Blog > Market Report > Saturday, 15 March, 2008

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GraySwan [38]

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14-Mar-08

Saturday, 15 March, 2008

The Delusion Continues

As this is my first post, it's probably worth outlining my thoughts on the state of the markets and my trading strategies for 2008. It'll be interesting looking back in a year's time to see how much of what I predict comes true.

The bear comes out of hibernation

Some traders and investors evidently believe the Fed can still rescue the US economy and markets from Greenspan's mess. The S&P struggled all week to rally off its lows, but various bailout initiatives by Bernanke and Co proved ineffective. The Fed meets again on Monday and most commentators expect a 50-75 pt cut. I expect this to be the dying gasp of the bulls. Any ensuing rally is likely to be short-lived and will give us a final chance to load up on the short side before the slide continues.

Bernanke's interventions so far have prevented serious falls, but have also had the unfortunate consequence of leaving the Fed with little wiggle room once the market breaks lower. I expect the falls to accelerate over the next few months. The next few weeks should see further bad news stories, especially from insolvent banks, brokers and hedge funds. Bernanke can't bail them all out. And with headline inflation rising, the market may not get as much help on interest rates (after 18 March) as it would like.

Here in Oz, with a much stronger economy, the ASX has been much weaker. The RBA keeps tightening and Stevens has taken pot shots at those that believe the Reserve shouldn't be worried about inflation. No bailouts and moral hazard here!! Should be at least one more rate rise this year, which could see the housing market finally tank.

Whining CEOs

ABS is the latest firm to struggle, causing Eddie Groves to suffer
margin calls. Suck on that, I say. I was short ABS and really peeved
when Groves got a trading halt and flew off to the US to seek a buyer, preventing me from covering.
One set of rules for CEOs and another set of rules for the rest of us. Never mind, still got out with a good result.

Predictions for 2008

More pain to come. I expect the bear market to continue for at least the rest of 2008. The ASX has already had sharp falls, so it shouldn't have as far to fall as the US, which has only just begun to weaken. Predicting levels is always fraught. But, with that in mind, lets take a punt on between 4000-4500 for the All Ords. And perhaps as low as 800 for the S&P500. After all, 50% falls are consistent with previous bear markets - just look at 1974. And this one could be a doozy. Especially if Mish and Mauldin are right about impending deflation once the bursting credit bubble gathers momentum.

Strategies

I'll continue to look for the occasional long for my Covestor account (can't wait until Covestor allows CFDs and merged accounts). My backtesting suggests longs picked up during bear markets - if they survive - go on to make wonderful profits in subsequent years. And the remaining longs I've got now are mostly gold stocks that have survived the market sell offs well so far. With gold going through $1000, they may withstand further falls.

However, I'll remain heavily short both the ASX and US markets until I see signs the market is finding a bottom. I don't expect this to happen, as I said, until late 2008, early 2009 (or even later for the US). I should get a couple more chances to add to my shorts over the next few months during bear rallies.

I'll also remain long gold until I'm stopped out, or gold goes parabolic and I get a blow-off top. I'm already sitting on a very nice profit now that gold has touched 1000. But there's still no sign of irrational exuberance, yet. I might buy another contract if we get another dip. A fall to 900-950 would be a great chance to buy.

My USD/JPY trade continues to do nicely. Shouldn't have taken part profits at 100 though. My long term target of 800 is looking increasingly likely. I'll continue to look for chances to short some more on rallies.

Correction: My target for USD/JPY is 80, of course.

Posted at 17:53 in Market Report | Permalink | Comments () | Top

4 Comments on "Saturday, 15 March, 2008"

Great post Greyswan. What do you think is going to happen to the dollar in this period?

Posted on 15-Mar-08 13:55 by PerryBlacher

PerryBlacher, not an easy question to answer. Plenty of analysts believe the dollar is already undervalued on conventional criteria, ie PPP. However, there are plenty of examples of currencies remaining over or undervalued for extended periods (eg. Yen). I tend to agree with Chuck Butler at the Daily Pfennig that the Fed's loose policy will continue to drive the dollar down, especially while Trichet, et al are tightening. Btw, this should also drive gold higher. Above all else, unfortunately, and somewhat bizarrely, it comes down to watching the various central bankers for any hint of a change in their stance.

That said, I'm also interested in how the carry trade will unravel. I'm with the camp that believes it will probably be messy, driving down equities and causing further large swings in the affected currencies. News stories about Japanese housewives (ie. the least sophisticated investors) speculating in currencies is all the proof you need that there's an irrational imbalance at the moment, and that it has to end in tears at some point. So I'm looking for the Japanese housewives to start covering in severe distress as a sign that the end is nigh.

So I'll remain flexible. I'll take part profits if/when the Yen touches 80 (sorry about the typo above), which is a previous support level, and keep at least one contract on until the trend bends.

Posted on 15-Mar-08 16:04 by GraySwan

Really interesting - thanks!

Posted on 15-Mar-08 16:31 by PerryBlacher

Yen value a different story. Japan a creditor nation. They can sit on near 0% interest rates. U.S. a debtor nation. Needs to have securities purchased to fund the debt. Lower dollar value drives investors away. Feds lower interest =s less foreign purchases of bonds and Treasury notes. Sooner rather then later the price of oil will drop at least $20/bbl. If U.S. economy shuts down for an extended period oil will drop to $70/bbl. We will enter a corrective period of asset deflation where even Gold and Platinum prices will precipitously fall. Right now the price of oil and gold are driven by speculation rather then supply and demand. The only question is timing for the price bubble to burst. My sense is the price will hold up for as long as investors don't see a recovery on the horizon or investors get antsy over the unreasonably high price and take money off the table.

PHP

Posted on 16-Mar-08 15:06 by pablo222

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