Correction time for markets 2010 - ref: Dow

As predicted in China's gift to the West - a double dip recession and using the Dow as an indicator, trading ranges were trading into a tight critical junction as volume was falling off. The move was going to be on the downside, particularly as markets rallied hard in 2009 and the first of the bad news and volatility began in January 2010.

We are now seeing a correction in stock markets.

If the Dow falls below the support of 9,678 trigger selling could send the index to July 2009 lows. A good dose of 4-5 mths of selling and a possible rebound in middle year. So watch for lows in the coming months and any aspects of stabilization. But on the fundamental side if things, the markets will react very negatively to companies earnings, consumer sentiment and deficit/sovereign debt issues Europe and elsewhere. Another aspect to watch is Asia, particularly China; which will also have an adverse effect of Western markets. Last but not least, watch for a global conflict, with North Korea and the middle east possibly being a flashpoint in 2010.



Always listen to your gut.

* MEC.research doesn't give investment advice, trade at your own risk

The global economy is falling to pieces

It's looking very bad. The US ecomomy is a write off, President Barak Obama has almost single handily sent the US into a debt death spiral, his predecessor George Bush Jnr set it up Obama is knocking it into place. If you can think back to 2008 post inflationary pressures when oil hit 147 in July 2008 and most developed and developing countries were showing uneasy sentiments towards growing inflation, particularly China. At that time credit spreads and risk spreads namely on CDS (credit default swaps) started to widen (high costs to insure debt) as the global economic meltdown began to gather pace and by November 2008 equity markets were collapsing and credit and default spreads widened on goverment and corporate debt. The massive stimulus programs that stabilized the global ecomomy in March 2009 ensured also that credit spreads narrowed and stocks rallied and the US dollar started to decline. The concern investors, traders and everyone else has at this point in time, is the next wave of defaults are going to be from huge deficits that were created by government stimulus; at this point the US cannot get out of the inevitable debt spiral.

As Obama pledges to create more jobs through stimulus (a 2nd stimulus should be factored in prior to mid term elections Nov 2010) and pass the health care act (Medicare and Medicade) - the 2nd stimulus will essentially be the nail in the coffin for the US economy. Two aspects that are going to hinder job creation rather than encourage job creation

1. If the Obama administration overly regulates the banks, in the sense starts to effect their funding capabilities, namely trading, this will ensure that banks will make it even harder for credit to be provided to the American consumer. As bank costs and independent capital raising becomes harder, all costs will be passed onto the consumer, this means higher interest rates on loans (housing) and limited credit (small/medium size business) .

2. Health insurance will be costly for employers, therefor the hiring may be less robust when the health plan is put in place. Basically adding too and creating larger deficits will cause the US consumer/citizen to find it increasingly hard to maintain wealth, as wages decrease and inflation erodes away what is left.

Of course widening credit spreads on Goverment debt will be in vogue after Greece will eventually reveal that it will default on it's debt. This should send a shock wave through the global economy namely Europe as Portugal, Spain, Ireland and Italy will all be next. Germany will struggle to maintain the integrity of the EUR as essentially the EU ecomomy may collapse.

Asia is also concerning, although mainly creditor based nations, the one fear which I think is somewhat valid is if the US dollar rallies significantly in 2010, in which I believe it will (on risk aversion) massive short positions (namely from Asia) could unwind and hit the Asian markets like Thors hammer. Which would mean that all risk assets (that also being property related assets) that were bought with borrowed US dollars will sell like no tomorrow; Asian equity markets could essentially collapse spectacularly namely China, Korea (including it's currency WON). This is on the premise that a sharp US dollar rally is on the cards, if we see some sovereign/country defaults like Greece and Portugal come to the boil; yes the USD will rise very sharply sending the carry trading market into panic - this could dent Asia. So much so Zhu Min (China's deputy central bank chief) at Davos announced his fears on the USD carry trade.

A global economic recovery relying on China (stimulus) is frightening

This is the equation: weakened global growth that rebounded on stimulus more so Chinese stimulus. So China being the the infinite (aleph zero ) number in the sense China's growth cannot be measured properly, so the assumption is that China continues to grow as the global economy becomes static or has negligible growth. Of course the problem is in that equation it appears the infinite style growth (China) will lead to a massive collapse. Particularly in China's case as the the US economy (and rest of the global economy) needs to support Chinese growth (US consumes and China produces) and this is not happening. Instead China is both producing and consuming with out external trade benefits. So essentially the global GDP is being propped up by country that is severally becoming a mega bubble with a decaying economic situation attached (America).

So current market risk aversion is primary a fear that China's credit markets are collapsing. As discussed in Global liquidity tightening 2010, a tipping point could have been reached now; so the invertible crunch maybe on it's way.

When all hell breaks loose you want a good watch

(note damage on outside minutes wheel, heavy impact and being dragged [me] on concrete, also note how date and day is completly outta fucking whack)

Ok one thing I have been noticing of late is military style watches or at least watches design by ex military guys and/or watches made for the military.

I like my wrist watches, recently I retired my Seiko divers (pictured above), this watch has an amazing history. It was given to me 23 years ago. In that period it has subsequently been dragged along half a meter of gravel (wrist under chest after falling off bike), it has witnessed (on my wrist) various violent situations, a car accident and a plethora of injures (included broken scaphoid on left wrist, maybe the watch helped in the break...) that I have sustained over the 23 year period (I played an lot of extreme sports in my 20's). At one stage the watch was pronounced lost to only reappear again.

It is one tuff bastard and still keeps good time but the date and day loses track sometimes.

The Seiko was my weekend watch, my day and formal watch is a Swiss made Oris. So I need a new weekend watch and I need a tuff one.

And viola! Below is my new weekend watch (Rogue Warrior) designed by an ex-navel seal guy by the name of Richard Marcinko. A more detailed review soon.

Global liquidity tightning 2010

Interesting aspect (although obvious) has occurred on the back of massive stimulus/bailout programs that goverment embarked on in 2009. 1) China is becoming a massive credit induced bubble 2) European countries deficits won't be able to cope with Greece's horrendous deficit/debt issues 3) The US public has finally had a enough of bailouts and spending by the US goverment. As correctly assessed in China's gift to the West - a double dip recession problematic 2010 economic conditions will lead, all evidence is now pointing that way, to a double dip recession in 2010. Which should occur more so in the first half of 2010 before US mid term elections in 2010. As discussed on this blog, Obama will try and appease the electorate by attempt to clamp down on banks that have been bailed out and the massive profits that occurred from tax payer and 0 % rate loans (free money) from the Federal Reserve. Essentially this is a nice slap in the face of interventionist economists, more so Keynesian style economic thinking. Stimulus and bailouts are a temporary support in an invertible economic boom/bust scenario. But assuming that wealth is restored by goverment underpinning assets is an extremely poor assumption. The public backlash against additional funding to ailing banks and bad businesses should reach a tipping point in the coming years - as the US goverment deficits implode.

China is trying (slightly) to tightening liquidity and credit, China is a bubble on the back of a huge goverment stimulus. The simplistic aspect of the reason/s China is in trouble is basically two things 1. it has overcapacity with it's inventories and 2. the US consumer are not returning to strength any time soon. It could be argued that China's overcapacity could insulate the country from extreme inflation say hyperinflation, but the problem which China (and the massive credit bubble of 2008/2009) will have to either go back into a recessionary environment or face invertible inflation. The US is simply not going to pick up the slack (buy) on China's exports. There is an implosion aspect of the Chinese ecomomy that could be on a tipping point scale (at that point), meaning it could tip into a credit default aspect (private) quite rapidly. China went too hard too fast after the global downturn, in fact every country did pouring money into the banking sector which issued credit on goverment guarantees.

Markets looking volatile...

...all over the place.

China lending curb. Greece and the EU (major problem if Germany is dragged in), JAL aftershocks and potential of a EUR collapse (Greece)

US consumer confidence and housing...still FUBAR

Japan airlines bankrupt - sends jitters to oil market (hedging)

I remember in 1994 I flew to the UK from Australia on Philippine airlines (PAL). Four years later Philippine airlines went bankrupt after the Asian financial crisis of 1998. PAL was able (successfully) to restructure privately without goverment intervention.

Just before Christmas my friend and I were discussing the airline industry and how we both thought it was miraculousness that a major carrier (airline) had not gone bankrupt. We then agreed that somewhere out their a major airline will go bankrupt from this current global recession and so we have it, Japan Airlines (JAL) has now officially become bankrupt only to reemerge as a government supported 'zombie'.

The volatility of the JAL bankruptcy can be seen in the futures market more so oil, in the case of JAL going bust it sent the Brent Crude oil futures down to a low of $75 a barrel. The reason behind the sudden sell off of Brent Crude was the hedging fuel contracts pegged to Brent Crude oil in the amount of $441 million. Fuel hedging contracts are done to protect the buyer from currency volatility. When bankruptcy occurs for a company hedging on forward contacts for oil, it triggers defaults and the contacts are terminated which creates a sell for the oil market (as terminated forward contacts add to price tension)

This can be seen on the following graph:

Note the high of $77.14 on the 19th Jan 2010 and the low on the 20th Jan (market reaction to JAL bankruptcy) at $75.37



What should be also noted is the subsequent rise from lows back to 77.76 on the same day (20th Jan 2010). The reason for a sharp rise was the goverment support of the bankrupt airline. Once again liabilities of failed private companies are shifted onto the public accounts. A future scenario (one that has been discussed by a handful of economists) is when the public accounts do eventually (Government) go bust, the turmoil will be an ensured shockwave through the markets. It would appear that no market (asset supported by goverment) will be left unscathed, except maybe gold, if such a scenario occurs.

Haiti earthquake disaster - Red Cross donation site

Not only is the tragedy of the earth quake disaster so widespread in Haiti, the global response has been an over-coordinated mess. Yes OVER-COORDINATED . At this point the suffering people of Haiti need food and water immediately, you would think that a massive air drop of food, water and other survival supplies be an absolute priority.

Human psychology when faced with survival will try and survival when given the opportunity, but if they (the Haitian people) are treated like injured caged animals - then we are going to have a problem.

Red Cross donation site, please click on this link

Tumultonomics - (update 1) Australian goverment bans/then unbans Aliens v's Predator release for 2010. On the premise of economic pressures

You know I made a call on a gaming forum about the Australian government banning the soon to be released Alien's V's Predator game. My post indicted that the Australian government would lift the ban on the game due to the fact it's desperately trying to keep the Australian retail sector alive...and at all costs. So censorship on certain items would be lifted if demand is there and of course demand is there for PC/PS3/Xbox games. I mean if you read the decision (a copy of decision no longer exists), it was all but a done deal by the prudes at the office of classification; but as mentioned in a tumultuous economic time (hence Tumultonomics) sales would have shifted offshore namely to Amazon or CD universe, obviously this would have effected the local sales.

As of 18 December 2009 the ban was overturned.

Do I get a free game for making that call? No, but being a closet nerd (as opposed another sort of 'closet' type person) it just saves me, although Amazon and CD universe are excellent mail order services, ordering online - although I still might. So I am looking forward to getting this game.

Australian Office of Classification press releases.

Aussie banks could be in for a round of mortgage losses.

Starting with CBA (First Colonial $850 million mortgage mortgage fund). These are public funded mortgage funds loosely guaranteed by the Australian goverment, as apposed to Bank term deposits fully guaranteed by the Australian goverment. Regardless mortgage defaults (generally) should be a significant stress on balance sheets of Australia banks and mortgage funds in 2010.

The false dichotomy in market thinking is how the Australian unemployment rate can keep falling (now at 5.5%) yet mortgage losses (CBA) are increasing.

China's gift to the West - a double dip recession

In a period of week and half China tightening it's one month bills at 1.84 % and the shortly followed by a tightening of the 3month bills at 1.36%, all combined with a pressure for banks to increase their capital requirements. Automatically Asian stocks dropped on the 14th Jan 2010 (MSCI Asia−Pacific index) 1.5 percent to 124.64 on expectation that China is going to try and tighten liquidity and slow inflows of capital into China. Of course the most blatant concern is inflation. The paranoia of deflation is easily trumped by inflation especially when the Chinese have to pay more for pork (meats), wheat products and milk. A potential for civil unrest will occur more dramatically if inflation in China goes unabated. That's the fear.

With the US going into a very anemic recovery a double dip recession is likely with President Barack Obama trying to please the electorate by putting the brakes on banks receiving a free ride via the American Taxpayer. US banks of course are still problematic with off the balance sheet losses from residential and commercial, so a possibility within the next six months of a credit market freezing over again is a real possibility; only to have the banking sector plead (after mid term elections Nov 2010 - US) for the liquidity pumps to be turned back on. But with banks slow on issuing credit to the consumer and continued mortgage losses, US economy growth will be benign for a long time to come. Meanwhile as discussed (China tightening credit re: inflation) China's overcapacity may insulate China putting on the brakes for their economy. This in turn will send Europe and the commodity producing countries back into recession.

A double dip recession and a stock market correction may be on the cards in the first half of (6th mths) 2010

refer to Dow, note the increasingly tight trading range. With light volumes and a narrowing bid/ask spread range - a breakout on the downside is imminent. Watch supports for any capitulating selling.

Market sell triggers kicking in Jan 2010

China: liquidity tightening, possibly a no buy for gold and talk of USD hitting bottom by China Investment Corp - opinion. Higher operating costs for Alcoa (beginning of reporting season may indicate profits of companies are being squeezed by operation costs), Australia housing (credit approvals) crunched.

This should ensure the start of 2010 market volatility, kinda reminds me pre crash 2008 when I cut positions and held cash (except gold and some currency puts).

MEC.RESEARCH store - Penn & Teller Bullsh*t: Complete Sixth Season

I like Penn and Teller. I remember seeing them both on the show Fear Factor when this gorgeous blonde goes into the water tank to bring something up from the bottom (can't remember what it was). Anyway...it would be fair to assume that she (blonde) had implants (breasts) and she was struggling to submerge. Penn's comment was 'I think she has some buoyancy problems'

It was funny at the time.

An oversupply in eveything - China tries to tighten (in a loose way)

Basically a colossal bubble forming around developed and emerging markets, bonds, stocks and everything in between.

Particularly in China which had the mother of all economic stimulus at $586 billion +

I remember (2008) some fucking dildo (sorry, just wanted to see how 'fucking' and 'dildo' work together as an insult...kinda works) analyst at Moody's economics saying how how great everything will be after China blows out the big stimulus. It's all short term baby, stock gains and over valuation plus a shit load of IPO's that will come onto the market in 2010 - oversupply central. Classic fundamentals of bubble orientated markers.

So, China has raised the auction yield of it's 3 month bills. Pitiful if you think about it, but...may indicate to the market that something is worrying the Chinese government and central bank; namely an implosion and inflation.

Still focused on USD strength on risk averse in 2010.

from Bloomberg (Jan 2010)

"China is trying to cement a recovery while preventing excessive liquidity in the financial system from causing resurgent inflation, asset bubbles and bad debts for banks. Property prices are surging in some cities and Liu Mingkang, the top banking regulator, wrote in an opinion piece in Bloomberg News this week that “structural bubbles threaten to emerge.”

“There’s no doubt that lending has been excessive and that explains why policy makers are starting to be more cautious about lending this year,” said Qu Hongbin, chief China economist for HSBC Holdings Plc in Hong Kong. "

MEC.RESEARCH store - Bright-sided: How the Relentless Promotion of Positive Thinking Has Undermined America (Hardcover)

In the vein of blog post Misplaced optimism is deadly - Alain de Botton

2010 market volatility and then some

If you look at 2009 when pessimism reached it's ultra low point and crunched equity markets in March 2009, no one could have imagined what monetary expansion (money printing) and fiscal economic stimulus would do to stocks. We saw the massive rebound from lows as trading ranges tightened and volatility all but diminished. Some commentators and traders made some great calls but could not factor when a correction would occur, as we heard that a correction was due in September, October and end year (2009). This didn't happen. What continued to persist was the absolute flooding of the global economy of liquidity (cash); never in history has this occurred in a synchronized way. Everything (markets) then narrowed: bid/ask spreads, credit default spreads, loan spreads, interest rates etc. A another example of how money expansion into the markets successfully trumped volatility.

Of course government and central banks have kinda ignored creeping inflation, but when you see the US dollar slide down over the year and oil, gold and other commodities rise you know that inflation is beginning to beckon - which is all but an inevitability.

Dubai and Greece where clear warnings (possibility of countries defaulting on debt) of a major downside from governments creating huge account deficits from their stimulus programs. The private sector has suffered immensely after the global economy collapsed with banks still stingy about issuing out credit to business and a massively oversupplied bond market mixed with huge amount of goverment debt will saturate bond markets in 2010. So businesses trying to raise capital in 2010 could be a thwart process. Quality issues and value of bonds will come into question from not only a benign economic recovery, but also at some point governments ending stimulus programs and central banks raising interest rates. The bond markets will be 'junk' overload.

Then you have China: protectionism, overcapacity, inflation, credit crisis, lending risks and so on.

The global economy will be in a grip of goverments desperately trying to restructure stimulus programs (so they won't go bankrupt), central banks slowly issuing inflation concerns. 2010 will be a volatile for markets after 2009's liquidity based rallies. Volatility could be turned up a notch higher if a war breaks out somewhere, first guess and most obvious - the Middle East.