It will be a day of profit taking, we reckon. We’re taking our lead today from Swarm Trader Gabriel Andre. In a note sent out to Swarm Traders yesterday, Gabriel wrote, “The coming long week-end may be an opportunity for traders and investors to take-profits.”
” Most of the market players who made quick and decent money during the past few weeks do not believe in a deep reversal trend on the markets,” Gabriel wrote. “They just took advantage of a technical rebound that already drove the S&P/ASX 200 twenty percent higher than the lows posted early March.
Is this rebound over already?
Take a look at the chart below. Gabriel says, “There is a potential resistance around 3,800 points. This level corresponds to a previous low posted in late October last year (point A) that became a new high this year during the first fortnight of January (point B). Today the index closed at 3,756 points. We are there. We expect a first correction towards 3,500 points.”
If charts give you a picture of collective psychology-via the aggregate buying and selling decisions that make up a market-then this chart tells us investors are going to be disappointed with the Reserve Bank today, no matter what it does. A 50 point cut in the cash rate is just the sort of thing to normally cheer investors. But that may not be the case today (if the RBA cuts rates at all). Why?
First, a big rate cut tells investors the RBA is worried about the slower economy and rising unemployment, both of which are bearish for shares and property. Besides, the cash rate is already at a 45-year low of 3.25%. The bank is running out of bullets. What happens beyond monetary policy when rates can go no lower?
We’d suggest that the credit bubble deflates even faster. But in point of fact, is begun deflating already. Check out the chart below from the RBA. Does this not explain how Australia’s house price boom began earlier than the boom in the States? And does it not suggest that the collapse in the annual rate of growth in credit is going to remove a regular supply of money to the property market?
The disaster is now occurring, but in a slow motion fashion. The government has sucked first home buyers into the market with an increase in the first home buyers grant. House prices are hovering just below their highs thanks to the influx of new money. But after that? Look out below.
The other reason that investors will be disappointed regardless of today’s decision is that the warm, fuzzy-glow from the G20’s big announcement has already worn off. Bank stocks in New York sold-off over night after Calyon Securities analyst Mike Mayo said loan loss levels at U.S. banks would exceed the levels seen in the Great Depression.
In his report on the Seven Deadly Sins of Banking, the Old Testament-minded Mayo cited, listed the reasons for his downgrade as “greedy loan growth, a gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators.”
How about a little Old Testament to follow up? “But let justice roll down like waters And righteousness like an ever-flowing stream,” writes Amos, chapter five, verse twenty four.
Investors threw the book at bank stocks in the States. It didn’t help when billionaire eccentric and never-shy George Soros said that the new mark-to-market rules that led to Friday’s rally only create a new tribe of American Zombie banks. Soros told Bloomberg that the banks are, “Weighed down by a lot of bad assets, which are still declining in value…The amount is difficult to estimate, but I think it’s in the region of maybe a trillion- and-a-half dollars.”
More losses. More capital. Less lending. That is what the global banking future looks like to us. It is not a recipe for the recovery the G20 leaders talked about last weekend. We’re not yammering on about it because we’re stuck in a rainy day Melbourne funk.
Quite the contrary. It’s opening day in baseball season, a day that always cheers our hearts. But for investors, the big risk is in thinking that the recent rally means the worst is behind us with the financial crisis and job losses in the real economy. The likely scenario is that we’re about half way through, and anyone who says otherwise is…not in touch with reality (or perhaps, talking his own book).
How about some reader mail?
“Gold falling! Isn’t that the greatest store of wealth man? I know the story now, it must be oil, wow that must be worth more, the world is running out stuff aren’t they? He you fools, least if you keep the crystal ball predictions coming something will go your way one day. Lucky for us you are not talking to world finance ministers.
Yes Mr. Davis, gold did fall over night. It’s back under US$900. The headlines say it’s falling because risk aversion and fear are receding. That’s nonsense. But it does bring up a simple question: how will gold and gold shares behave during another round of deleveraging and asset deflation?
Our guess is it will do relatively better than financial stocks and absolutely better over the next five years. But by all means, enjoy yourself on days like today. It’s hard to believe that anyone really takes comfort in the efforts of the world’s finance ministers, though. You may want to see a doctor. Or a therapist.
Hi Markets and Money,
I am wondering if you believe oil/energy stocks would fall if there were to be another stock market crash(say towards the end of this year), or would there be steady/rise?
This is a version of the same issue with gold above. When you have a bear market in stocks, most stocks got down. You find exceptions from time to time. Our take in Diggers and Drillers is that investors should definitely own energy stocks-especially producers. You can read that argument here.
As we’ve said before, the oil crash of 2008 virtually guarantees a price spike sometime later this year, even if the economy is not going great guns. The larger issue which you should take up with your financial planner or adviser or your own brain is your overall asset allocation. How much of your money should be in stocks over the next five years? After you decide that, you can work on sector analysis and stock selection and valuation.
I love your newsletter. It is such a great resource. Well done on being such a source of independent information. It is certainly not possible to rely on the main Australian media for the true story behind finance locally or internationally.
I would be grateful if you could explore further the proclamation from G20 that we now have a “new world order”. I find this very disturbing on a number of fronts. I personally have little confidence in Obama, Rudd or Brown et al to manage anything but it also appears to me that they are putting in place global mechanisms based on their ideological views and we are moving down a dangerous road infringing national sovereignty and this worries me. What is this “new world order”. It sounds very Orwellian to me and I wonder if this crisis is being used to implement other policies that suit the “internationalists”. Welcome any views you may have.
Keep up the good work
It does look like if the heads of the G20 have their way, the IMF will become something of a global central bank. Other institutions like the OECD or the Bank of International Settlements could play a role too. But will it work?
Frankly we have no idea. Nations have competing interests, despite what elected leaders say publically about the need to cooperate. It is hard enough for the nations of Europe to have a common economic policy, given their very different economies. We can’t imagine a global central bank having any real power to regulate interest rates in respective national economies.
What you might get, though, is a new institution to dole out fiscal stimulus to keep States from failing. For example, the increase in funding for the IMF that the G20 engineered will go to prop up governments in places like Hungary, Latvia, Ukraine, and Mexico. As John Robb has pointed out at his blog, this entire crisis is a stress test for National governments too, not just banks. In that light, the G-20 action is an effort by the State as an institution to preserve and grow its power at the expense of the market economy (which it blames for the crisis).
Of course, it would be fair to wonder who the State really represents anymore. It’s certainly not “the people” who elect official to serve in Parliament and Congress. Is it industry? Is it finance? Is it itself? This article in the Atlantic magazine suggest that the world’s bankers have engineered a quiet coup.
This is not that different than an idea we had a few years ago to write a report on how Goldman Sachs had become an unofficial fourth branch of the American government (behind the Legislature, the Executive, and the Judiciary). What we meant is that the economic policies of the nation were being determined by men (and they were mostly men) who clearly favoured creating a national economy based on finance. They preferred a capital account surplus and a current account deficit to a nation that produces real things and trades them. For more on that, look at the second half of the article here, with the sentence that starts, “It’s a remarkable thing.”
No matter how you stack it, it does look we live in a world where the interests of the governed are increasingly divergent with the interest of the governors. This is not that different than the financial industry, where customer and business interest are rarely aligned. It’s just that ordinary people are starting to notice it. And they’re not too happy about it.
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