Things are looking grim

Daily Financial Analysis / Simon Denham / 20 February 2009 / Leave a comment

Daily Comment Friday 20th February

Things are definitely starting to look very grim. Virtually every senior index market has slipped under major support levels and the only chink of light seems to be that there is no solid follow through. The Dow is now slipping below the low on the Futures last November (at a cash equivalent of 7400) and we are now quoting the US market to open at around 7395.

With the value of just about every asset on the planet falling ever lower security against debt is getting very stretched and we are risking an even more serious implosion as lenders demand ever more protection against existing loans let alone issuing more. As some high net worth individuals, in the news recently, have discovered when you pledge your existing stock against loans for new ventures the very real danger is that the debt on the new enterprise will go belly up just as the value of your stock is going south as well. Replace the words "high net worth" with "corporations" and "stock" with "assets, plant, land, cash" and you get some indication as to the worries arising in many a board room. With export volumes from the major Far East industrial giants seemingly running into a brick wall (Thailand's exports have fallen almost 30pc YOY) the fear of a serious unrest cannot now be discounted and if these major disturbances arise protectionism may not be far behind to put another boot into growth.

It is difficult to know whether the latest falls are another move to a new bear phase or just a clear out of weakly held speculative longs built up over the last few months. It has been reasonably simple for traders to deal the price ranges for the recent weeks and months and this latest move might just be a lesson to these speculators that making money is not (and never will be) this easy.

With banking stocks in the States now at such reduced levels that there is little point in selling them lower unless bankruptcy or nationalisation is in view the game will now turn to other sectors. Many companies have very heavy overheads which are difficult to downsize at a moments notice (manufacturers and retail spring to mind) and the end game now seems to be one of surviving whilst your competitors go to the wall rather than aggressive marketing. The upshot of retail failures or permanent car production cutbacks is that the remaining units have just enough of a pick up to help out.

After a particularly bloody day on the dealing floors I was amused (as presumably was much of Britain) by the sight of 'Our Gordon' visiting the Pope. Religion (apart from his apparently rather dour Presbyterian outlook on life) has never seemed to be at the forefront of his mind but I suppose help from any quarter would be useful just around now. The sight of the Prime Minister smiling uneasily might not go down as one of the greatest PR stunts of recent times.

Dealing remains fast a furious in the currencies with the pound falling back from the 1.4450 level in heavy selling yesterday afternoon. The dollar seems to be gaining ground versus most majors at the moment as the 'flight to quality' gathers pace once again. I realise that calling the Dollar an asset of quality these days might seem strange but with every economy on the planet seemingly in free fall it comes under the heading of 'the best in a bad lot'. In extremis the euro project just might fall apart (although I do not consider it likely) but the chaos of attempting to divest an entire economy from the currency bloc would be ...eeerrr... interesting.

Even Gold was looking a bit tired yesterday and (as with my comment of last week that the rising price of Yellow metal might presage a sell off of assets) those of us who hope for some stability in the markets this reluctance to drive to higher levels might indicate a small swing towards the attractions of other assets.

Brent managed a quick look below 40 bucks yesterday but seemingly did not like the view very much and has swiftly returned to around the $42 level. We are still in a new lower trading range and still a couple of dollars above Nymex and both of these facts may hold back any price gains for the moment but it must be noted that for all the efforts of recent weeks the vision of $25 a barrel oil is just as far away as it was at the close of the 2008.