Last day before the holiday slow-down

Bets in the City / Simon Denham / 12 December 2008 / Leave a comment

Daily View - 12th Decemeber 2008

So, it seems to be adieu to one of the big three auto makers State side. It has been educational, to say the least, that it has taken so long for the axe to fall in a nation that practically worships capitalism. The Big Three seem to have been losing money for most of my working life (with the occasional blip into positive territory) and the long slow crash will take many companies down with it. In reality President Elect Obama would probably prefer to get this out of the way before he takes up the reins of office as all the problems can then be safely blamed on the previous administration.

The perception that the Auto Sector is to be allowed to sort its own mess out has upset the markets overnight and the FTSE is being called a massive 190 points lower in pre-market action. Bulls will be desperately upset by the turn of events and will be hopeful that the 4200 level (where we look to be opening this morning) might act as some support. Unfortunately for the short term there has probably been quite a bit of stake building over the past few weeks and these traders will be looking nervously at valuations. If the perception that we are about to enter another downward spike takes hold then the temptation to dump stock and hoard cash again might dominate the pre Christmas period.

Today is the last serious trading day of the year as the next two weeks tend to be very, very short on liquidity and occasionally long on volatility (as small volumes push markets in unexpected directions).

In the UK there is now another variable to be taken into consideration and this is the potential for an election early in the New Year. Politicians are understandably nervous over their jobs as most of them appear to be almost unemployable outside of the political arena and with a big surplus of Labour backbenchers to be considered Gordon Brown may decide that the prospects of re-election now will be considerably greater than in a year(or so)'s time. Due to the way that the seats are made up the Tory party need some 6 to 7 pc more votes than Labour merely to win more seats in Parliament let alone achieve a working majority. The current administration may consider the prospect of fighting on the perceived strength of the Prime Minister in tough times when compared to David Cameron (who was really picked to fight against 'Our Tony') will make for their best chance to win. The 'men in grey suits' often described as the Tory kingmakers may decide, given time, that a more aggressive performer such as William Hague would stand a better chance of victory.

The prospect of another five years of this leadership might not be taken well by investors given that the FTSE has actually lost value in the eleven years since New Labour came to power. And this is even though much of it has been replaced, in that time, by higher valued foreign components. For all of the current angst over housing valuations the fall in bricks and mortar (even in the short term) is far, far, less than equities and over a ten year time horizon the differential is monumental. The perceived wisdom that, in the long run, equities will always be the best performing sector is taking a bit of a hammering at the moment. Housing is still almost three times the price today as in 1997. For those who claim that property cannot fall too far due to the lack of supply versus demand the absolute value versus other asset classes might be educational. Even if housing fell 50pc from where we are now it would still have performed creditably against equities.

Punters continue to trade the ranges and there has been solid buying of most of the indices in early action as there is not really enough information to really get totally negative at the moment. Yes, the demise of any major corporate makes for grim headlines but it can often be taken as good for the remaining companies (the last man standing syndrome). The same effect can be seen from the death of Woolies. The mortally wounded soldiering on can have a disastrous effect on the merely walking wounded. Propping up doomed enterprises only weakens everyone else and much as it sounds cruel, especially to employees, it is often best to put the slowly dying out of their misery before they infect the majority.

The pound is giving up even more value this morning as we hit yet another all time low versus the Euro and we are now down at 1.1185-1.1189. For those attempting to find a bottom the last few months have been a painful experience and traders seem to be getting in on the move in ever greater numbers. FX markets are well known for huge trend moves (albeit with big reversals) and the current demise of the pound is a good example of this. This comment has been consistently bearish on Sterling for over a year and whilst it is tempting to continue along on the same vein I am also mindful that the plight of the pound has now caught the attention of mainstream journalists. Analysts (who have been strangely silent until recently) are suddenly falling over themselves to call for ever lower levels. Cynicism always raises it head I am afraid and I generally feel that once everyone is calling for a move it probably means that the majority of the trend is already over!

Gold has regained the plus 800 level again and the ongoing fears over the global economy keep it coming back on the buy side. The last two moves lower have petered out at consecutively higher levels which is often taken as a trend signal. The current price of 818.0-818.5 is unchanged overnight having already recovered 10 dollars from an early morning sell off.

Oil having rallied 4 bucks yesterday is off 2 today and our clients seem to be calling it very nicely, running a big long position through the session and then closing out before the sell-off. We have seen some long building again this morning in the front month and this is understandable as January delivery is 260 cents cheaper than February. On an annualised basis this would indicate interest and inflation expectations of some 30pc! Of course this dislocation is more to do with delivery time schedules but the era of sub $50 price might well be very brief.

The Tradefair Spread Betting Team