Sunday, November 30, 2008

Well you couldn't be bored could you?

Well if you thought October was a dramatic month, November put that one to shame. It was nothing short of hectic with something significant hitting the headlines almost every day. There are not too many brokers/investors/punters out there right now with smiles on their faces.

So much has been happening on a daily basis in the financial markets right now that it is worth a quick recap of November’s events:

  • Barack Obama was elected President in a convincing victory.
  • European Central Bank cut rates by 0.5% to 3.25%.
  • UK’s Bank of England cut rates by a surprise 1.5% to 3%.
  • The Aussie RBA cut interest rates early in the month by a surprise 0.75% to 5.25%.
  • US unemployment hit 6.7%.
  • Most major economies (except Australia, so far) including US, Japan, UK, Germany, fell into recession.
  • GM and Ford pleaded for a Government rescue. US Government bailed out Citigroup.
  • US Government announced another initiative (“TALF”) to prop up consumer loans.
  • World Bank said China’s growth to slow to 7.5% for 2009.
  • Terrorist attacks in Mumbai.
  • China cut rates by 1.08% to 5.58%.
  • Aussie PM Kevin Rudd announced $15 billion spending package.

Australian interest rates cut by another 1% ‐ cash rate now at 4.25%
As broadly expected by the markets, having priced in a 1% cut, the Reserve Bank of Australia (RBA) cut official interest rates to 4.25%. This is the same level that helped the Australian economy to get through the deflation risk period of late 2001 and represents the biggest about face on monetary policy in recent history.

The RBA has moved quickly and with several large banks immediately announcing that they will bepassing on all, or most, of the cut, it should be welcome news for Australian households in the lead up to Christmas. Together with the spending measures announced by the Government, and a large fall in the Australian dollar exchange rate, significant policy stimulus should support demand over the year ahead. There is still room for further easing in the first half of 2009, with the official cash rate likely to dip below 4%.

Bursting the latest bubble – the “bubble” of pessimism
Despite equity markets in Australia and the US being up around 10% for the last week of November, people may assume that bull markets are forever dead.

So, how do we burst the bubble of pessimism? Keeping it simple, here are four key points:
  1. Unlike the 1930s, the stimulus being applied to economies is decisive, massive and creative. This will make a difference.
  2. Markets have fallen to such an extent to have priced in a major global depression. This is an extreme view and unlikely to happen.
  3. Throughout history, the Australian share market (as based on the All Ordinaries Index) has always bounced back from big falls to reach new highs. Should this time be any different?
  4. Investors who panic at these times tend to miss out over the longer‐term by selling assets at low prices and missing the opportunity to buy back in. Staying calm, if you have a diversified, high quality portfolio, will be a good long‐term strategy.

The key of course, is timing. There have been several examples during the year of what looked to be excellent buying opportunities. There were technical examples, fundamental examples, put/call ratios, government stimulus packages and a myriad of other measures. The market glanced at them and continued on its downward path.

So when will the market turn? That’s the $64billion question. Traditionally, equity markets put on a Christmas rally following the seasonally weak months of September and October. Will that follow through this year?

Saturday, November 8, 2008

Just ignore it and it might go away...

US: A very strong US Dollar and tumbling Oil prices and gave Wall Street a boost last week.

The market appeared to shrug off an announcement from mortgage finance giant Fannie Mae that it had sustained a quarterly loss of 2.3 billion dollars. Fannie Mae reported a loss per share of 2.54 dollars, compared with projections of 0.69 dollars, which it mainly attributed to provisions for losses related to the US housing downturn.

The credit crunch continues to plague major banks as UBS said it had struck a deal with US regulators under which it has agreed to buy back 19.4 billion dollars' worth of tainted securities.

There will be extended focus on the banking sector in the coming week following Citigroup's deal on Thursday with regulators to buy back billions of dollars in securities in a similar deal.

Analysts predict that other large banks and brokerages will soon strike similar settlement deals with the SEC and other regulators in relation to their marketing of such securities.

The reaction to all of this seems rather subdued...

Friday, October 31, 2008

Ah, October, here we go again

US Stocks: The Stock Trader's Almanac calls October the ”jinx” month because of the crashes in 1929 and 1987, as well as the slide on October 27, 1997, the back-to-back massacres in 1978 and 1979 and Friday the 13th in October 1989.

This October was no different. For the month, the Dow Jones Industrial Average was down over 14 percent, while the S&P 500 was almost 17 percent and the Nasdaq 100 down 15.7 percent.

The threat of economic upheaval has rattled markets around the globe as panicked investors and institutions, including hedge funds, rush to liquidate risky positions to raise cash.

Concern that the global economic downturn, sparked by the US housing slump, might be deeper than expected drove US stocks down sharply over the month.

Yet October sometimes turns out to be a "bear killer" or a turning point when bears, after gorging themselves on stocks, go into hibernation. So any whiff of encouraging news in the coming weeks could be fodder for the bulls and the bargain hunters out there.

Stock market volatility: With the sharp sell-off in stocks, market volatility shot higher last month – as you would expect. As noted last month extreme highs in the volatility index or “VIX” are often seen at the same time as lows in the stock market.

The chart shows the VIX pulling back from a high right as the S&P bounced from its low. So is that a sign that all the selling is over? By itself, unfortunately not. However with the market’s historical tendency to bounce from October lows and its tendency to perform well around election time, it could mean there some hope...

Crude Oil: The fear of worsening global economic conditions took its toll on Crude Oil once again last month. The market fell from above $100 at the end of September to around $67, a fall of 33 percent over the month about 54 percent from its high in July. The fall slowed late in the month around $64, but strong bearish sentiment remains. This ain’t over...

Tuesday, September 30, 2008

Oh yeah, let's ban short selling - great idea!

Those financial stocks love a bit of press. Mid month, Lehman Brothers filed for bankruptcy protection and large insurer AIG shortly followed with similar financial woes. While the US government have a good history of handling economic conditions, it looks like they’ve not done so well this time.

The banning of short selling by the SEC during the month was just plain nonsense.

It may be true that some large traders can use short selling to deliberately push the market lower, but the banning of this practice is a bandaid fix at best. The simple fact is the entire options and futures market allows and investor to short sell far easier than short selling in stocks. One can hardly claim that removing the ability to short sell stocks can support a market or reverse a crisis.

What you can say however it that it makes a good scapegoat. Remember the whole ‘weapons of mass destruction’ thing in Iraq? Serious claims with little or no evidence. There are parallels here. During this crisis several of the failing banks have spoken out about how “improper short selling” was the cause of the weakness in their share prices. So it was the short sellers to blame, not mismanagement, excessive leverage and outright incompetence? Well it was a lie the SEC believed.

As for that ‘$700million bailout’, the details seem to be changing on a daily basis, so it’s hard to comment until it all comes out in the wash. However, one has to wonder why anyone would bailout the companies and management that created the problem in the first place. Bailing out investors is one thing. Bailing out mismanaged companies is another.

Also one has to wonder what the real crisis is. Is it a bunch of bad mortgages? Perhaps that is enough to rock several banks, a bunch of broking companies and the entire economic system. Another thing however that can rock an entire system or make a problem worse is confidence.

The ‘doom and gloom’ view point is one that is self fulfilling. If enough people think the world is over, then their actions will cause it to happen. The Fed and the SEC seem to have acted in a way that has triggered a complete lack of confidence on the financial system.

If everyone thinks a bank is about to fail, everyone will take their money out and stop dealing with the bank. That in itself will cause the bank to fail. Back in 1946, James Stewart’s character in the movie ‘It’s a Wonderful Life’ knew this. Here in 2008, the Federal Reserve and the SEC do not.

You see this lack of confidence has put some serious brakes on the financial system. Credit markets have almost frozen as financial institutions have stopped lending to each other as each fear counterparty risk (risk that another bank will fail).

So what is the solution? It is clear that the US government has to step in somehow. In fact it seems highly unlikely that there will not be some sort of bail out. The ideal bailout however will be one that does two things:
  • Restores immediate confidence.
  • Limits the risk that this kind of thing can happen again.
The second point is a detailed one – and will probably take months before it can be addressed. But without a concerted approach to stop banks doing silly things, then what’s to stop this happening again in a few years?

Here is a bold prediction – it will happen again. The next time, the guns of Wall Street will have some new whiz-bang product and everyone will get carried away with it all - again. Hey, in the 80’s it was LBOs. In the 90’s, securitization became popular as did complex derivatives.

In the 00’s it was more securitization and complex derivatives, but with different names like CDOs. Slack credit policies and clever packaging does not a good investment make.

Monday, August 4, 2008

Finance stocks continue to shake

US: It was another volatile week for US stocks but with an ending that left prices almost unchanged.

In keeping with the current trend, the financial sector was the source of the volatility. Mixed economic data, mostly better-than-expected earnings reports, and volatile crude prices also prompted the market's swings. In the end, the good news offset the bad, with the major indices ending practically flat.

Last week’s action shows sentiment is still nothing more than nervous. Opinion and evidence is mixed as to whether the recent lows will be the worst we will see for time being.

COMMODITIES: Like stocks, Crude Oil had a rough ride last week. In fact for every session apart from Friday, the market swing was more than 1 percent (up or down). However prices finished near steady around the $125 mark.

Tensions in the Middle East persist after Israeli Deputy Prime Minister said that all options are open as Iran drives toward a “major breakthrough” in its nuclear weapons program. Iranian President they would “resist with force” any outside efforts to slow its nuclear program.

Comments such as these suggest there is a risk that Israel or US will attack Iran. Interestingly though, it’s not pushing Oil prices higher. You could argue its stopping process from falling, but it’s not actually pushing prices higher.

Gold, like other markets had a choppy week with sentiment seemingly flipping on a daily basis. The market finished down around $15 overall.

OVERALL: The market remains in a state of uncertainty. Often during these times the best bargains can be found. However it would be naive to expect this rocky road will get smoother any time soon. In other words, there are no real signs of a bottom.