Morningbull

Well, well, well...

 

November is over and that was quite a disappointment. After September and October, which had a pretty bad historical reputation, we could have expected something better form November.

 

The month was a though month and a mildly scary month. You gonna ask : “WHY?”... And you have the right to do so. Basically we fell in the same kind of trouble that messed up the market back in spring. Remember, the Sovereign Debt, the Greek's rescue, the euro's crisis ??? Remember that the EU and the FMI put so much money on the table in order to make things right ??

 

Yes, no doubt, you remember. Unfortunately, even if at this time we all thought that it was over and put back behind us, we were wrong, really wrong...

 

We started the month with a huge optimist sentiment, we've rarely seen so much investors 99% sure that the equity market will rally until the end the year, at least. Even if the equity market was a “no brain bet”, people were also 99% convinced that the Gold will also go to the sky, at least... But, as usual, when it's obvious, it's obviously wrong.

 

Although, everything seemed to perfect back in early November, we were expecting to GM back in the market, the earnings season went quite well, the forecasts looked ok, the economics were looking good, well not THAT good, but it could be worse than that. No basically the market was good looking and bullets proof...

 

It started when Cisco came with their quarterly numbers. They were ok. But John Chambers (CEO), made a quite shy presentation after that, and he showed himself very, very carefully for the future. Then some Technical Analysts reminded us that the last time Cisco was “careful”, it was near a major peak of the market. Then people started to say that it could a good thing to take some profits after the relatively good time we've enjoyed during September and October. So, the market was beginning to be weak... And the optimism was a little bit less strong... But, thanks God, it was still there and investors were still looking at the glass half full... Otherwise it could have been a lot worse...

 

Then, suddenly, the Irish came on TV... Yes, back few months ago, we all thought that Greece is the worst we can experienced in Europe. We were all wrong. Ireland was in pretty bad shape when the EU made a “check-up”, the disease was already largely spread in the economy. But the Government was still in denial. “It's ok, we will sort it out, don't worry for us, everything is fine and if not, we gonna ask Sonny Bono and U2 to help us..”...

 

But Bono never came.

 

And the markets started to be afraid of this contagious disease called “sovereign debt”... The Credit Default Swap of every country that could be the next in trouble started to rise to the sky. The top list was easy to build. N°1 Ireland, N°2 Portugal even with Spain N°4 Hungary and so on... the rest of the list depending on the declaration of each country.. Belgium is not that proud, Italy try to stay undercover and France is still very fond of themselves, but they're not really sure they're going to make it... Especially with the vultures from S&P, Moody's and Fitch hovering around them ready to downgrade their rating at the first move...

 

So basically, we can stop resuming the month right there, because the whole story of markets and economy in 2010 is about sovereign debt and the survival of Ireland, the euro and maybe Spain or Portugal.

 

The Portugal might a smaller problem since the Chinese have expressed their interest in the country. They would be ready to invest over there, maybe someone should explain them that they cannot “BUY” the country, like they do with the US companies... But anyway, that might a good solution for Portugal.

 

About China. There was also a big problem in China and, in extenso, in the rest of the world. The country has shown pretty good factory numbers and the growth in China seemed to be back in full power. The economic cycle seems to be quicker, faster and stronger than the rest of the world. Yes, but if the growth is a strong growth, we gonna have a problem with the inflation. The Real Estate in China has already heating up, and the Government is already acting, requesting more money for borrowing in the real estate market. But it's not over, analyst are expecting to see China to hike up the interest rates in order to stop inflation... And if they're going up, the equity market is going down... So, since then China's market is lower day after day. Recently we seemed to find a bottom, but we're at seven weeks low...

 

Finally the Irish accepted the money from the EU, you bet, who would refuse 85 billions Euros ?? They're starting to restructure their banks and made them smaller and better, in order to made them help the revival of the economy and not make money on it.... The Irish Government also take an austerity plan in order to save money. This plan seems to be even harder than the Greeks had back in May. As has said a women on TV last week, “Back in the middle ages, Robin Hood stole the richest and was giving to the poorest, now Irish Government is doing the opposite..”

 

As soon as the Rescue Plan was in the press, the market started to heel... Not immediately because as usual, we've to sell the news... We've had few rough days in order to clean up the rest of the month and to make a nice base in order to start a nice Christmas Rally. We didn't even care about the War to be between the Korean Brothers.

 

So far, after three days spent in December, the investors have already (almost) forgotten the Sovereign Debt problems and the China problems. We're already watching at the glass half full, and we don't even now that there was a “month of November in 2010”... Hope that we gonna be able to hold that mentality until Santa make is job...

 

On the Commodities business, nothing change, we just have more volatility, but people are still very fond of all this products we weren't able to trade back ten years ago. We love soya, we love cotton, we love metals, we love gold and we love oil... Yes, except one day, everything is going to blow up in our face...

 

But anyway, Gold was supposed to worth at least 1'500$ at the end of November. Well it is not. We're at 1390$, we a lot of hesitation. We are in a very strong identity crisis for the Gold. He doesn't know if he is a safe heaven or a new king of trading instrument for crazy day traders from Goldman Sachs. In the meantime, he has shown some weakness during the month, but there is some strong technicals supports around 1340$ and they don't seem ready to break for now. We're still on a buy on weakness mode. The only scary stuff is that 90% of Hedge Funds managers are going long gold.... and when it is obvious... you know the drill...

 

The oil is also trading in a totally erratic way... On week weak, one weak strong... There is also a lot of speculation around the oil. Actually 95% of the volume in crude oil is speculation.... Knowing that, anything could happen... There is a lot of calls with a strike of 100$, expiration December that are traded those days. Means that a lot of people believe that the oil could go to 100$, make a jump of more than 10%, before Christmas. There is no fundamental reason for that, since the inventories are not that bad, but again, there is lot of speculation. Then, if there is a Christmas Rally in December, since oil is following the market like a nice Labrador follow is master...the Crude Oil might a good tracker for the market...

 

Basically, on the fundamental basis, the valuation of the equity market is still low, people are still underinvest in it, the technical picture is intact, and the US consumer is still alive. After the Friday after Thanksgiving, we've seen that there still money to spend. There some good chances that the optimism and the fundamental can team up together in order give us a nice X-mas Rally for closing 2010... This the last we can wish...

 

We can use this nice period of the year to have some rest and forget the economical problems all over the world, but make no mistake, they come to haunt us again next year.. But as long as the bulls outnumbered the bears, we're safe.

 

The next summary will be done end of December of early January.

 

In the mean time, I wish you a Merry Christmas and Happy New Year... See you in 2011.

 

Thomas Veillet aka Morningbull