Another horrible morning dawns. However as Flash is long USD he's not too bothered. He was wondering when the people that put their faith in the euro were going to get a nasty surprise. Today's latest round of bank collapses and nationalisations seems to be it.
Anyway - Macro Man has more - and puts it better than Flash; and this, via FT Alphaville is pretty good too.
As the financial crisis deepens, jobs go and bailouts expand, the humour just seems to get more intense and - well, lyrical. In what we hope will be an occasional series, here’s today’s offering, from a Tokyo-based Beatles admirer known only as Mori (yes, a “hedgeman”…):
I am the Hedgeman
I screwed up as you screwed up as he screwed up
We’re in this mess together
see how they run from a money market fund
see how they fly
I’m crying
Sitting on some futures
Waiting for the bounce to come
Short duration T-bond, stupid bloody Dick Fuld man
You’ve been a naughty boy
You let the bank go down
I am the hedgeman (woo)
We are the hedgemen (woo)
I am the Paulson
Goo goo gajoob
Mr City Banker
Sitting pretty little bankers in a row
See the TED-spread fly, like Lehman in the sky
See how they run
I’m crying
I’m crying, I’m crying
CDO-squared custard
Dripping from a dead trader’s eye
Cram-a-lotta crap in
Pornographic lev’rage
Boy, you’ve been a naughty girl
You let your risk control down
I am the hedgeman (woo)
We are the hedgemen (woo)
I am the Paulson
Goo goo gajoob
Sitting in an English building society
waiting for that run
If the run don’t come you get a loss
When they nationalise the English way
I am the hedgeman (woo)
We are the hedgemen (woo)
I am the Paulson
Goo goo gajoob
Expert, texpert coked-up brokers
Don’t you think the credit analysts laugh at you (hee hee hee, ha ha ha)
See the bond guys smile like pigs in a sty
See the S&P slide
I’m crying
Securitised pilchard
Climbing up to triple A
Elementary screw-up, trillion dollar bail-out
Man, you should have seen them shorting
Those investment banks
I am the hedgeman
They are the hedgemen
I am the Paulson
Goo goo gajoob
G’goo goo gajoob
Goo goo gajoob
G’goo goo gajoob
G’goo
Monday 29 September 2008
Wednesday 24 September 2008
Paulson, the dollar and a bewildered rabbit (or, greed is bad)
Flash is hardly trading at all - in part because most of his long positions have been wiped out, in part because he's busy with other stuff, and most importantly because he doesn't have the time to watch the screen - and when the intraday moves in the S&P 500 have been over 3% practically every day for the last week there's a lot of screen watching to do.
There seem to be two possible views about where the market has got to right now.
The orthodox view at the moment seems to be roughly as follows:
A central bank bailout of the toxic debts held by the banks radically weakens the dollar. On the back of this, sentiment has moved sharply against the dollar, gold went stratospheric (that's a move Flash would have liked to have got some quick and dirty profits from, but half the rest of the world got on that bandwagon), and commodity prices have pushed back up. The only reason for this that Flash can spot is that the dollar's weakness means prices need to increase, plus a sentimental flight to 'safety' of gold. But gold isn't worth anything if no-one has the cash to buy it. Nothing has changed on the commodity demand front. If anything, demand will be weakening. To some extent the inflationary pressure of oil heading back up for everywhere other than the US will have been somewhat dampened by the currency move. So all the signs point to more contraction and a drop in commodity prices.
OK - so what has driven the collapse in the dollar's value? The orthodox view says that a bailout increases the US national debt enormously. And Flash understands perfectly why politicians and citizens are furious about having to buy a ton of currently worthless junk debts off the greedy bankers. But there are some wider considerations.
If the entire wholesale credit market collapses then the entire US economy collapses. A lot of domestic value is held in property and if half the country goes into negative equity then the consequences for the banking system are severe. Perhaps this pain is a necessary adjustment - it's a pretty bleak thing for people who need to eat, sleep, live and look after each other - but for those people that like capitalism, deeply ironically it requires one of the the biggest state subsidies the world has ever seen. It would be interesting to know what the ultra free market libertarians make of this: Flash is guessing that the ones that bet big the banks would collapse are shouting 'bring it on', but ultimately no-one will gain if we're into a 21st century great depression.
Regardless of what happens there will be a continued contraction in available credit as the banks rebuild their battered balance sheets. And discretionary, risky lending has already reduced, but borrowing is just going to get more and more expensive in real terms; credit in emerging markets who have been dependent on a one trick cash cow - resources - is going to get even tighter.
And the cost to taxpayers of doing nothing needs to be considered too - mass unemployment, crime rate goes through the roof, millions made homeless, businesses failing. And remember that companies are taxpayers too - and perhaps taxes will have to rise to cover some of this, but in Flash's book that's not such a bad thing, and isn't the end of the world as we know it. The alternative probably is.
Now if the US goes for a bank bailout plus a fiscal stimulus package - new deal mark II, with some protection for homeowners - some sort of government trust which backs distressed equity, then the outlook looks rather more positive.
If the US goes for a rate cut then although it might weaken the dollar it might also accelerate growth - hence strengthening the US economy against the negative growth of the rest of the planet. Similarly in europe and in the antipodean world - rate cuts may help boost liquidity and that is sorely needed.
Now a second question is - how inflationary is this?
Common sense would suggest that injecting this much cash, and cutting rates would have an inflationary effect. But wait a minute. Is cash actually being injected into the system? Well, quite a bit went in last week, but not just in the US - it was a co-ordinated action across the globe. So it's more like an emergency blood transfusion than a flooding of the arteries.
Buying these bad debts is not necessarily a complete disaster for the USA – what would be a complete disaster is if nothing is done – mass unemployment, complete collapse of wholesale credit market, and thus business/consumer credit market. And the position of these toxic MBS only weakens if the housing market doesn't improve.
But perhaps there's a line to be drawn between the inflationary pressure of rate cuts and stimulus, and the drag on demand caused by the fact that most people have completely run out of money. No-one's buying anything much right now. And ultimately if the US recovers more quickly then that's good for the dollar. And it will take another year for any kind of confidence to return to the housing market. So this could be a great time to buy property if you're cash rich.
So, the second, perhaps counterintuitive view is as follows:
How sustainable is the rally in GBP, EUR, AUD, NZD etc against the dollar when arguably these economies, and thus currencies are even more vulnerable? Flash suspects that other governments will also have to commit funds to back up some of the toxic debts in their system too. Actually Flash thinks the UK might not come out of this as badly as others expect - the UK economy is more flexible than most, and Keynesian public sector investment is providing some ballast, despite the crazy property boom. Hence he is still long GBP/EUR, a trade that's actually worked over the last two months.
So it comes down to two views (and many thanks to some more intelligent economic commentators who have helped Flash build up enough of a picture in his thick head to write this).
View one (indefinite armageddon)
- because of the weakening dollar, commodity prices rise:
- gold, because of it’s ‘safe haven’ status carries on rising - but only as a hedge, and we all know what happened last time everyone tried to hedge their equity losses by going long commodities
- oil rises on the back of a weakening dollar
If inflationary pressures mount, then central banks can’t act to cut rates
- essentially stagflation/recession/late 1970s
- no stimulus
- massive bust
- house prices halve
- borrowing collapses
- liquidity and lending between banks collapses
...and then some sort of rescue plan is put in place, or else we all go back to barter/self-sufficiency/feudalism - aspects of which might not be a bad thing. So Flash is looking for companies that understand this new world - trouble is, not many of them seem to. And technological innovation/flexibility/responsiveness will still be important. But it means a total depression in the price of stocks. A total write off. Massive destruction of value. And even cash loses its value because inflation is totally out of control. But it would be a good time to be in venture capital. Funding start-ups which understand this new world. And perhaps buying companies involved in public services, prisons, policing/security, healthcare, water, rail, energy efficiency, transport. Or pawnbrokers?
View 2 (some sort of bottoming out)
A ‘new deal’ stimulus, particularly under a democratic administration could give the US a huge rebound over an 18 - 24 month period:
- The US trade deficit shrinks because import demand is dropping so fast in the US. US labour costs and wage growth falls because competition for jobs is more fierce.
- Dollars become more scarce, hence more expensive because there are fewer of them around...perhaps?
- The rest of the world goes into an even steeper downturn than the US
- US leads a recovery - not rapid but not slow either. By spring next year there are signs of recovery in the housing market, by which time it will be a bit late to buy into the housebuilders.
- Inflation poses even bigger a threat to emerging economy growth than the developed world and if demand for all the goods the developed world produces falls off, then those economies go into steep decline too.
- On the other hand, petrodollars are plentiful but if prices rise then demand falls off even more – so Flash is looking for a bigger correction – oil down to $75, even if production slows
- China is in trouble because it's fuelled by demand for manufactured goods and cheap overheads - but demand is falling off and overheads have massively increased. Hence food riots, higher infrastructure development costs, falling property values and a creeping problem of growing unemployment, linked to political discontent and the collapse of the consumerist dream.
- Emerging market banks and BRICs sell off foreign reserves to stay liquid, and credit growth in emerging markets collapses, emerging market growth therefore slows.
- Demand destruction pushes down commodity prices
- Self-sufficiency and energy efficiency become even more important and we probably see an increase in protectionism. The end of breathless millennial Free Trade. The break up of the WTO. But commodity prices fall because demand drops off rapidly.
For this reason, Flash is looking to be bullish on some US-consumer facing equities, particularly those which have been heavily sold – housebuilders, some of the financials, large cap retailers, infrastructure – rail, water, roads, some technology stocks – he just bought back into Apple.
Flash will sell down some of the resource stocks if a rescue plan is agreed.
Flash is looking for an entry point to go long USD, short gold, short oil. He sold EUR/USD on the manufacturing PMI figures out yesterday. Other economies also likely to need to do bank bailouts – the contagion isn’t limited to the US.
He does have one dow long running from 10687 but came within a hairbreadth of closing it out yesterday to recover some of his losses on some of the other long equity positions he'd been trying to hold.
But this is just a view. Trying to piece it together. For now, he's very, very cautious and just wishes some of those index shorts had been left alone.
In these markets you seem to get caned whatever you try to do.
There seem to be two possible views about where the market has got to right now.
The orthodox view at the moment seems to be roughly as follows:
A central bank bailout of the toxic debts held by the banks radically weakens the dollar. On the back of this, sentiment has moved sharply against the dollar, gold went stratospheric (that's a move Flash would have liked to have got some quick and dirty profits from, but half the rest of the world got on that bandwagon), and commodity prices have pushed back up. The only reason for this that Flash can spot is that the dollar's weakness means prices need to increase, plus a sentimental flight to 'safety' of gold. But gold isn't worth anything if no-one has the cash to buy it. Nothing has changed on the commodity demand front. If anything, demand will be weakening. To some extent the inflationary pressure of oil heading back up for everywhere other than the US will have been somewhat dampened by the currency move. So all the signs point to more contraction and a drop in commodity prices.
OK - so what has driven the collapse in the dollar's value? The orthodox view says that a bailout increases the US national debt enormously. And Flash understands perfectly why politicians and citizens are furious about having to buy a ton of currently worthless junk debts off the greedy bankers. But there are some wider considerations.
If the entire wholesale credit market collapses then the entire US economy collapses. A lot of domestic value is held in property and if half the country goes into negative equity then the consequences for the banking system are severe. Perhaps this pain is a necessary adjustment - it's a pretty bleak thing for people who need to eat, sleep, live and look after each other - but for those people that like capitalism, deeply ironically it requires one of the the biggest state subsidies the world has ever seen. It would be interesting to know what the ultra free market libertarians make of this: Flash is guessing that the ones that bet big the banks would collapse are shouting 'bring it on', but ultimately no-one will gain if we're into a 21st century great depression.
Regardless of what happens there will be a continued contraction in available credit as the banks rebuild their battered balance sheets. And discretionary, risky lending has already reduced, but borrowing is just going to get more and more expensive in real terms; credit in emerging markets who have been dependent on a one trick cash cow - resources - is going to get even tighter.
And the cost to taxpayers of doing nothing needs to be considered too - mass unemployment, crime rate goes through the roof, millions made homeless, businesses failing. And remember that companies are taxpayers too - and perhaps taxes will have to rise to cover some of this, but in Flash's book that's not such a bad thing, and isn't the end of the world as we know it. The alternative probably is.
Now if the US goes for a bank bailout plus a fiscal stimulus package - new deal mark II, with some protection for homeowners - some sort of government trust which backs distressed equity, then the outlook looks rather more positive.
If the US goes for a rate cut then although it might weaken the dollar it might also accelerate growth - hence strengthening the US economy against the negative growth of the rest of the planet. Similarly in europe and in the antipodean world - rate cuts may help boost liquidity and that is sorely needed.
Now a second question is - how inflationary is this?
Common sense would suggest that injecting this much cash, and cutting rates would have an inflationary effect. But wait a minute. Is cash actually being injected into the system? Well, quite a bit went in last week, but not just in the US - it was a co-ordinated action across the globe. So it's more like an emergency blood transfusion than a flooding of the arteries.
Buying these bad debts is not necessarily a complete disaster for the USA – what would be a complete disaster is if nothing is done – mass unemployment, complete collapse of wholesale credit market, and thus business/consumer credit market. And the position of these toxic MBS only weakens if the housing market doesn't improve.
But perhaps there's a line to be drawn between the inflationary pressure of rate cuts and stimulus, and the drag on demand caused by the fact that most people have completely run out of money. No-one's buying anything much right now. And ultimately if the US recovers more quickly then that's good for the dollar. And it will take another year for any kind of confidence to return to the housing market. So this could be a great time to buy property if you're cash rich.
So, the second, perhaps counterintuitive view is as follows:
How sustainable is the rally in GBP, EUR, AUD, NZD etc against the dollar when arguably these economies, and thus currencies are even more vulnerable? Flash suspects that other governments will also have to commit funds to back up some of the toxic debts in their system too. Actually Flash thinks the UK might not come out of this as badly as others expect - the UK economy is more flexible than most, and Keynesian public sector investment is providing some ballast, despite the crazy property boom. Hence he is still long GBP/EUR, a trade that's actually worked over the last two months.
So it comes down to two views (and many thanks to some more intelligent economic commentators who have helped Flash build up enough of a picture in his thick head to write this).
View one (indefinite armageddon)
- because of the weakening dollar, commodity prices rise:
- gold, because of it’s ‘safe haven’ status carries on rising - but only as a hedge, and we all know what happened last time everyone tried to hedge their equity losses by going long commodities
- oil rises on the back of a weakening dollar
If inflationary pressures mount, then central banks can’t act to cut rates
- essentially stagflation/recession/late 1970s
- no stimulus
- massive bust
- house prices halve
- borrowing collapses
- liquidity and lending between banks collapses
...and then some sort of rescue plan is put in place, or else we all go back to barter/self-sufficiency/feudalism - aspects of which might not be a bad thing. So Flash is looking for companies that understand this new world - trouble is, not many of them seem to. And technological innovation/flexibility/responsiveness will still be important. But it means a total depression in the price of stocks. A total write off. Massive destruction of value. And even cash loses its value because inflation is totally out of control. But it would be a good time to be in venture capital. Funding start-ups which understand this new world. And perhaps buying companies involved in public services, prisons, policing/security, healthcare, water, rail, energy efficiency, transport. Or pawnbrokers?
View 2 (some sort of bottoming out)
A ‘new deal’ stimulus, particularly under a democratic administration could give the US a huge rebound over an 18 - 24 month period:
- The US trade deficit shrinks because import demand is dropping so fast in the US. US labour costs and wage growth falls because competition for jobs is more fierce.
- Dollars become more scarce, hence more expensive because there are fewer of them around...perhaps?
- The rest of the world goes into an even steeper downturn than the US
- US leads a recovery - not rapid but not slow either. By spring next year there are signs of recovery in the housing market, by which time it will be a bit late to buy into the housebuilders.
- Inflation poses even bigger a threat to emerging economy growth than the developed world and if demand for all the goods the developed world produces falls off, then those economies go into steep decline too.
- On the other hand, petrodollars are plentiful but if prices rise then demand falls off even more – so Flash is looking for a bigger correction – oil down to $75, even if production slows
- China is in trouble because it's fuelled by demand for manufactured goods and cheap overheads - but demand is falling off and overheads have massively increased. Hence food riots, higher infrastructure development costs, falling property values and a creeping problem of growing unemployment, linked to political discontent and the collapse of the consumerist dream.
- Emerging market banks and BRICs sell off foreign reserves to stay liquid, and credit growth in emerging markets collapses, emerging market growth therefore slows.
- Demand destruction pushes down commodity prices
- Self-sufficiency and energy efficiency become even more important and we probably see an increase in protectionism. The end of breathless millennial Free Trade. The break up of the WTO. But commodity prices fall because demand drops off rapidly.
For this reason, Flash is looking to be bullish on some US-consumer facing equities, particularly those which have been heavily sold – housebuilders, some of the financials, large cap retailers, infrastructure – rail, water, roads, some technology stocks – he just bought back into Apple.
Flash will sell down some of the resource stocks if a rescue plan is agreed.
Flash is looking for an entry point to go long USD, short gold, short oil. He sold EUR/USD on the manufacturing PMI figures out yesterday. Other economies also likely to need to do bank bailouts – the contagion isn’t limited to the US.
He does have one dow long running from 10687 but came within a hairbreadth of closing it out yesterday to recover some of his losses on some of the other long equity positions he'd been trying to hold.
But this is just a view. Trying to piece it together. For now, he's very, very cautious and just wishes some of those index shorts had been left alone.
In these markets you seem to get caned whatever you try to do.
Thursday 18 September 2008
Meltdown
Not much to say really, except that HBOS proved to be a dog of a buy, 90% of Flash's stops have been triggered, at least 50% for losses, and he's left holding a handful of anaemic looking equities showing some anaemic profits. And what's really shocking is that one of the UK's largest banks can say one day "our funding position is adequate' and the next agree to be bought up for virtually any price because they can't raise enough cash to keep the UK's biggest mortgage and retail deposit book afloat. This really is a monster of a disaster. And the leverage maniacs that brought us to this position ought to be held to account - perhaps it is indeed all of us, but some people have more responsibilities than others.
Lybos indeed. And who is going to want to write mortgages when the property market could slump another 10 - 15%? And cash doesn't cut it either. It's a total unravelling. And if the solution is for central banks to print money for bailouts then the inflation monster will be back with a vengeance.
All the long USD currency positions have been closed down and Flash just wishes he'd left some of the many index shorts he'd established to run their course properly. One little sideline might be to short some eastern european currencies - demo-trading buying GBPvsHUF has been pretty spectacular. Shame he didn't do it in reality.
Gold going from 777 to a high of 893 in 24 hours is pretty unbelievable too. Flight to safety? Capital flight out of the market, full stop. And most of Flash's trades in the last 3 days have been in the wrong direction.
Time for a breather and some reflection on the next move.
For light relief, this morning's FT Alphaville live blog was a cracker (especially some of the comments).
Lybos indeed. And who is going to want to write mortgages when the property market could slump another 10 - 15%? And cash doesn't cut it either. It's a total unravelling. And if the solution is for central banks to print money for bailouts then the inflation monster will be back with a vengeance.
All the long USD currency positions have been closed down and Flash just wishes he'd left some of the many index shorts he'd established to run their course properly. One little sideline might be to short some eastern european currencies - demo-trading buying GBPvsHUF has been pretty spectacular. Shame he didn't do it in reality.
Gold going from 777 to a high of 893 in 24 hours is pretty unbelievable too. Flight to safety? Capital flight out of the market, full stop. And most of Flash's trades in the last 3 days have been in the wrong direction.
Time for a breather and some reflection on the next move.
For light relief, this morning's FT Alphaville live blog was a cracker (especially some of the comments).
Sunday 14 September 2008
What a carve up
Well, the clock sits at two minutes to midnight on Lehman and Flash is frankly bewildered about how to trade this one.
Perhaps it would be better not to trade it at all. Trouble is, Flash has some decent long Dow and S and P positions sitting comfortably in three figure profits. But if the wider market decides to take this as a signal to go into full blown panic, then Flash will have to just cut them.
On balance he thinks he will cut the Dow long position in half when the futures indices open at 10.30pm tonight (if it's not cut in half for him) and put some hedging short equity positions on pronto.
Flash still stands by his view though that perhaps this isn't quite armageddon because so much is known - what may well not be known is the extent of all the other banks' exposure to Lehman (or ToxInc as FT Alphaville coined their 'bad bank' on Friday) - and that could have serious repercussions. So if there's even so much of a flicker on the price, as inevitably there will, the HBOS and Barclays long positions will go first thing tomorrow - and the same will probably be true for plenty of other much bigger fish. It's hard to see how most of the financials couldn't be heavily exposed to Lehman, unless they'd already got some damn good hedging in place ahead of this. (The hedging in all probability consists of heavy-duty short positions in their competitor institutions). Hence a mega selloff of bank shares?
Nouriel Roubini has this scary paragraph:
It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer.
So tomorrow will not be a good day for the banks, unless some unctuous calming anti-panic lotion is administered by Uncle Ben or his acolytes before midnight. Not good at all. The end of tomorrow might be good day to do some financial bottom fishing if you've got a long line (of credit??). Nasty, nasty.
It also depends if Lehman's liquidation is orderly or disorderly. Perhaps at the very least an orderly liquidation might enable some sense of rationality to prevail. It would be in all the banks' interest for this to happen, and Flash expects an unctuous statement to this effect before the night is out.
If a deal - or at least a clear 'road map' to dissolution - isn't forthcoming then it won't be much fun out there at all. Or perhaps this is just the final shakeout, the Big Capitulation. Or perhaps (for the reasons outlined in the last blog, not). Flash is watching and waiting, and pleased that he's reduced his risk and has a fair chunk of the fund sitting in cash right now.
Perhaps it would be better not to trade it at all. Trouble is, Flash has some decent long Dow and S and P positions sitting comfortably in three figure profits. But if the wider market decides to take this as a signal to go into full blown panic, then Flash will have to just cut them.
On balance he thinks he will cut the Dow long position in half when the futures indices open at 10.30pm tonight (if it's not cut in half for him) and put some hedging short equity positions on pronto.
Flash still stands by his view though that perhaps this isn't quite armageddon because so much is known - what may well not be known is the extent of all the other banks' exposure to Lehman (or ToxInc as FT Alphaville coined their 'bad bank' on Friday) - and that could have serious repercussions. So if there's even so much of a flicker on the price, as inevitably there will, the HBOS and Barclays long positions will go first thing tomorrow - and the same will probably be true for plenty of other much bigger fish. It's hard to see how most of the financials couldn't be heavily exposed to Lehman, unless they'd already got some damn good hedging in place ahead of this. (The hedging in all probability consists of heavy-duty short positions in their competitor institutions). Hence a mega selloff of bank shares?
Nouriel Roubini has this scary paragraph:
It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer.
So tomorrow will not be a good day for the banks, unless some unctuous calming anti-panic lotion is administered by Uncle Ben or his acolytes before midnight. Not good at all. The end of tomorrow might be good day to do some financial bottom fishing if you've got a long line (of credit??). Nasty, nasty.
It also depends if Lehman's liquidation is orderly or disorderly. Perhaps at the very least an orderly liquidation might enable some sense of rationality to prevail. It would be in all the banks' interest for this to happen, and Flash expects an unctuous statement to this effect before the night is out.
If a deal - or at least a clear 'road map' to dissolution - isn't forthcoming then it won't be much fun out there at all. Or perhaps this is just the final shakeout, the Big Capitulation. Or perhaps (for the reasons outlined in the last blog, not). Flash is watching and waiting, and pleased that he's reduced his risk and has a fair chunk of the fund sitting in cash right now.
Thursday 11 September 2008
Piecing it together
Around lunchtime today Flash started to get an interesting feeling in the pit of his stomach. He spent some of the morning trying to get the measure of the market - it was lurching around and heading down towards new lows, and Flash was beginning to think that going short bigtime was the only way he was going to keep his P/L in the positive zone.
But then he stopped and had a think.
Why was it that his large cap stocks weren't caving in as fast as the financials? Unilever, Scottish and Southern, Firstgroup and BA were all holding it together fairly well. HBOS and Kingfisher were coming off really fast on the back of nasty figures from Home Retail Group and Merv's grim comments on the UK economic outlook, but the whole market didn't look like it was going into a catatonic bust, even though it's not been far off yearly lows. Plus his small caps were actually outperforming the market - Cineworld and Workspace were actually up a bit today. If it was a total bust we were looking at (and Flash had been worrying that it was, especially when around 40% of his gains have been wiped out in the first 3 days of this week), then how come some of his positions were actually doing alright?
Why was it that USD was still rallying against EUR and GBP; why was it that EUR was in rapid decline against JPY and GBP, and gold and oil were still coming down - making the deflationary call even more obvious. And with deflation comes a whole new economic picture - input prices lower, overheads lower, less pressure on household spending, increased margins and a whole new picture on interest rates/currencies which actually could enable an economy to come back into growth quite fast. And some gossip about the Fed cutting rates - well, OK, but Flash thinks that rate cuts will come faster in the UK and in Europe if the disinflationary trend holds.
Lehman had tanked down to $4 a share. So everyone now knows they are bust - either they find a buyer or what? They'll find a buyer, even if they sell at 50c a share. It's the end of the line and the market knows all of this. And if they find a buyer then the market rallies in relief.
And then some interesting figures came out of the US. Import price inflation had tanked; the trade deficit had narrowed; mortage rates were down, and initial unemployment claims were marginally lower. This combined with mortgage applications being up doesn't say that the US has turned the corner, but it does say that the decline isn't as rapid as it has been for the last few months. It also says that things may not be quite so bad as everyone says. And as Flash has been saying for months, it may be bad in the US but it's way worse in parts of Europe, particularly eastern and southern Europe. That's one of the reasons for the strength of the dollar. And there may well need to be eurozone interest rate cuts pretty rapidly. And everyone (except perhaps those with petrodollars) is running out of cash, because it's all been burned servicing debts and buying goods at overinflated prices.
And then Flash thought some more. If the consensus view is to be utterly bearish on equities, what is there to be bullish on? if the long commodities/short financials trade is over there will be a lot of big money geezers feeling quite a bit of pain. They'll have felt plenty of pain from the rally over the weekend and will have wanted to sell that off pretty fast; they'll have been looking for a reversal in USD's fortunes because they've been invested in short USD for the last 3 years, and got caned on that trade over the last 6 weeks; they'll have had not just their fingers but their arms burnt off trying to buy back into gold and the other commods only to see their positions turned to toast within hours of putting them on; they've pumped their cash into oil and commodities and other exotic debt based securities, and absolutely hammered equities and the financials partly as a response to covering some of the losses of the last few months. So the ride down in equities has been as desperate and testosterone fuelled as the ride up was in commodities.
But this is a big adjustment. And if it's a big adjustment then there will be some fast and furious short covering happening. In all the talk about the Fed printing money and taking on all the housing debt of the country, a couple of things have been overlooked. They may be nationalising Fannie and Freddie but they're also putting a backstop on the housing market. There's a big guarantee there. Sure, if the housing market tanks they will be taking on trillions of debt, but if it recovers, it becomes an asset not a total liability. And if everyone gets a bit more cautious about lending money, that's probably a pretty solid adjustment. And everyone is so invested in the short financials trade, the question is - how much shorter can we all be on financials? Isn't this actually the perfect time to be buying some banks? Not necessarily all of them, but there's no way all of them can go bust, can they?
So Flash went long. If he'd had more capital (having burned an awful lot of it in the last three days), he'd have gone heavily long. But he went as long as he could afford on the Dow and the SandP, and then went long on FTSE as well when it hit 5325. And he bought even more HBOS, even more Scottish and Southern, more British Airways and more Kingfisher. He even bought some Morrisons - deeply discounted at 250p - their results actually really weren't that bad, he thinks.
Then he left the screen alone for a few hours, and logged back in at 8pm to find an absolute monster of a 350 pt rally in progress.
There may be some chatter this evening about Bank of America hoovering up Lehman which has helped a rally; there may well have been some boosterist buying, and it may well come off a bit tomorrow, but Flash is as confident about this call as he has been on any other of his big winning trades this year. He's got stops locked in on all the core positions; he may not make as much as he'd like but he won't be losing so much in the next few days as he has in the last few, that's for sure.
But then he stopped and had a think.
Why was it that his large cap stocks weren't caving in as fast as the financials? Unilever, Scottish and Southern, Firstgroup and BA were all holding it together fairly well. HBOS and Kingfisher were coming off really fast on the back of nasty figures from Home Retail Group and Merv's grim comments on the UK economic outlook, but the whole market didn't look like it was going into a catatonic bust, even though it's not been far off yearly lows. Plus his small caps were actually outperforming the market - Cineworld and Workspace were actually up a bit today. If it was a total bust we were looking at (and Flash had been worrying that it was, especially when around 40% of his gains have been wiped out in the first 3 days of this week), then how come some of his positions were actually doing alright?
Why was it that USD was still rallying against EUR and GBP; why was it that EUR was in rapid decline against JPY and GBP, and gold and oil were still coming down - making the deflationary call even more obvious. And with deflation comes a whole new economic picture - input prices lower, overheads lower, less pressure on household spending, increased margins and a whole new picture on interest rates/currencies which actually could enable an economy to come back into growth quite fast. And some gossip about the Fed cutting rates - well, OK, but Flash thinks that rate cuts will come faster in the UK and in Europe if the disinflationary trend holds.
Lehman had tanked down to $4 a share. So everyone now knows they are bust - either they find a buyer or what? They'll find a buyer, even if they sell at 50c a share. It's the end of the line and the market knows all of this. And if they find a buyer then the market rallies in relief.
And then some interesting figures came out of the US. Import price inflation had tanked; the trade deficit had narrowed; mortage rates were down, and initial unemployment claims were marginally lower. This combined with mortgage applications being up doesn't say that the US has turned the corner, but it does say that the decline isn't as rapid as it has been for the last few months. It also says that things may not be quite so bad as everyone says. And as Flash has been saying for months, it may be bad in the US but it's way worse in parts of Europe, particularly eastern and southern Europe. That's one of the reasons for the strength of the dollar. And there may well need to be eurozone interest rate cuts pretty rapidly. And everyone (except perhaps those with petrodollars) is running out of cash, because it's all been burned servicing debts and buying goods at overinflated prices.
And then Flash thought some more. If the consensus view is to be utterly bearish on equities, what is there to be bullish on? if the long commodities/short financials trade is over there will be a lot of big money geezers feeling quite a bit of pain. They'll have felt plenty of pain from the rally over the weekend and will have wanted to sell that off pretty fast; they'll have been looking for a reversal in USD's fortunes because they've been invested in short USD for the last 3 years, and got caned on that trade over the last 6 weeks; they'll have had not just their fingers but their arms burnt off trying to buy back into gold and the other commods only to see their positions turned to toast within hours of putting them on; they've pumped their cash into oil and commodities and other exotic debt based securities, and absolutely hammered equities and the financials partly as a response to covering some of the losses of the last few months. So the ride down in equities has been as desperate and testosterone fuelled as the ride up was in commodities.
But this is a big adjustment. And if it's a big adjustment then there will be some fast and furious short covering happening. In all the talk about the Fed printing money and taking on all the housing debt of the country, a couple of things have been overlooked. They may be nationalising Fannie and Freddie but they're also putting a backstop on the housing market. There's a big guarantee there. Sure, if the housing market tanks they will be taking on trillions of debt, but if it recovers, it becomes an asset not a total liability. And if everyone gets a bit more cautious about lending money, that's probably a pretty solid adjustment. And everyone is so invested in the short financials trade, the question is - how much shorter can we all be on financials? Isn't this actually the perfect time to be buying some banks? Not necessarily all of them, but there's no way all of them can go bust, can they?
So Flash went long. If he'd had more capital (having burned an awful lot of it in the last three days), he'd have gone heavily long. But he went as long as he could afford on the Dow and the SandP, and then went long on FTSE as well when it hit 5325. And he bought even more HBOS, even more Scottish and Southern, more British Airways and more Kingfisher. He even bought some Morrisons - deeply discounted at 250p - their results actually really weren't that bad, he thinks.
Then he left the screen alone for a few hours, and logged back in at 8pm to find an absolute monster of a 350 pt rally in progress.
There may be some chatter this evening about Bank of America hoovering up Lehman which has helped a rally; there may well have been some boosterist buying, and it may well come off a bit tomorrow, but Flash is as confident about this call as he has been on any other of his big winning trades this year. He's got stops locked in on all the core positions; he may not make as much as he'd like but he won't be losing so much in the next few days as he has in the last few, that's for sure.
Rethinking risk
After the agonising drawdowns of the last couple of days, Flash is stepping back and reassessing his view.
A few problems.
The disinflationary call has worked out perfectly - gold plummeting, dollar strengthening, and it's only really these trades that have kept his P/L afloat. Flash has been short EUR since way back when and reintroduced short EUR/JPY back to his fund late yesterday - now showing a nice profit, and EUR/USD broke through the 1.40 mark and now is headed down - Flash is looking for 1.25/1.30 as the next call (unless the Fed decides that an emergency rate cut is needed to stop the markets from tanking). Gold likewise - $720 an intermediate target but Flash thinks $600, with oil at about $85, would signal a real depression/recession.
But the second part of the call - that this should lead to a rally in equities, specifically some of the banks and large cap consumer stocks has eluded him. Shocking results today from Home Retail Group (and more to come, no doubt) have hammered Kingfisher, one of the stars of his portfolio since he got in there at 96p, and HBOS has taken a beating in the last couple of days. Stops are there to lock in some measly profits, but it ain't looking great for any of the financials or the retailers, or most of the other FTSE 100 stocks that Flash impulsively picked up on Friday afternoon - Unilever, Pearson, Scottish and Southern Energy and Marks and Spencer. Way too much trading, way too little assessment of the potential downside.
The Lehman raffle ticket got stopped out for a derisory gain of £2 - enough for a packet of chips which is probably all the bank may be worth. Flash was tempted to buy back in but he thought the better of it - he did however buy some more AMbac which again may prove to be a costly mistake.
Being impulsive and naive, Flash closed out his Dow short from 11500 when the market looked like bouncing early yesterday afternoon - for a while he thought he'd done exactly the right thing but this morning he's wishing he'd left it alone. Nothing now on the dow chart really to stop it retesting the 10900 level, or going for an almighty bust below 10000.
And yet - and yet - being bearish on equities has become such a consensus trade that Flash can't help wondering if there's some value in doing some buying. But in this market you need major confidence or deep pockets - and Flash's confidence has been ebbing away over the last 48 hours, along with a sizeable chunk of the cash in his pockets. On balance he is still more bullish than bearish about the USA - the UK he's becoming more circumspect about by the day. Very, very difficult markets to call, but it ain't looking good for the FTSE 100. Not at all.
Flash has quite a bit of his fund in small caps too - and there's been no spectacular action in these; on the other hand, the small caps he's invested in have largely flatlined in a really volatile market which gives him some hope that they were the right call - Tribal Group has held it's own all the way through the volatility of the last six months, and Workspace Group, in spite of its threatened relegation, has really done rather well - up to 140ish from where he bought them at 118. Cineworld holding up well too, Axeon crashed through his stop at 40p yesterday and he took a serious writedown - 5% of the fund - on that one. So much for energy efficiency and innovation. (What the hell were you doing putting 5% of the fund in an obscure small cap, I hear you say? Well, 5% of the fund were just the accumulated losses on what started out as a smallish position when he bought them at 80p. Another crap trade).
It's a dangerous market - and for this reason Flash has reintroduced that FTSE short and will look for a Dow short entry point this morning as a hedge against all his longs. It's only gold and the currencies that are keeping him in the money, but the fund has blown up badly in the last couple of days - too much risk, not enough margin - gave up a lot of his gains from the bounce over the weekend.
Less is more - so he's paring back his positions, putting on his tin hat, and holding off from trading. Like most of the rest of the world, unless they're selling. Which means that some serious downside could still be in front of us.
A few problems.
The disinflationary call has worked out perfectly - gold plummeting, dollar strengthening, and it's only really these trades that have kept his P/L afloat. Flash has been short EUR since way back when and reintroduced short EUR/JPY back to his fund late yesterday - now showing a nice profit, and EUR/USD broke through the 1.40 mark and now is headed down - Flash is looking for 1.25/1.30 as the next call (unless the Fed decides that an emergency rate cut is needed to stop the markets from tanking). Gold likewise - $720 an intermediate target but Flash thinks $600, with oil at about $85, would signal a real depression/recession.
But the second part of the call - that this should lead to a rally in equities, specifically some of the banks and large cap consumer stocks has eluded him. Shocking results today from Home Retail Group (and more to come, no doubt) have hammered Kingfisher, one of the stars of his portfolio since he got in there at 96p, and HBOS has taken a beating in the last couple of days. Stops are there to lock in some measly profits, but it ain't looking great for any of the financials or the retailers, or most of the other FTSE 100 stocks that Flash impulsively picked up on Friday afternoon - Unilever, Pearson, Scottish and Southern Energy and Marks and Spencer. Way too much trading, way too little assessment of the potential downside.
The Lehman raffle ticket got stopped out for a derisory gain of £2 - enough for a packet of chips which is probably all the bank may be worth. Flash was tempted to buy back in but he thought the better of it - he did however buy some more AMbac which again may prove to be a costly mistake.
Being impulsive and naive, Flash closed out his Dow short from 11500 when the market looked like bouncing early yesterday afternoon - for a while he thought he'd done exactly the right thing but this morning he's wishing he'd left it alone. Nothing now on the dow chart really to stop it retesting the 10900 level, or going for an almighty bust below 10000.
And yet - and yet - being bearish on equities has become such a consensus trade that Flash can't help wondering if there's some value in doing some buying. But in this market you need major confidence or deep pockets - and Flash's confidence has been ebbing away over the last 48 hours, along with a sizeable chunk of the cash in his pockets. On balance he is still more bullish than bearish about the USA - the UK he's becoming more circumspect about by the day. Very, very difficult markets to call, but it ain't looking good for the FTSE 100. Not at all.
Flash has quite a bit of his fund in small caps too - and there's been no spectacular action in these; on the other hand, the small caps he's invested in have largely flatlined in a really volatile market which gives him some hope that they were the right call - Tribal Group has held it's own all the way through the volatility of the last six months, and Workspace Group, in spite of its threatened relegation, has really done rather well - up to 140ish from where he bought them at 118. Cineworld holding up well too, Axeon crashed through his stop at 40p yesterday and he took a serious writedown - 5% of the fund - on that one. So much for energy efficiency and innovation. (What the hell were you doing putting 5% of the fund in an obscure small cap, I hear you say? Well, 5% of the fund were just the accumulated losses on what started out as a smallish position when he bought them at 80p. Another crap trade).
It's a dangerous market - and for this reason Flash has reintroduced that FTSE short and will look for a Dow short entry point this morning as a hedge against all his longs. It's only gold and the currencies that are keeping him in the money, but the fund has blown up badly in the last couple of days - too much risk, not enough margin - gave up a lot of his gains from the bounce over the weekend.
Less is more - so he's paring back his positions, putting on his tin hat, and holding off from trading. Like most of the rest of the world, unless they're selling. Which means that some serious downside could still be in front of us.
Tuesday 9 September 2008
Careful with that margin, Eugene
The last 24 hours of trading have been a perfect lesson to Flash Rabbit in how NOT to apply the principles of 'less is more'. It hasn't been an unmitigated disaster, by any means, but to set it in context, by the end of Monday Flash's fund was 400% up from the February start and by the end of today it was back to under 300%. A 28% drawdown in less than 24 hours. Ouch.
Surely a sign that
a) the fund is overleveraged and
b) Flash is overtrading.
c) in these markets, it doesn't pay to take anything for granted.
A few examples.
Flash caught the upward rally in the dollar mid-morning on Monday perfectly but didn't have the confidence to run the position in EUR/USD, GBP/USD, and sacrificed around £400 of potential profit. No loss, but not nearly the gain that could have been. He did get AUD/USD on the nail and picked up a nice £350 from that trade.
Flash had Dow, S and P and FTSE longs in place from excellent levels (put in late afternoon on Friday) and caught pretty well all of the spectacular bounce in equities. However, instead of leaving them alone, and take some profits, Flash greedily decided to leverage up his position by moving some of the stops and trading on margin, adding new S and P longs at 1240, 1250 and even (arrogant idiot!) 1270. Well, that's great when the market appears to be going up (and Flash was out for most of Monday, so he didn't really experience the seasick yo-yo signals which are a sure sign of some nasty action to follow), but when the market decides to tumble hard, as it did today, and you're way overleveraged, it just eats up your capital even faster. And Flash, being flash, decided he knew better until he started to feel sick, and took some of the initial dip this afternoon as a buying opportunity for UK equities, which will probably leave his P/L even more painfully reduced when the UK 'adjusts' to the US' action tomorrow.
Flash had an excellent long position in AMBAC from around the 550 mark. Again, instead of just leaving it alone, he nicked some of the margin from this successful trade and leveraged it up. So when AMBAC tumbled from its highs around 880 to around 750 (which in theory should still give plenty of room for maneouvre on a 550 long), Flash was caught with his trousers down - the two extra positions he'd added at 780 and 800 were stopped out fractionally above break-even (ie zero gain) and the tasty AMBAC long turned to toast as AMBAC hit the stop at 720. OK so he had another couple of hundred quid to add to his trading capital but the greedy rabbit had already spent that opening up new longs in his ragtag bag of equities, which in the light of today's events are pretty appalingly judged. Of course, the financials could be in for even more blood letting, in which case it'll be great he got out of Ambac when he did, but Flash's big picture macro call is that we have to see some sort of proper recovery for at least some of the financials or otherwise we are heading into 1929.
Lehman went to pieces too. Flash hadn't leveraged that one so at least he just put it in his pocket - a quick £60 gain as the stock crashed through his stop at $14.00. He's opened up another blind Lehman punt just before close of trade today for a tiny 30p a point from around 770 - no prob if it goes to slash and burn, but nice bonus if some sort of rescue operation is mounted.
Flash has been eyeing Scottish and Southern Energy for months now - he's seduced by windmills and hydro, and because he's made a pretty big pile of cash, by his standards, he pumped a bit in to Scottish and Southern this morning from 1390ish, only to to see the dam break and the reservoir empty as the price plummeted to 1365. Something to do with Darling not ruling out the windfall tax for the comrades at the TUC, coupled with tumbling wholesale energy prices? He's set a stop at 1310 (roughly where resistance is on the chart) and will try to hold this one for the long term.
On the positive side, gold behaved exactly as Flash expected today - he's been watching it hovering around the 800 mark for some days and as oil slid, gold went south - great stuff - shorts running towards a four figure profit on gold now (for the second time this year), and Flash is targeting a crash down now for gold to around the $720 mark or even lower. He can't see any reason why it needs to be any higher - unless that is we have the mother of all market meltdowns in which case it might represent some sort of flight to safety - but see this piece which has persuaded him that the gold bulls are wrong. The disinflationary trend is just too well established now, plus so much cash has been burned going long on commods as they've tumbled, that Flash thinks gold can only go lower. On the evidence of the last 3 days worth of trades, where he has been cautious where he should have been confident, and confident where he should have been much more cautious, he'll probably be overconfident and wrong on this call too.
Flash had the foresight to at least bang on a quick Dow short around the 15000 mark and that has offset a fraction of the pain and damage caused to his long view by the nervousness
So, from the outright long call of the weekend, we are now back into hedging/check and balance/risk reduction territory. Stops moved on 3/4 of the HBOS position up to 290. Can't lose but may not be onto such a winner as he thought.
If things carry on like this, Flash will be forced to become much less flash and much more cautious. Even though his Templeton antennae are saying buy, buy, buy. Fine if you're a billon dollar hedge leaping thoroughbred, but the problem for micro macro rabbit market jockeys is that if you don't have the margin to ride the volatility, you just get chucked off the horse. Right now quite a bit of his margin is being used to prop up some badly judged FTSE long positions around the 5450 and 5500 mark. And another chunk of it was eaten by the market gods as a sacrifice to overconfidence and overleveraging on the S&P 500.
Perhaps the action today was just everyone getting out before the whole thing goes to pieces. In which case a short in gold and a short Dow position won't shelter Flash's fund and he'll give up another 10% before he can hit the 'sell' button tomorrow morning.
So can gold save the day? If deflation goes faster and deeper than everyone thinks, then what are the implications for equities? Flash thinks a massive rally for large cap consumer stocks. Or perhaps it's not so much deflation, it's just a total liquidity crisis - everyone, including the banks and the Fed, run out of cash, so no-one can buy anything, so all the prices drop like a stone? Answers please!
PS Apparently Lehman is revealing its skeletons tomorrow. That will be a relief, whatever the outcome, but we can expect a nasty, nervous market early doors. As a precaution Flash is considering taking the loss on all but one of the FTSE longs and opening up a short position in FTSE before he hits the sack tonight.
Surely a sign that
a) the fund is overleveraged and
b) Flash is overtrading.
c) in these markets, it doesn't pay to take anything for granted.
A few examples.
Flash caught the upward rally in the dollar mid-morning on Monday perfectly but didn't have the confidence to run the position in EUR/USD, GBP/USD, and sacrificed around £400 of potential profit. No loss, but not nearly the gain that could have been. He did get AUD/USD on the nail and picked up a nice £350 from that trade.
Flash had Dow, S and P and FTSE longs in place from excellent levels (put in late afternoon on Friday) and caught pretty well all of the spectacular bounce in equities. However, instead of leaving them alone, and take some profits, Flash greedily decided to leverage up his position by moving some of the stops and trading on margin, adding new S and P longs at 1240, 1250 and even (arrogant idiot!) 1270. Well, that's great when the market appears to be going up (and Flash was out for most of Monday, so he didn't really experience the seasick yo-yo signals which are a sure sign of some nasty action to follow), but when the market decides to tumble hard, as it did today, and you're way overleveraged, it just eats up your capital even faster. And Flash, being flash, decided he knew better until he started to feel sick, and took some of the initial dip this afternoon as a buying opportunity for UK equities, which will probably leave his P/L even more painfully reduced when the UK 'adjusts' to the US' action tomorrow.
Flash had an excellent long position in AMBAC from around the 550 mark. Again, instead of just leaving it alone, he nicked some of the margin from this successful trade and leveraged it up. So when AMBAC tumbled from its highs around 880 to around 750 (which in theory should still give plenty of room for maneouvre on a 550 long), Flash was caught with his trousers down - the two extra positions he'd added at 780 and 800 were stopped out fractionally above break-even (ie zero gain) and the tasty AMBAC long turned to toast as AMBAC hit the stop at 720. OK so he had another couple of hundred quid to add to his trading capital but the greedy rabbit had already spent that opening up new longs in his ragtag bag of equities, which in the light of today's events are pretty appalingly judged. Of course, the financials could be in for even more blood letting, in which case it'll be great he got out of Ambac when he did, but Flash's big picture macro call is that we have to see some sort of proper recovery for at least some of the financials or otherwise we are heading into 1929.
Lehman went to pieces too. Flash hadn't leveraged that one so at least he just put it in his pocket - a quick £60 gain as the stock crashed through his stop at $14.00. He's opened up another blind Lehman punt just before close of trade today for a tiny 30p a point from around 770 - no prob if it goes to slash and burn, but nice bonus if some sort of rescue operation is mounted.
Flash has been eyeing Scottish and Southern Energy for months now - he's seduced by windmills and hydro, and because he's made a pretty big pile of cash, by his standards, he pumped a bit in to Scottish and Southern this morning from 1390ish, only to to see the dam break and the reservoir empty as the price plummeted to 1365. Something to do with Darling not ruling out the windfall tax for the comrades at the TUC, coupled with tumbling wholesale energy prices? He's set a stop at 1310 (roughly where resistance is on the chart) and will try to hold this one for the long term.
On the positive side, gold behaved exactly as Flash expected today - he's been watching it hovering around the 800 mark for some days and as oil slid, gold went south - great stuff - shorts running towards a four figure profit on gold now (for the second time this year), and Flash is targeting a crash down now for gold to around the $720 mark or even lower. He can't see any reason why it needs to be any higher - unless that is we have the mother of all market meltdowns in which case it might represent some sort of flight to safety - but see this piece which has persuaded him that the gold bulls are wrong. The disinflationary trend is just too well established now, plus so much cash has been burned going long on commods as they've tumbled, that Flash thinks gold can only go lower. On the evidence of the last 3 days worth of trades, where he has been cautious where he should have been confident, and confident where he should have been much more cautious, he'll probably be overconfident and wrong on this call too.
Flash had the foresight to at least bang on a quick Dow short around the 15000 mark and that has offset a fraction of the pain and damage caused to his long view by the nervousness
So, from the outright long call of the weekend, we are now back into hedging/check and balance/risk reduction territory. Stops moved on 3/4 of the HBOS position up to 290. Can't lose but may not be onto such a winner as he thought.
If things carry on like this, Flash will be forced to become much less flash and much more cautious. Even though his Templeton antennae are saying buy, buy, buy. Fine if you're a billon dollar hedge leaping thoroughbred, but the problem for micro macro rabbit market jockeys is that if you don't have the margin to ride the volatility, you just get chucked off the horse. Right now quite a bit of his margin is being used to prop up some badly judged FTSE long positions around the 5450 and 5500 mark. And another chunk of it was eaten by the market gods as a sacrifice to overconfidence and overleveraging on the S&P 500.
Perhaps the action today was just everyone getting out before the whole thing goes to pieces. In which case a short in gold and a short Dow position won't shelter Flash's fund and he'll give up another 10% before he can hit the 'sell' button tomorrow morning.
So can gold save the day? If deflation goes faster and deeper than everyone thinks, then what are the implications for equities? Flash thinks a massive rally for large cap consumer stocks. Or perhaps it's not so much deflation, it's just a total liquidity crisis - everyone, including the banks and the Fed, run out of cash, so no-one can buy anything, so all the prices drop like a stone? Answers please!
PS Apparently Lehman is revealing its skeletons tomorrow. That will be a relief, whatever the outcome, but we can expect a nasty, nervous market early doors. As a precaution Flash is considering taking the loss on all but one of the FTSE longs and opening up a short position in FTSE before he hits the sack tonight.
Sunday 7 September 2008
Going long, bigtime
After talking to some much wiser market players than him, Flash Rabbit has decided that the Fannie/Freddie bailout is unequivocally good news for the markets, because it removes so much uncertainty around the mortgage market and the debt guarantees market, and will restore a good measure of confidence to the financials - in the sense that they will not have to unload even more CDOs and that there will at least be the stability of the US Treasury bonds etc underpinning the US housing market rather than the crazy and schizoid world of the current 'free' market. Not great news for USD, putting it mildly so there will be a bit of a spike down, but Flash still thinks that the global macro picture is in USD's favour. Overall he thinks it's likely that the US trade deficit will continue to narrow and that the US economy is probably better placed to recover than most of the rest of the world. No serious long term player would want to buy Euros at this level - still pretty close to some of the historic highs against USD - even sterling looks more attractive than the euro, in Flash's opinion. Hence putting a short EUR/GBP position on when it hit its historic highs above the 0.81 mark earlier in the week.
Another interesting observation is that the rumours on Fannie and Freddie didn't particularly hammer the dollar, gold or oil on Friday afternoon - which again would suggest that the major, serious money will probably get back into the equities market. Where else is it going to go? Not into commodities, to get burned once again in the bonfire of demand destruction, unlikely to be seriously in currencies given that we've had such seismic shifts over the last 6 weeks, bonds are already overbought. So where else will it go? What looks the best value - i.e. where is the best risk/reward ratio at the moment? Equities, even if earnings weaken as expected. Particularly financials, large cap consumer stocks, infrastructure plays, big name retailers and certain niche small caps, particularly those operating in public sector services and in fast growing sectors e.g. creative industries.
For all of these reasons Flash is delighted that he's hung on to most of his long financials - particularly Lehman, AMBAC and HBOS. As the market got a sniff of the news on Friday afternoon there was a pretty strong rally out of the doldrums. Flash used this as an opportunity to restore a bunch of Dow, S & P and FTSE long positions, all of which are showing a profit, and he expects a pretty strong open overnight and tomorrow morning.If we do get a monster rally he'll shift the stops so he can't lose any money, but he'd love to have some Dow longs that he can run for the serious long term - 3 to 6 months. It's a pity that his long position in housebuilder DR Horton got stopped out in all the panic and volatility last week - he'll probably buy some more tomorrow if he gets a chance.
Most of the success of the last week's trading came in the currencies - clearly the long index positions got taken out one by one but judicious use of stops meant that Flash didn't lose much capital. Short EUR/JPY was a total monster and he's closed that one out now - probably has adjusted to a saner level and will trade in a new range now. Short AUD/USD, EUR/USD and GBP/USD also netted some excellent profits. He did get some of his short gold positions caned in the volatility, and missed out on the obvious opportunity to get some shorts in on the eurobanks during Trichet's press conference on Thursday - those old chestnuts Erstebank and Swedbank, very exposed to eastern european basket case economies, got hammered - Flash is keeping an eye on these and he thinks that Erstebank could have considerably further to fall, taking his cue from this prescient piece penned by a friend earlier in the year. But he's expecting all the financials to have something of a bounce up on the Fannie and Freddie news.
So, orders in place to buy more HBOS, and stops widened on the long dollar positions - he's trying to hold these for the long haul and may well treat a strengthening of EUR/USD as a further selling opportunity.
Plus on Friday he bought more UK equities - small long positions in Pearson and Scottish and Southern Energy to add to his existing long positions (list elsewhere in this blog, but some of his best performers have been British Airways, Tribal Group, Cineworld, Barclays, FirstGroup, Woolworths and Workspace Group).
All set for another torrid week! Bring it on!
Another interesting observation is that the rumours on Fannie and Freddie didn't particularly hammer the dollar, gold or oil on Friday afternoon - which again would suggest that the major, serious money will probably get back into the equities market. Where else is it going to go? Not into commodities, to get burned once again in the bonfire of demand destruction, unlikely to be seriously in currencies given that we've had such seismic shifts over the last 6 weeks, bonds are already overbought. So where else will it go? What looks the best value - i.e. where is the best risk/reward ratio at the moment? Equities, even if earnings weaken as expected. Particularly financials, large cap consumer stocks, infrastructure plays, big name retailers and certain niche small caps, particularly those operating in public sector services and in fast growing sectors e.g. creative industries.
For all of these reasons Flash is delighted that he's hung on to most of his long financials - particularly Lehman, AMBAC and HBOS. As the market got a sniff of the news on Friday afternoon there was a pretty strong rally out of the doldrums. Flash used this as an opportunity to restore a bunch of Dow, S & P and FTSE long positions, all of which are showing a profit, and he expects a pretty strong open overnight and tomorrow morning.If we do get a monster rally he'll shift the stops so he can't lose any money, but he'd love to have some Dow longs that he can run for the serious long term - 3 to 6 months. It's a pity that his long position in housebuilder DR Horton got stopped out in all the panic and volatility last week - he'll probably buy some more tomorrow if he gets a chance.
Most of the success of the last week's trading came in the currencies - clearly the long index positions got taken out one by one but judicious use of stops meant that Flash didn't lose much capital. Short EUR/JPY was a total monster and he's closed that one out now - probably has adjusted to a saner level and will trade in a new range now. Short AUD/USD, EUR/USD and GBP/USD also netted some excellent profits. He did get some of his short gold positions caned in the volatility, and missed out on the obvious opportunity to get some shorts in on the eurobanks during Trichet's press conference on Thursday - those old chestnuts Erstebank and Swedbank, very exposed to eastern european basket case economies, got hammered - Flash is keeping an eye on these and he thinks that Erstebank could have considerably further to fall, taking his cue from this prescient piece penned by a friend earlier in the year. But he's expecting all the financials to have something of a bounce up on the Fannie and Freddie news.
So, orders in place to buy more HBOS, and stops widened on the long dollar positions - he's trying to hold these for the long haul and may well treat a strengthening of EUR/USD as a further selling opportunity.
Plus on Friday he bought more UK equities - small long positions in Pearson and Scottish and Southern Energy to add to his existing long positions (list elsewhere in this blog, but some of his best performers have been British Airways, Tribal Group, Cineworld, Barclays, FirstGroup, Woolworths and Workspace Group).
All set for another torrid week! Bring it on!
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