Ezee Trader update- Here is an example of our weekly update that you can have sent direct to your mail box on a weekly basis.

Is stagflation a real possibility? It's all about managing risk, Where next for the indices? And more...

Welcome to the weekly update. We are all aware of the inflation speak amongst central bankers and commentators this year. It's funny to think that the majority were calling for interest rate cuts in the UK just 6 months or so ago and yet now we have a high probability of a hike in the coming months. Just to make it clear, we were writing about the inflationary pressures in the system over a year ago - and no-one wanted to listen! We must have been one of the very few analysts who were going against the grain last year and telling subscribers about the Producer Price Inflation that was building and that at some point, consumers would feel the pinch.

Anyway, the US looks set to raise rates again in this current cycle although something is amiss. The US economy is predicted to weaken next year, from an estimated 3.4% growth this year to 2.8% next, according to this weekend's 'The Business'. But with inflationary pressures still building, what should central bankers do when their economies weaken? Ease on interest rate policy to help sustain growth, or keep up with the tightening regime and risk pushing it into all out recession? We doubt any central bank would purposefully do that, but the current risk is that some key global economies (US, Japan & Germany) are expected to slow next year, in spite of inflation that is still yet to be fully tamed.

And what would be the result? Stagflation. Slow growing economies and rising inflationary pressures that make the costs of living more expensive. China, long thought of as the producer nation of the world's cheap goods is now seeing wage increases that are being passed on through some of its goods and services. If China were unable to keep its prices low for the rest of the world, we would have yet another concern on our hands.

Our take on it is that slower global growth will help reduce inflationary pressures. However, there is a fly in the ointment.. Iran. The current political tensions between the west and threatening statements from Ayatollah Khamenei have the possibility of upsetting the global status quo. If this were to happen, oil price spikes would certainly impact global economies and a brief return to 1970's style stagflation could be possible for a while.

We would rather be optimistic about how the global rebalancing act plays out, but it is always good to study your history, just in case...

It's all about managing risk

Speaking to a number of new and seasoned investors each month, we get to talk about the markets quite a bit. Considering a large percentage of readers would probably consider themselves as swing traders/intermediate term investors, the general topic of conversation has tended to be along the lines of them taking losses after the swift correction we have seen in global equity markets since early May.

However, studying the portfolios of anyone caught with their underwear round their ankles in May reveals an interesting fact. Few investors were looking at managing their risk. Managing risk comes in many guises, but for the purposes of this article, we are talking about hedging. If you have a portfolio and it is in 'long' positions, the risk of a correction hitting all your stops and unwinding the previous months of meticulous investing can be wiped out. The best way to reduce this 'risk' is to hedge your portfolio to some extent. This can be done with a small amount of capital by using leveraged vehicles such as options, CFD's, futures or even spread betting.

What you could do to hedge is to find a stock or two that are technically weak to sell short. If the market undergoes a correction such as the one we have experienced, the hedged positions can help offset the losses taken on the stocks you are invested in. We frequently hedge even when intra-day trading. If, for example we were in three long positions, we often look for a shorting opportunity to balance our trades. This way, if the whole market turns against us and stops us out of our long positions, the one stock we have shorted can at least cover the three losses on our long positions so that we can still end the day with either a small loss or even a small profit on what would otherwise be a losing day. If the market had continued heading higher, we might get stopped out of our short position, but the gains made on the other three stocks still give us a net positive return at the end of the day.

There are many different ways to hedge and we will write more in depth on how to use these strategies in an up coming issue of the main newsletter. For portfolio investors, hedging means your returns are smoother and you can sleep more soundly at night...

The markets

After giving back all the gains they had made for the year, the Dow and S&P finally started to rally after the CPI numbers were released on Wednesday. A positive divergence on the hourly chart of the Dow helped intra-day traders to find the lows of this move and be on board for what was a spectacular two day rally. With Friday being options expiry day, it was not surprising to see a choppy day with a doji candle being posted to show the match between sellers and buyers at current levels on the Dow.

There is a clear downward sloping trend line on the Dow that is will have to struggle with today. If it can break above it, the bulls could have another good run, but if it falters, sellers could regain control for a period. The key levels to watch are 11,050 and 10,950. For the S&P, it has resistance at 1260 which is its 200dma and then also has a sloping trend line to contend with. If it breaks below Friday's low, we would expect more sellers to come into the fray. For the bulls, a break above these key areas could give these indices a lot more rally potential, but if they falter, a further retest of the lows could be on the cards.

The FTSE rallied up to its 200dma on Friday and subsequently sold off as would be expected. On the upside, a break above this level (currently 5667) could aid a 150 point advance, but a break below 5550 could lead to another test of last weeks lows.

The big question is probably, 'has this correction ended or is there more to come?' We would say at this stage the trend has to be our friend. The trend is still down so we would look for rallies to get short until the markets can get back above their key 50dma's...

Economic review

UK

Factory gate inflation increased by 0.3% to 3.0% annualised. This inflation is more likely to be passed onto the consumer which in turn puts more risk that the BoE base rate will have to be increased sooner rather than later.

The official figures on house prices released from the government showed that house prices had picked up in April. This was little surprise as we had already seen other reports showing this. It was the reports later in the week that were more of a surprise as the May house price reports showed that prices had continued to increase at the strongest rate for two years.

UK inflation rate increased by 0.5% in the month and is now running at 2.2% annualised (as we predicted in the last copy of the newsletter). Once again this will create more pressure for a rate increase sooner rather than later.

Although some reports are suggesting that companies are keen to employ and employment hit a record high in April, the actual jobless figures also increased once again.

The world cup has a lot to answer for on the high street as retailers reported sales up 0.5% in May. This being predominantly sales of new televisions, barbecue foods and beer. That said, John Lewis reported that the last Saturday match resulted in their worse Saturdays takings for the year so far.

As house prices continue to rise, the house of cards is bolstered with yet another worrying statistic. First time buyers are borrowing record amounts, with the average loan now accounting for 3.21 times their incomes. Fortunately the report from the Council of Mortgage Lenders also reported that more of these had taken advantage of fixed rate deals. That said, this is a bit of a mixed blessing as when the term of the fixed rate comes to an end, some may be in for a nasty shock if inflation continues to rise and the BoE eventually increase the base rates once again.

US

The US treasury budget or should we say deficit came in at -$42.8billion against -$39.0billion expected and -$35.4billion last time

Producers Price Index came in at 0.2% verses an expected 0.4%, although core PPI came in above forecast at 0.3% causing further concern that the FED will be increase interest rates for a longer period than the markets were hoping.

Retails sales were hit by the lack of auto sales which brought the headline figure down to 0.1% whilst the core figure excluding autos was 0.5%.

The week's initial claims came in much better than expected at 295K verses 320K.

Capacity utilization and Industrial production both were slightly below expectation and down on previous.

The quarterly current account was not as bad as expected coming in at -$208.7billion against -$223billion forecast and -$223.1billion last.

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