Dow maintains trading range towards 11000

But danger ahead.

Dubai World default and the default issues of the Dubai sovereign fund may be the beginning of the problems with debt/bond markets leading into 2010. Essentially the funds that are connected to goverment i.e sovereign funds will start to feel pressure since goverments and central banks have become pseudo leaders to decaying companies, all bond markets may show quality issues as a recovery (from 2007/2008 credit crunch) for many companies will be negligible.

Still anything connected (business) to goverment may have debt refinance issues, that is essentially a warning of the massive liabilities that have been absorbed by the public sector from the private sector.

In the meantime the Dow is still showing overall gains despite glitches such as Dubai ( 27th November 2009 154.48 sell off) and the recent sell off of 86.46 on the 3rd December 2009. There is still however a tight trading range with a main support at 9,741

Of course a concerning issue (if you own shares) is the American Express stock price which was hammered (3rd December 2009 sell) from 41.89 30th November 2009 now at 38.81. A good bellwether to the underlying issue with banks write-downs as US unemployment grows in 2010

Australia trying to keep it's bond market afloat

Hence the recent interest rate rises of .25% as at 1 December 2009, with the current cash rate now 3.75%. On news of the Reserve Bank of Australia lifted rates for the second time in 2mths Bonds rallied as retail banks will start to increase their cash rates (Westpac bank adding .45% to their mortgage rates). This gave a lift to bond markets especially the 10 year bond at 94.78%. The reasons? Debt default fears and Australia falls into that category, as discussed in Australia - Export/import prices still falling . Australia has a widening trade account deficit and it's terms of trade is falling. As it will be an issue for it's sovereign fund as government will struggle to pay for debt and maintain tax revenues (with baby boomers retiring and a growing popoulation) - so overall it's fiscal deficit will blow out in the next 5 years.

Also unhelpful are the FX market distortions, namely becuase of a weak US dollar. Export countries may have no choice but to devalue their currencies to build up earnings from falling export credits. But of course this puts pressure on bond values as the market sees inflation creeping thus causing yields to rise. But regardless an oversupplied and value decreasing bond market constitutes to a global debt crisis brewing into 2010 as Dubai was the warning shot.

Risk is back on as Dubai debt problems fades.

The funny thing about the market reaction to the Dubai (although not so funny when you were holding calls on all risk currencies!), is the commentary of analyst saying that it was 'knee jerk' or a 'storm in a teacup' etc. Still we had a nice juicy sell off. So the overall point (jitters) is there is still excesses in the system, no matter if Dubai was considered small debt (80 billion), the overall concern I would have is how an oil exporter can be so indebted and needs to be bailed out by Abu Dubai and UAE banks. In my opinion this is a warning and if you like a Black Swan event; which should be factored in as a follow on to debt/bond markets problems in 2010.

All market supports held with the sell off. Nevertheless it's a precursor.

Dubai fears overblown?

We shall see.

In the meantime some recovery in risk positions.

Some analyst playing down Dubai contagion

A certain analyst at a certain bank saying that 'knee jerk reaction' is occurring from the Dubai situation, what a fool.

Dubai was a long time coming, it's not the debt issue it's the exposure issue and it's a fear issue. Since the credit crunch was papered over with public monies the underlying shit is still floating around and a major 'freeze' on credit markets cannot be ruled out. Especially on the back of sovereign funds exposure to commercial property debt; creditors are going to get really itchy.

It's FUBAR time

The AUD is going down - risk currencies could all be toast

So parity (AUD) may not happen against the USD. I know calls (yeah...fucking shock) and longs are unwinding as I write this; if the debt implosion from Dubai becomes systemic risk (banks, brokerage firms, hedge funds...damn the whole bond market); risk currencies like the REAL, AUD, PESO, CAD, NZD...are all going down, big time.

Dubai World CDS spreads blow apart

An apparent 163 basis points to 522. In other words the market sees a BIG middle eastern property developer (commercial) sinking real quick.

I wrote this blog post on November 16th 2009 titled Stocks globally may rally whilst the global economy cracks up in which in indicated that rallies in stock markets could continue right into 2010 although some "heads up" events are on the calendar. It appears these 'events' could be sooner.

The possible bankruptcy of Dubai World could not only derail markets (risk aversion) but hammer down on CDS spreads across the middle east. Since the Dubai government invests heavily into private and public investments. A nasty default crunch could be settling in and the first of the commercial property collapses (it's coming).

AUD driven up by bank speculation...and declining USD

There must be a lot big call options on the AUD as it is on a sustained incline. US dollar weakness is persistent as the money pumps are going all out in the US.

AUD/USD parity should hit at some point next year, possibly between January or February 2010. But as the global economy starts to choke on debt (from stimulus fiscal and monetary expansion) banks and institutional investors are pushing the AUD forward on the back (as mentioned) USD weakness and Reserve Bank of Australia interest rates. So the RBA that likes to make money (hell it is a bank) are also steering the AUD upward (even with out interest rates) with talking up recovery and advising that credit expansion for households is ok. Kinda shocking when the RBA deputy governor Ric Battellino said that Australian households appeared to have the capacity "to sustain a relatively high ratio of housing prices to income". As we have learned from the credit markets melting down in 2007 and 2008 central banks have no conception of what credit bubbles are; but it's all business and the RBA has sold (profit taking) some substantial amounts of AUD in the last week or so.

But banks could be straining into 2010 when stimulus falls off and capital requirements set in.

So if you own calls on the AUD there is a lot of support for a parity in 2010

US dollar and stocks contiue to diverge as US Treasuries are stuck the middle

2 Year Treasury notes sell at 0.802 yields (lowest ever!) Demand was high (2yr auction bid to cover at 3.16), but there was not a massive buy up of 2y Treasuries. But why would there be? You have a declining US dollar (o% interest) and a surging stock market that is giving better returns (within tight trading ranges). With Treasures yields as low as they are and interest paying almost non existent, current market buying was due to squaring off funds into goverment debt prior to year end; on the premise that the market (equities) are currently overstretched and a pending correction is due. But as I mentioned in this post Dow breaks psychological 10,000 resistance - trading ranges reset the only thing that will correct the markets is something major. This could actually be the bond markets at some point. In the meantime markets will continue to rally, the US dollar will sink, gold and commodities will stay inclined.

In summary the bond market expects the US goverment and Federal Reserve to continue to support asset prices and keep interest rates low. So the speculation will continue in the stock market as stock prices will inflate with poor fundamentals attached.

Completely distorted markets.

The Federal Reserve is on a roll and they are smoking some bad shit!

They (Federal Reserve) are watching as the 3mth bond yield dipped into negative territory. The money printing is going on overtime, it's brutal, check the USD tanked and Gold is (current) 1165. So it's all risk on (stocks). But the US treasury is about to issue more debt to the market.

But it's choked up and demand has fallen off.

The Fed will re-inflate assets markets till the endgame comes. It has too, if a sudden rush occurs from risk assets to risk averse assets like the US dollar and Treasuries the high yields on bonds will crush their value and with the Federal Reserve being the big holder that they are...fuck what an unrealized loss that will be; but the endgame, or the build up to the endgame, will be market flops on bond auctions (globally). Hence the Treasury yields all dipping in the last month or so as investors still buying up risk assets. But Obama needs investors to buy Government debt and the Fed have gone mad about driving down the yields on Treasuries.

The Federal Reserve and Obama administration are solely underpinning assets markets, and as I said, till the whole thing collapses. (Refer to article from the Telegraph reporting that Société Générale (bank) are preparing for a worst case scenario in a debt market collapse).

Either way it's a FUBAR situation with gold as the winner. Gold being an inflation and crisis hedge.

There appears to be a lot zombie small/mid cap companies out there

With most indices holding within trading ranges and a lot of liquidity going into stocks you have to consider that from March lows 2009 there has been a substantial rebound.

The other day I looked (randomly) at a hand full of small/mid cap companies; from 'junior' miners, biotechs and tech development. I was quite shocked that despite the rise in all of their share prices these companies had nothing to show for it, in fact what I saw was businesses running on air. Ok, it was a ruff cross section, but when you hear some analysts say that the recently stock rallies are not backed with sound fundamentals. You just need to have a quick look at the market to see for your self, more so their earnings and risk.


P/E was non existent for some (they are not making money) and generally overstretched in various sectors connected to the share price. Interest cover ratio was frightening for the companies that I looked at, in most cases it was very negative. With a credit crunch No2 around the corner banks won't extend credit lines to zombies.

The overall earnings out look was negative. Yet all have gained by the recent stock rallies. So it must be ascertained that a reprieve was bought for these companies post stock market crash 2008 and 2009. Some equity raising in the current bull market via stock speculation (money from Federal Reserve/US government) and general speculation (valueless US dollar). Another aspect that caught my eye was long positions. Which was a worry when it appeared that long positions were responsible in supporting stocks prices but the overall volumes were thin. The other aspect is the bond and junk bond markets could be a precursor for a big dump in shares (particularly these small unprofitable businesses). If the is a huge bond/debt bubble looming and there could be a collapse in bond prices into 2010. These companies are history, banks won't lend and the market will pull out liquidity out of a lot of these stocks. For what I have seen (like I said it was a snapshot) regardless shows that there could be a lot of zombie companies that have been buoyed by the recent stock rallies.

There is a big unwind coming soon.

Stocks globally may rally whilst the global ecomomy cracks up

As discussed in Risk aversion off. Risk now on we may see rallies right into 2010. With Central Bank policies of low interest rates and quantitative easing (money printing) namely the US Federal Reserve. The US dollar is on an absolute downward trend and may rapidly decline into 2010. Of course the flipside and now an accepted consequence of loose monetary policy (re-inflating credit markets with another credit bubble) to reinstate consumption again; is the abundant liquidity for Wall Street which is now causing immense speculation in stock markets. This can be maintained for as long as there is 0% worth on the USD.

In the meantime there are some heads up:

1. A bubble in government bonds, more particularly watching Japan's bond market as the government will issue more debt to fund it's huge deficits into 2010. This will add too supply coming onto the market thus causing yields to rise. In summary Japan may find it very hard to raise equity in the bond markets (as investors sideline on buying goverment bonds). We may see a slumping domino effect in other bond markets as goverments try and raise funds into 2010 and the colossal bubble forming in bonds deflates.

2. The new year 2010 should make the first on the commercial real estate writedowns as banks connected to the commercial mortgage backed security market start to post losses. Listening to reports on the amount of leverage compared to cash is mind boggling from Dubai to London and every other city in the world where investors borrowed big (with little cash) to build commercial property that in all retrospect is just sitting there.

3. With a US dollar going down this of course pushes up commodity prices this will effect food prices namley wheat prices. A real inflationary issue (globally) even if the Federal Reserve deny it, will effect developed counties (as it is now) and more so effecting poorer countries according to a Daily Finance report

Jim Rogers v's Nouriel Roubini

I like Jim Rogers, Nouriel Roubini is ok. Rogers has better instincts regarding global markets than Roubini who is an academic; yes he made some good calls, but Rogers that has made some better calls, particularly gold and equity rebounds.

This slight slug fest originates around the weakening US dollar and it's effect on commodity markets. As Roubini refers to commodities as bubble markets, he also refers to the current stock rallies as a bubble. Rogers dismisses this and says that markets (both commodities and equities) have yet to reach previous highs, therefore are not in bubble ranges (say compared to the equity markets in 2008 - before the collpase). In a sense Rogers is right, yes markets are bubbly, but not completely in bubble territory and rise in commodities is responding to a weak USD. So loose liquidity is driving markets higher, including gold. If dollar weakness persists in 2010, yes gold will go higher. As discussed in Gold price breakout on a 'mini' crisis 2009 (update 3) - or just overbought?, supports are now in higher prices ranges and trading ranges are narrowing. If the Federal Reserve starts to tighten interest rates they will be hit with the long term bond losses (value collapses). Again Rogers is correct the only bubble so far is goverment bonds. That's our pending problem. Not so much equities or even gold going higher as the declining US dollar is not critical yet.

Article found here

A clueless business reporter

This guy is a market optimist of the most irritating kind. I remember when the recession (global) was just about to hit. Even when global economy collapsed in 2008. Reporters like him were echoing government and central bank rhetoric that we would all avoid a recession because of China being a buffer. They were very, very wrong. I'll tell you, if this guy was a fund manager and I have gave him some money to invest in the markets inspired by that bizarre optimistic banter, not only would I lose my money; but he would reassure me that 'don't worry the government will insure the losses' and then quietly '... which you'll be covering later via higher taxes'

Even worst is the markets are now deemed too optimistic, which mans that a correction could sweep through them at some-point. It's just that we have absolute US dollar weakness, hence the drive in equity markets namely lead from Wall Street.

But this fucking guy knows nothing, re:Australia

• Australia's terms of trade have collapsed, meaning that credit to the country is out of whack to it's debits. In other words we owe more than what we earn.

• The Australian government is precariously trying to please everyone. Unemployment for October 2009 quarter up-ticked to 5.8% from 5.7% last quarter, but this information comes from government statistician body, which of course underplays unemployment by smoothing out numbers, namely overly countering in part-time and casual as employed. This is trying to balance confidence in the markets. But regardless unemployment is higher than what they (ABS) report. Why? The government is slamming down on skilled business visas, in other words the Australian job market is shrinking. This can also be seen in bad debt provision and bank-write downs that began this quarter. More notably the NAB, Westpac and ANZ write downs.

• Australian bonds like most government bonds will have quality issues. If Government is absorbing risk and it's income is shrinking from falling exports and tax receipts, why would I bother with government debt? As the Reserve Bank of Australia will continue to increase rates because they know that stagflation is already occurring in the Australian economy. This of course effects the value of bonds. This will be another income shock for the Australian economy.

• So investors buy the Australian Dollar (I own calls on the AUD), this again effects the overall income of the Australian ecomomy as exports are too expensive.

• With large deficits close to 80billion and a deteriorated bond market, inflation and export problems. The Australian economy will struggle. But most people know this, hence a degree of liquidity tightening towards end of the year.

It's obvious certain reporters/commentators have some plays in the market, but they are terrible investors as they rely on delusion of constant gains. Remember this is what got us into the mess we are still in (belief that market never goes down); the market works in two directions positive and negative. Government intervention tries to maintain the positive but that is like trying to hold back the sea. It's impossible. So at some point it will term negative. If you don't realize these things 1. you shouldn't invest in the markets. 2 you shouldn't write shit like that guy does.

I am down with this philosophy: refer to blog post: Misplaced optimism is deadly - Alain de Botton

I am going to have a coffee now.

Gold price breakout on a 'mini' crisis 2009 (update 3) - or just overbought?

The USD is not at critical stages as yet, so a USD collapse could be pending if the USD touches the 0.71 support. In the meantime the market knows that with 1.US unemployment coming in stronger at 10.2% (which is of course is under-read and unemployment is higher), 2. the Keynesian style stimulus program isn't working (i.e private sector is still shrinking) 3. Growing goverment deficits (adding the new Medicare and Medicaid programs) will blow out the deficits even more. 4. which means the Federal Reserve can only do two things 'print money' and keep interest rates at 0%. 5. This all equals inflation and with tax revenues (via government tax receipts collapsing) it will be a form of inflation that will accelerated with USD weakness. 6. Watch for a flop in US goverment bonds, which could come from oversupply.

The proof of inflationary conditions beginning in the US in the current gold price at 1100 (from trading range at 1090). Is gold near term overbought? Most probably, but supports are at 1028 and a possible trigger sell at 990

But with low volatility via the ATR shows an indication of a possible pullback of the Gold price, but also with low volatility it would also indicate that another upside breakout is possible.
May also indicate trading ranges are narrowing.

*morbius glass doesn't give investment advice, trade at your own risk

Is the US dollar a risk aversion 'buy' end 2009?

Below is one of my favorite US dollar graphs. As it reflects weakness against the gold price. This was followed in The US Dollar and Gold showing a reflected 'crossover' patten. (update 1).As discussed in those blog posts regarding the USD and Gold, the USD and Gold crossed over as both assets began to diverge from each other. The first time occurred (on a monthly graph) in August 2007 and again in March 2009. After Lehman collapsed in September 2008, the USD gained strength sharply from risk aversion, gold corrected and fell to 706 on 27 October 2008, but steadily maintained it's upward rise (currently at 1088). Primary due to USD weakness and a diversification out of USD and into gold and commodities.

If you look at the graph carefully you'll notice that the extreme lows for the USD occurred in March 2008 (0.71) then as mentioned, risk aversion sent the USD soaring.

So in summary, yes the USD could stabilize and show some sideways type recovery, but for the USD to really gain strength we need the following, a substantial trade war (some shots have been fired namely Obama's tariff on Chinese tire imports and of recently Australia's duty 16% on Chinese aluminum - after China began dumping Aluminum onto the Australian market. China and Australia are essentially already having a trade war re: BHP fiasco), a conflict, a major economic meltdown or other collapse (US bank of otherwise).

Considering the last quarter of 2009 could see some correction in stocks and USD buying. The USD is still in a decline and hasn't reached critical as yet (assuming 0.71 we be the 'crisis' point for the USD).

Volatility kicking in - Risk Aversion back on

Like any good option trader, try to keep open two positions. Albeit you keep an option spread relatively tight with stop losses as close as you can to supports and resistance on both call and put options. Yes this post Risk aversion off. Risk now on (Markets) was written a day for the big sell off (30th October 2009) and this post Investment update October 2009 - It's cracking up (economically speaking) - risk aversion on the rise was written when risk aversion occurred. Both posts cover, in a journalistic sense, an option situation.

In saying that volatility has caused risk averse trading to take place. Volatility via CIT bankruptcy (confirmed with a 2 billion hit to US taxpayers - US Treasury loans) and US consumer sentiment (tanked)

Risk aversion off. Risk now on (Markets)

US GDP numbers, as suspected, have reinstated market confidence that has been with us for the last 9 mths (measured by the Dow). But one should note the tight trading ranges, as analyzed in Dow breaks psychological 10,000 resistance - trading ranges reset, I don't see a major downside on indices. Yes these are risk appetite markets, but they are tight and volatility in stocks has diminished. So there is no real forward signals indicated that you would want to look at the main indices for puts or short selling. It is a professional traders market at this point in time. The ranges are just too narrow. Although new highs may not be reached in 2009.

refer to graphs:

Dow (resumption within trading range)


S&P 500 may have peaked out for 2009

Investment update October 2009 - It's cracking up (economically speaking) - risk aversion on the rise

Risk aversion has kicked in, with some US dollar recovery and Treasury buying. With stocks slumping. We could be looking at the well overdue stock market correction, but depending on more 'bad' news. A substantial sell could be on the cards. Stocks could have peaked out for 2009 on both the Dow and S&P 500. Whether we reach 2008 and 2009 lows is disputable. But the system is cracking up both private and goverment, more so banks should be coming under stress as they point (obviously) to a bell whether picture on the state of the ecomomy via credit write downs. In other words goverment unemployment statistics are good for quick option and FX trading, but at the end of the day the long term direction on equity markets, via stock prices on banks, indicates that unemployment growing. Hence credit write downs and debt provision. Also watch electronic companies post losses in coming quarters, note recent NEC (chips) loss.

Sitting on the side is the H1N1 (Swine flu) spreading throughout the northern hemisphere and the National emergency issued by President Obama. This should also be factored into the markets.

The other aspect is the massive deficits that have been created, that are straining goverment budgets as we have a huge global tax receipt shortfall; so at some point taxes/prices and costs on everything are all going to rise. With the Federal Reserve not willing to containing inflation and the money printing to Wall Street and the possibility for a second stimulus from the US goverment (extension and revision of existing stimulus plans). The whole thing is looking perilous, sure goverment bonds have been bought near term, but over supply and quality will become an issue once Americans release they are amidst a Tsunami of inflation (at some-point).

So, shorting could come into vogue, with shorting indexes; but watch supports and trading levels to see where a breakthrough on the downside has occurred. Remember these are tight trading ranges, so a rebound in oversold signal's could be significant. Should be factored by acknowledging that the Fed will rev up money printing on any economical/stock downside.

Again my long position is pharmaceuticals as they are holding well, but in risk averse environment everything is sold. Still, H1N1 is still lurking and biotechs and their bigger pharmaceuticals will profit from Goverment stuff ups on vaccination programs, meaning reordering and under ordering could have occurred. Keep in mind the two anti viral's (recognized by the markets) Tamiflu and Relenza have had their supplies hammered. So a restock should go into hyper drive, look for end year profits on companies connected to both flu drugs (refer to this article).

Shorting banks could also be in vogue again, but a watch tight ranges and monetary bailout support by the Fed and Treasury/goverment or otherwise.

US dollar buying is risky, even though it was very over sold. A downside may persist into 2010 on the back of fiscal/monetary support into 2010. Watch for Fed and GDP numbers. Option traders may be indicating that the USD is still doomed near/mid term.

*morbius glass doesn't give investment advice, trade at your own risk

Australia - Export/import prices still falling

As discussed in Australia - first developed nation showing hallmarks of stagflation. Australia is starting to show economically stagnated signs. Basically when prices start to rise and the Reserve Bank of Australian begins to lift interest rates (1st developed country to do since the 'crisis'), it's an attempt to cool off an overheated economy thanks to an oversupply of fiscal stimulus, namely housing grants. But of course the paradox is that Australia's earnings as a country are decreasing on falling exports this can be blamed on the high Australia dollar and slower China growth (as opposed to hyper speed pre crisis).

The Terms of trade were rleased on the 23rd October and kinda flew uder the rader, but the trend is there all falling inport/export prcies, refer to graphs:

Exports/Imports


Source ABS