Friday, December 18, 2009
Is it my imagination or does the 'risk-on' rally finally seem to be losing steam ? Maybe it's Citibanks difficulties with getting away its $20 billion capital increase, or maybe it's the end of the Dollar Goes Down Forever (DGDF) trade, or maybe simply year end torpor that have unsettled market sentiment over the last few days. Of course it could be the awful recognition that Greece is sleep walking to default or a growing understanding of the scale of Dubai's continuing problems.
As we enter 2010 I can't but help feel that the stimuli packages entered into around the world have kept the banks solvent ( that's a real result) but have done little else to stem declining fundamentals in the broader economy. Certainly the consumer doesn't seem to be riding to the rescue and the corporate sector is going to find accessing capital difficult as 2010 wears on. Calls in the US and the UK for an immediate end to both loose fiscal and monetary policy are growing - if they are followed through are we prepared for unemployment of 10% in both countries with an even larger number of underemployed? What does that mean for tax rates and GDP growth?
At one stage in November I was lulled into believing that the threat of a double dip had passed but horrid hotel occupancy numbers and the continued weak level of demand for airline business class seats still point to a 50% chance of one occuring. In 2009 mid-week business travel has been much weaker than weekend leisure travel so that we are now at the lowest hotel occupancy rates in the US since the 1930's depression. In the Emerging Market space the scope for another spat between Russia and Ukraine over gas is firming up for early January, while the PRC's non-performing loan book (and associated fraud) hovers over Beijings banking sector like a wraith.
I guess quality corporate bonds are as good a place as any to park as we enter the New Year while I try to work out whether we're headed for inflation or deflation. For the time being I guess we should be preparing for the fact that we are experiencing a recessionary environment within a longer term depression. The emphasis on cash rich , blue chip, well managed companies seems to be coming right at last.
Wednesday, September 30, 2009
As for the rest of the market I'm still a doubting Thomas. The performance of banks, autos and the construction sector has been literally awesome. But the share price recoveries have been based on government stimulus . This is the equivalent to building a house on sand rather than rock. What happens when QE is scaled back or withdrawn altogether? Flood the markets with money and prices will rise - for a while. The recent massive flow of funds out of zero yielding money market accounts into bonds and equities is entirely sensible while government subsidies are generating an economic recovery but what then?
Todays IMF report claiming that out of $2,800 billion of system-wide 'crisis' losses only $1,300 billion has so far been recognized shows that global bank capital must still take a further $1,500 billion hit over the next year and a half. There's lot of loan portfolios out there that are going to have to be adjusted down particularly in Germany,Spain and the UK. Expect lots of capital raising ($310 billion in Euroland and a further $110 billion in the UK alone) by financial institutions but don't expect analysts to re-learn the word 'dilution'.
The outline of a new slower growth, higher tax investment environment can be glimpsed . As we've seen at the UK's governing Labour Party Conference this week , and to a lesser extent at the G-20 meeting in Pittsburgh over the weekend, there is a recognition that to withdraw subsidies now would lead to a second, and possibly more severe downturn. What is equally clear is that at some stage bond markets are going to force governments into slowing down their largesse if not dropping it entirely. What happens when electorates in the EU and elsewhere wake up to the fact that the solution to this crisis lies in long term reductions in services,retirement at 70,and higher taxes to pay for QE. In baser terms that's called a reduction in living standards - what politician anywhere is going to tell you that?.
People in the real world are facing this new environment logically. For the first time since records began consumer credit is being repaid more quickly than it's being issued. In both the UK and the US savings rates are on track to reach the 8-10% level as consumers adjust to heightened job insecurity and the need to have a much larger cash deposit when taking out scarce mortgages or car loans. Not long ago the UK savings rate was negative! With the consumer firmly in reverse gear for the next two or three years the long expected inventory restocking may prove to be feeble and short lived. Pricing pressure is going to be around for a while yet. A dollar saved is a dollar less consumed so economies at the macro as well as the micro level are likely to be sluggish through 2010.
Finally, just a thought about politics. This market is simply not pricing in any geopolitical risk. It seems as though there's a belief that the Obama honeymoon will make everyhting ok after the Bush wilderness years. Yet, the more one looks at it North Korea and Iran seem as intractible as ever. Russia seems a little more supportive after the dropping of the Polish/Czech missile shield but remains at best non-commital.And now we wait for the outcome for the Irish vote on the Lisbon Treaty.
Against this backdrop what is the safe haven currency? When it's clear that there is no 'V' shaped recovery but rather a gentle upward drifting stagnation where will be the best place to hold your savings ? The Yen, greenback, euro, sterling or swissie?
Tuesday, September 22, 2009
The bottom line is that my worries about the health of bank balance sheets or demand for IT products should be set aside for another day. Isn't it galling to have been so right on the way down and so out of kilter on the way back up?
Although clearly wrongfooted by the extent of the rally I'm still not converted to the longevity of this bullish world view. I still cling to the belief that my realistic (some would say negative) stance on the global economic outlook has some basis to it. Banks have led the markets surge higher but strip out one-off gains and frenetic investment banking and you're left with a sector that's enjoying a relief rally thanks to the tax payer. At what stage does a relief rally become froth? Ditto the autos who have enjoyed their time in the sun due to 'cash for clunkers'. When that boost evaporates at the end of the year their revenue streams might again appear exposed. As for IT the consumer credit environment doesn't look any rosier than it did six months ago. Certainly, the airlines are not seeing any sustainable signs of an upturn in either leisure,or more worryingly,business traffic. A harsh autumn awaits them.
Putting it all together it looks as though we're past the worst. Some see bright sunlit uplands ahead whereas I see limited recovery, government budgets stretched to breaking point, and the growing eventuality that stimulus packages are going to have to be reduced (if not reversed). I'm more than happy to stick to those sectors that are lagging behind - ie those enjoying strong demand, high visibility of earnings, and predictable and conservative cahsflows. Undervalued equities have been and always will be attractive. Cyclical stocks (now on PE's of nearly 30x) have been where the action is but from a UK perspective the latest 18% fall in domestic business investment and the biggest decline in commercial credit since records began doesn't seem to be a benign backdrop.I'll put the markets recent enthusiasm down to institutions being dragged back into the game and to a large number of commentators whose heart is ruling their head - a view reinforced by an article saying that day trading is reaching levels not seen since the glory levesl of the dotcom boom.
Thursday, September 3, 2009
Corporate earnings in Q2 were boosted quite nicely by cost cutting including widespread layoffs. This trick can be repeated a few times but ultimately there is a limit to how much you can cut the workforce without impacting revenues. There's maybe another quarter of upside left in cost cutting but after that nothing. Elsewhere, there is at last some recognition that the banks can either repair their balance sheets by sitting on cash or , if we want them to lend, by raising fresh capital. Lloyds is talking about another $16bn. The smart players like HSBC were in early and are now gaining market share but the dilatory ones will have to hope that investors have forgotten what the word 'dilution' means. For holders of the banks it was a great run up while it lasted but for the 500 banks slated to fall under FDIC protection in the US over the next 12 months the outlook isn't as bright.
On the airline front demand in July was close to levels seen in '08 but with the caveat that there continues to be widespread trading down to cheaper,lower margin fares. Business to coach, first to business and so on. This will probably mean that revenues fall by around 20% on an annualised basis at the major carriers. They must be praying that they don't get hit with a hike on fuel prices. Yesterday, SkyEurope a low cost carrier in central europe threw in the towel. All eyes are on Septembers business figures - early indications that they are likely to be pretty dire and reverse any creeping sense of optimism about business travel. Ditto for hotels.
Todays London Times is talking about more than 130,000 jobs being cut in the National Health Service as part of government attempts to get its borrowing levels back under control. Multiply that by cutbacks and layoffs in other public services and the prospect for unemployment in the UK next year and in 2011 starts to look set to breech 3 million. What is consumer demand going to be like when unemployment soars and taxes, both direct and indirect, have to increase? Add to that higher,prudential savings rates and the outlook for consumer non-staples looks challenging This isn't doom and gloom but a reflection of where we stand in the cycle. I'm still wanting to buy into high yield , household name equities for the long term and hoping that I'll get a second chance.Gain shall take the place of loss.
Sunday, August 16, 2009
15.2 million US mortgages (32.2% of all mortgaged properties) were in negative equity as of June 30th. In Nevada 2/3rds of all home owners are in negative equity.
Hotels have enjoyed a summer surge in occupancy rates- they rose as high as 67% in late July. Now the peak summer travel season is ending a bleak Fall season beckons. Revenue per available room in the US is running at a level some 16% below last years already weak levels. Business travel is down much more sharply than leisure travel which doesn't auger well.The 3rd and 4th quarter numbers are likely to be pretty dire.
Some good news. Capacity utilization rates for US industry rose 0.5% in July to 68.5% a level nearly 12.5% below the 1972-2008 average.
Tuesday, July 28, 2009
As a bull turned bear I feel as though I'm the one at the party drinking soda while everyone else is on the hard stuff. I recognize that markets move on more than fundamentals. This market has done well on a flow-of-funds basis and a growing belief that we shall see a strong upside recovery in H2. But to support current levels on the FTSE and Dow earnings need to rise beyond any short term boost that comes from restocking. With unemployment rising and deleveraging continuing this is going to be difficult.
What if instead of being a 'V' shaped turnaround this is a no-recovery recovery ? Why if things are going so well has the BoE issued a further £50 billion of Quantative Easing - taking almost all the analyst community by surprise?Stocks are surging and hitting stratospheric and possibly unsupportable valuations relative to earnings . I find it telling that in the US between April and June insider selling ran at a rate 22x greater than insider buying. Ryanairs chairman reporting his Q2 numbers says that he sees no improvement in any Euroland economy and that this winter will be particularly hard. Willie Walsh at British Airways is saying the same thing.
Another worry I have is consumption. US private consumption ran at a $10 trillion rate (16% of global output) in 2008 with EU levels at $9 trillion and Asian consumption at around $5 trillion.With American and European savings rates increasing sharply there is a real chance that we will see a significant reduction in global GDP in 2010. Japanese manufacturing fell 37% from peak to trough and looks as though it will settle down 20% or so from the peak - admittedly a pretty healthy upswing from the lows. In the short term the comparisons can look pretty good but what happens to profits once companies have cut costs by laying off workers?
I still can't get it out of my head that this is a bear market rally, that my trader friends are making hay while the sun shines, and that more trouble lies ahead.
Sunday, July 26, 2009
The total number of vacant properties in the US has reached 18.7 million as of June 2009. Assuming four people in a family this is enough surplus housing to resettle the entire population of the UK and Israel in America.
In the UK home ownership levels have fallen back to rates last seen in Q2 2000 erasing most of the much touted gains in homeownership over the last decade.
The number of households in America is decreasing as extended families move in together and new graduates opt to live at home in the poor economic climate.
Operating income for companies on the S&P 500 that have reported their Q2 numbers have been 29% lower than last year and 80% lower than 2007.
The 'funding gap' of the big UK banks - the difference between customer loans and deposits was estimated at £800 billion last year. This gap has been largely filled by government support but the Bank of England cautions that UK banks may need to downsize their balance sheets by £500 billion between now and 2013.
The latest survey by accounting firm Deloiites shows that companies are not looking to banks for finance.Equity is currently the most popular form of finance and bank borrowing the least popular. This is the exact opposite to the survey conducted in June 2007.
The UK economy fell again in Q2 and has now shrunk 5.7% from its peak in Q1 2008. The downturn in the early eighties saw output shrinking by 4.6% over five quarters so this is now officially the worst downturn since WWII.
The National Institute for Economic and Social Research expects growth in the UK to be 1% next year and expects it to be the autumn of 2012 before the economy reaches the output levels recorded at this time last year. Living standards are not expected to recover to 2008 levels until 2014.
British Airways Chairman thinks it will be at least five years before demand for business class travel recovers to the rate seen in 2008 .
Friday, July 17, 2009
Against this backdrop of tighter credit access what is the economy going to be like once we emerge from this downturn? Analysts talk about V, U, or W shaped recovery from the recession but in the absence of the consumer isn't this overly optimistic? What if it's none of the above and the economy is instead on a ' -- ' shaped track ? What would it mean if the 10% or so reduction in global output caused by this downturn doesn't ever come back? Sure, there will be inventory restocking from a very low level and sure families will eventually replace their ageing vehicles . Together this will stop the decline in output but replacements as a motor for growth are going to make the recovery very shallow. Compared with where we were two years ago there is bound to be a lot of surplus capacity in the system and a lot of capital expansion plans that will be scaled back permanently.
In a 'repression' governments will have to scale back services to balance the books and avoid bankruptcy, indirect taxation will have to rise ( VAT at 20% ) to pay for higher structural unemployment, and bank lending will have to be more tightly regulated to avoid a repertition of the crisis.Taken together this points to continued weak demand, softness in exports and continued weakness in corporate earnings.
Thursday, July 16, 2009
Why the S&P is trading on 17x when the historical average is 16x remains a mystery to me. Despite huge injections of stimulus economic growth in the US,Asia and the US remains decidedly lacklustre. What corporate bright spots there are seem to be related to short term re-stocking leaving the longer term question of where demand will come from unanswered.
Naturally, with equity markets discounting a sharp recovery in earnings ( something I think most unlikely ) the delayed new issue schedule is opening up again. Russia seems to be in the lead - although which institutions will be keen to add to positions in a country where corporate governance is so 'light touch' remains to be seen.
Monday, July 6, 2009
Elsewhere in the bellweather airline sector Swiss is cutting winter capacity by 9%, Austrian is laying off 1,000 staff while Czech is reducing its fleet by 10%.
Although we've stopped plumetting economies continue to drift downwards. If not a depression then it's certainly a more than standard recession - perhaps we should start calling it a repression. At the end of this global demand is likely to be severely repressed by perhaps as much as 7-10%. At some stage governments in the UK and the US are going to have to toy with inflation financing to get out of this mess - that's why in the long term I think the Euro will continue to appreciate. There is talk of 20% cuts in government spending in the UK but I'm not sure the electorate is ready for reductions of this projected scale. Anyway, the opposition would need to have a huge swing to unseat the incumbents huge arithmetic lead - Labour isn't dead yet. Currency and bond markets may well have got Sterling wrong.
Other unconnected pieces of recent data that surprised me:
- Phoenix house prices have fallen by 53.7% from their peak. By contrast Charlotte is down 11% and Dallas 8%.
- State level personal income tax collection is down 26% from prior year levels in the January - April timeframe.
- June autosales are set to rise above 10m units annualised in June - still down from last years 13.7m level.
- For the first 4 months of the year Central California bankruptcy levels are up 75% from 2008 levels.
Friday, July 3, 2009
Tuesday, June 23, 2009
Over dinner a few nights ago a neighbour suddenly launched into an impassioned attack on bankers, greed and the need for much tougher regulation of the financial industry. It suddenly struck me that the call for additional oversight ,although popular, if badly handled might make matters worse- possibly much worse.
Anyone who has ever had to deal with the FSA or SEC over the last decade will know that this economic crisis did not occur because of lack of regulation - these august bodies already had vast armies of people, a record number of regulations,and near unlimited powers. Now , the regulators want even more powers and want the banks to raise more capital,lend less and impose tighter controls.
In a world where credit is evaporating , capex is shrivelling and where factory utilisation numbers are dismal (65% in US manufacturing) this enforced shrinking of capital is the last thing we need.With US and Euroland banks needing to write down another $1 trillion or so over the next couple of years governments are talking about imposing what looks like regulatory and economic idiocy. Why not simply go back to the good old days of partnership structures and unlimited directors responsibility? I'm all for sensible targetted regulation but hastily drafted rules might end up proving to have dire,and unintended consequences for the broader economy.
Friday, June 12, 2009
- Irish prices fell by 4.7% in the year to May - the steepest fall since 1933
- US household net worth ( including real estate,stocks, and bonds ) was off $14 trillion from its 2007 peak
- US May retail sales were off 10.8% from year ago levels - gas station sales were down 33.8% and car dealership sales off 19.6% from prior year levels.
IATA has said that the worlds airlines are seeing few concrete signs of recovery and many of them are at a knife edge. Yields are crumbling and losses are widening at a hectic pace. IATA also revised its forecast for industry losses in 2009 to $9 billion a doubling from its forecast of $4.7 billion made just two months ago. After September 11 airline revenues fell by 7% and it took three years to recover. This time round revenues are down by more than 15% and the demand side is showing little sign of improvement.British Airways CEO says the carriers business faces 'serious threats' while Aer Lingus managements says this is the most difficult environment in its 73 year history.
- May 2009 Air France-KLM y-o-y passenger numbers down 7.8%. Asia Pacific down 10.9% and Trans-Atlantic down 9.3%.
- May 2009 SAS Group y-o-y passenger numbers down 17.1%.
- May 2009 SkyEurope passenger numbers down 37.5%
- Swiss CEO says that premium passenger and cargo demand has stabilized at a very low level and that prospects of a recovery this year are unlikely.
From the perspective of the airlines this economy ain't on the mend and higher fuel and financing costs aren't going to make it any easier to make a profit let alone survive. I'm told that Uniteds order for 150 new planes is dependent on the manufacturers finding the financing! I think we will avoid a depression thanks to government largesse but consumer expenditure hit by higher taxes,higher borrowing costs and higher unemployment is going to take a long time to recover. This now becomes a stock pickers market with sectors where demand is little impacted by a huge downturn in credit looking attractive no matter what happens to the broader indices. Pharmaceuticals fit the bill, as do restructuring plays, consolidation candidates, agriculturals and some precious metals.
Monday, June 1, 2009
- The coherent policy actions taken by government to get the world moving again
- The way second quarter numbers were overly negative and have surprised on the upside
- For the man on the street lower interest and mortgage rates are putting money into his pocket
- With the S&P at 666 levels prices were at all time lows and discounting Armageddon
- Long only funds are long cash and short equities and now having to play catch-up
- Hedge Funds have seen redemptions slow or cease and are back to earning their money by investing
- We're all expecting a correction but the market has a way of surprising us - why shouldn't it go higher?
Cash has proven to be the wrong place to be. Until the bills for the stimulus packages come due through higher tax and structurally slower growth there is no reason for markets not to party.What the hangover will be like when the party finishes is a different question.This is till likely to be the deepest recession since 1945 even if a depression has been averted.
Thursday, May 28, 2009
Am still sitting on cash. The latest airline numbers might point to some slow down in the rate of decline in the global economy but that's as bullish as I can get. As for growth forget it. Aprils IATA data shows the decline in demand continuing (load factors fell to 74.4% despite the boost from the Easter holidays) outstripping the 2.5% cutback in capacity. Premium traffic in March saw a 35-40% drop in revenues. Cargo traffic in April was down a shocking 23.3% from prior year levels.May will be a key month - if there is some tentative sign of inventory restocking then it should show up in the cargo numbers then - if it doesn't some of the airlines are going to be on life support.
Thursday, May 21, 2009
US hotel occupancy rates fell to 57.8% down 12.6% from the year earlier period while the average daily room rate was down 10% to $98.33. Not a sector to be investing in just yet.
There are signs that the pace of decline in the global economy is moderating . In Taiwan after a 7.4% fall in Q4 the economy stablized and returned a fall of just 1.5% in Q1 2009. Y-o-y the Taiwanese economy contracted by 10.2% - or to put it another way the biggest recorded fall since 1952 when records began. We should see some signs of growth in the current quarter as Korea,Taiwan and Singapore see some recovery from the 35-50% decline in exports they've suffered. Stock levels around the globe are now at , or approaching a base level and will need to be built up.
Despite these green shoots we are still likely to find that global GDP has contracted by around 7-8% between October 2008 and the end of this quarter. In the US nominal wages have turned negative for the first time in 50 years while the only employer hiring staff was the government - the private sector continues to shed employees.Growth when it comes will be laggardly.
When markets wake up later this year to just how much money corporates and governments are going to need to repair balance sheets and fund spending the fun will begin. I'm still of the opinion that there is more uncertainty coming although this next time it may hit the government debt and currency markets harder. British Airways today announced a full year loss of £401m. That's a £1.3 bn profit reversal during the course of the year. Those low cost carriers are going to start hurting if fuel prices carry on rising north of $60.
Sunday, May 17, 2009
The UK Sunday business pages are all studiously upbeat about the outlook for equities . Where once the analysis was all doom and gloom now its sunshine and roses. It can't be the weather that's making all the financial pundits happy so it must be the sight of Britain's venal politicians getting their come uppance over fraudulent expense claims.
I mused some time ago that the rise in equities might be down to the huge wave of liquidity that just about all governments are injecting into the system. After all, those billions of taxpayers dollars have got to find a useful home somewhere . Where after the post-Lehman collapse in prices could be better than the equity market ? Just about everyone apart from the shorts benefits. Banking shares soar reducing their huge capital raising requirement . At the same time long only investment houses and pension funds see the damage wrought to their portfolios in 2008 being rapidly repaired. Retail investors are happy that their portfolios are turning to the upside. Indeed, for long only houses taking a five year view equities with low debt levels and strong cash flows probably provide some form of inflation hedge even if the economy is zero growth . Having said that quite why banking and retail is leading the charge escapes me as the latest data still shows weakness:.
April US credit card defaults rose to record highs - Citibanks delinquency rate in April was 10.2%
- US industrial production fell 0.5% in April after the 1.7% fall in March. Shockingly capacity utilization is now 69.1% implying that any investment in facility expansion will be sometime acoming.When factories are producing too many goods pricing power disappears - FIAT take note.
- Hotel occupancy levels in the US are approaching levels last seen in 1981 and stand at 53.6% on an average room rate of $97.58 down 14% and 10% respectively from year ago levels.
Taking the above into account it seems to me that :
1) it's too early to get steamed up about inflation with factory utilization running below 70% and stockpiles in steel and other commodities rising . Europe seems to be heading towards deflation with a 2.5% fall in eurozone GDP in Q1 with Germany tumbling 3.5% a worse number than the debt ridden UK's 1.9%. You can criticise the Brits for being overleveraged but it was the Germans and French who sold to them and who are now discovering just how important the anglo-saxon markets were.
2) savings rates are on the rise with the UK lvel going from -1.2% to nearly 5% today. History teaches that these levels will probably come close to doubling over the next two years further weakening consumer demand .
3) Banks and governments are hoping that they will be allowed to repair their balance sheets over a five year period as consumer loans are sliced back and personal savings rates move towards a 10% level in the anglo-saxon world.
4) the world is entering a period of slower and lower growth. In this new world there will be fewer airlines,car makers,banks,insurance companies,and small retail chains.
I'll buy selectively when we get a good setback towards 4000 on the FTSE .
Wednesday, May 13, 2009
If I'm not getting any steer from the powers that be then self reliance in forecasting is the game. The numbers from the airline sector still aren't telling me that the pace of contraction in the economy is letting up. Lufthansa's passenger numbers are down 4.6% in April from year ago levels while cargo volumes are down an eye scorching 26%. Air France-KLM's passenger numbers are down 3.7% while their code share partner Aeroflot has said it plans to amend its 2009 capacity and budget due to falling demand. On top of all this Iberia's management said that they had ' low visibility regarding 2009 full year results' - so no sign of a stabilization there! The hopeful signs that the pace of contraction is slowing simply aren't being seen in business class or discretionary travel within and beyond Europe. The recent hike in oil prices is going to make the business planning for the legacy carriers much more difficult if it is sustained - rising input prices and trough levels of demand make an unholy alliance for any CFO. One airline exec made the comment that although there are some signs that Italy and France might have reached a possible trough in Q1, corporations in the UK are shedding staff at the fastest rate since records began in 1996.
Monday, May 11, 2009
It is also quite possible that the damage done to bank balance sheets coupled to the financial sector deleveraging that will be required over the next half decade will merge to keep the global economy sauntering along at a moderate pace for some time. I'm also toying with the idea that the severity of this downturn in Euroland and the UK might send consumer behaviour off in a new direction - leading to some unexpected successes and some unexpected failures as society readjusts to a world of tighter capital access. Some business models that worked in an era of easy credit are not coming back any tiime soon that's particularly true in the world of personal finance.
Despite my belief that we are in a bear market rally I've added a bit to our emerging markets allocation by taking money off the table elsewhere. Some PRC stocks and Gazprom look cheap on a mid-term outlook. Forgetting for a moment the patronising moniker, emerging markets are likely to show stronger growth than more mature markets over the next decade. If nothing else the gravitational switch in the centre of power from G7 to G20 is a belated recognition that in an interdependent world India,China and Brazil will enjoy growing economic and political clout. There will be surprises en-route. I'd expect the investment banking industry, hitherto the domain of anglo-saxons of one form or another, to have one of its top three champions owned and run by mid-East institutions within two years. With G7 growth rates slowing , a rational area for investors to seek superior returns is going to be in the Brazil,Indian and Chinese markets and their regional relations. Russia remains attractive as a resource supplier ( ie Gazprom and LUKoil ) but endemic corruption and weak, and highly politicised managements will likely keep it a relative laggard overall.
Older investors are also likely to change their lifestyles. I don't think that the habit of maintaining 70%+ of a 401k in equities will appeal to baby boomers after their recent experience. Faced with bruised 401k's the older investor is going to have to work longer or spend less or both. My betting is that we shall see a profound shift towards a new model based on a feel good 'support' economy. Companies providing innovative approaches to improving lifestyle quality, and more cost effective health care needs are going to do very well - kind of Wikipedia with substance.
Sunday, May 10, 2009
I'd be tempted to think about stepping back into the market ( after all equities are a pretty good hedge against inflation ) but then reality intervenes. This time it was the British Airways April traffic figures. Over thirty years I've found that British Airways is as good an indicator of sentiment in the business market and of the health of the underlying economy as it is possible to get. In April their premium traffic fell a staggering 17.7% - the sixth month in a row of double digit falls. The CEO said he sees no signs of improvement in the economic environment and said that things will deteriorate further before they get better. To make matters worse yields at the airline are also under pressure due to a ferocious discounting war going on among the European carriers.
Sunday, May 3, 2009
History doesn't repeat itself but it does rhyme.No replay of the great depression but this time a great stagnation.
I've been talking to my old friends who are still hands on in the frontline of the investment banking industry about this rally and more importantly my singular absence from it. One, who is now head of research at one of NY's remaining ultra blue chips says that mutual funds, insurance companies and long only houses, after a disastrous 2008, are back in the market and learning the value of trading derivatives as part of portfolio insurance . It sounds a good line even if I'm note exactly 100% sure what it means in practice. Another, who is head of trading for a v.large firm in NY informs me that he has been let loose with his prop and back books and is playing as if there has been no crisis ( and doing rather well at it). Margins on his desk are up 50% y-o-y if I understand him correctly - and I think I do if his comments on the conjectured 2009 bonus were anything to go by. A third who heads an emerging market trading desk at a former bulge bracket, now owned by a culturally alien retail bank , has been given the green light to start playing again. He says he is finding willing takers for his financial esoterica in the more aggressive hedge funds who are willing to marry liquidity and risk. Even the worst managed of 'perpetual growth' Russian stocks are back in fashion. So, it would seem that we have a rally driven by trading desks that believe that we have missed global armageddon. This relatively benign outlook has in turn brought in some of the more conservative value driven players together with the specialist emerging market and sectorial players - hence the indices recent surge. The only missing part of the bull story is the relative lack of volume at this stage of the rebound which indicates that the perfect recovery story is not yet fully believed.
If you buy into this post-armageddon view then the recent equity market rally has some logic to it - risk brings its own rewards particularly if you're an institution taking a three to five year view. Reduce real GDP by the say 6% to 8% hit it could take from this downturn . Then go back in recent economic history to see which year corresponds to this lower level of output and corporate profits. In the case of the UK after strong national growth in 2006 and 2007 that would return us to output levels last seen in 2004/2005. The FTSE then traded in the low 4000 to mid 5000 level making the current 4240 number look reasonable.
The problem with all of this is that I can quite understand why institutions and their 'star' portfolio managers that have had a terrible 18 months are biting at the bit to get back in the market and do some trading. I can also understand at face value a reworking of valuations back to levels of 3 or 4 years ago when GDP was comparable to the likely 2010 rate. I can also understand that there are signs that the economy is stabilizing or at least moderating after some pretty hairy falls in Q4 2008 and Q1 2009 . Certainly, despite this now being one of the worst downturns since 1947 we are only about 2/3rds of the way to a full depression (as defined by a 10% fall) .
What worries me is the political and economic aftermath of the crisis and what it means for equities. In the UK ahead of an election next year neither party wishes to upset the electorate by talking of the bitter choices ahead. A reasonable analysis would indicate that taxes will have to rise, government spending will need to be cut and whole swathes of public services that are taken for granted will need to be cancelled in order to pay for the latest government unfunded spending spree. At the personal level savings are growing and personal expenitures are falling and housing ( that great national store of wealth ) is far from reaching a bottom. Taken together these factors hardly represent a recipe for the return to levels of credit elevated growth seen over the last half decade.
Politically, governments will be torn between wanting to raise taxes on a smaller revenue base in order to maintain services and on the other side those who call for draconian reductions of 20% in outlays in order to balance the books. In the UK even the Trident nuclear deterrent, the hallowed sacrosanct last symbol of post -empire status, is now being revisited and is likely to be cancelled and replaced with air breathing cruise missiles. What a blow to national pride that would be with the French remaining the European Unions only premier nuclear power.What then of the UK's seat on the UN Security Council, or its voice in Europe , or its special relationship with Washington? The economic and political implications of this downturn are only now emerging and markets haven't even begun to pay credence to the new, possibly sharply lower growth, but certainly very different world that awaits.
So I come back to my original view and happiness to stick with cash and bonds. There are some signs of stablization but a long U shaped recovery lies ahead or possibly (30% chance ) an L . Toyota US April sales down 42% don't point to an upturn yet. The ISM numbers for April show the 15th fall in a row and indicate that exports and industrial production will remain weak for the balance of this year as banks suck money back out of the general economy depressing earnings. Bank deleveraging and the reversal of financial innovation is now increasingly holding back lending activity leading to aggressive consolidation across the service and manufacturing sectors. In other words we're back to the world of 2004 and staying there. History might not repeat the experience of the 30's but we'll be left with something painful that rhymes a long slow period of deflation and stagnation.
Thursday, April 30, 2009
I guess if I look hard enough there are some positive straws blowing in the wind.The Bank of Japan said this morning that it expected further contraction in the economy with a forecast of a negative 3.1% GDP figure this year against the previously posted negative 2% number. Having said that , factory output actually rose 1.6% last month for the first time since Q3 last year leaving Japans ouput down a mere 34% from March last year. That's ok then.
In Europe, Germany's jobless level rose less than expected to 8.3% from 8.1% but the tentative 'green shoot ' is promptly trampled on by the additional information that a further hike in unemployment by 1 million is expected over the next year. With a collapse in credit fuelled demand there is a lot of excess capacity floating around in those exporters around Stuttgart which everyone assumes is going to be utilised again quickly. I'm not so sure.
Am grudgingly watching the market go up.However, the banks , which have led the charge upwards,seem to be living in denial.Do they disagree with the IMF's view that they need another $4.5 trillion in order to recapitalise to viable levels? I'm waiting to see the fudge that the stress tests will bring whenever they are eventually released - on or about May 4th.Since when has a bank balance sheet leveraged 33 times been prudent? After the wonderful creativity in the financials Q1 results ( almost as fictional as the burlesque that passed for the Chancellor's UK budget )perhaps we can all get on with looking at further downside earnings surprises,jaw dropping commercial real estate and credit card writedowns,and accelerated deleveraging that will continue to starve industry and the consumer. Some of the sector will see effective nationalisation.With credit contracting at the rate it is, a lot of those German factories are going to be staying idle for some time.
It's painful seeing the market surging but I'll wait for the savvy, strong balance sheet market leaders see their share price come off and then step in and buy them . For the time being I'll stay unfashionable risk averse let others view Chrysler's impending bankruptcy and a further fall in UK house prices as positive news.
Tuesday, April 28, 2009
- IATA's latest survey of management in the sector says that expectations for the next 12 months have moved away from indicating further sharp declines in profitability. There is a view that traffic expectations will remain stable at these levels for the next year and that yields will remain weak for both cargo and business.
- Only 50% of airlines have secured funding for aircraft deliveries in 2009 and H1 2010.60% of airlines believe the funding environment has worsened in Q1 to such an extent that it is now unavailable - probably a view Boeing and EADS are coming to share.
- At the operational level OAG says that for April airlines around the globe have scheduled 6% fewer flights than this time last year. This is the ninth month in a row of reductions with 136,000 flights and 9 million seats removed from last years levels.
- Within Europe scheduled flights were cut by 8% for a 7% fall in the number of seats available. The UK was worst hit with the number of domestic flights contracting by 13% and seats by 14%. Internationally British airlines have cut their flights by 10% and seats by 9% to the lowest levels since 2001.
- British Airways management has a pretty good history of telling it as it is - the CEO said on Reuters that he didn't expect to see an upturn until 2010 and that the economy will get worse before it gets better.
AIG has received three offers for its ILFC leasing unit - all are below $5 billion - a pale imitation of the divisions value a year ago.
So there we have it. Some signs from the airline managements that the collapse has moderated to a manageable pace but no signs yet that either the business or vacation traveller is stepping up and spending more. Still makes me think that I'll be able to buy back into equities at a more attractive price as markets readjust valuations for continuing weak demand and poor bottom line numbers. It also hints to me ( as a purely unscientific guess ) that the US and EU economies post-recovery will be unleveraged and probably 10% or so below its 2007 peak in terms of turnover. That would indicate that a lot of companies that have expanded are going to find themselves with a lot of excess capacity and the associated debt and inefficiencies that go with it. Risk seems to be in fashion but I'll eschew smaller co's and stick with big balance sheets, growing market share, pricing power and visible earnings.
Sunday, April 26, 2009
I've been agonizing over the recent rally in stocks. Being 60% in cash, 30% in bonds and 10% in stocks hurts.Why have I been so wrong? Could it be the rally in the FTSE over the last month is a recognition by institutions that governments have opted for inflation to get them out of this mess?. At this stage of the inflationary cycle beaten down stocks must represent a pretty good 3 year option .
Monday, April 20, 2009
Then I read the small print - the numbers were boosted by one off items - a gain on the sale of China Construction Bank for $1.9bn and $2.2bn of gains on widening credit spreads. Ex these out and the expanded operation ( post the acquisition of Merrill and Countrywide ) would have been breakeven. Credit quality deteriorated with charge-offs rising from $2.72bn in Q1 '08 to $6.94bn in the year later quarter. Non-performing assets tripled to $25.74 bn and the credit card operations lost $1.77bn.
The market seems to believe that these 'better than expected' numbers point to a recovery in this 'stricken' sector. That may be right , but to me it makes the stock look expensive on the real underlying numbers and the deterioration in credit quality makes me fearful that more capital raising will be needed.
Saturday, April 18, 2009
Yes,the bank numbers over the last week looked better than expected but with the sheer scale of Federal cash sloshing around in the system is that a surprise? Also a quick scanning of the notes to the accounts takes me back to the days of being an analyst - the devil is in the tiresome detail and there is sure a lot of detail in Citi's ( and GS's and JPM's ) earnings release. From what I can see this downturn is being more destructive of loan books than anything in the last 30 years. Returns on corporate bonds post default seem to be running at around $0.30 - at this rate all the bank capital raised over the last two years is gone. If I'm right then there is going to be another round of capital raising and lending books are going to remain extremely tight. Just wait until credit card defaults and Commercial real estate impairments start to kick in . I come full circle to my bugbear that unemployment is a major driver of loan defaults and that bank loan books are sick and getting sicker.
I see Blue Wings ,a Russian oligarch owned airline in Germany, has filed for bankruptcy. If the oligarchs can't keep their day to day operations going what does it auger for all those banks who lent to Moscow and were secured against much stronger commodity prices and a robust rouble? If Barclay's equity is about 3% of its assets, and loan loss provisions are about 0.3% then further trouble might lie ahead. I'll do the numbers on Deutsche ,which is even more exposed to Russia, but would expect the numbers to look much the same.
Sterling has been rising this week. I'd love to believe that quantitative easing is working and getting the UK economy on track but with money supply growth of 19% inflation looks like a very scary possibility- as we're still on the deflation/inflation fence we've added a bit more gold to the pension pot below $890.The Chancellor announces his budget this coming week so it may be a question of selling sterling on the news - after all what can the poor guy do ahead of an election? Tell the voters that there are going to have to be huge cuts in public sector funding? The news
that building societies are on the hook for £50 billion of self certified and highly dubious ' whole-loan sales' couldn't come at a worse time. These fast track applications seem to have received little or no scrutiny by the FSA.
We're beginning to reshape the pension plan for the ten year view by switching into blue chip plays with good cash flow and market share. This downturn is going to wipe out excess capacity through consolidation - interestingly FIAT added 10% yesterday on the view that a deal with Chrysler will be completed within the 12 day deadline. The survivors are going to have both improved market share and increased pricing power - the weaker players are simply going to go. The better managed companies have reduced inventory and have recognized that capacity utilization isn't going anywhere fast. Talking to managements over the last week there doesn't seem to be any great rush to use cash to make acquisitions just yet - the view from those I've talked to is that as the pain in the economy increases prices for viable companies with stretched balance sheets will get even more attractive. The pressure on third and fourth tier suppliers is dreadful.I guess that there is going to be massive differentiation in equity valuations going forward- that's the real opportunity here.
Thursday, April 16, 2009
Yet, underlying this upbeat outlook I can't but help feel that there is something wrong. In thirty years in finance I've always found the airline numbers to be a pretty good reflection of what's happening in the real economy. Looking at the latest numbers from IATA it would seem to me that the bottom of the cycle may arrive in early Q3 but any rebound is going to be anaemic with yields not rising until 2011. US carrier dometic yields are shrinking fast , falling 14% in March .That darling of the Street,Southwest Airlines ,has warned that it may be driven into bankruptcy with the toughest revenue environment in its history and no bottom in sight..Premium revenues for US and European airlines fell about 30% in February which will exert strong downwards pressure on Q1 numbers.Making matters worse the reduction in yield across the Atlantic last month was the worst in a decade - beating even the post 9/11 decline.
I can see the Dow continuing to rise towards 9,000 but I'd like to see the airline traffic figures for May before believing that this is a structural change. My fear is that we may be closer to hitting bottom but the recovery at the tail end of 2009 will be extremely muted and the cashflow and balance sheet ramifications of over capacity are not yet discounted.
Monday, April 6, 2009
I'm still hugely negative on the banks believing that their balance sheets simply aren't stressed to stand the level of corporate and consumer delinquencies that are on the way. We have to see a wave of capital raisings a la HSBC in order for the banking sector to continue to function and that's going to be massively dilutive.
The G20 meeting was great. Nobody promised the earth and the leaders were remarkably sensible in their criticism of protectionism and their mutual agreement not to do too many stupid things. This is a huge result.
The retracement continues to work its course:
BA expects to make a £150 million operating loss in the year to end March '09 and will also take £75 million of redundancy costs. Downward pressure on yields and volumes continues.
Air Canada trans-Atlantic passenger traffic down 15.6% y-o-y
Austrian Airlines is reducing pilots salaries by 8.5% and pension contributions by 75%!
The owner of London's Evening Standard newspaper said he would be cancelling an order for 20 Airbus A-320's following the German Federal Aviation Agency's revoking of the operating license for BluWings.
UK new car sales fell 30.5% in March y-o-y
Sunday, April 5, 2009
Looking at the data over the last week I suppose you could say that it could have been worse but it's still pretty dire. With the banks repairing their balance sheets and cutting back on lending I can't help but feel that any recovery in consumer demand is likely to be tepid even with lower mortgage and gasoline costs boosting purchasing power.
Exports of Australian wines fell for the first time in 15 years. In 2008 the value of wine exports to the UK and US shrank by 17% and 23% respectively.
Bankruptcies in the US during March are running at 5945 a day - the highest rate since 2005
April foreclosures are likely to rise after the moratorium on sales and evictions on properties owned by Fannie Mae and Freddie Mac ended on March 31st.
In March the number of people in the US involuntarily working part time rose by 423,000 to 9 million.
Sunday, March 29, 2009
Am still looking for the upside as a sign to move out of cash and put my 401k to work but so far all I see is false dawns. Am betting Q1 will be worse than Q4 '08. If I take European plane maker EADS as a guide then I have to assume that capital investment has come to a halt - this will hit all those German family companies and US mid-west machine tool manufacturers. My guess is we'll be down 7% and I'm betting equity markets won't like the multiple that the S&P is trading on. Italy's central bank thinks the economy will ease by 2.5% this year - I'm betting 4.2% is more likely as all those sub-component orders from Germany evaporate.
This week all eyes will be on London. The Germans ,French and Italians are coming over all conservative. They haven't yet got the message that if the Brits and Americans aren't buying then there is much worse to come for their economies. Paris may like protectionism but I'm not sure Germany ultimately will.
Remain a bull on Geithner's latest package but he will need to force some of those 'too big to fail' institutions to take the balance sheet hit of selling toxic assets at 50 cents on the $. Too many bankers have their heads in the sand and still think they are worth the full buck. As credit card and commercial real estate defaults start to hit bank balance sheets nationalisation will remain a very real option.
Key issue in London thsi week will be the body language between the Americans and the Chinese. The Chinese need to boost consumption and the Americans need to promise to keep the greenback strong. Europe is a sideshow .What does a strong dollar do to all those commodity and precious metal trades ?.
Friday, March 27, 2009
Air France KLM have said that they expect an operating loss this year. According to IATA February passenger traffic y-o-y was down 10.1% and cargo traffic down 22.1%. IATA says that the priority for airlines is to conserve cash and adjust capacity to match demand ahead of an expected $62 billion fall in industry revenues. The recent rise in oil prices ( Brent is up 3.3% to $54.36 a barrel ) is working its way through to jet fuel prices. If this continues fuel surcharges may make a surprisingly quick come back with a dampening effect on traffic later this year.
For the 3rd consecutive week US seasonally adjusted claims for first-time unemployment benefit rose 8,000 to 652,000 while the number collecting state benefits rose by 122,000 to 5.56 million. The underlying data is even worse with 6.4 million taking state unemployment benefits, 1.4 million on federal benefits, 8.6 million on part time work and a further 2 million unable to find work. Together 15% of the workforce is unemployed or underemployed. Don't look for a turn in consumer sentiment just yet.
Thursday, March 19, 2009
Sunday, March 15, 2009
Switzerland decided to intervene in the currency markets last week to reverse the relative strength in the Swiss Franc. An immediate beneficiary of lower interest rates were all those Hungarians and others who had taken out mortgages on the Budapest and Riga villas in Swiss Francs. Elsewhere in the currency universe it's gone very quiet. Chancellor Merkels comments yesterday about the need to see how the existing stimulus measures work before pushing for any additional programmes seems to me to be important. I'm more and more of the view that the ECB is working on a guarantee programme that will bail out Ireland and Greece (possibly Portugal ) but only in return for the imposition of strictly monitored fiscal policies ( higher VAT, lower spending ?) aimed at producing a more balanced budget. The effect of this generosity wedded to a tough dose of fiscal conservatism on the other members of the Eurozone like Italy, Belgium and Spain would be salutary. For Frau Merkel (who will ultimately sign the cheque ) linking the bail out to strict terms will go down well ahead of Septembers elections with a German public that is increasingly dismayed at the cost of Euro membership.The political ramifications of a conservative bailout on a wayward financial centre like Dublin would make life very lonely for Gordon Brown and Sterling - a point which may be viewed positively by the bureaucrats in Berlin and Paris.
Monday, March 9, 2009
Have stuck with Euros through the first quarter. For the life of me cannot see why sterling has remained so strong although willing to agree that things are bad on the continent and set to get dire. There seems to be an Anglo-Saxon view that things are worse in Europe than in the UK. Will believe it when Germany starts to print money. The biggest cloud on the horizon would seem to be the likelihood that German banks will have a big hit from Russian corporate defaults but this local difficulty is likely to be pushed to one side until after the national elections.Until then sterling seems set for further weakness - my biggest fear is that with the government borrowing ever larger sums, borrowing costs would rise, currency levels fall and hey presto inflation in the UK might actually start to grow. Stuck between a recession and higher financing costs corporate and personal balance sheets would be in agony.
China told us it was on track for 8% growth this year. For a day markets rallied , until sager counsel reminded them that utility usage is contracting - hardly a sign that all is well. All this patent fear adds up to huge amounts of cash sitting on the sidelines - at some stage there is going to be the mother of all rallies - but what will trigger it? The arrival of better weather , stability in the banking sector, or signs that installed capacity is falling more rapidly than secular demand?
Wednesday, March 4, 2009
A couple of weeks ago I saw an advert for a company called Swift Turbines in Edinburgh. They produce small roof mounted wind turbines that can produce up to 2000 Kwh of power a year. My initial reaction was that the technology might work in a blustery environment like Scotland but never here. However, after the weather of the last few weeks I've had occasion to reassess that opinion. They only seem to sell in the UK but there must be some way of storing the power and using it in the house here. Is anyone out there an expert on wind turbines? Solar power would appear to be the logical solution for alternative power sources here in Italy but the square footage needed to generate a worthwhile amount of power makes me cautious.
Tuesday, March 3, 2009
The Association of European Airlines has asked the EU to drop the regulation requiring airlines to use their slots at least 80% of the time so that airlines can suspend services during the downturn without losing their slots.
BA says that it is buring up its cash pile of £1.6 billion at the rate of £2.7 million a day.
Air France has delayed delivery of two Airbus A-380's in order to conserve cash.
Friday, February 27, 2009
We take some perverse comfort from the numbers as they show that we are in for a sharp recession that is much more likely to be brief and fiery rather than a Japanese 1990's style recession which was long and gradual. By Q3 we should be seeing some marked slowdown in US economic contraction with stabilization emerging in Q1 2010 and an upturn thereafter.
If true this has a number of important effects:
1) The US budget is too optimistic in its revenue assumptions - the deficits will emerge larger than currently forecast
2) Banks that have weathered the Q4 storm should only have one more quarter of dire contraction ( 6% annualised ) to face before the storm starts to ease - this should make provisioning easier
3) With the worst numbers since 1982 there can be some confidence that this is not going to be a long drawn out mild recession - it is going to be red in tooth and claw , brief and savage. The epicentre of the storm is upon us and it won't be too many more months before the cash sitting on the sidelines starts looking for a new home. The US was the first in to the downturn and should be the first out .
Of course with higher taxes on the way, cuts in government spending, and a propensity for households to save rather than spend the upturn when it comes may disappoint. As I used to say about the cheese plate in my local hotel 'there is less to this tham meets the eye'.