Monthly Archives: May 2009

29th May US and UK equities starting to struggle

It was only a fortnight ago, that I was starting to be won over by the latest rally. The pervasive optimism was tantalising to say the least. Dow 9100 by the end of June really looked like it was on the cards.

However the rally has lost its strength in the last couple of weeks. Not only has the 3 month average of volume declined by 25% in this period, daily volume has been extremely light. The only day when volume was at levels seen from January through to the end of March, the market declined.

While confidence readings on both sides of the Atlantic have shown marked improvement, this is a lagging indicator and has almost certainly been heavily influenced by the rally itself.

In my defense I had said I didn’t like the current state of the market and therefore had stayed out of it.

Dollar weakness and Gold’s rally in the last few weeks adds to my impression that a correction is around the corner. I still believe that the next leg down will break through the March lows.

I am going to open small short positions on the FTSE100, Dow and S&P500. I am going to give these positions reasonable room, but am going to pay very close attention to any signals of the rally resuming its upward path.

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Bankrupt Britain Part II

I was going to write today’s blog in response to yesterday’s news that the IMF had praised the UK’s recession plan — I was going to ask what planet these people were on and how they could not see the glaring contradiction in this statement.

While praising the Government’s plan, IMF economists were sticking to their projections of a 4.1% decline in GDP in the UK, versus the Chancellor’s 3.5% forecast. If the IMF economists are to be believed then the Government’s recession plan is dead in the water. In the face of staggering debts and plumetting revenue, the next thing we would likely here from the IMF would be a proclamation detailing the rules they expect our economy to be run by in return for a huge bailout from them.

But then today happened.

In case you missed it Standard and Poor’s have announced that there is a 1 in 3 chance that our Country is about to lose its triple AAA rating —

While this has not actually happened yet, the prospects are horrendous. To put this into context, this has never has never happened before and would rank our economy alongside those of Ireland, Greece, Portugal and Spain. Once again it looks like we are on course to resume our place amonst the Sick Men of Europe.

The first practical implication of such a downgrade would be that it becomes more expensive for our Government to borrow money and less likely that foreign lenders will even be found. I don’t need to repeat what this means for the “bold and wide-ranging” recession plan.

The next likely event will be the total collapse of Sterling. In the face of a crippled economy and a threadbare public purse what support can remain for our beleagured Pound. When we take into acount falling North Sea Oil revenues the outlook worsens.

Some of you might say that this is an overly pessimistic view and that Gilts haven’t yet been downgraded. You may well point to Sterling’s resilience to today’s news, but if my views are right then 2010 looks awful for us.

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20th May; Geithner speaks sense (well mostly)

As summer approaches, markets rise and volume dissipates I caught a very interesting interview with US Treasury Secretary Tim Geithner on Monday.

I’ve got to be honest, I am increasingly impressed by this man. I know he is not universally popular amongst market commentators, but a lot of what he says makes sense. Although I don’t agree with some of his responses to dealing with the Credit Crisis (notably the PPIP, which I am sure is going to end badly), I have to respect the manner in which he has implemented them.

It is clear he has a deep understanding of what is happening in the Global Economy and has had the courage to make some very difficult decisions. More importantly he has demonstrated a willingness to stick by these. The situation he inherited is unique and the extent of the mess staggering, but he is starting to exhibit some of the qualities of leadership, which have been so desperately lacking to date.

A conversation with an ardent, Obama-supporting friend of mine a week or so ago had started to give me a fresh perspective on some of the Administration’s appointments. Where I had previously been very negative about the “same old faces” taking key roles of responsibility, my friend pointed out that Obama had little choice but to do so. While he is pursuing his radical agenda in other areas (War on Terror, Climate Change, civil liberties etc.) to have been too radical at this stage with the economy would have jeopardised his prospects for re-election in 2012.

At the very least he has the opportunity now to allow the current initiatives to fail, at which point he can then make the argument of having tried to work with the people and system he inherited and the failure being no fault of his own. The flip side to this argument of course, if that if the current initiatives work he can claim all the credit.

While this sort of “West-Wingesque” version of politics tends to be the realm of dramatic, script writers, listening to Geithner on Monday, there might well be some substance to this idea.

Throughout the interview he struck a very balanced but reformist tone. Above all he stressed the need for economic growth to be restarted, but in a measured manner. The growth he talked of is to be more sustainable and less-driven by credit. He recognised that America (and for that read the UK as well) needs to make some very hard choices in the coming years and that we all need to reassess how we live our lives. The process of moving from old spending habits to new saving ones is bound to be difficult, but the long term advantages cannot be underemphasised.

Interestingly he talked about the future withdrawal of fiscal stimulus measures. This has been a particular concern of mine in the last year. Geithner acknowledged that this is going to be a very difficult set of decisions to make. Withdrawing too soon, will have a severe impact on any fledgling recovery, whereas leaving it in place for too long will have as adverse an affect on long term prospects. While he would be drawn on any specific plans he might have for disentangling the public purse from the wider economy, it is comforting that this topic is at least on the minds of policy makers.

What I liked most about the interview was Geithner did not allow himself to be carried away by any of the recent optimism, which has flooded markets. Several times the interviewer tried to draw him on the recent rally, but Geithner stuck to his basic message that although the risk of catastrophic failure had been abated, there are still notable dangers lurking out there. Complex derivatives, a failed regulatory framework, heavily indebted consumers (especially those with large credit card bills) and excessively leveraged foreign banks are all going to dampen any recovery.

The last point was particularly notable. Geithner made a point of highlighting the state of balance sheets of foreign banks. While part of this argument felt like a retort to Gordon Brown’s “this is an American problem” argument, there was also an underlying suggestion that the worst is over for US banks. I have still to write about the results of the Stress Tests, but on this point I am still not so convinced.

I am still out of the market for the time being, but I have the feeling this interview is going to have a lasting affect on my long-term views.

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15th May; Bank of England cuts growth rate and US Treasury sale struggles

I am still out of the market at the moment. Work is pretty stacked up, hence the lack of blogging. Even though it is late now, two notable items have hit the headlines in the last couple of days, which I want to record.

First the Bank of England cut its growth forecast for the UK and predicted a “more protracted and severe”. The full report can be read here

This downgrade in estimates must be especially worrying for the Government (and the rest of us good, tax-paying citizens!). You will remember that a large portion of the criticism levelled at the latest budget was directed at the optimistic growth forecasts. These forecasts were used as the basis for the planned huge deficit.

Given that this was just over a month ago, this has to be troubling signal of worse to come. I still feel an IMF bailout beckoning, yet somehow Sterling has maintained its recent strength!!!! (As an aside I still don’t understand this rally, but I am going to leave it alone for the moment).

The second major item, which has caught my attention was the struggle the US Treasury found itself in with its latest bond auction. Although they successfully sold the allotment, there were definite signs of weakness in demand. Proposed US bond sales in 2009 dwarf those of the UK, standing at $1trillion.

Both items are clear signals of the twin problems facing the bailout plans, namely the World Economy is in worse shape than feared and international investors are starting to doubt the sagacity of funding US/UK deficits.

No doubt I will be returning to this topic soon, but expect equities to continue to rally in the meantime.

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11th May; Some technical analysis of the Dow

When I wrote last week about the Dow’s next retraction zone being at 9159:9168, I failed to check its 200 day Moving Average. For the record it stands at 8,437.

Tonight this index closed down 155 points at 8,417. Volume was roughly 85% of its 3 month average. Although the pullback from the 200MA might be seen as bearish, the lack of volume dilutes this view.

Although I took the majority of my profits last night, I still have a small long position. I am going to hang onto it for the time being. While I don’t like being long, the resilience of equities in the face of pretty bad news is giving us a clear signal of the likely direction of the market for the time being.

I am still going to write about the results of last week’s Stress Tests, but I expect the Dow to be up to about 8,700 by the end May and beyond 9,000 by the end of June. Beyond that is anyone’s guess, but surely reality is going to have set back in at some point in this overly optimistic bull rally.

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8th May; Stabilisation versus recovery

I am still digesting the results of yesterday’s Stress Tests (and fighting my way through a mammoth workload), so was going to spend a bit of time this weekend analysing them.

As I wrote earlier in the week the market has seemed able to shrug off, what appear to be, pretty bad results. The recently released Jobs Report now puts US unemployment at 8.9%, though the decline was less than expected.

Even so Dow futures are up >100 points and my position has erased my losses from the start of the week. I have moved my stops up. I really don’t like being long at the moment, but the ticker is telling us that the market’s outlook is more optimistic than mine; ignoring that would be folly for the short term.

I had a long car journey yesterday to think about why I feel so uneasy about the durability of the current rally.

While economic newsflow has improved and there are signs of bottoming out in several critical areas, we are still a long way off recovery i.e. when economies start growing again and new jobs are created. At best I think we can call the current data a process of stabilisation. The affects of Government intervention are starting to be felt, but there are still serious concerns about the long-term viability of these measures. The US still has a huge amount of bonds to sell throughout the rest of the year and there are signs of this market straining.

Overall I don’t like this market and am going to continue to tread extremely lightly.

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6th May Are the stress tests a mess?

After the terrible handling of the implementation of the TARP last year, one would have hoped that the Fed and US Treasury had learned their lessons over how to handle the announcement of sensitive policy tools to deal with the Credit Crisis. The bumper announcement of the PPIP, which was the catalyst for the latest rally, seemed to indicate that this was the case. Although I didn’t (and still don’t) agree with a lot of the detail of this plan, I couldn’t fault how it was delivered and the impact it had.

However fresh from this success there are worrying signs that the release of the results of the Stress Tests tomorrow are going to be yet another own goal.

What worries me most is that a big deal was made of the necessity for secrecy during the process of applying these tests. No official announcements were given on what the tests contained and it was made illegal for companies to release results early. We saw the great drama, two weeks ago, when the execs of the banks being tested were summoned to the regional reserve banks, to be given their results. All of this was conducted in full view of TV cameras, but interviews were forbidden.

Of course since then there has been a steady stream of leaks and there are now accusations that these have been orchestrated by the Obama Administration. Frankly, judging by the news which has come out, it looks like there is genuine concern behind the scenes that the Stress Tests are going to hit the financial sector hard. If you saw Bernanke’s testimony before Congress yesterday he had the demeanour of a man who has given up. He didn’t quite shrug his shoulders and ask Congress “what else can I do?” but he wasn’t far off this.

If the rumours are true then tomorrow we are officially going to be told:

  • Bank of America is all but dead in the water. It is nonsense to suggest that they are going to be able to raise money privately to shore up their balance sheet. Who on Earth is seriously going to put the level of capital required into an institution that has been on death watch for most of the last year, has received two bailouts and has still failed to pass its Stress Test?
  • Citigroup is basically going to be nationalised. There is no real surprise here as this has pretty much already happened, but it is still a terrible indictment of quite how far financial services have fallen
  • A total of 10 of the 19 banks are going to fail their tests (including Citi and BoA). The Fed are going to expect these institutions to raise money privately and this will not be insured by this FDIC. If this last point is true it is a crazy proposition. Why would private investors sink money into broken banks, without the FDIC guarantees, when they could just as easily snap up the bonds under the PPIP, with all the security those offer.
  • JP Morgan are fine!! Again this is no big shock. It was just over a year ago that they stole Bear Stearns. The future for this company has to look incredibly bright as they are pretty much going to be left last man starting, when the dust finally settles

We still don’t know the detail of the Stress Tests, but if they are in any hints of political manipulation of the measures used (e.g. they borrowed from Alastair Darling’s book of economic growth projections!!!!!), then this could add further weight to the announcement.

I should point out though that I am still long stocks. While I am not comfortable with this position I am trading on the basis of a breakout from the 8256:8271 retraction zone and there is still a chance that some or all of the rumours are untrue or that measures will be announced to deal with any failure. Even if this is not the case the market could well shrug off the negative news as the momentum appears to be behind the rally.

I fully expect to have a lot of my bearish sentiment confirmed tomorrow, but hopefully the trend will remain my friend in the short term.

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5th May; Rolling with the punches, trying to figure out what next for May…

OK, so I should really start with the bad news. I got stopped out of my short £/$ and Dow positions, locking in reasonable losses. While losing trades are never good, I am pretty happy with how I managed my risk. I had clear plans in both cases, but neither came off. C’est la vie…

Looking at each trade individually I still see a lot of downside to stocks and the Pound, but it is clear the market doesn’t agree with me. Well for now at least.

So working on the basic principle that I am wrong for the time being what is likely to happen in May?

Yesterday we saw equity markets in Europe and the US break into positive territory for the year. Although volume hasn’t been that high, markets have been exceptionally resilient to pretty bad economic news and corporate announcements. While the latter generally beat expectations we must remember that the outlook coming into this set of results was dire. Although earnings were “positive” in comparison to what had been predicted, in real terms they were still pretty shocking and the outlook for the rest of the year and 2010 wasn’t exactly boosted that much.

Economic news has consistently been worse than expected, apart from apparent signs of improvement in the US housing market. Again though we need to remember the context in which this “improvement” is occurring. The US housing bubble has been largely (though not necessarily that accurately) blamed for causing the Credit Crisis. Stabilisation in US house prices is widely regarded as one of the precursors to any recovery. While I broadly agree with this, I think it a little early to become too bullish on this.

Although recent data from this sector suggests that buyers are returning to the market, I still see one major distorting influence at play. This is of course state aid.

A critical aspect of US Government intervention in markets has been to address the availability of credit to homeowners. By flooding the financial system with liquidity through negligible interest rates, the TARP and PPIP it is little wonder that this money is starting to find its way to home buyers. Given the extent to which house prices have fallen the temptation to buy is increased.

Whether this proves to be the catalyst to a genuine recover must surely still be in some doubt, but that does not mean we will not see an extension of the current rally for the next few months.

While the release of the results of the US banking Stress Tests on Thursday and Friday’s payrolls numbers might contain some nasty surprises any weakness caused by either of these is likely to be short lived.

I wrote a couple of weeks ago that I had placed a buy order on the Dow at 8280, based on the system’s prediction of a retraction zone at 8255:8262 (as it stands now). The next retraction zone is at 9162:9173. With the wind stocks now seem to have behind them what’s the betting we see this level tested in the next few months?

The ticker is clearly telling us that this is on the cards. So while I am not that confident in the durability of this rally, I am still going to buy more of it with a relatively short term outlook.

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