My comments yesterday that the rally in the morning session was most likely a bear market bounce fell on deaf ears as our clients continued to buy throughout the day. The huge falls in the indices in late trading demonstrate the lack of confidence coming into the close of business every day. Now that people cannot short a huge swathe of stocks there is not even the buoyancy afforded by potential squeezes on those holding shorts.
Massive equity positions are held on margin… nearly all CFD’s and virtually every speculative stock position held by the hedge funds. Unfortunately the banks and brokers are now calling in the loans and the Funds do not have the liquidity to pay out the margin calls AND retain the positions. This will (and is now) leading to massive redemption of long held positions.
The most visible evidence of this has been Robert Tchenguiz having to liquidate both his Mitchells and Butler and his Sainsbury stakes but be assured that this is not an isolated incident. Mr Tchenguiz was a high profile player for reasons of his own but most big CFD investors keep themselves well behind the parapet by trading through the CFD provider companies themselves.
The biggest Spread Betting/CFD company in the UK had to increase its margin rates yesterday in the face of the problems and this increase will cause their own knock on effect as even those traders who might have been able to make the margin calls find that they are asked for additional funds to hold the same position they had yesterday.
Banks are still not lending to each other and the news throughout the night session with the Nikkei and the Far East trading some 10pc lower is unlikely to encourage them to do so. There were some tentative rumours that the G8 might be about to guarantee all interbank dealing between their banks but this would be a huge risk and would presumably doom any units outside of the protected umbrella.
Recessions do not just arrive, wipe out a few banks and then go away. The pain is still nowhere near widespread enough with most citizens of the western nations merely looking on as interested observers to the woes in the Financial Sector. Downturns mean BIG job losses and longer term insecurity. Trade Unions going on bank bonus bashing expeditions just do not think through their comments. If people have less money to spend this means lost employment down the line. The people who really suffer are seldom the guys at the top (aside from a few high profile cases), or even in the middle where professional qualifications generally ensure some protection, it is the shop floor where the pain will be felt the most.
Today looks to be starting off as a complete bloodbath. The FTSE is being called an astonishing 300 points lower on the open which will mean a massive 7pc off yesterday’s close. The news that GM might be close to administration has sent shivers throughout the world. A company the size of GM has not just hundreds of thousands of employees but, if you look down the supply chain, millions who work for suppliers. Chapter 11 is a technical level of administration but it is difficult to see who would fund the administration in the current environment. The company has been losing billions of dollars every year so who would want to buy it. The motor industry is massively over supplied even in good times. Even if we were in a growth scenario you would struggle to get a bank to lend to a possible purchaser. But now? Absolutely no chance. The US government might come under extreme pressure (having saved all those high flyers on Wall Street) to now come up with the money to prop up an ailing car company. Politicians who glibly talk about ‘Moral Hazard’ might now have their words thrown back at them.
Perhaps traders will listen today. Sit on your hands. Do nothing and preserve your wealth. The markets are going to be absolutely mad throughout the session and hundred point moves in the indices and currencies (both up and down) are going to be ten a penny and likely to occur on a moments notice. If you have the spare cash then small investments in the best companies are probably (in the long run) going to pay off but the emphasise is on small. Do not bet the house on a turn in the markets.
There is a saying that I have always liked. "The Markets will always move in the direction that causes the greatest amount of harm to the greatest number of people". If most traders are short the markets will rally and if most are long then it will fall
Click here to go to Capital Spreads
Simon Denham is Director of London Capital Group and Capital Spreads. We do not endorse the information and analysis available in this comment and it is provided purely for information purposes only and is delivered as a personal view by the writer. Under no circumstances is the information in this comment to be used or considered as an offer to sell, or a solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. The investments referred to herein may not be suitable investments for all persons accessing this page. You should carefully consider whether all or any of these are suitable investments for you and if in any doubt consult an independent adviser. We accept no liability whatsoever for any direct or consequential loss arising from use of the information on this web page. Please see our Terms and Conditions.