Posted on 2 May 2012 | No responses
Time for a change of scene. The format for this blog was getting tired. After fluffing around waiting for Choice - a story for another day – posts have now moved to Financial Freepress.
Click here to check out the view…
Posted on 12 January 2012 | No responses
Welcome to 2012 – and to celebrate its arrival the World Economic Forum has published its annual risk report (here). The report presents the results of a survey where 469 experts ranked 50 risks to our world – click on the diagram to be taken to the interactive chart.
It’s notable that the largest risks as perceived by North America and Europe arise from the impact of ‘fiscal imbalances’ and ‘systemic financial failure’ while Asia, North Africa and Latin America fear ‘water supply’ and ‘food shortage’ crises.
(62% of the survey respondents were drawn from North America and Europe – here - hence the headline figures for the survey are overweight these regions views…)
Posted on 14 December 2011 | No responses
A couple of interesting charts that emerged from a shuffle through the filing cabinets this morning.
1) BIX relative to SPX – looks suspiciously like the S&P500 financials are setting up to outperform the broader index. The trend break in the RSI is one prerequisite that has been checked recently:
Trying to reason how this might work requires a bit of imagination – US financials benefit from the flight of capital from Europe and China into the USD perhaps? The flipside is that materials and exporters take a hit by this same rise in the USD. Alternatively, the Fed is playing a game of cat’n'mouse and will in fact unleash QE3 in January (as consensus would have us believe). In any event, it doesn’t mean that the market as a whole is about to head higher does it…
2) Market breadth – which leads us to a quick look at recent trends in market breadth. Following is a chart of market breadth capturing those hectic days of late 2008 and early 2009:
Note that during the selloff into the March 2009 lows, breadth began to signal value investors were entering the market as early as December. First, the NYSI created a small divergence into a new low. Next, the NYSI broke its relative downtrend as the market rallied out of this low. Finally, as the market plunged into the capitulation selling, the NYSI flashed that a valuation floor had been found.
Now to a glimpse at how the NYSI is behaving today – the recent low gave us a small divergence – which has duly been followed by a relatively healthy rally. The question from here is how breadth will respond should we get the deeper selloff that seems so near to hand.
Posted on 25 November 2011 | No responses
The flight to cash seems to have begun again in earnest. And the biggest, scariest trend is the acceleration in deleveraging. Just as the 2008-08 selloff was fuelled by forced selling by margined investors, this time it is the banks themselves that are being squeezed out of their positions. Until the Europeans find a circuit breaker, the thrust downwards in global asset prices is likely to continue.
One of the more remarkable features of the first phase of the crisis was that banks were permitted to roll their problem assets. Through the magic of mark-to-market accounting, the system was able to buy time and often times induce enough investors to stump up for tranche 1 of the recapitalisation. But it was always a finger-in-the-dyke solution.
The European sovereign debt crisis has called time. While markets have long ignored the flagrant abuse of the Maastrict Treaty at al, something broke over the last two months and the herd is now running scared.
The key problem is that the leverage in our banking system is based on collaterallised lending. This global pool of collateral has been bid up by decades of credit expansion. At some point the suspension of disbelief that this virtuous cycle requires becomes impossible to sustain. Total leverage relative to cashflows – rather than collateral – is too high. At this point, the banks find themselves in a prisoners dilemma.
And so we arrive at today, where the European banks have broken ranks and have begun a firesale of assets. While quick exits often prove profitable for the buyers, history is pockmarked with examples where the resultant lower asset prices have a disturbing ripple effects on markets.
It is this uncertainty that investors of all shades and hues have to contend with. While the bear market rally from March 2009 failed on declining volumes, there is a strong liklihood that the current selloff will be joined by volume selling as the flight from all but the very safest collateral goes mainstream.
Posted on 23 November 2011 | 2 responses
Like a good bedtime read? The latest from the Financial Crisis Observatory might perk you up then (here) – “Collective behavior of stock prices as a precursor to market crash”.
One of the conclusions of this field of research is that markets generally exhibit increasingly volatile price behaviour as a crescendo matures. And further (and the point of this paper) once the event that precipitates a crash has occurred, then this price volatility also recedes in a relatively predictable fashion. Or to quote the paper,
“Results demonstrate that the relaxation dynamics of a financial market immediately after the occurrence of a crash resemble an earthquake after-shock. The frequency of a large aftershock decays according to a power law.”
The authors then note that the news cycle was synchronised to the ‘Lehman’ crash and also followed the same decay profile – as measured by the frequency of mentions of ‘financial crisis’.
Which then got me thinking about how “European crisis” was tracking in GoogleTrends. (Note the scales between the two charts are very different – the European crisis is still a babe in the woods.)
The European crisis has been on the stove for some time – and is only now reaching boiling point. The financial system is the the crucible in which all this rising volatility is happening, so it’s interesting to compare the news chart above with that of European bank CDS spreads (that also reached new extremes overnight).
Whichever way you look at it – it’s increasingly likely that someone is going to get stopped out and soon.
Posted on 22 November 2011 | No responses
Some 20 years ago I got some cheap tickets to see Pavarotti at the Met. The three of us standing behind the last row saw a very different show to everyone else that night – our view of proceedings was sandwiched between the overhanging balcony and our seated friends. My memory is of a splendidly voluminous shirtfront and that bloody white hanky – sometimes the clearest view comes from unlikely angles.
Two recent articles that stand out on the European sovereign debt festival are:
1) John Hussman (here) – who coherently argues that the ECB is incapable of printing money (without a radical overhaul).
2) Grant Williams (here) – who walks through the contradictions in Basle III that highlight the terminal condition of Europe’s banks.
We are deep in Act III…History doesn’t favour the creditor, meaning that the odds still favour disintegration over political unification. Europe’s banks are being mercilessly squeezed – who will be first over the parapet? (I’ve got my money on Deutsche Bank.)
Posted on 7 November 2011 | 1 response
Been puzzling as to what might be driving the consolidation in Chinese equities. Sure global equity markets have bounced back from the Euro conundrum – and China may have been a beneficiary as much as anywhere – but one-size-fits-all explanations are suspiciously shallow aren’t they?
Looking at the price action, the strength of the selling had been fading since late September, giving rise to a positive divergence in the RSI. Should the weekly MACD crossover, we can probably expect the recent bounce to persist through to year-end at least. If nothing else, the 2300 level has grown in stature as an important line in the sand.
It’s interesting then to note that Chinese equities look like they may be ready to test their relative downtrends against the satellite economies of South Korea and Hong Kong.
And that the SSEC may even be able to summon the gumption to test the relative strength of commodities:
These pictures all suggest that the Chinese equity market may well have found a floor – at least for the near term.
Looking into the relative performance of industry sectors in the SSEC we can see that financials were the first to reverse course in October.
Note the financials have been in a downtrend since peaking in mid-2009. Their relative weighting in the Chinese market meant that the strength in commodities and energy was not sufficient to pull the SSEC index back to its highs in 2010 (#2). The recent bounce in the broader index was lead by financials (#3).
Now perhaps the recent strength in the SSEC begins to make sense – with some expectations for further near term outperformance - financial conditions are easing for Chinese banks. Looser money may be good for the banks, but may take time to flow through to the broader economy – hence the possibility that the SSEC could be set to outperform even while commodities struggle.
Posted on 11 October 2011 | No responses
More’s law is a theory that seeks to explain how and why our lives are accelerating. At it’s simplest, it says that we are all caught in a race against our own mortality. French philosopher John Francois Lyotard captured the mood when he said (bad translation follows):
The human race is in the grip of the necessity of having to evacuate the solar system in 4.5 billion years.
My own contribution to the t-shirt printing industry is:
Evolution is the race against entropy.
All this is a long-winded way of saying that I’m currently trapped in my own mini vortex of working around the clock. I’m hoping normal transmission will resume shortly.
Posted on 22 September 2011 | 4 responses
With the European liquidity/solvency crisis in full swing, and major disappointment from the markets on the Fed’s announcement, it looks increasingly likely that the USD will continue to catch a bid. A likely casualty of a higher dollar is gold:
Note that prior periods of USD strength have taken the wind out of gold’s uptrend. With the 150 day moving average and the long term uptrend sharing the $1600 that area looks like the most probable target for this consolidation.
Posted on 21 September 2011 | 1 response
Looking at the relative performance of high yield versus investment grade credit, one would be forgiven for thinking that the pre-conditions are set for a sizeable risk rally if the Fed announces another QE instalment. Risk aversion has been elevated for some time – with the VIX having peaked in early August and now easing from its highs:
Some pundits are suggesting that the market has already priced in Operation Twist (given the rally in Treasuries and dealer positioning), but looking at the selloff in equities and credit, there is plenty of room for a sharp rally if sentiment improves:
Don’t get me wrong. This chart has all the hallmarks of a market that continues to roll over. It’s just that the gap between today and early August is large – and if we stick by the playbook that says buy when the government is throwing money at the problem then, well, more QE is exactly that.
While the ‘portfolio balance channel’ may prove ultimately fruitless as a means to stimulating the economy back to health, Bernanke has shown that this is the favoured strategy. If more QE is announced, then we can probably expect at least a brief respite from the European crisis.