Saturday, July 23, 2011
And I thought I'd seen it all .
Yesterdays FT carries a report citing the Chinese Governments Foreign Exchange authority and its call on the US government not to default on its debt . Communist China calling on the capitalist US to stand by its financial obligations ! And I thought I'd seen it all .
Monday, June 27, 2011
The Monday morning fact .
America's $14 trillion debt is growing at a rate of $40,000 a second . At the time of writing there are are no plans to rein it in . The phrase ' in denial ' seems apposite .
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.
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.
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.
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?
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