Monthly Archives: November 2009

30th November The Dubai Jitters

The news that Dubai World (essentially the management company of Dubai) was going to seek an extension to credit terms was treated as being tantamount to a default by investors internationally and has generated a storm of media coverage. While I don’t believe this is going to be the catalyst for a sustained Global sell-off in stocks this event does raise yet more questions about market belief in the “recovery”.

Although the announcement did spark a short-term collapse in stocks and other financial asset classes, prices stabilised fairly quickly and have started to return to the previous highs. This can easily be explained by the fact that the “news” from Dubai cannot have come as much of a surprise. Even the most passive observer of Dubai’s growth cannot have failed to have recognised that the situation there was a classic bubble and was bound to cause problems. While the U.A.E. is oil-rich, the extent to which debt was used to drive Dubai’s growth was always likely to make it a victim of the Credit Crisis and ensuing Global downturn. This was just another bubble that had to burst one day.

However this situation does not look like another Icelandic crisis. It is true that Western banks seem to be exposed to yet more losses as a result of this default, but the sustained market reaction has remained localised to the Middle East. This suggests strongly that unless a genuine shock occurs and this event has surprising ramifications elsewhere, the Dubai situation will remain isolated.

However this is not to say that we should not pay attention to warning signals from this latest mini-crisis.

I am reminded of events in February 2007. You may or may not remember that there was a huge sell-off in stocks during this month in response to negative news on Chinese GDP. This sharp decline was followed by a strong rally, driven by expectations of US Federal Reserve Interest Rate reductions. I am sure I don’t need to remind you what happened after October 2007, when the financial World went into meltdown as the Credit Crisis really took hold.

So where do the parallels between then and now lie?

The answer is quite simple. As in February 2007 we have now witnessed an extreme, short-term sell-off in stocks belying genuine confidence in the economic soundness of the current rally. As with then, however, we are likely to witness a resumption of the uptrend driven by Central Bank financed liquidity. In short any concerns about the viability of the recovery will be trumped by the availability of substantial “cheap” money.

The speed at which stocks have recovered convinces me that we are likely to see the recent highs tested and broken in the run-up to the New Year.

Given the behaviour of markets since March 2009 any questions about the likelihood of other sovereign debt defaults, the latest failure of rating agencies to warn over Dubai’s perilous financial position, how well international investors have priced risk in Global Government debt or over the bubble characteristics clearly present in current financial-asset prices will be conveniently put to one side. Well for now at least….

17th November Some technical analysis of the Dow and FTSE!

OK so it has been quite a while since I last wrote some analysis using the trading system, but this does not mean I have not been keeping eye on it. My general pessimism about what I see happening in our economy has intensified to such an extent that I have wanted no part in the return of irrational exuberance. I wonder now if this has been a bit of a personal mistake, but I will stand by original logic.

In July, September and October clear buying signals were fired on the FTSE and Dow by the system and lo markets rallied!

Great you are probably saying to yourself. Writing after the fact is as much good as the proverbial chocolate fireguard, but in my defense I did not and do not want to become a cheerleader for stocks. Frankly I cannot believe what I am seeing on a daily basis in markets.

Forget about expensive P/E valuations, staggering money invention, rising unemployment, political paralysis, excessive banking bonuses and all the other clear warning signs out there; the stock market is telling us that the good times are set for a comeback in 2010. For now at least…

– As an aside if I keep consistently writing about a severe correction at some point I am bound to be right, but this could be in a decade! –

Hindsight is 20/20 vision and the current stock market rally is not that surprising in the context of the stimulatory policies adopted by governments and central banks around the World. The tidal wave of stimulus money was bound to have an inflationary affect on financial assets. The likelihood is that this will translate into “real” inflation in the coming years, but more of that another day.

In the meantime both the Dow and FTSE have hit passed critical technical levels, indicating that this bull run is likely to remain strong in the near term.

Starting with the Dow its October 2007 retraction zone stands a 10190:10211. The fact that it has broken through this is extremely significant. Remember that stocks peaked in October 2007 and carnage followed. If we continue to see gains in the next week or so, then the Dow really could surpass 11,000 before the year end. As of writing the Dow is at 10,380.

In the case of the FTSE100 the picture is even more bullish. This index actually broke its October 2007 retraction zone in September, moved further forward, pulled back and then rallied off it at the start of this month. Again this is an extremely bullish sign. Currently the FTSE100 October 2007 retraction zone is 5059:5067. The FTSE100 closed today 5339.

The difference between the FTSE100′s rally and the Dow’s can be explained by the relative weighting of mining and oil stocks in both indices. In the case of the FTSE100 this weighting is substantially higher than the Dow’s. As such this index has been more exposed to the rally in oil and commodity prices.

While the price patterns look very positive, volume in both indices is still not as high as one would expect. Average volume has consistently fallen in the past 4 months and continues to decline. The trend for volume is clearly on a downward trajectory, with a succession of lower lows and lower highs.

Although this contradiction in price/volume movements will be unsustainable in the medium term, the tidal pressures of excess liquidity in the market will likely ensure that all ships continue to rise in the near term.

10th November The timing of the General Election could not be worse

It’s taken me a few days to gather my thoughts on events of the last week. My interpretation of CIT going bankrupt, the Fed announcing their rates will be on hold for a long time, Lloyds and Barclays receiving another bailout, Quantitative Easing being extended by another £25billion and the US unemployment rate rising to 10.2% was that 2010 is already a clear right-off. In spite of this stocks have continued to rise and Sterling actually rallied.

This still leaves me feeling utterly bemused. I am either completely wrong in my assessment of the macro-economic outlook (certainly conceivable) or we are simply witnessing yet another hope/liquidity/greed-fuelled (pick any combination) bubble in financial assets.

Whatever the case there is one clear picture emerging; Britain is going to take far longer to extricate itself from this mess than other developed nations. While there are still serious doubts over US plans for the removal of fiscal stimulus, at least they are debating their exit strategy. Over here there is no such debate. It is not even likely that we have seen the end of the QE programme.

I read Stephanie Flanders’ blog yesterday and one statistic caught my attention. Of the £175billion of “invented money” issued through QE, £173billion has been used to by Gilts (UK Government debt). In other words this has been used to fund the deficit. Officially the reason for this has been to underpin the UK bond market and therefore alleviate pressure on banking sector balance sheets. In reality such has been the unwillingness of the Government to address public sector spending in an election year that the BoE has been boxed into a corner.

There cannot be much demand amongst international investors for British bonds. This would have meant much higher financing costs and the likely reduction in Britain’s AAA rating. Had this happened then the Government and BoE’s ability to steer Britain out of recession would be severely hampered.

The problem is that it is highly likely both will still happen. The structural imbalances in our economy, which are clear to all, have not been addressed but rather have been exacerbated as the Government has vainly attempted to paper over gaping crevaces. The longer this goes on the worse our predicament becomes as more money is being spent on unsustainable spending programmes. The argument that these spending programmes are propping up the economy is tenuous to say the least. The last quarter’s GDP figure was testament to this (a surprise 0.4% decline).

I wrote last summer that we needed a General Election then. This has now become desperately true and the only question we should really ask ourselves is can we afford to wait another 7-8 months?