Finance 2.0

Managed to get my position of 1000 shares down to an average of 112.50 pence. Holding the 1000, will buy more on the dips.

Waiting for another big move down from the markets. Got a lot of cash at the moment and want to pickup bargains again. Will probably invest more heavily this time around.

Also bought 1000 shares of Level 3 Communications (LVLT). Just an impulse buy. Maximum loss is $700 so I’ll see how that one turns out.

People will say I’m crazy but that’s because people love bandwagons. Wal-Mart is a bandwagon stock. People have jumped on it because the economy is bad and everyone will shop for bargains.

If we look at the Wal-Mart valuation realistically though that is not going to happen. Wal-Mart was the stock to invest in 18 months ago as the bargain hunter stock. 

There are some problems with Wal-Mart and the fundamentals of the markets.

Wal-Mart has a P/E of 17 and is valued at $225B.
Dividend is nothing to write home about
A lot of other big blue chips are in the 10-12 P/E range
If Wal-Mart is a good bet when the economy is bad what happens when it recovers? Surely the growth will stop?
If the economy stays bad for a really long period of time surely we are going to go into deflation and see Wal-Mart profits drop too?
Deflation will lead to asset prices dropping further and big funds will have to give in and sell into the $225B monster
If the economy turns good I think investors will take their money out of Wal-Mart and start putting it elsewhere where larger growth prospects are.

You see, I cannot see any reason to not short Wal-Mart when it is in the $58+ range

Nice rally today, I sold a lot into last weeks though.

Current holdings

4x NDAQ100 futures
100 Rio Tinto Shares
1000 SOLA Shares

I sold my 500 NVDA (Nvidia corp) last week at $7.75 and made 25c per share trading 500 last friday, wish I held on for the rally, but oh well it’s back down again. Also sold a NDAQ100 future today at 1200.

Lightened by position so I can concentrate more on work and load up if we dip down again.

Current Orders

BUY 500 NVDA @ $6
BUY 500 SOLA @ 90p 
BUY 1 NDAQ100 @ 1102

SELL 1000 SOLA @ 180p
SELL 100 RIO @ 1505p

Google Finance: http://finance.google.com/finance?q=LON:SOLA

A huge selloff here on some news from JASO.

Just bought 1000 @ 134.25p

Limit sell set at 200p, will consider selling at 150p+ depending on other market conditions. Been wanting to get in on this company for a while though. Not sure about a  long term hold at the moment. The way the markets are at the moment a long term hold may not break even for 5/10 years.

Buy the fear, sell the party

Update: Bought 500 more at 95 and sold at 110 and 500 @ 90 and sold at 105. I want around 2000 shares of this company. I am going to keep trading and if it drops heavily enough i may commit to another 1000.

I’m so glad I sold into the recent rally. I knew it wouldn’t last. Inflation is no longer an issue in the world. Depression is on the way. The only way we can generate inflation is to print trillions of dollars. Rate cuts do not inject that much money into the system.

http://www.bloomberg.com/apps/news?pid=20601087&sid=axScg04s0X38&refer=home

The reason inflation is not a worry any more is because cash is in short supply. All these hyper inflated assets are crashing in price. There is no liquidity in the markets to buy them and no one wants them because they are not worth anything.

I do not understand the BoE inflation targets though. Inflation has been over the target for the past couple of years. Why maintain such static numbers for inflation? Isn’t that childsplay? Surely we should be looking at long term inflation rather than just a one dimensional YoY basis. If inflation is 3% one year and 1% the next we’re looking good, why would we want to aim for 2%? We’ve had 5% inflation this year and he’s worried about a -1% drop in inflation. Considering what happened with oil in the past year it is not a surprise that we are deflating. Is he seriously saying we want higher oil prices just so our inflation number looks nice? Oil hit $145 and is now sat at $57. That is a good thing!

Our currency is getting killed at the moment too so that is surely sending prices of goods up?

I still don’t understand the obession with inflation targets and controlling the economy with the interest rate. It seems like the dumbest system ever. Isn’t there quite a bit more to the world than that?

Also why are they surprised that price of materials are sinking so much? If something goes up 100% then drops 50% it is back where it started. Yes a 50% drop sounds bad, but in the bigger picture it is really nothing. So long as things maintain equilibrium I do not see the point of fussing about deflation in commodities as an effect of a bubble.

Real deflation where everything starts dropping in price is an issue. I think that is on the way. Jobs are being cut heavily. Wait till unemployment rises and people are desperate for jobs. Supply will out weigh demand and wages will drop. That’s when we’re in for trouble, especially with the amount of debt around the world.

I’m glad the UK goverment holds all my debt and I’m sitting on a nice pile of cash. I can’t wait to go shopping!

Dow 11,015.69 -372.75 (-3.27%)
Nasdaq 2,178.98 -94.92 (-4.17%)
S&P 500 1,207.09 -47.99 (-3.82%)

JPMorgan Chase & Co. -13.28%
Wells Fargo & Company -11.61%
Bank of America -8.88%

The short ban is working well. It’s almost as effective as a tea towel on a burning house.

I’m annoyed the market is sinking though. I don’t have an options account yet. It will probably be too late to take advantage of this temporary bubble by the time mine is verified and activated.

This all reminds me of a quote from an old music production lecturer. “You can’t polish a turd”. No amount of fiddling with the free market will fix the fundamental problems of the financial markets. All they have done is well, made things worse. 

Short sellers have sat back and seen that even longs have no faith in financial stocks. I’d expect financials to get hammered through October. Of course earnings is the key though. It’s all down to them. Check the consensus estimates. Wall St. is good at guiding really low so they can rob individual investors despite dire earnings.

Fridays rally has caused the worms of ignorance crawl out the woodwork. The short ban co-inciding with a huge rally must mean that shorts caused the markets to sink? The beauty of correlation causation fallacy.

Most of the ignorance is coming from the UK where the FTSE was up nearly 10% at one point. What these people fail to realise and research is the FTSE futures and the fact that the UK markets close before the American markets. Americans can trade ADR’s for UK stocks after our markets have closed.

When the FTSE closed at 4884 on thursday the DOW was trading at ~10620. When the dow closed thursday it closed at 11027. The FTSE and Dow have quite a strong  2:1 point relationship. If the dow moves 2 the ftse moves one. This is not absolute on a minute by minute basis but it is a general rule I use.

When the DOW closed on thursday FTSE futures closed at 5080. That is almost perfect 2:1

The FTSE closed friday @ 5310 +8.84%.  The real FTSE rally from shot banning is only +4.5%. Still impressive but there are more factors to weigh in.

On thursdays news of the bank bail out American investors could cover their short positions.  On friday on the news of the short ban they could also cover. For the UK it was different. All that news came in one go. All investors wanting to cover will have had to cover in the same trading day. Heavy short covering means buying. These two factors gave sellers a unique opportunity. The big boys knew they had an amazing opportunity to squeeze a huge amount of shorts.

Just as a market collapses if they are no buyers it bubbles when there are no sellers. Check friday volume for financial stocks. Lowest of the week for most. This includes the huge option blocks that go through too. Lowest volume of the week on quad witching day? That doesn’t sound like a liquid market to me. Liquidity is the problem in the markets too. So what has banning shorts achieved? It’s killed the last source of market liquidity.

There is a hate for shorts. Thing is it is not their fault. If people were buying stocks and the stocks wouldn’t go down. No one wants to buy junk bank stocks though. Everyone is sitting and holding hoping for the best. AIG LEH BSC have all shown us you can end up with next to nothing. The rest of the financial sector is not faring much better than nothing either.

EDIT: It’s monday today and what is happening to financials? They are sinking. Oh what a surprise. But how is this possible with short selling banned? Maybe it is because shorts are only a fraction of the market?

We are currently having a down day on the markets and it’s a good time to expose a big flaw in what people seem to think is a “recovery”.

Since march the indexes have started to rise again. People have taken this at face value and obviously the media do their part in inducing rubbish into peoples brains. Earnings season was considered good because most companies beat the low estimates and this is considered a reason for the markets crawling back up.

“Investors have regained confidence”

I beg to differ especially considering the low volume of trading on the markets in the past 3 months.

My first example is the FTSE 100. Every day I stare at big name companies that play an important part in the UK economy. British Airways, Royal Bank of Scotland, Barclays, Lloyds TSB are some examples. They flash red all day long yet I look at the FTSE and it’s in the green. Watching this happen a few times made me wonder. “What on earth is keeping the index up?”

The FTSE 100 is a market cap weighted index so when you see it go up whilst nearly every large bank is 3-5% in the red you begin to wonder what big money stocks are propping it up and what state the majority of the index in terms of the actual companies is in. With an economy built around financial services it just doesn’t make sense!

I got a list of all the tickers and pasted it into a Google finance portfolio. The reason for the recent gains became immediately obvious. The top 5 companies by market capitalisation are…

Shell (oil) – £135B
BP (oil) – £120B
BHP Billiton (mining) – £114B
HSBC (The only bank yet to get burned badly in the credit crisis) – £106B
Rio Tinto (mining) – £97B

Between them they amount for nearly £600 billion in value (over 1/3!). At time of writing FTSE has a combined market value of approx £1650 billion (Approximate FTSE market cap in millions can be worked out quickly by multiplying the current index value by 265)

I put them into a chart (below) and took a look at their gains since the march lows

BP RDSA HBSA RIO BLT

The gains are as follows

Shell: +29%
BP: +23%
BLT: +43%
HSBA: +7%
RIO: +34%

Those are impressive gains, especially for top 5 blue chip stocks. If we take away those gains what are we left with?

Shell: £105B (£30B)
BP: £97B (£23B)
BHP Billiton: £80B (£34B)
HSBC: £99 (£8B)
Rio Tinto: £72B (£25B)

Collectively these 5 have gained £120 billion in value! How much does this contribute to the FTSE? Remember the quick way to work out the market cap? Well we can reverse that and use it to find out how many points an amount of gains are worth

Gains (£ Millions) / 265 = Index Points
£120,000M / 265 = 453
Current FTSE 100 = 6260
FTSE 100 – Top 5 gains = 5807

5807 is not far off the range we were in back in March. All I can say is watch out below.

BLT and RIO are going up on buyout and investment speculation. BLT wants to buy RIO so RIO has gained. BLT has also gained because of some Chinese investment speculation. The Chinese don’t want the deal to go through due to interests in Iron Ore so they want to buy a big enough stake in BLT so they can block the buyout.

The way I see it is that whatever happens one of them will fall. If the chinese get their stake in BLT which enables them to stop the buyout of RIO, RIO will drop due to the buyout falling through. If they don’t get their stake BLT should drop because of no chinese investment plus they are going to have to invest a fortune in RIO.

I guess as usual the market is ignoring the facts and all investors are set to “optimistic”. RIO holders are holding on for one deal while BLT investors are holding on for the other. If I held either I’d have sold the lot by now. Looks like the market is doing so today.

BP and RDSA are going up because oil prices are soaring. What happens when Oil tanks? Do we get an oil co sell off? What happens if oil continues upwards? The FTSE 100 will go higher yet consumers will struggle more and more.

With all this in mind do I think financial markets are stabilising? No way. Libor is up. Commodities are up. Mortgage rates are up. None of those are positive for consumer based economies. It seems people are picking and choosing what they want to believe. Fact is the FTSE is only up because of certain components pulling a lot of weight. There are a few in the DOW too but that’s another story.