Extract from interview between Sky News' Jeff Randall and Sir Victor Blank (Chairman of Lloyds Bank). - 19th January 2009
JR:
Why don't the banks come clean, why are they not telling us what's really going on?
VB:
Well this bank has come clean. We showed twelve months ago exactly what we had got in terms of any kinds of toxic assets.
JR:
Including HBOS?
VB:
We didn't own HBOS then.
JR:
But is everything out there now?
VB:
I believe that everything is out there as far as HBOS is concerned. They've made I think three or four statements over the course of the last year explaining exactly what their financial position is.
Friday, 13 February 2009
Peter Cummings: the loaded gun
I might start a collection of quotations from the directors of various banks over the last year or two. To get the ball rolling, here's one from Peter Cummings, HBOS' former head of corporate finance. According to the Telegraph, "Mr Cummings received a £1.8m bonus last year on top of his salary and has built up a £5.97m pension pot that will pay him a retirement income of £344,000 a year from the age of 60." Another profile of the guy that won't have to worry about money, while the millions of people affected by this bubble go down like flies, is from the Guardian, here.
http://www.bankofscotland.co.uk/corporate/pdf/propertydealleader11.pdf
(see page 2)
Peter Cummings: The loaded gun
"At Bank of Scotland Corporate, we and our partners have been
deliberately prudent in our approach to commercial real estate in
contrast to the unrealistic top-of-the-cycle behaviours we’ve been
witnessing elsewhere.
We’ve seen enough of finance in the hands of amateurs in real estate in the last
two to three years. And that’s been dangerous. The loaded gun
we’re now giving the next generation of promising property
entrepreneurs will absolutely score – for them and for us."
Peter Cummings
"It was hard work for
a team of unfit bankers"
(from page 1)
Priceless.
http://www.bankofscotland.co.uk/corporate/pdf/propertydealleader11.pdf
(see page 2)
Peter Cummings: The loaded gun
"At Bank of Scotland Corporate, we and our partners have been
deliberately prudent in our approach to commercial real estate in
contrast to the unrealistic top-of-the-cycle behaviours we’ve been
witnessing elsewhere.
We’ve seen enough of finance in the hands of amateurs in real estate in the last
two to three years. And that’s been dangerous. The loaded gun
we’re now giving the next generation of promising property
entrepreneurs will absolutely score – for them and for us."
Peter Cummings
"It was hard work for
a team of unfit bankers"
(from page 1)
Priceless.
Thursday, 15 January 2009
(Don't) make me a trader
Did anyone watch ‘Million Dollar Traders’ on BBC2 last night? If not, and you want a laugh, and you’re in the UK, it’s worth catching up with on the BBC iPlayer. Eight beginner traders with no previous experience were put in charge of $1m of someone else’s money, and left to get on with it after a two week induction programme.
I sat through it with bemusement and horror. Anyone who traded through the scary markets of summer 2008 will recognise some of the mistakes. One character bought British Gas – at 1204p – remember those prices? He did it just as the gas price peaked and then watched it lose 5% in about 5 minutes. Another decided to have a flutter on HBOS around the rights issue (a tactic I was guilty of) and then watched it collapse. Another bought Bradford and Bingley, about a month before they went to virtually zero. One had the (good) idea of shorting BA as the oil price spiked but only risked £2/ a point (or 200 shares) when her maximum trade size was up to £50/pt. It’s always good to start small and see what happens, but no-one seemed to suggest that if the trade was working she might want to add to her position.
On another morning everyone simultaneously went short and within 5 minutes they’d blown up 2 grand – not one person thought that having the odd long position to hedge their shorts might be a good idea.
And presiding over this fiasco was invisible, almost always absent hedge fund manager Lex Van Dam. There’s a name to conjure with. I think I should change my name to Lex Rabbit. He’d left a 29-year old sidekick in a glass office, who occasionally emerged to shout at the traders, particularly after Lex had got cross on the phone about how much of his money they were blowing up. There didn’t seem to be much ongoing coaching or support, nor did any of the traders seem to be discussing their ideas with the rest of the team. The guy who was in charge didn’t come round and chat to people about how they were getting on very much. And the traders mainly they sat around reading the FT, taking long lunches and staring at the screen in horror – now that’s something I can identify with. But it was a pretty scary idea to put 8 complete beginners in charge of $1m and let them loose in the worst bear market in 60 years.
They only seemed to be trading equities; no currencies, no indices, no commodities. It might have seemed to be a sensible strategy to limit the asset classes these novices were working with, and certainly made the world of trading more accessible to the viewer. But to be trying to run an equity-only fund, even if you could go short, in the summer of 2008 wouldn’t be a picnic for anyone. I’m amazed that Lex risked $1m of ‘his own money’ on this . It was less like Curtis Faith’s ‘Way of the Turtle’ and more like ‘Way of the Fool’ (I was going to say ‘idiot’ but I thought that would be a bit unfair and rude – it wasn’t those guys’ fault).
I don’t know really if the foolishness was more to do with Lex’s appetite for serious risk, or the lack of preparation the traders had. I’m sure some of them will come out in better shape than others. And it’s not a scenario I’d wish on anyone, although I’d had loved to have got my hands on some of Lex’s cash to trade with last year!
Everyone, except for Lex and his sidekick, seemed remarkably relaxed as the markets collapsed around their ears. Anyway it’s worth a look and most of you will recognise some of the scenarios all too well. A good lesson in ‘spot the mistakes’.
Trading Update
Talking of mistakes, I should probably have left those housebuilders and banks alone – Taylor Wimpey are sitting back roughly where I started, having had a round trip yesterday afternoon into more than £100 of profit and back again. I closed out most of the position and have left a small long in Barratt and Taylor Wimpey running. Apart from what I wrote earlier, the other reason for sticking with Taylor Wimpey (that is, if they survive) is that they have a US operation and may be one of the beneficiaries of an Obama housing stimulus package. But I won’t risk holding them below 18p a share. I’ve set wide stops on the banks (they’re just in at £2 a point) and I’m seeing them as a foolish hedge for the size of my short index position.
Game’s results were good but not good enough for the market, so that long has gone now too, and I closed out Activision yesterday for a £50 profit. I’ve kept my long DSG going for now, and I’m still short of Tesco.
The key thing I’ll be watching, when I get a chance, over the next few days, is the dollaryen and euroyen cross. If they spike up that may be a signal to close out my index and gold shorts and consider going long again. But for now, I’m happiest being mainly short, in small amounts. And my long dollar currency trades are galloping on, for now.
I sat through it with bemusement and horror. Anyone who traded through the scary markets of summer 2008 will recognise some of the mistakes. One character bought British Gas – at 1204p – remember those prices? He did it just as the gas price peaked and then watched it lose 5% in about 5 minutes. Another decided to have a flutter on HBOS around the rights issue (a tactic I was guilty of) and then watched it collapse. Another bought Bradford and Bingley, about a month before they went to virtually zero. One had the (good) idea of shorting BA as the oil price spiked but only risked £2/ a point (or 200 shares) when her maximum trade size was up to £50/pt. It’s always good to start small and see what happens, but no-one seemed to suggest that if the trade was working she might want to add to her position.
On another morning everyone simultaneously went short and within 5 minutes they’d blown up 2 grand – not one person thought that having the odd long position to hedge their shorts might be a good idea.
And presiding over this fiasco was invisible, almost always absent hedge fund manager Lex Van Dam. There’s a name to conjure with. I think I should change my name to Lex Rabbit. He’d left a 29-year old sidekick in a glass office, who occasionally emerged to shout at the traders, particularly after Lex had got cross on the phone about how much of his money they were blowing up. There didn’t seem to be much ongoing coaching or support, nor did any of the traders seem to be discussing their ideas with the rest of the team. The guy who was in charge didn’t come round and chat to people about how they were getting on very much. And the traders mainly they sat around reading the FT, taking long lunches and staring at the screen in horror – now that’s something I can identify with. But it was a pretty scary idea to put 8 complete beginners in charge of $1m and let them loose in the worst bear market in 60 years.
They only seemed to be trading equities; no currencies, no indices, no commodities. It might have seemed to be a sensible strategy to limit the asset classes these novices were working with, and certainly made the world of trading more accessible to the viewer. But to be trying to run an equity-only fund, even if you could go short, in the summer of 2008 wouldn’t be a picnic for anyone. I’m amazed that Lex risked $1m of ‘his own money’ on this . It was less like Curtis Faith’s ‘Way of the Turtle’ and more like ‘Way of the Fool’ (I was going to say ‘idiot’ but I thought that would be a bit unfair and rude – it wasn’t those guys’ fault).
I don’t know really if the foolishness was more to do with Lex’s appetite for serious risk, or the lack of preparation the traders had. I’m sure some of them will come out in better shape than others. And it’s not a scenario I’d wish on anyone, although I’d had loved to have got my hands on some of Lex’s cash to trade with last year!
Everyone, except for Lex and his sidekick, seemed remarkably relaxed as the markets collapsed around their ears. Anyway it’s worth a look and most of you will recognise some of the scenarios all too well. A good lesson in ‘spot the mistakes’.
Trading Update
Talking of mistakes, I should probably have left those housebuilders and banks alone – Taylor Wimpey are sitting back roughly where I started, having had a round trip yesterday afternoon into more than £100 of profit and back again. I closed out most of the position and have left a small long in Barratt and Taylor Wimpey running. Apart from what I wrote earlier, the other reason for sticking with Taylor Wimpey (that is, if they survive) is that they have a US operation and may be one of the beneficiaries of an Obama housing stimulus package. But I won’t risk holding them below 18p a share. I’ve set wide stops on the banks (they’re just in at £2 a point) and I’m seeing them as a foolish hedge for the size of my short index position.
Game’s results were good but not good enough for the market, so that long has gone now too, and I closed out Activision yesterday for a £50 profit. I’ve kept my long DSG going for now, and I’m still short of Tesco.
The key thing I’ll be watching, when I get a chance, over the next few days, is the dollaryen and euroyen cross. If they spike up that may be a signal to close out my index and gold shorts and consider going long again. But for now, I’m happiest being mainly short, in small amounts. And my long dollar currency trades are galloping on, for now.
Tuesday, 13 January 2009
Don’t splash the cash, Flash
I’m moving into a busy period at work, and this has coincided with a retrenchment in stocks, as more and more grim earnings and gloomy outlooks hit the headlines. So I’ve cut back my exposure on the long side, reducing the number of positions I’m running, so hopefully I don’t come home to nasty shocks. My overall position is ‘neutral’, – I have sufficient long equity positions left but I also have two short index positions running – short S&P from 910 and short FTSE from 4515, to which I added a Dow short on Monday evening.
Cutting the retailers down to size
I’ve taken profits on a lot of my retail longs except for Game Group and DSG – I’m waiting for results – Tuesday morning for Game and DSG. So no more Sainsburys for me at the moment. I’ve added to my short position in Tesco – it’s just a hunch. I’m not sure that their results, also due out on Tuesday morning, will hold up. I doubt they’ll hold market share. They’re already trading on a P/E ratio of 13.4, which looks a bit high to me, given that profits this year are likely to be heavily squeezed. On the other hand, wholesale prices will be tumbling so there are plenty of opportunities to offer good deals – I saw a 50p loaf of bread the other day. But Tesco are squeezed between the deep discounters and the more upmarket rivals, with a big overseas empire that is vulnerable to local competitors. And they have a lot of debt.
Leaving Gold in the cold
My long Gold trade got chucked out this morning for a loss of over £150. So I’m not trading back into that for the moment. The dollar is continuing to strengthen and I don’t fancy buying gold when the dollar looks so hot. I may revise my view if Gold gets back and holds above the 830 level; as I’ve argued before, I think there may be some case for buying gold on the grounds of countering currency debasement. If the purchasing power of money decreases because the government pumps money into the economy through quantitative easing, and borrowing is cheap, and demand goes up, then costs can escalate into hyperinflation, because money is effectively worth less. So in that scenario buying gold as a ‘store of value’ might make sense. But it depends on banks being willing to lend and I’m not sure I see a serious thaw in the credit markets. In the meantime businesses are laying off staff and going to the wall every day.
So if we continue to see a deflationary environment (and I’m sticking to a prediction of oil at $25 - $30 a barrel between now and the middle of the year, but haven’t quite managed to trade it), why would you buy any commodity futures? One could equally argue that there isn’t any reason for gold to stay so high, given how much all the other commodities have collapsed. So it’s a difficult call – deflation now, and inflation later, as governments print money?
In the meantime gold could drop back even further, tracking dollar strength and the falling oil price, so I put on a small short when it held below 826 this afternoon. Looking at the chart, if gold can’t regain and hold the 829 – 833 level then it could easily slide to 800 - 815 or below, and it’s made continuously ‘lower highs’ over the last nine months, which suggests, after today’s massive move, that a longer term downtrend is intact. One interpretation of that is in this chart.
The way the euro is dropping against the yen and the dollar tells me that cash is still king – traders are nervous and risk appetite is low. So I’m sticking with my short EURUSD and short EURGBP positions, which have made me a bundle already, and I see no reason to close them at the moment.
If we see signs of inflationary pressure, that might be a moment to begin to short the dollar. But right now I can’t find evidence for this view. Inflation would depend on people actually getting out, spending and lending money. In this environment cash preservation and debt reduction (deleveraging) seems to be the order of the day. In the UK, I can imagine that as lower interest rates work through, some sort of recovery in consumption might be on the cards by mid-year. That’s why I have some bullishness on some underperforming retailers like Debenhams, DSG and Topps Tiles who are still trading at dirt cheap levels – so if they can survive, they could be great buys, if you’re willing to gamble that in six to nine months the recession will bottom out and that they’ll make arrangements with their creditors to stay afloat in the meantime. But rising unemployment will be a real drag on spending, so consumer stocks are very risky to buy right now – and that’s reflected in their apparently cheap prices.
Keeping it small and simple
Because I’m not going to have so much time to trade over the next couple of weeks, I’m trying to keep it simple and scale back, running much less risk than I have been over the last few weeks.
I have, however, added to my longs in cheap housebuilders Barratt and Taylor Wimpey (who are due to give a trading update on Tuesday morning but who have been on the verge of restructuring their debt covenants). And I speculatively bought into a couple of UK banks on Monday morning. There’s a rumour doing the rounds that the government is on the verge of creating a ‘bad bank’ in which the banks’ bad assets can be chucked – which could be positive for lending and liquidity – so I’m expecting a bit of a bounce – and that could also be good for the housebuilders, particularly those that are trading at multi-year lows.
In general I’m taking cash off the trading table, and waiting to see how the earnings figures out of the US look over the next few days. I’d rather keep my money in reserve for now. If earnings look bad but not terminally bad I may switch round and go back long, particularly with the potential for a bit of Obama-inspired optimism over the next few weeks.
Cutting the retailers down to size
I’ve taken profits on a lot of my retail longs except for Game Group and DSG – I’m waiting for results – Tuesday morning for Game and DSG. So no more Sainsburys for me at the moment. I’ve added to my short position in Tesco – it’s just a hunch. I’m not sure that their results, also due out on Tuesday morning, will hold up. I doubt they’ll hold market share. They’re already trading on a P/E ratio of 13.4, which looks a bit high to me, given that profits this year are likely to be heavily squeezed. On the other hand, wholesale prices will be tumbling so there are plenty of opportunities to offer good deals – I saw a 50p loaf of bread the other day. But Tesco are squeezed between the deep discounters and the more upmarket rivals, with a big overseas empire that is vulnerable to local competitors. And they have a lot of debt.
Leaving Gold in the cold
My long Gold trade got chucked out this morning for a loss of over £150. So I’m not trading back into that for the moment. The dollar is continuing to strengthen and I don’t fancy buying gold when the dollar looks so hot. I may revise my view if Gold gets back and holds above the 830 level; as I’ve argued before, I think there may be some case for buying gold on the grounds of countering currency debasement. If the purchasing power of money decreases because the government pumps money into the economy through quantitative easing, and borrowing is cheap, and demand goes up, then costs can escalate into hyperinflation, because money is effectively worth less. So in that scenario buying gold as a ‘store of value’ might make sense. But it depends on banks being willing to lend and I’m not sure I see a serious thaw in the credit markets. In the meantime businesses are laying off staff and going to the wall every day.
So if we continue to see a deflationary environment (and I’m sticking to a prediction of oil at $25 - $30 a barrel between now and the middle of the year, but haven’t quite managed to trade it), why would you buy any commodity futures? One could equally argue that there isn’t any reason for gold to stay so high, given how much all the other commodities have collapsed. So it’s a difficult call – deflation now, and inflation later, as governments print money?
In the meantime gold could drop back even further, tracking dollar strength and the falling oil price, so I put on a small short when it held below 826 this afternoon. Looking at the chart, if gold can’t regain and hold the 829 – 833 level then it could easily slide to 800 - 815 or below, and it’s made continuously ‘lower highs’ over the last nine months, which suggests, after today’s massive move, that a longer term downtrend is intact. One interpretation of that is in this chart.
The way the euro is dropping against the yen and the dollar tells me that cash is still king – traders are nervous and risk appetite is low. So I’m sticking with my short EURUSD and short EURGBP positions, which have made me a bundle already, and I see no reason to close them at the moment.
If we see signs of inflationary pressure, that might be a moment to begin to short the dollar. But right now I can’t find evidence for this view. Inflation would depend on people actually getting out, spending and lending money. In this environment cash preservation and debt reduction (deleveraging) seems to be the order of the day. In the UK, I can imagine that as lower interest rates work through, some sort of recovery in consumption might be on the cards by mid-year. That’s why I have some bullishness on some underperforming retailers like Debenhams, DSG and Topps Tiles who are still trading at dirt cheap levels – so if they can survive, they could be great buys, if you’re willing to gamble that in six to nine months the recession will bottom out and that they’ll make arrangements with their creditors to stay afloat in the meantime. But rising unemployment will be a real drag on spending, so consumer stocks are very risky to buy right now – and that’s reflected in their apparently cheap prices.
Keeping it small and simple
Because I’m not going to have so much time to trade over the next couple of weeks, I’m trying to keep it simple and scale back, running much less risk than I have been over the last few weeks.
I have, however, added to my longs in cheap housebuilders Barratt and Taylor Wimpey (who are due to give a trading update on Tuesday morning but who have been on the verge of restructuring their debt covenants). And I speculatively bought into a couple of UK banks on Monday morning. There’s a rumour doing the rounds that the government is on the verge of creating a ‘bad bank’ in which the banks’ bad assets can be chucked – which could be positive for lending and liquidity – so I’m expecting a bit of a bounce – and that could also be good for the housebuilders, particularly those that are trading at multi-year lows.
In general I’m taking cash off the trading table, and waiting to see how the earnings figures out of the US look over the next few days. I’d rather keep my money in reserve for now. If earnings look bad but not terminally bad I may switch round and go back long, particularly with the potential for a bit of Obama-inspired optimism over the next few weeks.
Monday, 15 December 2008
A lesson in trading discipline
The latest missive for paddypowertrader:
In my first blog I wrote that one key indicator of risk appetite would be a reversal of fortune for the yen. That’s exactly what’s happened last Wednesday. Take a look at the Euroyen cross – it jumped out of a key downward trendline. Short Euroyen is a deflationary trade – it’s a sign that risk appetite is on the decline and that Japanese investors are selling their assets held overseas and bringing their cash home; it’s also a sign that the carry trade is breaking down. A reversal is very significant, especially when combined with the other bullish indicators as the indices push up above their 50-day moving averages. So I bought some EUR/JPY at 11942 and by Thursday evening it was comfortably trading above 12200. Nice trade. So I thought to myself that I’d need to watch it carefully but if it holds above the 12000 level that’s a further sign that we could have seen a bottom in equities, for now.
So I went to bed on Thursday night smugly looking at a growing three figure profit on the euroyen cross, thinking about all the nice Christmas presents I could buy with the proceeds, which in turn would keep the high street humming and my retail longs winning. But then the Senate voted down the auto bailout and EUR/JPY plummeted an hour to two to 200 points below where I went in, taking out the position. I’d put a stop at 11972 above where I went in so I made just £30 on that trade. And because my position size was so small (just £1/pt) I couldn’t do what Mr FT usually does on the currencies and take some profits when the trade was firmly in the black, just leaving a small long running. It was all or nothing. In my case, I got next to nothing.
Now here’s the really daft part. I was almost speechless when I found my P/L figure so unexpectedly reduced on Friday morning, even though most of the loss was down to the loss of that single EUR/JPY trade. So at 8am set about selling off half of my winning equity trades, in a panic about potentially losing even more profit. My retailers and other equities had fallen back a bit, but a lot of them were well off my stops, and as the news filtered through that some sort of TARP-inspired rescue would transpire, the markets recovered sharply during the day. So I compounded my panic by cutting back the risk, even going short on FTSE and the Dow momentarily before the indices bounced back.
All this is a tricky call. It’s easy to add risk – building up positions - when the market is moving in the direction you’d like, and the profits just appear to multiply. But the more risk you take on, the more pain and shock you feel when the inevitable reversal happens. But that’s exactly what stops are for and the trick is to be disciplined – if you’ve built up a position over time you can trail some stops near high points but leave others with wide margins so that the whole trade isn’t chucked out by the volatility. It’s also a lesson in the risks involved in leaving trades running overnight – and a warning about being too smug about having called a move correctly.
And having been stung I didn’t have the guts to buy back in to the EUR/JPY – look how quickly it bounced back! A sign that there’s still some desire out there to buy equities, I think. I might have another go at it later in the week.
Trading Update
This week I’m still running that long gold position from $777, and I’ve added to it a bit with additional longs from $789 and $803, all protected with stops; I’ve moved the stop on the main gold trade to $790. As far as I can tell, it’s dollar weakness that is pushing up gold, together with a bit of a revival in other precious and industrial metal prices on the back of that theme about infrastructure and automobile production. I still have a basket of equities that I’m long of, although my long positions in Barclays and Man Group hit their stops (above the entry point) in Friday’s volatility and I’m disinclined to buy back in. I’m also looking to see if the long EUR/GBP trade is going to get squeezed, particularly if the various bits of eurozone data due out are weak (I expect they will be). So I’ve set a small sell order in EUR/GBP below the current trading range at 8930, with a tight-ish stop just 40 points away at 8970. And I’ve got a long FTSE position from 4266 and a long Dow position from 8430, both with stops set just above their entry point.
Wednesday, 26 November 2008
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.
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.
Thursday, 20 November 2008
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.
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.
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