S&P Update - Back on support and looking weak

Quick note - the S&P is right on it's support, despite the good financial results out today. We may see a continuation of the correction at the beginning of next week. Keep a close eye on the cash breaking 1,130 and the March Future breaking 1,127 - if it does I will look at stopping and reversing the long position and also re-evaluate the Emerging Markets ETF and the iShares S&P GBL Nuclear Energy positions.

Have a good weekend all!

Cameco Corp looking weak

Cameco Corp is dropping towards it's stop at 30 - I have decided to move my stop 29, just below the medium term support. The reason for this is because I view the position as a long term trade. What I don't want to happen is to get stopped out when the long term support is broken then seeing the medium term support hold and the price bounces back up past the long term support.

Also, see the latest performance of my portfolio below. The average was as high as 4.5% during this week, but today's drop in the equity markets has wiped off some of those gains. The retail and jobless claims data out of the US was pretty bad. The S&P is back testing it's long term support - again I am expecting the level to hold. However the end to this week and the beginning of next should give a clearer indication to the short term direction of the market. Keep an open mind!!

S&P Support Holds - portfolio update

The S&P bounced off it's support in style yesterday which is good news for all the bulls out there. From a technical perspective, this weeks candle formation is all important - at the moment it is showing a 'doji' which conveys a sense of indecision between buyers and sellers. It could be that the the buying pressure is starting to weaken. Obviously, we have to wait until the candle is fully formed to infer anything, but it is worth noting that the candle may signal the start of a reversal.

The latest performance of my portfolio is below - I have included hypothetical 'bets' for those looking at the leveraged spreadbetting option. As you can see, using leverage significantly increases the percentage returns as determined by the margin required to put the positions on.

Note - the £100/pt shown for equities is the same as £1/pt where the tick size is x100 (as offered by most spread betting brokers). For example, Shaw Group trading @ 3240 (32.40 x 100), long £1/pt.

S&P - Big break??

For those who are interested, the S&P is hovering around it's long term diagonal support on the weekly and daily chart (formed since the March 2009 low). A break of this line may be a key signal so I am keeping a very close eye. As you can see, I am currently long the S&P in my virtual portfolio. Tomorrow's retail sales data and inflation data on Thursday could be key. See below for graphs...

A New Beginning....

As you may have noticed, it's coming up to a year since I last updated my blog! March 2009 was a very busy time for me career wise, so I ended up sacrificing my blogging duties so I could have a life. Now thing's have calmed down a bit and I have had some good news!

I am going to be writing monthly articles for GX Magazine on my views on the economy and investment ideas. The articles are going to be supplemented by entries on my blog - readers can follow my latest thoughts, check my graphs and follow the performance of my virtual portfolio.

My first article is appearing in February's edition so I cannot go into too much information on here before it is published.

I thought I'd share my virtual portfolio in the meantime - I have selected the following positions based on my views on how I believe the economy is going to perform in the year ahead and beyond. Short(ish) term I am bullish the equity markets (US and emerging markets), medium to long term I am bullish the nuclear sector and gold. I have also gone for a defensive play with a water fund. Should my views change, I will update on here. You can see the performance below - I will be monitoring the positions daily and once the article is published, I will upload the charts. Click on the below table to open in a new window.

The opening prices are from the 4th January when I started writing the article. They are securities that I have been watching for months and ones I believe are worth looking at for good growth potential.
The average performance can be used as an indicator for the performance of a portfolio made up of an equally value weighted portfolio of the securities on the table.

Please feel free to contact me if you have any questions or comments!

Is cutting interest rates a good idea?

It has been a hell of a long time since my last post! I have been off enjoying myself in Vegas before the Xmas break and Mauritius post New Year. The economic, financial and political world gone through a great deal since my last post - the inauguration of Obama in the US, more government bailout's on the cards, terrible unemployment (Q4 2008 1.92m, highest level since 1997) and GDP (Q4 2008 -1.5%, official recession confirmed by 2 consecutive quarters of negative growth) figures confirming the recession is with us, the Israel-Gaza conflict, just to name a few.

The latest piece of news announced today is that the BoE base rate has been cut by 50bps to a record low of 1% - the 5th interest rate cut since October. The aim is obvious - to attempt to stimulate lending and to boost the shrinking economy. Good news for industrialists, retailers, builders and estate agents. However, as I have written about previously, I completely disagree with the notion that we should try to borrow our way out of trouble, hence I think the rate cut is yet another wild decision by the powers that be.

Firstly, it is terrible news for savers and creates moral hazard. Those who were prudent enough to save when things were booming no longer have the same incentive especially when they see bail outs for the careless being handed out left, right and centre. It is as if they want people to get themselves into more debt that they can't pay off rather than save which is what caused this crash in the first place! What the BoE seem not to understand is that by paying lower rates there is less of a chance that people will keep their cash in the bank or building society. The result, fewer funds become available for borrowers and the effect of the interest rate cut is nullified.

Secondly, the damage to sterling could be horrendous. Lower rates means lower returns for foreign investors in sterling denominated products. That gives them less of an incentive to hold sterling, lowering it's value. The more the pound devalues, the more reluctant external holders are to own it. The implications are that in order to service the massive national debt which is estimated to be well over £1 trillion within 5 years, the government will have to issue hundred of billions of pounds worth of gilts. And if external investors do not want to invest in sterling assets, who will buy the gilts?! Unless the government offer higher rates to entice investors - so by cutting the base rate, the long term rate of interest that we'll have to shell out is forced up.

A look back at recent history points to the Japanese interest rate cut to nearly zero in 1995. All that succeeded in doing was shattering confidence so badly that the economy suffered the so-called “lost decade” of collapsing property and share prices. In fact, the Nikkei 225 index is now no higher than it was fully 26 years ago. The bottom line? Lowering interest rates from 5.5% made sense. Cutting them now is a big mistake. Unfortunately, the Bank of England has struggled to work that out.

A Christmas gift from Madoff and the FED

It's been a while since my last entry, and in our current climate, two weeks seems like an eternity! We've had the botched attempt by the US government to secure their auto industry, the fall of Woolworths and Entertainment UK, the release of more terrible economic data - especially unemployment - exemplified by the announcement of massive redundancies and spending cuts at Rio Tinto. We have seen the German chancellor feud with Gordon Brown over their different approaches to the financial crisis - the Germans do not believe more debt is the answer and are refusing to burden future generations with high taxes (endure the pain now so that things will be better in the future - very prudent thinking). And let's not forget the pound hitting new lows against the Euro following fresh concerns over the health of the British economy and hints by the BoE that interest rates will be cut again soon.

This week has seen one of the largest ever financial fraud cases come to light. Bernard Madoff, the former chairman of the Nasdaq stock exchange and hedge fund big man (!), was arrested after running the world's largest yet least intricate pyramid scheme ever. Those who are not familiar with the world of funds may be interested to hear how simple it was too do. Obviously being a person with a credible record, he convinced people to invest in his fund with promises of high returns. When it came to the end of the year, he claimed that he successfully made said returns which convinced existing investors to keep their money in the funds and attracted new investment. The new investment money was used to pay the existing investor's returns. All was fine until the credit crunch hit and investors wanted their money back. Incredibly, it is not until such circumstances arose and his own admission of guilt, that he has been caught.

I assign the blame on two parties. First, and most importantly, the regulators (in this case the SEC) failed to spot the massive irregularities between the returns Madoff claimed to have made and the manner in which they are made. There is a common misconception that hedge funds are unregulated. In the UK they are constrained by MiFID - all trades have to be reported to the FSA and independent administrators have to be hired for valuation and audit purposes. By the sounds of it, US hedge funds are not constrained by the same rules - which begs the question, what is the point in having a regulator in place if it is not there to catch such irregularities? The situation is made worse by the suggestion that the SEC had been warned about the possibility of fraud in 1999. Rather than obtain a subpoena to obtain information themselves, the SEC relied upon data voluntarily provided by the firm. Literally, one independent audit would have uncovered the scheme. Many people, funds and companies have lost a great deal of money through this guy simply because it looks like his firm were treated with somewhat preferential treatment by the SEC.

The other portion of blame goes to the investors themselves. During the good times, investors simply could not say no to the offering of 10% interest a year. They failed to ask the necessary questions and evidence. All they did was follow in the footsteps of other investors and relied upon the integrity of a former big chief on Wall Street. And these investors aren't the "get rich quick" type - they are major corporations - including HSBC ($1bn), RBS ($601m), Santander ($23m) , BNP Paribas ($460m) and Natixis ($605m) - funds, individual investors and even charities. When you put it in perspective, both individuals and firms gave this guy hundreds of millions of dollars to invest simply because other people had done - what the BBC have coined "Irrational Euphoria." I bet they aren't feeling so euphoric now!

In a world where hedge funds are quickly disappearing the collapse of Madoff is likely to to accelerate the contraction of the industry - in that it may persuade many investors to demand their money back from even high quality funds and funds of funds. As a result, I would like to personally thank the SEC and Madoff for providing me with even less job security that I had before.

The other piece of major news on the radar is the rate cut by the FED to a range between zero and 0.25% (from a high of 5.25% in Sept 2007) to try to stimulate the economy. Great news for people with debt, although as an attempt to revive the credit markets it will fall short. More bad news for people with savings. It also brings the risk of deflation to the surface once again - people put off spending money now (a further hit to consumer spending) due to the belief that prices are going to fall in the future. The implications of this move are massive for the US as they now have no monetary tools left at their disposal apart from changing the money supply which is a dangerous game. By printing off and pumping more cash into the system they risk further devaluing the dollar. It will be interesting to see the road they take now. I suspect a glut of chat from the Obama camp about increasing public spending and more public initiatives.

There are also implications for the UK. The BoE released the minutes of their last meeting where they cut the base rate to 2% - the board discussed the option of reducing rates further which sent the pound tumbling against the euro and the dollar. We should expect the BoE to act like the proverbial sheep and follow in the FED's footsteps and lower rates in the near future. I would go so far as to suggest that we will soon be enduring a 0% base rate. Not because it's the best thing to do for our economy or the pound, but because our own economists like to follow those in the US but a little bit later. A case of lets see what happens to them before we do it ourselves.

The problem for the UK is that if we lose the tool of monetary control of interest rates and with the possibility of deflation looming over our heads, letting Gordon Brown and his sidekick Alastair Darling play games with the money supply could lead to a run on the pound and further economic strain. Let me remind you that these two genius's think that getting into more debt is the answer to getting out of this recession - nice one guys!

Bring on the Euro!

Back in the day before it's inception in January 2002, I remember saying that I was against Britain joining the Eurozone. Back then a mixture of youthful inexperience and British pride made that decision for me. Looking back in light of the knowledge I have acquired since, I still agree with the decision made back then. Sterling was a pillar of strength for the country and essential to maintain the strength of the FS industry in the City. Also, the nature of the housing market in the UK meant that more people are exposed to variable rate debt which could have been susceptible to unfavourable interest rate changes by the ECB. Since 2002, the government, media and the public have employed traditional hostility towards adopting the common currency.

As Paul Taylor in the Telegraph put it, "For most of the past decade, as the flexible, finance-driven British economy was roaring ahead of its sluggish Continental cousins, the economic and political case for joining the single European currency was hard to make."

The picture changed on Monday when the president of the EU commission, Jose Manuel Barroso, said Britain is "closer than ever before" to joining the euro. There is obviously an element of political spin from Mr.Barroso - the UK, being the fifth largest economy in the world, would be a boost to the standing of the EU. However, he has spotted an opportunity to take advantage of a drop in confidence in the country due to the financial crisis which may make even the staunchest cynic of the euro reconsider the option.

We are entering an era where he pressures on the pound are mounting. Next year, total government borrowing will be a whopping 8% of GDP and total government debt by 2014 will reach 57.4% of GDP. The housing market is collapsing and the pound has fallen 21% against a basket of currencies in 15 months. It is very likely that the Bank of England will drop interest rates to unprecedented new lows and they are likely to stay low for the foreseeable future. The result - downwards pressure on the pound, higher import costs, higher prices, lower consumer spending, higher unemployment...hardly what we need right now(see my last blog entry).

The mantra expelled by the commission is that "the euro protects." In my opinion, that is exactly what this country needs right now - protection from an over exuberant government, more interested in scoring political points than the future welfare of the public. The government would be obliged to follow the rules set out by the ECB for sound financial and economic prudence. In fact, if the UK were a member of the euro, the commission would already have initiated an "excessive deficit procedure," demanding that the UK gets its borrowing under control. In effect, it gives the government some accountability to a higher body.

Some would argue that this is a disadvantage since the government would not be able to employ monetary tools to safeguard the UK's economy. Interest rate decisions made by the ECB would be made for the benefit of the eurozone as a whole and may not be to the benefit of the UK's economy, for example if a majority of the eurozone is in a recession and the UK is not. Essentially, the UK would be at the mercy of the euros performance in those countries within the zone. A bad thing when the UK's economy was healthy, but remember that forecasts are that the UK will be hardest hit economy during the global recession. Through joining the euro, we may be able to seek strength from the more prosperous European countries (I am mainly thinking of Germany here).

There are also benefits for business and employment. A single and transparent currency will tempt more UK businesses to compete in mainland Europe and, visa versa, will encourage European businesses to venture into the UK - both boosting job creation. A prosperous combined Europe could think of challenging the USA in new and existing markets. A weak pound means higher prices for imports, a stable euro will encourage imports.

The idea of joining the euro will be seen by most people as an extreme one. The government have responded to Mr.Barroso's comments by reaffirming their position against it. And I am not stupid enough to believe that public opinion will change enough overnight to force the government into reassessing their position. However, I do think that the impending problems facing our economy and currency should force at least a rethink in near future. The government at least have a duty to explore whether the pound is a sustainable currency. Unfortunately, in reality the situation is going to have to become much worse before we see anything significant happening.


FTSE....

The FTSE has been swinging in roundabouts since my last post on the 21st Nov. Some of the big levels I mentioned before have come into play (support @ 3700, 3830, 3945 and 4075).

Last week the FTSE bounced back above 4200 following news of the Citi bailout and fiscal stimulus plans in Europe with the EU Commission set to formally unveil a plan aimed at stimulating the economy, amongst other news. Some commentators have gone so far as to say that the deleveraging process which has largely contributed to the fall in the FTSE is coming to an end which may stimulate the markets. Again, in the short term, this is nothing but a temporary bull in an otherwise bear market, confirmed when the markets opened on Monday.

This week has seen the FTSE fall below 4000 again due to further recessionary concerns and the release of some terrible economic figures. Since then the FTSE has fluctuated violently in a tunnel between 3950 and 4170. Short term support @ 4035 and resistance @ 4165.

There are no outstandingly obvious entry points at the moment - in a week that one of Britain's oldest retailers Woolworths faced administration, the FTSE rallied. It seems that market sentiment is not reacting rationally which makes it so hard to read. I think the FTSE will end the year below 4000 - 4165 provides an entry point.