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Extremism market trend baffles even the most seasoned
Last week US equities ended a volatile week with big rallies on Friday,
but
these only came after the benchmark S&P 500 index had plunged to levels
not
seen for over a decade on Thursday. Despite Friday's 6%+ rallies on the
Dow
Jones and S&P 500, those markets still finished the week down 5.31% and
8.39% respectively. After months of bailouts, mini rallies, rate cuts,
and
false dawns, investors threw in the towel. On Thursday, there was a
panicked
flight to quality, as the yield on the shortest term US treasury bonds
sank
to near zero. Money is flooding to what is perceived to the safest haven
in
these troubled times. The panic pushed investors into bonds, breaking
records for that market. The yield on four-week Treasury bills fell to
0.045
%, and the three-month bill was yielding just 0.03 %, as investors
rushed
for safety.
The cost of insuring against investment grade companies defaulting shot
up
to its highest level since the crisis began. Worse still, Warren
Buffet's
Berkshire Hathaway fund has seen the cost of its credit default swaps
shoot
to 5 times the level they traded at in June. At current levels, the CDS
prices are implying that Berkshire is more likely to go bust than Morgan
Stanley. When the Dow was trading around 13,000, Buffet used derivates
to
effectively bet that the market would be higher than this level in 15 to
20
years time. While there is still considerable time for this bet to work
out,
Buffet has already marked down a $6.7 billion loss on that trade. When
investment 'Gods' such as Buffet look ready to fall, it is hardly
surprising
that investors are running to safe havens.
Just two months ago, the US Federal Reserve was still concerned about
the
"upside risks to inflation". With last week's 1 % decline in US consumer
prices and rapid declines in UK inflation figures, we've gone from fears
over inflation and stagflation, all the way to deflation in the space of
90
days. As a sign of the times, oil prices hit a new milestone last week.
Just
four months after making record highs of $147 a barrel, oil touched a
low of
$48.25 on Friday, a remarkable drop of 67%. The rapid demise in crude
prices
is having a direct impact on the Russian economy and stock market. Since
May
the Russian stock market has been leading other so called BRIC nations
lower, with a drop of around 70% since the May highs.
Financial shares led the selling. HSBC received a broker down grade on
fears
of the state of its tier 1 equity ratio. HSBC was formerly at arm's
length
to the rest of the banking sector with its relatively low exposure to US
subprime loans. However, the 'world's local bank' is now feeling the
pressure due to its exposure to emerging economies, especially the
troubled
BRIC economies. In the US Citigroup was hit hard, losing half its value
in
just three days. Once the biggest US bank by market value, there is
speculation that bad loans and writedowns may add up to losses totalling
$20
billion for the troubled Citigroup. Some commentators point to Treasury
secretary Paulson's change of tack with regard to long directly buying
toxic
assets under the TARP program for sparking much of last week's sell off.
Next week starts with the German Ifo business climate report which will
analysed closely after recent announcements that many parts of the
Eurozone
are already in recession. US existing home sales are released at 13.00
on
Monday and analysts are expecting further declines to 5.02 million from
5.18
million. Tuesday morning brings a raft of UK economic announcements with
the
MPC treasury committee hearing top of the list. Preliminary US GDP is
announced around midday, with the revised UK figures out the next day.
Thursday is an extremely busy day with a large number of US
announcements.
Cor e durable goods, unemployment claims and new home sales are the
notable
highlights. The rest of the trading week could be relatively quiet with
many
traders using Thursday Thanksgiving holiday to make a long weekend.
There is simply no telling what the market or economy might be like as
we
start 2009. A selloff of this speed hasn't been seen since the 1930s,
and
although comparisons have often been made of late, it is worth noting
that
at the low points of this period, rallies, when they came were
surprisingly
aggressive. Barry Rithholtz last week noted that the AAII individual
investor's stock allocation was 15% below its 21 year historical
average.
Although not marking the exact bottom, readings of this nature were not
a
million miles from the lows of 1987, 1990 and 2002. With a hoard of cash
waiting in the wings, there is always the possibility of this reading
again
marketing the bottom. However, this market has left many seasoned
professionals scratching their heads as the selloff has been unlike
anything
seen for generations. In recent months, these markets have reached
extremes
of sentiment that in the past have market key turning points. The
trouble is
that of late, markets have continued to make new extremes way beyond
previous inflection points.
One market that has been away from the headlines is gold. In the first
quarter, it ran up to over $1,000, but has since retreated to just under
$800. Gold was seen as a hedge against inflation and was used as a hedge
against the weak dollar. With inflation on the wane and the dollar on
the
attack, gold has been on the retreat. However it hasn't collapsed in the
same manner than oil has and this is because gold is seen as a safe
haven in
times of trouble. These opposing cross winds have kept oil in a volatile
trading range between $800 and $700 over the last 30 days. With gold
rallying $50 alone on Friday, there is a very real chance of a break out
of
this range in the next 30 days.
An up or down trade predicting that the price of gold in dollars (Gold/
USD
in the forex menu) will touch $650 or $900 in the next 30 days could
return
111% at BetOnMarkets.
Contact: Mike Wright
Company: Regent Markets (IOM) Limited
Email:
editor@regentmarkets.com
URL:
http://betonmarkets.com
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