Wednesday, 29 October 2008

A cautionary clip from 2006

Other than the sexist comments at the end, Flash thinks this is very, very instructive.

Tuesday, 28 October 2008

Back in the water

Well, Flash has been dipping his toes back into the market, and whilst he's not exactly striking off out to sea, he's waded in with some good calls over the last few days.

He was onto the turn in USD/JPY and followed it through with a couple of NZD/JPY longs today which have been delightful. He caught the big rally this evening in the Dow and S&P. He's shorted EUR/GBP and so far that's more than 100 pips on side. He thinks the euro ought to revert back down to the 0.70 mark against GBP and that's what he's gunning for. The weakness of the eurozone really hasn't hit home yet, whereas in the UK a lot of the doom is firmly out in the open.

Flash even bought some equities today. That might be a bit premature, but you never know. He's increased his long position in British Airways, and bought back into Morrisons Supermarkets, Game Group, BT and Cineworld. So far, except for BA, all up a bit. Perhaps a bit more in the morning. The logic (?) on BA is that they're now so cheap that they're vulnerable to an investor or two with deep pockets who wants to buy an airline swallowing them up. Iberia buys into BA, BA buys Iberia, AA ties up with BA, a kind of mating game for global domination. Look what happened on the Cathay Pacific rumour the other week. And they're now so cheap that he intends to hold them for a couple of years, even if they drop by a third. He's only got a few hundred shares - good for a 10% discount on flights which he'll make use of and make back his losses that way (someone said "It's like a discount travel card with unlimited upside"). In the long term Flash thinks the airline industry is pretty screwed, but there will still be winners and losers. And he thinks, perhaps irrationally, that BA is more likely to be a winner.

He even bought some BHP Billiton shares the other day - that's been a bit of a white knuckle ride, but they're in the black.

His reasoning on Billiton is that the resources stocks are oversold and sooner or later there will have to be some sort of reinflation. On the other hand the miners are very exposed to emerging markets which are going to be totally crunched. On balance though he thinks there's some long term value there. Particularly if the dollar devalues a bit. This is what is preoccupying him at the moment. He can see that EUR/USD could well be heading for parity, which he'd welcome, as he's short EUR/USD, and in which case cable would logically move down to the 1.40 - 1.50 mark. He thinks euro interest rates will have to come down pronto otherwise the gummed up markets will stay gummed up, and borrowers will be reaching for their suicide pills. A certain amount of dollar devaluation could actually be disinflationary for the rest of the planet - a bit of retracement could help balance things out - provided commodities don't go climbing mountains, which seems unlikely because there ain't much cash in corporate pockets left to buy stuff with, and what cash there is people are hoarding.

The consumer world outside of the USA hasn't completely felt the benefit of the collapse in commodity prices yet, because the dollar has simultaneously strengthened. A certain amount of weakening might be a good thing. Countries with high domestic inflation are going to get even more screwed as the dollar climbs, and their currency falls, and thus imported inflation kicks in. Look at Iceland. On the other hand, all of the big thematic trades, the carry trades, the long commodities bet, the Asian/Russian tiger bet, the emerging market infrastructure plays, have completely unravelled. And we're not allowed to short the financials any more, so they've taken even more of a hammering. So the dollar provides the flight to safety, and Flash thinks that's got further to go - plus people will be taking money out of more 'risky' emerging markets and putting their cash into the relative safety of US equities. And there could well be an Obama effect as the US digs itself out of its political pit which could boost equities some more. A more interventionist government will provide some fiscal stimulus and start spending on public infrastructure - schools, rail, roads, energy, that sort of thing. Once the spending tap gets turned on there will be some reinflation, particularly becuase the spending won't be financed by taxes, it'll be financed by borrowing. A New Deal of sorts, and the beginning of another reinflation bubble (and perhaps a journey southwards for the dollar?) So being long the Dow and S&P seems like the right call, although he's been trying to do this for months and has been totally caned. Caution is needed. Position sizes are small, stops are in place and he's watching carefully.

The big toxic call - and the next source of jarring volatility - will be what happens with emerging market currencies which are collapsing all over the place - Iceland, Hungary, Pakistan, Russia. One explanation for the vicious sell offs of the last few weeks is that anyone with assets has been selling them to raise cash - not just hedge funds, but insurance companies, pension funds, Russian oligarchs, retail investors, you name it. But particularly people with foreign currency debts - eastern european countries, but also the UK - as their currencies have plummeted have been forced to sell euro (and dollar) denominated assets to raise the cash to service these foreign currency debts, which have been getting more and more expensive by the day. So there's a self-reinforcing cycle of liquidation and deleveraging, made worse by the fact that the usual hedging strategies (the carry trade, shorting the dollar, buying commodities etc) have completely broken down. The easy pop, as usual, has been at hedge fund redemptions, and undoubtedly the hedgies will have had to get out of some painful trades which will have compounded the problem, but the real dealers here are the investment banks and the retail banks and their big corporate customers - they're locked into cycles of liquidation just to keep their cash flow afloat, especially when bad debts are on the rise and the cost of overnight borrowing is still pretty prohibitive. This might also partially account for the selloff in gold.

Most eastern european countries, with their swiss and euro denominated mortgages and loans are in the grip of utter panic now - this piece has a more lucid analysis than flash can manage at this time of night. That's why the Swedbanks etc exposed to another wave of sub-prime in eastern europe are looking at some big, big trouble - pointed out in this piece months back. So he's expecting the euro, but even more than the euro, the dollar to continue to appreciate against the emerging market currencies - difficult to see what can stop them, really. There's a self-reinforcing cycle there as EM countries have to sell their foreign exchange reserves in euros and dollars to prop up - buy back - their own currencies.

The gold short isn't working so well - whether this is a short term bounce or an indicator of some sort of inflationary pressure will no doubt reveal itself in the next couple of days. Flash thinks gold has further to go down but it hit his target of $720; but there's a lot of resistance to further falls in the $720 - 30 range; the dollar would need to make another move upwards for gold to resume its southwards drop, it seems. For now Flash is just running a small, lossmaking gold short from $744 and will watch and wait.

Friday, 17 October 2008

Marx and Spencer

"Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells. For many a decade past, the history of industry and commerce is but the history of the revolt of modern productive forces against modern conditions of production, against the property relations that are the conditions for the existence of the bourgeois and of its rule. It is enough to mention the commercial crises that, by their periodical return, put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity -- the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed. And why? Because there is too much civilization, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions, by which they are fettered, and so soon as they overcome these fetters, they bring disorder into the whole of bourgeois society, endanger the existence of bourgeois property. The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand, by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented."

Marx and Spencer

Thursday, 9 October 2008

In Business

Dow crashes....again. Gold up, unsurprisingly, but it'll come down...

Very useful BBC programme here on the prognosis for the next year, two years, five years. Flash almost completely totally agrees with John Kay.

Flash sells out...and buys in... yet again

Will he ever learn?

Very nasty trading indeed but Flash is dropping in a few long equity positions.

He bought some BA at 115, some Game Group at 150, some Firstgroup at 490, some Royal Bank of Scotland at 100, and some more Kingfisher at 130. He also picked up some BT at 142. All, with the exception of RBS, showing a bit of a profit.

And yesterday evening, and again this morning he sold some gold and reinstated a EUR/USD short from around the 1.37 mark.

So far so good. Not trading the indices yet - he wants to see a more sustained rally before he burns any more cash there.

And, pasted below - here are his current thoughts on gold and USD as posted to the paddypowertrader blog (with acknowledgements to people in the know who have helped him think this through).

"Long term, broadly speaking, I’m still very bullish on USD, for the reason that a lot of emerging market economies have expanded on the basis of buying up cheap USD-denominated assets and using cheap dollars as a source of funds to expand lending. Now that liquidity/credit is tightening, and growth is rapidly slowing, they are selling off dollar denominated assets and scambling to call in lending- USD foreign exchange reserves held by overseas governments are falling. PLus EM currencies are tumbling all over the shop - partly because commodity prices are falling, demand for exports is slowing, and so their economies can’t make so much cash in real terms, so the prospects look really dire for them.

In this environment, and especially with a shrinking US trade deficit, my reading is that the dollar becomes stronger - remember that US weakness is RELATIVE to weakness everywhere else, and in my view, the weakness pretty well everywhere else (partly as a result of sub-prime etc in the US) is set to get worse. In the US however, taxpayer bailouts notwithstanding (and interestingly, everywhere else is now going down this road, so we;re all in the brown stuff) there are the beginnings in place for some sort of recovery, especially as inflation is going to go almost to zero in the next 12 months, because of recession/demand destruction/contraction in output.

So that then leads to gold. It’s hard to see how gold can go up, other than with short term panic bursts of trading like we’ve seen over the last week, when the rest of the commodity environment is so disinflationary. PLus if the dollar strengthens I agree that gold will become more expensive here relative to the dollar (and I expect sterling and euro to tank even more in the next few months as recession really bites), but that doesn’t mean that the PRICE of gold, denominated in USD will go up. In fact I’m expecting it to fall. A lot. So my view remains resolutely long USD, short gold, and then trickling in a bit of long equity over the next few weeks and months.

But of course I could be wrong…….

THe opposing view says that the bailouts are deeply inflationary. I’m not quite sure I buy that argument - I think the rate cuts signal a shift away from a single-track focus on inflation towards looking at the downside risks of outright recession. And I think that the downshift in house prices, commodity prices and even - likely real terms wages as the labour market becomes tighter and more competititve- should stave off some of the inflationary pressure. Demand is more than muted, it’s almost utterly destroyed. Of course the flipside of currency devauation against USD for EUR, GBP, and even more worrying places like Iceland and Russia will be deeply inflationary - but that in a way will just strengthen demand for ‘hard’ currency like the dollar. Hence dollars retain their value. And remember, if we take a historical view, gold is still trading near its recent mega highs and the dollar is not that far off some of its lows. I’m still gunning for EUR/USD parity, especially if the slowdown in Europe (especially southern and eastern europe) turns into something even nastier, which seems entirely possible to me.

And I can see that in an environment of outright bust gold would have an appeal - but I expect a slow, painful bottoming out rather than outright bust.

So this morning I sold some gold and reinstated a EUR/USD short. I wonder if I’ll be able to hold it through the volatility…"

Tuesday, 7 October 2008

The lights go out in New York City

Well not literally, but if things carry on like this for another week or two the lights will be going out all over the world, at least in the trading rooms, and by extension in workplaces, factories, farms, schools and hospitals as the globalised version of the economy judders to a complete halt.

We are now looking at the S&P 500 heading down to 900, the dow heading down below 9000, and the FTSE headed below 4000. This an event building towards the scale of 1929 - which could lead to a medieval scale depression and bloodbath, followed by very unpleasant global conflicts over resources, particularly water, gas, food and oil. Taxes will have to rise to pay for the orgy of borrowing; there will be enormous demand destruction - it's essentially the end of the rampant consumer society that began in the 1960s and accellerated through the age of reagan, thatcher, the bushes, clinton and blair. Not such a bad thing perhaps. It points to an entirely different social and economic order - the banking system at least partially owned and guaranteed by the state, self-help and local community aid/mutualism will be essential - and one in which the economic assumptions that have prevailed over the last thirty years are completely unravelling. So Flash needs to do some more careful thinking. He actually thinks some of this could be quite a good thing. A monumental adjustment, or a monument to the massive expansion in credit and borrowing begun by Thatcher and Reagan. But one thing is sure, flash parties for the masses are over and we're heading into a more austere few years. For example, Heathrow Terminal 5, a monument to the millennium, is terminated. Flash was hanging around there on Saturday night and observed that the only people buying anything were in the pub that sold cheap beer. Austerity...

In pure capital destruction terms, this is carnage. It's beyond insane. Flash is out for the moment. He just can't risk any more cash in this crazy market. On the other hand he thinks that he ought to be buying equities aggressively but the volatility is so extreme that it's just impossible. He may make a couple of strategic equity purchases in the next couple of days - BA at 128p looks pretty darn cheap, BT at 154 likewise, similarly with some of the utilities and even the real estate stocks.

All the gold shorts stopped out, unsurprisingly; the dollar longs are what has kept him in the game over the last couple of days but in the wild swinging back and forth they too got stopped out. He made a pile of cash shorting EUR/JPY too. Flash thinks that going long gold for the next few days may actually be the right call now as the currency markets are just so messed up too - no liquidity - spreads widening - the whole international financial system going through its death agonies. It's likely that investors will continue to pile into gold. But Flash thinks that the outcome of this is likely to send gold tumbling as deflation accelerates, fuelled by dollar strength. In the final analysis, gold has to trade in line with the rest of the commodity complex.

In Flash's view, the dollar will continue to appreciate against all other currencies, particularly any emerging market ones which have been the beneficiaries of the cheap dollar over the last few years. A lot of emerging markets have pumped up their economies by buying cheap US assets denominated in dollars - and this trade is now unravelling (and thanks to a fried who runs a proper hedge fund for this insight. The US trade deficit will shrink. The Euro is toast. It could easily go back to parity with the dollar. Sterling will also get at least mildly toasted, as we could have just as big a mortgage meltdown here - especially if property prices halve in value, which looks entirely possible. People who are thinking that their 80% mortgage is comfortable will get nasty shocks if property prices drop another 15 - 20%, The banks aren't lending anyone anything, and most households are way over-extended, and unemployment/layoffs will kick in, making the gloom even worse. Wage inflation has been modest, and is likely to remain modest if the labour market contracts, as competition for jobs will push down what people can ask for.

States and whole countries are now going bankrupt. California is on the brink, Iceland is over the edge, and Indonesia looks badly messed up. China is going to have some severe challenges as demand for manufactured goods collapses. Its labour market will contract and the flow of cheap dollars is going to stop.

Governments are going to be under intense pressure. Tax revenues will be severely reduced; this will lead to pressure on public services; there will be pressure to control imported inflation but also to stimulate investment. Probably one of the only viable solutions is for government to keep up its investment in the public sector, and to borrow more to fund it. If government doesn't take a Keynesian turn then the prospects for those people that are not able to insulate themselves in highly skilled occupations are really bleak. Education, reskilling, retraining and keeping public services going will be crucial, otherwise we risk turning the country into a divided rathole like NYC in the 1970s.

Borrowing will push sterling down, and this may stoke inflation, but it'll make exports more competitive, not that there's much left to export as far as UK manufacturing is concerned. And the UK economy, built on services, is in a particularly vulnerable position. Flash thinks that the value plays, if and when the dust settles, would be infrastructure, engineering, manufacturing, educational services, utilities, and some value-based retailers. If he didn't thoroughly disapprove, he'd also be investing in security services, prisons and defence. But he won't do that. He's also still bullish on the potential of small scale creative industries, but they'll have real trouble accessing capital. So he expects a newly politicised, DIY ethos to take hold, fuelled by web, accessible media technologies and small scale platforms of all kinds, digital and physical. The web will be crucial but the big mass media institutions could well get absolutely stuffed. Major tech companies like Google and Apple could well continue to be winners, so this could be a great time to buy them; on the other hand their prices might fall another 30 - 40% from here given the action of the last few weeks.

Even with a global recession, the pace of technological change is unlikely to slow. Flash thinks that its ingenuity and innovation that is the only thing that will stop UK plc from going down fast. And in some ways he thinks it's pretty good for some of the smugger business grandees to get caned. But he also knows that the people who really get caned are those at the bottom of the pile. And that worries him a lot.

It's like a riot in which the traders are just smashing up everything in the city. Not unlike when the lights went out and the looters went on the rampage in New York in 1977. And it's very hard to see what will calm anything in this market. People that were outright short will be coining it; as readers of this blog will know, Flash has been in naive optimist mode, trying to call a bottom, for the last three months. He was wrong.

However, it's precisely because of this bleakness that Flash is looking for a bounce.

But Flash thinks he needs to see the dow up another 900 points and holding there, the S and P back to 1080 or 1090 before he trades again. Perhaps this is the grandmother of all corrections and stocks are just going to trade cheaper. After all, not that many folk are going to have much cash left once this riot unravels and a damage assessment can be done.

Friday, 3 October 2008

Appetite for risk

Well, flash has been toying with the idea of some full tilt trading in the face of some extreme nervousness and volatility (VIX at multi-year highs, routine 3 -4% drops in the indices).

What gives him this view?

Well, the bailout looks like 80% a done deal. So there is likely to be some sort of relief rally. Data on how deep the piles of dodgy loans the banks are buried in is out there. We know a recession is coming, or is here - but how bad are things, really? Commodities are coming off fast (he made a packet shorting gold in the last couple of days), oil is coming down, and Flash thinks it could hit $75 a barrel within weeks. Flash has also made a good bit being long USD, and nothing has changed this view. All of these major transitional events - a reworking of the easy assumptions of the previous macro environment - (ie long commods, short USD, long inflation, short airlines, short financials, short consumer stocks). This changes the game for equities, despite some really nasty payroll data today, and more contraction to come. What Flash was surprised by was that the reaction to the data was much less violent than on previous payroll days - this reinforces his view that recession and unemployment is largely priced in. Earnings will be hit - of course - but how cheap can equities get? Answer - very cheap indeed, but Flash is working with small stakes and very large margins as a way of dampening off some of the volatility. And he's stlll, despite all the nastiness, way up on the year.

Rate cuts in europe, the UK and the US now look more likely than not. Credit markets are gummed up and liquidity is awful.

So Flash thinks the uniform short equity trade is overdone. Some of the financials look like they could be worth more in a year or two than now. Some of the more solid retail propositions will see their overheads coming down over the next few months. Flash observes that whilst the mood on the street is muted and nervous, it doesn't feel like a full on depressionary recessionary gloom like the early 1980s (although this could yet come...) And the defensive plays - utilities, infrastructure stocks look pretty attractively priced. However the resources stocks deserve more of a hammering and they've been what's been pulling down the indices more than anything else.

However, a relief rally could be a good point to get some longer-term long equity positions in place.

So for this reason, holding on to his hat and bracing himself for a kick up the arse, Flash has staked a bit on a couple of long Dow and S and P positions. He'll get stops underneath them if there is a relief rally, but really wants to try to hold them for a bit longer than a few hours. A high risk strategy, but at a time when all the retail investors seem to want to buy gold and put their cash in the safest place, Flash thinks the market could reward him for taking a risk.

And he has cumulatively added to his small long positions open in the following stocks over the last week or so: Scottish and Southern Energy, Firstgroup, Kingfisher, Marks and Spencer, Workspace Group, E*Trade, Morrisons Supermarkets, Cineworld Group, Game Group, Barclays. Plus he's holding on to his shares in Tribal Group, BA, HBOS and IG Group, despite them being underwater right now.

Stupid? Perhaps. But the rewards will be good if this view works. And the amount he's made shorting gold has covered some of the other indiscretions and recklessness. He stands by his forecast that gold will be back to $720 or below before too long.

Wednesday, 1 October 2008

Diverse, inclusive, innovative, ambitious

How wonderful. Flash wishes he'd got a job there. It looks like such a great place to work, so well managed.

Flash wishes all the former Lehman employees well but can't help the word hubris coming into his head.