Ive had to prioritise house building and a few other agendas recently which resulted in no update yesterday. Hopefully youve managed to survive anyhow.
* Markets are increasingly declaring this downturn over
I beg to differ. This downturn is by no means over. It has been injected with the equivalent of financial steroids, (ie, yet more debt) in order to keep it going for a limited amount of time. Unfortunately, this steroids supply will run out (unless governments, treasuries and centralbanks decide they will monetize their debt by printing money to buy it themselves).
Having said that, this is not the time to go against this market, at least not in the underlying. Options is a different issue, depending on how they are utilised.
*How to trade the market from here then?
Well, with an increasingly liquidity driven market, also crap rises with the tide. It must have escaped noone that the biggest junk assets that fulfilled any or all of the following criteria;heavily leveraged, heavily indebted, negative or weak cashflow, underlying market heading straight into the ground, have been the ones that by far have risen the most over the past month or so.
Long garbage has worked very well lately. It could very well continue to work nearterm.
Main drivers of this recent rally has mainly been shortsqueezing combined with underinvested institutional investors scrambling to get equities on board.
With global inventories at their lowest level since 1974, inventory build ups and export finance led exports are further driving underlying business improvements.
The climbing of this "wall of worry" seems to continue and short risky assets will likely still be the biggest pain trade - mainly due to the institutional investors. I am myself long garbage in the form of SAS, the Scandinavian Airline stock. So far, so good,,, Perhaps I should mention going for junk is by no means my main objective. Market price timing and optionality are the real variables. Although while earlier I might have shied away from outright garbage, currently I am not. Playing the momentum and market sentiment - not the story.
* Looking for optionalities
From a trading perspective it is interesting to note the "optionalities" present in the marketplace.
What do I mean by that then?
Assets or indexes with an extremely low probability of going to zero. Example; The ETF LOIL (ETFS Leveraged Crude Oil - Beta two). Underlying price is option premiumlike with a huge upside potential. Maturity; Unlimited. Probability of underlying going to zero; very unlikely.
I am long LOIL.
There are others on the radar that I am monitoring. Stay posted.
*How long will this bearmarketrally last for? (Yes - I still call it bearmarket rally)
I could see it running for one to two months more perhaps, but not longer than that.
By then garbage assets should be well overpriced, institutional investors have gotten their longs in and be fully invested. Inventories will be full again and export led finance will have filled international demand. Thus, market data will likely weaken again.
*The bad debt issue will return
Add to this the coming market realisation and focus on the fact that European banks are due to raise 600 BN Usd this year compared with 275 BN Usd for US banks. All according to the IMF and all til 2010. There is another vast difference between the US and European banks funding situation, namely the fact that the US banks are able to convert preferred stock to common stock and thereby improving their capitalratios(and becoming government owned in the process). European banks do not have this possibility which may increase their capital need beyond the 600 BN USD announced by the IMF.
As have already been announced by BAFIN, the German bank regulator, estimates that the current Toxic assets present on German banks balance sheets amounts to over 1 TRN Usd.
*Risk loving markets near term; Shaky USD?
This near term bullish and risk loving environment should not be beneficial for the USD. 6.7 TRN Usd is aimed for investments outside of the US. Hence, a push for higher yields abroad will benefit local currencies, leaving the USD softish. However, this should reverse in the 2H of this year in line with the reasons presented above.
*New positions
- Long SAS, the Scandinavian Airline
- Long LOIL the leveraged crude Oil ETF
As usual, good luck
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.
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