October Review 2008
With the ink on the September quarterly valuations hardly dry I thought it might be a good idea to try and summarise what has occurred in the last 6 weeks with an aim to review current strategies, etc.
As was clear to many commentators a global credit bubble had grown since the turn of the millennium ably assisted by the Federal Reserve’s emphasis on assisting borrowers rather than protecting the greenback (US$) which in fact is its remit. The gradual implosion of the asset bubble perpetrated by sub-prime and other derivative instruments forced firstly Bear Stearns and then Lehman Brothers out of business. A gradual pandemonium in financial stocks, mainly investment and international banks, subsequently forced some to merge (Merrill Lynch into Bank of America, Wachovia into Citigroup) as well as leaving governments no alternative other than to intervene on an “unprecedented” basis (Northern Rock, B&B, HBOS/Lloyds, RBS, etc just in UK). The utilisation of providing extra liquidity to all types of markets and instruments has arguably created a more stable financial environment with LIBOR (London Interbank Offered Rate) gap narrowing somewhat and many stocks stabilising in the process aided by a global rate cut (the Fed cut rates 0.5% to 1% recently). With the printing presses running flat out a deflationary market in property and commodities has occurred. Of course, the property price implosion and the banks demise has meant that the extraordinary commodities slide has been missed by many pundits although it is clear that price declines in commodities and commodity related stocks has been overstated as hedge funds have become forced (distressed) sellers in this arena. It is far easier to liquidate stocks in these conditions than property and clearly part of this easing of liquidity constraints has left investors nursing serious losses (as yet mainly uncrystallised) in their portfolios. There are many observers who have felt that the billions of $, £’s, Yen & Euros that have been raised would have been better deployed to stimulating core industries/sectors rather than bailing out the very banks who often or not catalysed this crisis of confidence. With balance sheets remaining questionable with off-balance sheet positions (debts?) remaining unquantifiable (the derivatives tail is now estimated at US$500 trillion) some market commentators have suggested that these banks didn’t need saving. Arguably new stock banks should have been created but instead governments have suggested that regulations were weak and have demanded more regulation thus making life more difficult for themselves, the banks and broking houses as well as investors going forward. I would argue that less regulation is needed allowing for new organisations to be formulated by entrepreneurs from any ongoing fallout but I fear that the opposite will happen (Sarkozy has called for more regulation along with other more socialist powermongers). In addition to personal crises several governments have had to go cap in hand to the IMF, notably Iceland, with Hungary, Austria and a host of others illuminating distress flares. The Barack Obama era has finally arrived but the euphoria may die down as the US deficit nears the magic US$1 trillion mark. Steve Forbes, CEO Forbes Inc, the int’l magazine emporium, has suggested that Obama may replace the Treasury Secretary Paulson with Paul Volcker the former Federal Reserve (before Greenspan) man who may be in a better position to stand up to Bernanke. Who knows what will happen or what the new administration will do to reverse the damage that Greenspan did to the US economy by maintaining low rates for too long but one thing is for sure, the bumpy ride is likely to continue as unemployment figures increase dramatically in the western world and a retail slump is forecast. Just how Wall Street reacts hereon is anyone’s guess but it is clear that until financial organisations are allowed to fail, thus cleansing the system, it is very difficult to see the wood for the trees.
I continue to suggest that all investors review their risk profiles and adopt more cash, precious metals, orientated strategies and only adopt domestic investments where there are clear value opportunities present. The intra-day volatility in all securities of all types is extremely unnerving but there are clearly value plays in these markets which are a stock-pickers paradise. Technically speaking all markets are off their lows but I am predicting more downside in the next three months (the ‘double bottom’) testing previous lows (FTSE may reach 3,300; S&P500 around 800). Gold, platinum, silver and most base metals stocks yielding in excess of 3% can be purchased as alternatives to risk deployment persist and as emerging economies grow at GDP growth rates of 4%+. In particular Templeton Emerging Markets, JP Morgan Russia, JP Morgan India, BlackRock Latin America present good long-term value on any further pullbacks. Looking at charts before making trades in these markets are really a necessity that many investors should not ignore.
Please contact me to discuss any aspect of your financial affairs at any time 24/7. A recent valuation is attached for your perusal. I am reminded of another market maxim from W.Dennis Heymanson’s excellent booklet;-
“Buy when the market is oversold, lighten when the market is overbought.”
Wednesday 5 November 2008
Thursday 2 October 2008
Review 3 Q 2008 6th October 2008
“Don’t listen to what people are saying about the market, listen to what the market is saying about itself” Market Maxim booklet by W.Dennis Heymanson
“A financier is a pawnbroker with imagination.” AW Pinero 1893
Whilst clearing out my desk I came across a stockbroker’s booklet full of market maxims; many of them most of us have heard many times but I thought I’d share two of them with my clients. The “financier” definition perhaps explains what has happened in investment banking in the last decade whilst the former perhaps focuses one’s attention on deciding where we are going from here. Whilst opening my father’s US dealing book of the ‘80’s I can see cash transactions in many of the household names today (“Microsoft/Apple”) as well as a few that didn’t make it (“Petroleum Helicopters/Countrywide Credit”). Then US brokers operating out of London, New York and all points west phoned him up to ask him to participate in IPO’s on an unprecedented scale. Some of you may recollect participating back then. But then something happened that none of us could predict. Alongside us at many of the roadshows accompanying these IPO’s (Initial Public Offerings) sat small characters describing themselves as hedge fund managers. Making discreet enquiries it transpired that investment banks were financing individuals in the running of these funds and allowing them to gear up many times in the IPO fundraisings. It didn’t take long before cash managers like ourselves were receiving “zero” allocations whilst the new kids dealt in highly leveraged “asks” effectively taking the pot for themselves. It became a simple numbers game for the investment banks albeit one that was highly leveraged; so long as markets rose, so did the commissions for the brokers working there. Cash players like ourselves got left behind. I last received an invitation from a US investment bank around 1998 and haven’t had a call since then. I think this says something about the greed driven climate change that occurred on Wall Street. Around the same time dot-com occurred and property prices started to escalate as the era of self-certified mortgages began. Today the “market” is telling itself, enough is enough.
In crude terms many banks will fail from here, recession could lead to depression and more regulation as suggested by politicians could well stifle competition (new banks and brokers are needed) making life extremely difficult for all concerned.
Looking at my quarterly reviews since January 2005 I have warned of these extravagances in the financial system and suggested to clients that they consider precious metals and oil shares. Today the outlook for most domestic securities is dire. On the positive side emerging markets are still growing but the impact of a major downturn in US followed by a weaker dollar is not yet factored in.
With the current volatility it is ridiculous to contemplate making individual stock recommendations but I have stated to some of you that both Royal Dutch Shell ‘B’ and BP probably both offer sound havens in the current market with yields approaching 5%. I still believe oil will retest its previous highs and that gold will bounce to $1,200pto + before long. For those holding cash the UK government gilt market represents safety; S&P reiterated its AAA rating on UK sovereign paper this week. Please do NOT trust the supposed safety as subscribed by GB & AD, the Laurel and Hardy team. One more major corporate (bank) failure is likely (the ‘Burma’ factor) and this may well call the bottom in equities and I would expect this in the weeks/months ahead.
The final capitulation will occur sometime in the next quarter that I am sure of. The tension is still there in the gulf and between Putin/Medvedev and the west so let’s keep our fingers crossed. One further thought, the Paulson bailout could well cost the US taxpayer up to $2 trillion equating to $50,000 per US household according to Jon Moulton of Alchemy Partners; a UK bailout doesn’t bear contemplating as the nationalized banking system grows disproportionately. The US election may well bring in a new era but I wouldn’t want to bet on the outcome for America over the next 4 years.
“A financier is a pawnbroker with imagination.” AW Pinero 1893
Whilst clearing out my desk I came across a stockbroker’s booklet full of market maxims; many of them most of us have heard many times but I thought I’d share two of them with my clients. The “financier” definition perhaps explains what has happened in investment banking in the last decade whilst the former perhaps focuses one’s attention on deciding where we are going from here. Whilst opening my father’s US dealing book of the ‘80’s I can see cash transactions in many of the household names today (“Microsoft/Apple”) as well as a few that didn’t make it (“Petroleum Helicopters/Countrywide Credit”). Then US brokers operating out of London, New York and all points west phoned him up to ask him to participate in IPO’s on an unprecedented scale. Some of you may recollect participating back then. But then something happened that none of us could predict. Alongside us at many of the roadshows accompanying these IPO’s (Initial Public Offerings) sat small characters describing themselves as hedge fund managers. Making discreet enquiries it transpired that investment banks were financing individuals in the running of these funds and allowing them to gear up many times in the IPO fundraisings. It didn’t take long before cash managers like ourselves were receiving “zero” allocations whilst the new kids dealt in highly leveraged “asks” effectively taking the pot for themselves. It became a simple numbers game for the investment banks albeit one that was highly leveraged; so long as markets rose, so did the commissions for the brokers working there. Cash players like ourselves got left behind. I last received an invitation from a US investment bank around 1998 and haven’t had a call since then. I think this says something about the greed driven climate change that occurred on Wall Street. Around the same time dot-com occurred and property prices started to escalate as the era of self-certified mortgages began. Today the “market” is telling itself, enough is enough.
In crude terms many banks will fail from here, recession could lead to depression and more regulation as suggested by politicians could well stifle competition (new banks and brokers are needed) making life extremely difficult for all concerned.
Looking at my quarterly reviews since January 2005 I have warned of these extravagances in the financial system and suggested to clients that they consider precious metals and oil shares. Today the outlook for most domestic securities is dire. On the positive side emerging markets are still growing but the impact of a major downturn in US followed by a weaker dollar is not yet factored in.
With the current volatility it is ridiculous to contemplate making individual stock recommendations but I have stated to some of you that both Royal Dutch Shell ‘B’ and BP probably both offer sound havens in the current market with yields approaching 5%. I still believe oil will retest its previous highs and that gold will bounce to $1,200pto + before long. For those holding cash the UK government gilt market represents safety; S&P reiterated its AAA rating on UK sovereign paper this week. Please do NOT trust the supposed safety as subscribed by GB & AD, the Laurel and Hardy team. One more major corporate (bank) failure is likely (the ‘Burma’ factor) and this may well call the bottom in equities and I would expect this in the weeks/months ahead.
The final capitulation will occur sometime in the next quarter that I am sure of. The tension is still there in the gulf and between Putin/Medvedev and the west so let’s keep our fingers crossed. One further thought, the Paulson bailout could well cost the US taxpayer up to $2 trillion equating to $50,000 per US household according to Jon Moulton of Alchemy Partners; a UK bailout doesn’t bear contemplating as the nationalized banking system grows disproportionately. The US election may well bring in a new era but I wouldn’t want to bet on the outcome for America over the next 4 years.
Wednesday 9 July 2008
2 Q 2008 9th July 2008
“3 Wheels on My Wagon” -performed by The New Christy Minstrels December 1971
For the last 6 weeks or so I’ve heard it mentioned occasionally on Bloomberg/Sky News/ITN/Channels 4 & 5/CNN and the BBC that the wheels have fallen off and a total capitulation of equities and bonds may be on the cards. For some reason throughout I’ve been humming an old song from my schooldays and after a quick glance at it on YouTube it brought a fresh smile to my face. It’s the story of some prospectors caught by Cherokee Indians in the mid-west; their wagon kept “rollin’ along” and so long as it did with Cherokees firing arrows at them they kept “singing a Happy Song”. Eventually, as happened to many prospectors, the wagon wheels all came off and in the finale they sang in harmony with the Indians….”I’m singing a Happy Song”. Of course in real life it never ends like that and if you do see the analogy between the Cherokees and the mortgage lenders, bankers and ghastly outfits like Ocean Finance then please have a thought for those who cannot fend off the arrows or stop their wheels from coming off. The attitude in capital markets in the last 20 years has been that wheels (read “loans/overdrafts/mortgages/other monstrous devices”) can be fixed and it will be all right later but then as people are finding there is an end-game. It’s called repossession, IVA, bankruptcy or a trip to the pawn shop.
Much has been spoken about asset deflation/depreciation and I experienced it first hand last month myself. My 3 year VW Passat Estate was hit by a 4wd in a sussex lane. Around £2,500 damage (just a few wings) to a car that I discovered had dropped from over £16,000 when I bought it in 2005 to around £5,000 today. Who needs high fuel costs when car depreciation is this vicious? Our cousins throughout EU rent cars from Avis and Hertz saving on insurance, maintenance and depreciation and I am considering car rental as the way forward hereon. Elsewhere, house prices continue to slump slowly and commentators keep repeating their alarming forecasts about when prices will rise. What none of these experts appear to have fathomed is that the boom was born out of a lie, namely a housing shortage and fuelled by governments intent on cementing this lie by artificially keeping rates low. Now that inflation is here the central bankers have nowhere to go. Rising inflation and flirting stagnation equals stagflation so I think rates are likely to rise as LIBOR (London Inter Bank Offering Rate) seems to be showing us. It comes back to the fact that when an asset, in this case a brick, is dramatically over-priced it eventually comes back down to reality which is a long long way from here (another 50% collapse in retail property prices ex-Central London could be possible). Recently I’ve heard comparisons between the dot-com boom/implosion and the sharp rise in oil prices but I don’t agree with the analogy except it could be argued that the rise in dot-com stocks (some of you may remember Medi@Invest that rose from 3p to 98p and back to a penny!) is similar technically to the rise we’ve seen in oil. Dot-com was a synthetic concept where valuations were ignored and really it was just an over-exuberant extension of a long-term technology boom that went wrong sending zero earnings companies into the stratosphere. To date none of the oil stocks have even remotely performed in line with oil and the price has only nearly doubled after ever-increasing demand. Much has been blamed on speculators but the real issue is that oil demand has overtaken the world’s ability to deliver, refine and sell on this oil downstream effectively. I think $200pbo ++ is on the cards. And it is this pricing drive in oil, soft commodities (grain, rice, most food stuffs) and general commodities kicked into gear by South America, Africa, Middle-East, Asia, Far East and the FSU that worries the west and world capital markets. Some money men like Jim Rogers have embraced these new markets and opportunities whereas most people just fear them.
So what’s the answer?
Well, as many of you know since 2000 I have advocated overweight positions in commodities, oil and gas, precious metals, softs (although there are few equity ways to play this) but more recently have recommended selling out of raw commodities and reducing exposure in the other sectors. A rotational spin back into financials will occur in the next 6 months I believe and I suspect that the Beijing Olympics will open investors eyes to the problems prevalent in China. In fact their stock market has already slumped around 50% from the highs and I think the best way to play the growth game in these areas going forward is through overseas banks like HSBC and Standard Chartered. But not yet!!! It is marginally too early. Another bank failure is pretty likely and a host of a other failures to boot before the worm turns. In 1974 the market rallied very fast at the end of its final capitulation and so having cash on the sidelines in the next few months ready for reinvestment into banks, precious metals, oils, international conglomerates and the occasional housebuilder involved in the London Olympic bid could reap spectacular profits. Some of the stocks that I have sold recently could be re-examined when this happens. They are British Airways, Aviva, Prudential, Taylor Wimpey, etc. Furthermore, a few investment trust investments in emerging markets is great way to stem the inflation we are likely to experience here as governments try to stimulate manufacturing and the almost aimless service industries that are so weighed down by regulation. I continue to recommend Templeton Emerging and suggest also JP Morgan Fleming Indian Investment Trust and Black Rock Latin America, both on further weakness. In addition the following can be looked at; BP, Royal Dutch Shell ‘B’, Thomson Reuters, Randgold, Anglo American, BT Group, Imperial Energy, Fresnillo, Hochschild, and the interesting Blavod Extreme on any pullbacks.
To summarise this second quarter has seen FTSE100 decline 3.87%% although it fails to summarise the real decline as usual failed constituents have been replaced and daily volatility has at times been quite severe. The likelihood of gold recovering from below $900pto appears likely as inflation/stagflation looms and $1,200pto for gold this year is still on the cards. But if I had to make a near certain prediction then I think the short-term profit-taking seen in oil will submit to the bulls who could speculate oil to $150pbo and onwards to $200pbo later this year. Tensions in Middle East (Iran mainly) and between Russia and West continue so the next 6 months could well be even more lively with some great long-term investment and trading opportunities presenting themselves. One positive outcome towards the latter part of this quarter has been the relative stability of the US$ but as John Paulson, the Hedge guru, suggested only last week, the credit crunch maybe only 1/3rd of the way completed. Despite the difficulties in the banks and housebuilders there hasn’t been any noticeable failures amongst hedge funds, private equity groups or large corporations which is a bit surprising.
The recent comments surrounding banking protection have been highlighted and in my view the new intended threshold of £50,000 should NOT be trusted until a more full-proof mechanism is in place should another Northern Rock materialise. I continue to recommend that clients consider UK government fixed interest (gilts) for large capital sums but am happy to comment when required. Some of the attractive rates available at banks and societies should be spread around as previously suggested.
Have a good summer!
For the last 6 weeks or so I’ve heard it mentioned occasionally on Bloomberg/Sky News/ITN/Channels 4 & 5/CNN and the BBC that the wheels have fallen off and a total capitulation of equities and bonds may be on the cards. For some reason throughout I’ve been humming an old song from my schooldays and after a quick glance at it on YouTube it brought a fresh smile to my face. It’s the story of some prospectors caught by Cherokee Indians in the mid-west; their wagon kept “rollin’ along” and so long as it did with Cherokees firing arrows at them they kept “singing a Happy Song”. Eventually, as happened to many prospectors, the wagon wheels all came off and in the finale they sang in harmony with the Indians….”I’m singing a Happy Song”. Of course in real life it never ends like that and if you do see the analogy between the Cherokees and the mortgage lenders, bankers and ghastly outfits like Ocean Finance then please have a thought for those who cannot fend off the arrows or stop their wheels from coming off. The attitude in capital markets in the last 20 years has been that wheels (read “loans/overdrafts/mortgages/other monstrous devices”) can be fixed and it will be all right later but then as people are finding there is an end-game. It’s called repossession, IVA, bankruptcy or a trip to the pawn shop.
Much has been spoken about asset deflation/depreciation and I experienced it first hand last month myself. My 3 year VW Passat Estate was hit by a 4wd in a sussex lane. Around £2,500 damage (just a few wings) to a car that I discovered had dropped from over £16,000 when I bought it in 2005 to around £5,000 today. Who needs high fuel costs when car depreciation is this vicious? Our cousins throughout EU rent cars from Avis and Hertz saving on insurance, maintenance and depreciation and I am considering car rental as the way forward hereon. Elsewhere, house prices continue to slump slowly and commentators keep repeating their alarming forecasts about when prices will rise. What none of these experts appear to have fathomed is that the boom was born out of a lie, namely a housing shortage and fuelled by governments intent on cementing this lie by artificially keeping rates low. Now that inflation is here the central bankers have nowhere to go. Rising inflation and flirting stagnation equals stagflation so I think rates are likely to rise as LIBOR (London Inter Bank Offering Rate) seems to be showing us. It comes back to the fact that when an asset, in this case a brick, is dramatically over-priced it eventually comes back down to reality which is a long long way from here (another 50% collapse in retail property prices ex-Central London could be possible). Recently I’ve heard comparisons between the dot-com boom/implosion and the sharp rise in oil prices but I don’t agree with the analogy except it could be argued that the rise in dot-com stocks (some of you may remember Medi@Invest that rose from 3p to 98p and back to a penny!) is similar technically to the rise we’ve seen in oil. Dot-com was a synthetic concept where valuations were ignored and really it was just an over-exuberant extension of a long-term technology boom that went wrong sending zero earnings companies into the stratosphere. To date none of the oil stocks have even remotely performed in line with oil and the price has only nearly doubled after ever-increasing demand. Much has been blamed on speculators but the real issue is that oil demand has overtaken the world’s ability to deliver, refine and sell on this oil downstream effectively. I think $200pbo ++ is on the cards. And it is this pricing drive in oil, soft commodities (grain, rice, most food stuffs) and general commodities kicked into gear by South America, Africa, Middle-East, Asia, Far East and the FSU that worries the west and world capital markets. Some money men like Jim Rogers have embraced these new markets and opportunities whereas most people just fear them.
So what’s the answer?
Well, as many of you know since 2000 I have advocated overweight positions in commodities, oil and gas, precious metals, softs (although there are few equity ways to play this) but more recently have recommended selling out of raw commodities and reducing exposure in the other sectors. A rotational spin back into financials will occur in the next 6 months I believe and I suspect that the Beijing Olympics will open investors eyes to the problems prevalent in China. In fact their stock market has already slumped around 50% from the highs and I think the best way to play the growth game in these areas going forward is through overseas banks like HSBC and Standard Chartered. But not yet!!! It is marginally too early. Another bank failure is pretty likely and a host of a other failures to boot before the worm turns. In 1974 the market rallied very fast at the end of its final capitulation and so having cash on the sidelines in the next few months ready for reinvestment into banks, precious metals, oils, international conglomerates and the occasional housebuilder involved in the London Olympic bid could reap spectacular profits. Some of the stocks that I have sold recently could be re-examined when this happens. They are British Airways, Aviva, Prudential, Taylor Wimpey, etc. Furthermore, a few investment trust investments in emerging markets is great way to stem the inflation we are likely to experience here as governments try to stimulate manufacturing and the almost aimless service industries that are so weighed down by regulation. I continue to recommend Templeton Emerging and suggest also JP Morgan Fleming Indian Investment Trust and Black Rock Latin America, both on further weakness. In addition the following can be looked at; BP, Royal Dutch Shell ‘B’, Thomson Reuters, Randgold, Anglo American, BT Group, Imperial Energy, Fresnillo, Hochschild, and the interesting Blavod Extreme on any pullbacks.
To summarise this second quarter has seen FTSE100 decline 3.87%% although it fails to summarise the real decline as usual failed constituents have been replaced and daily volatility has at times been quite severe. The likelihood of gold recovering from below $900pto appears likely as inflation/stagflation looms and $1,200pto for gold this year is still on the cards. But if I had to make a near certain prediction then I think the short-term profit-taking seen in oil will submit to the bulls who could speculate oil to $150pbo and onwards to $200pbo later this year. Tensions in Middle East (Iran mainly) and between Russia and West continue so the next 6 months could well be even more lively with some great long-term investment and trading opportunities presenting themselves. One positive outcome towards the latter part of this quarter has been the relative stability of the US$ but as John Paulson, the Hedge guru, suggested only last week, the credit crunch maybe only 1/3rd of the way completed. Despite the difficulties in the banks and housebuilders there hasn’t been any noticeable failures amongst hedge funds, private equity groups or large corporations which is a bit surprising.
The recent comments surrounding banking protection have been highlighted and in my view the new intended threshold of £50,000 should NOT be trusted until a more full-proof mechanism is in place should another Northern Rock materialise. I continue to recommend that clients consider UK government fixed interest (gilts) for large capital sums but am happy to comment when required. Some of the attractive rates available at banks and societies should be spread around as previously suggested.
Have a good summer!
Wednesday 9 April 2008
Review 1 Q 2008 10th April 2008
“When one bubble pops, the next one always appears somewhere else. So don’t even think about buying back into the finance sector. That trend is over. George Soros says it’s the end of the road for cheap and easy borrowing. That is to say, it’s the end of a trend that has been going for the last 28 years. We may not see another boom in the financial industry during our lifetimes.” -The Daily Reckoning April 2008
I apologise for yet another quote from my friends at the Daily Reckoning but it really does look as though the bear market has finally started to impact on people’s lives. Stockbroking firms are being taken over (see the acquisition of Hichens Harrison) and quite a few are “up for sale” (WH Ireland). In the property world March prices fell and estate agents are closing their doors. Inflation has reared its ugly head (now around 3 ½% in Eurozone) and central bankers are losing room to manoeuvre viz-a-viz the lowering of interest rates. Stagflation is nearly upon us although commodity prices remain buoyant. The FTSE100 trades on a prospective p/e of 10.9x versus an average of 14x but let’s not forget that things are likely to get worse before they get better. Households in UK are receiving utilities bill increases above inflation and buy to let investors are struggling to stand still. Sales of all types of property have almost ground to a halt and my predicted fall of up to 70% in the south-east looks possible. Although official statistics show only marginal declines the real picture is much worse as Brown’s housing demand policy turns in to an oversupply policy almost overnight. The impact of the credit crunch arguably has hardly occurred yet as banks struggle to admit more liabilities. Conservative estimates indicate up to another US$400bn of losses being impacted later this year combined with a massive unwinding of credit derivative instruments. Expect more hedge fund failures going forward.
To summarise this last quarter has been the worst quarter in the history of FTSE100 with a decline of 11.68% although at one juncture on 16th March it was showing a decline of 16.1%. The FTSE All Share index by comparison fell 9.85% over the same period whereas gold rose around 6% over the same period having peaked at around US$1032pto. The likelihood of oil and precious metals prices rallying from the current levels appears positive with most analysts predicting $1,200pto for gold this year (may be too conservative) and $125pbo for oil.
As far as individual stocks are concerned I continue to recommend BP, Royal Dutch Shell ‘B’, Venture Productions, Aviva, Prudential, Reuters (becoming Thomson Reuters shortly), Randgold, Anglo American, BT Group, British Airways (can things get any worse?) and on further weakness, Tullow Oil and Templeton Emerging Markets Investment Trust. I still believe that the risks outweigh the rewards for bank and building shares. I have been investing in a small AIM company recently, Blavod Extreme Spirits PLC (now 4p), and if anyone would like to discuss the merits of investing into this company then please contact me in due course.
As many of you are no doubt aware Personal Equity Plans (PEP’s) merged with ISA’s on 6th April and I attach a Redmayne brochure accordingly. This is an opportune moment to review any PEP’s and ISA’s managed by institutions as at long last there is a one stop shop for Self-Select Stocks & Shares ISA’s. Many of the Cash ISA’s simply don’t have the flexibility that stockbroker’s ISA’s have and it should be stressed that cash and cash funds can be held within a Stocks & Shares ISA whereas the products offered by the banks just don’t have that degree of flexibility (or expertise as it would appear).
As April arrives with snow may I wish you all a prosperous summer and can I suggest that a small investment in an umbrella may be useful for Wimbledon and Royal Ascot this year.
I apologise for yet another quote from my friends at the Daily Reckoning but it really does look as though the bear market has finally started to impact on people’s lives. Stockbroking firms are being taken over (see the acquisition of Hichens Harrison) and quite a few are “up for sale” (WH Ireland). In the property world March prices fell and estate agents are closing their doors. Inflation has reared its ugly head (now around 3 ½% in Eurozone) and central bankers are losing room to manoeuvre viz-a-viz the lowering of interest rates. Stagflation is nearly upon us although commodity prices remain buoyant. The FTSE100 trades on a prospective p/e of 10.9x versus an average of 14x but let’s not forget that things are likely to get worse before they get better. Households in UK are receiving utilities bill increases above inflation and buy to let investors are struggling to stand still. Sales of all types of property have almost ground to a halt and my predicted fall of up to 70% in the south-east looks possible. Although official statistics show only marginal declines the real picture is much worse as Brown’s housing demand policy turns in to an oversupply policy almost overnight. The impact of the credit crunch arguably has hardly occurred yet as banks struggle to admit more liabilities. Conservative estimates indicate up to another US$400bn of losses being impacted later this year combined with a massive unwinding of credit derivative instruments. Expect more hedge fund failures going forward.
To summarise this last quarter has been the worst quarter in the history of FTSE100 with a decline of 11.68% although at one juncture on 16th March it was showing a decline of 16.1%. The FTSE All Share index by comparison fell 9.85% over the same period whereas gold rose around 6% over the same period having peaked at around US$1032pto. The likelihood of oil and precious metals prices rallying from the current levels appears positive with most analysts predicting $1,200pto for gold this year (may be too conservative) and $125pbo for oil.
As far as individual stocks are concerned I continue to recommend BP, Royal Dutch Shell ‘B’, Venture Productions, Aviva, Prudential, Reuters (becoming Thomson Reuters shortly), Randgold, Anglo American, BT Group, British Airways (can things get any worse?) and on further weakness, Tullow Oil and Templeton Emerging Markets Investment Trust. I still believe that the risks outweigh the rewards for bank and building shares. I have been investing in a small AIM company recently, Blavod Extreme Spirits PLC (now 4p), and if anyone would like to discuss the merits of investing into this company then please contact me in due course.
As many of you are no doubt aware Personal Equity Plans (PEP’s) merged with ISA’s on 6th April and I attach a Redmayne brochure accordingly. This is an opportune moment to review any PEP’s and ISA’s managed by institutions as at long last there is a one stop shop for Self-Select Stocks & Shares ISA’s. Many of the Cash ISA’s simply don’t have the flexibility that stockbroker’s ISA’s have and it should be stressed that cash and cash funds can be held within a Stocks & Shares ISA whereas the products offered by the banks just don’t have that degree of flexibility (or expertise as it would appear).
As April arrives with snow may I wish you all a prosperous summer and can I suggest that a small investment in an umbrella may be useful for Wimbledon and Royal Ascot this year.
Monday 17 March 2008
Review 4 Q 2007 14th January 2008
“Gold is in a bull market. Stocks are in a bear market. That is all ye know…and all ye need to know. Stocks are being driven down by the market, in a natural, ordinary, inevitable correction. And gold is being driven up by the central banks’ attempts to stop it. Buy gold on dips. Sell stocks on rallies.” –Bill Bonner of The Daily Reckoning January 2008
I hope you have all had a merry xmas and may I wish you a prosperous new year. I’ve spent the past two weeks thinking of how to start my 2007 year-end review and how to convey a prosperous picture for 2008, but I regret I can’t register a prosperous outlook for western stock markets. The old adage, buy on bad news, coined perhaps by the most famous of these market catchphrases “Vickers (who were making machine guns at the time) falls on fear of peace” are being matched today by traders cries like…”buy on the dips, it’s going up” except of course in a bear market it’s very short-lived. This is a bear market; I have no doubt.
As per my last summary in October my favourite stock picks are BP, Royal Dutch Shell ‘B’, Aviva, Reuters, Hochschild, Randgold and adding Anglo American (having made a poor decision to sell these over a year ago), BT Group and British Airways to the pretty narrow list. I would like to add Tullow Oil (if they ever retreat) and the banks if and when they show their hands (I suspect they are as much as 30-50% over-priced, possibly more). The volatility and newsflow in the stock market is breathtaking. It may not have the see-saw gyrations that we saw in 1987 when markets tended to move huge percentages (as much as 23%) almost hourly (due to programme trading which was in it’s infancy then) nor the acute stock movements that we saw during dot.com but the struggle today between the bulls and bears is something that I haven’t seen in my business lifetime. I say business lifetime because when I was 17 y.o. Hoblyn & Co ceased trading in the most vicious bear market ever seen in UK. Stocks then were trading in low multiples, taxes were crippling and the unions ruled. Today it would appear that as the Daily Reckoning has highlighted there is a massive disparity between the rich Londoners and the rest of the country. London is and has always been a cosmopolitan place but describing it as an “attractive global village for the internationalati to alight upon” does leave a bad taste in the mouth. Asset values (other than commodities) do look overpickled and it’s important to stress that the accounting universe looks unstable with far too much creative accounting and hidden debt and dubious director’s earnings to boot (Bob Diamond at Barclays earned £28m last year on a £250,000 basic against a Barclays share price that performed -34% over the same period). As Jim Rogers (the legendary investor who used to work with Soros) has said repeatedly the growth statistics remain very doubtful for US and UK economies which both have a bias towards financial services and financial engineering. There are tough times ahead for UK as US struggles to come to terms with the weakened industrial performance that has been genuinely on the slide for years (Detroit is never mentioned these days in business news).
Much has been said in UK about housebuilders, developers, and the impact that the 2012 Olympics may have on the UK economy. With the budget being stretched it remains to be seen how housebuilders perform over the next few years but in the past year they have underperformed as follows; Barratt Developments -74%,Bovis -58%, Persimmon -56%, Taylor Wimpey -69% almost tracking retailers such as M&S -45%, Debenhams -66%,Woolworths -67%. Both sectors need to be avoided for the foreseeable future I think.
You’re all going to hate me for saying it but as many of you know I’ve been bearish for some 7 years now regarding UK property. I have heard varying reasons for the astounding price rises and for reasons for investing in property. Here are some of them; city bonuses, housing shortage, demographic shift, nowhere as safe as houses, dot com implosion, huge investment driven climate, higher population, Russian buyers, footballers, it’s going up, please buy my property tear it down and put a housing estate in my garden, let’s paint it white it’ll sell easier and it’ll add £10,000 to the asking price (for a few pots of paint), there are 2 million poles here (and I’m not referring to scaffolding) and millions of other immigrants, my estate agent says it’s worth it and finally Mr.Brown (when Chancellor) encouraged us to buy by keeping interest rates artificially low. According to GB now there’s still a housing shortage. So GB where are the 3-4 million people that need these 2m new houses? The Empty Homes Agency (www.emptyhomes.com) states that there are circa 650,000 empty homes and these properties have been empty for years reducing from 772,000 in 1999. In addition the buy/let market has been propping up the market by forcing tenants to pay extortionate rents for years now. These tenants inability to save so as to invest in pensions, purchase their own property, invest in the stock market, etc is incredibly damaging to the infrastructure of the economy. The repercussions for the “phoney boom” since late 90’s are going to reverberate for years yet. I estimate that retail prices in UK South-East could decline by as much as 70% at today’s prices excluding inflationary indexing especially if the employment outlook for immigrants disappoints and many of the eastern Europeans return to their roots. With household mortgage debt in the UK being more acute than the US (126% of GDP against 104%) the gap between total mortgage debt (£3tn) and last years highpoint value (£3.6tn) can only narrow dramatically as foreclosures escalate.
For those of you holding oil shares and precious metals shares let me now give you some comforting news. An oil option contract with a strike at $200pbo has been set recently and one bank, Saxo Bank has published a 2007 oil target of $175pbo (not good if you own 4x4’s as I do). The heavy demand from the emerging nations, the BRIC’s (Brazil, Russia, India & China) and the emergence of Africa as an investment theme for 2008 (an estimated £500m has been raised in London by PLC’s and specialist African funds such as New Star and Arch,etc recently) is causing this rise as bio-fuels and alternate energy sources fail to impact on demand. The 3 w’s, Wind, Water and Wood are my favourite alternative themes going forward in the alternative energy field but it would appear it is still early days. In brief the market commentators and press have failed to recognise last week's significant shift in sentiment for precious metals as gold settles above its previous all-time high (was $850 in 1980) and presses on to the magic $1,000. Further reports on gold in the last Q reflected on the current gold price adjusted for gold since its previous high of $850 suggesting that an inflation indexed price of $2,200 is fairer value so gold is still at a significant discount it would seem as the recession clicks in, with $ weakness, compounded by excessive western debt and eastern trade surpluses based on average growth rates of 8% (four times that of the main western nations for 2008). The risk profile has changed and one Emerging Market fund manager this week suggested that Emerging Market's were lower risk, albeit on higher multiples reflecting their wealth, versus our own traditional investing universes (UK, US & Europe). I would not disagree. I am looking at Templeton Emerging Markets Investment Trust as an alternative investment theme; the trust is at a discount of 15% to NAV and is capitalized at £2.1bn and helmed by Mark Mobius, the recognized leader in emerging markets.
And finally, who could have predicted that the Northwest Passage would finally open up the Europe/Asia shipping route as the ice cap melts? When businesses can work out a way to profit from green eco environmental issues the investment universe might get interesting in the next few years….just might. For now stick to oils and metals, and possibly emerging markets! As the Sunday Telegraph article headline said on 23rd December, “This could make 1929 look like a walk in the park” referring to the financial mess in the banking system and it’s effect on world economies.
I hope you have all had a merry xmas and may I wish you a prosperous new year. I’ve spent the past two weeks thinking of how to start my 2007 year-end review and how to convey a prosperous picture for 2008, but I regret I can’t register a prosperous outlook for western stock markets. The old adage, buy on bad news, coined perhaps by the most famous of these market catchphrases “Vickers (who were making machine guns at the time) falls on fear of peace” are being matched today by traders cries like…”buy on the dips, it’s going up” except of course in a bear market it’s very short-lived. This is a bear market; I have no doubt.
As per my last summary in October my favourite stock picks are BP, Royal Dutch Shell ‘B’, Aviva, Reuters, Hochschild, Randgold and adding Anglo American (having made a poor decision to sell these over a year ago), BT Group and British Airways to the pretty narrow list. I would like to add Tullow Oil (if they ever retreat) and the banks if and when they show their hands (I suspect they are as much as 30-50% over-priced, possibly more). The volatility and newsflow in the stock market is breathtaking. It may not have the see-saw gyrations that we saw in 1987 when markets tended to move huge percentages (as much as 23%) almost hourly (due to programme trading which was in it’s infancy then) nor the acute stock movements that we saw during dot.com but the struggle today between the bulls and bears is something that I haven’t seen in my business lifetime. I say business lifetime because when I was 17 y.o. Hoblyn & Co ceased trading in the most vicious bear market ever seen in UK. Stocks then were trading in low multiples, taxes were crippling and the unions ruled. Today it would appear that as the Daily Reckoning has highlighted there is a massive disparity between the rich Londoners and the rest of the country. London is and has always been a cosmopolitan place but describing it as an “attractive global village for the internationalati to alight upon” does leave a bad taste in the mouth. Asset values (other than commodities) do look overpickled and it’s important to stress that the accounting universe looks unstable with far too much creative accounting and hidden debt and dubious director’s earnings to boot (Bob Diamond at Barclays earned £28m last year on a £250,000 basic against a Barclays share price that performed -34% over the same period). As Jim Rogers (the legendary investor who used to work with Soros) has said repeatedly the growth statistics remain very doubtful for US and UK economies which both have a bias towards financial services and financial engineering. There are tough times ahead for UK as US struggles to come to terms with the weakened industrial performance that has been genuinely on the slide for years (Detroit is never mentioned these days in business news).
Much has been said in UK about housebuilders, developers, and the impact that the 2012 Olympics may have on the UK economy. With the budget being stretched it remains to be seen how housebuilders perform over the next few years but in the past year they have underperformed as follows; Barratt Developments -74%,Bovis -58%, Persimmon -56%, Taylor Wimpey -69% almost tracking retailers such as M&S -45%, Debenhams -66%,Woolworths -67%. Both sectors need to be avoided for the foreseeable future I think.
You’re all going to hate me for saying it but as many of you know I’ve been bearish for some 7 years now regarding UK property. I have heard varying reasons for the astounding price rises and for reasons for investing in property. Here are some of them; city bonuses, housing shortage, demographic shift, nowhere as safe as houses, dot com implosion, huge investment driven climate, higher population, Russian buyers, footballers, it’s going up, please buy my property tear it down and put a housing estate in my garden, let’s paint it white it’ll sell easier and it’ll add £10,000 to the asking price (for a few pots of paint), there are 2 million poles here (and I’m not referring to scaffolding) and millions of other immigrants, my estate agent says it’s worth it and finally Mr.Brown (when Chancellor) encouraged us to buy by keeping interest rates artificially low. According to GB now there’s still a housing shortage. So GB where are the 3-4 million people that need these 2m new houses? The Empty Homes Agency (www.emptyhomes.com) states that there are circa 650,000 empty homes and these properties have been empty for years reducing from 772,000 in 1999. In addition the buy/let market has been propping up the market by forcing tenants to pay extortionate rents for years now. These tenants inability to save so as to invest in pensions, purchase their own property, invest in the stock market, etc is incredibly damaging to the infrastructure of the economy. The repercussions for the “phoney boom” since late 90’s are going to reverberate for years yet. I estimate that retail prices in UK South-East could decline by as much as 70% at today’s prices excluding inflationary indexing especially if the employment outlook for immigrants disappoints and many of the eastern Europeans return to their roots. With household mortgage debt in the UK being more acute than the US (126% of GDP against 104%) the gap between total mortgage debt (£3tn) and last years highpoint value (£3.6tn) can only narrow dramatically as foreclosures escalate.
For those of you holding oil shares and precious metals shares let me now give you some comforting news. An oil option contract with a strike at $200pbo has been set recently and one bank, Saxo Bank has published a 2007 oil target of $175pbo (not good if you own 4x4’s as I do). The heavy demand from the emerging nations, the BRIC’s (Brazil, Russia, India & China) and the emergence of Africa as an investment theme for 2008 (an estimated £500m has been raised in London by PLC’s and specialist African funds such as New Star and Arch,etc recently) is causing this rise as bio-fuels and alternate energy sources fail to impact on demand. The 3 w’s, Wind, Water and Wood are my favourite alternative themes going forward in the alternative energy field but it would appear it is still early days. In brief the market commentators and press have failed to recognise last week's significant shift in sentiment for precious metals as gold settles above its previous all-time high (was $850 in 1980) and presses on to the magic $1,000. Further reports on gold in the last Q reflected on the current gold price adjusted for gold since its previous high of $850 suggesting that an inflation indexed price of $2,200 is fairer value so gold is still at a significant discount it would seem as the recession clicks in, with $ weakness, compounded by excessive western debt and eastern trade surpluses based on average growth rates of 8% (four times that of the main western nations for 2008). The risk profile has changed and one Emerging Market fund manager this week suggested that Emerging Market's were lower risk, albeit on higher multiples reflecting their wealth, versus our own traditional investing universes (UK, US & Europe). I would not disagree. I am looking at Templeton Emerging Markets Investment Trust as an alternative investment theme; the trust is at a discount of 15% to NAV and is capitalized at £2.1bn and helmed by Mark Mobius, the recognized leader in emerging markets.
And finally, who could have predicted that the Northwest Passage would finally open up the Europe/Asia shipping route as the ice cap melts? When businesses can work out a way to profit from green eco environmental issues the investment universe might get interesting in the next few years….just might. For now stick to oils and metals, and possibly emerging markets! As the Sunday Telegraph article headline said on 23rd December, “This could make 1929 look like a walk in the park” referring to the financial mess in the banking system and it’s effect on world economies.
Review 3 Q 2007 8th October 2007
When will the Chinese ever dump their U.S. treasury debts? When will the Asians get tired of funding America’s $800 billion annual current account deficit? The Asians bought US-dollar investments for two reasons; they were safe and secondly, they put them in dollars in order to hold the dollar up. As long as the dollar stayed up, Americans could continue to buy goods from Asian suppliers. But today the dollar is going down anyway and their US dollar investments no longer look so safe. Furthermore, Asians are becoming more confident about their own prospects. Their own financial instruments are becoming more sophisticated. The rate of return on Asian investments is much higher and Asians are much happier to invest in their own economies, their own companies, and their own financial instruments. When will they sell US dollar financial instruments? Soon perhaps. – an abbreviation of a recent Daily Reckoning newsletter.
As I predicted in previous quarterly reviews 2007 has indeed proved to be a rocky ride for investors to date. The US sub-prime market may have started the recent volatility in all types of capital markets but looking at the levels of Dow Jones and FTSE100 today anyone would be excused if they believed that all the problems had ever happened or indeed have gone away. The extensive levels of easy credit that has led to asset inflation may have created problems in the money markets and in the banking system but the only evidence to date is a stricter tightening of credit, highlighted problems at Countrywide, much lower US property prices as inventories are left standing empty and in UK a semi-run on Northern Rock after the biggest ‘guffaw’ that I can say I’ve seen in 31 years by a Chancellor. Despite train-loads of staff arriving every morning at Canary Wharf I am disheartened to see that not a single regulator seems to think it peculiar that the Financial Services Compensation Scheme should be able to safeguard UK investors assets with a mere £4.4m in the kitty. Just how many more guarantees can Mr Darling give before the ship starts taking in water? I continue to suggest to clients and anyone who has the common sense to ask that holding accounts at a demutualised society (A&L, NR and B&B) is a mugs game. Indeed having visited the Tunbridge Wells branch of Nationwide (the biggest mutual) last week I was appalled at the way they handled ex-Portman customer accounts. So I’m not sure that having balances of more than £2,000 at any mutual is wise until someone sees sense to bolster the Compensation Scheme significantly. The critical level is £31,700 and so no more should be held with any one banking institution until the government ensure that the Bank of England and FSA strengthen the area of investor protection. As I’ve pointed out to several clients already if large depositors were effected by a total failure (this was not the case at Northern Rock) then capital balances would be frozen for possibly years (see Barings). For those holding extensive cash balances I continue to recommend UK government gilts, National Savings and Premium Bonds. No balances should exceed the threshold of circa £30,000 anywhere in the system. Stockbroking accounts incidentally are covered 100% under Professional Indemnity policies up to £10m per account here at Redmayne’s so clients can rest easy.
The headline above concerning the US dollar continues to perplex market observers. At some juncture China in particular will change their stance on US Treasuries. The dollar slide will continue and I recommend exposure in precious metals and oil shares certainly for the next 2 years or so. I see little merit in investing in the banking sector at current levels as the practice of accounting off balance sheet makes it impossible to assess bank’s commitments in the derivatives arena. The estimated US$500 trillion derivatives exposure mainly taken by banks worldwide is largely synthetic in nature and I believe that this needs to be reduced. At some stage the banking sector will be attractive but I do believe that much lower p/e‘s are forthcoming. Major investment banks such as Goldman’s, UBS and Citigroup have indicated tough times around the corner and I believe that commercial banks are far too exposed to the credit cycle and property. In UK the discrepancy between the current overpriced value of property, around £3 trillion, versus the level of household debt, around £3.6 trillion, needs to be played out. More bankruptcies and smaller companies failures are likely in the next few years as taxes and bureaucracy have risen to crazy levels against a cheap credit universe. All the ingredients for a dangerous cocktail are in place. For central banks to lower interest rates at this juncture is rather like throwing petrol onto a roaring fire. Commentators like Jim Rogers believe that higher rates are around the corner and I for one don’t disagree as asset prices need curbing. The big unknown is inflation and I think we will hear more about this in the next two quarters.
To summarise then I continue to believe that the next quarter is one to batten down the hatches! My favourite stock picks are BP, Royal Dutch Shell ‘B’, Aviva, United Utilities and Pennon Group, Reuters, Sainsbury, CSR, Redrow, Hochschild Randgold and Peter Hambro, Rio Tinto and I would avoid like the plague Man Group and other hedge funds.
As I predicted in previous quarterly reviews 2007 has indeed proved to be a rocky ride for investors to date. The US sub-prime market may have started the recent volatility in all types of capital markets but looking at the levels of Dow Jones and FTSE100 today anyone would be excused if they believed that all the problems had ever happened or indeed have gone away. The extensive levels of easy credit that has led to asset inflation may have created problems in the money markets and in the banking system but the only evidence to date is a stricter tightening of credit, highlighted problems at Countrywide, much lower US property prices as inventories are left standing empty and in UK a semi-run on Northern Rock after the biggest ‘guffaw’ that I can say I’ve seen in 31 years by a Chancellor. Despite train-loads of staff arriving every morning at Canary Wharf I am disheartened to see that not a single regulator seems to think it peculiar that the Financial Services Compensation Scheme should be able to safeguard UK investors assets with a mere £4.4m in the kitty. Just how many more guarantees can Mr Darling give before the ship starts taking in water? I continue to suggest to clients and anyone who has the common sense to ask that holding accounts at a demutualised society (A&L, NR and B&B) is a mugs game. Indeed having visited the Tunbridge Wells branch of Nationwide (the biggest mutual) last week I was appalled at the way they handled ex-Portman customer accounts. So I’m not sure that having balances of more than £2,000 at any mutual is wise until someone sees sense to bolster the Compensation Scheme significantly. The critical level is £31,700 and so no more should be held with any one banking institution until the government ensure that the Bank of England and FSA strengthen the area of investor protection. As I’ve pointed out to several clients already if large depositors were effected by a total failure (this was not the case at Northern Rock) then capital balances would be frozen for possibly years (see Barings). For those holding extensive cash balances I continue to recommend UK government gilts, National Savings and Premium Bonds. No balances should exceed the threshold of circa £30,000 anywhere in the system. Stockbroking accounts incidentally are covered 100% under Professional Indemnity policies up to £10m per account here at Redmayne’s so clients can rest easy.
The headline above concerning the US dollar continues to perplex market observers. At some juncture China in particular will change their stance on US Treasuries. The dollar slide will continue and I recommend exposure in precious metals and oil shares certainly for the next 2 years or so. I see little merit in investing in the banking sector at current levels as the practice of accounting off balance sheet makes it impossible to assess bank’s commitments in the derivatives arena. The estimated US$500 trillion derivatives exposure mainly taken by banks worldwide is largely synthetic in nature and I believe that this needs to be reduced. At some stage the banking sector will be attractive but I do believe that much lower p/e‘s are forthcoming. Major investment banks such as Goldman’s, UBS and Citigroup have indicated tough times around the corner and I believe that commercial banks are far too exposed to the credit cycle and property. In UK the discrepancy between the current overpriced value of property, around £3 trillion, versus the level of household debt, around £3.6 trillion, needs to be played out. More bankruptcies and smaller companies failures are likely in the next few years as taxes and bureaucracy have risen to crazy levels against a cheap credit universe. All the ingredients for a dangerous cocktail are in place. For central banks to lower interest rates at this juncture is rather like throwing petrol onto a roaring fire. Commentators like Jim Rogers believe that higher rates are around the corner and I for one don’t disagree as asset prices need curbing. The big unknown is inflation and I think we will hear more about this in the next two quarters.
To summarise then I continue to believe that the next quarter is one to batten down the hatches! My favourite stock picks are BP, Royal Dutch Shell ‘B’, Aviva, United Utilities and Pennon Group, Reuters, Sainsbury, CSR, Redrow, Hochschild Randgold and Peter Hambro, Rio Tinto and I would avoid like the plague Man Group and other hedge funds.
Review 2 Q 2007 10th July 2007
"We think it's the top of the market, but it's a long top" says former Asda boss, Archie Norman in an interview in The Times. Hubris in the build up will amplify the crash he says; "People tend to believe they are great investors because they made a great return in a rising market. Many of this generation of financiers have not experienced a crisis, a recession for many, many years and so they are not prepared."
After writing my last quarterly review in a very bearish manner I feel as though I’m beginning to sound like that chap who cried “wolf wolf”. The long overdue correction has just not materialised and FTSE trades today at around an astonishing 6,700. I said then that “the current scenario in stocks, property and art prompts me to believe that 2007 could pan out similarly to 1987” and have heard others in the media repeat just this comment. The heading above from Archie Norman appeared in today’s Times. The big question is, are we in a super-super-cycle? I don’t think so. It is my belief that the world economies and markets are in a massive crossover with stupendous growth on one side balanced out by real commercial and political headaches on the other. Shelves throughout the USA are today floodied by cheap asian goods, China has over 25 major car manufacturers but I don’t think you’ll find Detroit mentioned amongst the array of holiday destinations. The extreme shift in capital power towards the far east, mainly China, will eventually smash the US$ to possibly 3:1 parity. I can remember $2.40/£1 in the late ‘70’s so why shouldn’t things get really bad for US economy again?
With all this new world growth the demand for energy is immense and markets have seen oil burst the important $70 pbo level again recently. The US consumer will eventually have to pay real prices for oil putting even more pressure on a tested US economy. The likelihood of a $100 oil price is unquestionable as the majors try to resolve the shift in the demand curve.
My recommended weightings to equities 85%, cash 15% and fixed interest zero remains the same and I continue to emphasise positions in Royal Dutch Shell, BP and a small exposure in general miners. The precious metals shares mini-sector has had a rocky period over the last quarter but I continue to recommend exposure here. Goldman Sachs initiated a ‘BUY’ stance on 23rd February for Randgold with a target price of 1635p and have now been joined by Citigroup. Hochschild now has a 453p target from JP Morgan with an ‘Overweight’ recommendation. Both companies appear safe havens to me in an inflationary environment. What inflation you may say? Well, of course, property prices are conveniently omitted from government statistics and with the knock-on effect from the US sub-price debacle a put on UK property is subscribed. ABN-AMRO’s recent report suggested that UK retail is 50% overpriced. In London and South-East prices are perhaps overcooked by as much as 70% in my view. Those that listen to buoyant estate agents who in many cases are unqualified to comment on values and markets really need their heads examining!
The interest cycle has clearly turned and as investors of all shapes and sizes analyse asset classes the conclusion is that there is little value left except of course, in Gold. There are selected equities outside the above-mentioned sectors that I am advocating but like 1987 many are break-ups, Private Equity targets, etc and likely to be much cheaper next year.
Many of you perhaps are bemused by the weather. In UK/France the sun has not been seen this year. If anyone does see the sun (not the newspaper) please let me know as I’ve got a few disgruntled colleagues who would prefer to locate to this rare luxury rather than watch the daily market drudgery. Someone said to me this week, “Climate warming, what warming?”.
After writing my last quarterly review in a very bearish manner I feel as though I’m beginning to sound like that chap who cried “wolf wolf”. The long overdue correction has just not materialised and FTSE trades today at around an astonishing 6,700. I said then that “the current scenario in stocks, property and art prompts me to believe that 2007 could pan out similarly to 1987” and have heard others in the media repeat just this comment. The heading above from Archie Norman appeared in today’s Times. The big question is, are we in a super-super-cycle? I don’t think so. It is my belief that the world economies and markets are in a massive crossover with stupendous growth on one side balanced out by real commercial and political headaches on the other. Shelves throughout the USA are today floodied by cheap asian goods, China has over 25 major car manufacturers but I don’t think you’ll find Detroit mentioned amongst the array of holiday destinations. The extreme shift in capital power towards the far east, mainly China, will eventually smash the US$ to possibly 3:1 parity. I can remember $2.40/£1 in the late ‘70’s so why shouldn’t things get really bad for US economy again?
With all this new world growth the demand for energy is immense and markets have seen oil burst the important $70 pbo level again recently. The US consumer will eventually have to pay real prices for oil putting even more pressure on a tested US economy. The likelihood of a $100 oil price is unquestionable as the majors try to resolve the shift in the demand curve.
My recommended weightings to equities 85%, cash 15% and fixed interest zero remains the same and I continue to emphasise positions in Royal Dutch Shell, BP and a small exposure in general miners. The precious metals shares mini-sector has had a rocky period over the last quarter but I continue to recommend exposure here. Goldman Sachs initiated a ‘BUY’ stance on 23rd February for Randgold with a target price of 1635p and have now been joined by Citigroup. Hochschild now has a 453p target from JP Morgan with an ‘Overweight’ recommendation. Both companies appear safe havens to me in an inflationary environment. What inflation you may say? Well, of course, property prices are conveniently omitted from government statistics and with the knock-on effect from the US sub-price debacle a put on UK property is subscribed. ABN-AMRO’s recent report suggested that UK retail is 50% overpriced. In London and South-East prices are perhaps overcooked by as much as 70% in my view. Those that listen to buoyant estate agents who in many cases are unqualified to comment on values and markets really need their heads examining!
The interest cycle has clearly turned and as investors of all shapes and sizes analyse asset classes the conclusion is that there is little value left except of course, in Gold. There are selected equities outside the above-mentioned sectors that I am advocating but like 1987 many are break-ups, Private Equity targets, etc and likely to be much cheaper next year.
Many of you perhaps are bemused by the weather. In UK/France the sun has not been seen this year. If anyone does see the sun (not the newspaper) please let me know as I’ve got a few disgruntled colleagues who would prefer to locate to this rare luxury rather than watch the daily market drudgery. Someone said to me this week, “Climate warming, what warming?”.
Review 1Q 2007 12th April 2007
Before I start my regular quarterly report I should mention that I believe that this may be the most singularly important letter I have ever written to my clients since joining the exchange in 1980. Prior to joining stockbrokers Beardsley Bishop I worked for 18 months as the silver clerk for a London Bullion Market firm having moved there from Marshalls Moneybrokers where I trained as a London inter-bank dealer and prior to that with the Chartered Bank so I believe that I may be in a unique position viz-a-viz the current market scenarios unfolding today some 30 years later. The 9% growth rate in China today and the opportunities in the asean region were well known by our forbears at Chartered and HongKong & Shanghai and if I had to back two banks that I think will benefit the most from today’s opportunities I would certainly back both Standard Chartered and HSBC in preference to the less specialised opportunists. I recollect that in 1978 overnight rates reached between 15% and absurdly 35% at times so I am hesitant to correct those bulls who maintain that rates will stay forever in single figures. In the early 1970’s exchange firms were closing down around the secondary banking crisis brought about by chaotic lending, muddled economic thinking from No. 11 Downing Street, real inflation which ultimately engineered the single biggest move in bullion prices in history thanks largely to Nelson Bunker Hunt and his brother cornering silver and the Soviet Union entering Afghanistan sending gold to trade as high as $855 pto. The real reason then, arguably, for the invasion was to stimulate bullion so that the soviets could buy grain on the open markets to cover the failed harvests and I recollect that my firm bought gold and silver in vast quantities from Metallgesellschaft, the East German business fronting the soviet master plan. It was all very John Le Carre! There are striking similarities with the current scenarios unfolding in the world although the characters have changed as have the flags. The main point that I am attempting to make is that I believe that bullion will become the big news story over the coming years as problems with derivatives and debt combine to effect the liquidity that is prevalent today. One nameless analyst recently suggested that gold should be trading at $1800 pto on a comparative basis to copper. I am not sure whether this is relevant but I do know that historically gold has moved for different reasons on around 10 occasions since the Gold Standard. With increased demand from China, Japan and India the supply is drying up and when the derivatives positions start unwinding as Warren Buffett has predicted then gold will be treated as a real currency which recently in the West it has not. Central banks (not France) have been net sellers for the last 25 years and it is only a matter of time before things get very interesting.
Since writing my year-end report M&A activity in London has continued relentlessly fuelled by the extraordinary and excessive growth in Private Equity. Daily speculation sparked by hedge fund activity has created a bewildering stock casino whereby valuations are often thrown to the wind. Last year the UK’s favourite pharmacist Boots merged with Alliance Unichem creating Alliance Boots and not withstanding the obvious merits in the merger of cost savings and better European coverage not a single retail analyst in London had a significant ‘BUY’ recommendation after the event. In fact many analysts forecasted target prices as low as 650p in the weeks prior to the private equity approaches that catapulted the price from £8 to over £10. Similar patterns have emerged in many other companies such as Scottish & Newcastle, ICI, Royal Sun Alliance to name just a few and just this last week Sainsbury, Barclays/ABN-AMRO/Royal Bank of Scotland have all been in the spotlight. It astounds me that only last week I watched a banking analyst on Bloomberg TV talking about a wave of consolidation in the banking sector referring to the interest in ABN-AMRO. I doubt many hedge fund dealers even know that the Dutch banking giant consists of Algemene Bank Nederland, Amsterdam Rotterdam Bank, Mees & Hope, Pierson Heldring & Pierson, and a host of smaller dutch banks, many of whom were major City/Amsterdam names only ten years ago or so! How long can all this speculation and consolidation continue? Well, the answer has to do with valuations, accounting, liquidity and a host of other factors not forgetting sentiment and my dread topic, regulation.
Following on from the argument that cash is the main driver of markets there’s no reason then that the markets should correct at all but as we all know bubbles are burst for the very reason that they have to at some time. The current scenario in stocks, property and art prompts me to believe that 2007 could pan out similarly to 1987. A summer fuelled by takeovers then was quickly vanquished by a 23% correction in a day with a real hurricane thrown in for good measure. The bears (I am bearish but not recommending 100% cash like some scribes) forecast higher interest rates, a property crash (see Ohio), a slowdown in China, military action against Iran/Syria and an escalation in the Middle East involving Israel, turbulence in the currency markets and a host of other catalysts forcing an asset implosion. Inflationary fears persist in the western economies. Bulls on the other hand will continue to support the speculators and the excessive valuations not supported by traditional analysis. The majority thus continue to subscribe to the view that the trend is their friend as did the lemmings of course once upon a time.
In this backdrop and forever changing environment I have changed my strategy by amending my intended portfolio weightings to equities 85% cash 15% and fixed interest zero. The consensus weightings are UK equities 55% overseas equities 20% fixed interest 20% and cash 5%. But with the yield on many equities now trading in close proximity with their underlying debt instruments and with a higher interest cycle in the offing I see little merit in considering this approach. Five year AAA/Aaa £ Eurobonds yield around 5.7% whereas 10 year AAA/Aaa bonds yield somewhere around 5.4%; none of the treble AAA/Aaa bonds in £ appear very attractive in an inflationary environment. Yields in Euros bonds and US$ Eurobonds are even lower. Marks & Spencer, as an aside, have just issued a new 5 7/8% coupon £ Eurobond maturing in May 2012 at just under par (current yield 6.04%) but Standard & Poor and Moody’s have rated Marks with a low BBB/Baa2 rating. The risk to reward for many household names in the bond markets do not equate to the perceived risk taken by many equity investors. This week Moody’s have downgraded 44 banks including ABN-AMRO to Aa2/3 ratings transmitting alarm bells amongst banking analysts and annoying prime and sub-prime lenders. My weightings thus differ from many of my peers. Currently my ideal portfolio would have international equities 85% and cash 15%. The equities element, albeit higher than the consensus weighting, would be large capitalised international businesses split as follows; int’l miners (Rio’s & BHP Billiton) 15%, gold miners (Randgold, Anglo American & Hochschild) 5%, int’l oils (BP & Royal Dutch Shell ‘B’) 10% and other equities to 55%. In the coming storm predicted liquidity is going to be very important indeed as will be flexibility. Selling general equities (i.e other than miners and oils) and moving to short-term cash instruments is the likely scenario unfolding as current hedging instruments will become too unpredictable for many investors. I should indicate that in the banking sector I remain negative on domestic banks in view of the recent developments in the US sub-prime market which is quite clearly probably mirrored elsewhere although the triggers have yet to be pulled.
So gold looks interesting at $678 (January price $630 pto) and I continue to recommend Randgold where Goldman Sachs initiated a ‘BUY’ stance on 23rd February with a target price of 1635p. Hochschild is another London-based gold stock destined for growth this year.
With FTSE100 index trading in 6000-6450 range don’t be surprised if the next major move is down. It is time to nail one’s flag to the mast and I am in the Buffett Navy under the sub-commands of Messrs. Marc Faber and William Bonner.
As I said in January “the ride in 2007 could be very volatile” and it looks very likely still. No-one can predict for certain how or when the correction will come but I do believe that now is the time to prepare the defences.
Since writing my year-end report M&A activity in London has continued relentlessly fuelled by the extraordinary and excessive growth in Private Equity. Daily speculation sparked by hedge fund activity has created a bewildering stock casino whereby valuations are often thrown to the wind. Last year the UK’s favourite pharmacist Boots merged with Alliance Unichem creating Alliance Boots and not withstanding the obvious merits in the merger of cost savings and better European coverage not a single retail analyst in London had a significant ‘BUY’ recommendation after the event. In fact many analysts forecasted target prices as low as 650p in the weeks prior to the private equity approaches that catapulted the price from £8 to over £10. Similar patterns have emerged in many other companies such as Scottish & Newcastle, ICI, Royal Sun Alliance to name just a few and just this last week Sainsbury, Barclays/ABN-AMRO/Royal Bank of Scotland have all been in the spotlight. It astounds me that only last week I watched a banking analyst on Bloomberg TV talking about a wave of consolidation in the banking sector referring to the interest in ABN-AMRO. I doubt many hedge fund dealers even know that the Dutch banking giant consists of Algemene Bank Nederland, Amsterdam Rotterdam Bank, Mees & Hope, Pierson Heldring & Pierson, and a host of smaller dutch banks, many of whom were major City/Amsterdam names only ten years ago or so! How long can all this speculation and consolidation continue? Well, the answer has to do with valuations, accounting, liquidity and a host of other factors not forgetting sentiment and my dread topic, regulation.
Following on from the argument that cash is the main driver of markets there’s no reason then that the markets should correct at all but as we all know bubbles are burst for the very reason that they have to at some time. The current scenario in stocks, property and art prompts me to believe that 2007 could pan out similarly to 1987. A summer fuelled by takeovers then was quickly vanquished by a 23% correction in a day with a real hurricane thrown in for good measure. The bears (I am bearish but not recommending 100% cash like some scribes) forecast higher interest rates, a property crash (see Ohio), a slowdown in China, military action against Iran/Syria and an escalation in the Middle East involving Israel, turbulence in the currency markets and a host of other catalysts forcing an asset implosion. Inflationary fears persist in the western economies. Bulls on the other hand will continue to support the speculators and the excessive valuations not supported by traditional analysis. The majority thus continue to subscribe to the view that the trend is their friend as did the lemmings of course once upon a time.
In this backdrop and forever changing environment I have changed my strategy by amending my intended portfolio weightings to equities 85% cash 15% and fixed interest zero. The consensus weightings are UK equities 55% overseas equities 20% fixed interest 20% and cash 5%. But with the yield on many equities now trading in close proximity with their underlying debt instruments and with a higher interest cycle in the offing I see little merit in considering this approach. Five year AAA/Aaa £ Eurobonds yield around 5.7% whereas 10 year AAA/Aaa bonds yield somewhere around 5.4%; none of the treble AAA/Aaa bonds in £ appear very attractive in an inflationary environment. Yields in Euros bonds and US$ Eurobonds are even lower. Marks & Spencer, as an aside, have just issued a new 5 7/8% coupon £ Eurobond maturing in May 2012 at just under par (current yield 6.04%) but Standard & Poor and Moody’s have rated Marks with a low BBB/Baa2 rating. The risk to reward for many household names in the bond markets do not equate to the perceived risk taken by many equity investors. This week Moody’s have downgraded 44 banks including ABN-AMRO to Aa2/3 ratings transmitting alarm bells amongst banking analysts and annoying prime and sub-prime lenders. My weightings thus differ from many of my peers. Currently my ideal portfolio would have international equities 85% and cash 15%. The equities element, albeit higher than the consensus weighting, would be large capitalised international businesses split as follows; int’l miners (Rio’s & BHP Billiton) 15%, gold miners (Randgold, Anglo American & Hochschild) 5%, int’l oils (BP & Royal Dutch Shell ‘B’) 10% and other equities to 55%. In the coming storm predicted liquidity is going to be very important indeed as will be flexibility. Selling general equities (i.e other than miners and oils) and moving to short-term cash instruments is the likely scenario unfolding as current hedging instruments will become too unpredictable for many investors. I should indicate that in the banking sector I remain negative on domestic banks in view of the recent developments in the US sub-prime market which is quite clearly probably mirrored elsewhere although the triggers have yet to be pulled.
So gold looks interesting at $678 (January price $630 pto) and I continue to recommend Randgold where Goldman Sachs initiated a ‘BUY’ stance on 23rd February with a target price of 1635p. Hochschild is another London-based gold stock destined for growth this year.
With FTSE100 index trading in 6000-6450 range don’t be surprised if the next major move is down. It is time to nail one’s flag to the mast and I am in the Buffett Navy under the sub-commands of Messrs. Marc Faber and William Bonner.
As I said in January “the ride in 2007 could be very volatile” and it looks very likely still. No-one can predict for certain how or when the correction will come but I do believe that now is the time to prepare the defences.
Introduction
Richard Hoblyn has worked in Capital Markets for 31 years since leaving school. This site shows what he has been sending to his clients each quarter. Richard Hoblyn can be contacted by email info@hoblyn.com
Richard Hoblyn is a Fellow of the Securities Institute, London and acts as an Associate of a Member firm of the London Stock Exchange.
Richard Hoblyn can be found on FSA website;
http://www.fsa.gov.uk/register/indivBasicDetails.do?sid=363070
RPH01037 CF30 Customer (previously CF21 Investment Adviser, CF26 Customer Trading & CF27 Investment Manager)
Richard Hoblyn is a Fellow of the Securities Institute, London and acts as an Associate of a Member firm of the London Stock Exchange.
Richard Hoblyn can be found on FSA website;
http://www.fsa.gov.uk/register/indivBasicDetails.do?sid=363070
RPH01037 CF30 Customer (previously CF21 Investment Adviser, CF26 Customer Trading & CF27 Investment Manager)
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