Doom: A Crowded Trade?

You don’t need to try hard to imagine an abyss opening up beneath the markets. It’s hard to see any reason to be cheerful at all, with the likes of George Soros predicting no visible end to the bear market.

But as usual I’m taking a skeptical line. We’ve had eleven down days in a row. If the S&P 500 (^GSPC) continues to drop at the rate of 7% a week we’ll be down another 60% within a couple of months. And I don’t see that happening. Even if the slide is set to continue over the medium term, there ought to be some tradable bounces in there.

So I’m maintaining a neutral position, with a particular focus on the Japanese yen and on my staple equity trades, beaten down consumer stocks and banks. I closed out my S&P short position from 860 this morning for over a grand of profit. Not bad. I could have let it run but I decided I’d put the cash into the bank. A profit is only a profit when it’s realized, which is something I’m still trying to learn, having seen my notional P/L surge and then burn when I’ve been too reluctant to change my view. (I’ll do a blog about some of my more spectacular failures soon).

Looking For The Rapid Recoveries

So, in my usual way I’m buying into stocks that look reasonably cheap and that are towards the bottom of their recent trading range. For all of these I’ve set pretty tight stop-losses to avoid risking too much capital. I’m still holding long positions in Barclays (BCS) (from 50 and 55p) and RBS (RBS) (from 16p), and I’m running with some other equity longs which I’ve held for a few weeks now - online estate agent Rightmove from 150p, British Airways from 115p, Debenhams and public sector consultancy group, Tribal. All are pretty static - they’re not rising fast, but for now they’re holding their value, although the banks are more volatile than most. In the last 24 hours I’ve added to these with a small long position in Kingfisher, and I’m closely watching high end estate agent Savills to see if it’s worth a punt to the upside, assuming that the property market shows some signs of stabilisation as lower interest rates work through. Shorting estate agents is just too crowded for me - and there are often rapid rallies as hedgies and others take profits on their shorts.

And these small equity long positions are offset with a large short position in Land Securities (from a very tasty 700) and from Tui Travel who, it is rumoured, are running into trouble selling off their Hapag-Lloyd shipping business. Not surprising when there’s such a surplus of capacity in the freight market! Is there a bouyant market (especially at the lower end for the likes of First Choice, owned by Tui) for foreign holidays with the high euro and rising unemployment? I don’t think so! The opposite view would say that this is a great opportunity to pick up market leading holiday brands like Tui and Thomas Cook at bargain basement prices.

Why Am I Buying Equities?

Well, April’s G20 summit is coming up. And behind the scenes the politicians and the central bankers will be bricking themselves about how bad it’s going to get, with headlines forecasting a summer of rioting. So my bet is that, unlike the protectionist 1930s, we’re going to see another round of liquidity injections particularly in the form of bailouts to emerging markets - eastern Europe and other commodity exporters like Brazil and India. And there could be some great opportunities, but not quite yet, to buy into some big companies in Brazil and India. I’m not quite in the mood to start exploring that just yet myself, having had my fingers burnt trying to buy Brazilan oil corporation Petrobras earlier this month as the oil price continued on its down ward spiral.

Because the alternative to injecting liquidity - complete collapse of the financial system - is just too grim to contemplate. We’ll probably see the US government take bigger stakes in the likes of Bank of America (BAC) and Citigroup (C) - it’s all but priced into their shares already - and invent a new word to avoid talking about nationalisation, even though that’s what it will be. And this will reassure the market.

Selling The Yen

Even more money pumped into the system by the central banks could then begin to revive the carry trade - and we’ve begun to see that already in the australian dollar/yen cross, which has rallied nearly 2% in the last 24 hours. This would pave the way for some stabilisation in the currency markets, away from the ‘race to the bottom’ scenario I outlined in my last blog. A weaker yen might suggest a bit more appetite for risk, which in turn would build momentum around equities, feeding through to my staple consumer stocks in the FTSE 100 (^FTSE). A long shot? Undoubtedly, but I”m making some money already with this view. I went long AUD/JPY yesterday and I’m considering adding to my position. I’m already long USD/JPY and have been for about a week - that’s up substantially from my entry point of 9100. I’ve left my other currency positions unaltered. Whether the yen’s weakness is about the dire state of the Japanese economy, the unwinding of long yen positions, or a revival in the carry trade, I don’t know - I’ll leave it to greater experts than me to figure out. For now, I’m enjoying speculating on the next big move.

Finally - For Those Who Want To Stick With The Doomy View:

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

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