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.
Friday, December 18, 2009
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.
Tuesday, July 28, 2009
Nationalizing credit
The second quarter was great for equities and the third is shaping up to be even better. Optimism is back in fashion in a big way and commentators are moving past the 'green shoots' stage to talk about a rebound in house prices and a sharp 'V' shaped recovery. There are even those who are talking about 3% GDP growth in the US in the fourth quarter. On this side of the pond the newspapers are beginning to call and end to the recession and forecasting positive GDP growth by year end. What a turnaround from only a few months ago.
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.
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
Weekend reading.
All my old colleagues on Wall Street are in an upbeat mood having been awarded great mid-year bonuses. With a recession underway demand for loans has fallen and banks are having to park their money somewhere .The Q2 returns on trading equities has clearly been the right place to put their TARP funds and the stellar returns since April have been a big help in repairing some of the balance sheet damage incurred in 2008. Institutions that have been sitting long of cash have recently started to pile into the markets afraid of missing out on further strength at the end of Q3. Amid all this wild optimism I thought it might be useful to jot down a few comments from the Sunday papers to put current market valuations in perspective:
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 .
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 .
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