Darshan's Blog

Darshan's Daily Market Ponderings

The Ratings Agencies Get Trigger Happy on Nations

Thursday 10th December, 2009

Morning all!

Sorry for the lack of update yesterday, was rushed off my feet. There is definitely pressure building up on the bulls and bears. At the moment, it feels like the daily technicals are trying to base for a lift off into christmas but the scenario is set for a collapse to 10000 on the Dow first - if the bears want it. The closer we get to Monday, the more chance that we have of basing and lifting off for the week before Christmas. So really, if the low from the futures on the 29th November wants to be tested in the cash session (at the very least), then the bears need to get a move on.

Today we have the weekly US Initial Jobless Claims - which will be interesting in the face of the non-farm payrolls positive surprise from last week. Economists are expecting a 2k fall in jobless claims with initial claims of 460,000 in the last week, and I am sure that a better than expected number is yet again going to be dollar positive...hence market negative. On that note, the USDX is backtested the 76 level and could either drop right through it and back towards the lows or head on up to the 76.60 or 77 before reversing. Many feel that the USDX has now bottomed - which of course, means that it has most likely not done so. If the entire market is watching the same play, then you can expected a curve ball for sure.

Talking about curve balls - it seems the rating agencies have suddenly decided to turn up for work and do all the work they were supposed to have done years ago. Yesterday, Standard & Poor's cut Spain's rating to negative and of course, this was only a day after Moody's warned that the UK and the USA were getting closer to losing their AAA status. Can't blame them really with every country trying to raise money in such ridiculous numbers. Yesterday's $21 billion 10-year bond auction in the US, was a smack in the face to Tim Geithner - with the bid to cover ratio being below the average of 2.7. Of course, it could just be investors waiting for the 30-year bonds auction today, which will see a further $13billion of debt added to the US misery...bringing the week's total to $74 billion. Uncle Sam will be pimping himself out to more investors next week too. Of course, Geithner has no choice with economists thinking that the upcoming monthly budget report for the treasury will show a decificit of $135bn compared with $125bn last year.

Hey I'm not just knocking the USA - the UK is just as bad and the pre-budget report yesterday showed just how bad things are. A deluded Chancellor, Alistair Darling - spoke "from a position of strength" (what? Is he living on the same planet?) and announced that the UK GDP is likely to fall by 4.5% in the current fiscal year (Remember he forecast a reduction of only 3.5% earlier this year). Of course he then puzzled everyone by insisting that the economy would grow by 3.5% in 2011-2012 and the year after that too. Fair enough. However, all this at what cost? Well he then told us that government borrowing will increase by #3bn - up to #178bn and then to #176bn the year after. After that it will fall to #82bn by 2014-15. Interesting again. So how is he going to pay for all this? (That's if New Labour are still in power by then)

With spending cuts and tax rises for the middle income earners of course. The Sun's headline "Darling Screws More People Than Tiger Woods" was certainly spot on. Essentially the people that will be hurt most will be the ones earning #20,000 a year. Well done - this is from a Labour government. How bizarre. Of course, the windfall tax on banking bonuses was also announced and that is due to come into to place. The tax will not be on the banks' profit but instead any bonuses over #25,000 will be taxable at a rate of 50% and this is to raise #550m. Of course, this is designed to make a weak Labour party, popular again in time for the election. However, will it backfire? Of course it will. The entire policy is just ill thought out. The worry is that bankers will leave London. Right - so where are they going to go exactly? I've never heard such nonsense in my life. They will not go anywhere, they will just find more loopholes to avoid the tax. For example, here is why the policy is weak and nothing more than a cynical political game - The tax will be paid by the bank, not the banker. So it is very easy to get around paying the tax. Why? Well, here is one way - Simply pay out a cash bonus of #24,999 and then provide the rest in shares. Not only, will we see bank share prices rise 'all of a sudden' when it comes time to selling, but the banker will merely be paying capital gains tax instead of a windfall tax. I am not a tax accountant, but I am pretty sure - there will be some very smart ones, working out some very sophisticated ways out of this.

All in all, all this is academic - because New Labour might not even be power come mid next year. However, the UK will still be heavily in debt and so it is no wonder that the ratings agencies are circling around us. Nevermind hey, our children's children (I don't have any yet and at this right, I might not be able to afford any!) will pick up the tab sometime in the future.

Anyway, enough of the happy chat! For today - be careful as we have a classic 'pump the futures, sell the cash' set up - even though I said that there is an equal chance of having based for the Santa rally, there is also a need for higher yielding instruments such as equities and commodities, to be sold into - so that the 30 year bond auction can be a success. So there is every chance for a sell off and then a rise into the close. We shall see - I'm keeping both options open.

If you have any questions - just ask anytime.

Happy trading

Darshan

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