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.