Weekly Update

---

Here is an example of a recent weekly update that you can have sent direct to your mail box on a weekly basis:

It's newsletter week! How much were US property prices overvalued? Fear Vs greed based traders, UK interest rate decision on Thursday, and more...

Welcome to the weekly update. Subscribers please note that the newsletter will be out by Friday. We don't often comment on housing markets in these updates, preferring to stick to our favoured field of the more liquid asset classes. However, there has been so much news surrounding the sub-prime lending market in the U.S that we feel it deserves some attention. In February, existing home sales rose above analyst expectations which could be seen as a good thing despite the fact that home prices across America are down 1.3% from a year ago. So does this mean we have seen a bottom and that the market is beginning to recover? Anything's possible, but we doubt we have seen any meaningful low just yet.

For starters, houses are staying on the market for longer than usual (the supply of housing stock is now running at 6.7 months). Secondly, Moody's (the credit ratings agency) estimates that the number of foreclosures we have seen in the past year will double by the end of 2007. This means there will be an additional 800,000 homes added to the housing supply stock. So with greater levels of supply in the market and reducing demand, it should mean more downside pressure for U.S house prices.

Before we get all out pessimistic here, let's look at some recent data provided by Bill Gross, managing director of PIMCO (he runs the world's largest bond fund). He provides us with some interesting views on where U.S house prices are today and what needs to happen to get them back to historical norms. The major bull market in U.S house prices started in 2003 when they started to put in double digit annualised gains. The average historical house price appreciation is 4-5% annually, so since 2003, Gross estimates that home prices are 15-20% overvalued (3 years multiplied by 5%+ annual overpricing). Gross states that if mortgage rates don't come down, home prices will need to decline by 20% in order to reach pre-2003 affordability levels.

 

The above table shows the effect on home prices ranging from mortgage interest rates not decreasing at all right through to a 1.2% decline in rates that would then keep home prices where they are currently. Will the Fed reduce interest rates? Obviously it depends on whether inflation falls but Gross quotes the Federal Reserves' very own study written in 2005. In it, the Fed makes it very clear that they will cut interest rates significantly in order to maintain economic growth (and therefore stability in the housing market). They may well do that, but we still see a bumpy ride for a while before we ever see any huge rises in U.S property prices again...

Fear Vs Greed based traders

Two key drivers for humans are fear and greed. They influence us in all aspects of life and can aid/disrupt our decision making abilities. When it comes to trading the markets, individuals who are influenced by one or the other of these traits will need to recognise them so they can improve their results.

A greed based trader tends to want 'the action' and is excited by the thoughts of making substantial quick gains out of the markets. This personality will buy and sell in the blink of an eye and is liable to over leverage due to their greed wanting them to make their fortune "now". This type of trader will find themselves jumping into stocks/commodities/currencies because they were increasing in price and so they couldn't help themselves but to get in on that action! They are also likely to ignore sell signals when they are already in a profitable position as their greed wants them to hold out for a bit more profit (which simply isn't there). As a result of this greed, they sometimes see a profitable trade become less profitable or even a loss.

Greed based traders are a very dangerous breed. Because of their drive for success, they treat the markets more like a casino than a serious business and are susceptible to large swings in their profit and loss account. If you ever hear a story of a trader losing a lot of money, you can bet it was a greed based trader!

A fear based trader is motivated differently. They are far less likely to jump in and out of the markets as frequently as the former personality type. A fear based trader has trouble even hitting the buy button on their broker screen! They want the heavens to come into alignment in order to take a trade. Because of this, they miss out on a lot of opportunities. When they do take trades, they will be very strict with their correct use of money management to ensure that any losses are minimal. When in profit, a fear based trader is far more likely to cash in long before any sell signals are given, thus missing out on more profits.

Fear based traders will never lose much money. But their personality trait stops them from making much money too.

The best traders tend to draw on the strengths of these two previously mentioned trader types. The methodical character will not hesitate to take a trade, but will ensure they use correct money management. They will be analytical, but not to the extent that they miss out on opportunities. They give the market the respect it deserves and so don't treat it like gambling. They simply obey a defined set of rules and don't allow their emotions to affect their decision making abilities. This is the trader everyone should aim to become...

The markets

In the previous weekly update on the 19th March, we said if the Dow could break above 12,350, it could then push to the 50dma. This is exactly what we have seen and it has subsequently sold off from the 50dma. On Friday, we saw a wild swing during the day that broke both above and below the previous two days range. For the Dow to gain any momentum to the upside, it needs to close above the overhead descending trend-line which currently crosses 12,400. Likewise, for a confirmed break to the downside and another potential test of March's lows, it needs to close below 12,300.

The chart of the S&P looks more negative than that of the Dow right now as volume has been more geared to the downside. For this index, the equivalent levels to watch are 1432 and 1415 respectively. It is worth noting that both indexes are trying to create bullish flags at the moment so a break to the upside through the levels already mentioned would confirm these patterns.

The FTSE broke above its respective 50dma and came back to test it last week. If it can maintain momentum above this area, this would be a positive for this index in the intermediate term. The two key levels to watch on this index are 6350 and 6250 respectively.

If you don't currently receive our own video commentary, click here to go to where we give free access to these videos...

Economic diary

It is a results packed week, with the Bank of England Interest rate decision due on Thursday. With so many numbers due we could see quite some volatility in both the equity and forex markets. As the UK and US markets are closed on Friday, beware of some increased action on Thursday.

Monday 2nd April
UK Manufacturing PMI 09:30
US Manufacturing PMI 15:00

Tuesday 3rd April
UK Construction PMI 09:30
US Red Book 13:55
US Pending Home Sales 15:00

Wednesday 4th April
UK Nationwide Consumer Confidence 00.01
UK Official Reserve changes 09:30
UK Services PMI 09:30
UK BRC Shop Price Index 09:30
US Factory orders 15:00
US Factory Inventories 15:00
US Services PMI 15:00
US oil stocks 15:30

Thursday 5th April
UK Industrial Production 09:30
UK Manufacturing Production 09:30
UK Bank of England interest rate decision 12:00
US Initial claims 13:30

Friday 6th April
US & UK Markets closed due to Good Friday
US Employment report 13:30
US Wholesale sales 15:00
US Wholesale Inventories 15:00
US Consumer Credit 20:00

Have a great week!

Kevin & Kym

To sign up for it -> Sign up