“It took us three years to find someone to manage our wealth, and we can now sleep at night! ”

Darren and Ruth Johnston (Semi-retired entrepreneurs) (N Wales) (2011)

Buy the rumour, sell the news

Posted by jdavis on November 16, 2010

Dear Client

I wrote on 4 November “It may be that we are seeing a classic ‘Buy the rumour and sell the news’ situation.”  This was with regards to the Federal Reserve’s asset purchase scheme.  Sure enough, the market rallied a little bit more.  Then, the evening that I wrote “I shall be recommending to clients that they sell the DB S&P inverse tracker fund” the market sold off a little.  On top, the US$ continued to strengthen as also I had suggested would happen.

The reason why I have not made any bespoke recommendation to any client to sell the S&P inverse fund is because it appeared that the market was indeed selling the news, a few days after the news came out.   As the fund makes money from the S&P falling, it was appropriate that we just sit and watch events unfolding.

I had believed that the market had gotten ahead of itself before the Fed announcement and this appears, now, to be unfolding.

What is particularly interesting is that the Fed made asset purchases on Friday and yesterday.  Yet both days, the market ended lower.

Remember, while the Fed were talking about buying assets, from late August to the beginning of November, the market hardly had a down day.  After they announced the purchases the market started having down days.  As I am wont to say The Market moves in (somewhat) mysterious ways.

Not just stocks but also commodities are falling heavily.  These tend to lead stocks.

On top, the very reason that Bernanke said they were buying assets was not happening.  He said it would reduce interest rates for American borrowers.  In fact, US bond yields have shot up ie borrowing rates have too.  Central bankers really are either arrogant idiots or crooks.  The problem is, they’re probably not crooks.

What is so curious is that the Fed now owns more US Treasuries than China.  In other words, government borrowings have been supplied by an organ of government – which just pushes a button and Hey Presto!  Money is created and loaned.  You really could not make it up!  As I have said, money comes from thin air.  Strange but abundantly true.

So, what do we expect?  A mild correction in commodities and stocks taking, for example, gold back to $1250 - $1300 from $1420 (around 10%) and the S&P back to c 1130 from c 1230 ie not far from where we instituted the short position.

Then, it would appear, we will have a final surge in markets into the first half of 2011 for the S&P to go to 1300/1400 and gold to go just above $1500.

We can see a major fall in the markets next year due to bond collapse, $100 oil, still strengthening US$, rising risk aversion, plummeting corporate profits and China hurting.

This current correction may only be this or next week as Santa will soon be here and he’s jolly enough to boost the markets.  No rationale behind it.  It just tends to happen.

So, we will still be recommending selling the DB inverse tracker in a wee while and recommending purchasing more Eclectica Agriculture and/or Miton Special Situations, as presented last week.  If markets turn back up with gusto, immediately, the recommendations will be made pronto.

We expect this to be a mild correction as there does not yet appear to be a trigger for the major falls expected next year.  If and when we go lower we’ll know more as to future direction.


Background

You may be interested in this article in the New York Times.  Have you heard me talking about the ‘decimation of the middle classes’? It’s already started in the US (in fact its past 2nd gear) and its just starting in the UK.  I am afraid to say, it’ll likely pan out over several or maybe even many years.

I repeatedly tell [anyone who’ll listen :)] that ‘People have no idea how bad it is going to be’.  The vast majority are still in denial or in blissful ignorance.

As to views on the inept and hurtful Federal Reserve, 23 economists (including George W Bush’s advisers!) wrote to Ben Bernanke and put the letter in the Wall St Journal and told him to stop buying financial assets with future tax-payers’ money.  The CNBC interviewee, one of the signatories of the letter, compares the US to Ancient Rome, Weimar Germany and Argentina.

I am delighted to have it confirmed that Congressman Ron Paul will be chairing the Fed’s oversight committee from January.  CNN article here.  Con. Paul was the only elected official in Congress who understands the issues clearly.  It’s amazing he was elected some years ago.  Even more amazing is his son, Rand Paul, was elected this month to the Senate.  Now, there are two parliamentarians who understand the issues.  Thus, the long road back to sanity may just have begun.  The problem is, it will be far too late for the economy in the West to survive without major problems for the bulk of the population.

Those Irish eyes are definitely not smiling

Do you have friends or family in Ireland?  As Prof Kelly wrote, as attached last week, the next 7-8 years’ taxes will be used to bail out banks and bank lenders and shareholders.  Just think on what I’ve written there.

What about paying for hospitals, police, picking up rubbish? Security?

I can vaguely remember huge estates in Ireland going for relative pocket money.  I believe it will come back for Sterling buyers.  I would not be surprised to see Ireland leave the €uro and debase their currency to make their goods and services more exportable.  Of course, the inflation they will induce will wipe them out but the politicians and central bankers will pretend that they’ve sorted the problem if unemployment falls for a year or two.

Same for Portugal and Greece and probably Spain and Italy.
How long will they be in the €uro? 5 years? 10? 2?

On a medium to long term basis, we recommend investors get out of the €uro if you hold anything significant there.


There remain huge problems in the global economy, particularly in the West.  This will inform markets medium to long term.


I found it funny that when the G20 circus arrived in South Korea the hundreds of civil servants from the West couldn’t use their mobile phones – their smartphones such as Blackberry, HTC and iPhone.  Why?  Because they ran on 3G technology.

South Korea uses 4G.


Please remember, investments can fall as well as rise. And they will!

If any of the above is at all unclear, as ever, please do contact me for clarification.

 

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