Do anything in haste and repent at your leisure.

My mother often used to say to me; "do anything in haste and repent at your leisure". As a trader I have learnt the truth of this phrase. Any trader out there will appreciate the impact of this saying, when he/she has jumped into a market on an impulse and then had to take a stop and nurse the psychological wounds at their leisure. Well, in much of the developed world we have all become traders, betting on house prices, pension funds and any asset that will yield to the ravages of leverage. Well at least that was the way it was until recently.

So lying in bed I thought what picture could I use to encapsulate the title of this particular piece and from out of my subconscience came a floating monthly chart of the Nikkei. Perfect:

So where is this all going you may ask. Well there has been a lot of press about the rise in US 10 year yields. This got me thinking about how sustainable the current bond yield move is. What followed in my mind was a philosophical debate about what deflation actually is. Big picture, I believe that deflation is a way of controlling the animal instincts of fear and greed that lead people to flip houses, bid up tulip bulbs and price palaces in downtown Tokyo at values greater than the state of California. It is a mechanical restorer of equilibrium, but it takes time. As can be seen in the chart above, after the initial collapse in the Nikkei in the late 80's there have been many false dawns where the animal instinct has been beaten back and my mothers wise words have been repeated. Could it be that every time the Nikkei rose, the bond market sold off, as this was perceived to be the beginning of a new bull market? Then yields got to a point where, deleveraging became slower and began to hamper the economy (again) thus setting off another mini-crisis and fresh lows. If you are a zombie bank and the rate at which you can roll over your debt suddenly rockets any hopes of expansion and new hiring are thrown out of the window. Consumers who have mortgages also begin to feel the pain.

The point I am trying to make here is that the biggest credit bubble in the history of the world cannot be cleansed by a group of central bankers buying shed loads of bonds. Mr &Mrs consumer and the corporations that employ them first need to pass through years of balance sheet repair. It is thus my assumption that, as happened in Japan, we will undergo further setbacks which will drag yields lower until we are all in a position to comfortably pay down debt. It is essentially a self induced viscious cycle where premature risk taking stokes the animal instincts that have not quite been extinguished from the last pasting, the herd jumps in and then yields rise and ooops premature tradeaculation, those yields at what would, in a historic context, be considered low levels, lead to a reversal of enthusiasm and back down we go. Eventually you have had so many beatings your psychology changes and the end result is a chart called the Nikkei.

The alternative is a biblical style of debt cleansing where the consumer and corporate debt slate is wiped clean. How would our high street banks feel if we just walked away from our debts, well for a start they could not pay their staff wages. You get where this is going. So deflation forces upon us a Yin phase in the economy (see post below), where yields stay low for a long time but despite low interest rates nobody wishes to leverage themselves up to the eyeballs. So you only need a few false dawns as happened with the Nikkei and pretty soon phsychology has changed and we are all left reflecting why we jumped in so soon. Why did we not listen to our mothers!

Another phrase my mother used to say to me was; "if you can't say anything nice, don't say anything at all". Sorry mum.

Nifty 50 P/E update

As a follow up to my post last week on the Nifty 50 I noticed yesterday when looking at the chart that the p/e ratio got to around 22 in the initial recovery following the dot com crash. By my calculations this should correspond to a level on Nifty at about 4700. I would recommend going short inbetween 4700 and 5000 for a return to 3600 initially.

Stops could be placed over 5300.

The Yin phase of the economy

It seems that I am not the only person who gives some credence to Richard Koo's work, as detailed in http://you-buy-the-high-i-sell-the-low.blogspot.com/2009/01/good-read-holy-grail-of-macroeconomics.html, I think we can learn a lot from the experiences in Japan. The following link written by Carl Stick acts as a good summary of the afore mentioned book. Check it out:

- http://www.telegraph.co.uk/finance/personalfinance/investing/shares/5403059/Stock-market-Were-in-the-yin-phase.html

Stock Markets - Some random thoughts

Consumer confidence stats that came out yesterday signify hope not confidence. Even if we have made a bottom it will need to be tested. When that does occur it is more likely to be a deep retrace, and the USD will probably strengthen. There is a high likelihood that S&P starts downgrading commercial mortgage backed secuities so a credit event may be associated with any such correction. (Not that we rate S&P, we just know that they move the market). So I'm simply advising readers to keep their eye's peeled and watch that USD Index, see http://you-buy-the-high-i-sell-the-low.blogspot.com/2009/05/nzdusd-is-it-really-that-good.html, (which is actually about the USD Index despite the title!). The USD may be offered now but when I hear rumours in the market, as I did today, that Geithner opposes a strong dollar, I sense that someone is trying to get filled. It turns out to be a false statement from Geithner.

EURGBP - Breaks below the 200 day moving average

Today EURGBP has traded below the 200 day moving average for the first time since last October. According to my own studies this is occurring at the same time as a volatility breakout. As returning readers will know this is a trade that I like both technically and fundamentally. Technically the pair has become over extended on the top side and the fundamentals are much the same as when I first wrote about the pair in the past, so please refer to:

-http://you-buy-the-high-i-sell-the-low.blogspot.com/2008/12/from-sweats-to-shivers-eurgbp-one-to.html, or

-http://you-buy-the-high-i-sell-the-low.blogspot.com/2009/01/eurgbp-weakness-likely-to-continue.html, or

-http://you-buy-the-high-i-sell-the-low.blogspot.com/2009/01/eurgbp-potential-lower-high-in-place-at.html, or

-http://you-buy-the-high-i-sell-the-low.blogspot.com/2009/02/eurgbp-update-and-trading.html

That's right I'm a bear! In the chart above I have detailed some targets. I would suggest getting short around .8723 the recent low that was broken today with a stop over .8790, for the short term players otherwise a stop over .8870 for those looking to blow the lights out. Its always nice to blow the lights out!

GBPCHF - Approaches 1.7490 pivot

As regular readers may have noticed I have ditched the idea of just mentioning trading ideas as I feel that the chart adds so much to the narrative, so decided to continue as before.

Sterling has been the star performer of late. As mentioned in prior posts I am a EURGBP bear and due to my medium term bullish stance for EURCHF I become a GBPCHF bull. Looking at the chart above it can be seen that the pair has recently broken clear of resistance and is now trading close to the crucial 1.7490 region. It is my view that this level will act as a pivot with a break over 1.7490 ending the the downside hopes of many. I favour an eventual break higher and have an initial target at 1.8215, then 1.9100 and finally the potential for 1.9685.

I would suggest trying to get long on pullbacks towards the old resistance turned support near 1.6950, with a stop under 1.6625. Click on the chart above for more detail. Good luck.

Great Post about the failure of economists

Last November the queen of Great Britain asked why nobody had seen the economic crisis coming, and was told by an LSE professor; "At every stage, someone was relying on somebody else and everyone thought they were doing the right thing." Maybe all she need do is look at her old honours lists and see that the leaders of most of the banks operating in her territory deserve a good questioning. Top of the list she would find the now infamous Sir Fred Goodwin. Perhaps she could ask him? Along these lines, see the following:

http://www.financialarmageddon.com/2009/05/largely-on-the-mark.html

Although there is no evidence on my blog, as it is too new, I can assure you it was as obvious to me as it was to Michael Panzner that there was an almighty imbalance building and that the amount of consumer debt was unsustainable. We were at the top of a minsky cycle.

India's Nifty 50 - Too fast too soon

Yet another market can be described as going too far too soon. As was described in my prior post http://you-buy-the-high-i-sell-the-low.blogspot.com/2008/12/indias-nifty-fifty-recovery-favoured.html, I was bullish, however when I look at the p/e ratio on a weekly basis which has previously acted as a reasonable indicator of overbought/oversold condtions, it seems that we are getting close to levels where you would want to be medium term short of this market. So here again is a market that makes me think that recovery hopes have gone too far too soon. I would be a seller here for a minimum return to the to the 3600 level.

As can be seen on the p/e chart above, the P/E ratio broke over 20 last week and readings over 23.5 have typically been associated with markets set for a correction lower. Somehow seems a little too quick to be up at these levels already?

If S&P had a rating it would be junk

Well it seems that S&P's announcement has had little effect on Sterling. I must admit I have sympathy with the price action. Afterall why should we trust an organisation that got it so wrong on the way up to tell us how things are on the way down. Ultimately they are a corrupt organisation who's influence on the market is far too great. Over time S&P have managed to get their ratings into various bits of legal documentation that stipulate what can and cannot be held in various funds. It is via this route that they still exercise such influence. If major sovereign downgrades do occur it will be for the better, because with it S&P may find that they instigate their own demise. In the long run Japan proved that you don't need to bother with S&P. And hopefully the investment community at large will conclude the same. Of course an equivalent independent organisation that is not funded by those that it rates would be most welcome.

That said, as someone who lives in the UK, I do appreciate that the debt burden on the state and the consumer is considerable, but is it really that much worse then other major economies (US, Germany, France). We are all in this together and that is why I think that the markets shrugged off the initial knee jerk reaction.

In the short run I remain a EURGBP bear simply due to a major over-extension on the top side. In time I hope to do an update on this too. Back to cable. The price action is exhibiting some initial signs of exhaustion, so given my view on the USD I feel that the region around 1.6055 could act as a decent area for shorts with a return to the 1.5000 region initially. Where to place a stop is down to the individual trader but a minimum 100 tick stop is recommended. To get at least a 2:1 ratio you could place one over 1.6400 too.

NZDUSD - Is it really that good!

The movement in the Kiwi of late has led me to take a closer look at the USD index. I cannot help but think that the movement in the Kiwi is analogous to the madness in the financial sector where crap is being bought up as part of a massive short squeeze, with some buyers no doubt thinking they are snapping up a bargain.

Markets can certainly stay irrational longer then those trading can stay solvent. Anyhow looking at the USD index I feel that it has undergone a very healthy correction and although there may be a touch more to come, it could well be time to think about buying some US dollars again! In my view equities are due a correction and for what it is worth I am not in the V shaped recovery camp. I would like to point readers to the following which sums up my views well:

http://globaleconomicanalysis.blogspot.com/2009/05/market-bottom-what-market-bottom.html

Now take a look at the above chart of the USD index, it has retraced close to 50% of the initial recovery and looks to be in a decent position to at least begin a period of consolidation. Although I am not a believer in armageddon, as per my prior posts, I do not think we are going back to the glory days that were driven by excess leverage either. The US consumer is fertig and thus in time the US current account will repair itself. Isn't this the main reason that the USD was sold off. It was at the center of most arguements that I can recall.

As an example, the movement seen in GBPUSD which I will follow up with in a post, looks set to exhaust itself, and I would recommend going short soon. This is just one example of currencies that have gone a little too far a tad too soon versus the USD, a bit like the S&P500. Who knows, maybe the inverted head and shoulders may work this time!

Contact details

Greetings to anyone who is still reading this blog after the many days that have gone by without updates. I now have an e-mail address that you can use if you wish to contact me; greyheroninfo@gmail.com. Updates to follow shortly.