“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.
Monday 17 March 2008
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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