US Stocks oversold in Bear Market rally

So watch for a sell off, could be anytime soon. Stocks rallied after Treasury Secretary Tim Geithner announced the Treasury plan (23rd March 2009) to purchase toxic assets from banks. To put simply a purchase agreement in which the American tax payer will guarantee toxic bank assets, with a small percentage of private investors (also guaranteed by the taxpayer) will contribute in the purchase. This is to clear out the banks depreciating assets, hence (in theory) get the banks to lend to each other. In effect an attempt to free up global interbank lending which in turn then will re-lend to the consumer. Of course the plan won’t work. Suffice to say stocks rallied. Although the rally is essentially an artificial stock rally as economically the US is still very weak (the US shrank by 6.8% last quarter).

Also Treasury yields hit negative, inflation could be on the rise with the US Dollar being sold off. Note also gold is rising. I think most traders gut feelings (trust the gut…it’s always right) something is going to give with the US government, as it becomes a monetary expanding debt binged monster.

The US stocks rallied in almost every industry, good to note that the banking sector rallied although somewhat muted. Note the 8300 line (US banks) in my opinion doesn’t show a sustained recovery, so it has to be put into context that the Tim Geithner plan is related solely to banks, not the broader economy. In may be a long time before banks return sustained profit as most of them are operating as zombies. In conclusion there is no major rebound in the banking sector, even with the rally.

The dow and s&P500 are both now sitting above the 50 day average and touching the upper Bollinger band, the RSI (although better suited for stocks) shows overbought signals.

Global currencies devaluing – protectionism end games

Ok, my post here was essentially a caffeine (yes caffeine) induced conversation with a friend who trades in the market. Basically we were amazed (as was everybody) as US taxpayers paid AIG executives bonuses, although not entirely surprised. We tried to imagine the possibility of the US government reversing it’s ‘bailout everybody’ policies; to protect it’s own wealth (taxpayers monies). So it is a fantasy. Nothing more. The reality is that the US (with other countries already beginning the process) is now on a mission to destroy it’s currency. This quantitative easing (printing money) and buying up mortgage back securities and any other securities tied to the credit markets, is essentially a massive attempt at flooding the USA and world with cash. Courtesy of the Federal Reserve under a self confessed money printer Ben Bernanke.

This is of course will lead to inflation even in deflationary environments, but the other factor is the protectionist aspect as all global currencies are been devalued at the same time. So it could be wise to assume that a huge debasement in global currencies and their value is the first shot in a protectionist agenda.

As the US attempts to self capitalize, outflows of investment from USD and USD related assets will occur. Today I listened to an economist at a certain big bank explaining the benefits of the massive money printing exercises by the Federal Reserve, but again he missed the point that inflation will trump any internal inflows of cash into the US economy (hey like Zimbabwe!). But as discussed with all the global Central Banks attempting to do the same as the Federal Reserve like the Bank of Japan and Bank of England; by collapsing their currencies they will of course force import prices up. So it’s a terrible situation for the global economy. But expected.

So, from a trading perspective it’s time to look at inflation protective buys. Obliviously gold, oil and the few currencies that still show a degree of value, at this point the Japanese Yen although I would say short term. Stocks, such as bigger oil refinery and produces, some bigger mining companies. Pharmaceuticals, although debased currencies will kill the import market on drugs (hence effecting company profits) although depending if there is crisis such as a severe flu out break. Or watch for tariffs removed for flu drugs. Some ETF’s, say long term purchases on Japaneses stocks. Still if you trading short term, ETF’s on silver, index put warrants on all major indices. Short US banks.

The USD/YEN – notice the USD about to punch through 93 Yen support, then it will reside in the trading range of 83-92:

Oil:

Gold against the USD (self explanatory):

2009 – Get ready for massive deflation, US dollar destruction and the global economy slump further into recession

A trader from Japan noted in a report that he felt that volatility had diminished, or at least volatility had narrowed within a range. The trader may be correct, volatility has tone down somewhat, but the markets still represent dysfunction. Not to forget the oil price, that decided to move back into the high 40’s on the back of the Israel invasion into Gaza Strip – remember the oil spike is not so much on the Israel blockade and attack on Gaza, the oil spike is on the back of Iran (and a wider middle east conflict) and it’s response.

But the global economy is falling into a sharp downtrend, which is now unstoppable (until it reaches a bottom). Hence massive deflation is on the horizon, no matter how much is spent and how much stimulus is given out, confidence in the global economy has been shattered, therefore a stimulus package is essentially a waste of money and it is a token gesture at best

So it could be assessed that global stock markets could decline in a massive sell off, under the weight of very poor corporate earnings, the bubble bursting in US Treasuries and a substantial sell off of the US dollar (capital flight out of America); and mix in a broader conflict in the middle east. We could be a the edge of a huge price decline on everything, hence a massive wave of deflation beginning at the end of the first quarter of 2009.

Traders and some commentators are now looking at US Treasuries as the next bubble to burst and a bigger slide in the US dollar. As Obama will attempt sell a muted (with tax cuts) stimulus package to congress, regardless it will put pressure on the USD – and I think this time, as opposed to the USD recovery in mid 2008, it will definitely get crunched very hard in 2009.

But in saying that massive deflation is on the horizon also means the rise in the Japanese Yen, Gold and now possibly Oil. With money outflowing out of stocks, Treasures and USD, it will end up with the very few safe havens left.

Global indices generally were flat into 2009, the ‘feel good’ rallies in the first week of 2009 started from Wall Street, although Asia was subdued, now Europe’s main Indies rallied as the US stocks fell. These rallies won’t last, in fact they are barely rallies. There are speculative at best, as new year profit driven trading begins – but the bad news is just settling in. As mentioned, the narrow volatility range now could indicate that the market is waiting for the next shoe to drop which could be a nasty deflation slump, with inflation remaining on food and other essential amenities.

Confused markets, deflation/stagflation threats and our old friend gold.

The recent rallies in global stock markets occurred from one market report, which was that Citigroup had been bailed out. The ‘too big to fail’ argument was the main driver of the bail out package, which then drove oversold markets from Germany to the UK and of course Wall Street to rally. It is the same market rhetoric from institutional players, ‘restore confidence’, ‘restore psychology of the markets’ and so on. We have to remember as the deal to save Citigroup was revealed to the media, also reported was the US property markets continue to fall (3.1%) and across to Europe where German business confidence is down from 90.20% to 85.80%. I still think continued stock market rallies into 2009 maybe unlikely; and if we talk about stabilization, especially in the market and fiscal stimulus and bank bail outs; the epicenter of the economic collapse in the US stems almost solely from a depressed housing market linked to the credit markets. The equation just doesn’t calculate. So the whole financial system can be bailed out, a trillion plus pumped into the global markets. Yet, if they calculate a fiscal stimulus to just rally the equity markets, fill banks up with cash; then it is assumption, and most probably a misguided one (as they all have been), that a flow on effect will occur to reinflate a depressed housing market. This has not happened, the housing market is still declining.

FTSE, US markets, German DAX all rallied on Citigroup bail out. Markets still 30% and 40% over sold.

In saying that the closest correct calculation (on the premise that throwing money into the financial system is going to work). Would be that the governments of the world should buy every mortgage on the planet and shift them onto their balance sheets – and guarantee defaults (on every mortgage) to keep the markets stable. Otherwise ‘bailouts’ especially for financial institutions is an unbalanced and flawed market assumption. The deluded idea that inflated equity markets will instill ‘confidence’ in the broad market is dangerous, hence the market volatility. But in reality throwing money at the problem is a pointless and wasteful exercise.

I don’t believe in a fiscal stimulus or bail outs, of course ‘the too big to fail’ policy is inevitable part of policy in capital markets. But AIG is a mess and I suspect Citigroup will prove to be problematic too.

The market is still too cautious to believe that a fiscal stimulus and ‘bank bail outs’ is going to work, rallies are somewhat subdued and contained. With oversold markets yes sporadic rallies have occurred, but not significant prolonged rallies going into the end of the year.

Can the deflation in the global market be stopped? I guess this is the global financial experiment that is occurring, with President elect Barack Obama pledging to throw 1 Trillion + into the US economy, the UK with a 40 billion stimulus and every other country doing the same. We shall see.

But of course governments tapping surpluses (commodity producing nations) that they may have had, or sovereign/future funds. They will eventually drain them too nothing, increase taxes and cut public services and health care. So the taxpayer will foot the bill for everything and still get shafted.

As discussed in Watch Global Currency markets. Country bankruptcy ‘endgames’., we are either going to see stagflation come back quicker, maybe at some point in 2009; or there will be a slew of countries going bankrupt; and become deflated, poor economic wastelands. From the middle east through to Europe and quite possible at some point the United States. Either way, destroying their capital reserves and falling into deficit is a recipe for a greater economic disaster.

From an investors point of view I am still bearish on the Euro, GBP and the AUD and all South American currencies. I still think the US dollar has life in it, especially against the EURO and the AUD, PESO (Argentine). But the Yen could be the only currency with sustained buying power on the back of risk aversion into 2009. I only say that the YEN has a buy on it because Japan can’t really go any lower as an economy. Until Europe, the US and major parts of Asia join Japan in a deflated slump; the YEN still holds value against most currencies. One should watch the USD into 2009, still viable against the GBP, AUD, NZD; we could see major sell offs of the AUD and NZD, also the GBP and EURO. If the Federal reserve cuts rates to 0%, then most of the global central banks will cut very aggressively emulating Fed policies (as they all have been timing ‘joint’ rate cuts). The commodity producing currencies will get destroyed against the Greenback.

Stock markets are still volatile, so I am in nothing in stocks. I mentioned Biotech in Brace for a global recession (update 2) – Japan in recession, rest of Asia next. Next stock market bull run 5-8 years., The biotech industry will shrink significantly from lack of finance as will junior miners and the mining industry in general. But with the economic ‘crisis’ still front page material; we are forgetting potential virus related crisis’s. Bird flu could still reappear refer to World Crisis scenarios for the 21st century – Bird Flu (H5N1) and other pandemic Virus concerns, or other pan epidemic virus. I wouldn’t completely live in an arrogant bubble assuming that the economic crisis is ‘the’ crisis. We have a few lining up, and the bio viral threat is one of them.

But our old friend gold has held it’s own, static in the 730 – 744 range now rallying (with the stock markets) to highs of $829. Gold in someways has been solid, not moving much with volatility, nor suffering major sell offs, apart from it decline from the high 900’s in July 2008 down to it’s current trading ranges. Still, when risk aversion is turned on and I suspect it will be right into 2009. Gold may hold it’s upper range, or move further into the 900’s. In light of supply demands of raw materials and gold (miners closing up shop), the scarcity and flight to safety will come into play.

*please note morbius glass does not give investment advice. The following information is for reference only. Trade at your own risk.

Brace for a global recession (update 2) – Japan in recession, rest of Asia next. Next stock market bull run 5-8 years.

Japan officially slipped into recession a day ago (17th November 2008 to be precise); technically Japan has been in recession for about 9 months into 2008. Japanese car exports (mainly to China), was the only positive contributor to their GDP, when everything else was collapsing, property, shares, machine orders, technology and consumer goods – pretty much everything Japan created was now piling up adding to large inventories. As the US slows down more dramatically going into September 2008, Japan’s GDP was also shrinking dramatically (0.1%). Now with China going into recession, thus ultimately effecting Japan, it therefore officially sent Japan into recession. Again there is a false belief that Japan could emerge somewhat less effected in a global recession. We have to remember Japan feeds US consumption from cars to technology. To assume that Japan could survive (retaining a 2nd place as the worlds largest economy) via it’s mass of savings or a re-feeding Chinese demand, is quite deceptive. In the sense Japan is an export based economy, that is not commodity driven, in fact Japan doesn’t mine anything and is an importer of oil. With global consumption slowing sharply throughout the world, a country that ‘produces’ like Japan is in big trouble. It is also a country that has never really come out of two decades of deflation, when inflation comes back; especially on oil and food. This could evaporate any domestic savings after the current ‘slump’. I honesty cannot see Japan rising as a powerhouse economy after this global downturn is through. As for the rest of Asia? Yes, Hong Kong, Singapore, South Korea, Philippines, Indonesia and quite possible China will all follow suit into recession. Joining the US, Germany, UK and the rest of Europe – into a global slump.

The markets know this, therefore there is continuing selling on all market indices. As discussed in The falling Oil price and Treasuries ‘ bank bailout plan’ falls apart. , we may not see significant rallies into 2009. Partly because the start of the recession is here, from a fear perspective it could be a long and harsh economic slump.

If you look at my portfolio, it is mostly made up of index puts on major commodity producing countries and their stock markets, currency put warrants on the AUD, RIYAL, EURO, PESO. Gold and gold shares (bullion), Gold ‘call’ Warrants. No company stocks at this point and I still think the markets have yet to find a bottom; I also think there will be a slew of creative destruction in the market. A depressed global stock market that could last 5-8 years, with sporadic rallies, but no way close to the highs it reached in the ‘boom’. In saying that, I personally see biotechnology stocks (on the premise that bird flu will migrate to human strain), renewable energy and energy stocks (as the next big crisis and more significant one will be energy) as possible stocks to watch. Geo-political turmoil will also occur, especially in Asia, India and possibly China, middle east (if oil drops lower). So relatively safe countries (western) could see some opportunities in real estate from overseas investors (this is very speculative at this point most since most western countries have huge housing bubbles). All in all, the governments of the world will pump the money and pour millions into infrastructure and stimulus cheques for the consumer. Probably too late, since all countries are contracting at the same time. Depleting sovereign funds and emptying reserves will equate to more countries going bankrupt than surviving a recession somwhat intact.

The Treasury and the Federal Reserve will bail out the WHOLE American banking system. (Updated 2) – All distressed debt on the table, cracks now appearing in the ‘plan’ USD sell off, commodities rev up.

As the Treasury and Federal Reserve bail out proposal of the whole US (and possibly even global) banking sector gets approval via congress. It has to be kept in mind that the approval for such a broad institutionalization, or protection of banks and the finance sector, is no way a broader effort to bail out the indebted/poor American citizen. Who, as it has been discussed will be footing the bill of such bizarre and in someways desperate measure to stop the rich from going into recession.

The dangers are immense in this ‘bail out’ scheme, obvious at this point with a Trillion plus money pledge to buy banks distressed assets, it’s effect on inflation and devaluation of the US dollar. Traders will be now trying to bet at which way the US economy will go, whether a deflation recession, or stagflation recession. With the new bank bail out proposal it appears to be a stagflation ‘severe’ recession looming; just as the commodity markets were adjusting to a US slowdown, the USD strengthening. Then Federal Reserve (under Ben Benanke) and US Treasury (under Henry Paulson) whack this badly thought out plan of propping up badly run banks and their losses. The commodity markets, being relatively good safe havens to inflation, may start to rally again.

The market will of course tear this plan apart with due skepticism, more notably the problems with asset valuation and the buying of distressed debt at discount from banks. In other words, to what extend should the bailout cover the toxic assets of bank, which in some cases could equal the value of the bank itself, say 100% (remember AIG insurance was 80% junk). Which would essentially qualify as a complete takeover from the US government. Otherwise the bank with it’s ‘junk’ bought at a discount, may find it hard to function – after selling it’s distressed assets at a cheap rate to the US government. Hence they might as well close up shop anyway.

With broader consumer markets in recession, it has to asked how a bank which has had it’s toxic waste disposed of return to profit? Or, do they scale down, horde cash and sit it out – likely scenario. If this is the case banking stocks will still come under pressure with no real recovery occurring (in the bank sector).

The Foreign Exchange markets may be good indication of the soon to be worries of the USD under a lot of pressure.

Politicians who should be looking after the interest of the electorate have now helped distinguished the two separate economies in markets, the banks, Wall Street and main street. This plan will essentially shut off main street from the finance markets; insulting the banking world from further losses (but as discussed this plan may still not stop the banks running at a loss – even if they do disengage from the broader economy and it’s ills. The banks may just become corpses kept alive with government money).

Of course main street will go further into recession. A dreadful distortion of free markets, as the powers at be are now reshaping and protecting the gamblers who caused their own markets to meltdown.

Gold doesn’t go bankrupt.

Gold has risen from lows of 736 (11th September 2008) to highs of 893 (18th September 2008 – gain of 157). Although the current price spike (17th and 18th September 2008) is the historic aspect, to rise as quickly as it has in a short period of time is impressive. Although note as discussed in The world is most likely in Recession, gold was showing signs of instability in the lower price ranges; so a large rally was on the cards. Of course in light of the now recognized meltdown of Wall Street and the world’s finance sector, the spike in the gold price was exasperated even further; as liquidity comes rushing bank into the commodity markets.

After bouncing off support of 744, gold has now passed over supports of 772 and 837. Now moving into the trading range of 857 and 931. Gold could hit a peak of 900 (short to medium term), with some selling (trigger selling) to occur.

But as long as the USD get’s crushed and bank failures continue in the US and Europe, the credit crisis migrates to a broader liquidity crisis. Gold will continue to be a reliant hedge against a falling market.

Although watch take profit signals.

click on graph for larger image

*please note morbius glass does not give investment advice. The following information is for reference only. Trade at your own risk.

Global recession tipping point, gold over sold, oil price shock on the cards. Bank losses continue.

The markets at the moment are dysfunctional. The US has been in recession in nominal terms since the end of 2007. A slew of economists argued throughout 2008 up to now that the rest of the world would decouple from a US slowdown. A terrible analysis and poorly throughout, luckily most people with common sense knew that the decoupling theory from the worlds largest economy is a fallacy. The world is now falling into recession, lead by the US.

Still a text book boom bust cycle hasn’t really come in to play, the US has a collapsing housing market (second to the 1930’s Great Depression), the credit markets are probably not even half way becoming normalized (if ever) and inflation is still high. Europe and the UK are sliding into a sharp downturn, which is now indicating that the Eurozone is at the tipping point of a harsh recession.

Japan is in a technical recession, that appears to be becoming a broad consumer based one.

So in reference to traditional deflation bust cycles, the markets are showing an unpredictable dysfunction. In other words they are in the extremely volatile in an unstable way. Any investor will have a hard time making money in these markets. Despite global inflation still higher the commodity markets appear, although not entirely, finishing their bull run. The short selling recently of gold is to say the least a brave bet, this of course effected the gold price from 916 on the 1st August 2008 to 790 as of 17 August 2008; the sell off was intense and ridicules at the same time. Still shorting the commodity markets is audacious and only big institutional players would attempt it, but oil dare not come under the same sell off. As mentioned in Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oil shocks be brewing?, anyone shorting oil will have their balance sheet destroyed and I imagine some people also got burnt (short selling) on the oversold gold price (now back into 800 range 18th Aug 2008, back to 788-789 19th Aug 2008 – from lows of 772 15th Aug 2008 ) the price still looks so oversold. I doubt we are going to see a dramatic deflation in all commodities, it all depends on the Federal Reserve rate decisions and the US dollar. With the Fed’s track record, it may be unlikely that there will be a rate increase. But even as commodity prices have declined, they still remain high and volatile. Inflation as mentioned is now flowing over to all consumer goods. If consumer prices on goods start to spiral upward, if not contained even a recessionary economy may have little effect in dampening inflation.

The market hasn’t finishing wiping out balance sheets and smashing ‘zombie’ companies into oblivion. It is still disputable where the cyclical bottom to the US stock market will be, I just think there is so much more trouble out there. The en masse bank failures should due soon, of course the ‘to big to fail’ policy is in place by the Fed, but the smaller to mid size banks could ready to go under in a synchronized way.

Still my concern is an oil shock that may be around the corner, Iran has test fired a satellite carrying rocket and Russia is still pushing further into Georgia.

The gold bugs have cried foul on the recent price drop of gold, which has been senseless selling and risky. With gold under priced – the only relief people have holding positions with gold is to continue holding them. Like oil, gold may spike upward on environmental, geopolitical and economic crisis.

(gold spot chart, note support at 772. click on image from larger graph)

Gold entering a bull run to $1000.00.

As discussed in World Crisis scenarios for the 21st century – Worldwide economic depression (update 15) and The Bear Market. Depressed banking stocks dragging indexes lower, the global banking stocks have crashed and will continue to become depressed. This inevitably has shifted from the banking liquidity crisis of the last six mths, now too an insolvency issue on a large scale. In other words, it’s highly likely a lot of US banks will go bankrupt and disappear of the face of the earth.

The global credit crisis now entering into large scale bank default problem. With most global stock indexes in bear markets or close to bear market territory. Global stocks, sans China, have essentially collapsed. Because what was a relatively sudden decline within the 6mth period, no ‘bottom’ in the falling indexes dare be called at this point. So, funds need somewhere to go, the commodity markets have shown incredible growth on the back of demand issues. Namely oil, as mentioned in World Crisis scenarios for the 21st century – Peak Oil (update 14) Oil heading towards $150.00, oil has now trading range of 136 and 142 (refer to graph). Note recent sell off oil, now 137 – 138. Gold in a lot of ways has remained quite static, with not a huge amount of buying going on. This could change dramatically if the US (and Europe) report of banking collapses or run on banks. I suspect this is going to be soon, I wouldn’t be surprised if a European Bank (namely Spanish or German bank) shows real signs of weakness.

On a one day chart Gold spot price, resistance set at 953, barrier set 845. Trailing above the 100 day moving average at 917 and the 50 day M.A at 906. A current trading range of 998 and 933 is set. Current price 971 – 974. CCI (1) set on lows of 32 days, CCI (2) 91 (3mths) / 32 x 12 / 7days = 4.87.

Gold is steady on the technical chart after breaking through resistance at 953, the Bollinger bands and CCI’s are indicating overbought signals. A slight sell off is probable within the set trading range. Depending on any negative news from both the US and Europe on banking woes – gold may move into the 980 and 1000 range by July 20.

Long Trade, take profit (July 20th 2008 ) at 995

refer to graph (please click on larger image)

*please note morbius glass does not give investment advice. The following information is for reference only. Trade at your own risk.