Tuesday, 25 March 2014


I listened to a very interesting programme about Hyman Minsky and his theory which explains why market crashes are inevitable. The programme claimed that the reason why Minsky was never awarded a Nobel Prize for his work is that his theory was descriptive, not mathematical, so it was unsuited to the building of

If Gordon Brown had listened to Minsky he would never have claimed that there would be "no return to boom and bust". And Bernanke would have been far more cautious about leaving the brakes off as the US economy careered towards the busting of Lehman Brothers and the subsequent crash.

Minsky's theory is simple. He claims that in prosperous times, when money is freely available as companies generate more cash than they need to pay back debt, a speculative euphoria develops. Asset prices inflate and banks lend at a rate where, first, borrowers can only afford to pay the interest on their loans but cannot repay the capital; and,second, banks lend to borrowers who can neither repay capital nor interest and debts are rolled up. The expectation is that the profits made from the inflation of the value of assets will eventually clear debts.

The denouement of this euphoric lending by banks drives the seemingly stable and prosperous economy towards the inevitable "Minsky moment." The fragility of the banks is finally revealed, the customers to whom they lent so freely are unable to pay their debts, and the economy falls off the cliff.

Since this process is intrinsic to market economies, Central Bank intervention is essential. The impulse for banks to lend to ever more risky projects needs to be curbed by regulation.

My fear is that, following the latest banking crisis, it is the Central Banks themselves that have indulged in euphoric lending through the process of Quantitative Easing. I have said many times before that I believe that stock market values have been inflated by an excess of cash in the system. An excess that has been deliberately created by the authorities. When, I wonder, will the fragility of the central banks be revealed? Who then will bail us all out?

Monday, 24 March 2014

Not my usual mealy mouthed post

Busy weekend so no post.It looks to me that the market is primed for a fall. It may not happen today, or even tomorrow, but soon.

  • We have had a series of lower highs. 
  • Friday saw one of those volume spikes that suggest there may be a change in direction. 
  • The time of year is right for a pull back at the very least. 
  • And the fundamentals are starting to point in the wrong direction. 
    • QE is coming to an end, 
    • people are starting to speak of rising interest rates 
    • the economy is coming out of the doldrums so governments are going to take their feet off the accelerator. 
  • I've read reports that insiders are nine times more likely to sell shares in their companies than to buy them. What do they know that we don't I wonder? Perhaps they're expecting profits to stall.

I have cleared the decks. I took a small but expensive excursion back into gold when I thought the yellow metal might recommence its rise. I've pulled out of that too. Very often a sell off is a sell off. Avoid risk at all costs. That usually benefits the Dollar, the Yen and the swiss Franc.

So I'm set for the summer. Provided I do not fall into temptation.

That was an uncharacteristically clear expression of my belief. I have acted on it. But I may still be wrong.

Tuesday, 18 March 2014

Strategic withdrawal

Anyone unconvinced of the value of support and resistance lines needs to look at the FTSE chart. Going right back to March 2009 the line I drew has underpinned the trajectory of the current bull market. Since the beginning of this year, twice price action has tried to break down through support and twice that line has marked the point where a pull back has halted to create a higher low.

The point of drawing support and resistance lines is not that they are always right. What they do is alert you to a moment where the price action MAY change direction.

The imperfection of the methodology is demonstrated by the S&P 500 where the price action broke down through support before breaking back up. I will now redraw my support line to take into account the new pattern of price movement. (The new line is in blue.) A determined break down through that line Could be the beginning of the end. There are two more support lines to go and then we could be facing the end of a bull market that stretches back to March 2009. Five years is a very long run indeed.

I face the prospect of a bear market with equanimity. I hold almost no shares at present. I ditched my holdings a few days ago. If my exit was premature. I will buy again but I will be ready to dump my holdings when danger looms. Vector Vest advises that the end of the bull market is likely to occur when forecast earnings growth turns negative. We are not there yet but it may soon come. The bottom of a bear market offers wonderful bargains and the opportunity for great profits.

Today I ditched my remaining gold shares. They made me 5% in a month so I am not going to complain. The market may well bounce off support in which case I shall be back in there. So now I have a clean slate
and am seeking the next challenge.

Saturday, 15 March 2014

Is it the Ukraine or is it Quantitative Easing?

The market looks as though it is sliding and, as ever, commentators are seeking after-the-event explanations.  Favourite is the Ukraine. But, as attentive readers know, I was sucked into that first day crash that followed the start of the Russian invasion of the Crimea. It was a one day wonder, followed by an immediate rally and a new all time high on the S&P.

We have now had a week in which the Dow has fallen by 3%, the S&P by 2%, the nasdaq by 3%, the FTSE by 4% and the DAX by 5%. Major support lines have been broken, but it has not all been one way. Most interestingly the DAX, following a major dive on Friday, recovered all the lost ground and ended the day higher than Thursday's close. This is interesting because Germany is closest to the Ukrainian action. The US/Russian talks  in London seem to have made no progress and the Crimean referendum will take place on Sunday. The result is an almost foregone conclusion in Russia's favour. So why do the Germans seem unconcerned.

This is my view, for what its worth. We are seeing the establishment of a firm border between Europe and the Russian Federation. I suspect that Russia will want Ukraine, Belarus and Moldova to fall into its sphere of influence. On the plus side they will accept that the other countries of Europe, the ones that have already joined the EU, are part of NATO or are likely to become so, will remain outside. In this way the trade ties that have been established between Europe and Russia will continue and the status quo will be unruffled by anti-authoritarian uprisings in the countries that Russia wishes to keep as its buffer states.

The US is building up its military presence in Poland to underscore the Western edge of that border. I don't think anyone is spoiling for a fight. Russia will deal with dissidents on its side of the border and the West is unlikely to interfere.

My alternative view on the market? I think it is all down to the beginning of the liquidity squeeze that is coming as QE is reduced. There will be a big shortage of cash in the market. No cash: no buyers and the inevitable crash. All that margin trading that I pointed to in my last post will have to unwind and we will have to hold onto out hats as prices spiral downwards.

My gold bet still seems to be working. It's a precarious bet and I am taking profits as they come and am ready to reverse out PDQ if my luck seems to be running out.

Wednesday, 12 March 2014

Mixed messages

The US  market is giving mixed messages. The S&P is pulling back from a new all time high, but today's price action so far suggests that the period of weakness may be coming to an end.

The Dow on the other hand is pulling back from a lower high. This could indicate the end of the bull run. Two support diagonals, one short term and the other long term offer points where we might see a turn in the market.

The FTSE is definitely struggling with repeated vicious pull backs. However there is a succession of new highs so it's not all bad news.

The DAX is also a basket case when viewed in the short term, It's suffered a 6% fall from its latest high. But looked at in the longer term it is up at least 75% from the low it hit in September 2011.

Will it all end in tears?

Will it all end in tears? My answer: could go either way. We must be ready for anything. The Ukraine situation hasn't gone away it is lurking, ready to pounce. And there is talk of raising interest rates. Not now but soon. That could hit sentiment. On the other hand there is all that QE money still going free. Linked to this is the level of margin trading which is now well north of $400 bn on the US markets. The chart makes it clear that margin trading is drawn by stock performance. However, at this very high level it will act as a catalyst for very sharp falls as investors are forced to unwind their positions if prices begin to weaken..


On a happier note, for me at any rate, gold has broken out of its triangle. I hope it continues onward and upward. Gold and silver mining is now my only area of short term investment. I have taken some profits and jiggled my portfolio. My present portfolio is, in US: PPP MDW RBY PZG SLW MUX AUMN; in the UK: CAML RRS CEY.

Sunday, 9 March 2014

Golden Triangle

As a result of my recent activity I have closed the bulk of my short term positions with the exception of all those mining shares I picked up around the 12th February. The return (2.8% in three and a half weeks) has not been as good as my China shares (3.6% profit now realised) and Misc (23.8% profit mostly realised). Nevertheless the returns on those mining shares are great - equivalent to 41% pa. My reason for holding on is the renewed bullishness of the gold market - the bulk of those mining shares are in gold.

Not all is smooth sailing. Gold has spent the past five days failing to penetrate a horizontal resistance line in place since April last year. The support line that began on 31st December is still strong but I must be aware that a return to the low is still possible. Weakness in gold could be the signal for me to withdraw from the market for the summer.

As for the main markets. They continue on their upward push. Just the other day the general news noted that a new all time high been reached. That news has yet to hit the headlines. When it does you can be reasonably confident that the bull run has come to an end.

In the mean time I regret my decision to exit the market on news from the Crimea. It does not look as though it will become a shooting war but I still believe that the Ukraine will fall back into the Russian sphere of influence with minimal Western protests.

Wednesday, 5 March 2014

Well I got that wrong

The Ukraine effect on the markets turns out to be a one day wonder. The markets have made up the ground they lost and then some. That does not mean its all over but it does mean that the appetite for risk remains unassuaged.

I am left feeling foolish even though yesterday I made back half of Monday's losses . That was luck rather than judgement. I kept hold of my mining shares and stoked up my holdings a little. That paid off despite weak gold prices. I am now 45% in cash after buying ABG RRS and SLW and selling most of my non mining shares.

I am now left in a quandary. Does this thing move up further or have we reached the end of the line? (There are precedents for the market retracing after the first down day in a major pull back. So we could still be seeing the start of a big pull back - as shown in the DJI chart above.) Or do I take my monthly market analysis seriously and accept that I have drawn in my horns a few days or weeks too soon, but I should call it a day nevertheless.

I am dragged in two directions. I'd dearly like to reduce my loss for the year a bit more before the end of my financial year on April 5th. But then again I don't want them to grow.

And there's still the very big risk that I am right about the Ukraine and Putin is just biding his time before he strikes again. I still think that Yanukovych will be back, with Russian backing and that no-one will do anything about it. The US continues to talk tall but it lacks support, to say nothing of the fact that it has lost the moral high ground after all its recent overseas excursions.

Russian trade with Europe is so important that even words of outrage this side of the Atlantic will be be muted. Poland and all those former Soviet satellites will be sweating a bit and will be glad that their membership of NATO is well and truly in place.

The markets could be in for more nasty and unpredictable shocks like Monday's as the Russian "tanks" move forward. Let's just hope it continues to be soldiers that hold their fire and the new "unelected" Ukrainian leadership gives in gracefully to the inevitable so bloodshed is avoided

Monday, 3 March 2014

What a difference a day makes

I have lots to tell you today. I have kept the best till last so keep reading.

Reaction to the Ukraine crisis

At last the market is faced with a situation it cannot ignore. All those banks pumped full of free cash from QE have happily sailed through political crisis after political crisis. Free money low interest rates and indifference to risk, have meant that all those traders were willing to push stock prices higher and higher. Now that the free money era is coming to an end a new political crisis is weighing on the minds of those traders. How will the situation in the Ukraine pan out? I have my own private view which I will come to in a moment. It is based on gut feel - no more, so you have been warned.

The markets

But more important what should I do with my holdings? I have already sold out of my UK shares to realise a profit of 5.8% in two and a half weeks. I felt it too risky to stay in.

Currently the FTSE is down 133 points and the DAX 293, the latter being closer to the front line. At the same time the dollar is recovering some of its losses. The change is too small to say that, for the moment at least, the market is running for cover in US bonds.

Gold has made a new high in its recovery trajectory. Again nothing massive, but it is still 13% up from its low. I pray that when the US market opens my mining shares will reflect that strength as I dump the rest of my portfolio. Hopefully with some of my profits intact.

Ukraine (a personal take on the situation)

My unresearched gut feel about the Ukraine crisis is as follows: I thought late last week that the Russians would take control of the Crimea to see if they could get away with it. They have taken over and they have gotten away with it. Next move? They will consolidate and take over Eastern Ukraine. They will reinstate Yanukovych as the lawfully elected president of the Country (which he is). They will encounter more bluster and inaction. They will consolidate their position in an area where pro Russian inhabitants predominate and then, at Yanukovych's request, will take over the rest of Ukraine. Their PR will focus on the right wing and neo-fascist elements that contributed to the over-throw of the "legitimate" government. There will be more bluster from western leaders, economic and diplomatic sanctions, NATO on a heightened state of alert and we will have to learn to live with a new and less stable European status quo. Let's see how it pans out and then we'll see if I'm right.

What else?

I have two stories to tell. The first concerns the dangers of trading on the US market. Friday was going on happily for me until the late evening (late afternoon US time). I was horrified to find that my portfolio had taken a massive cash hit. Investigation showed that it was all down to a  fall in the price of one share: NQ Mobile down 30% from its high of the day. The next hour or so saw it recover and my loss was cut by three quarters. No news items threw light on what had happened. The only item was, if anything positive. It was only the next day that I found this item on a share analysis site:

"NQ Mobile (NQ), which makes mobile security and productivity software. It lost 47% last Oct. 24 when a short seller's report questioned its accounting. The stock has worked its way back near a high, but its chart is deeply flawed. The fundamentals were solid, but none of the top funds had it in their portfolio. That was a red flag."

The only reader comment on the report accused the author of being a liar. I investigated and discovered that institutional shareholders held 14.17% of the stock. Perhaps they were not the "top funds" but a more measured comment might not have sent the price reeling. I suspect that some short selling hanky panky was going on. The other share mentioned in the article suffered a similar hit. Clearly the author has a big following who acted precipitously on his comment.

Sell in May - again

I have have kept  records of my monthly trading over the past ten years. Here is how I have performed month by month. It is very revealing

Monthly contribution to profits Percentage of losing months
Dec 41% 10%
Sep 24% 20%
Nov 21% 10%
Feb 18% 20%
May 12% 40%
Mar 5% 40%
Oct 5% 40%
Apr 3% 50%
Jan -3% 50%
Jul -4% 50%
Aug -6% 50%
Jun -16% 50%
Five months have been the big contributors: September, November, December, February and May. 

Apart from May in most years those months have been winners. 

April, June, July, August, June and January have only been winners in half the years. 

January, June, July and August and  have been losers despite my efforts to avoid being in the market in losing months. 

Lesson is clear: Trade in the winter starting in September and avoid risks in the summer starting in March.