A bit of a downer yesterday but as investors actually looked at the ‘green shoots’ and decided that “errrrr…actually….500K people losing their jobs in one month, retail sales down, house prices still under pressure etc, etc, etc” did not look particularly wonderful after all.
Not only this but both the US and the UK look to be applying even more regulatory straitjackets on lending criteria, capital requirements and salaries for the financial sector (whilst at the same time exhorting those same bankers to “lend more”). Do any politicians ever ask themselves whether these two aims are contradictory? It pains me to say it but the level of intellectual capacity in our ruling elite seems sadly lacking. Perhaps most of their creative time and energy is spent concocting dubious expense claims!
Now that we have given back some of the recent rally the natural question being asked is “what now?” Was the rally just a bounce in a bear market or is this pull back merely a minor correction in a general longer term rally? The fall in the FTSE has paused at the 4300 region which is around the top of resistance level prior to the break out last week. Longs will be hopeful that there is no further weakness today as momentum to the downside could build very easily if two or three solid down days in a row are created. The arguments for a solid bull move are not really convincing just yet but on the other hand the economic situation is certainly not accelerating to the downside anymore. Are we likely to see flat growth over the next 12 months (as hinted by the Governor Mervyn King yesterday) or will the undoubted negative immediate future weigh too heavily on the start of 2010? The major problem seems to be that people are now expecting good news, because green shoots are all the hear about these days. If people around them continue to lose their jobs into the summer and autumn then we risk a return to the doldrums later in the year. The pause in house price decay may be short lived if pessimism takes hold. On a personal note, last week, I heard of three friends losing their jobs, highly paid, middle aged, middle class etc. It seems that job destruction is still very much with us.
Anyway..today will probably be a battle to see whether the FTSE can get back above the strong resistance of around 4340 to 4350 or will bust the smaller support at around 4285. Best guess is that neither will occur unless a move develops this afternoon in the US.
On the currency front the pound is weakening again as the problem over the quantative easing and high levels of future borrowing raises is ugly head once again. As mentioned several times over the last few months the losses that the BOE is likely to make over its purchases and subsequent sales of Gilts and Bonds are probably going to be astronomical. In reality they are handing huge sums of money to the investment banks as the purchases drive up prices to unrealistic levels and when they come to sell out, later on, they will drive prices down to just the same degree. The £1 billion ‘lost’ by Norman Lamont back in ’92 is likely to pale into insignificance in comparison. Lest anyone be under some illusion this will be a straight loss to the tax payer.
The only bright spot for the pound is that virtually everyone else in the same boat!
Oil is falling from the highs of near $60 (brent) but there is very solid support at the 57.00 to 57.35 region which may give the bulls optimism of making a renwed attack on the higher levels. The fact that the expiry of the June contract passed with little last minute selling is yet another positive factor as it indicates that the glut in inventories may be fading. On the other hand the Oil Producers are suffering along with everyone else at the moment and the usual knee jerk reaction is to pump more and sell it off on the quiet. If too much over capacity is recreated then there is a strong possibility of another leg to the downside.
And finally
For those of you who love conspiracy theories… of particular interest over the last few months has been the resurgence of the banking sector from the lows in March. Perhaps the fact that bankers were forced to take much of their bonuses in Stock rather than cash had something to do with this? Bonuses are generally paid in March, coincidentally the low point for most bank shares. If I was, say, a Barclays employee it would have been very nice to pick up stock options down at around 70p (price now 240p). In conversation with an investment banker friend of mine he was rather chuffed to discover that, at current valuations, his bonus this year is now worth far in excess of anything he received in the past. Admittedly he must wait a few years to cash it in. Ah well, ‘plus ca change, plus c'est la meme chose’.
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