Thursday, September 3, 2009

Nothing new

There's been little new to post about in the investment landscape over the last three weeks. I continue to be wrongfooted by the markets renewed and voracious appetite for risk. Indeed most markets (China excepted) have continued to rise on the back of signs that global economies are stablizing and that the worst of the 'repression' is behind us. During this time in the wilderness I've added a few more corporate bonds to the portfolio and topped up on gold . Apart from that I'm content to wait until equities finish their all night partying and start to focus on the term paper that's due tomorrow. If recovery from this downturn is anything other than a very sharp 'V' then across the board P/E's will be exposed to sharply lower earnings growth,embeded excess production capacity and increased risk.

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.

1 comment:

  1. Does it make sense that they are trading on the shifting and shiftable workforce like cattle in a market just to get good FT PR, when we know ultimately that the numbers don't mean a thing?

    I'm confused here, when did the lunatics take over the asylum? I love life, people, kindnesses. It's the so called financial markets that makes me swoon from an incredulity headache. Other than that, I thought your analysis was apt, astute and of the wiser bear mentality.