Splashing cash and watching rabbit ears

Flash's latest blog for paddypowertrader:

Splashing the cash and watching the rabbit ears

I’ve had a decent couple of trading days since the last blog. My risky retailers gamble paid off quicker and better than I expected; Darling’s VAT cut fuelled some speculative buying of beaten down shopkeepers, something I didn’t fully anticipate.

My thinking at the moment is that a combination of Christmas cheer, end of year relief, and Obama anticipation could be just enough to keep equities afloat into the New Year. So for the time being I’m happy to stay running with my equity longs, and I’ve been building them up a bit. In the retail sector, I have long positions in Kingfisher, Sainsburys, Marks and Spencer and Morrisons supermarkets, and at the start of Tuesday I added longs in Vedanta Resources, Game Group, Barclays and BT.

The Fed splashes out

Now that quantitative easing (a fancy term for printing money) has seriously taken hold, it’s led me to revise my opinion on gold. The Fed has been working the printing presses hard over the last few weeks. How do we know this? Well, they’re not issuing bonds as fast as they’re buying up assets, bailing out banks and underwriting bad debts. So rather than raising cash from the wider market they’re just pumping out dollars. An awful lot of dollars. This particular bailout is going to cost the US more than it cost them to do World War Two. One analyst says that it’s the biggest, most expensive programme of public spending in American history.

Going for gold

Set against the inflationary effect of printing money, credit remains tight and demand is muted, so this will have a restraining effect on prices. So I’m not expecting gold to go back to $1000 but there will continue to be some upward pressure if the dollar continues to weaken; and nervous investors are looking for somewhere, anywhere to put their money that might help it to retain its value. Commodity prices in general are likely to rise if the dollar weakens, which will also help gold.

So I’m staying long gold for now, with half my gains from my £2/pt long from $729 protected with a stop at $798, and I added to my position this morning by buying another £1 at $817, with a stop set at 798. This is because I’m anticipating a bit more downward slippage for the dollar, particularly against the yen and the euro, and because I think commodity prices in general are showing signs of firming up over the next few months.

Don’t believe the eurohype

I missed out on most of the currency moves; I was away from the screen for most of Friday and Monday, and so didn’t find a good point to get in. There were some great trading opportunities on offer in EUR/JPY and EUR/USD, but I just wasn’t there at a moment I felt confident to put the trade on. Despite the monster gains in the indices since last week, the dollar is continuing to weaken against the yen. My GBP/USD short was stopped out for a £500 gain at 1.53, and my EUR/GBP short is finished too – stopped out for around £50 of profit. But, looking ahead, I’m still inclined be bearish on the euro, even against sterling – bits of the eurozone are in such poor economic shape that even if France, Finland and bits of northern Europe only get ‘mild’ recession, other places – particularly eastern and southern Europe will have a seriously dragging effect. Unemployment, plummeting property prices and very weak demand will leave all currencies battered, but it’s hard to see how European Central Bank will be able to manage the very different needs of its constituent countries. These tensions are going to cause some structural problems for the eurozone, which might not be able to shake off recession as fast as the UK and the US. So I’m looking for an entry point to go short EUR/GBP again.

Is the dollar’s run done?

Does all this mean the dollar will weaken substantially? I’m not so sure. If credit wasn’t so tight, then we’d see huge capital flows into the economy, and soaraway inflation. But perhaps the money being printed is offsetting the money that has been blown up in the process of deleveraging. Trillions of dollars have drained away as share prices have collapsed, banks have written off assets and complex derivative bets have gone horribly wrong. There’s also the effect of ‘dollar repatriation’ where investors sell off risky assets overseas and stick their money back under the mattress at home. A lot of funds have been selling hard, because everyone wants their money back, partly to avoid defaulting on their debts. Everyone, Flash Rabbit included, is conserving as much cash as they can.

And a bit of inflation, in a period where demand is weak, could be a good thing. Inflation means that the value of debts go down quicker over time, relative to wider price rises; in times of inflation, basically debts ‘deflate’. Plus lower interest rates will work through. It’s going to get cheaper to borrow money, if you can find someone who’s willing to lend you some. Across the developed world, fiscal stimulus is temporarily putting a bit more cash in people’s pockets – much needed cash. As interest rates fall, households and businesses will find their debts easier to pay, with more disposable income trickling back into the economy.

Beware the ominous rabbit ears

But – just take a look at the long term chart on the S&P 500, which looks suspiciously like a classic ‘double top’ or pair of rabbit ears. We are back at the 800 levels of 2003 and 1997. Doesn’t look like it’s headed back up to 1500, does it? The best we can hope for is a sideways move or some sort of slow ‘slope of hope’. There’s some resistance at the 750 – 800 level but if we drop below this then we are a looking at 500, or much, much worse.



And yet – a lot of equities are still trading cheaply, even in relation to reduced future earnings. And governments are pumping out the policies and cranking the printing presses like there’s no tomorrow (because perhaps there isn’t).

By the end of January we could well see another 2000 point move on the Dow – and I’m not confident to say in which direction it’s likely to be. Remember the Dow was trading well above 10000 eight weeks ago! And it’s precisely the existence that ‘wall of worry’, that uncertainty and anxiety, that makes me think that this is a good opportunity to be cautiously bullish. If you can withstand the inevitable volatility, my view is that for a good number of large cap equities, the risk/reward ratio is to be found more to the upside than the downside, at least for the next couple of months.

Bargain basement or liquidation sale?

This is Flash's latest blog over at paddypowertrader:

One of the equity sectors I’ve spent time trading profitably in and out of over the last few months is UK retail. UK retail, I hear you ask. Are you insane? Perhaps, but I’ve made a few bob on some long positions in big, unloved retailers over the last few months. Not by my usual ‘buy and hold’ strategy but by buying on dips and looking for peaks to sell.

Take DIY retailer Kingfisher, for instance. Since mid-June it’s been trading in a 96p – 140p range. By buying near the bottom of that range and selling when it gets up to the high 120s or 130s I’ve picked up £30 here, £40 there. Not too bad. Kingfisher is one of those unloved businesses that is likely to do well in a buoyant housing market and in a ‘Changing Rooms’ era when home improvement, paid for by borrowing and equity release is all the rage. Now that house prices are plummeting, just like companies that sell carpets and ‘big ticket’ furniture items like sofas, they’re not doing nearly so well, so the market has already priced in a considerable reduction in their profits.

Like half the rest of the spread betting community, I made a few bob shorting the likes of Topps Tiles, Land of Leather and DSG Group earlier this year. But Kingfisher is interesting because as well as mega-home improvement stuff, they also sell everyday stuff – tools, paint, plants, Christmas lights. The B&Q brand is solid and they’ve been offering some good deals recently to lure the punters in. And their shares have consistently bounced when they get down towards the bottom of the 96p range. So having sold my last lot of Kingfisher at about 110p, I bought some more this morning at 102p.

Another lot I’ve been watching are the supermarkets. When Morrisons got down towards their recent low of 225p I dived in and bought at £3 a point from 229p. In spite of all the carnage in the wider indices they’re still trading at around the 250p mark. Sainsbury’s is the same. Bought in mid-October about 250p, sitting at 270 to 280p. Now these aren’t big gains but so long as the price holds off the yearly lows there’s some money to be made. And if we do eventually see a bounce (which I have to say, I’m beginning to give up hope on), these are great levels to have got in at and bought some shares. And I’ve protected all these positions with stops so I can’t lose any money.

Retail stocks are a gamble at the best of times. There are so many factors that affect their price – fads and fashions, stocking levels, profit margins, whether they have the right buying policy (look at the mess that M&S made of food retail earlier this year); but there are also residual values, and there are dividends to be had. Retailers also have assets. And Marks and Spencer, according to some analysts, is trading at around the residual value of its property portfolio. Now if they can make some money by aggressively discounting (and judging by the number of M&S bags I saw on the train home this afternoon, they must be doing something right) to be buying into a massive blue chip global consumer brand at this level does begin to look like a bargain basement price.

And I’m watching Game Group (I’ll do another blog about why video games are worth keeping an eye on), Debenhams, and even that very unloved, almost unprofitable outfit French Connection. Mrs Rabbit says that their coats this season are exactly the right shape. In the US, I’m watching Wal*Mart and cheapo retailer Family Dollar.

Now, this is seriously contrarian. We know that the consumer is being hit hard by the downturn; unemployment is rising; disposable income contracting. But in a world in which commodity and energy prices could easily plummet another 25%, and in which ‘just in time’ delivery means that retailers don’t have to carry the same amount of stock that they used to, which means that overheads are rapidly falling, it would be a very poor retailer indeed who couldn’t still make some money in this period. And today’s retail sales figures, whilst a bit unbelievable (only a 0.1% decline in Oct?) might just suggest that there is more resilience in the high street than the consensus suggests.

So with a slightly churning feeling in the pit of my stomach, I went long of M&S today from 205p, and I’m considering buying a few hundred M&S shares for my ISA.

I have to say that it makes me feel anxious writing this, but if I was Warren Buffett (or even Philip Green) I’d be out with my cheque book buying up sackloads of high street brands in anticipation of better times in two or three years time. As it is, I’m just trickling in a few long positions (£1 here, £2 there) and seeing what happens. I’m not ready to bet anything on a rise in the wider indices though.

In wider trading, I’ve cut back. I’m still running a short EUR/GBP position, a short GBP/USD position, and that long gold trade from $129. I’ll keep you all posted about how I get on.

Meltup, and meltdown

Total nightmare. At least Flash had the sense to buy some gold this morning. And is Citibank safe?

Reuters has this:

NEWS
- G20 leaders head to U.S. for summit to address worst financial crisis in 80 years
- Euro zone data shows bloc went into recession in Q3, first time since common European currency formed
- U.S. retail sales suffer record decline in October
- Citigroup Inc to shed 10 pct of global workforce. Sun Microsystems Inc cutting 5,000 to 6,000 jobs
- GM's Opel seeks 1 billion euros in German state aid, Western Europe car sales plunge 15.5 percent in October
- Freddie Mac reports record $25 billion quarterly loss, draws on $100 billion Treasury Department lifeline
- U.S. Fed Chairman Bernanke says central banks worldwide ready to do more to support faltering growth - U.S. Senate to take up auto bailout bill, unemployment on Monday
- U.S. banking regulator unveils plan to prevent about 1.5 million foreclosures, breaks ranks with Bush administration
- Pakistan asks International Monetary Fund for $9 billion bailout
MARKETS
- U.S. stocks fall, Dow <.DJI> slides 337.94 points, or 3.82 percent. Dow slides 5 percent for the week
- European stocks close higher as oil shares storm ahead
- Stock markets up in Asia <.N225>, but pare sharp gains by half
- Oil drops 2 percent as Euro zone enters recession
- Interbank lending rates for dollars up for second day
- Dollar rises against a basket of major currencies, falls against the yen
- Gold futures up more than 5 percent in heavy buying ahead of G20 summit
QUOTES
"By working together, I'm confident that with time we can overcome this crisis and return our economies to the path of growth and vitality." - U.S. President Bush in his weekly radio address to air on Saturday.
"The funds and guarantees that may be required would be invested in product development and manufacturing sites in Germany and would by no means be spent outside of Europe." - Opel statement.
"You'd have to be a brave investor to be a bargain hunter now. There are bargains out there, but you'd have to be prepared to hold them for a considerable amount of time." - Peter Dixon, an economist at Commerzbank in London.
"People are going to wait on the sidelines and see what comes out of (the G20 meeting) before they start to take a view with respect to what's going on next week." - Robert Blake, senior currency strategist at State Street Global Markets in Boston.
"Frankly, we at Dow are looking at an '09 that looks like a pretty protracted global recession, probably going into 2010." - Andrew Liveris, chief executive of Dow Chemical Co , the largest U.S. chemical maker.
EVENTS
Saturday, Nov 15
WASHINGTON - President George W. Bush and French President Nicolas Sarkozy are expected to meet world leaders at an international financial summit of G20 nations to examine ways to overhaul the financial system (Compiled by World Desk, Washington, +1 202 898 8457) Keywords: FINANCIAL/SNAPSHOT

Nassim Nicholas Taleb - angry with economists

Rifkin on networks instead of markets

His manner of delivery is a bit irritating, but his ideas are right on the money.

Jeremy Rifkin on energy networks

Equities - quick update

(image from LOLFED)


A decidedly mixed bag of trades over the last week or so. The crucial call is whether we are seeing the death throes of a fake bull market, or a determined effort to bottom out the market ahead of some sort of recovery, with determined government intervention designed to boost confidence and avoid financial armageddon. Flash favours the latter view, but the evidence is mixed and he needs to guard against too much optimism.

A wave of Obama-inspired euphoria flushed over the market at the end of last week, bouying up equities, but it's not been enough to offset the bleak, bleak outlook for mega US stocks like GM and AIG. And Fannie Mae unveiled another crock of shite today, enough to sour the mood and force traders into swift profit taking. Unfortunately Flash was out so he missed the chance to join that party, sacrificing a chunk of cash to the twin gods of misplaced optimism and smug complacency.

Flash bought into a bit of clean energy bounce on the back of Obama, buying into the Powershares Wilderhill Clean Energy ETF towards the end of last week- that trade climbed into profit but it's now back underwater. Flash has a stop and knows how much he'll lose if it plummets. Flash also bought some Johnson Controls shares, which were looking pretty cool, but as they're a major supplier to GM the contagion from GM has spread to them today and he got chucked out of that trade for a hundred quid loss. What is looking more positive are some of the large cap stocks that Flash bought into - British Airways is up nearly 40% from where he bought them at 115; Kingfisher is holding up from where he went in at 103; Firstgroup has been fantastic - up to the upper 400s from a purchase point of 412; BHP Billiton up around 25% from where he bought them at 828; M and S in the mid '60s from an entry point of 220; Game Group is working well.

Another blog to come about the screen economy - video games, cinema, and which stocks Flash favours in this sector. He's taking a close look at Pinewood Shepperton at the moment - the stronger dollar means that it'll be at least 20% cheaper than 2007 for Hollywood to come and shoot in the UK over the next 12 months, and there's always a James Bond-influenced bounce to consider.

Flash has long index positions firmly entrenched from - 3699 (FTSE); 8356 (Dow); 870 (S&P). He's added bits and pieces to them on the journey up and down, but not been as nimble as he should have been in getting the cash out of these calls.

So he's reasonably happy, but it's not getting any easier. Perhaps it would just be better to go back short?

Flash hits paddypower

Flash has got a new guest spot on the paddypowertrader blogs, one of the sites that he stalks for information and ideas. You can read his first blog for them here.