Thursday, May 28, 2009

If hotels could talk.....

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.
Spent Friday night in London. The Berkeley was as always efficient,comfortable and an overall fun place to stay ( like the Carlyle in New York or the Park Hyatt in Milan they somehow manage to find polite,unflappable staff ). The main restaurant was already booked solid when we made the reservation three weeks ago but they called back to say we could have a dinner table at 10.30. We opted for the Box Tree Cafe and a more reasonable time of 9.30. From the look of London on a Friday night there is no sign of a recession, the hotel, restaurant and bars were all humming.Onto Woodstock on Saturday for a wedding. The Feathers had lost our reservation which was no loss as The Bear was an altogether better choice. Again, no sign of a downturn with restaurants and bars all solid.Was struck speechless to see a coachload of Japanese tourists getting off their bus with all of them wearing face masks as a first line of defence against swine flu.
Wedding was full of City grandees many complaining about their new ( vulgar and brain dead ) owners. Feeling over the third glass of Dom was that the rally was running out of steam but that another leg would come storming through when long only funds decided to commit to the market - even hedge funds are seeing a slowdown in the rate of redemptions.It seems the big worry for many institutional investors is that having missed the upwards turn in April they are in danger of underperforming for a second quarter if they don't get their equity weightings back up into line.Absolutely no allowance being made for geopolitical problems re North Korea or Tehran.I seem to be a solitary bear.

Thursday, May 21, 2009

The money just keeps on rolling into the market and out of companies

Spoke to my old friend the head of research at a large NY bulge bracket about the markets. His sanguine view is that there is still a lot more upside as the actuaries start to tell institutions that they are underweight equities. In short don't fight the wall of money. We'll see.

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 precipitous fall eases as we drift gently ever lower

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

Lufthansa, Air France, Iberia and Aeroflot all feeling the heat

Have just seen the Governor of the Bank of England on Bloomberg. He seems every bit as confused as me. Inflation has 'significant risks in each direction'. Bank capital maybe sufficient - or not. The economy may have troughed and be slowly growing - or not. Doesn't fill me with confidence.The impression I got ( reading my own book ?) was that after the 'massive stimulus' the authorities are still uncertain about the turnaround but are inclined to believe it will be slow and possibly very slow.

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

After the 'square root' shaped storm - what sectors will outperform?

People are saving more and spending less. Put the two together and it's clear that consumer demand will take a long time to recover. This absence of purchasing activity makes me nervous about the mid-term outlook for equities. Based on what is likely to be a tepid 'square root' shaped recovery current valuations and returns look challenging . I still don't like the look of either the banks or retailers.

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

Ever higher but British Airways numbers make me pause

Equity markets continued their rally this last week leaving me still on the sidelines. Everyone is rejoicing in the green shoots that are appearing but all I can manage to see is weeds. My former colleagues in investment banking tell me that trading desks are still commiting proprietary capital and that they are being joined at the party by hedge funds freed from redemption fears. Why fight the wall of money? More fool me.

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.

Maybe it's the sunshine but I'm coming round to the view that thanks to all the government money being printed we are going to miss a huge 1930's style explosive depression.

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.