“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.
