A Short Story
I am writing this newsletter on a bus from Kuala Lumpur, Malaysia to Singapore. It's funny how I can surf the internet on an air conditioned bus that is WiFi enabled in South East Asia, but still lose my mobile phone service when I enter my driveway in Southern California. Speaking of things Asian, many people I have spoken with are interested in how Asia is viewing the economic slowdown in America. I was a guest on CNBC Asia last week and have also been following much of the local financial news. The economic crisis in the US is taking the forefront globally.
I have a copy of the Straits Times and in glancing the headlines of the money section, there are titles such as, "Rebound in Asia iffy give fresh Wall Street jitters." Watching Wall Street is a critical tool in the Asian Trader's arsenal. Another article really gave me pause though. It was written about the recent ban on naked short-selling in the US exchanges and a fear that the same tactic could be used at the Singapore Exchange.
What exactly is naked short selling? No, it's not trading when you are too lazy to get dressed in the morning, although that should probably be banned as well. It is the practice of brokerages and institutions shorting a stock without first borrowing it. This is a practice that has been going on for some time and the US government has recently banned the practice in an attempt to prop up the financial industry and the market as a whole. There are several problems with this governmental interference into the financial markets. The first is that it will raise costs for the brokerages. Before you start saying, "Good, they should pay," remember, they will pass their higher costs onto you the client!
The second and more troubling effect will be the false rally that we have been seeing in the markets. Most retail investors and traders have been waiting for a market bottom. This rally was not a bottom but a flurry of buying sparked by naked short sellers closing positions. A few "bottom feeders" were sucked into buying as well but the upward move will not last. In my classes, I discuss sector rotation and how a rally in the financials can usually lead the market out of recession. This IS NOT THAT RALLY! This has been another attempt by the government to rescue the financial markets, and like the others, it is only a temporary fix. We have already seen two more banks taken over by the government last week. First National Bank of Nevada and First Heritage Bank were sold to Mutual of Omaha in a deal announced Friday. These are the sixth and seventh bank failures this year and will surely not be the last.
We have seen this governmental interference before with the sale of Bear Stearns and the changes in the Federal Reserve Term Securities Lending Facility (TSLF). Neither one was a permanent fix nor did they stop the markets from declining. The Fed and the government are trying to place band-aids on a major wound. We would expect nothing less especially in an election year. Restricting free markets is a bad idea and will only lead to a prolonged recession. There was talk about restricting commodities trading to "help alleviate oil prices."
The markets did rally yesterday on a higher Consumer Confidence number and falling oil prices. I hate to be the bearer of bad news, but the Consumer Confidence number is not an accurate reflection of spending in the US. Let's see what Non-Farm Payrolls bring us on Friday. We have been in a steady rise of unemployment and should see the trend continue. As for commodity prices falling, before you celebrate, I want to refer back to my article called, "Going Down?" from April 30th this year. Measuring the peak from bonds, I estimated a start to the recession at September of this year. From the peak of the equities market, we should have a recession beginning somewhere between July to September. And in the article, I mentioned that commodities usually peak two to three months prior to the start of a recession. Are you still happy about the drop in oil and gold prices? The world will survive the upcoming recession. We must be smart about it and for you traders out there, make sure you look for those shorting opportunities, and just make sure you are dressed!
Until next time, may your trades be green and your losses small!
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A member of the Market Technicians Association, the Chartered Financial Analyst Institute, and now holding the Chartered Market Technician Designation, Brandon has appeared as a guest on CNBC Asia's Cash Flow and conducted special seminars for CNBC staff on technical analysis. He has published articles in The Trader's Journal Magazine and was interviewed in Share Investor Magazine. Brandon was also an industry expert speaker at the Asia Traders and Investors Conference 2008. As a former stockbroker, brokerage trader, and hedge fund trader, Brandon brings various market views and insight to his trading classes and lectures. A wealth of knowledge, he has held NASD securities series 7 and 63 licenses. An Online Trading Academy graduate himself in 1998, Brandon has been trading equities, options, forex, and futures in his own account since.