Daily Financial Analysis / Simon Denham / 02 March 2009 / Leave a comment

Daily Comment Monday 2nd March

With the FTSE sitting just on the massive support at between 3725-3750 it would be a brave investor who pitted his hard earned money on a bounce at this point.

The continued weakness in the Dow and S&P is driving ever more companies into problems with their banks as capitalisation and asset values shrink ever further against borrowing levels. It is all very well for congress and the other central banks to throw huge sums at the toxic debt problem (mainly based around retail property write downs) but what will happen if really big employers start to break their banking covenants? Either the banks will have to call in the debt or be forced to loosen covenant levels (therefore massively increasing the possible bad debt impact on their books) or appeal, yet again, to the State for more aid for industry (as per the auto industry). The slowly falling indices are dragging ever more of the total economy into the mire and there is a very real possibility of the problem accelerating into an absolute disaster as opposed to a problem mainly constrained to the financial sector at the moment.

The FTSE is being called 90 points or so lower at around 5740 (the level, approximately, from which we have bounce several times in the last six months) and if we do not recover from here today this will make eleven down days out of the last twelve. This is bad even when looking at the last 18 months of never ending disasters.

Punters continue to buy into the falls and I can only hope that they are correct in their assumption of some kind of support from these levels. In reality the news continues to deteriorate and we really do need, desperately, to have some vision that the ruling elite have any real idea of a solution rather than just reacting, ever more frantically, to current events. At some point nasty decisions are going to have to be taken. The Swedish premiers stance over Saab should be applauded across the globe as an indication of elected officials willing to take an unpopular decision for the benefit of the whole economy not just the electability of the governing party. Oddly enough, in the UK there is so little money available to the Government that we may have to be at the forefront of the 'hair shirt' decision taking which may harm us in the short to medium term but might well benefit in the long.

Currency markets are pretty much academic at this stage as more and more economies slip into the mud. I mean, which currency looks stronger than any other? It is now more of a question about which is the least weak. In very grim times the most attractive currency will probably be the Dollar as even with the US economy in real trouble it remains the global currency of business. Most international contracts are written in dollars, nearly all commodities are bought and sold in them and even many domestic companies across the globe report in them. This is the case even though much of the aforesaid business does not go any where near the USA. The same cannot be said for the Yen, Euro, Pound or Yuan. With interest rates converging across the world to 'somewhere around zero' more and more of the liquid capital may well diverge towards the one true global currency.

Gold is bouncing (once again) against a weakening equity scenario but traders should beware that it did exactly this on Friday (as the Dow and S&P fell) before slumping in the afternoon against a very minor equity market rally. We are now back up at $955, having hit 927 on Friday, but we rally need to make a successful attempt at $1000 soon otherwise the costs of holding the bullion will start to weigh against it's attractions.

On another note it is nice to see that the Government is now in so much of a pickle that they are actually proposing to enact new legislation just to punish one man. This is not democracy as I was always brought up to understand it. Sir Fred might not be a sterling example to use to defend the principles of Law but enacting Bad Laws to defend good causes generally has very dire and unforeseen consequences.