The Dow reached a low of 10084 today, over coninuing pessimism with worse than expected initial jobless claims (470K vs 450K) and orders for durable goods (0.3% vs 2%), and continued uncertainty over Bernanke's relection (which was later confirmed).
Following on from the previous quarters better than expected GDP results, the market is forecast for tomorrow is 4.5%. Given the level of stimulus in place, I think we still have a 50 50 chance of this being met. However, as stated in my previous blog, will the market rally off it?
Secarios, and strategies:
A)GDP worse than expected, 2-3% lets say.
Strategy:
1)Sell the Dow, Stop at 10190, target 9600
I see no reason why the Dow cannot break through the 10,000 mark, to target 9800 initially over the next two weeks, and finally after a worse than expected Non farm payrolls resut in the weeks ahead, to target 9600.
2) Sell Eurusd (and also buy US dollar index)
Eurusd currently around 1.39, heading towards 1.30 by the next quarter.
3) Sell the miners (Rio tinto target around 2600)
4)Sell Crude (Currently at $73 Targeting $65)
B) GDP meets or exceeds expectations
1)Buy the Dow targeting an initial rally to the 10200 region. However I expect it to sell off quickly after this rise, as the market awakens to the continuing poor fundamentals.
Thursday, 28 January 2010
Sunday, 24 January 2010
Dow breaks 50 day moving average- Reversal? (Long FTSE, Short Dow, Long Dollar)
The Dow broke its 50 day moving average on Thursday, due to a combination of news of the Obama plan to halt propietary trading activities at banks (meaning a significant decline in their revenue), as well as the ongoing bank tax plan, and continuing impact of tighening of lending at Chinese Banks.
Since around October though, the Dow has been running out of juice, with the chart seeming to form a dome shape. In order for the dow to maintain its rally since March, we require a catalyst in the form of topline growth from Q4 earnings. So far, in the earnings season, it hasnt come, and if there is no sign of significant progress on this I think we may be in for a reversal.
I think that Bernanke most likely will not raise rates early as he is a "scholar" of the depression, and says that was one of the shortcomings of the 1930s Era.
On the other hand if top line growth comes in, and yields start rising again (as they have been), rates going up sooner, could lead to more foreclosures, so lower consumer spending (for those using their homes as equity).
Also with current uncertainty regarding regulation reforms (bank taxes, and the likely cost increase to their customers), health care , I dont see large scale business hiring, and even if unemployment does bottom, a lack of hiring, and improvement is likely to reinforce a reversal.
Week ahead:
Bernankes reelection is unconfirmed as of yet, requiring the approval of at least 1 of 4 republican board members to make it through. If it does so happen that he is not reelected, this is likely to cause uncertainty among traders who were relying on Benanke keeping the cheap money rally going.
However with the lack of this, and lack of any other bearish news this week, of key important wil be the USD GDP news. Forecasts currently at 4.2%. There is a clear dichotomy in my view between stimulus induced news results, such as GDP, and the reality of the economic situation such as Non Farm Pay rolls.
No doubt GDP will meet expectations, or roundabouts, however what will be key will be if the Dow rallies off it. If the Dow starts selling off, on "good news" then we know the reversal is on, and the general sentiment is bearish.
We also have the FOMC rates decision coming up this week. I think Bernankes likely to maintain his previous rhetoric of rates remaining low for an "extended period", given rate increases were to be on the back of clear evidence of a stabilisation/recovery in unemployment.
I am looking for the Dow break below 10,000 within the coming weeks, particularly around the release of Jan payrolls.
My overall macro strategy to benefit from this would be to go Long the FTSE, and short the Dow (over the period of the next month).
The FTSE closed the week at 5217, and the Dow at 10202. However the FTSE has been pulled down largely due to the fall in share price of banks and miners (as per the Obama regulations, and Chinese tightening of Bank lending). However, with CPI coming in at 2.9% last week for the UK, I think it is likely that UK GDP will beat expectations this week, as finally the QE induced recovery begins to kick in.I also think unemployment in the UK is likely to have bottomed.
My view on commodities stocks are that they are likely to range for the next two weeks. There is alot of uncertainty out there, about rates, the dollar, the Chinese economy, ultimately even good earnings (as was the case with GS) will prove difficult to overcome market sentiment at the moment.
I see the dollar getting stronger due to risk aversion (rather than market expectations of rate increases), and US 2 yr yields falling. I do not see any significant rally in Gold til perhaps March, if the US decides to continue QE.
Since around October though, the Dow has been running out of juice, with the chart seeming to form a dome shape. In order for the dow to maintain its rally since March, we require a catalyst in the form of topline growth from Q4 earnings. So far, in the earnings season, it hasnt come, and if there is no sign of significant progress on this I think we may be in for a reversal.
I think that Bernanke most likely will not raise rates early as he is a "scholar" of the depression, and says that was one of the shortcomings of the 1930s Era.
On the other hand if top line growth comes in, and yields start rising again (as they have been), rates going up sooner, could lead to more foreclosures, so lower consumer spending (for those using their homes as equity).
Also with current uncertainty regarding regulation reforms (bank taxes, and the likely cost increase to their customers), health care , I dont see large scale business hiring, and even if unemployment does bottom, a lack of hiring, and improvement is likely to reinforce a reversal.
Week ahead:
Bernankes reelection is unconfirmed as of yet, requiring the approval of at least 1 of 4 republican board members to make it through. If it does so happen that he is not reelected, this is likely to cause uncertainty among traders who were relying on Benanke keeping the cheap money rally going.
However with the lack of this, and lack of any other bearish news this week, of key important wil be the USD GDP news. Forecasts currently at 4.2%. There is a clear dichotomy in my view between stimulus induced news results, such as GDP, and the reality of the economic situation such as Non Farm Pay rolls.
No doubt GDP will meet expectations, or roundabouts, however what will be key will be if the Dow rallies off it. If the Dow starts selling off, on "good news" then we know the reversal is on, and the general sentiment is bearish.
We also have the FOMC rates decision coming up this week. I think Bernankes likely to maintain his previous rhetoric of rates remaining low for an "extended period", given rate increases were to be on the back of clear evidence of a stabilisation/recovery in unemployment.
I am looking for the Dow break below 10,000 within the coming weeks, particularly around the release of Jan payrolls.
My overall macro strategy to benefit from this would be to go Long the FTSE, and short the Dow (over the period of the next month).
The FTSE closed the week at 5217, and the Dow at 10202. However the FTSE has been pulled down largely due to the fall in share price of banks and miners (as per the Obama regulations, and Chinese tightening of Bank lending). However, with CPI coming in at 2.9% last week for the UK, I think it is likely that UK GDP will beat expectations this week, as finally the QE induced recovery begins to kick in.I also think unemployment in the UK is likely to have bottomed.
My view on commodities stocks are that they are likely to range for the next two weeks. There is alot of uncertainty out there, about rates, the dollar, the Chinese economy, ultimately even good earnings (as was the case with GS) will prove difficult to overcome market sentiment at the moment.
I see the dollar getting stronger due to risk aversion (rather than market expectations of rate increases), and US 2 yr yields falling. I do not see any significant rally in Gold til perhaps March, if the US decides to continue QE.
Wednesday, 13 January 2010
Higher Reserve Requirements for Chinese Banks-Commodities Correction? Buy the miners?
From what I can see there has been a small corection in miners, crude oil, and Gold hasnt maintained its gap open from Sunday night. Yesterday news came out that policy makers in China, will look to raise reserve requirements of the banks, raising concern about liquidity levels in Asia (for speculative purposes, to push prices up) and I guess also to support loans for more construction etc (which would support greater demand for commodities).
As we know there is a close relationship between commodities and the bond market. Commodities tend to rise in an inflationary environment, in which yields are required to go up(to compensate the investor in real terms) and so bond prices decline.
However momentarily there seems to be some scepticism over the recovery with the non farm payrolls result from last week, which has led to a slight improvement in demand for treasuries.
The issue in China is not something that I think will take hold of the market for long, I expect it to be forgotten in a week, if less, and for the rally in commodities to continue. This is likely to be further aided, rather than hindered, by a lack of improvent in payrolls next month, leading to hope of an extended period of low rates in the US, and more room to play out the carry trade.
My recommendation would be to see how this plays out, on the first sign of a clear resumption in the upward trend, either this week or next, I would be looking to buy into the miners.
Gold has fallen alongside the commodities sector, however from its viewpoint as a currency, there is no reason, that it should remain weak, hence I am still bullish on gold prices, especially if next months payrolls show no improvement.
As we know there is a close relationship between commodities and the bond market. Commodities tend to rise in an inflationary environment, in which yields are required to go up(to compensate the investor in real terms) and so bond prices decline.
However momentarily there seems to be some scepticism over the recovery with the non farm payrolls result from last week, which has led to a slight improvement in demand for treasuries.
The issue in China is not something that I think will take hold of the market for long, I expect it to be forgotten in a week, if less, and for the rally in commodities to continue. This is likely to be further aided, rather than hindered, by a lack of improvent in payrolls next month, leading to hope of an extended period of low rates in the US, and more room to play out the carry trade.
My recommendation would be to see how this plays out, on the first sign of a clear resumption in the upward trend, either this week or next, I would be looking to buy into the miners.
Gold has fallen alongside the commodities sector, however from its viewpoint as a currency, there is no reason, that it should remain weak, hence I am still bullish on gold prices, especially if next months payrolls show no improvement.
Sunday, 10 January 2010
Trade Recommendations for 11/01/2010
Equities;
Buy at Open, Sell at Close;
UK:
Carclo Plc
Kazakhmys Plc
Legal & General Group Plc
Randgold Resources (play on Gold, as it has opened up 17 points tonight)
UK Coal Plc
US:
Union Pacific Corp
United States Steel Corp
Qualcomm Inc
Europe:
Commerzbank
Sell at Open, Buy at Close;
Real Estate Opportunities Ltd
Costain Group Plc
Commodities;
Buy Gold (Apr-10 futures). Target Entry between 1155-1140, stop at 1129. Hold til 1200 (if not previous high of 1230's).
Please note this is a fundamental trade recommendation, exit and entry points for this should really be placed in accordance with the traders own risk/reward preferences.
Buy at Open, Sell at Close;
UK:
Carclo Plc
Kazakhmys Plc
Legal & General Group Plc
Randgold Resources (play on Gold, as it has opened up 17 points tonight)
UK Coal Plc
US:
Union Pacific Corp
United States Steel Corp
Qualcomm Inc
Europe:
Commerzbank
Sell at Open, Buy at Close;
Real Estate Opportunities Ltd
Costain Group Plc
Commodities;
Buy Gold (Apr-10 futures). Target Entry between 1155-1140, stop at 1129. Hold til 1200 (if not previous high of 1230's).
Please note this is a fundamental trade recommendation, exit and entry points for this should really be placed in accordance with the traders own risk/reward preferences.
Non Farm Payrolls-Is the Gold rally back on?
The Non Farm Payrolls result for the month of december, coming in at -85K, was a disappointment to most traders. However interestingly the stock market rallied off it, with the dow closing at 10620.
What to make of it?
The Dow rallying (after its initial sell off) probably indicates that the market is relieved to know there will still be some time before the Fed tightens, facilitating the rally to continue off "cheap money".
The december payrolls were also revised to show a gain of 4k, compared to its previously stated loss of -11k.
Is the Gold Rally/Carry trade rally back on?
Perhaps. Gold sold off prior to the news release, however subsequently came in stronger, and closed at $1139. Gold being the bet that the Fed cannot tighten, as soon as it needs to (in order to avoid escalating and excessive inflation lecvels), due to the adverse affect it would have on a struggling job market.
Prior to the release expectations for a rate increase by June were around 50%. They must now surely be corrected. Given that, in order to be sure of any sort of stabilisation, or recovery, they would ideally be looking for consecutive monthly improvements in the unemployment figure (well thats what I would be looking for at least).
Implications for consumer spending and topline growth (Q4 earnings and beyond)?
Clearly without evidence of a stabilising unemployment number, the notion of an increase in consumer spending this year to support top line growth of companies (as opposed to profits made by cost cutting) is questionable.
Another fact to point out is that there has been no correction in the rising yields for treasuries with the outcome of this report, so it looks like the mortgage rate level is set to rise from its current 5% level. This will not aid the property market, as more foreclosed properties come onto the market (due to the high, and increasing unemployment rate) with buyers still uncertain about the property market.
This means a large number of American homeowners will still remain underwater (their property being worth less than their mortgage), and thus unable to use their home equity for loans, and so prevent an increase in consumer spending.
This combined with the the vastly contracted availability of credit lines to the consumer, is unlikely to the support the short term desire (of the market) for companies to produce top line growth, in my opinion.
Meredith Whitney Cuts estimates on Goldman Sachs;
News broke on Thursday of Meredith Whitney cutting her profit estimates for Goldman Sachs, and Morgan Stanley among others. The share price took an immediate correction, but quickly rallied back to close on Thursday the 7th at $178.
Given the steepness of the yield curve and spread between the 30yr and 2yr (traditionally indicative of profitability of banks) I would recommend that the rally seen in banking stocks since the start of this week is likely to continue.
Is the Gold rally back on?
Having opened at $1156 just now, from a close of 1139. Yes it most definitely is!
What to make of it?
The Dow rallying (after its initial sell off) probably indicates that the market is relieved to know there will still be some time before the Fed tightens, facilitating the rally to continue off "cheap money".
The december payrolls were also revised to show a gain of 4k, compared to its previously stated loss of -11k.
Is the Gold Rally/Carry trade rally back on?
Perhaps. Gold sold off prior to the news release, however subsequently came in stronger, and closed at $1139. Gold being the bet that the Fed cannot tighten, as soon as it needs to (in order to avoid escalating and excessive inflation lecvels), due to the adverse affect it would have on a struggling job market.
Prior to the release expectations for a rate increase by June were around 50%. They must now surely be corrected. Given that, in order to be sure of any sort of stabilisation, or recovery, they would ideally be looking for consecutive monthly improvements in the unemployment figure (well thats what I would be looking for at least).
Implications for consumer spending and topline growth (Q4 earnings and beyond)?
Clearly without evidence of a stabilising unemployment number, the notion of an increase in consumer spending this year to support top line growth of companies (as opposed to profits made by cost cutting) is questionable.
Another fact to point out is that there has been no correction in the rising yields for treasuries with the outcome of this report, so it looks like the mortgage rate level is set to rise from its current 5% level. This will not aid the property market, as more foreclosed properties come onto the market (due to the high, and increasing unemployment rate) with buyers still uncertain about the property market.
This means a large number of American homeowners will still remain underwater (their property being worth less than their mortgage), and thus unable to use their home equity for loans, and so prevent an increase in consumer spending.
This combined with the the vastly contracted availability of credit lines to the consumer, is unlikely to the support the short term desire (of the market) for companies to produce top line growth, in my opinion.
Meredith Whitney Cuts estimates on Goldman Sachs;
News broke on Thursday of Meredith Whitney cutting her profit estimates for Goldman Sachs, and Morgan Stanley among others. The share price took an immediate correction, but quickly rallied back to close on Thursday the 7th at $178.
Given the steepness of the yield curve and spread between the 30yr and 2yr (traditionally indicative of profitability of banks) I would recommend that the rally seen in banking stocks since the start of this week is likely to continue.
Is the Gold rally back on?
Having opened at $1156 just now, from a close of 1139. Yes it most definitely is!
Wednesday, 6 January 2010
Trade Recommendations for 07/01/2010
Hold (from Tues):
Kazkhmys
Chariot Oil and Gas
Buy at Open, Sell at Close:
UK:
BHP
Nestor Healthcare Group
Zions Bancorporation
Stobart Group
Compass Group
Xstrata
Wolseley PLC
US:
Wells Fargo
Sell at Open, Buy at Close:
National Grid PLC
Kazkhmys
Chariot Oil and Gas
Buy at Open, Sell at Close:
UK:
BHP
Nestor Healthcare Group
Zions Bancorporation
Stobart Group
Compass Group
Xstrata
Wolseley PLC
US:
Wells Fargo
Sell at Open, Buy at Close:
National Grid PLC
Monday, 4 January 2010
Trade Recommendations for 05/01/2010
To buy before close on 4th:
Goldman Sachs Hold (if havent bought, buy 172.40, 170.90 Stop, Target 175 by Thursday 7th)
UK stocks:
ChariotOil & Gas LTD Buy; 26.443 Stop 24.9 Sell; Close
Halfords Group PLC Buy ;417.45 Stop 408.00 Sell; Close
Kazakhmys PLC Buy ;1372 Stop 1322.0 Sell;Close
Lloyds Buy ;52.00 Stop 50.41 Sell;Close
Marks&Spencer Buy 409.39 Stop 405.71 Sell;Close
RBS Buy 31.82 Stop 28.83 Sell;Close
UK Coal PLC Buy 79.72 Stop 76.72 Sell;Close
Goldman Sachs Hold (if havent bought, buy 172.40, 170.90 Stop, Target 175 by Thursday 7th)
UK stocks:
ChariotOil & Gas LTD Buy; 26.443 Stop 24.9 Sell; Close
Halfords Group PLC Buy ;417.45 Stop 408.00 Sell; Close
Kazakhmys PLC Buy ;1372 Stop 1322.0 Sell;Close
Lloyds Buy ;52.00 Stop 50.41 Sell;Close
Marks&Spencer Buy 409.39 Stop 405.71 Sell;Close
RBS Buy 31.82 Stop 28.83 Sell;Close
UK Coal PLC Buy 79.72 Stop 76.72 Sell;Close
Sunday, 3 January 2010
Trade Recommendations 03/01/2010-08/01/2010
Goldman Sachs Buy; Open (04/01/2010) Sell; Close (04/01/2010) Stop$167.80
(Previous close is 168.80)
Risks:Earnings estimates have been cut by Meredith Whitney, any bearish statements prior to Q4 season coming up could cause a sharp drop.
(Previous close is 168.80)
Risks:Earnings estimates have been cut by Meredith Whitney, any bearish statements prior to Q4 season coming up could cause a sharp drop.
Strong Dollar
The dollar breaking its 50 day moving average on the 4th of December, has been a key day. Prior to this the dollar had mainly rallied on risk aversion, as a safe haven, and with better than expected non farm pay rolls of -11000, this led the market to bring forward their expectations of a rate increase, and thus the dollar rallied. Since then it has been consistently rallying off good news.
January the 8th is a key day, when we'll see if this non farm pay rolls was simply anomalous data volatility, or part of a reversal in the unemployment trend.
Obviously this is a key moment, as from historical perspectives of the Fed's decisions after previous recessions, market perceptions are that the Fed cannot begin rate hikes until there is evidence of an improving job market.
Also given that Ben Bernanke is a scholar of the great depression, and has stated that one of the mistakes in those times was increasing rates too soon, my own view is that remains will remain low for an "extended period" well into late 2010, and perhaps early 2011.
We are also approaching Q4 earnings season. And market perceptions are that the holiday sales went well for retailers, but will companies show "top line" growth, and not just savings made by cost cuttings? Is consumer spending back?
When I try and look at market consensus for these things, given I do not have access to my own research, data etc, what I look at is stories. Who's selling me the best story, that makes sense, that fits in with what the market is saying.
Long term my view on the US economy is doubtful. I think there will come a stage towards the latter part of 2010 or early 2011, when paying interest on their debts becomes a serious issue, and the Fed will keep printing money, people will lose faith in treasuries (to a greater extent they have now), yields go up as default risk is priced in, as well as a devaluation of the dollar.
However short term, I'm looking for a strong dollar, with support on the US dollar index at 74, and a near term target of 80, which could quite well be taken out on Friday, or earlier, as the market begins to anticipate Friday will show positive figures.
Another reason why I'm bullish on the dollar, for 2010, is that there are numerous problems within other regions, such as the Greece, Italy, Spain debt concerns, as well as those in dubai. Any additional unexpected news releases of this nature, (for example from Eastern European loans), is likely to bring the dollar up as a safe haven again.
Bearish view points on the US economy;
If I were to state a case for a bear it would go along the lines of Im looking for unemployment to get worse, " Im looking for 10.2%-10.4% maybe more in January (so the payrolls released in Feb), cuz although businesses can get credit now, there's no consumer spending, and with fears over healthcare reforms and stuff the employer cant take risks adding to his expenses.." Which is actually what I did say 3 weeks ago.
I could also say there are problems in commercial real estate, which if unresolved, could pose supply risk on the property market, cause prices to go down again, thus reduce consumer spending, and reduce the possibility of a near term improvement in the job markets.
Bullish (on the price of the dow):
Business driven recovery, unemployment is a lagging indicator, improving retail sales, top line growth set to resume, positive news in jobless claims. So much liquidity out there, it has to go up.
Given these two view points, my feeling is that the non farm pay rolls news on Friday is likely to be positive for the dollar.
Scenario A) Job losses low, in the region of -20000, to -75000, or even a slight addition in the number of jobs and the dollar rallies.
Scenario B) Although the dollar has been selling off, on bad news, I think that if the december results were shown to be an anomaly, and the losses were around -120k, or more, the whole market shakes up. And the dollar rallies as a safe haven.
So my feeling is that the odds are in favour of a dollar rally.
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