I think the resilience of the consumer is something that can’t be underestimated. The fact that consumers have been enduring economic turmoil for over a year now may also create the need for an emotional break in for form of splurging at Christmas. For this reason I think spending will hold up into the shopping season and whilst consumers are savvier and shrewder I believe that most will let their hair down over the holiday period and ignore the perils till next year.

This leads us nicely into next year where I believe that the reality of the current situation will reveal itself. Companies have been slashing costs, staff and anything that isn’t core to the running operations but this tactic only goes so far. With funding still a problem for most small businesses I believe next year will spell the beginning of another round of large jobless numbers. With this comes the problem for the US administration who have used up their congress good will and may find it hard returning for more stimulus.

The central goal achieved by the stimulus was a shot in the arm of a cardiac patient who has stabilised and shows signs of recovery but another episode could easily occur if the underlying problem is not addressed. The Administrations states its stimulus has created close to 700,000 jobs although this is heavily challenged by the sceptics. The fear is that there is no central program for job creation. It’s past the point of no return for the Administration and their hopes rely on the consumer who is in a fragile state.

I believe once we are past the Christmas period analysts will scurry to increase estimates for corporate growth which will lead to an unattainable goal for the consumer who ultimately entrenches following a harsh January where the bills flood in. My opinion is that once March arrives dire numbers will be reported and a return to reality will dawn.

Some of this is reflected in the price of gold which has risen above $1,100 showing the level of mistrust the market has. Whilst larger companies have been using the past six months to optimise performance a lot of smaller companies have been struggling to keep the doors open. Another blow to small business could result in a sizable increase to the unemployment numbers which the Administration has no plan to address. Unemployment could rise to 12% or in real terms accounting for all those who gave up or are off the list could be as high as 17% by the second half of next year. With those types of figures any talk of a V shaped recovery will reveal that the current rally was a great run but no bull.

I have been sitting on cash for months now and whilst I have missed some amazing opportunities which I do regret I don’t think the last buying opportunity is over. At this stage another 5% to 10% upside is possible but many stocks are pushing their 52 week ranges and at these prices I don’t see much value over the long term. However if you are a short term trader 10% is still nice to have and a Christmas rally is a high probability in my opinion.

Safe trading and keep your losses small.

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The rally so far has taken on many new subscribers with me included. Many of the perma-bears have shed their coat and are now wearing a nice new
bull skin. I had thought that the fundamentals would have put the breaks on the markets but then lots of little things kept improving. This morning is a case in point as UK house prices rise for the first time in 16 months. All this little signs have fed the most amazing and unprecedented rally in recent history. Hindsight has clearly shown us that the March lows were very oversold but the current pricing in of growth is in my humble opinion overly exuberant. Somewhere in between these two extremes lies the perfect market price. However that’s not my concern, in the past this would have swayed my view but now I’m just watching the trend and not questioning the greed.

There are a few things that do concern me going forward which is why I am now extremely cautious. The increasing chatter on exit strategies and the awkward bond between China and the US is of cause for concern. It’s no coincidence that president Obama is the first president to deny a meeting with the Dalai Lama. China needs to keep buying US bonds and the US needs to keep printing money but this is not an indefinite exercise and eventually someone will have to play their hand. The notion of the US defaulting is preposterous and will never happen but the notion that China may tighten its terms and conditions crippling the US for generations to come is not. In such a scenario China could make the terms of payment so sever that the US will essentially be at its mercy economically and monetarily. This is something that concerns me and until we have a clear notion of how the United States is intending to pay back the trillion dollars and mounting deficit I will remain concerned.

My second fear is not a new one but an old one that has yet to materialise. A few months ago when some people were convincing me property was now a good bet I maintained that it would go lower and then spike higher would happen only to lead to a bigger drop in prices. This is the classic bull trap as prices reach a level that people are willing to pay and those waiting on the sidelines start to trickle back. The only problem with this spike is unemployment. In Ireland it is starting to show signs of stabilising but I believe growth is a long road and with the car being repossessed walking that road is going to take time. This is why I believe this is a false dawn in the property market. New legislation in the UK placing the responsibility of the mortgage on the mortgage provider. Spending on shoes, clothes and childcare could also be assessed under a new, industry-wide “affordability test”. These new measures will make it harder to get money and with the risk of unemployment it will be interesting to see how willing the banks are to dish out new loans.

With this fear is also the prospect of continuing defaults in the commercial property markets and escalating defaults in the private sector too. Evidence of consumer saving patterns showing excessive savings signals an uneasy and apprehensive customer who is uncertain and unwilling to part with their cash. Until this is corrected it will be hard to see consumers rushing back to the shops and maybe a seismic shift has occurred leading to the majority of consumers living within their means.

Lastly and back to my opening remarks we have a new earnings season afoot with high expectations. I think we will get through this as companies have continued to trim the fat but with no fat left and winter approaching how are some of these companies going to weather the long and cold nights ahead. I believe the next point to note is next March when the true picture will be revealed one where earnings are not as great as greed desires and traders seek new pastures for riper pickings. My assumptions maybe wrong and we may be fine but looking at 52 week highs on 50 companies I monitor they are all pushing that upper range and considering we are still in the woods this is optimistic.

Since bottoming at a 12-year low March 9, the S&P 500 has rallied nearly 61% and the Dow has rallied nearly 53%. According to Thomson Reuters, 79% of the companies that have reported results have beat on earnings and 61% have beat on revenue. This week I will be looking at Apple, Microsoft, Coca-Cola, Yahoo, Wells Fargo, Amazon and eBay. The tech giants will be an indicator of the consumer’s mood and with Microsoft launching Windows 7 it will be interesting to see what traders make of their results and forecasts.

Safe trading and keep your losses small.

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The battle for 4,400 lasted allot longer than I had anticipated causing a little stress as my concern was this really could go sideways for a long duration. Whilst investor’s exuberant enthusiasm seemed to have no end the underlying fundamentals have not improved as much as the equity markets would like to believe. The ambitious V shaped recovery play seemed doomed from the offset but stubborn, naive or fool hearty investors ploughed into stocks, commodities and anything else going.

Banks and financials have had a roaring success. My personal feeling is that the US treasury couldn’t finance more debt and has had a hand in propping up markets with actions and propaganda. The main goal was to allow the refinancing of banks under the premise that they were now sound following the infamous stress tests. I personally don’t believe this for a second but I’m a designer not an accountant. The huge leverage and mounting defaults in credit cards along with commercial property losses could see the banks going back for help mid 2010. This is slightly ironic considering the stampede to repay TARP funds.

On the equity side of things some value stock pose a good investment. I bought Microsoft and Coca Cola shares at the March lows and sold them in the recent rally. My belief is that the rally is six months premature and we may even test the March lows. Some stocks will obviously fair better than others. The notion that Tech stocks will lead us back from the brink is ridiculous. A new iPhone at $299 is a great deal but the huge contract fee and add on costs make this a luxury product in a declining market. Penalising existing iPhone users by charging them more to upgrade seems counter productive and the Apple share price rise to $145 seemed ridiculous. Google and Microsoft are other candidates in the questionable equity rises although I’m still bullish on Microsoft above $20 and will re buy near these levels. Tech seems very reliant on consumer confidence and spending which I feel will all but dry up come December 2009. My predictions are for a black December but I still hold my previous prediction of FTSE 100 closing at 4,400 at year end.

Gold is something that has spiked my interest and above $880 I think it’s a good deal. I have looked at ETFs and mining stocks but you can’t beat the real thing. For me gold would be a long 5 year trade with an expectation of gold attempting a push at $2000 in mid 2011 as inflation soars. Buying coins or bullion requires a substantial investment but at $880 to $900 I think I’m prepared to make that investment.

My view in the intermediate term hasn’t changed and I’m still bearish but I believe the battle for 4,400 on the FTSE 100 isn’t over but the trend lines are now starting to point down. 4,000 is my exit target and after that I think I will be re evaluating my trading strategy. Over the last few weeks I have been analysing my trading and gave myself a nice D- rating. I have a long way to go in the quest to become a good trader.

As for the new website it is still being designed and I’m eagerly awaiting the arrival of my first son which is my all consuming focus at the moment. I’m fairly active on twitter so feel free to drop me a message.

“A man must believe in himself and his judgement if he expects to make a living at this game.” Jesse Livermore

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