge proportion of UK employment. Of the 2.2 million jobs “created” during the uninterupted 10 years of “growth”, roughly 2 million of these were in the public sector. Of course we all know how this was funded, with UK public debt accounting for 43.4% of GDP.

While I would personally welcome tax cuts, there are only two means of funding this – through spending cuts or further borrowing. With an election 18 months away there is little to no chance of spending cuts, but at the same time, who on Earth do the Government think are going to lend us more money?

I have talked about Iceland being a serious warning for us in this country and the more I look at the situation the more concerned I become. If the continuing fall in Sterling is anything to go by, it looks like the market is holding onto this view as well.

After the landslide, time for fundamentals to start to matter again

While the World let out a collective sigh of relief that the end is finally in sight for the dreadful Bush Presidency and just over half of voting Americans partied long into the night, the implications of the situation facing us all really set in. The sell-off in global equities was symptomatic of this mood, but the absence of volume left today being far from conclusive.

Thankfully Obama has the clear mandate to show the kind of leadership his rhetoric has convinced us he has within him. And boy is he going to need it.

October was an awful month and we are going to see more horrific economic data over the course of November. Starting with Friday’s payroll numbers things really can only get worse. It is now impossible to guess whether or not we are going to see a rally, inspired by a wave of optimism in anticipation of the much-promised “change”, or another collapse as the dire state of economic fundamentals proves too much to overcome.

As I have said before I am staying out of this market until December. I really want to see what happens at the next earnings season.

However in the meantime there are some things which I will be closely looking out for.

First I fully expect Obama to break with tradition and start to announce key appointments and policies in the next 3 months. In normal circumstances we could not expect much to happen in the final lame-duck months of a Presidency. However, given the exceptional times we live in this tradition clearly now has to be different. If things are not to become far, far worse in the Global Economy then we need to see some of the kind of leadership I have been writing about for the last few months.

When it comes to his appointments there will probably be some bi-partisan surprises. While last night’s victory was pretty comprehensive, Obama also galvanised a lot of opposition. The tasteless booing at McCain’s rally and the bullet-proof screens at Obama’s were the most visual signs on the night that there are some pretty entrenched opponents to the new regime. For his Presidency to work we are going to have to see the most unlikely collaboration. Dealing with the bailout, economic stimulus, Iraq, Iran, Russia and Global Warming will be just some of the major issues facing him on January 21st.

Second I want to see how November’s economic indicators shape up. In particular we should hope to see an easing in bank-lending rates. For any recovery to start, or even for a bottom to form, this has to be a prerequisite. Equally important are the housing figures. While aspects such as consumer confidence and manufacturing/industrial output will be influential, the health of the housing market is more pertinent. Again we need to see a leveling off of the price declines, before we can start to feel optimistic again.

Third I want to see what happens geopolitically. Increases in tensions with Iran or Russia will not bode well. There was talk earlier in the summer that the Israelis might take Bush’s last few months in power as the opportunity to strike Iran. While this is unlikely, it is certainly not out of the question.

Finally I am going to keep a close eye on commodity markets. Prices have now fallen to levels, which indicate over-corrections. Recovery in these asset classes will not be good for the inflationary outlook, but will be an indicator of increased economic activity.

I don’t really have a clear view, at the moment, on directions for currency markets, but these are also likely to give clues as to what we can expect in 2009.

Election day looms

By any other standards last week’s surge in US indices would have caused a flurry of blog-writing. Although volume was notably absent, the 14-16% weekly gains were positive. Of course this good news was tempered by yet more diabolical economic news (consumer confidence at all-time lows, manufacturing output at 26-year lows, acknowledgement of a European-wide recession, IMF bailouts of the Ukraine and Hungary, Japanese banks teetering on the brink, currencies collapsing, Iceland being abandoned as its population take to the high-seas in Viking raiding ships etc etc etc), but even this did not stir market reaction. The reason for this is simple.

All eyes are focused on tomorrow’s big vote. The signs are that we are going to see the kind of election that comes around once in a generation. Turnout projections are huge with +65% expected nationally and 90% turnout in Virginia! Apparently 25 million Americans have already voted, amongst these 4 million Floridians making sure that the travesty of 2000 doesn’t occur again.

The polls all point to an Obama landslide (apart from John McCain’s super, top-secret, special, private polls!) and it is hard to see them being wrong. Obama is not only ahead in terms of Electoral College votes, but also the popular vote. While a landslide is not going to provide quick solutions to what we face at least Obama will have the mandate to force through a radical plan of economic reformation.

Bring on 2010!!!!

And then there will be Friday. Economists are expecting a 200K retraction in the US labour market. Sigh……..