InterChange

From the July low of 10,827 the index has attempted to cut through the Fibonacci 38% resistance level nine times and unless it can climb over this hurdle soon, we have a potential bearish setup.

Although we have stayed above the recent pivot low of 11,290 we still need to see strength come into the markets and with the summer holidays over we should really start to see higher volumes come into the markets now.

Technical indications still remain negative and with a triple RSI sell signal as well as the index below its 20 day moving average it remains to be seen if we will see a sharp September sell off. Keep in mind that September often sees declines rather than rallies and this may add pressure to the overall market.

The falling price of Crude Oil has also had no impact on the index and there has been an increase in the options market with a higher number of Put buyers which also suggest that sentiment is still pointing to expected falls.

The bulls are going to have a tough time against the bears over the coming weeks and will need to take the Dow Jones above 11,715 very soon to target the 11,982 area. A break below 11,375 for the coming week could see the bears come in and push the index lower towards 11,347 – 11,290.

As indicated previously, a Fibonacci turning point is evident during September and November. If we see a cross reference of Time Meeting Price then a surprise rally may be at hand and send the bears scrambling to cover their short positions.

Until we can break out of the current trading range of 11,710 – 11225 we remain in a sideways mode for the time being.



Sandy Jadeja is Chief Market Strategist for ODL Markets and founder of www.Spreadbettingtowin.com where he teaches low risk trading strategies and money management.  

Nearly two thirds of our economy is based on consumer spending and this has expanded as we were all encouraged by dim-witted politicians and greedy bankers to pile up debts and to keep the national spending spree going – after all “It’s good for the country!” The fallacy of growing an economy by merely inflating the debit side of the balance sheet is the economics of the speculator. This may be an acceptable structure for a company to gear up its balance sheet (to make it more efficient) in order to obtain the maximum value out of its capital, but for individuals and families this is a high risk strategy which will inevitably end in disaster when the economy starts to slow down – and here we are.

The good news is that we have not all been so profligate and that there are some quite dramatic variations. One’s first thoughts on debt usually relate to those at the poorer end of society, but in fact it would appear that research (from reallyworriedaboutdebt.com) shows that the most indebted area is actually the City of London, where those in debt owe an average of £41,002. This reflects the high salary and bonus levels, but also the higher risks with the increased level of job losses that are occurring.

At the other end of the scale are the Orkney Islands, where there appears to be the lowest level of debt at a mere £4,188 – well, not so much to buy I suppose?

Another measure is that of debt as a percentage of take-home pay and again there are significant variations. Both the South East and the North West have a debt percentage at some 132% of take-home pay, whilst the more relatively frugal Ulstermen are at a still worrying level of 97%. What is clear though is that these debt levels are neither sustainable nor compatible for a growing UK economy. 16 years of borrowing boom is not repaid in 6 months, especially if your house value is falling.

***

Airlines have been back in the news for all the wrong reasons. From the dreadful fatalities in Spain through to the previously little known flight concern of mushroom soup injury (as suffered by a Ryanair passenger), there is however, a broader concern regarding the future of many airlines themselves. A challenging mix of overcapacity, falling demand and rising costs, especially on fuel, has meant that for certain airlines and particularly some ailing flag carriers, they may have reached the end of the runway.

Alitalia defies all financial logic, and others may well follow once national pride is overcome. More likely though is that we are going to see a spate of mergers as proposed by BA with Iberia and American Airlines. For passengers, this may well mean the end of such generally cheap air travel, especially with flight capacity being taken out and fewer operators. I will not be mourning this as I would far rather have a safe airline which is profitable enough to look after its fleet, staff and passengers properly, than a cheap one that may be cutting back on some of those vital things I can’t see but still worry about – and mushroom soup doesn’t tend to be one of them.

***

Following on from my comments last week, it was pointed out to me that although the Russians may have greater expertise in chess than the Americans, the US strength lies in the game of Poker. I am not sure when it comes to international politics that this fills me with too much confidence either way.

***

And finally.....an indication of the impact of the rising cost of commodities is perfectly illustrated by the estimated value of the 50,000 manhole covers stolen this year - £1.5 million. Surely time to launch the new Dyson replaceable manhole cover?

Have a good weekend,

Justin A. Urquhart Stewart

Director

Seven Investment Management Limited 

Following the release of the June industrial production figures, it was always likely that the preliminary second quarter GDP figures would be revised down a shade. What financial markets were not braced for, however the second estimate would show the UK economy had ground to a complete halt. The expenditure split of the data also contained one or two surprises with consumer demand estimated to have contracted by 0.1%; spending on the high street slowed markedly during the quarter, but growth had remained positive. This means that non-retail spending, which is normally more resilient, must have fallen considerably. Similarly, although a sharp fall in business investment had been reported the day before, the 5.3% decline in overall fixed investment spending was much larger than the consensus had been expecting at the start of the week. But as far as we are concerned, the most alarming feature of the figures was the huge rise in inventories during the quarter, which added some 0.6 percentage points to the headline quarterly GDP growth figure. In other words, had it not been for this, instead of being flat, headline GDP would have contracted by 0.6%. As a result, final domestic sales, which are our preferred measure of the economy’s underlying strength, declined by 0.9%, the weakest showing since the dark days of 1991.

This explains why Mervyn King presented such a downbeat assessment of the economy at the press conference for the August Bank of England Inflation Report. Just to have a neutral effect on GDP in Q3, inventories need to increase by no less than the change in stock-building between the first and second quarters (£1.8bn in chained 2003 volume terms). But given the weakness of final demand, much of the build up in stocks in Q2 is likely to have been involuntary. As a result, companies will do everything in their power to reduce their inventories not add to them further. Inventories are therefore likely to make a large negative contribution to headline growth in Q3. True, net exports are currently supporting overall activity, but only by virtue of imports falling more quickly than exports, itself a feature of weak final demand.

From here, with the squeeze on disposable incomes intensifying and the labour market deteriorating, it is difficult to see why consumer demand should rebound any time soon. Similarly, with house prices falling and mortgage approvals plummeting, construction investment surely has further to fall. Consequently, and with the new lower starting point for the second half of the year, economic growth in 2008 as a whole now looks like coming in at 1.0% with only 0.8% in prospect for 2009. That’s the bad news. The good news is that the MPC should now be free to start cutting interest rates. We have long held the view that interest rates would start to decline in November. By following this data, and with the inventory overhang it is likely to intensify the price discounting on the high street, the first cut could now be even earlier.  

The previous week closed with a net loss of -0.27% and started this week with a sharp decline. This indicates clear weakness and historically we have found that the month of September is not a good time for the markets. In fact there have been more declines rather than rallies.

We also noted that the index is still struggling to climb above the 11,700 level which has pushed the Dow Jones lower several times. With this type of price action we could be setting the stage for a sharp decline.

Let’s look out for the recent pivot low of 11,290 which if broken could see the index fall lower back towards the 11,100 area and lower back down to the major July low of 10,827.

In sideways markets which are what we seem to be experiencing right now, the risk can be hard to manage and an increase in volatility can swing traders up and down. The best thing to do in this scenario is to maybe sit on the sidelines until a clear direction has been put in place.

Technical indicators are suggesting that the market is still weak as indicated by the RSI indicator on both the short term and intermediate term time frames. The recent Buy signal has been negated by a new double Sell signal and the index is also back below the 20 day Moving Average.

All of this analysis points to lower prices and a Fibonacci Time Analysis points to a turning point in either September or November. Support levels for lower prices come in at 11,225 and 10,700 for the next few weeks. If we deteriorate with severe declines the next major support levels are below the crucial 10,000 level.

At best we can expect further sideways price action with a bias to the downside unless we break above 11,635 very quickly to negate the bearish analysis for now.

Sandy Jadeja is Chief Market Strategist for ODL Markets and founder of www.Spreadbettingtowin.com where he teaches low risk trading strategies and money management. 

Whilst there are still quite rightly continuing worries about rising inflation and a global economic slowdown, the geo-political issues seem to have now come to the fore. Thus the invasion of Georgia has been a key element to bring out some of these concerns – however, it should not simply be seen as a regional issue but rather just one factor in a far larger story.

Russia reasserting its power is not a new story although one which is of growing importance. After all, has not Russia always been an empire since Peter the Great formally proclaimed its formation in 1721? From Tsarist to Communist the Empire has existed, except for the short period under the alcoholic haze of Boris Yeltsin when the economy nosedived into near anarchy and valuable national assets were given away (salted away) to his apparatchiks who seemed to effect an astonishing amount of money laundering – often out of the country. Out of this chaos arose the power of the “Putinist” Empire buoyed by the rocketing value of the oil and commodity boom, which has allowed him to reassert the power and pride of the nation. As an ex-KGB colonel he will have no doubt been trained in key strategies of chess and thus when looking at Russian external policy, look not to one unfortunate country like Georgia, but rather at the broader chess board and see how the pieces have been deployed.

When considering Russia I have found it useful to remember something my father showed me when trying to understand the attitude of the nation. He would take the map of the world and turn it the other way around and then imagine yourself as Russia. Your southern boundaries are surrounded by unsettled, and often unreliable, neighbours most of whom seem to be keen to either break further away from or chip away at, their relationship with you. Not only that, but you then have the USA behind your back, which is never a comforting position to be in – either from enemy fire, or friendly fire come to that.

Now we can begin to understand the apparent paranoia that is prevalent in Russian attitudes to foreigners – especially as they seem to have a history of regularly invading the Empire – from Napoleon, the Crimean War, 1919, and 1941. Then, when they could at last establish a buffer zone of the USSR around the old Russia - even that finally broke apart!

So where are all the chess pieces? Ukraine has to be a vital knight. Not only is she covering the southern flank of mother Russia, she is now leaning towards the West. More than that she owns the Crimea, where the vital Russian Black Sea fleet is based in the warm water port of Sevastopol. The Russians lease this under an agreement which is due to expire in 2017, and there will no doubt be fears that a pro-Western Kiev government might not renew it. That I suspect would not be acceptable to Moscow. Additionally please remember that there is a significant Russian population in the area and, as with the Georgian disputed regions, any threat to those citizens can easily be used as justification for more forceful action.

A concerning parallel with Georgia should also be noted. The pro-Russian organisation that operates in both South Ossetia and Abkhazia also now operates in the Crimea. This group named “Proryv” has already warned of heightened tension leading to a possible “spark of serious escalation” – a concerning statement.

The other chess pieces obviously include the Baltic states and Poland, all of whom are being brought into the game but in addition to this Western Europe is also involved, as now some 60% of its gas and 30% of its oil is now coming from Russia – are the EU states in danger of becoming Russian pawns?

My problem is that I not sure that we have many political chess grand masters in the West any more who have the experience of how to effectively play the game. The “great game” that was the Cold War had bred such expertise; the Tepid Peace that followed wasted it.

With the Americans intending to plant missile defence radar systems ever closer to the borders, they should understand the reaction that they are likely to receive. If you are stupid enough to stick your hands through the bars of caged bear, you are just as likely to lose them! Mr Bush I suspect is not a chess player. With the radar agreements with the Czech and Polish governments and potentially the Ukraine wishing to join as well, this can only further aggravate an already tense situation.

The old spheres of influence that existed before may have been forgotten but the US may be forced to reconsider if the Russians decide to repeat what another young inexperienced president in the US had to deal with shortly after attaining office 40 years ago – Cuba.

Such tensions will further push risk levels and force worried investors to seek even more security. So far Oil and Gold prices have not reacted but if there is any hint of a Bear paw pressing on the pipelines to the West, then we could easily see a spike up in those prices.

***

In the meantime some care watch on the banking system will be required - Mr Rogoff’s warning in Singapore may have had a touch of hyperbole – but there is no smoke without fire. Thin plumes of smoke seem to be rising from Australia’s Babcock & Brown and America’s Lehman Brothers.

***

And finally......more cost effective news from a local authority as Chichester District Council installed a miniature camera in a bin bag to try and catch fly tippers. Unfortunately no one told the dustmen (sorry – waste operatives) who of course threw the bag in the lorry and carted it away. Only another £10,000 of camera lost!

Have a good weekend,

Justin A. Urquhart Stewart

Director

Seven Investment Management Limited 

This week’s price action has made it clear that the Dow does not like the 11,700 level.

The bears did indeed push this index lower and also below a pivot level which means that we could potentially be on the verge of a larger degree decline. With seven failed attempts at the 11,700 level it is evident that a stronger force on the bearish side is more likely and that unless we can rectify the start of this weeks fall, the picture does not look too good.

We seem to have a choppy ABCD type correction into the resistance area and with the RSI now changing direction to the downside we can assume that there is more to follow through if we break below 11,434.

Short term traders will notice that the index is also below its 20 day Moving Average and will be focusing on trading the short side which could also bring momentum traders to drive the market lower.

The decline in Oil prices has still not helped the index to rally higher and with all of these factors, we should be careful not to get on the wrong side of the fence as things can get nasty very quickly here.

For the week ahead, I would be looking at the Dow to get back above 11,535 at the very least to target 12,000 and if we start to head lower then a breach of 11,225 could set the stage for the Dow to head back down towards the 10,700 target.

Momentum indicators are not clear to the next move and it is obvious with the chart pattern that the market is trying to find its feet for a firm footing before taking off again. Either way we can expect volatility to be around for a while. The struggle between the bulls and bears is still on and one side is soon to hold the flag up to give in.

Sandy Jadeja is Chief Market Strategist for ODL Markets and founder of www.Spreadbettingtowin.com where he teaches low risk trading strategies and money management.

Its stadium and facilities for the athletes had already received rave reviews as sports men and women the world over waited patiently to have their turn in the spotlight. So naturally it would follow that economists wanted a piece of the action too. No, not content enough in forecasting anaemic growth rates and crippling inflation, it seems some have been busy predicting which of the participating countries would come away with the highest medal count.

Cooking up an economic model, adding a dash of statistics, and probably a sprinkling of magic fairy dust, they are out to disprove the theory that economists were put on this earth to make astrologers look good. So before you go to your local betting shop and gamble away willy nilly, you might want to look up a chap by the name of Daniel Johnson. This Colorado College professor, along with his trusted undergraduate, has come up with a five piece computer model to calculate not just how many times the stars and stripes would be hoisted, but how many gold medals their countrymen will take home.

And just what are these five crucial factors? Mr Johnson puts it down to GDP per capita, total population, political structure (this is one instance where not a having a vote really wins out), climate, and home-nation bias. One can imagine that population weighs heavily on medal totals – after all the higher the population the deeper pool of talented athletes and hence a greater chance of producing winners. For instance, the heavily populated China is projected to take an incredible haul of 89 medals, up from the 63 they took at Athens.

But population alone is not enough to explain the ability to win medals. Or else India should be walking away with a lion’s share now. Instead countries like the United States, Russia and Germany with a high per capita income are near the top of the medal winning table. In other words these countries have the added advantage of being rich too. The US is expected to take 103 medals in Beijing, with 33 of them being gold and the incredible Mr. Phelps is obviously seeing to that. This half man, half fish, has so many gold medals already that if he was a country he would be ranked sixth on the list!

The next factor favours communist and authoritarian countries in the medal stakes. The fact that India prides itself on being the biggest democracy in the world is seriously working against its fortunes in Beijing right now. That and the country’s obsession with cricket! Will its first ever individual gold medallist - Abhinav Bindra – boost the sport of shooting as much as he has his marriage prospects? His dear mother has already claimed that she has “lots of work ahead as he is the country's most eligible bachelor”.

The last two factors of climate, meaning the number of frost free days, and the added benefit of hosting the Olympics apparently add to the medal tally. Something to do with the government mobilising resources into the sport and the psychological impact of the home crowds cheering on should mean that our athletes should expect to do well at the London Olympics in 2012. But of course we all know different, don’t we? How else does one explain the ‘Henmania’ phenomenon failing to produce a Wimbledon tennis champion?

Another study by PricewaterhouseCoopers (who have also been forecasting Olympic success since 2000) factors in previous performance. This bodes well for US, China, Russia and Japan who all exceeded expectations in the Athens Games. At this point, I would just like to say to you kids – Don’t try this at home! Past performance is not an indication of future performance when it comes to your stock portfolio.

Daniel Johnson does have an astonishing 95% rate of accuracy and so his study perhaps should not be poo-pooed. In that vein, here are some things we should do to ensure this country has a good chance of winning further Olympic medals. Have more kids, make more money, turn communist, and drive more cars (more cars, more global warming, more frost free days – you get the picture!). Your country needs you.

***

And finally………. as the saying goes ‘War is how Americans learn geography’. Perhaps, then, Birmingham City Council should go to war with Alabama. The council’s shocking grasp of geography was evident in the 720,000 leaflets it produced at a cost of £15,000 and sent to its residents thanking them for doing their bit for recycling. The photograph of the city it used on the leaflet showed not the famous landmarks of the Rotunda and Bullring shopping centre in Birmingham, West Midlands, but the American skyline of downtown Birmingham, Alabama instead. Oops!

Have a good weekend,

Aparna Ram
Research Analyst
Seven Investment Management Limited

Bear markets are much more common than most investors would guess.

The trend was different 100 years ago. The norm in those days was for sporadic and often quite painful bear markets. A quick-running downturn in 1920 knocked prices by more than 40 per cent. Another one, from 1928-32, produced a total decline of 60 per cent.

A major trend change occurred in the second-half of the century. Since1950, there were 14 separate downturns. In other words, one began every four years or so, on average.

Those who began to invest in the rip-roaring 1980s or 1990s are especially likely to be surprised by these figures. Unfortunately, that powerful two-decade long advance probably was probably a once-in-a-century experience.

We seem to have gotten back on track in recent years with separate downturns in 1998, 2000-3 and 2007-8.

History makes a clear point. The road to long-term capital accumulation must either include working and saving or being born into the right family. Stock market gains of the magnitude seen at the end of the last century probably will no longer do the trick.

Another trend change worth noting is the role of financial institutions in triggering bear markets.

Go back to the 1950s, '60s and '70s and you will find that interest rate changes and bank lending restrictions played a role in many bear markets.

But these changes and restrictions were typically forced upon financial institutions by the government of the day. These institutions were frequently buffeted by government policies or broad economic forces, just like the rest of us. They were often victims as well as victimisers.

The world changed in recent years - big time. Indiscriminate lending practices and high leverage provided by leading financial institutions were implicated in each of the last three downturns.

Recall that the collapse of the Long Term Capital Management hedge fund triggered the 1998 downturn. LTCM went belly up after bank loans allowed it to leverage some of its bets by a factor of 100:1.

Speculative lending to investors in start-up tech companies in the late-1990s contributed to the Tech bubble and the bear market of 2000-3

The bear market of 2007-8 was triggered by sub-prime real estate loans, coupled with clever ways of repackaging these loans in a highly leveraged fashion.

To be fair, low interest rates by the Greenspan-led Federal Reserve also contributed to the problem. Even so, there is an old expression that war is too important to leave to the generals. Perhaps the same thought should now be applied to the link between the economy and financial institutions.

We now know that short-term greed and mismanagement by top financial executives can slam the entire economy, not just one errant company. There is an urgent need for more supervision and regulation. Otherwise, we must prepare for future banking-caused stock market drops.  

The slide in oil and other commodity prices has been key here but also the evidence pointing to a weakening economy is accumulating.

The fall in bond yields is not just a UK phenomenon. Much the same thing is happening in other major government bond markets, though to a lesser extent in the US Treasury market.

The evidence now indicates that the developed economies are heading into recession, if they are not in one already. Second quarter GDP growth in Japan and the eurozone has turned negative. In the US, GDP growth is being held up by the contribution from net exports. The growth of US domestic demand has already turned negative. Given that monetary policies are being geared increasingly towards restraint in the emerging economies and that growth has stalled in the major economies, the contribution to US GDP growth from net exports is set to become less supportive so US GDP is also likely to turn negative.

What all this means is that the downward pressure on government bond yields is likely to be sustained. Government bond markets not only reflect the growing conviction that the underlying tendency is disinflationary in the major economies but they also reflect just how deadlocked monetary policy has become.

In its Quarterly Inflation Report, the Bank of England judged the balance of risks to be on the downside for growth and on the upside for inflation, though ultimately it expects inflation to drop convincingly below target. The economy is in need of lower interest rates but inflation, which by the CPI is now more than double the MPC’s target and expected to climb further away from it, is preventing the MPC from bringing them down.

We have been making the point that lower gilt yields support the case for high yielding UK equities (see High yielders for value investors 16 July 2008 and A boost for high yielders in the UK equity market 6 August 2008). The chart on the preceding page conveys the sense in which high yielding equities have been moving. It shows the FTSE 100 along with the FTSE 100 excluding Resources. The latter is up some 11 percent from this year’s mid-July low. The FTSE 100 is up by half that amount.

The dividend yield on the FTSE 100 ex Resources got to be a full percentage point higher than that on the FTSE 100 in mid-July. It is less now but the index still carries a premium yield to the FTSE 100. It is dominated by the Banks but it has plenty of other high yielders in sectors like the General Retailers, Travel and Leisure, Household Goods, Media as well as few other financials. The FTSE 100 ex Resources has become something of a high yielding equities index.

A good test of whether the rebound from the mid-July low is just another bear market rally could come if and when oil prices (as well as other commodities prices) regain momentum, which could happen if China’s economy picks up steam once the Olympic Games are over.

Inflation in China has come down from a peak of 8.7 percent in February to 6.3 percent last month. In view of this deceleration, the Chinese authorities are now attaching priority to sustaining rapid growth and may choose not to tighten monetary policy further. They may even relax it.

But if bond yields continue to edge lower against this backdrop - on the view that the next move in interest rates is not only down but that there will more cuts thereafter - yields on UK equities should continue to fall. The equity market should be discounting recession already. The prospect of lower interest rates should not only help it to think ahead to the recovery but should also help high yielding equities acquire a re-rating. We think sterling is set to continue weakening and this will be helpful for earnings.

As the chart on the preceding page shows, the tram lines have defined a year long trading range for the FTSE 100 ex Resources. Having rebounded from its mid-July low, the FTSE 100 ex Resources has run up against resistance. At some stage, one or the other of the tram lines will be broken. The chances are it will be the top one - when interest rates are cut. 

* The information contained in this report has been taken from sources disclosed in this presentation and is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. The opinions expressed in this document are not the views held throughout Brewin Dolphin Ltd. No Director, representative or employee of Brewin Dolphin Ltd. accepts liability for any direct or consequential loss arising from the use of this document or its contents. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. In addition we reserve the right to act as principal or agent with regard to the sale or purchase of any security mentioned in this document. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk. The value of your investment or any income from it may fall and you may get back less than you invested. Past performance is not a guide to future performance. If you are in any doubt concerning the suitability of these investments for your portfolio you should seek the advice of a qualified investment adviser. Brewin Dolphin Ltd, a member of the London Stock Exchange, authorised and regulated by the Financial Services Authority. Registered office: 12 Smithfield Street London EC1A 9BD. Registered in England and Wales no 2135876.

The main question on trader’s minds right now is if the current move is going to be the start of a major move to the upside. And given that we have seen a +9.6% move from the July low, one could believe that this is indeed a significant factor. However, we must really focus on the larger degree trend in that we have already lost -17.5% from the May high of 13,136 and that the current move is really a counter trend rally. In other words we should assume the rallies to be corrections to the main trend.

Therefore we should be focusing on resistance targets which could potentially halt the rallies and keeping the index from seeing new highs. That being said, the bears are going to keep this market under pressure unless we can see a significant turnaround. So what would it take for the market to experience this turnaround?

Initially the Dow will need to clear 11,710 which it seems to have struggled with over the last three weeks. If we can stay above this level then the next main resistance barrier comes in at 12,255. But also the current pattern formation could either be an ABCD correction or a five wave formation which could end up having a choppy price action during its corrective move.

If during this correction we can see a strong momentum build up and see positive closes near the intra day highs then that would indicate the bulls are starting to take control and feel confident going home on the highs. There really is an overall lack of confidence in the markets at the moment and the drop of Crude Oil has had no major impact on the indices as one would expect. Overall the commodities markets have started a decline and if investors feel its time to move back into stocks then much work is required to take this market back up to key levels.

For the moment though, I would keep a close eye on 11,380 as a support this week of which a break below could take the index lower to test lower support levels. 11,225 is still an important level and must remain intact.

Sandy Jadeja is Chief Market Strategist for ODL Markets and founder of www.Spreadbettingtowin.com where he teaches low risk trading strategies and money management.