Monthly Archives: June 2011

25th June 2011 – Further weakness in markets

Recently I have been investigating the state of equity markets. For the last month US and UK indices have been somewhat directionless. Although they have retreated off highs they have also found, what look like solid levels of technical support.

However it looks to me like the situation is weakening.

I have been experimenting with a new system I am developing, keeping a close watch on price and volume movements. My idea is very much in its infancy, but the historical testing I have done indicates I could be onto the start of something.

It is a bit early to talk specifics about this, but at the moment markets are definitely looking weak. The pace of selling seems to be accelerating, while the price movements are pointing down.

I lack, in my analysis at the moment, the ability to examine individual stocks so am having to rely on index views, but as I say things do look weak.

Of course it is always dangerous to fight the overall trend. While I am extremely bearish on the outlook for the global economy, I am still bullish on financial instruments thanks to the sustained momentum liquidity will continue to provide. So with this in mind, had I any money at the moment, I probably wouldn’t short stocks just yet, as I would like to see a break through support and confirmation that a correction is underway.

The following chart helps illustrate how interesting the situation is. Long-time readers of this column might recognise this as a MIDAS chart of the S&P500.

 

This chart shows us to clear things. First the value zone for Support Level 2 is at about 1265:1275. The index is now at or near this. Second the value zone for Support Level 1 is at about 1115:1125.

If prices break then a correction down to S1 looks feasible. At this level prices will look extremely attractive, subject to conditions, as this level has already been confirmed in the run-up of the last two and a half years. If, on the other hand, the price rallies, then a new high should be reached in the current bull market.

Such are the tailwinds facing global markets I would not be at all confident going long at the moment, but equally I would like to see more confirmation that a correction is underway.

20th June 2011 – Europe’s great test

The failure over the weekend of Europe’s leaders to agree on a second bailout package for Greece has further reinforced my view that the danger posed by the Greek calamity will be predominantly political not financial. Although the financial damage of a Greek default will be extensive the damage to the European project for union will likely be far greater.

Running anything by committee is normally fraught with difficulty, especially at a time of crisis. When strong leadership is required, dissenting voices and disunity make it next to impossible to form a united response. This is especially true in the affairs of government.

There can be no doubt now that the EU has is now facing its greatest challenge since inception at the Treaty of Rome just over fifty years ago.

For whatever reason, I was reminded over the weekend of the attempts to create a written European Constitution. After years of toing and froing, a committee of the great and good under the auspices of Romano Prodi eventually produced as long winded and meaningless a document as one dare imagine. It was promptly rejected by French and Dutch voters. Not to be outdone, the issue was not-so-quietly put to bed by European politicians, who circumvented the intention of creating a ratified constitution by signing the treaty of Lisbon in 2009. Continue reading

15th June 2011 – Greece on the brink and the solving of a conundrum?

I found the following article on the BBC website extremely disturbing. To now I hadn’t really considered the implications of a state failing as a result of the Credit Crisis.

It is probably still a bit early to anticipate this and the headlines are probably a touch dramatic, but what happens when a European Government fails to meet its debts. In the last 30 years such events have been limited to the Developing World. Now it is about to occur on our doorstep.

According to European Central Bank member Christian Noyer, a Greek default would mean that EU member states would have to refinance the entire Greek economy. Such a statement is clearly aimed at the Germans and indicates negotiating stance the ECB is going to take at this weekend’s Greek summit.

However it also presupposes one thing; namely that Greece will default in an orderly fashion as a member state of the EU. What happens if the Greeks act unilaterally and withdraw? Continue reading

14th June 2011 – When the ratings’ agencies turn on you, you know the game is up

Yesterday Standard & Poor’s hammered the final nail in the Greek coffin.

Greece now is officially the World’s least credit worthy nation below Ecuador and Argentina. Both of these latter two countries have defaulted on debt in the last 12 years, Ecuador twice!

The message from S&P couldn’t be any clearer. Greece is going to default. 

Now when we consider the efforts of ratings’ agencies in anticipating the Credit Crisis, the contrarian in us might well view this downgrade as a bullish signal! In fact it would be most amusing if this turns out to be the Greek bottom and this weekend Europe’s leaders will stage a miracle of fiscal rescue.

Somehow I doubt this will happen and it is now time for the debate to move onto what comes next.

The only thing I can’t really understand about this whole situation is how doggedly resilient the Euro continues to be. A month or so ago I was declaring my bearish views towards the currency. Logic surely dictates that a Greek default is going to have serious implications for the currency. I understand the argument that Greece represents only 10% of the German economy, but the threat is broader than just Greece going down.

If Greece fails then what of Ireland and Portugal?!

Perhaps the Greek default is already priced into the market as it has been trailed for so long. At the moment I am at a bit of a loss to explain this, but will certainly watch the Euro for any signs of weakness over the summer.

8th June 2011 – How Pimco’s Lehman losses relate to Greece

One article really caught my attention yesterday and that concerned Pimco’s losses relating to the collapse of Lehman Brothers.

This salutary tale serves as an excellent indicator to us all about the times we live in.

The Pacific Management Investment Company has a reputation as being one of the safest investors on Wall Street. It is the pension fund manager of choice for millions of Americans. As such it performs a vital social function.

Pimco was one of the few financial services companies to emerge from the Credit Crisis with reputation and balance sheet largely intact.

When Bill Gross, co-founder of Pimco, appeared on television in summer 2008 and claimed that he believed Lehman to be “100% safe” this view was backed by the $4.5billion his firm held in Lehman bonds. These bonds had been acquired over a long period of time at near enough face value.

Bear in mind that this is a firm, which prides itself on the diligence of its research and insightfulness of analysis. If these guys were wrong-footed by the collapse of Lehman, what chance did most other people have? Continue reading

4th June 2011 – At enormous cost we’ve avoided disaster and are recovering

I finally watched “Inside Job” today.

This is the first film about the causes of the Credit Crisis. Although it is a bit of a witch hunt (understandably some might say), the film gives a very good overview of what went wrong and who is to blame. It is well worth watching.

However the closing words of narrator Matt Damon helped focus my unease about the state of conditions;

“For decades, the American financial system was stable and safe. But then something changed. The financial industry turned its back on society, corrupted our political system, and plunged the world economy into crisis. At enormous cost, we’ve avoided disaster and are recovering. But the men and institutions that caused the crisis are still in power, and that needs to change. They will tell us that we need them, and that what they do is too complicated for us to understand. They will tell us it won’t happen again. They will spend billions fighting reform. It won’t be easy, but some things are worth fighting for.”

While I agree with the sentiment of these remarks, albeit they are a touch dramatic, there is, to my mind, an inherent fallacy within them; namely the use of the word “recovery”. Continue reading