What’s going to happen to stock market prices? If we knew that, we could be very rich! Nevertheless, financial analysts constantly try to predict the movements of shares in order to decide when to buy and when to sell. One thing they do is to look at charts of price movements and look for patterns. These ‘chartists’, as they are sometimes called, refer to something known as the ‘death cross’ or ‘dark cross’.
So what is the death cross? Imagine a chart of the movements of share prices, such as the FTSE 100 in the UK or the Dow Jones Industrial Average and S&P 500 in the USA. These movements can be shown as a moving average. In other words, for each day you plot the average of the past so many days. Typically, 200-day (sometimes 100-day) and 50-day moving averages are plotted. The 200-day (or 100-day) is taken as the long-term moving average and the 50-day as the short-term moving average. In a falling market, if the short-term moving average crosses below the long-term moving average, this is called the ‘death cross‘ as it signifies growing downward pressure in the market. The fall in the long-term average in these circumstances will indeed lag behind the fall in the short-term moving average.
Markets around the world are experiencing the death cross. So should be be worried? Or is this like looking for patterns in tea leaves, or the stars, and using them to make bogus predictions? So: science or mumbo jumbo?
First the science: the death cross indicates a fall in confidence. And at present, there is much for investors to worry about. Burgeoning debts, austerity measures and fears of a double-dip recession are spooking markets.
Now the mumbo jumbo. Just because markets are falling at the moment, this does not prove that they will go on falling. Markets are often spooked, only to recover when ‘sanity’ returns. People may soon start to believe that a second credit crunch will not return, given all the regulatory and support measures put in place, the huge amount of liquidity waiting to be invested and the support packages from the ECB and IMF for Greece and, potentially, for other eurozone countries having difficulties servicing their debts. In other words, patterns may repeat themselves, but not necessarily. It depends on circumstances.
Articles
Market’s Swoon Prompts Fears Of the Dreaded ‘Death Cross’ CNBC, Jeff Cox (1/7/10)
Death Cross in S&P 500 May Not Lead to Rout: Technical Analysis Bloomberg Businessweek, Alexis Xydias (30/6/10)
Are the markets about to encounter the”Death Cross”? BBC News, Jamie Robertson (1/7/10)
MarketBeat Q&A: Debunking the ‘Death Cross’ Wall Street Journal blogs, Matt Phillips (30/6/10)
Technical analysis and market data
Moving Average Crossovers TradingDay.com, Alan Farley
Death Cross Investopedia
FTSE 100 historical prices Yahoo Finance
S&P 500 historical prices Yahoo Finance
Dow Jones historical prices Yahoo Finance
Questions
- Explain what is meant by the death cross and use a diagram to illustrate it. What is menat by the golden cross. Again, use a diagram to illustrate it.
- Under what circumstances would speculation against stock market price movements be (a) stabilising and (b) destabilising?
- What is the implication for stock market prices of a ‘wall of money’?
- How much faith should be put in chartist explanations of stock market prices? Do criticisms of chartism apply to all time-series analysis that is used for forecasting?
- Look back at newspaper articles from a year ago and see what they were predicting about stock market prices. Have their preductions been borne out? If so, why? If not, why not?
As the news from the Gulf of Mexico goes from very bad to even worse, so BP is increasingly coming under the international spotlight for its approach to risk management and safety. Was it sufficiently cautious? Could the accident on April 20 that killed 11 men and has been gushing some 800,000 gallons per day of crude oil into the sea have been averted? When the consequences of a pipe rupture are so catastrophic, is ‘catastrophic risk’ appropriately priced? As Tony Hayward, BP’s Chief Executive, told the Financial Times (see links below): “It was ‘an entirely fair criticism’ to say the company had not been fully prepared for a deep-water oil leak.”
One insight into BP’s approach to risk has come to light with the leaking of a 2002 memo from BP on how human life ought to be valued in any cost–benefit analysis of a project. As the Chicagoist summarises the memo:
A two page document prepared by risk managers in 2002 titled “Cost benefit analysis of three little pigs” shows the type of thinking BP put into risk assessment. The memo shows, in cartoonish fashion, that blast resistant trailers for BP’s workers weren’t necessary, because the cost was too high. In 2005, a refinery caught fire, killing 15 and injuring 170 people.
So how should catastrophic risk be taken into account? What does a company do when the probability of a disaster is extremely low and yet the costs of such a disaster, were it to occur, are extremely high?
BP’s Shocking Memo The Daily Beast, Rick Outzen (25/5/10)
Old BP document calculates worth of human life with “Three Little Pigs” diagram Yahoo News, Brett Michael Dykes (25/5/10)
Industry can cut accident risks, says BP chief Financial Times, Ed Crooks and Edward Luce (2/6/10)
BP ‘not prepared’ for deep-water spill Financial Times, Ed Crooks (2/6/10)
The BP Oil Spill’s Lessons for Regulation Project Syndicate, Kenneth Rogoff (1/6/10)
US oil firms ‘unprepared’ for major offshore disaster BBC News (15/6/10)
Questions
- What is meant by catastrophic risk?
- Why is it difficult to put an accurate valuation on outcomes with a very low probability of occurrence?
- Explain the table entitled “Cost benefit analysis of three little pigs” in the Rick Outzen blog.
- How should human life be valued?
- What value should be put on a serious injury (of a particular type)?
- Should BP (or any other company, for that matter) ever conduct operations that risk human life? Explain your answer.
- On what basis should BP have decided whether or not to install a $500,000 acoustic trigger that could have shut off the well when the blowout protector failed?
- How is the existence of environmental externalities relevant to BP’s decisions on safety?
The Labour government’s investment in education has been widely publicised since its rise to power in 1997 and there has been a significant increase in funding to match its ‘50% participation in higher education’ target. However, at the university level, this looks set to change. More than 100 universities face a drop in their government grants as a consequence of £450 million worth of cuts. 69 universities face cuts in cash terms and another 37 have rises below 2 per cent. Furthermore, increased funding is now going to those departments where research is of the highest quality, which means that whilst some universities will not see a cut in funding, they will see a reallocation of their funds.
Sir Alan Langlands, Chief Executive of Hefce, said: “These are very modest reductions. I think it is quite likely that universities will be able to cope with these without in any way undermining the student experience.” Despite this reassurance, there are concerns that, with these spending cuts and growing student numbers, class sizes will have to increase, the quality of the education may fall and ultimately, it may mean a reduction in the number of places offered. The Conservatives have estimated that 275,000 students will miss out on a place. UCAS applications have grown by 23% – or 106,389 – so far this year, but the number of places has been reduced by 6000. This policy of cutting places is clearly contrary to the government’s target of 50% participation.
With the average degree costing students over £9000, it is hardly surprising that students are unhappy with these spending cuts and the fact that it could lead to a lower quality education. With the possibility of rising fees (in particular, as advocated by Lord Patten, who has called for the abolition of a “preposterous” £3,200 cap on student tuition fees) and a lower quality degree, this means that students could end up paying a very high price for a university education.
Articles
Universities fear research funding cuts Financial Times (18/3/10)
More students but who will pay? BBC News, Sean Coughlan (18/3/10)
University cuts announced as recession bites Reuters (18/3/10)
How about $200,000 dollars for a degree? BBC News, Sean Coughlan (18/3/10)
Liberate our universities Telegraph (17/3/10)
Universities should set own fees, say Oxford Chancellor Patten Independent, Richard Garner (17/3/10)
University budgets to be slashed by up to 14% Guardian, Jessica Shepherd (18/3/10)
Universities face cuts as Hefce deals with first funding drop in years RSC, Chemistry World (17/3/10)
University cuts spell campus turmoil BBC News, Hannah Richardson (18/3/10)
Universities told of funding cuts Press Association (18/3/10)
100 universities suffer as government announces £450 million of cuts Times Online, Greg Hurst (18/3/10)
Data
HEFCE announces funding of £7.3 billion for universities and colleges in England HEFCE News (18/3/10)
Questions
- Why is there justification for government intervention in higher education? Think about the issues of efficiency and equity and why the market for education fails.
- What are the arguments (a) for and (b) against allowing universities to set their own tuition fees?
- Why is the government planning these substantial cuts to university funding, when it is still trying to increase the number of students getting places at university?
- Is the ‘50% participation in higher education’ a good policy?
- What are the benefits of education? Think about those accruing to the individual and those gained by society. Can you use this to explain why the government has role in intervening in the market for higher education?
- Is it right that more spending should go to those departments with higher quality research? What are the arguments for and against this policy?
- What are the costs to a student of a university education and how will they change with funding cuts and possibly higher tuition fees?
The most popular sport in the world: football. What else?! Huge games and salaries to match. But is it really as glamorous as we think? We may see some top players receiving a salary per week that most people can’t hope to come close to in a year, but players at Portsmouth have had to go without their wages on three occasions, as the club entered financial strife. It is these high salaries that prevent many clubs from breaking even, let alone making a profit. Whilst a lack of salary to footballers is a rare occurence, the football industry isn’t the money-churning machine that it appears to be.
We’re used to seeing full stadia and fans decked out in their club’s regalia, so surely football clubs are awash with money? But things aren’t so rosy. Research published by the Centre for the International Business of Sport at Coventry University in 2008 revealed that clubs in the top four tiers of English football between the 2001/2 and 2005/6 seasons made an aggregated loss of more than £1bn. In addition, 56 clubs in the English leagues went bankrupt between the Insolvency Act’s introduction in 1986 and June 2008.
We’ve seen a number of buyouts of clubs in recent years by extremely wealthy families. The Glazer family bought Manchester United in 2005, yet this buyout and many others are heavily leveraged and servicing their debts is now proving a problem. Whilst some clubs publish annual profits, it doesn’t mean they are without debt. Manchester United, defending champions of the English football league, earned profits of £48.2 million in the 2008/9 season, but its debts are estimated at around £700 million. The club received a loan of £509.5 million and had to pay £41.9 million in interest.
The owners of Chelsea and Manchester City have recently converted £340 million and £304.9 million of loans into equity respectively. Financiers, however, say this is simply “moving money from their left pocket to the right”. Manchester City reported a massive loss of £92.6 million for the 2008/9 financial year. Unfortunately for them, these figures ignore outlays since May 2009 for Carlos Tevez, Kolo Toure and Emmanuel Adebayor. Portsmouth’s £7 million share of TV revenue has been diverted directly to other clubs to whom they owe money for transfers.
So, how much of a money-maker is football? Well stadia are still full and it’s certainly growing in popularity in Asia. Premier teams are now appreciating how much money can be made out there by selling television rights. However, in 2008 the FA chairman Lord Triesman still estimated that English football debts stood at £3bn. With all this debt, are there any positives? Just one – at least it’s less than the UK’s public debt!
Abu-Dhabi family reduce debt for Manchester City Campden FB (7/1/10)
Manchester City post massive loss BBC News (6/1/10)
What a waste of money – the Premier League’s best paid flops Guardian, Jamie Jackson (10/1/10)
Portsmouth players still not paid as Premier League expresses concern at crisis Telegraph, Paul Kelso (6/1/10)
Paying by the rules The Lawyer, Adam Plainer (11/1/10)
Jacob unimpressed by fan protests Press Association (11/1/09)
Cardiff City to face winding up order BBC Sport (8/1/10)
Debt swap is ‘window dressing’ The Independent, Nick Clark (7/1/10)
Manchester United aim to raise £500m in bond sale in bid to reduce mounting debt Telegraph, Mark Ogden (11/1/10)
Chelsea debt wiped off by Roman Abramovich but club still record loss Telegraph (30/12/09)
Manchester United to raise £500m BBC News (11/1/10)
Cristiano Ronaldo saves Man-Utd – Again Sky News (11/1/10)
Tony Fernandes and David Sullivan vie for control of West Ham Telegraph, Jason Burt (16/1/10)
One thing at Manchester United isn’t going downhill – their debt Guardian, David Conn (6/1/10)
Premier League looks to cash in on Asia BBC News, Guy de Launey (29/12/09)
Questions
- Why do footballers receive such high wages? Illustrate why wages in the Premier League are so much higher than those received by players in non-league teams. What’s the key factor?
- What is debt swapping?
- In the Independent article: ‘Dept swap is Window dressing’, what does it mean by (a) window dressing and (b) debt swap is ‘moving money from their left pocket to the right’?
- How can a club such as Manchester United record a profit, but have substantial debts?
- What is leveraging and why is it a problem for some football teams?
- How will an issue of bonds enable a football club to refinance its debt?
- What opportunities does Asia present to English football?
The UK section of the North Sea used to be sufficient to supply all of the country’s gas requirements, but now some has to be imported from countries such as Norway. With the cold weather, the usage of gas has increased to record levels and there are now concerns for future supplies, especially if the cold weather returns.
However, the National Grid has said that there isn’t a problem, despite a glitch with a Norwegian gas supply. Gas supplies from various sources have been increased to deal with this record demand. There have been calls for Britain to build more gas storage facilities and the National Grid did issue ‘gas balancing alerts’, asking power firms and other large industries to cut back on their gas consumption. There are suggestions that even if supplies of gas aren’t a problem at the moment, we could see serious shortages in a few years.
Following growing demand for gas supplies, wholesale prices rose, but they did fall again when supplies were increased. Prices of household bills could be affected in the future, but for now, it’s too soon to tell. However, rising prices could spell further trouble for ours and other economies suffering from extreme weather on top of a financial crisis. Economic recovery could be put in jeopardy.
This fear of gas shortages and security of supply has led environmental and business groups to argue that Britain needs to diversify its energy supplies and become less dependent on foreign exports. This issue fits in with the latest developments in new investment in wind turbines.
Who knew that something as beautiful as snow could cause so much trouble and provide so much economic analysis!
National Grid warns of UK gas shortage Guardian, David Teather (5/1/10)
Is the United Kingdom facing a natural gas shortage The Oil Drum (9/1/10)
Wind farms: Generating power and jobs? BBC News (8/1/10)
Gas rationing in -22C Britain increases fears of energy crisis Mail Online, Martina Lees (8/1/10)
Gas usage hits new high in UK cold snap BBC News (8/1/10)
Energy fears over gas and kerosene shortages Scotsman (6/1/10)
Gas shortages highlights firms’ exposure to energy security risks Business Green, Tom Young (8/1/10)
Uh-oh: the return of $3 gas CNN Money, Paul R La Monica (7/1/10)
Natural gas prices seen rising with winter shortages Global Times, Chen Xiaomin (4/1/10)
Gas demand hits record on Thursday Reuters (8/1/10)
Gas demand in UK hits another highBBC News, Hugh Pym (7/1/10)
Questions
- Illustrate the effects in the gas market of increasing demand and the resulting shortages. Then show the effects of increasing the supplies of gas. How is equilibrium achieved when there is a shortage in the market?
- Why did energy prices increase and then fall?
- To what extent should the government have been able to forecast this higher demand? Should better contingency plans have been in place?
- The article from CNN Money looks at the effect of rising prices of oil and energy and how this is likely to affect consumer spending. Why could rising prices of these commodities adversely affect economic recovery?
- What is an ‘interruptible contract’ and how useful have they been in dealing with these gas shortages?
- Why has this gas shortage presented environmental groups with an opportunity to promote renewable energy supplies? Think about economic interdependence.
- What alternatives are there to our current gas sources? Are they realistic alternatives?