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.
Friday, July 16, 2010
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.
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.
Friday, December 18, 2009
Running out of steam ?
Ages since I last posted but Q4 seemed to have been dominated by the markets love affair with risk. With so much bullishness around what new was there for me to say? "If you rest you rust" as the old saying goes.
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.
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
A new quarter awaits
The markets recent adrenalin rush got another boost - this time from a wave of M&A activity. The swallowing up of the small by the large is a very logical way of dealing with surplus capacity and weakened competition. Indeed corporates that are managing to grow profits and sales in stagnant markets - primarily pharmas, retailers, and telco's - are about to embark on another , entirely logical, round of consolidation. These are areas I'm happy to be in and we should see rotation into them.
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?
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 head ruling the heart.
My old friends on Wall Street,now occupying frighteningly senior positions, continue to tell me that the rally in equity (and other) markets will continue through to the end of the year. Institutional investors are still relatively underweight equities and the higher the market goes the greater the peer pressure to join in. End of story as far as they're concerned.
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.
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
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.
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
From the weekend press.
Bradford and Bingley, the British mortgage bank, reported that at the end of June 40% of its mortgage book was in negative equity . This number was up from 30% recorded at the end of 2008. Customers who were more than 3 months behind in payments rose to 5.88% of the book from 4.6% at year end.
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.
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.
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