It really has been a shocking start to the year - already I am down about 11% on my Exposure and that includes selling some stuff and having some Big Hedges - but sadly I took this action too late and a lot of damage had already been done. With such a poor start, it really feels to me like this is a ‘Damage Limitation’ and ‘Capital Preservation’ kind of year and any dreams of making 20% + Profit for the Year are pretty much distant memories.
Obviously if we get no kind of Recovery later in the year, then it will be pretty much impossible to get anywhere near Break-even for the year. However, there are still 10 months to go so there is plenty of time for things to perk up.
As per my previous Tweets, Pods, Blogs, etc., I am of the view that the Markets will struggle prior to the EU Brexit Vote which will most likely be around the end of June - and whatever the Result of the Vote (stay in or cry “Freedom“), the Markets will Rally. This would be quite realistic when you consider that the Bear Market has been going on since April 2015 when the Peak was and if we Rally around October or something, then the Bear Market will have been running for roughly 18 months which sounds like the right sort of time span.
Why let the Bear munch your Wealth?
As mentioned above, for me this is very much a time of nailing down the hatches and trying to protect my Wealth as best I can. Obviously this is in no way easy to do but at least it is worth trying. Even if I was to only take 10% of my Stocks Exposure off the table and move it into Cash, that would provide a little bit of Protection and it means I would have Fire-Power for when the Rally starts (hopefully in late 2016, but almost certainly in 2017 or we are at Baked Beans, Bottled Water and AK47s time).
My chosen method of Protection is by using Hedges on the FTSE100 - it’s by no means perfect but by far better than just watching my Portfolio Wealth evaporate. It simply amazes me that People are so complacent and resigned to watching their Portfolio shrink and do nothing about it. The usual justification is “oh, it’s only paper money, it will come back” - but that is making a huge assumption about the Recovery of the lost Wealth and it is really a psychological comfort blanket and ducking from the reality.
The big problem with such a ‘Bunny in the Headlights’ approach is that you could easily lose 30% of your Portfolio this year. If this happens, it means you need over 40% next year to get back to Breakeven - this is a seriously big ask.
If you are aiming for Compounded Returns over the years of at least 10% CAGR (Compound Annual Growth Rate), then you really cannot be suffering hits of such a big size in the Bad Years - I wouldn’t want to lose any more than 10% in any year really - it is just too hard to pull it back after such a drop. In truth, you have to expect Volatility of Returns over the years but you really cannot afford Negative Years - especially big losses.
In other words, if you want to make decent CAGR over the years, then you must protect Capital in Bear Markets and this means selling some stuff and moving into Cash and/or Hedging.
Concerning the Banks…….
I am actually quite surprised and questioning my thinking as I write this section and with regard to much I have mentioned to mates and sent out via Tweets.
If you had asked me late in 2015 if a repeat of the Credit Crunch around 2008 was possible I would probably have said that such an event was extremely unlikely - Bear Market crises rarely have the same cause. However, I am increasing getting concerned that something is very wrong in the Banking System - it may not be a carbon-copy of 2008 but it could be close enough in its effect upon Stockmarkets and other Asset Classes.
My concern has been triggered by the utter collapse in Bank Shares since the start of 2016 (I think many are down by 40% already !!) and the fears over Deutsche Bank are scarily reminiscent of the problems at Bear Stearns, Lehmans, etc. DB is not the only bank in the firing line - other Banks like Credit Suisse and pretty much all the Italian Banks have been fingered. In addition, Gold has been rising - this is sending a consistent message that something is not right.
Many people will say this is just scare-mongering etc., but I am not so sure this is right. The commonly repeated line is that the Banks have been ‘fixed’ since 2008 but I seriously doubt this is the truth. The ‘Stress-Tests’ that have been performed have been widely questioned for their validity and strike me as more a ‘Window Dressing’ exercise by Politicians and Central Banks to give the impression that the Financial System is robust.
To me the Banking System is incredibly fragile. I suspect this is something that has grown up over the last 30 years or so - mainly as a result of advances in Information Technology (Computers !!) which have enabled even more complicated and sophisticated Derivatives to be created and have also increased the Global Linkages between Banks. This Complexity has benefited the Big Business and Political ’Elites’ and enabled them to drain more and more wealth out of the Global Economy whilst creating an extremely fragile Banking System.
This has been compounded by Central Banks in recent years employing more and more ’clever wheezes’ to try and create Demand in stagnant Economies that have been tied down by ever increasing Regulation which has entrenched Big Business and taken any dynamism out of Western Economies - you try starting a Business in the UK now - it is not worth the bother. The EU has been the worst example of this dead-hand bureaucracy and it has simply strengthened the position of the Elites.
What Western Economies need is Deregulation, not Financial Voodoo. Part of the problem is that well-meaning, socialistic, Politicians love adding new Regulations onto Business but they never remove any of the old ones. It’s truly nuts.
In many ways it is like the 2008 Crisis was never actually fixed - they have merely been ‘Can-Kicking’ for the years afterwards - the system is just as breakable and unstable as it was before - nothing has really changed. The lack of Demand has been covered over with bouts of Quantitative Easing (QE) and huge injections of borrowed Government Spending (Austerity? Don’t make me laugh).
So, the latest Central Bank trick is ‘Negative Interest Rates’. This was thought to be impossible up until now but Japan and I think Switzerland and some others have now taken this step. In theory it sounds great - you have to pay to deposit money at the Central Bank so rather than do that, you will use the Cash in better ways which will help stimulate the Dead Economy. The problem is that there is a knock-on for Banks - it means their Lending Margin is squeezed - meaning less Profitability and this leads to more worries about their already questionable Capital Bases.
When Interest Rates are higher, a Bank can borrow from the Central Bank at say 3% and lend it out to Business or for a House or something at perhaps 6% - so the Interest Margin is 3%. When the Interest Rate is 1%, the Bank may only be able to lend it at 2% - so they only make 1% as the Interest Margin - so it is much less profitable as Interest Rates fall.
Towards the end of 2015 the expectation was that Interest Rates would slowly rise (Normalise) - in fact, the US Federal Reserve (the Fed) started down this path with a small rise. As a result, Stockmarket participants thought that Banks were a good play as their Lending Margin and hence their Profitability should increase - but this has all changed in 2016 and could be the Trigger that starts the next Banking Crisis.
OK, if that is not big enough a concern, the next problem for the Banks is all the dodgy Loans they have made to US Shale Oil Companies (what a bunch of Frackers) - with Oil at $30 a barrel, many of these Companies will go bust - meaning that Banks are sat on loads of ‘Bad Loans’. It is not too much of a stretch to substitute ‘Sub Prime Mortgages’ in the US which triggered the last Banking Crisis for ‘Shale Oil Loans‘. Many Banks are also in a similar problem with loans to Commodity Companies in general, where the price of pretty much all Commodities has fallen.
If that isn’t enough, we then have fears over Global Growth - you can see it in pretty much every bit of Macro Data that is being released and across all Regions of the Globe - there is a clear trend to missing Expectations and slowing growth. Banks do not do well in Recessions.
You may counter that Central Banks will do more QE - but it appears to me that such bouts of QE are having diminishing impact and it looks like Central Banks are running out of ammunition to save the Markets.
Did I mention Greece?
Staunch the Flow
Even with the Hedges I have in place, I took a big hit last week losing about 3.4% of my Portfolio Exposure. This makes me think my Hedging is too light and I need to increase it a bit. I am hoping we will get a bit of a Bounce this week and I will be looking to increase my FTSE100 Shorts if this happens - I might also sell a Stock that is in the firing line for me.
Now, I might be wrong on all of my concerns mentioned above, but I do not want to take a chance on being wrong - the reality is that whatever the cause, we are in a Bear Market and this probably means we will go a lot lower - I do not want to keep Bleeding Cash. For me, Protection is critical.
Let’s see how things play out - in the meantime, here are the Charts:
The graph below from the quasi-magical ShareScope Software, shows the Daily Candles on the FTSE100 for about 8 months back. If you look to the far right you should see a Big White Up Candle what was generated by the strong day on Friday 12th February 2016 and this suggests that the Market can rise for maybe a few days.
There is Resistance at 5768 which is from back on Black China Monday 24th August 2015 where Support failed recently and should now act as Resistance. If the Price can rise through this, then the next Resistance area is at 5800 and then there is a lot of Resistance around 5900 and 5950 which I have put the Blue Circle around.
The Black Arrow points to Resistance at 6100 but it also points to the Blue Wavy Line which is the 50 Day Moving Average - this could be Resistance at around just under 6000. The Red Downtrend Line, Marked with the Big Red Arrow, will most likely cap any rise.
Note how the RSI was down around 20 back on Black China Monday 24th August 2015 - I would expect we need to see the RSI back down around these levels before this Bear Market finally ends - such an event would help signal ‘Capitulation’ - which is a final clear out of the Bulls before the Market then bounces back strongly.
The Screen below has the S&P500 for the last 5 months ish. My Blue Arrow points to a nice White Up Candle from Friday and this suggests more gains to come. Note the Resistance up above at 1870 and then 1900 and 1920, 1930 and 1950. Note there is a cluster of Resistance around 1900 though which might be difficult to get through.
Note down below there is good Support around 1812 - in fact, we have been down near here a couple of times so this could be building a good Base of Support. On the flipside, if 1812 fails, then we will go much lower. I expect this Support to fail before we see the Bear’s Backside.
The Graph below has the Daily Candles going back about 8 months or so. My Black Arrow points to a Hammer Candle from Friday which suggests we might get a bit of recovery - however, my Blue Circle shows there is a lot of Resistance around $50 and this will be difficult to get over. I suspect it will take many weeks before we get to test this higher level - the Market is still in a Downtrend.
On the Chart below of Daily Candles for Gold, my Black Circle highlights 2 Candles from Thursday and Friday last week which suggest that the Price will drop back in the Short term. The Green Line at $1180 might act as Support and possible $1200 may do also. Note the 200 Day Moving Average (the faint Blue Wavy Line) is down around $1130 - this should be Support if it falls back a lot - which is possible if Stockmarkets Rally a bit.
P.S., I am not convinced that ‘Bleeding Love’ is really an appropriate tune for Valentine’s Day…….