Sunday, August 29, 2010

Summers over.

Nearly two months since I last posted. Not much has happened since. Markets have been treading water, torn between the optimists who see recovery round the corner and the pessimists who don't. The Dow and the FTSE seem to be stuck in tight trading corridors around the 10400 and 5200 levels respectively. With the jury out and the data releases contradictory, corporate bonds still seem to be as safe a place as any to overweight.

As we enter the second half the benefits of last years stimulus package will start to wear off. Inventory restocking has more than run its course and companies have done all the easy cost cutting. The growth outlook everywhere seems to be moderating. This puts policy makers in a difficult position. Do nothing and deflation may rear its ugly head. More quantitative easing and inflation becomes a near certainty. Through it all banks continue to rein in their lending book. The airline numbers are a pretty good proxy for what's happening in the real world. Premium traffic in June was up 40% over the same period a year earlier. Economy traffic was up 10%. However, compare the latest numbers with the levels of April 2008, the peak month prior to the crisis, then premium traffic is still down 13%.

Expect to see some sharp rallies and some sudden falls on low volumes as Q3 turns into Q4 and optimists and pessimists battle it out. However, unless growth picks up the financial system will find itself under growing pressure. Get set for greater, possibly extreme, turbulence. Ireland and its banks are a cause for concern and may have wider ramifications for the Eurozone and its banking sector.

Friday, July 16, 2010

Where are we in the cycle?

So where are we in the cycle? The latest hotel and airline numbers upto the end of June have reflected a fairly robust turnup from last years lows. The most recent hotel occupancy figures reinforce this view. After tumbling for eight straight quarters hotel occupancy rates finally bottomed out at the end of Q4 2009. Since then they've been rising at a fairly brisk pace and are now 6% above the lows recorded last year. However,they are still 5% below the 1997-2007 decade median for before the crisis erupted. So there you have it. After a trillion dollars of stimulus we are a little more than halfway back to where we were.

As we enter the summer season hotel rooms in the major global centers are scarce and prices are non-discountable. Much to every hoteliers relief the Americans are back en masse and spending . Chinese and Indian travel flows are also up strongly . No sign here of a double dip although we'll have to wait until after the summer tourism and leisure boost to see how corporate spending is holding up.

This probably indicates that equities, at current valuations, are discounting in a continuation and possible acceleration of the Q1 and Q2 uptrend. With government expenditures set to be cutback, in some cases sharply, the posited continuation of bullish consumer sentiment maybe overly optimistic. I'm still happy to be long quality corporate bonds until this jobless recovery morphs into something sustainable. Compeling value still doesn't seem to exist in the equity universe. At current rates of job creation it's going to take another 5 or so years for employment levels to get back to where they were. The same for the banks holdings of real estate. Let's hope a double dip doesn't come along ( or a separate downturn is say 2014) to compound matters.

Wednesday, March 10, 2010

Are we close to a leg down?

So far it's been a good first quarter . Markets have been risk-on and the portfolio has gone a long way to recovering from the hammering it took in 2008.

Of late I've started to think again about raising cash. None of the macro news fills me with enthusiasm. Apologists have been saying that the weak consumer confidence, employment , construction and home sales numbers can be put down to the miserable winter we've had. Let's hope so.

There again after the huge fiscal stimulus in the US and the UK we should surely now be setting ourselves up for some fairly robust growth in H2 . However, as it stands 1.5% seems to be the best that the US can hope for as inventory restocking seems to have run its course. Even more challenging will be the drag effect as the economic boost from the huge wave of fiscal stimulus starts to reverse and weaken later in the year. On this basis maybe the 1.5% GDP growth I've got pencilled in for H2 might prove to be too bullish. It's also possible that on this side of the pond the BoE will have to consider more QE despite its depressing effect on Sterling and imported inflation.

This afternoon I read that the UK's FSA regulator has mandated the banks to run a new round of stress tests based on a double dip recession and an unemployment rate of 13.3%. This assumes a further 2.3% fall in GDP for a total contraction of 8.1% from the peak of the boom in 2007. Ouch! That's a shocker. Wonder why they chosen to come out with these new and tougher stress tests now? Could it be banks still remain wildly leveraged - I hear 10 to 15 times remains the norm. If so expect a lot more capital raisings to boost equity levels.

Maybe I'll just sit out the rest of the quarter and watch what equity markets do - valuations are once again looking challenging. Corporate bonds still look attractive to me - certainly corporate balance sheets look as strong if not stronger than their sovereign counterparts.