Monthly Archives: July 2011

31st July – The Grand Fudge

A month ago Obama was proclaiming the Grand Bargain he was seeking. He delivered a Grand Fudge. While the latest Greek “deal” was even more laughable, tonight’s announcement in Washington is ridiculous.

Nothing has been solved and the problem has only been delayed until after next year’s Presidential Election. The debt ceiling is being raised to $16.4trillion and $2.4trillion of spending cuts have been promised, $1trillion immediately.

Quite how Republicans believe that they will be able to sort out the deficit without tax increases of any description is beyond me. This is surely going to be the defining line of the election.

I could go on here about how deeply harsh America can seem sometimes, but I am not anti-American and politics is not the purpose of this blog. However a little more compassion from those who have everything at their fingertips would surely not go amiss.

Moving on, as I thought might happen on Friday, markets have popped at the open on Sunday. I am now sitting on tidy profits. I’ve moved my stops up to lock in some of my gains, just in case there is a negative reaction to this deal.

I can’t see their being a reversal just yet. I really don’t like the look of this deal that is being proposed. It seems to me that it is going to knock the economy pretty hard, whilst not really sorting out the problem. Surely only a greater problem is being saved for 2013? Continue reading

29th July 2011 – Understanding why I am right

I went long oil and the Dow tonight, just before the market closed. I am still extremely short of money, so only have tiny positions, but I am in nevertheless.

With this move I bring to an end my fake short. I would be showing a nice profit in it. After such general weakness you might ask why I wouldn’t have held on to it. Well the answer is simple; I clearly don’t understand why I was right.

While that is not entirely true (the recent sell-off has been on concerns of the Debt Ceiling impasse), I am coming to realise that this explanation is not enough.

Two weeks ago the market underestimate how entrenched the Democrats and Republicans were. This week the market has pushed prices lower as the risk of default has drawn nearer. There are now two days over the weekend when the market is closed and Congress and the Senate are open.

I am still not certain a deal will be reached, certainly not one that will be credible as a long term solution. However I have to be pragmatic. I can take on two highly leveraged positions and manage my risk with guaranteed stops. On the balance of probability this move just feels like I am on the right side of the line of least resistance. Any deal will see markets pop. Failure to reach an agreement might not see an immediate sell-off on Monday.

With respect to oil, I wrote the other week that I liked the look of the WTI charts. They look extremely bullish to me and the pullback seems to present a buying opportunity. I am fairly bullish now on oil for the rest of the year and now seems an excellent time to get into this market, considering my financial position. Continue reading

28th July – The beginning of a sea change

I want to make one thing clear. I am convinced that a US default, of any description, in the coming weeks will represent a sea change in modern economics.

The reaction might not be immediate, but the importance of such an event will be profound. Our economies are based on trust and confidence. Once this is lost it can never be recovered, perhaps partially, but never fully.

Default will be the start of a new era of uncertainty. The US might suffer a downgrade and then reclaim its triple-A rating, but the damage will be done. No longer will any investor be able to bank on the certainty of Uncle Sam’s liquidity. When the next, inevitable crisis comes around, it is extremely difficult to see how the Fed will be able to leap into action as it did in 2008. We’ve already heard Bernanke admit that they are nearly out of ammunition, yet still the Credit Crisis prevails.

I like that we will live in a world of consequences again, but the journey to that point will be tough.

Although my fake positions would be nicely in profit now, I am less sure that failure to resolve the Debt Ceiling crisis will result in the crash we saw in 2008, when TARP failed the first time in Congress. Then there was a true liquidity crisis, now the world is inundated with bailout money. My plan has now changed with my fake position. I would have tightened my stops to lock in a small profit and might be looking to buy the news, if a short-term drop occurs.

I still think we are heading for a nasty reaction, but I am less convinced it will turn into a correction. I hope I haven’t had my head turned by various commentary I have come across, but I will write more about this. Continue reading

26th July – Oil breaks $100 while BP, BSKYB and British Growth (or the lack of it) catch my eye

This afternoon WTI broke $100 for the first time since early June. According to “rule of 100” this would be a legitimate place to go long.

Had I money at the moment, I would be tempted to go long oil (after the Budget Ceiling row has resolved itself!). Since it first started pulling back at the end of April after the Arab Spring rally it has broken the $100 level several times only to retreat. On the last retreat it breached its 200MA and looked to be heading much lower. Since then it has recovered and what looked like a bearish pattern has turned decidedly bullish. From early July to now it both held and then rose off the 200MA support.

I like this pattern and a break above $103 should see the recent high of about $114 tested. If it breaks out through this then the next stage could well be $130. I will come back to this in the next few days, but part of my plan, were I to trade this, would be to watch for my top indicator; namely when Wall Street firms start declaring it is going higher. In fact their recent silence on the matter leads me to suspect that the upwards trajectory will be maintained.

Moving my attention back to this country a couple of items caught my attention today. First was the announcement of a likely 4.5billion dividend from Sky. In spite of the recent upheaval at News Corp (and the fall out for Sky, I am really bullish on the prospects of both companies. I probably would have bought some shares in both on the recent weakness, even with the threat of the Debt Ceiling. Satellite television remains an incredible cash generator, operated through virtual monopolies. I wouldn’t be at all surprised if News Corp didn’t come back for Sky, when Murdoch has left, so see substantial potential long-term capital appreciation in the stock as well. I might return to this issue, if I have time. Had I more money and were looking for stocks to buy, then these two would be towards the top of my list.

Another company I have really liked the look of in the last 12 months is BP. They reported “disappointing” results today. I say “disappointing” because surely anyone can see the enormous long-term, cash generative power of this company. Its wealth is staggering, notwithstanding the losses incurred from Deepwater Horizon. Yes the dividend is low at 7p a share, but this will surely only be the case for another year or possibly two.  Again buying and holding this stock would seem like a good idea and will be another I will probably revisit in the coming months. Continue reading

25th July – A quiet nationalisation

Today’s expected sell-off in markets has been a tempered affair, not least thanks to Apple hitting $400 a share for the first time. At the risk of repeating myself, the ticker is starting to prove my position in the market to be wrong, but in the ongoing absence of a deal on the Debt Ceiling I would still be happy to lie in my bed.

I need to do some analysis on transportation stocks (a failure I have been meaning to address for some time), but it looks like the market believes Congress will find a palatable solution for the Senate and White House and then it will be the earnings story which drives shares higher. I’m still not convinced, but we don’t have long to wait now.

In the meantime, I came across an interesting little side story.

Apparently over the weekend that the Bank of Spain has basically nationalised the Caja Mediterrano (“CAM”) bank. I can almost hear the resounding great “who cares?!” response to this news.

Well the answer is probably a lot more of us should. CAM was the 4th largest savings bank in Spain and, crucially, was one of the five banks, which recently failed the European stress tests. When the results of the stress tests were announced, Spain’s response was apoplectic – along the lines “how dare the integrity of their financial institutions be called into question”.

I am surprised that more hasn’t been made of this news (note the source of the link I have provided!). After all 8 banks failed and a further 12 were put on a watch list of risking failure. Leaving to one side the arguments since then about whether the stress tests were strict enough, the fact that the first threatened bank has failed before a Greek default has to be a worrying indicator. This failure reveals that the Credit Crisis is still looming large over Europe and it is not only being caused by the impending Greek tragedy.

CAM was one of the main architects of the Spanish housing bubble. The wholesale collapse in value of the Spanish property market has not yet been fully accounted for and my expectation is that this failure is the precursor of worse to come.

But for now let’s turn our attention back to America and see what tomorrow brings us……

24th July 2011 – Utter disbelief

My fantasy short position has proved to be a useful exercise. I would have made a mistake doubling up the week before last, but I am glad to have had the focus it has given me in recent weeks.

A strong earnings season has helped push stocks higher, but I am surprised that the market does not seem to have flinched at what looks increasingly like an impending US default. My positions would be underwater at the moment and I would plan to exercise a great deal of discipline with them. On Friday I would have tightened my stops, in the event of a breakthrough in talks on the Debt Ceiling.

After last week’s fudge of a “solution” for Greece it would have been foolish not to expect the same in America.

Then on Friday night, US House Majority leader Boehner, walked out of discussions with Obama.  The total lack of grace in his departure strikes me as a ploy designed to cause the most disruption possible. I caught a bit of Obama’s press conference and he seemed, justifiably, fuming. Not returning the calls of the President of America is not going to play well with the voting public. If Boehner and the Republicans believe that allowing this crisis to develop further will improve their chances of seizing the White House next year, I believe they have made a huge miscalculation.

The blame for failure will be placed squarely at their door. As best I can make out the Democrats conceded roughly $1.5trillion spending cuts (including Medicare, which is a huge political sacrifice for them), whilst looking for about $1.2trillion in tax rises.

On the face of it this solution seems well balanced and fiscally responsible. By cutting services and raising taxes in harmony, the pain of austerity would be spread fairly around. Continue reading

July 19th 2011 – Apple beats along with Coke and IBM

Today’s rally has been spurred by a raft of positive earnings, not least from Coke and IBM. However it is Apple’s performance that has particularly caught my eye.

I wrote a month ago that Apple had been trading in a range and I wondered if this was an indicator that stocks are generally treading water. Apple has been one of the leaders of the charge since March 2009 and is extremely popular with retail investors.

However today’s breakout has given me pause for thought about my theoretical short positions. Stocks are still trading below their highs and my positions would just about be in profit, but I would certainly be feeling wary right now.

If I am wrong and the next move is up, I would stick with my plan to wait until a breakout occurs then reverse my position and go long.

I’d still like to wait for a few days and see how the rest of the week plays out, but earnings appear to be giving stocks something of a foundation. The weight of sovereign debt concerns is still pressing, but if this is somehow released in the next few weeks (even if only temporarily), then I would have to face up to being wrong in my view that the next move is down.

I still feel the probability of an imminent Greek default is high and there is a much smaller, but present, risk of US Congress failing to raise the debt ceiling.

16th July 2011 – The battle between earnings, expectations and fear

One advantage of my little, pretend short positions is that “they” are causing me to watch days’ individual action far more closely. After the surge the week before last and last week’s stall this week has revealed a level of anxiety in markets absent for a while.

Quite simply the buying hasn’t been right.

Chinese growth, Italian austerity measures, Bernanke/the Fed’s hints of QE3 and surprise positive earnings results (notably JPM) caused momentary leaps in stock prices. However as each index rallied, they promptly sold off, even reversing entirely some days to finish down. Friday’s lacklustre trading range was further evidence that the market isn’t positively inclined.

Were I in the market at the moment then I imagine this would have been a nervous week. The gaps up and rallies were pretty strong. However after Thursday’s sell-off I would hope for follow through selling in the next week.

Further weighing on market sentiment is the news that 8 European banks have failed the ECB stress tests and 16 more scraped through. Of the 8 that failed, 5 came from Spain, causing a furious reaction from the Spanish.

Spain looks to be the next victim (is “victim” the right word? – how about “culprit”) in the European Sovereign Debt Crisis. The outlook is dire.

So all in all I would like being short at the moment and would look for a break through technical resistance by the end of the summer.

However I will also be keeping a close eye for signs that I am wrong. US earnings are proving to be fairly resilient and if Congress manages to get its act together over the US Debt Ceiling then this could provide a great deal of relief to stressed stocks.

14th July 2011 – Could the unthinkable happen (again)?!

I’ve been thinking about summer 2008 a lot recently. At the time one of the main topics I was writing about was the probably “Armageddon” in the event that Lehman Brothers failed.

We all know what happened, but I remember not really believing that it could actually happen. Even though I trailed it pretty well, I just couldn’t bring myself to believe that such a calamity would pass. Next Congress failed to pass the proposed bailout and stocks tanked.

These disasters were not only self-inflicted after years of gross, economic mismanagement, they were also exacerbated by political intrigue and dissent.

My leitmotif since returning to blogging is that not much has really changed systemically in the intervening period.

It is through this lens that I am now watching the debate over the US debt ceiling. I find it incredible that US politicians seem to think it in their best interests to engage in such dangerous brinkmanship. On a personal level I believe disunity is sinful, but on a practical level it can only be self-defeating.

Leaving such an important issue unresolved with three weeks to go is the height of folly.

Yesterday Moody’s sent out a stark warning that it has increased the risk of the “rising probability” of a US default of some kind. Bernanke has also been giving dire warnings of what will happen if Congress fails to agree.

This is deeply troubling. Continue reading

13th July 2011 – The Ostrich Doctrine

As European leaders continue panic about an Italian implosion, yesterday’s release of minutes by the Federal Reserve and the market reaction were most amusing.

Less than a month ago Bernanke said that there would be no QE3. Now it looks like this could be on the cards. At the very least it was discussed at the last policy meeting. Although precise numbers of board members in favour of or opposing this idea are not available, the fact that it was alluded to and minuted is clearly a sign that the Fed is feeling out the market for how it might react to additional stimulus.

Within moments of the release the market rallied, only then to sell off substantially at the end of the day.

The rally is an indicator that further monetary stimulus is likely to drive up stocks again. However the sell-off reveals the prevailing mood in the market is negative.

As of writing this piece there has been a rally overnight, based on Chinese growth at 9.5%. I have written before that I am sceptical about Chinese statistics, but the buying it has encouraged now feels like another opportunity to sell.

Although I am not trading at the moment, I would have opened another short position. I would have set my stops just above the recent high. My plan would be that if I am wrong in my view and markets rally, I would reverse my position, once new highs have been made. I would not open anymore positions now until confirmation of a move in my favour is revealed.

If I am correct in my assertion, that a correction is coming, then I would have a nice line to profit from. I would not now add to this position until the levels of technical support, I outlined recently, are breached. If these levels are breached then I would add to my position again.

One major risk I am aware of in my timing is that markets have been somewhat directionless in the last 3-4 months. There could be an argument that I am jumping the gun. However in this instance such is the weight of pressure building up that I can only see one move in the short to medium term; down.

11th July 2011 –Good money after bad

I made a decision yesterday. Had I any money then I would have gone short the US stock market.

Two items helped make up my mind for me. First I saw this excellent and credible interview on Breakout. I really like the analysis and it helped persuade me that hopes of a 2nd half recovery are misplaced. Given all the other resistance markets are likely to face if this earnings season does disappoint or downward revisions are made to future estimations, then we could well see the correction I have been expecting.

Second I saw this item. My immediate reaction was “well that is just throwing good money after bad”. With such a strong view I would have been forced to go short.

I am still learning the trick of when best to enter a position. Although there has been recent strength, the fact that we are nearing the recent high feels like a good pace for me to get in. I would have managed my stops tightly, but also could have afforded to as if I am wrong then the ticker should power forward and allow me the chance to reverse my view.

I am still conscious of the recent technical bounce. At the same time the weight of negative news is surely becoming unbearable. There is also so much pent up expectation that companies will deliver strongly for the rest of this year and well into next that if this is confounded the negative reaction should be pronounced.

I would have traded last night at the first opportunity. Now of course saying this is all well and goo Continue reading

9th July 2011 – So much information to digest

Yesterday was an extremely significant day for information releases.

Apart from the ongoing effects of monetary liquidity it strikes me that there are four main themes facing markets at the moment.

  1. Earnings
  2. Global recovery
  3. The European Sovereign Debt Crisis
  4. The US debt ceiling debate

The first is surely powering equities at the moment, but the other three are exerting more and more pressure. However I am increasingly coming to the opinion that belief in a second half recovery is possibly misplaced. The other three issues all pose individual dangers and there is even a risk that all three may strike at the same time.

Yesterday’s US payrolls number were dreadful. I picked up some excellent analysis on them today, here.

In summary, if weakness in the US job market continues for another two months then even the staunchest believers in the success of monetary stimulus will be hard pressed to stand by their case.

A further, less followed, item that I also caught showed that US consumers increased borrowing in May. This further strengthens a developing trend and could be another indicator of the pressure ordinary American citizens are under. If this also continues it more proof that the root causes of the Credit Crisis have not been solved.

Although the lunchtime release (UK time) caused a fairly large sell-off, it is also worth noting that US stocks recovered well from their lows to finish moderately down on the day. The earnings story has life in it yet. Continue reading

6th July 2011 – Portuguese downgrade and rising Chinese inflation

The news that Moody’s have downgraded Portugal’s rating to junk status and that the Chinese have raised rates for a  3rd time this year to cool inflation will not come as a surprise to anyone.

However the relevance of both items is not to be underestimated when judging the long term outlook. Although the stock market continues to rally strongly and commodities are on the way up again all the warning signs are there of sever nastiness around the corner. When this will happen remains to be seen but it feels like there is now an inevitability of another collapse.

I still believe this will ultimately be caused by another seizure in credit markets and the evaporation of liquidity.

I just can’t see where growth is going to come from to contradict this view.

There can be no doubt that the 2003-2007 bull market was credit driven. The excesses that built up in the system as consumers, corporations and governments borrowed heavily have not been satisfactorily resolved. However for the time being, the salve applied by monetary stimulus looks set to persist with its temporary relief.

I have been expecting a significant correction for a while now. Irrespective of this happening 2012 should still be a bullish year for stocks, not least because of November’s Presidential Election and the measures designed to help the PIGS have been designed to provide relief until 2014.

However at the moment I believe 2013 could well prove to be a watershed as the slow moving forces of disaster finally collide.

5th July 2011—The worst recovery since World War 2

The disparity between the recovery in financial markets and the so called recovery in the real world has been something I have been trying to make sense of in the last few years. More recently I have been trying to understand what has been driving company earnings to such a great extent, in the face of such anaemic growth rates.

Yesterday I read this very interesting blog.

The main thrust of the author’s argument is that while corporate profits have not only recovered but are now surpassing record levels worker pay has lagged substantially behind. What the author fails to note is that while it is true pay has risen in the US at an annual rate of roughly 1% this means a drop in real terms. With inflation at the level it is, the situation in America is similarly as bad as for British consumers.

Companies are currently in a strong bargaining position with their staff. Such is the widespread indebtedness of ordinary British and American and fear of being dumped into one of the worst labour markets in living memory, compensation levels for workers have been suppressed.

This alone cannot explain, what can only be described as, recent corporate outperformance. Continue reading

2nd July 2011 – A confounding rally

A week has passed since I last wrote about probable weakness in markets; they then go on to have the strongest week in two years!

Apparently the Greek Parliament’s double acceptance of austerity measures has helped drive prices up. I cannot believe this is reason alone or enough. Even though the Greek Government has passed the austerity measures, they still need to act on them. Given their track record and the extreme opposition they face, is it wise to trust that this is the beginning of the end of the European Sovereign Debt Crisis?

I cannot believe for one second that it is.

So this leaves me asking myself what have I missed?

Something is clearly driving markets.

Although volume hasn’t been that great (it is summer after all), last week’s was impressive.

Next Friday sees the release of the monthly Nonfarms Payroll Data. I have noticed in the past that this data release can cause markets to move the preceding week. The expectation is for an increase of 80,000.

Although positive, this news is hardly exceptional and can’t surely be behind the rise. Continue reading