Monthly Archives: April 2009

29th April A less than inspiring performance by our Chancellor

Watching Alastair Darling stammer through yet another Commons Committee today was not the confidence inspiring spectacle one might have hoped for. Once again he seemed unsure of his figures, gave evasive answers and didn’t really appear to be a man committed to his projections or decisions. He strikes me as a decent man and I have a great deal of sympathy for the predicament he finds himself in, but I do not believe he will be the man that leads our Country out of this mess.

Somehow Sterling rallied against the Dollar during this questioning. I feel really at odds with the market’s view on Sterling at the moment and I just cannot see how any confidence is being placed in what we are hearing.

Particular points I picked up today included;

  1. Darling acknowledged the importance of an “orderly withdrawal” from the strategy of Quantitative Easing. This is a sentiment I certainly agree with, but what concerns me is that any current planned “orderly withdrawal” will be based on discredited projections. Michael Fallon, who once more showed an assured command of the economic challenges facing us, made this point adeptly by revealing that the Government had promised to balance the budget by 2006 and had failed to do this. He then went on to ask how we can trust the current projections. Darling had no answer for this.
  2. The argument that our current travails are “a global problem” is increasingly hollow. As one MP pointed out the UK’s standing relative to other nations has been downgraded substantially. As much as Darling tried to argue this was not the case, this exchange ended in him being accused of being in denial. Again no response was forthcoming.
  3. With respect to borrowing the level of money the Government requires to fund the deficit, Darling was asked whether or not he believed this will be a problem in the current climate. He answered that he did not, but also did not offer any evidence as to why he felt this, other than “foreign investors and pension funds” will pick up the tab. Quite what we will do if he is wrong about this is hard to predict, other than an IMF bailout will likely become a foregone conclusion.
  4. Darling would just not admit that this latest budget represents a substantial cut in public spending in real terms. While I am in favour of this move, as I think it is a vital necessity, I am sure the Government would gain much credit by just being honest that this is what they have done. Not doing so only reinforces the impression that this Budget was little more than a flagrant attempt at electioneering, at a time when we can least afford it and are desperately in need of strong leadership.

Why can’t the Government just admit that they have made mistakes? The tripartite arrangement for overseeing the financial services sector failed, public sector spending is in urgent need of substantial reform and not enough money was saved during the 10-year “boom”. By denying these three basic facts, I think they are insuring that the Conservatives will stroll to a +100 majority at the next election. Whether or not that will be a good thing remains to be seen, as we haven’t exactly heard much substance from the Tories about what they would do differently.

28th April Some interesting analysis and are Bank of America and Citigroup about to fail?

A couple of items have caught my attention in the last 2 days, which I think are well worth passing on.

First, in case you missed them, Will Hutton has just released two films on Channel 4 about the Credit Crisis. In case you missed them they are on Channel 4′s catch up service. The link can be found below and they are well worth watching (be warned they are only online for the next three weeks);

http://www.channel4.com/programmes/dispatches/catch-up

A main argument Hutton makes is that the Credit Crisis is a product of a substantial moral failure at the heart of our system. As you know I couldn’t agree more with this point. Unless short-term greed is properly disincentivised then the same problems will afflict us again.

Secondly I caught a more positive item on Finance.yahoo today. The article makes a very good point about the “true” recovery from the last Depression.

http://finance.yahoo.com/focus-retirement/article/106981/25-Years-to-Bounce-Back-Try-4-and-a-Half?mod=fidelity-buildingwealth

In summary, when dividends and deflation were factored in, the author asserts that the recovery tool a little over 4 years. Of course this doesn’t tell the whole story as a lot of companies went under during this period. The same is likely to continue to happen in the next few years, but I think there is a basic message we can take from here. Although equity prices are likely to take another dip, now is an excellent time to enact a long term buy and hold strategy, focusing on reliable businesses, with strong balance sheets and positive free cash flow.

Two businesses, which clearly don’t have strong balance sheets are Bank of America and Citigroup. An article in today’s Wall Street Journal has claimed that the Fed is “urging” both to raise yet more money from markets. http://online.wsj.com/article/SB124088901025362487.html

It looks like both are going to fail their “stress tests”. It is no surprise that this news has leaked, even though early release was meant to be illegal. It is also no surprise that these two banks are still in so much trouble. Citi had to have yet another bailout only 3 months ago and we recently learned how much BoA objected to taking on Merrill Lynch’s toxic balance sheet.

Official news is due to be released on May 4th, but now that this is in the public domain I expect it to dominate headlines in the next week.

All that is surprising at the moment is that equities seem still to be holding up. With the Fed announcing its latest rate decision tomorrow, I think that a break could well occur in the immediate aftermath to this, unless we get yet another bumper announcement.

23rd April; Two Parliaments of Pain

The Institute of Fiscal Studies has issued a damning indictment of the budget. See below for link

http://www.ifs.org.uk/publications/4509

I know that we should try and remain positive, but the growing pressure on every aspect of this country’s finances is more and more troubling. An IMF bailout has to be around the corner.

Still shorting Sterling, in spite of bounce today.

23rd April System back up; looking at some Dow technicals

The last 6 months of action on the stock market has been incredible. One could even argue that the events we have witnessed are once in a lifetime (at least if they happen again while I live, I expect to be so geriatric I won’t care a fig for price/volume movements on stock markets!).

Regular readers of this column will know we had a server crash last year and it has taken us a while to get our acts together to reinstate the system. Of course part of our slowness was down to the beating we took in anticipation of the “Presidential Rally” that never was.

That is all a distant memory now and while I hope/expect never to forget the hard learned lessons of 2008, my confidence is returning to my trading activity.

I have spent some time in the last few days looking over the system and it has shown some intriguing calls.

To keep things simple I will focus on the Dow.

On November 4th 2008 and January 2nd 2009 the system gave the clearest selling signals. These were followed by 25% and 35% declines within 6 weeks respectively.

Jumping forward to current indicators we can see a convergence of value and retraction zones. This is further evidence that the Dow is about to break in one direction. The current value zone is 7582:7591 and the retraction zone is 8258:8265. Since April 1st 2009 the index has traded in a range between these two levels. A breakout to either side and we should see a 10-15% move in that direction.

I have to admit, I don’t know which way we are like to see the move. While I am still very bearish on stocks, the Dow has shown some bullish signs. Specifically it has maintained its position above its 50 and 100 day moving averages. Volume has been somewhat misleading as it has been roughly as high on the down days as the up days.

I am still writing my blog on last week’s indicators, but I am tempted now to place a buy order at 8280 and a sell order at 7520. While this could be seen as copping out, it might actually prove to be the most sensible approach.

Hopefully a breakout won’t occur this week, so I will have the weekend to think about it.

22nd April What price Britain’s AAA credit rating?

I have just taken all my profits in my Sterling/Dollar trade. I probably should have held onto some positions, but the proximity of the currency to its 50 day moving average (1.4426) and 100 day moving average (1.4473) could well give it some short term support. If we see a bounce from here I am likely to go short again.

Today’s budget has heightened my bearish feelings towards the prospects of the UK.

Starting with the growth figures the Treasury is predicting a contraction of 3.5% of GDP during 2009. This figure is at the top end of optimistic predictions and smells of politics (I am going to ignore all the polticised aspects of the Budget). If you consider that the conservative International Monetary Fund is predicting a decline of 3.8% during the same period, this gives some indication that Darling’s predictions could well be off.

The major problem with the Treasury being off in its predictions is the level of debt it is forced to take on. In a time of declining revenues and economic output, the Government is forced to borrow to cover the shortfall. Looking at the figures announced today it appears that Britain is about to take on £220 billion in borrowing during 2009. Yes that’s right £220 billion. This figure is quite simply unimaginable.

Unless the Government’s spending plans deliver a momentous impact to the economy the consequences for us are horrific. I doubt we will see this sort of success. Talk of a “generation of debt” appears less and less to be hyperbole.

The harbinger for another northern European island being cut adrift in the financial maelstrom will be the failure of the Government to sell the £220 billion of bonds. I am going to pay special attention in the coming months to any announcement relating to Britain’s creditworthiness. At the moment we are AAA, the highest possible rating. Any reduction in this will be a clear indicator of international unease at the state of our Nation. The practical implication will be that the costs of borrowing will increase, in the event of any downgrade, making a terrible situation even worse.

These are difficult times we are going to live in.

20th April Another sobering stat for the UK’s prospects

I caught an article on the BBC website today, which puts into context the parlous state of the UK’s public finances

http://news.bbc.co.uk/1/hi/business/8004567.stm

In 1976, when Britain last had to receive a bailout from the IMF, borrowing was 6% of GDP. In Wednesday’s budget the Chancellor is likely to have to admit that the current figure will rise to 12% by 2011-12.

I wrote, just after the G20, that Brown’s so-called achievement of achieving an extension to the level of support the IMF can now grant was most likely to benefit us. With the statistic above in mind, it looks like I might not be wrong.

Sell Sterling….

20th April Quick thought on the UK Budget

Sorry I didn’t get to write at the weekend. I got a bit overtaken by personal events, but I have a lot of notes from all that happened last week. I will definitely write about these as they have helped firm up my medium term view.

In the meantime our illustrious Chancellor is going to announce the budget on Wednesday. Over the weekend we heard that apparently he is going to be forced to admit the worst recession since 1945. So much for the “end to boom and bust”.

I went short Sterling against the US$. So far it looks like the currency market is voting with its feet. Sterling is taking another beating. I can’t really see what possible announcements the Treasury can make at this stage which will lift the mood of pessimism. Anything they say that smells of being unrealistic is surely going to give more succour to the Sterling bears (sounds a bit like a Scottish ice hockey team!).

My Dow position is also hanging in there. We are due a wave of earnings results this week, so I think this is going to be make or break for that strategy.

17th April TARP, PPIP & restructuring initiatives doomed to fail; Joseph Stiglitz

I had been planning to write a blog tomorrow. There has been a barrage of indicators out this week as companies have announced results and the Obama Administration has been making noises about the results of their much vaunted “stress tests” for the banking sector.

I am still going to write this blog, but there has been an interview today, which I felt merited an immediate response.

Joseph Stiglitz was interviewed on Bloomberg http://www.bloomberg.com/apps/news?pid=newsarchive&sid=afYsmJyngAXQ

If you care at all about what is happening in the Global Economy and about what is likely to happen then you need to read this link.

In summary he believes that the “bank restructuring has been a complete mess”.

Regular readers of this column will know I agree wholeheartedly with this view. While the massive injections of liquidity into the system, might have averted the need for a radical reappraisal of how our economies function, this will prove to be short-lived. To my mind (and that of the Nobel Prize Winner it seems — nice to be in such esteemed company!) all that is happening is that the inevitable is being delayed.

Stiglitz makes the point that part of the reason for this is that Obama has chosen advisors, strongly linked to Wall Street. In essence the people who caused this mess are meant to be the people sorting it out. Do we think this likely? What happened to the message of “change”? What happened to “Yes We Can”?

Although equity markets are still showing short-term strength, the warning signs are all there that things are likely to get far worse.

At the heart of the requirement for a radical restructuring of the financial sector is the issue of how addicted to debt our society has become. We (Governments, companies and citizens) are leveraged to the hilt. In the USA in 1954 $1.1 of debt generated $1 of economic output; in 2008 the ratio increased to $4.4:1. In other words debt is 4 times less effective than it was 55 years ago. As with any addict we are suffering from the severe, diminishing returns of our habit.

Clearly this cannot last in the long run.

I have written before that policy responses to the Credit Crisis needed to be bold, innovative and properly targeted. The severity of the situation facing us cannot be underestimated. Part of me is now starting to wonder whether or not our Governments and Central Banks have actually got things so wrong, that they have in fact substantially brought forward the point at which there will be no choice but to act decisively, quite simply, because things will be so terrible.

On the face of it this is a very pessimistic outlook. However I believe it will actually serve society for the best in the long run, as our re-purposed economies will be based on more sustainable principles and fundamentals. Maybe this is a pipe dream, but I am going to give it a lot more thought….

14th April Not getting carried away with Goldman’s results

In case you missed it Goldman Sachs apparently “blew away” market expectations, when they announced a bumper set of results. They made a profit of $1.66 billion in the first quarter of this year and announced plans to raise $5 billion to help pay off the money the company received from the TARP

With Thursday’s “positive” results from Wells Fargo, there are now those claiming to see the first green shoots of recovery in the financial sector. This has been amplified by the drop in LIBOR rates (the rate banks lend to each other at) to 1.13%, from a peak of >5% 6 months ago.

I am not so sure.

My immediate reaction to this set of earnings was tempered by the announcement that the majority of earnings had come through bond sales and trading desks. The sheer volume of Quantitative Easing around the World explain the former revenue stream, while the persistent volatility in markets explains the latter. Neither explanation however gives me any indication of a widespread recovery.

Listening to a lot of analysis that is out there I am not convinced by what I am hearing.

Starting with LIBOR, it is not at all surprising that the rate has come down from its peak to such an extent, given the sheer scale of Government intervention in markets. There must be so much liquidity in the system (or at the very least the promise of it), that of course banks are lending to each other again. The drop in LIBOR represents a simple equation of supply and demand. What remains to be seen is how much of this “benefit” is passed onto the wider economy.

Moving next to the “bumper” profits of Wells Fargo and Goldman Sachs we must remember that there are far fewer players in the market than there were 6 months ago. It will take some time to gauge the overall health of the market, but the short-term increase they have experienced must have been influenced by the collapse of so many competitors.

Then of course there is the issue of repayment of TARP funds. Broadly I am in favour of tax payers receiving some of there money back, but there are two crucial factors causing me unease. First the reason for the repayment is that Goldman is concerned about its future ability to hire the “best” talent if it has limits imposed on how it awards compensation. This argument is nonsense. It always has been and always will be. Such justifications were used to hire the people who created the mess we find ourselves in and the fact the Goldman board is still peddling this con gives us the clearest indication these people have learned nothing from their past misdeeds.

In the medium term I sincerely hope that the receipt of TARP funds will not be the measure used to define executive pay. It is clear limits need to be imposed irrespective of this.

The second I have concerns over how much of the TARP funds Goldman intends to repay. The coverage I have seen states the $10 billion they received directly. But what about the $12 billion they received through the AIG bailout? Although this money went to AIG first, its ultimate destination was Goldman. Will they repay this as well? I doubt it.

We will see the results of the Obama Administration’s much vaunted “stress tests” at the end of this month. These apparently are going to determine the capital requirements for banks. How this news will sit alongside the announcements of the banks will be very interesting.

9th April Bleak picture from the Fed’s minute

Yesterday’s release of the Federal Reserve Open Markets Committee’s minutes has shed further light on exactly why the US has engaged in the level of Quantitative Easing it has. The minutes can be found here

http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20090318.pdf

It is obvious, if it weren’t already, that policy makers are extremely worried about the likelihood of the recession continuing into 2010. Given this is just the latest in a long line of downward revisions from the Fed, are they really telling us that a likely recovery might not be experienced until 2011 or later?

We must remember that the latest rally in equity markets was sparked by the US’s QE announcements. This gave rise to optimism of an end in site for the economic crisis.

Although the Dow has drifted up in the last few days, volume has been extremely light. Alcoa’s earnings came in below expectations and they also downgraded their outlook. The Fed minutes are bound to weigh on sentiment.

While I don’t expect there to be any significant moves on the market this week I am going to hang on to my short position in the Dow and my long position against the Dollar.

7th April Calm before the storm and surprising Dollar strength

Yesterday’s anemic trade saw small losses in global equity markets This has been followed by more selling this morning, but the pace of declines is still moderate.

It is clear that the market is holding its breath in anticipation of Alcoa’s results this evening (10pm GMT). In spite of the recent rally I am still convinced that corporate earnings will be what drives any recovery. While technical indicators have been quite bullish in the last two weeks major disappointments in earnings and, more importantly, revised lower outlooks will almost certainly hammer this bear rally.

I stayed true to my word and went short the Dow on Friday. I have taken advantage of Monday and Tuesday’s declines to move my stops so that I now have a risk free position.

While I am still very pessimistic about this set of earnings, it would be foolish to ignore the bullish sentiment, which has built up over March. If there is news, which is regarded as “positive” by the market, then the rally could extend for the next few months and I don’t want to get caught on the wrong side of a sharp move up.

On the subject of being wrong-footed I have been surprised by the Dollar’s rally against the Euro. Friday really should have seen my positions move into decent profits. As it turned out I locked in a small gain.

I have just opened another long position against the Dollar at the 13233, 100-day moving average. However I should point out that the Euro/Dollar pairing is giving signals of Dollar strength. Specifically the latest pullback has completed the pattern of a lower high. The first high was set on March 19th at 13663. This was followed by yesterday’s high of 13528. With this in mind I have fairly tight stops on my position. I am still holding onto my view of the likely damage Quantitative Easing is going to have on those economies, which engage in it relative to those that don’t. While risky, I am going to trust what we have heard from European politicians and central bankers. Let’s see how that works out!!!

4th April Some technical observations

Yesterday was a pretty interesting day on the markets, given the lack of reaction to another dreadful US Payrolls report. In case you missed it the US economy shed another 663,000 jobs in March and the unemployment rate jumped to 8.5%. While there have been some signs of recovery in other economic data sets, job losses show no sign of abating.

In spite of this equities and the Dollar showed surprising resilience.

I had expected the Dollar to get hammered. While my position is still just about alive, I have to wonder whether or not there is any truth to market rumours about the likelihood of European Quantitative easing. For the time being I still believe that the European Central Bank will stay true to its word, but I am now watching for any change in tone, which might indicate a policy shift.

Looking at the Dow, I had said I was going to go short at 8,000. I have opened one position, but I think this might be a mistake. Yesterday’s slight move up in the Dow (it closed at 8,017) wasn’t supported by a great deal of volume (volume was 1/3 lower than the 3 month moving average), but this was in the context of the terrible Payroll report.

There are however a couple of other technical indicators, which give an indication of positive market sentiment.

First on Tuesday the Dow bounced off its 50 day moving average (which was at 7,444) and closed 100 points above this. Then on Thursday it closed above its 100 day moving average, which was at 7,949. This was the first time this had happened since June 6th 2008. The fact the Dow held this level yesterday gives a clear signal of the underlying strength in this bear rally.

Earnings Season starts on Monday, but I wonder now how negative the news will have to be to drive stocks lower. The Dow’s 200 day moving average is 8929 at the moment, but this will drop over the course of the week. Even so this could be a possible target if we get some slightly positive announcements.

Another factor to consider is the level of short-interest in the market. Short-interest is the level of shorting activity in the market. As I wrote the week before last, short-interest has now reached levels last seen when Lehman collapsed. This is especially important for deciding on a trading strategy for April. On the one hand this short interest is a suppressing influence on the market. If the news is negative and the short-interest level increases, markets will fall, probably heavily. However if there are any surprises to the upside we could see sharp moves up as stock-shorters are forced to cover their positions (i.e. buy stocks to stop their losses).

Whatever the case, the next few weeks are likely to be extremely volatile. I am sticking to my shorting strategy as I think earnings are likely to be awful and expectations for future earnings seriously downgraded. But I am going to manage my stops carefully.

2nd April Watching fundamental data and the Euro

Over the last 2 weeks, fundamental economic data has shown signs of improvement. Whether or not this is a lull in the declines or the first signs of a genuine bottom remains to be seen. As I have written before the next Earnings Season is going to be vital in setting the tone for the rest of 2009. If outlooks are revised sharply lower, then the current rallies in equities will likely be brought to abrupt halts.

However if companies don’t paint a picture of more doom and gloom, then we could see further strength to the positive market moves.

I am still very bearish about our situation and do no not believe that this will turn out to be anything other than a bear rally, but it would be foolish not to recognise the possibility of further near-term gains.

Of course the G20 meeting today has the possibility of influencing the mood of investors and I will be looking out for the official statement with keen eyes. I have to admit I am not overly hopeful about the G20 being a “new Bretton Woods”, but it is best not to prejudge its results before they are released. — As an aside remember that Bretton Woods lasted 3 weeks; how much can be achieved in 24 hours remains to be seen.

What I am most interested in today is the announcement from the European Central Bank about Interest Rates. When the US announced Quantitative Easing measures two weeks ago the Euro rallied strongly against the Greenback. However in the intervening period it has given up these gains and is trading at a similar level to where it started. I think that this move backwards is an expression of market expectations of the ECB reversing its position on QE. You will remember that the ECB has been adamant that QE is not on its agenda.

For my money I believe they will stick to this position. I have gone long the Euro this morning. While there is a chance they will cut rates further, I believe all the signals from European politicians indicate an unwillingness in the Community for Anglo-fiscal stimulus measures. If this is the case, then watch for a substantial move to the upside on the part of the Euro against the Dollar.