Monthly Archives: January 2009

More evidence of the Dow forming a base

As I mentioned earlier in the week, I got stopped out of my Dow trade on one of the days it spiked down. I had moved my stops up so that position was risk free but getting stopped out always has a detrimental effect on one’s view of a particular market.

Although not actually in the market I have been watching the Dow closely. Inauguration Day was a washout (one of the worst on record), but this was followed by a huge rally, which was followed by another sharp sell-off. Although nowhere near as volatile as a lot of the action seen during 2008, volume was still notably high. So what does this mean?

Given the level of uncertainty in the market drawing definitive conclusions can be dangerous, but I still think there are two prominent factors to take into account.

First 8,000 is clearly a critical level of support for the Dow. Although we are not able to use the system at the moment, it is clear that this level is significant. When markets tanked in the final quarter of 2008 it was at this point that plummeting stocks stopped plummeting. Since the lows were first hit we have seen 2 failed rallies bounce off this point. I say “failed rallies” because they both reversed at about 9100. When we consider the dire economic data and earnings announcements that have occurred over this period, this reinforces the view of the importance of 8,000 to the Dow.

Second Obama is now in office. So far the total absence of a positive market reaction to his appointment has been surprising. Given the massive mandate he has for change and the level of his popularity this is a clear indication of the prevailing negative sentiment. However Obama’s first great economic test occurs in the next fortnight. He has to ensure that his stimulus package passes through Congress and the Senate without any trouble. It is vital that this happens without anything like the controversy the TARP caused. While I do not believe that the Obama stimulus will solve the economic crisis, its smooth passage will likely be positive for US stocks.

Dow futures dipped 40 points after the market close on Friday night. I am going to spend the next 24 hours doing some more research, but I think I might reopen another small position on Sunday night.

A terrible week for the UK

When I wrote, 10 days ago, that I expected Sterling to fall, I didn’t expect it to plummet 15%. Make no mistake this week’s collapse in Sterling is the clearest possible sign of much worse to come. Quite simply, the market has voted on our prospects and the results are dire.

I am still trying to formulate some medium term strategies for 2009, so it is worth looking at why this week, of all weeks in the last 6 months, has been so bad.

On Monday the latest bank “bailout” was announced. I say “bailout” as the clear desired intention for these measures is to recapitalise the banks to allow them to start offering loans again. As it turns out, it couldn’t be more apparent that no-one has the slightest faith this is going to work. Worse than that the market clearly fears how able the Treasury is going to be able to repay this latest round of borrowing.

At the heart of the problem are fears for the Bank of England’s ability to implement a policy of “quantitative easing” effectively. Essentially this means printing money and distributing it through a variety of schemes, such as purchasing toxic debt from the banks and swapping it for higher grade government debt. Now as all good monetarists will know, increased money supply leads to higher inflation. In other words, the concern is that even if (and it is a big “if”) quantitative easing does work, is it not just sowing the seeds for even larger, inflationary problems later on?

Serious questions have also been raised about what happened to the £37billion of the first bailout. So far no spokesperson has been able to answer these adequately. The truth of course is that this money has been sucked into the morass that has come to represent the global financial system. It is doubtful anyone really knows what has happened to the money, thanks to the complexity of the counter-party arrangements of the problem asset classes, which are scuppering financial institutions worldwide.

Judging by the parallel collapse in financial stocks the market is now pricing in the expectation of a wholesale nationalisation of Barclays, Lloyds Group, and Royal Bank of Scotland.

On Wednesday we then heard that unemployment leapt by the highest amount on record, to a touch under 2million. This news was bad enough, but if you take a closer look at the figures what is most troubling is that these redundancies are almost exclusively in the private sector. At a time when it can least afford it, the Government is now facing collapsing revenue. When we consider that the vast majority of jobs created in the last decade were in the public sector, this makes for the extremely unappetising prospect of the Treasury being forced to balance the books. Again basic economics tell us that when spending is too high and revenue is falling, the only solution is to cut costs. When this happens it is going to be extremely painful for the economy and is likely to cause social unrest. After all it is highly unlikely that the powerful public sector unions will accept mass-redundancies quietly.

Finally, today, this terrible week has culminated with the news that the recession is shaping up to be deeper than originally anticipated. The official statistics revealed that the economy contradicted by 1.5% in the last quarter. There was no real surprise in these figures as they come against the backdrop of job losses, plummeting activity and increasing defaults across the board.

However this was not the only bad news out today. The National Association of Pension Funds announced that it conducted a survey of 100 leading firms in the UK, 25 of which have declared the intention of ending their final salary pension schemes to existing staff. Where most final salary schemes are already closed to new staff, the prospect of existing staff losing the retirement nest-eggs they might have previously expected is just yet another long-term issue facing the economy.

Last year, I wrote about Iceland being the harbinger of tough times for us in the UK. The more the outlook worsens the more likely this view looks.

Time to nationalise a bank

I really can’t believe I am about to write this blog, but here goes.

I am now sick to death of the failing bailouts and the mood of dark pessimism that has settled in this country. Reading through some of the information released about the latest measures, a possible part-solution to this mess struck me.

If the Government is so keen for banks to start lending again, then I think they need to take charge of the situation by nationalising one (and only one) of the beleaguered banks, sticking in a new management team, flooding it with capital and to start lending directly to consumers and businesses. Such an aggressive move would surely force the other banks to follow suite, or lose market share, possibly indefinitely. Of course this is totally contrary to free market doctrine and is almost certainly anti-competitive in European terms, but is such a prospect now so unrealistic?

One complication to this idea is the de minimis rule on state-aid to companies. This holds that SMEs cannot receive more than 200,000euros support over three fiscal years. I haven’t the time or inclination to fight my way through the regulations to establish whether or not a loan from the Government counts as aid, but it might.

However a small footnote to today’s announcements has made me think this is the way things are heading. This news was that the state-owned Northern Rock is going to start lending to the mortgage market “to provide stability”. Now that the Government owns 70% of Royal Bank of Scotland, after their appalling results (£28billion loss in case you missed it), it can’t be long before this institution ceases to be independent. Assuming this occurs then the Government is positioned to intervene directly in both the mortgage and commercial lending markets.

Barclays, the Cable Trade and long Wall Street

Something really nasty happened to Barclays share late Friday afternoon. At about 3.30pm the price plummeted nearly 30% on huge volume. It recovered slightly at the end of the day, but still closed down 25% at 98p. Almost as soon as London closed the Barclays Board announced their results, roughly 3 weeks ahead of schedule. They claimed their profits will beat forecasts and that the bank’s capitalisation is secure after the money they raised from Dubai last year.

This really was a return to the heady days of 2008; after all who will ever forget Bear Stearn’s claiming there wasn’t a problem, Washington Mutual’s “recapitalisation”, AIG’s assertion that all was well and Lehman Brothers’ early announcement of better than expected “profits”. The common feature with all of these examples was that they ended disastrously for shareholders. In each case the ticker didn’t lie.

Regular readers of this column will know my previous feelings that Barclays was a decent long-term buy. I had reasoned that their recapitalisation at the expense of existing shareholders, but avoiding part-nationalisation, would leave the bank with a much freer hand to play in the long run. Also Barclays has been quietly snapping up depressed investment banking assets, most notably the remains of Lehman Brothers, with the clear strategy of positioning itself as a major player in this sector, once the current crisis abates.

In fact I had planned to write a blog on Friday about the positive prospects for Barclays, based on the news that they had bought UBS’s commodities desk, at another knock-down price. This latter news was buried by Saturday after the shock fall in Barclay’s share price.

The question now is, are Barclays about to go out of business?!

I am not so sure. There has been another announcement today that the British Government is going to step in with yet another bailout for the beleaguered banking sector. The initial figures I have seen indicate this is another huge intervention, with the Treasury providing a £200billion backstop for distressed banking “assets”.

I can’t see how the Barclays collapse on Friday and today’s action can be unrelated.

It is bound to come out in time, but something very serious has either happened or has been identified.

I am sceptical as ever about all the bailout plans but this week’s news should be extremely interesting.

The Cable Trade

My Cable trade (GBP/USD) worked perfectly and I locked in a decent profit on Tuesday. It was good to get back on the wagon, but I am still planning to tread lightly.

Long the Dow

With this last point in mind, I saw on Thursday that the Dow hit 8,000. I wrote in December that this would be my entry point for going long again. I know I am writing after the fact about this trade, but I am really pleased with the timing of it. Monday sees Martin Luther King Day, when the US market is closed, and Tuesday is Obama’s inauguration. Although earnings season is proving to be pretty awful, next week is extremely light for macro-economic data, so I expect to see the Dow post decent gains.

I have used some of my Cable profits so this is really a zero risk position at the moment, which I am content to leave. I also want to stay in the market as we are due an equity rally. Having some money in the market will help keep my focus. If the Dow breaks through 9130:9157 then we could see a rally beyond 10,000, in spite of the dire data flow. However I certainly wouldn’t want to risk too much on this.

A first trade in 4 months

Hello and Happy New Year!

After a yuletide hiatus it seems that today is a good day to get back on the blog-writing wagon.

Over Christmas I have been following the Madoff scandal with a great deal of interest and trying not to let all the black economic predictions colour my view too badly. OK so the regulatory system seems to have failed completely, the bailouts don’t seem to be working, we are now all up to our eyeballs in Government debt and earnings season looks like it will be bleak, but you’ve got to smile!!!

The movement in Sterling in the last 10 days has been noteworthy. You can’t have missed the news that UK Base Rates were cut to an all-time low of 1.5% (remember that “all-time” means 300 years in this instance — not since the Second World War or 1970′s!). Bear in mind that in the last 3 Centuries this country has had a Glorious Revolution, fought the French Colonial Wars, the American War of Indepence, the French again under Napoleon, the Crimean War, World Wars One and Two, came through the Great Depression, the Cold War and Oil Shocks of the 1970′s, not to mention having won and lost an Empire. Thursday’s announcement was truly momentous. Yet…..

…. Sterling has rallied.

I believe the answer to this conundrum can be found a month ago. US Payrolls data comes out in 10 minutes. This is likely to be dire, so it is little wonder this is having a surpressing affect on the Greenback. However once this is out of the way watch out for Sterling to take a kicking next week.

I am long Sterling/Dollar as of writing with a small position. I intend to bank a small profit on this and the short the same pair this evening before the market closes.

Good luck to all of you this year!