Tuesday, 4 December 2007

First trade - Selling some S&P 500 Futures

Selling a little under $30,000 worth of December S&P 500 futures @ 1465.25.

The US recession appears to be coming head-on, as a liquidity crunch spreads from what was originally sub-prime mortgages to all asset classes. Property values look like they only have one way to go for the next 3-5 years, barring a miracle. Consumer debt levels are high and refinancing at any sort of a reasonable level appears off the table for a while. The bear case has been thoroughly laid out recently by Mish and Nouriel Roubini, and the inescapable downtrend for both residential and commercial real estate has of course been put forward clearly at Calculated Risk.

Whilst if you only read the blogosphere, you'd be convinced that EVERYONE is bearish, I think back in the real world there is still too much optimism and hope, especially in some of the dumb bail-out ideas recently put forward. So reality is yet to set in for the bulk of market participants, and this is what could destroy equities.

3 Year chart of S&P 500

But lets just have a brief look at the POSITIVES in the US stock markets:
- they haven't gone up nearly as much as the rest of the world, with the S&P 500 up only ~23% in the last 3 years. So it has already been lagging
- Market has been sold fairly severely prior to last week's bounce
- The weak dollar will be beneficial to those companies earning overseas, as foreign earnings translate into more dollars. However a slowdown in the developed world seems to be beginning, I suspect China will follow, and the US dollar seems oversold relative to the likes of the Euro/Sterling/Canadian Dollar, and could benefit as those economies also start cutting rates.
- The US is still the most dynamic and innovative economy in the world, and will have world-leading companies in every market sector for years to come.

However these don't sway me much in wanting to be short the market...lower growth and a peak in the corporate earnings cycle can only reak havoc on share prices.

What say you?


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