Monthly Archives: February 2012

28th February — Has the wind turned?

Has the wind turned?

There has been a definite feeling on AIM in recent weeks that the wind has finally turned. After interminable months of grind and decline, stocks have finally started to move more positively. Where before good news was met with apathy and bad news was punished, we are not starting to witness strong movement from strong performers.

Those that kept their nerve in the last six months should be back to or approaching break-even at the very least. Those who had the fortitude to buy when everyone else said “sell” should be sitting on pretty profits. For the time being the bull is back and the signs are that we are entering another period of sustained advance.

But what has changed?

Greece’s “bailout”

The obvious answer to this question is that Europe has agreed to the terms of Greece’s “bailout”. After months of tortuous wrangling, indecision, announcements about nothing and general failure to get to grips with the problem, eurozone nations finally provided €130billion to “solve” the Greek debt crisis.

Now you may call me a traditionalist, but I tend to view words such as “bailout” and “solve” as having an air of finality about them. In the case of Greece though, these words are often used in their less recognised sense of delay. A bailout is a bridging loan until the next disaster and a solution is simply a postponement.

Remember this is Greece’s second “bailout”. There is a strong likelihood that they will be back for a third. The latest deal is fundamentally flawed. Crucial assumptions in the projections are wildly optimistic or downright unrealistic. Chief among these is that Greece will return to growth in 2013 (having contracted 7% in 2011 and preparing to undergo more painful austerity in 2012!!!) and that the debt to GDP ratio of 120% in 2020 will be sustainable (which it clearly isn’t). This is not to mention the likelihood of the triggering of credit default swaps in response to the “voluntary” (there are those quotation marks again) write-down of debt or the probable collective upheaval of a society in deep distress.

Against the backdrop of anaemic economic growth in developed countries, persistent unemployment, rising commodity prices and escalation of tension in the Middle East you are probably asking yourself why I am still bullish.

This is another straightforward answer.

I do not believe economic fundamentals matter one jot to markets at the moment. Continue reading

28th February – That time of year again

As oil shoots through the roof, one of my favourite contrarian signals has triggered.

With WTI at about $106/barrel and Brent at $121/barrel, the banks are starting to issue recommendations to buy.

Remember the last time this happened?

As I said then when the banks recommend buying an asset it usually means a top is not far off. They remain mysteriously quiet when commodities pull back to support and they start loading up.

Today I saw an item from Barclays saying they expect Brent to hit $150-$200 and last week Goldman Sachs buying WTI. Perhaps encouragingly for WTI Goldman didn’t actually set a wildly optimistic price target, but as soon as they do I will certainly consider going short.

There is definitely the threat of an Israeli strike on Iran. It is impossible to say whether or not this will or will not happen, but I think it won’t. Unless the Americans join in I think Israel lack the military capacity to halt the Iranian plans. This BBC piece echoed a view I have had for a long time. The Iranians are likely to have buried their bunkers deep underground and dispersed them over their large country. They have probably also used civilian populations as further deterrents to military action. To do meaningful damage to these targets will require multiple strategic bombing strikes and only the Americans possess the means to do this. Continue reading

23rd February – So the show goes on, but for how long?

Well what an exciting week this has been.

I am glad I took precautionary steps on Friday and would certainly do so again. I have to be careful how I manage my risk and I thought there was a very real possibility that Europe would not reach agreement about Greece.

They did and markets have rallied, although serious questions still remain.

I am sure this is not the end of European Sovereign Debt Crisis. The deal seems fundamentally unworkable and the financial system is at breaking point. As this Zerohedge article points out we came to the brink because Greece could not meet a “measly” €14.5billion payment in March.

Even so the appearance of a solution will hopefully be enough to give new life to the current rally. Monetary conditions are certainly bullish thanks to the ongoing efforts of the world’s central bankers. I am actively looking for points to increase my positions to the same levels as last week. I will have to be nimble in this pursuit and intend to take the opportunity to rebalance my holdings.

At some point economic reality will have to set in and we can expect more steep drops. I don’t believe this will happen in the next six months. Continue reading

17th February – Reducing risk ahead of the possible end of the Greek crisis

I’ve been away for the last week and banned from using the Internet.

This said I have still had positions to watch and I have done my best to keep track of events, albeit as discretely as possible to maintain domestic harmony.

One email service I really like is produced by John Burford, under the title “MoneyWeek Trader”. Mr Burford is a great believer in Elliott Wave. I like this method of technical analysis, although I am still learning about it. I have signed up to the service, but the Moneyweek Trader newsletter is free and an excellent starting place.

Anyway Mr Burford called a top in the Dow earlier in the week, based on a clear 5-wave pattern. He then cancelled it the following day only to reinstate it today. The changing state of his view over the week is a useful reminder of some of the limitations of technical analysis. Personally I believe that technical analysis is best used in combination with a clear macro view (hence the blog writing) and solid fundamental research.

Even so Mr Burford’s initial analysis has caught my attention because it has come at a time when I am concerned about the downside risks from here. I do not agree that we are at the top of the bull market, but I have to recognise there is a risk of an imminent correction.

I have been increasingly bullish since October (thanks to the trading system and my Market Strength Test tool). I have positioned myself accordingly and have a combination of stocks and leveraged positions. I am sitting on decent paper profits and generally feel good.

Even in this happy frame of mind I am conscious of a serious looming threat. Continue reading

10th February 2012 – Looking at the Falklands

A couple of months ago I started reading about Borders and Southern’s (BOR) then impending spud at the Falklands. Understandably there remains a good deal of excitement about this event, not least because it marks the first of five drilling campaigns, for different companies, by the same deep-sea rig.

So far, investors in Falklands’ oil exploration have had a very rocky ride. There was an initial mania, thanks to the success of Rockhopper (RKH), which led to the inevitable speculative bubble. When expectations were dashed, as a series of companies struck out one after another, prices crashed and remained in the doldrums until recently.

Reading about BOR, the question I found myself asking was could this time be different?

I wrote a few years ago that I believed the first Falklands war was in all likelihood an oil war. At the time it was fought there was a great deal of excitement about North Sea oil. The sea beds around the Falklands are similar in characteristics and depths to those of the North Sea. It was not a great geological leap to identify them as highly prospective territories.

I’ve been collecting links over the last few weeks to add to this post. These can be found here, here, here, here, here and here. Continue reading

7th February – The inflationary monster bubble versus the deflationary death spiral

Obviously the Fed didn’t deliver QE3 last month. Thanks to this my Google Alert for “QE3” makes for interesting and divided reading.

To begin with there are lots of news articles written everyday on this topic. Where it gets a bit more fascinating is that opinion is split evenly down the middle as to whether or not the Fed will engage in QE3 at all.

The following two articles encapsulate the debate quite nicely. This one makes the case for QE3 as inflation is apparently benign and companies have little pricing power. However this article attributes the decline in the price gold to the expectation of no QE.

For what it’s worth I am sure the Fed will engage in QE3. I have positioned myself for another burst of manic printing.

Not to print would be to call into question the entire policy response of the last 4 years. Once this happens the next logical step would be to question the active roles of those still in power, who took us down this path in the first place. Given that desperately clinging onto power, at any cost, is the fashion amongst our leaders, the chances of enlightened honesty suddenly sweeping through their ranks seem mightily thin to me.

There is also the “race to the bottom” to consider. Debt levels are so high that there is little chance of genuine repayment. At the moment, default is an extremely dirty word. Currency debasement is simply another form of managed default. The weaker your currency becomes the less valuable your debt is. That the majority of developed nations are now so over-leveraged is exactly why we now have a race on our hands. In other words which nation can successfully weaken their currency the fastest without wrecking their economy? Continue reading

2nd February 2012 – Revisiting some trading ideas; gold and Amazon

A month or so ago I wrote about my initial forays into the gold market. I wrote about the small losses I took and how I jumped the gun, but would probably still do the same again. Finally I wrote about my plan for getting back in at the turn of the year.

This is all well and good, but one question begs to be asked. Do I read my own bloody blog?!

Apparently not!

For the life of me I cannot begin to understand why I am not long gold. In terms of my macro-view it is just about the perfect trade at the moment. The pullback was extreme, the sentiment was generally extremely bearish (ideal contrarian indicators), yet the conditions looked set for a rally.

The record expansion of the ECB’s balance sheet and the prospect of further QE led by the Fed are ideal for gold. While governments and central bankers persist in trying to solve a debt crisis with more debt, gold represents the only true international store of wealth.

Forget about its lack of practical application. It is a vessel catching international flows of money.  Continue reading