— aleatory

fin markets

The smart money is on a resumption of the bear market.

The upcoming earnings season is thought to be the spark that reignites the bears’ tinder.  But as this report points out, firms have already downgraded themselves to expect nothing but bad news anyway.  There hasn’t been any warnings because the bar has been lowered to a point where no one will come in under it.  So I think this might not be the smoking gun the analysts are looking for.  Let’s face it, when something like that is telegraphed so far in advance the trades have already been made.  

Likely then it will be the visibility vacuum created after the deluge of numbers dries up that provides this rumour based market with sufficient uncertainty to go to the wall once more.  Looking forward the consensus is still predicting a 2nd half recovery, or at least a slowdown in the rate of economic decline.  This imbalance between a somewhat doveish expectation and the fact there is far more uncertainty built into the economy as things stand is the disconnect to sell into.

If we are to look at the market as a series of quarterly themes, it is the mid-quarter that can often tell the tale for the time frame as a whole.  

The phrase “sell in May and go away” is shaping up to be my key investment theme this summer…

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The thought also occurred in my head this week – “Citi Vs GM: First to Fail?” Before giving myself a hefty slap across the face and a “GM you dumbass!” sardonic response. A fairer question would be “will GM go bankrupt before Citi’s controlling shareholder is the US government?”.

Either way it’s the public who will be getting nasty over this. A lot more of them are gainfully employed in America’s flagship car wreck than in America’s flagship bad loan. Stand by for a surge in social unrest somewhere in the West in the next few years. Events elsewhere will only serve to stoke things further. My bet isn’t entirely against America on this one.

Here’s what the market thinks:

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Just thought I’d call a spade a spade.  At the moment the best way of measuring whether or not commentators believe we’re in the midst of a depression seems to be how often they fail to refer to it as a recession.

Anyway on the subject of blogging on the markets in general, it’s not often I allow myself the opportunity to comment on the daily financial noise, so when I do it’s with the intention of pointing out that the general short term outlook of those who should know better is more or less completely at odds with long term, set-in-stone realities.  And it seems even those who do know better are unable to see any other way out of it:

The rise in debt eventually will lead to slower economic growth and diminished standards of living in the U.S

Allan Sinai, chief economist Decision Economics

Nevertheless he supports the Obama stimulus plan.  I have a ‘meh’ attitude to all the political hubris surrounding the market today, but I can’t understand all his talk of building for the future when his policies will result in a poorer US tomorrow.

Another noteworthy individual coming from the ‘knows better but doesn’t appear to think there’s anything else for it’ stable is George Soros.  He has been expounding exactly what circumstances the US finds itself in, but his solution seems to be to throw more public debt at it.  Puzzling.

To put this into perspective, take a look at the ‘Some Inconvenient Truths’ paper causing a stir amongst the more savvy market commentaries.  A depression of between 3 – 7 years.  Note the FT writer covering the story was equally unable to decide on the state of the economy – the two tags she decided on to accompany the story?  Depression and recession.

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And now the ineptitude of our economic ‘masters’ has lead to violence on the streets of Paris.  Not an uncommon thing in Paris but you can’t help wonder if it’s a sign of things to come?

 As the cluster of disparate economies known as the eurozone struggles to cope with the oncoming depression, is it prudent to watch out for the health of the emerging banking sector of Eastern Europe as the next source of financial panic in the global meltdown?  Austrian banks say EU bailouts are needed to prevent these organisations (their debtors at the end of the day) from collapsing – from this we may deduce their own balance sheets would not withstand such an event either.

The emerging Eastern states received the bulk of EU investment and optimism as the collection of states struggled to move sluggish economies even in the good times – will they prove their downfall in the bad times?  And can anyone realistically expect to see a unified EU action on the crisis?

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  • If economists think we’re going to lose more jobs in 2009, why do analysts feel we’ll buy more cars then 2008?
  • Why does the US government think getting consumers to spend when they’ve nothing left to spend is a solution?
  • How far can a market rally on hope?

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Tagline from 1984 Amsoft epic, Sultan’s Maze.

The first trading day of 2009, the year after the crash. Or was it? 1929’s fall of didn’t mark the bottom; those who bought then would be in the red for the next three years. 1907 on the other hand was the bottom. And stocks ran out 47% winners the next year.

I consulted Wikipedia (I know, I know) to decide which market our current predicament shares its traits with. The inability of many commentators to shed much light on such comparisons – in light of strikingly similar numbers – only gives me greater confidence that there is something in it. The sure sign of analyst capitulation being silence?

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UK, US, Irish RepublicMore will follow…

Once the debt has been drawn down, which will happen, will the 10s become the new 80s?  Much more recognised voices than mine can articulate the cycle that may produce it.

And is Brazil, largely seen as immune (insofaras an economy can be immune from a global recession) to events elsewhere, merely being set up as the last domino to fall?

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The recent climb for the Dow to just under the 9k mark has been surprising to say the least. If markets like to climb a wall of worry then they had quite a high one to get over of late, economic data in the past two weeks coming in worse than already poor expectations.

But last night the penny dropped, albeit in the form of disappointment over the automakers bailout. That in itself may prove to be unsuccessful even if it passes the senate eventually. The Whitehouse is now looking to use some of the bailout loot reserved for the banks instead. Either way it’s messy and the outcome will be highly uncertain at best, a waste of money from the outside at worst.

The Dow came out of it’s benign hibernation to finish down 200pts. It’s also poised for a triple digit decline today, although just how bad may be tempered by the news that retail sales came in not as bad as expected. Barring a high profile pre-Xmas bankruptcy, I’m looking to find support around 8,200 or if a bankruptcy occurs, somewhere around the mid to upper 7,000 (ie no lower low for the time being).

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 The problem, as I see it, is that unless the Treasury wants to back the entire credit market (likely reducing Treasuries to junk status – and no, I’m not kidding), we’re simply delaying the inevitable failures yet to come. When we’re losing 500,000 jobs per month, you can let these guys get our money at 3% – but it won’t be enough to stop the tide of foreclosures and defaults.In fact, a case could be made that once these programs run out — and once our Treasuries have become one gigantic SIV — the pain will eventually be felt.

Bennet Sedacca, Minyanville

World governments have received praise from numerous quarters regarding their interventionist strategies.  Indeed this praise often seems to be circular-referencing itself has one government gives the thumbs up to the next.  Meanwhile though, the markets gyrate wildly on the possibility of where the public fund bucket will pop up next.  Let’s face it, what else would cause a 1500pt rally on the Dow amidst the economic crater of over half a million jobs lost in a month?

People say markets are not listening to the fundamentals.  Neither are governments whose main weapon against bad debt has been to bail it out.  Banks with remarkably positive market risk betas, subprime mortgage holders & illiquid automakers have benefitted.  The dot com bust came when people realised there was no business case for pumping money into pipe dreams. 

When will the ‘old’ [read ‘The’] economy bust come?

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The market now appears to be in the midst of it’s 2nd bear market rally.  Or is it?  Some people are feeling confused.

 After the Dow hit another lower low a couple of weeks back the following question occured to me – what level would be seen as the beginnings of the long equity-led road to recovery?  Closer inspection of the current toing and froing shows quite uniform reaction to support and resistance levels.  The 1st bear market rally died at 9,400 resistance.  This week ended with the market breaching the 8,600 level.  A move above 9,000 next week would surely mean a worthwhile bet on a move towards 9,400. 

The reaction to consumer data next week should be followed closely; a sanguine reaction to the surely inevitable bad news will be taken as a sign the market thinks it has priced in the slowdown, over the Christmas period at least.  A negative turn and it’s back on the look out for a lower low, most likely.

 It’s reassuring that others are thinking & looking at same.

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