Trading and Investing News
Posted on October 9, 2008
Filed Under Currency, Investing, Trading |
As many of you know, I now publish a weekly newsletter - if you would like a copy “hot off the press” please just visit the making bread site and follow the link at the top of the page and I will add you too my mailing list - I normally write this Sunday evening and email on Monday morning, giving a round up of the week’s news and topical tips and information on various markets. I propose to publish these here as well every week, but a week or so later, so if you would like the next one please just sign up ( it only takes a minute) Here is the first one written two weeks ago.
Welcome to my newsletter in which I hope to offer some insight into the financial markets at a time when the future has never appeared so confusing and uncertain. To paraphrase Winston Churchill, is this “the beginning of the end or the end of the beginning?”The FTSE closed the week just 66 points down while the S&P 500 actually managed a small profit. However, the closing figures do not even begin to tell the whole story with the FTSE trading in a 521 point range and posting its best one day rally in history on Friday. In the case of the Dow Jones Industrial Average, it moved over 1000 points from Thursday’s low to Friday’s high, an achievement that represents a “first.”
The catalyst for this bout of turmoil was the bail out of Fannie Mae and Freddie Mac. This raised hopes of a similar bail out of Lehman Brothers. To say that investors were shocked when Lehmans was not only denied a bailout, but filed for insolvency would be an understatement. Lehmans collapse sent shockwaves throughout equity markets sparking a domino effect that knocked over Merrill Lynch, AIG and HBOS .
Even the most seasoned investors had a hard time steadying themselves last week as the newswires continue pump out dark news, and once in a generation headlines. Fear was understandably widespread with the Russian stock market suspended indefinitely after dropping 10% in an hour.Investors saw little choice but to fly to quality. The flood of assets transferring to short term US Government Treasuries, forced the yield on three month Treasury Bonds down to their lowest level since the great depression. Crude Oil and precious metals also exhibited powerful reversals. From a low of 90.51 on Tuesday, Crude Oil soared to close the week at 104.55. The rallies in Gold and Silver were just as spectacular and probably represented record (or near-record) gains in 1-2 days.
However, it was the two emergency announcements on Wednesday and Thursday that had the greatest impact last week. After central banks dropped a coordinated liquidity bomb overnight on Wednesday, global equity and credit markets initially seemed to show a very cautious reaction. The greatest reaction seemed to come from the Feds plan to create a giant bad bank that would absorb many of the toxic subprime assets held by banks. This measure accompanied with a crack down on short sellers, seemed to have hit the nail on the head for the financial institutions, with the root cause of the credit crunch (sub prime assets) being attacked.The rush to blame short selling for this current catastrophe ignores the role played by the regulators who abolished the uptick rule in July 2007.
The week’s headlines were dominated by Ben Bernanke’s testimony before congress starting on Wednesday. However, planned economic announcements are now secondary to surprise headlines or emergency measures.When markets move by whole percentage points in a matter of minutes, anything can happen, and probably will.
Even though equity markets bounced last week, the panic at one stage reached such an extreme level that the yield on 3 month US Treasuries reached 0.02% on Thursday, returning just $2 on a $10,000 investment. Investors weren’t just running to safety, they were blindly staggering to anywhere with no exposure to the credit markets. When investors press the panic button as they undoubtedly have done, there is potential for a counter rally to set in the short term as we saw on Friday. However, looking at large crashes from 1987, 1997, 1998, 2000 and 2001, the follow on reaction is typically a range bound market.
A small footnote to the current situation:A few weeks ago month the MPC’s (Monetary Policy Committee of the Banks of England) pension fund liquidated its portfolio of equities, property and private equity holdings and transferred the whole lot into government gilts. The cynicism took my breath away.You will soon be able to post your thoughts and comments in my soon to be launched forum.
Trading Question Answered:
I’m often asked about COT (Commitment of Traders) Data and how this can help us trade and invest.First the raw numbers for this can be found at: http://www.cftc.gov/marketreports/commitmentsoftraders/index.htm.The data is easy to chart using excel but if you don’t want to do this yourself other readers have recommended: http://www.timingcharts.com/. Second COT data is a sentiment indicator, which when taken with other signals can help us trade and invest across a range of markets. A fuller explanation of the COT report can be found by clicking on the link.
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