Opportunities come knocking

A selloff in technology shares has turned into something of a rout for global stocks in the past few days. The latest Merrill Lynch fund manager had almost 70% of respondents believing in the US soft landing scenario; the events of last week would suggest that confidence has been drawn into question. All sectors have to take pain, tech investors obviously the most. One has to highlight that despite the rapid selloff, many tech names have held onto the majority of their gains for the year.

I am not sure how many follow the Japanese market and are aware of the idea of a carry trade. Fundamentally, it’s when speculators borrow cheap money in one currency, mostly yen, and deposit it in another higher-yielding currency, currently the dollar, picking up “the carry.” It’s a classic risk-on-risk off-trade. As the yen has been rallying recently, mainly after the BoJ raised rates, traders have been looking to unwind the trade. Everyone then heads for the exit at the same time; carnage ensues, margins are called, and other assets need to be sold, hence the knock-on effects to other risk assets, pouring oil on a simmering fire.

In his daily Bloomberg article, John Authers compares historic market selloffs to identify where we might find support and what we should compare today to. He does miss out on 2000, which, to my mind, is probably the most comparable time, in some ways at least. Mr Authers’s view is that we look more like 1998 than the others; we shall see.

It’s quite possible that there is more to go, as the markets ensure the Fed is left in no doubt that they are expected to cut in September and offer clear guidance on what the market should expect in the coming months.

The market is now speculating a 60% chance of an emergency cut of 25 basis points, which would really send the investors into meltdown.  For some reason, many retail investors hate these times. The pain becomes too great. Get me out so I can sleep at night again. I love these times, the chance to add to those favourite positions or add ones you have had your eye on. Warren Buffet revealed last week that he sold half of his Apple holding and had oodles of cash. He will be licking his lips at this, like a kid in a candy shop. One could be right or wrong in the next week or month, but for the next five years, it is highly unlikely.