“Markets have gone up too much, too soon, too fast” - ROUBINI 5th Oct 2009
Nouriel Roubini, dubbed Dr Doom after he predicted the financial crisis, yesterday warned stock and commodity markets will fall as the slow pace of recovery disappoints investors. “Markets have gone up too much, too soon, too fast,” said the New York University professor. “I see the risk of a correction, especially when the markets realise the recovery is not rapid and V-shaped, but more like U-shaped. That might be in the fourth quarter or the first quarter of next year.”
Since March this year the sentiment in the markets has changed dramatically from the dark days of the credit crunch allowing for a thinly traded rally to occur (S&P up around 60%). Many financiers minds have been bewildered somewhat and find it incredulous that Wall Street and Main Street could disconnect so alarmingly. Today the bulls still hold the market by the scruff of the neck but as I highlighted in my ‘market warning’ email of 11th September investors globally have entered dangerous territory. Alarmingly markets and investors are ignoring consumer confidence statistics alerted to the fact that unemployment is actually rising (see US non-farm pay roll numbers recently) and production is suffering as businesses fail to come to terms with lower revenues and fewer customers. These same consumers, many of them cash investors, are hardly showing much faith in the stock market either. Cash net inflows into US equity funds is a measly $2.6bn in the last 6 months whereas bond fund inflows have increased appreciably. Politicians crow about the supposed success of various measures especially the scrappage schemes and yet GM report a drop of actual car sales end-Sept as -47% year on year. This is hardly good news.
In UK banking sector many tax-payers (self-employed & SME’s mainly) complain that lending has stalled or at least when proffered is wholly unreasonable. Despite a bank rate of ½% most banks are still profiteering from their entrapped customers (one can count the number of UK retail banks remaining on one’s fingers leaving the thumbs free). With FSA now calling for 3 x more capital amongst UK banks (to be held in Gov Bonds) one wonders where the money is coming from or how the lending practices and practicality thereof can be improved and ignited. Elsewhere billions have been raised in discounted rights issues where many household names have stiffened resistance by bolstering over-geared balance sheets but as I’ve highlighted since joining Redmayne’s in January 2005 the (dis)trust in universal accounting practices whereby companies are being encouraged (by accountants, consultants and investment bankers) to spuriously withhold detailed information concerning derivative positions and suchlike from shareholders is still very much in evidence. With regulators, politicians and market commentators calling for better transparency in the mature economies the opposite still seems to be the case when it comes to treating shareholders fairly. This and unfathomable corporate governance is the most damaging aspect of the latter stages of the long bull run that encompassed dot-com and then a global base metals stampede. In essence the continued prospects in the BRIC’s and other emerging markets are keeping mature markets alive but the real concern should be that practices adopted by western banks might just be replicated in the final engines of growth which the ‘emerging/emerged’ markets appear to represent. With very little growth in mature markets being translated to the bottom line it’s likely that more dividends are cut in problematic sectors as businesses struggle to manage and profit in an increasingly slowing global economy. Over-regulation could easily kill off many more smaller businesses unless incoming governments can get to grips with curbing the Public Sector and the nonsense that goes with it. Obama, Cameron, and Blair (in anticipation of the Fettes boy’s rise to head boy of the EU Senate) may just find that trying to translate jobs from the public to private sectors is virtually impossible in the current unreal regulatory universe. The domestic outlook for investors and young people is truly depressing and it’s not surprising that the pessimists are suggesting that the so called recession may well migrate towards The Greater Depression.
With £175 billion of Quantitative Easing in UK and some similarly shocking US$ numbers over the pond the real result of all this regulatory and governmental interference in capital markets is that debt levels across the private and public sectors is still spiraling (out of control?). I heard the other day that every citizen in UK may well have to pay directly/indirectly £25,000 per person for years to come just to stall the overall public sector debt. This frightening scenario just hasn’t been taken on board by most of the electorate (yet). Nor by most politicians either nor the vast numbers of spin doctors by the judge of it.
A further major sell-off of global equities is likely quite soon. Multiples (price earnings ratios) and valuations on all accounts appear over-cooked (see 20 & 30 day moving averages). A nasty surprise may come from China very soon as the 10s of millions there embrace all the creature comforts of rapid growth <=Rapidly rising property prices, extraordinary sales in domestic goods -computers, mobiles, iPods, etc, new factories (cars), greater mobility and a stock market in the stratosphere, etc, etc.> Where has one heard that before?
When will equities become attractive (again)? Well, some think they already are but markets don’t just retrace and rise constantly and consistently. It may be a worrying loss of faith in the $, it may be a shock in taxes, it may be a black swan event (Iran, Korea, Afghanistan), an implosion of growth in China &/or emerging markets, a major corporate scandal and failure (& this is quite possible), but something will happen that brings markets back to reality.
Going forward hereon the shrewdest way to position one is to focus on oils, metals (mainly of the precious variety) and the odd gem amongst traditional equities. To date those investors holding blue-chips may indeed have had a good run but when the train slides off the track or enters the siding the repairs or replacements may be very laboursome and cumbersome.
To summarise then I continue to believe that the next quarter is (yet again) one to batten down the hatches! My favourite stock picks are BP, Royal Dutch Shell ‘B’ (safe dividends), Randgold, Harmony Gold and Yamana Gold; the latter 3 are ‘insurance viz-a-viz capital protection’ against a severe downturn predicted. I am still avoiding banks/financials and thinking seriously about pharmas (Glaxo), water (Northumbrian) and grocers (Sainsbury). Whether Noudini is right about the ‘U’ shape is open to conjecture as others predict ‘L’ & ‘W’ patterns but a wake up call similar to what happened when Lehman failed is a virtual certainty. Detroit still is in a mess and western industries are struggling to maintain momentum. The stock markets, of course, aren’t looking at Main Street just yet but I detect an undercurrent of doubt creeping in. As you know I have been advocating high cash positions throughout the last Q and exposure in ‘gold’ where appropriate as inflation can be spotted on the horizon.
Tuesday 6 October 2009
Friday 11 September 2009
Treating Stockbrokers Fairly (TSF)
OPEN LETTER TO LONDON STOCK EXCHANGE/SECURITIES & INVESTMENT INSTITUTE/APCIMS/FSA/UK GOVERNMENT/MEMBERS OF PARLIAMENT/FLEET STREET/INVESTORS & OTHERS ON THE ELECTORAL ROLE WHO BELIEVE IN DEMOCRACY, FAIR PLAY & THE RIGHT TO WORK
I suppose if you're a builder and have been putting up skyscrapers for a living for 30 years plus you would be pretty miffed if someone told you that in order to continue what you've been doing for most of your adult life you would have to take a degree course. Furthermore this examination would take around 3 months off your work schedule and might lose you some contracts in the process. Without this examination and the assumed certificate you would NOT be able to practice as a self-taught builder. As part of this examination process you might be told that the British way of building was no longer the norm (by someone who has never lifted a brick) and that you must adopt new methods that have only recently been proved to be disastrous for the industry. In addition the reappraisal of the Health and Safety issues surrounding your building activities would be reappraised and a lecturer would remind you of the need to wear a hard hat even whilst sitting inside your wooden shed eating sandwiches and drinking builders tea. READ ON....
My partner, a former Lieutenant in the Russian Army, a daughter of KGB parents (& a friendlier family you couldn't imagine to meet) has ordered me to respond in the appropriate manner. I was brought up in a typical English (actually the roots are Cornish but I wont dwell on that just now) family with strong protestant beliefs and a self-belief that fair play and hard work would pay off in the world of business, a business or profession as it happens that family members have been doing the same way for over 135 years. In the traditions of many apprentice trades the world of stockbroking and investment management has evolved through brokers passing on trading and investment techniques to younger brethren and investors in turn often writing and talking about their experiences sometimes to brokers but usually to all and sundry. I have a letter dated 1986 during 'Big Bang' suggesting that I was deemed back then (perhaps) as someone who they would grant a Registered Representative status to. The letter goes on to say that the LSE would respond in due course. That follow-up letter from London Stock Exchange ("LSE") never arrived and as my father, my younger brother, around 3500 Members of the Stock Exchange can testify the single ownership shares controlled by them were unceremoniously swapped for a pittance, £10,000 each. In order to appease this obvious anomaly in valuation their membership was transferred to a new FREE body (The Securities Institute) who promised to protect their interests and uphold the ethics that once proud Members maintained. In addition those younger brokers and practitioners, then described as the "marzipan layer", were unconditionally offered FREE membership alongside the former Members, some who had taken Stock Exchange Practice Examinations, others simply fathered in. It should be recalled that the "LSE" effectively suspended its examinations around 1986 and The Securities Institute (as it was known then) took on the old Members and a few "marzipan" brokers without any plans to introduce or replace the existing arrangements. My interview with the then CEO clearly stated to me personally at SII offices near the Monument that a waiver for further examination would be accepted at any time in the future. My father, my younger brother, myself and around 3500 stockbrokers and stockjobbers thus became MSI (Members of The Securities Institute). Many brokers back then were alarmed at the way that investment banks were behaving; the rest is history. The Securities Association was formed from the Financial Services Act 1986 and all 'registered representative' licences were administered to those of us deemed competent to give advice. Those that had been simple assistants were given 'registered trader' permits allowing them to take orders rather than actually give advice or transact. Now a peculiar thing happened I recollect prior to the new Act, FSMA 2000, replacing the FSA 1986. All compliance departments reassessed those in the front office and 'control functions' were introduced. I remember being seriously perturbed that my qualifications in banking, my experience as an inter-bank money broker and my experience as a bullion broker & clerk between 1975 (when I left school) and 1980 when I joined a stock exchange member firm would NOT be taken into account. In essence I believe that it was too complicated for my compliance department at that time to processs these functions but ultimately my control functions were (see FSA website register on the internet) CF21 Investment Adviser, CF26 Customer Trading and interestingly CF27 Investment Management dates 1st Dec 2001 to 31st October 2007. These dates are interesting because it would appear now that brokers and investment managers in my position have been suitably stitched up by FSA and all the bodies that have interests in maintaining CPD (Continued Professional Development) and generating vast revenues from providing courses and examinations for younger less experienced capital markets personnel. On 1st November 2007 prior to the June 2009 publication of the 168 page Retail Distribution Review my control function was downgraded like many others to merely CF30 Customer allegedly replacing the previous 3 functions but actually teeing us all up for a new Level 3/Level 4 process. Words like draconian and orwellian spring to mind but it's the sheer ageist attitude here together with the lack of honesty, integrity and ethics that I find extraordinary. No wonder then that many secretly are alarmed at the little white book that was sent to me recently by The Securities & Investment Institute (now with 40,000 members)entitled "Integrity At Work". In addition the FSA have introduced another interesting sideshow called "Treating Customers Fairly". It might be argued, and who could disagree, that the banks have NOT treated their customers fairly but without sounding arrogant or patronising I doubt the same could be said for the remaining UK stockbroking firms nor their personnel. Perhaps if the UK government had listened back in 1983-1985 to the experienced exchange personnel who objected to banks competing head to head with brokers in investment products and trading enterprises then this debate about professionalism and integrity would not have surfaced. It was evident, however, to many that once the Conservative Government had introduced the FSA 1986 and a new regime of regulation and compliance that a monster would be created. I suppose that the great irony is that it was the same Thatcher government who preached PRODUCTIVITY that created this institution, the super-regulator, that meanders from one crisis to the next, preventing established practitioners from driving the investment community. One former broker I know eloquently referred to the compliance industry as THE DEALING PREVENTION UNIT and he wasn't far from reality. Having looked at the RDR myself I find little to commend. It has little mention of what we do daily and seems to forgot the raison d'etre for having stockbrokers and investment managers in the first place. The sheer misundertanding of the word INVESTMENT is the basis of what is wrong with FSA (and New Labour). The likelihood of FSA addressing the need to attract suitable professional personnel is unlikely. In the past few years there has been a deliberate attempt by FSA to replace ex-practitioners with lawyers, accountants, professional bureaucrats and such like. I can't see any reasonable experienced and competent stockbrokers and investment managers moving across to a compliance role.
The Conservative Party should oppose the RDR and all its recommendations as it goes against the grain of what the british end of the market stands for. The sooner the FSA is disbanded the better along with the permanent dissolution of FSMA 2000 and the interference that goes with it. Over the last few years many onshore bucket shops have been granted licences by FSA; if they sat offshore they would be called boiler rooms. A new exchange that is self-regulated like the old exchange that my family were part for over 130 years is long overdue. The SII like many other groups with vested interests needs clearer direction and I think UK broking personnel need to stand up to these orwellian changes. The alternative is to move offshore BUT this would be a great disservice to the many '000s of clients that already have had to put up with monstrous legislation, the costs of which have been passed on to them and are likely to continue to do so. The current millions of complaints outstanding with the banking ombudsman will pale into significance if experienced personnel grandfathered into the process are treated this way.
YOUR EXCHANGE NEEDS YOU TO STAND UP TO THIS HYPOCRISY AND SAY NO TO 'FSA' AND NO TO 'RDR'. WE ALL RECOGNISE THE NEED TO IMPROVE STANDARDS BUT THIS IS ONE STEP TOO FAR LORD TURNER!
CAN I SUGGEST A NEW FSA DIRECTIVE "TREATING STOCKBROKERS FAIRLY" (TSF) FOR THE 5,000+ BROKERS EFFECTED BY THIS NONSENSE?
I suppose if you're a builder and have been putting up skyscrapers for a living for 30 years plus you would be pretty miffed if someone told you that in order to continue what you've been doing for most of your adult life you would have to take a degree course. Furthermore this examination would take around 3 months off your work schedule and might lose you some contracts in the process. Without this examination and the assumed certificate you would NOT be able to practice as a self-taught builder. As part of this examination process you might be told that the British way of building was no longer the norm (by someone who has never lifted a brick) and that you must adopt new methods that have only recently been proved to be disastrous for the industry. In addition the reappraisal of the Health and Safety issues surrounding your building activities would be reappraised and a lecturer would remind you of the need to wear a hard hat even whilst sitting inside your wooden shed eating sandwiches and drinking builders tea. READ ON....
My partner, a former Lieutenant in the Russian Army, a daughter of KGB parents (& a friendlier family you couldn't imagine to meet) has ordered me to respond in the appropriate manner. I was brought up in a typical English (actually the roots are Cornish but I wont dwell on that just now) family with strong protestant beliefs and a self-belief that fair play and hard work would pay off in the world of business, a business or profession as it happens that family members have been doing the same way for over 135 years. In the traditions of many apprentice trades the world of stockbroking and investment management has evolved through brokers passing on trading and investment techniques to younger brethren and investors in turn often writing and talking about their experiences sometimes to brokers but usually to all and sundry. I have a letter dated 1986 during 'Big Bang' suggesting that I was deemed back then (perhaps) as someone who they would grant a Registered Representative status to. The letter goes on to say that the LSE would respond in due course. That follow-up letter from London Stock Exchange ("LSE") never arrived and as my father, my younger brother, around 3500 Members of the Stock Exchange can testify the single ownership shares controlled by them were unceremoniously swapped for a pittance, £10,000 each. In order to appease this obvious anomaly in valuation their membership was transferred to a new FREE body (The Securities Institute) who promised to protect their interests and uphold the ethics that once proud Members maintained. In addition those younger brokers and practitioners, then described as the "marzipan layer", were unconditionally offered FREE membership alongside the former Members, some who had taken Stock Exchange Practice Examinations, others simply fathered in. It should be recalled that the "LSE" effectively suspended its examinations around 1986 and The Securities Institute (as it was known then) took on the old Members and a few "marzipan" brokers without any plans to introduce or replace the existing arrangements. My interview with the then CEO clearly stated to me personally at SII offices near the Monument that a waiver for further examination would be accepted at any time in the future. My father, my younger brother, myself and around 3500 stockbrokers and stockjobbers thus became MSI (Members of The Securities Institute). Many brokers back then were alarmed at the way that investment banks were behaving; the rest is history. The Securities Association was formed from the Financial Services Act 1986 and all 'registered representative' licences were administered to those of us deemed competent to give advice. Those that had been simple assistants were given 'registered trader' permits allowing them to take orders rather than actually give advice or transact. Now a peculiar thing happened I recollect prior to the new Act, FSMA 2000, replacing the FSA 1986. All compliance departments reassessed those in the front office and 'control functions' were introduced. I remember being seriously perturbed that my qualifications in banking, my experience as an inter-bank money broker and my experience as a bullion broker & clerk between 1975 (when I left school) and 1980 when I joined a stock exchange member firm would NOT be taken into account. In essence I believe that it was too complicated for my compliance department at that time to processs these functions but ultimately my control functions were (see FSA website register on the internet) CF21 Investment Adviser, CF26 Customer Trading and interestingly CF27 Investment Management dates 1st Dec 2001 to 31st October 2007. These dates are interesting because it would appear now that brokers and investment managers in my position have been suitably stitched up by FSA and all the bodies that have interests in maintaining CPD (Continued Professional Development) and generating vast revenues from providing courses and examinations for younger less experienced capital markets personnel. On 1st November 2007 prior to the June 2009 publication of the 168 page Retail Distribution Review my control function was downgraded like many others to merely CF30 Customer allegedly replacing the previous 3 functions but actually teeing us all up for a new Level 3/Level 4 process. Words like draconian and orwellian spring to mind but it's the sheer ageist attitude here together with the lack of honesty, integrity and ethics that I find extraordinary. No wonder then that many secretly are alarmed at the little white book that was sent to me recently by The Securities & Investment Institute (now with 40,000 members)entitled "Integrity At Work". In addition the FSA have introduced another interesting sideshow called "Treating Customers Fairly". It might be argued, and who could disagree, that the banks have NOT treated their customers fairly but without sounding arrogant or patronising I doubt the same could be said for the remaining UK stockbroking firms nor their personnel. Perhaps if the UK government had listened back in 1983-1985 to the experienced exchange personnel who objected to banks competing head to head with brokers in investment products and trading enterprises then this debate about professionalism and integrity would not have surfaced. It was evident, however, to many that once the Conservative Government had introduced the FSA 1986 and a new regime of regulation and compliance that a monster would be created. I suppose that the great irony is that it was the same Thatcher government who preached PRODUCTIVITY that created this institution, the super-regulator, that meanders from one crisis to the next, preventing established practitioners from driving the investment community. One former broker I know eloquently referred to the compliance industry as THE DEALING PREVENTION UNIT and he wasn't far from reality. Having looked at the RDR myself I find little to commend. It has little mention of what we do daily and seems to forgot the raison d'etre for having stockbrokers and investment managers in the first place. The sheer misundertanding of the word INVESTMENT is the basis of what is wrong with FSA (and New Labour). The likelihood of FSA addressing the need to attract suitable professional personnel is unlikely. In the past few years there has been a deliberate attempt by FSA to replace ex-practitioners with lawyers, accountants, professional bureaucrats and such like. I can't see any reasonable experienced and competent stockbrokers and investment managers moving across to a compliance role.
The Conservative Party should oppose the RDR and all its recommendations as it goes against the grain of what the british end of the market stands for. The sooner the FSA is disbanded the better along with the permanent dissolution of FSMA 2000 and the interference that goes with it. Over the last few years many onshore bucket shops have been granted licences by FSA; if they sat offshore they would be called boiler rooms. A new exchange that is self-regulated like the old exchange that my family were part for over 130 years is long overdue. The SII like many other groups with vested interests needs clearer direction and I think UK broking personnel need to stand up to these orwellian changes. The alternative is to move offshore BUT this would be a great disservice to the many '000s of clients that already have had to put up with monstrous legislation, the costs of which have been passed on to them and are likely to continue to do so. The current millions of complaints outstanding with the banking ombudsman will pale into significance if experienced personnel grandfathered into the process are treated this way.
YOUR EXCHANGE NEEDS YOU TO STAND UP TO THIS HYPOCRISY AND SAY NO TO 'FSA' AND NO TO 'RDR'. WE ALL RECOGNISE THE NEED TO IMPROVE STANDARDS BUT THIS IS ONE STEP TOO FAR LORD TURNER!
CAN I SUGGEST A NEW FSA DIRECTIVE "TREATING STOCKBROKERS FAIRLY" (TSF) FOR THE 5,000+ BROKERS EFFECTED BY THIS NONSENSE?
MARKET WARNING- & a strong case for Precious Metals exposure
What really is happening in the Stock Market - MARKET WARNING & the strong case for Precious Metals exposure
-Richard Hoblyn FSI
Since 9th March the FTSE100 (S&P and DJIA have similarly rallied) has rallied almost 50%. Why? Well, in essence there has been a strong media drive (spun no doubt by Mendelsohn) that 'green shoots' and recessionary recovery is well on it's way. Recently commentators have suggested that the recovery and speed of it has been remarkable and even efficient. The predictions that the TARP program and Quantitative Easing may cause horrific economic problems in the future has been brushed aside. The old market adage "sell in May...don't come back till St.Leger Day" has been quashed as markets have been rising almost untested. The truth is that volumes have not been that high whilst institutions have sat on the fence. Day traders and active investors have had a field day as SHORTS have been squeezed mercilessly. Hedge funds have gone out of business only to be replaced by new funds, ably supported and funded by the very architects of the credit crunch. Regulation has failed yet again to curb excesses despite political and electoral anger. Guaranteed bonuses and just ordinary bonuses have been spun to death as shareholders get fleeced by the very managers that they effectively control. Balance sheets remain overstretched despite numerous fund-raisings and reorganisations but banks are still not playing the game. Funds raised through QE have not found their way into SME's and the private sector in the UK has been abandoned. The scale of debt amongst banks and large cap stocks is still breathtaking and no-one seems to be getting to grips with the destructive forces surrounding derivatives that many in financial services just don't understand. Many companies with questionable balance sheets should be ignored by sensible investors but sadly many are getting sucked into this rally. The old "Rockefeller shoe-shine boy" effect is back as new investors (just like 1930) clamber aboard the runaway train.
What is going to stop this train from getting to its destination? A major derailment is on the cards as the US$, £stg & Euro come under more pressure as the Chinese Yuen screams for attention. The recent rise in the gold price has got most short-term bulls of precious metals excited. Long-term gold/silver bulls such as myself remain relaxed as daily activity and volatility in precious metals still remains relatively low compared to the early '80s when bullion offices had queues of investors selling scrap or buying krugerrands. Just this week there was confirmation (& this is significant although Bloomberg hasn't yet caught up to speed on this) that the Chinese Goverment have accumulated over 1,000 tonnes of gold in preparation for a pseudo-gold standard attack on the US$. Of course China doesn't want to rock the boat just yet as it needs to accumulate a great deal more tonnage to combat the effect of it's $2+ trillion exposure in US Treasuries. The story goes that once China feels it has enough enabling stabilisation of its own currency it will pull the plug on its Treasury Bills, probably making substantial losses along the way, but of course the $ would spin out of control and gold would rocket to $2,000+++ thus compensating them. The effect would be a swift replacement of the reserve world currency to the YUEN. Let's not forget that the chinese invented the capital markets ideology well ahead of the British in 18th/19th centuries. Another alarming factor in the markets today (again a case for further chinese buying of gold) is the growth rate there of circa 7-8% (well below the 11% but above the recent 5-6% end 2008) that is fuelling chinese property prices (on cheap credit!) and the stock market which is a vast bubble. The chinese authorities are trying to educate their army of investors but like 1929, 1974, 1987 & 2008 it may just be too late. My own take on this is that global investors are expecting a capitulation in the USA (the Obama healthcare program is one step too far and Detroit thinking is dreamy) whereas the likelihood of a major slowdown in China after a burning correction there may put the skids on further western recovery. Emerging markets (ignoring China for a moment) are still growing and there is no doubt the demand will continue regardless so some exposure with Mobius' Templeton Emerging & JP Morgan Emerging seems sound.
The FTSE100 by my calculation will hit resistance around 5133 and I urge everyone to review exposure in property portfolios and equities. The virtual 0% interest rate policies adopted by the west could suddenly change direction (the Economist Intelligence Unit has suggested this) catching everyone out and sending equities and property prices further south. The bulls, however, argue that Kraft's bid for Cadbury's is the beginning of new M&A activity. I don't buy this argument as accounting issues and a lack of genuine investment for new businesses is at an almost standstill. Furthermore the recent GM Opel scenario does not bode well for EU relations as unions smell the flavour of the stale coffee down the road; this could be a repeat of the '70s as UK industrialists ignite ill feeling towards UK (mis)governance.
Throughout the remainder of 2009 I expect oil activity to continue (this is the one sector where some genuine M&A consolidation is likely), would be wary of the base metals story and continue to recommend exposure in precious metals despite further deflationary pressures. The world global markets are like a pressure pot just now. It's just a case of where it will blow next but some alarming f/x rate moves are on the cards very soon.
-Richard Hoblyn FSI
Since 9th March the FTSE100 (S&P and DJIA have similarly rallied) has rallied almost 50%. Why? Well, in essence there has been a strong media drive (spun no doubt by Mendelsohn) that 'green shoots' and recessionary recovery is well on it's way. Recently commentators have suggested that the recovery and speed of it has been remarkable and even efficient. The predictions that the TARP program and Quantitative Easing may cause horrific economic problems in the future has been brushed aside. The old market adage "sell in May...don't come back till St.Leger Day" has been quashed as markets have been rising almost untested. The truth is that volumes have not been that high whilst institutions have sat on the fence. Day traders and active investors have had a field day as SHORTS have been squeezed mercilessly. Hedge funds have gone out of business only to be replaced by new funds, ably supported and funded by the very architects of the credit crunch. Regulation has failed yet again to curb excesses despite political and electoral anger. Guaranteed bonuses and just ordinary bonuses have been spun to death as shareholders get fleeced by the very managers that they effectively control. Balance sheets remain overstretched despite numerous fund-raisings and reorganisations but banks are still not playing the game. Funds raised through QE have not found their way into SME's and the private sector in the UK has been abandoned. The scale of debt amongst banks and large cap stocks is still breathtaking and no-one seems to be getting to grips with the destructive forces surrounding derivatives that many in financial services just don't understand. Many companies with questionable balance sheets should be ignored by sensible investors but sadly many are getting sucked into this rally. The old "Rockefeller shoe-shine boy" effect is back as new investors (just like 1930) clamber aboard the runaway train.
What is going to stop this train from getting to its destination? A major derailment is on the cards as the US$, £stg & Euro come under more pressure as the Chinese Yuen screams for attention. The recent rise in the gold price has got most short-term bulls of precious metals excited. Long-term gold/silver bulls such as myself remain relaxed as daily activity and volatility in precious metals still remains relatively low compared to the early '80s when bullion offices had queues of investors selling scrap or buying krugerrands. Just this week there was confirmation (& this is significant although Bloomberg hasn't yet caught up to speed on this) that the Chinese Goverment have accumulated over 1,000 tonnes of gold in preparation for a pseudo-gold standard attack on the US$. Of course China doesn't want to rock the boat just yet as it needs to accumulate a great deal more tonnage to combat the effect of it's $2+ trillion exposure in US Treasuries. The story goes that once China feels it has enough enabling stabilisation of its own currency it will pull the plug on its Treasury Bills, probably making substantial losses along the way, but of course the $ would spin out of control and gold would rocket to $2,000+++ thus compensating them. The effect would be a swift replacement of the reserve world currency to the YUEN. Let's not forget that the chinese invented the capital markets ideology well ahead of the British in 18th/19th centuries. Another alarming factor in the markets today (again a case for further chinese buying of gold) is the growth rate there of circa 7-8% (well below the 11% but above the recent 5-6% end 2008) that is fuelling chinese property prices (on cheap credit!) and the stock market which is a vast bubble. The chinese authorities are trying to educate their army of investors but like 1929, 1974, 1987 & 2008 it may just be too late. My own take on this is that global investors are expecting a capitulation in the USA (the Obama healthcare program is one step too far and Detroit thinking is dreamy) whereas the likelihood of a major slowdown in China after a burning correction there may put the skids on further western recovery. Emerging markets (ignoring China for a moment) are still growing and there is no doubt the demand will continue regardless so some exposure with Mobius' Templeton Emerging & JP Morgan Emerging seems sound.
The FTSE100 by my calculation will hit resistance around 5133 and I urge everyone to review exposure in property portfolios and equities. The virtual 0% interest rate policies adopted by the west could suddenly change direction (the Economist Intelligence Unit has suggested this) catching everyone out and sending equities and property prices further south. The bulls, however, argue that Kraft's bid for Cadbury's is the beginning of new M&A activity. I don't buy this argument as accounting issues and a lack of genuine investment for new businesses is at an almost standstill. Furthermore the recent GM Opel scenario does not bode well for EU relations as unions smell the flavour of the stale coffee down the road; this could be a repeat of the '70s as UK industrialists ignite ill feeling towards UK (mis)governance.
Throughout the remainder of 2009 I expect oil activity to continue (this is the one sector where some genuine M&A consolidation is likely), would be wary of the base metals story and continue to recommend exposure in precious metals despite further deflationary pressures. The world global markets are like a pressure pot just now. It's just a case of where it will blow next but some alarming f/x rate moves are on the cards very soon.
Wednesday 22 July 2009
FSA the RDR & the conservatives!
What great news this week from George Osborne & The Tories re the intended abolition of FSA. This in my view is long overdue. The compliance industry has mushroomed since the late '90s to the detriment of the securities industry. Is it coincidence that the growth in FSA numbers has corrolated with excessive profits at the investment banks? No, the profits have just lead to fatter fees for the regulators. What has happened though is that equity securities personnel have been over-regulated in comparison to derivatives specialists and investment banking personnel. What George hasn't said is what happens to the LSE and the securities firms (mainly British) that have NOT caused the credit crunch. Well George, I've got a suggestion for you. Why not delist the LSE (that way knighthoods cannot be handed out for allegedly fighting off competition) and allow the British practitioners (individuals) who have been let down consistently by LSE , SII ,APCIMS to (re)create a Stock Exchange run by and for the benefits of its members and investors ie. similar to the GREAT exchange that we once had. All we have today is a LSE PLC intent on cranking up volumes. A better quality, self-managed exchange will do BRITISH INDUSTRY alot of good. We no longer need an exchange and regulator that jointly have squandered the opportunities and allowed bankers to call themselves brokers by trading (shareholders) capital intended for proper banking servicing and investment. Let's ALL hope the FSA gets its feathers trimmed before the Retail Distribution Review nonsense gets any further! My SII Handbook entitled "Integrity At Work in Financial Services" has found its way into my eco-wood burner. Now that's what I call an integrity dilemna! It rather looks as though Lord 'RED' Adair Turner may have a firefight of his own pretty soon.
Thursday 16 July 2009
Even LSE seems to be heading in the wrong direction
For someone who runs a stock exchange, Xavier Rolet is a big believer in bonds. One of the most prominent acts of the new chief executive of the London Stock Exchange since he took over in May has been the purchase by his family trust of £3.2 million worth of his employer’s 2019 bonds, which bear an enticing 9.125 per cent yield.
But such fixed-income securities could figure in his thinking in other ways — specifically as one of the areas into which the LSE might expand. Its Borsa Italiana offshoot already operates a retail corporate bonds market, MOT, which could be usefully transplanted to London. So, too, could the breadth of equity derivatives traded on its Idem exchange in Milan, a natural next step given the presence of the LSE’s EDX platform in Russian and Scandinavian futures and options.
Elsewhere, Mr Rolet has a clear opportunity to push into post-trade activities, specifically clearing and settlement, where the LSE is a minnow relative to NYSE Liffe and Deutsche Börse, its overseas rivals.
With Mr Rolet only eight weeks in the job, the LSE’s shareholders will have to wait a little longer for his strategic pronouncements. But for now, yesterday’s first-quarter update provided grounds for quiet encouragement. At an above-forecast £162 million, revenues in the three months to June 30 were down 8 per cent on the year, but up 5 per cent on the previous quarter. Post-trade activities in Italy provided much of the boost, with the LSE’s move to cut fees at Idem increasing derivatives volumes by 41 per cent, with a corresponding benefit to clearing. That change raises hopes that the LSE’s lower tariffs for UK equity trading, which come into effect in September, will be similarly well-received.
Of course, the LSE’s wider fortunes remain geared to stock market levels, while revenues from data services are sensitive to City job cuts. But competition from rivals such as Chi-X has been muted to date, the scope for capturing share of the over-the-counter derivatives market is huge, and Mr Rolet is heavily incentivised to succeed. At 676p, or 11 times earnings, buy on weakness.
***my god there we have it...the LSE has finally forgotten what its role is....instead of promoting investment it wants to support the likes of Goldmans by spreading into DERIVATIVES...it'll end in tears***
INSTEAD OF CURBING DERIVATIVES THE LSE SEEMS TO WANT TO CHASE THE RICH PICKINGS THAT THE LIKES OF GOLDMAN SACHS, JP MORGAN CAN PROVIDE. TIME FOR THE GOVERNMENT TO STEP IN & RETURN THE EXCHANGE TO THE (HONEST) UK PRACTITIONERS WHO NAVIGATE THEIR WAY IN THE EQUITY, GILT & BOND MARKETS.
But such fixed-income securities could figure in his thinking in other ways — specifically as one of the areas into which the LSE might expand. Its Borsa Italiana offshoot already operates a retail corporate bonds market, MOT, which could be usefully transplanted to London. So, too, could the breadth of equity derivatives traded on its Idem exchange in Milan, a natural next step given the presence of the LSE’s EDX platform in Russian and Scandinavian futures and options.
Elsewhere, Mr Rolet has a clear opportunity to push into post-trade activities, specifically clearing and settlement, where the LSE is a minnow relative to NYSE Liffe and Deutsche Börse, its overseas rivals.
With Mr Rolet only eight weeks in the job, the LSE’s shareholders will have to wait a little longer for his strategic pronouncements. But for now, yesterday’s first-quarter update provided grounds for quiet encouragement. At an above-forecast £162 million, revenues in the three months to June 30 were down 8 per cent on the year, but up 5 per cent on the previous quarter. Post-trade activities in Italy provided much of the boost, with the LSE’s move to cut fees at Idem increasing derivatives volumes by 41 per cent, with a corresponding benefit to clearing. That change raises hopes that the LSE’s lower tariffs for UK equity trading, which come into effect in September, will be similarly well-received.
Of course, the LSE’s wider fortunes remain geared to stock market levels, while revenues from data services are sensitive to City job cuts. But competition from rivals such as Chi-X has been muted to date, the scope for capturing share of the over-the-counter derivatives market is huge, and Mr Rolet is heavily incentivised to succeed. At 676p, or 11 times earnings, buy on weakness.
***my god there we have it...the LSE has finally forgotten what its role is....instead of promoting investment it wants to support the likes of Goldmans by spreading into DERIVATIVES...it'll end in tears***
INSTEAD OF CURBING DERIVATIVES THE LSE SEEMS TO WANT TO CHASE THE RICH PICKINGS THAT THE LIKES OF GOLDMAN SACHS, JP MORGAN CAN PROVIDE. TIME FOR THE GOVERNMENT TO STEP IN & RETURN THE EXCHANGE TO THE (HONEST) UK PRACTITIONERS WHO NAVIGATE THEIR WAY IN THE EQUITY, GILT & BOND MARKETS.
Tuesday 14 July 2009
The response from SII and my reply
Yvonne
Thanks for your prompt response! It seems to me that SII has a moral responsibility to support its long-serving members as without the support given to the Institute by these members I doubt the SII would be in its present strong position today. The routes of SII were NOT in the examination area but based on experience in the main. It is clear that FSA cannot be trusted in keeping to its promises and guidelines undertaken in its previous life as TSA so I believe that the minority of those members here described by me as the marzipan members should be supported by SII.
I regret I cannot be present tomorrow so hope that SII can convey my views which I suspect are representative of many of SII members.
It is pretty galling that the very ethical conduct that FSA seems to advocate does NOT appear to be very prevalent in its own policies.
Richard Hoblyn FSI NO 3513
--------------------------------------
Dear Mr Hoblyn
Thank you for your email. I look forward to seeing you at the open day tomorrow.
I do understand your views on this, but I'm afraid that your question is really for the FSA (who will be present tomorrow) rather than the SII. As an Institute, we have tried very hard, and with some success, to support our members by making sure that our legacy qualifications are acceptable as meeting the transition arrangements, but the FSA is clear that it will not accept what it terms grandfathering of individuals without current or legacy qualifications. I can say that if you do not feel that you wish to take a written examination, the FSA is proposing an oral examination route conducted by awarding bodies for very experienced practitioners, and when the arrangements are in place for this, you may want to consider that option.
I am sorry not to be able to be more help.
Kind regards
Yvonne Dineen
Via RDR inbox
Thanks for your prompt response! It seems to me that SII has a moral responsibility to support its long-serving members as without the support given to the Institute by these members I doubt the SII would be in its present strong position today. The routes of SII were NOT in the examination area but based on experience in the main. It is clear that FSA cannot be trusted in keeping to its promises and guidelines undertaken in its previous life as TSA so I believe that the minority of those members here described by me as the marzipan members should be supported by SII.
I regret I cannot be present tomorrow so hope that SII can convey my views which I suspect are representative of many of SII members.
It is pretty galling that the very ethical conduct that FSA seems to advocate does NOT appear to be very prevalent in its own policies.
Richard Hoblyn FSI NO 3513
--------------------------------------
Dear Mr Hoblyn
Thank you for your email. I look forward to seeing you at the open day tomorrow.
I do understand your views on this, but I'm afraid that your question is really for the FSA (who will be present tomorrow) rather than the SII. As an Institute, we have tried very hard, and with some success, to support our members by making sure that our legacy qualifications are acceptable as meeting the transition arrangements, but the FSA is clear that it will not accept what it terms grandfathering of individuals without current or legacy qualifications. I can say that if you do not feel that you wish to take a written examination, the FSA is proposing an oral examination route conducted by awarding bodies for very experienced practitioners, and when the arrangements are in place for this, you may want to consider that option.
I am sorry not to be able to be more help.
Kind regards
Yvonne Dineen
Via RDR inbox
Monday 13 July 2009
Letter to CEO The Securities & Investment Institute 13th July 2009
Sir(s)/Madam
I have been a member of the Institute since The Securities Insitute was formed after 'Big Bang' becoming a FSI based on experience some years ago. When the institute migrated the interests of the old LSE members into it's membership there were a number of other people who's interests were protected too. At the time these people were referred simply as "The Marzipan Layer", perhaps described as those front office personnel destined for partnership in existing private client firms (rather than institutional firms). Some of these people had partially/wholly taken LSE examinations or had other professional qualifications and because their degrees of experience and integrity were deemed worthwhile and commensurate The Securities Institute supported these people and at the time sought to strengthen its own membership base. At the time it was made clear that this grand-fathering would not require further examination so I am somewhat bewildered by my firm's guidance that maybe I might be forced to undertake up to 200 hours of course work also involving stress testing of the level of my integrity.
At the age of 52 y.o. , being self-employed and having a substantial private client business involving discretion, advice & simple execution of business I am at a loss to ascertain how I can fit this extra work in to my busy schedule and at the same time pay for this and manage my business whilst doing this extra work.
Surely the FSA should honour its agreement to the registered representatives in the industry and SII ensure that elderly members such as myself are not subjected to unnecessary overload in what is already an over-regulated universe. I commend the work of SII to date but question the need for those with experience (maybe over the age of 50) to undertake such Orwellian further examination.
Richard Hoblyn FSI
I have been a member of the Institute since The Securities Insitute was formed after 'Big Bang' becoming a FSI based on experience some years ago. When the institute migrated the interests of the old LSE members into it's membership there were a number of other people who's interests were protected too. At the time these people were referred simply as "The Marzipan Layer", perhaps described as those front office personnel destined for partnership in existing private client firms (rather than institutional firms). Some of these people had partially/wholly taken LSE examinations or had other professional qualifications and because their degrees of experience and integrity were deemed worthwhile and commensurate The Securities Institute supported these people and at the time sought to strengthen its own membership base. At the time it was made clear that this grand-fathering would not require further examination so I am somewhat bewildered by my firm's guidance that maybe I might be forced to undertake up to 200 hours of course work also involving stress testing of the level of my integrity.
At the age of 52 y.o. , being self-employed and having a substantial private client business involving discretion, advice & simple execution of business I am at a loss to ascertain how I can fit this extra work in to my busy schedule and at the same time pay for this and manage my business whilst doing this extra work.
Surely the FSA should honour its agreement to the registered representatives in the industry and SII ensure that elderly members such as myself are not subjected to unnecessary overload in what is already an over-regulated universe. I commend the work of SII to date but question the need for those with experience (maybe over the age of 50) to undertake such Orwellian further examination.
Richard Hoblyn FSI
Friday 3 July 2009
Review 2Q 2009 2nd July 2009
“Doomed! We’re all doomed, doomed!” -Private Fraser’s catch phrase in Dad’s Army
Whilst reading Wikipedia’s description of Fraser whilst researching the real activities of my grand-father’s Home Guard platoon in Kent I thought it quite appropriate during a period when two other Scotsmen hog the headlines of the National Press. It reads; “Fraser is tight with money, had wild staring eyes, and was known for issuing regular pronouncements of doom”. Now, I’m not sure the same applies to Rt Hon Gordon Brown (except the eyes possibly) but I wonder how long it will be before Gordon wishes he had been a little tighter with the Budget and a little more honest with his forecasts. As for the other Scotsman well he’s due on Centre Court for a Wimbledon match shortly and hearing the brand men speak of “AM” being a potential £100m brand I doubt he’ll be that tight and let’s hope he’ll be less pronouncing of the D word than Fraser. Oh sorry! The D word is doom not Depression nor Defeat!
As the financial pundits still come to terms with the last 9 months it’s still being hotly debated as to whether this is just an ordinary recession, an excessive recession, the recession to beat all previous recessions, The Great Recession (the popular description) or as some describe The Greater Recession, which may or may not leader to The Greater Depression. Ooops sorry! I’ve used the D word again.
So let’s examine how the authorities, that’s the politicians and regulators have reacted to the events in the banking system and the general economy. It’s pretty well common knowledge that various mainstream US & UK banks have been nationalised/part-nationalised but has anything changed? I don’t think so. Authorities were very quick to bolster bank balance sheets and were even slower to bolster those of us living in (& sometimes ON) Main Street. As one friend of mine dealing in defunct Land-Rover parts and a complete novice in Capital Markets and macro-economics said to me recently; “I can’t borrow from my bank and these politicians have the gall (my terminology not his) to save the bankers hides (again this has been censored). Where is the government when I’m in trouble? Instead of supporting these banks that seem to have forgotten what they’re there for why didn’t Darling just send me a cheque for £36,000 (his back of the cigarette packet calculation not mine) and I would have dearly spent it and got the local economy moving.” Quite! Which brings me to the favoured phrase of the media currently – I’m referring to “Green Shoots”. In order for there to be green shoots in anyone’s garden, in a field, or allotment, there need to be little green things actually appearing and growing. More importantly everyone needs to be able to recognise these Green Shoots. Even those with colour blindness would recognise the shoots as being green. Well, I can’t see them, find them and neither can anyone I’ve spoken to. But please do email me with an outbreak of “Green Shoots” and I’ll pass it on to Conservative Central Office for their take on it.
It’s generally accepted that the cause of the recession and initial market collapse was another D word. DEBT! Just this week Mervyn King, the Governor of the Bank of England has voiced his concerns at the current debt levels and the Quantitative Easing policy that intends spending up to £125bn in the bond markets with money that has magically appeared designed to kick start the economy. I think privately he can probably tell that this isn’t working either. With the recently announced average bonus pool for Goldmans Sachs partners and staff allegedly standing at £430,000 per person, it’s similar at Morgan Stanley and other financial architects , it neatly brings me to my favourite topics. I wish I could say that the art of ‘banking’ is to stimulate industry by lending and borrowing to corporations, SME’s and self-employed but that is NOT what banking is about today. Commenting on the Goldman’s bonus today Mr Vince Cable says; “This suggests that far too many people in the banking sector are going back to business as usual and appear to have learnt no lessons from the past. Governments and regulators have been far too slow and complacent in introducing a new regulatory framework to prevent people in the banking industry betting the house and creating massive instability.” I couldn’t put it better myself Vince. Furthermore I wish I could say that the art of stockbroking is to ensure that businesses, industries and economies are properly and honestly financed and that investors are rewarded through patience. Sadly I can’t say that the markets today look after the long-term interests of shareholders. Indeed short-termism is so prevalent in capital markets these days thanks primarily to derivatives trading that the interests of the shareholders and the very companies invested in are often far from the thoughts of the profiteers. It could be argued that the pirates of the Caribbean pillaging spanish galleons in 15/16th centuries (and off the Horn of Africa today) are doing very little different to the financial architects in todays capital markets. The sheer lack of transparency (despite the internet) and the deceit of the international accounting universe make it very difficult to analyse and assess the true picture of many ‘000’s of businesses. Is it just my imagination but I can’t be the only broker in the markets who has clammed up when certain US investment banking analysts have put out cheesy ‘Buy’ recommendations (with absurd target prices) when the opposite seems more obvious. But as long as the central regulators pick up their large fees from these gigantic (dis)investment houses then everyone else is forced to turn a blind eye. How anyone, except socialists, can argue that over-excessive regulation is good for the markets and investors alike amazes me as more negative productivity ensues for each and everyone of us. Meanwhile, hedge fund activity rises and derivatives (credit default swaps, etc) remain properly unsupervised as the US authorities still debate the position of SEC. It’s former Chairman, Arthur Levitt, doesn’t think more excessive regulation and supervision will do any good so what sense is there for politicians to think otherwise. My own experience of a 300%+ increase in my personal FSA fees is outrageous and only highlights the ineptitude of regulators; higher fees incidentally only lead to more confusion as more rules and monitoring is increased leading to higher commissions and management fees. How can that be good for investors one asks? No, until regulators focus on the real culprits and rid the markets of these derivative instruments no-one can rest easy. I was pleased to hear this week of one fund manager at M&G say that hedge funds are selfish and devious and derivatives are “the scourge of the modern age”. The Times article then goes on to say, “it is thought that many fund managers at M&G are concerned that the activities of hedge funds can damage the interests of traditional investors, forcing some companies into insolvency when a more patient approach might have saved them.”
So the big question everyone is asking is, Is this a ‘V’ shaped recovery or should we expect a double dip or ‘W’ shaped economy albeit one that might be stretched for years to come. It appears that the two camps are split more or less 50/50 but one retired economist and former CIO of a household insurer commented to me last week that he felt it was an ‘L’ shaped economy, one that doesn’t really bottom but trawls along for years with inadequate growth as economies fail to get to grips with changes taking place globally. There is a shift towards growing emerging markets economies as opposed to failing contracting western economies that seem to have forgotten about productivity in return for over excessive regulation and red tape. If manufacturing is the heart of any industrial and agricultural economy then there must be positive and direct investment without red tape and interference from bureaucrats. Having visited Africa again recently (Malawi and Kenya briefly) I was envious of the entrepreneurial spirit there as it’s something that seems to have escaped the UK. The “can’t do wont do” attitude is NOT forthcoming any longer in these emerging markets. The emerging markets, in my view, may well become The Emerged Market Economies whereas the West could become ever embroiled in politicising a Regulated Diseconomy Malfunction. The Austrian School** of Economics promotes free markets and lack of external interference so it is a little bewildering to watch the shenanigans between the Bank of England, HM Treasury and FSA who perhaps should examine this school. Lord Turner needs to remember that FSA’s role is to “Regulate” period (apologies for this americanism). I can’t believe that I was the only one who squirmed when I saw Adair Turner commenting on the state of the UK economy on TV and seperately on the pension age. It is NOT the role of the regulator or the executive of the regulator to comment on anything BUT regulation. This is the role of economists, market strategists and analysts, brokers, hedge fund & LONG ONLY fund managers, bond dealers, and a host of others including financial journalists to comment on financial matters. I repeat, it is NOT the role of the regulator Lord Turner.
Now to stock markets, enough of pontificating in regard to regulation, derivatives and the global debt. Since early March the equity markets have rallied although in the last few weeks things have begun to unwind a little. Much has been commented on the China growth story (now around 7 1/2% per IMF but depends on who you read), the US debt (even California is in dire straits), the price of Gold, base commodities and of course the price of oil. Because there has been perennial commentary on the economic recovery the domestic markets (perhaps) have got ahead of themselves although the precious metals and oil stocks have gone off the boil. It has been a particularly difficult period to invest and trade in with often stocks out of synchonisation with peers. Like others I’ve fallen foul on occasion and traded out of Hochschild (for some clients) too early only to see them charge to £3+ (current around 290p). The sale was exacerbated by an untimely purchase into the giant Canadian gold miner, Yamana which has drifted below £6 (having been over £7 several months ago). Patience is required in all major oil (BP has drifted from 530p to 480p) and precious metals stocks (Randgold has come off from a high of c.£48 to c.£40) at the moment. I have started looking seriously at JP Morgan Emerging (it’s smaller and arguably as well managed as Templeton Emerging) Markets I.T and I think if the shares come back to 400-440p level they might be an excellent long-term play. Elsewhere, I have been buying Dana Petroleum in recent weeks ahead of a persistent rumoured £18 bid from RWE (first bought at below £12) and lightened Heritage Oil which may be in the early stages of a squabble between Iraq and Kurdistan (KRG) over oil rights; 2 directors have been selling but I should stress I still think long-term Heritage is an interesting business especially with its intended merger with Genel allowing the new company, HeritaGE Oil PLC, the boost of FTSE100 status. Elsewhere in FTSE100 I have bought a few GlaxoSmithKline but generally speaking I have avoided most sectors such as retail, property, housebuilding, services, banks (I have bought Lloyds cum- entitlement but it remains to be seen if the timing is right ahead of branch sales and redundancies), etc as I tend to go with the ‘W’ theory. The two brewers, Marstons (ahead of an intended heavily discounted rights) and Greene King, both good yielders, may be safe buys throughout what is likely to prove to be a very very long hot summer. With OECD reporting bearish views on UK economy outlook this week in truth there’s not a lot to go for in the short-term and I must confess I’m more alarmed at the gyrations in £/euro and the further likelihood of western currency weaknesses. The current deflationary environment (properties still look a potential horror story) could easily be replaced by a faster inflationary environment for 2010. With ECB holding its rate today at 1% (UK bank rate is still ½%) I am somewhat bemused how deposit rates can be higher than this. Just last week Rothschild issued a 2 year Fixed Bond at 4.35% and the doors were closed fairly swiftly (the quality of some of the paper creating these yields leaves a lot to be desired) whilst many banks and building societies continue to woo depositors. My advice is to tread carefully as there is a clear disconnect here. The basis of having a central bank rated system is to allow for banks to trade around the base rate allowing for depositors to receive less and borrowers to pay more. I can never remember a period when Personal Loans and Credit Card rates were so close and yet so far from the perceived base rate. HSBC for example have a Personal Loan at 17/21% depending on one’s credibility/credit-worthiness when in truth these rates should be nearer to 6/7% (the old norm of 4/5% over base is long gone). This is telling me something. Rates must go up eventually and probably much higher than envisaged which will result in a severe knock on housing and what’s left of the real economy. Just today in a speech at the London School of Economics, Andy Haldane (Executive Director for Financial Stability) said U.K. banks would need to hold around five times the amount of capital they currently hold, using a model based on the so-called Merton approach. I haven’t studied exactly what he said but in essence I doubt if there’s enough institutional liquidity to cover this. To make matters worse there is around £233bn of personal debt in UK charging around 20% to UK householders. Now if I haven’t alarmed you enough about the state of the markets and economy this is what Anthony Hilton commented this week in The Evening Standard; “If you could imagine a country where the government routinely lies to the electorate about how it can avoid spending cuts; where the opposition either has not the courage to tell the truth or, even more worryingly, has even now failed to grasp it; where the amount of new government debt soon to be sold is greater than the volume of domestic saving; where the tax base has collapsed because the main engine of growth for the past 20 years is beset by crisis; and where inflation and currency collapse may well be seized on by cynical politicians as the soft option that postpones the day of reckoning — if you could imagine all those things, would you then invest your pension savings in that government's debt?” That seems to have put the knockers on further ongoing gilt taps as the realization that the UK Pension position could well be the next Tsunami that we all have to deal with along with a reduction in UK Sovereign ratings to AA+ or even AA-. A run on the £stg pound is likely as the UK economy contracts further (the 1Q 09 contraction of -2.4% was the worst since 1958).
With all this bearishness I continue to favour portfolio weightings such as 30% Fixed Interest (a spread of currencies), 20% cash, 50% equities (overseas earners mainly incl. up to 25% in precious metals and 15% in oils such as BP/Royal Dutch B) throughout the rest of 2009 and into 2010. Gold could well be the star performer as the year unfolds but beware ETF’s as AIG yet again comes under pressure. I hate to say it, but I’m beginning to get more bearish than before as the debt mountain just spirals and jobless numbers accelerate in US and UK.
Whilst reading Wikipedia’s description of Fraser whilst researching the real activities of my grand-father’s Home Guard platoon in Kent I thought it quite appropriate during a period when two other Scotsmen hog the headlines of the National Press. It reads; “Fraser is tight with money, had wild staring eyes, and was known for issuing regular pronouncements of doom”. Now, I’m not sure the same applies to Rt Hon Gordon Brown (except the eyes possibly) but I wonder how long it will be before Gordon wishes he had been a little tighter with the Budget and a little more honest with his forecasts. As for the other Scotsman well he’s due on Centre Court for a Wimbledon match shortly and hearing the brand men speak of “AM” being a potential £100m brand I doubt he’ll be that tight and let’s hope he’ll be less pronouncing of the D word than Fraser. Oh sorry! The D word is doom not Depression nor Defeat!
As the financial pundits still come to terms with the last 9 months it’s still being hotly debated as to whether this is just an ordinary recession, an excessive recession, the recession to beat all previous recessions, The Great Recession (the popular description) or as some describe The Greater Recession, which may or may not leader to The Greater Depression. Ooops sorry! I’ve used the D word again.
So let’s examine how the authorities, that’s the politicians and regulators have reacted to the events in the banking system and the general economy. It’s pretty well common knowledge that various mainstream US & UK banks have been nationalised/part-nationalised but has anything changed? I don’t think so. Authorities were very quick to bolster bank balance sheets and were even slower to bolster those of us living in (& sometimes ON) Main Street. As one friend of mine dealing in defunct Land-Rover parts and a complete novice in Capital Markets and macro-economics said to me recently; “I can’t borrow from my bank and these politicians have the gall (my terminology not his) to save the bankers hides (again this has been censored). Where is the government when I’m in trouble? Instead of supporting these banks that seem to have forgotten what they’re there for why didn’t Darling just send me a cheque for £36,000 (his back of the cigarette packet calculation not mine) and I would have dearly spent it and got the local economy moving.” Quite! Which brings me to the favoured phrase of the media currently – I’m referring to “Green Shoots”. In order for there to be green shoots in anyone’s garden, in a field, or allotment, there need to be little green things actually appearing and growing. More importantly everyone needs to be able to recognise these Green Shoots. Even those with colour blindness would recognise the shoots as being green. Well, I can’t see them, find them and neither can anyone I’ve spoken to. But please do email me with an outbreak of “Green Shoots” and I’ll pass it on to Conservative Central Office for their take on it.
It’s generally accepted that the cause of the recession and initial market collapse was another D word. DEBT! Just this week Mervyn King, the Governor of the Bank of England has voiced his concerns at the current debt levels and the Quantitative Easing policy that intends spending up to £125bn in the bond markets with money that has magically appeared designed to kick start the economy. I think privately he can probably tell that this isn’t working either. With the recently announced average bonus pool for Goldmans Sachs partners and staff allegedly standing at £430,000 per person, it’s similar at Morgan Stanley and other financial architects , it neatly brings me to my favourite topics. I wish I could say that the art of ‘banking’ is to stimulate industry by lending and borrowing to corporations, SME’s and self-employed but that is NOT what banking is about today. Commenting on the Goldman’s bonus today Mr Vince Cable says; “This suggests that far too many people in the banking sector are going back to business as usual and appear to have learnt no lessons from the past. Governments and regulators have been far too slow and complacent in introducing a new regulatory framework to prevent people in the banking industry betting the house and creating massive instability.” I couldn’t put it better myself Vince. Furthermore I wish I could say that the art of stockbroking is to ensure that businesses, industries and economies are properly and honestly financed and that investors are rewarded through patience. Sadly I can’t say that the markets today look after the long-term interests of shareholders. Indeed short-termism is so prevalent in capital markets these days thanks primarily to derivatives trading that the interests of the shareholders and the very companies invested in are often far from the thoughts of the profiteers. It could be argued that the pirates of the Caribbean pillaging spanish galleons in 15/16th centuries (and off the Horn of Africa today) are doing very little different to the financial architects in todays capital markets. The sheer lack of transparency (despite the internet) and the deceit of the international accounting universe make it very difficult to analyse and assess the true picture of many ‘000’s of businesses. Is it just my imagination but I can’t be the only broker in the markets who has clammed up when certain US investment banking analysts have put out cheesy ‘Buy’ recommendations (with absurd target prices) when the opposite seems more obvious. But as long as the central regulators pick up their large fees from these gigantic (dis)investment houses then everyone else is forced to turn a blind eye. How anyone, except socialists, can argue that over-excessive regulation is good for the markets and investors alike amazes me as more negative productivity ensues for each and everyone of us. Meanwhile, hedge fund activity rises and derivatives (credit default swaps, etc) remain properly unsupervised as the US authorities still debate the position of SEC. It’s former Chairman, Arthur Levitt, doesn’t think more excessive regulation and supervision will do any good so what sense is there for politicians to think otherwise. My own experience of a 300%+ increase in my personal FSA fees is outrageous and only highlights the ineptitude of regulators; higher fees incidentally only lead to more confusion as more rules and monitoring is increased leading to higher commissions and management fees. How can that be good for investors one asks? No, until regulators focus on the real culprits and rid the markets of these derivative instruments no-one can rest easy. I was pleased to hear this week of one fund manager at M&G say that hedge funds are selfish and devious and derivatives are “the scourge of the modern age”. The Times article then goes on to say, “it is thought that many fund managers at M&G are concerned that the activities of hedge funds can damage the interests of traditional investors, forcing some companies into insolvency when a more patient approach might have saved them.”
So the big question everyone is asking is, Is this a ‘V’ shaped recovery or should we expect a double dip or ‘W’ shaped economy albeit one that might be stretched for years to come. It appears that the two camps are split more or less 50/50 but one retired economist and former CIO of a household insurer commented to me last week that he felt it was an ‘L’ shaped economy, one that doesn’t really bottom but trawls along for years with inadequate growth as economies fail to get to grips with changes taking place globally. There is a shift towards growing emerging markets economies as opposed to failing contracting western economies that seem to have forgotten about productivity in return for over excessive regulation and red tape. If manufacturing is the heart of any industrial and agricultural economy then there must be positive and direct investment without red tape and interference from bureaucrats. Having visited Africa again recently (Malawi and Kenya briefly) I was envious of the entrepreneurial spirit there as it’s something that seems to have escaped the UK. The “can’t do wont do” attitude is NOT forthcoming any longer in these emerging markets. The emerging markets, in my view, may well become The Emerged Market Economies whereas the West could become ever embroiled in politicising a Regulated Diseconomy Malfunction. The Austrian School** of Economics promotes free markets and lack of external interference so it is a little bewildering to watch the shenanigans between the Bank of England, HM Treasury and FSA who perhaps should examine this school. Lord Turner needs to remember that FSA’s role is to “Regulate” period (apologies for this americanism). I can’t believe that I was the only one who squirmed when I saw Adair Turner commenting on the state of the UK economy on TV and seperately on the pension age. It is NOT the role of the regulator or the executive of the regulator to comment on anything BUT regulation. This is the role of economists, market strategists and analysts, brokers, hedge fund & LONG ONLY fund managers, bond dealers, and a host of others including financial journalists to comment on financial matters. I repeat, it is NOT the role of the regulator Lord Turner.
Now to stock markets, enough of pontificating in regard to regulation, derivatives and the global debt. Since early March the equity markets have rallied although in the last few weeks things have begun to unwind a little. Much has been commented on the China growth story (now around 7 1/2% per IMF but depends on who you read), the US debt (even California is in dire straits), the price of Gold, base commodities and of course the price of oil. Because there has been perennial commentary on the economic recovery the domestic markets (perhaps) have got ahead of themselves although the precious metals and oil stocks have gone off the boil. It has been a particularly difficult period to invest and trade in with often stocks out of synchonisation with peers. Like others I’ve fallen foul on occasion and traded out of Hochschild (for some clients) too early only to see them charge to £3+ (current around 290p). The sale was exacerbated by an untimely purchase into the giant Canadian gold miner, Yamana which has drifted below £6 (having been over £7 several months ago). Patience is required in all major oil (BP has drifted from 530p to 480p) and precious metals stocks (Randgold has come off from a high of c.£48 to c.£40) at the moment. I have started looking seriously at JP Morgan Emerging (it’s smaller and arguably as well managed as Templeton Emerging) Markets I.T and I think if the shares come back to 400-440p level they might be an excellent long-term play. Elsewhere, I have been buying Dana Petroleum in recent weeks ahead of a persistent rumoured £18 bid from RWE (first bought at below £12) and lightened Heritage Oil which may be in the early stages of a squabble between Iraq and Kurdistan (KRG) over oil rights; 2 directors have been selling but I should stress I still think long-term Heritage is an interesting business especially with its intended merger with Genel allowing the new company, HeritaGE Oil PLC, the boost of FTSE100 status. Elsewhere in FTSE100 I have bought a few GlaxoSmithKline but generally speaking I have avoided most sectors such as retail, property, housebuilding, services, banks (I have bought Lloyds cum- entitlement but it remains to be seen if the timing is right ahead of branch sales and redundancies), etc as I tend to go with the ‘W’ theory. The two brewers, Marstons (ahead of an intended heavily discounted rights) and Greene King, both good yielders, may be safe buys throughout what is likely to prove to be a very very long hot summer. With OECD reporting bearish views on UK economy outlook this week in truth there’s not a lot to go for in the short-term and I must confess I’m more alarmed at the gyrations in £/euro and the further likelihood of western currency weaknesses. The current deflationary environment (properties still look a potential horror story) could easily be replaced by a faster inflationary environment for 2010. With ECB holding its rate today at 1% (UK bank rate is still ½%) I am somewhat bemused how deposit rates can be higher than this. Just last week Rothschild issued a 2 year Fixed Bond at 4.35% and the doors were closed fairly swiftly (the quality of some of the paper creating these yields leaves a lot to be desired) whilst many banks and building societies continue to woo depositors. My advice is to tread carefully as there is a clear disconnect here. The basis of having a central bank rated system is to allow for banks to trade around the base rate allowing for depositors to receive less and borrowers to pay more. I can never remember a period when Personal Loans and Credit Card rates were so close and yet so far from the perceived base rate. HSBC for example have a Personal Loan at 17/21% depending on one’s credibility/credit-worthiness when in truth these rates should be nearer to 6/7% (the old norm of 4/5% over base is long gone). This is telling me something. Rates must go up eventually and probably much higher than envisaged which will result in a severe knock on housing and what’s left of the real economy. Just today in a speech at the London School of Economics, Andy Haldane (Executive Director for Financial Stability) said U.K. banks would need to hold around five times the amount of capital they currently hold, using a model based on the so-called Merton approach. I haven’t studied exactly what he said but in essence I doubt if there’s enough institutional liquidity to cover this. To make matters worse there is around £233bn of personal debt in UK charging around 20% to UK householders. Now if I haven’t alarmed you enough about the state of the markets and economy this is what Anthony Hilton commented this week in The Evening Standard; “If you could imagine a country where the government routinely lies to the electorate about how it can avoid spending cuts; where the opposition either has not the courage to tell the truth or, even more worryingly, has even now failed to grasp it; where the amount of new government debt soon to be sold is greater than the volume of domestic saving; where the tax base has collapsed because the main engine of growth for the past 20 years is beset by crisis; and where inflation and currency collapse may well be seized on by cynical politicians as the soft option that postpones the day of reckoning — if you could imagine all those things, would you then invest your pension savings in that government's debt?” That seems to have put the knockers on further ongoing gilt taps as the realization that the UK Pension position could well be the next Tsunami that we all have to deal with along with a reduction in UK Sovereign ratings to AA+ or even AA-. A run on the £stg pound is likely as the UK economy contracts further (the 1Q 09 contraction of -2.4% was the worst since 1958).
With all this bearishness I continue to favour portfolio weightings such as 30% Fixed Interest (a spread of currencies), 20% cash, 50% equities (overseas earners mainly incl. up to 25% in precious metals and 15% in oils such as BP/Royal Dutch B) throughout the rest of 2009 and into 2010. Gold could well be the star performer as the year unfolds but beware ETF’s as AIG yet again comes under pressure. I hate to say it, but I’m beginning to get more bearish than before as the debt mountain just spirals and jobless numbers accelerate in US and UK.
Thursday 14 May 2009
Much more pain to come in retail property
I am still very bearish on retail property in UK & EU. The falls measured in US retail are now -59% and are similar to the collapse in UK commercial. Today Land Securities PLC reported as follows;-
Property giant Land Securities saw its net asset value slashed by two-thirds in 2008 in what it described as ‘unprecedented market conditions.’ Basic net asset value per share slumped to 639p at the end of March 2009 from 1,862p a year earlier. The group’s property portfolio took a £4,744m dive, after sliding £1,293m the previous year. The valuation hit helped push the company deep into the red, with a pre-tax loss of £4,773m versus a pre-tax loss the year before of £988m.
Sector peer Hammerson has completed its evacuation from Germany by selling a Berlin shopping centre for €70m. The news did little to stop the share price from joining Land Securities in hurtling downwards.
& from the Daily Reckoning today;-
..."from DR today..."What mistake did California make? It increased expenses – counting on Bubble Epoque growth rates to continue. But instead of continuing to rise, property prices – which held the bubble aloft – collapsed.
Now comes word that housing prices are still going down. In fact, they went down faster than ever during the first quarter of this year – 14% year on year.
The biggest drops were not in California... but in Cape Coral/Ft. Myers, Florida, and Saginaw, Michigan. The Cape Coral area saw a staggering 59% collapse in house prices. Saginaw was not far behind; there, house prices fell 54%. "
UK retails down circa -20% has much further to fall. In fact I think it could fall another 50% reflecting my forecast of top to bottom declines of -70%. As the founder of English Heritage said to me today "Stay out of retail property, this is a 15 year downtrend."
Property giant Land Securities saw its net asset value slashed by two-thirds in 2008 in what it described as ‘unprecedented market conditions.’ Basic net asset value per share slumped to 639p at the end of March 2009 from 1,862p a year earlier. The group’s property portfolio took a £4,744m dive, after sliding £1,293m the previous year. The valuation hit helped push the company deep into the red, with a pre-tax loss of £4,773m versus a pre-tax loss the year before of £988m.
Sector peer Hammerson has completed its evacuation from Germany by selling a Berlin shopping centre for €70m. The news did little to stop the share price from joining Land Securities in hurtling downwards.
& from the Daily Reckoning today;-
..."from DR today..."What mistake did California make? It increased expenses – counting on Bubble Epoque growth rates to continue. But instead of continuing to rise, property prices – which held the bubble aloft – collapsed.
Now comes word that housing prices are still going down. In fact, they went down faster than ever during the first quarter of this year – 14% year on year.
The biggest drops were not in California... but in Cape Coral/Ft. Myers, Florida, and Saginaw, Michigan. The Cape Coral area saw a staggering 59% collapse in house prices. Saginaw was not far behind; there, house prices fell 54%. "
UK retails down circa -20% has much further to fall. In fact I think it could fall another 50% reflecting my forecast of top to bottom declines of -70%. As the founder of English Heritage said to me today "Stay out of retail property, this is a 15 year downtrend."
Friday 1 May 2009
SELL in May & go away..don't come back till St.Ledger Day
There's nothing unusual in the above but clearly the market traders are getting ahead of themselves and events. It seems to me that bank shares are not reflecting the impending problems in their Tier 1 Ratios/derivatives contracts and precious metals stocks are showing short-term weakness because inflation fears in the recent rally have subsided. Navigating through May and the rest of the summer could be problematic as Detroit shows signs of imploding. Chrysler's Chapter XI announcement and Obama's 2 month recovery target hereon is unrealistic. GM & Ford both have their own problems and bearish news on Citibank (break-up?) and Bank Of America are likely as well as poor news from around 1,000 regional US banks. I remain extremely cautious at this time and am only LONG of Intertek, Heritage Oil and Yamana and looking for a large correction soon in mainstream markets. Clearly a disconnect by Wall Street to Main Street has happened. More heavily discounted rights issues could unsettle the markets in the short-term.
Thursday 23 April 2009
The Times 17th July 2007
In an article titled
"Credit crunch gives banks $11bn headache
A torrid market for higher-risk debt has left Wall Street investment banks struggling to sell loans and bonds worth $11 billion"
my response was duly published. For what its worth here is what I said then.....
What have markets, regulators and investors learned from Michael Milken in '80's (who coined the junk market) and subsequent failures at Enron & LTCM? Not much by the looks of it. What no-one in the financial press is mentioning is that all this over-excessive debt parcelling wouldn't be possible without an accounting failure on a monstrous level. Looking at any balance sheet (especially bank balance sheets) for any multi$bn company is such a maze. It's only a matter of time before several banks get bailed out and then investors, etc will be taking a closer look at these balance sheets and come to the conclusion that transparency is hardly taking place. Can someone please explain to me what the point of regulation is?
Richard Hoblyn, CofL, UK
"Credit crunch gives banks $11bn headache
A torrid market for higher-risk debt has left Wall Street investment banks struggling to sell loans and bonds worth $11 billion"
my response was duly published. For what its worth here is what I said then.....
What have markets, regulators and investors learned from Michael Milken in '80's (who coined the junk market) and subsequent failures at Enron & LTCM? Not much by the looks of it. What no-one in the financial press is mentioning is that all this over-excessive debt parcelling wouldn't be possible without an accounting failure on a monstrous level. Looking at any balance sheet (especially bank balance sheets) for any multi$bn company is such a maze. It's only a matter of time before several banks get bailed out and then investors, etc will be taking a closer look at these balance sheets and come to the conclusion that transparency is hardly taking place. Can someone please explain to me what the point of regulation is?
Richard Hoblyn, CofL, UK
Tuesday 21 April 2009
IMF calculates $4 trillion and spiralling
The huge losses inflicted on banks across the West by the credit crisis and past, lax lending are set to soar to $4 trillion (£2.75 trillion), the International Monetary Fund (IMF) said today.
Confirming massive loss estimates first revealed by The Times two weeks ago, the IMF says that the mounting toll on banks from the worst global recession since the Second World War is leading write-offs from loans to spiral.
In an analysis, the fund has sharply increased its estimate of losses on lending first made in the US for a second time, to $2.7 trillion. That is up from an initial forecast of slightly less than $1 trillion and an updated $2.2 trillion estimate released six months ago.
For the first time, the IMF has also produced estimates of likely losses inflicted on banks across key economies from lending originated in Europe and Japan.
It now puts likely total losses due to European lending at $1.19 trillion, and those for Japan at a comparatively modest $149 billion.
Two thirds of the total $4 trillion in write-offs are set to be made by banking groups, the IMF believes, with the rest affecting insurance groups and other types of financial institution.
Losses by British banks in 2009-10 alone are put at $200 billion, compared with $750 billion for European banks, and $550 billion for those in the US.
The vast scale of the losses and writedowns, released by the fund today in its twice-yearly Global Financial Stability Report, will massively increase the need for banks across the West to raise huge amounts in new capital, or be given capital injections by national governments.
To restore banks’ financial strength, measured by the amount of capital they have to back outstanding lending, to levels immediately before the present crisis erupted, the IMF says that banks need a total of $775 billion in fresh funding.
British banks would require $125 billion, US banks $275 billion, and eurozone institutions some $375 billion.
But the IMF warns that the capital needed could be very substantially larger.
To restore banks’ financial strength to the more secure levels of the mid-Nineties, it puts the capital required at almost $1.5 trillion — $250 billion for UK banks, $500 billion for US banks, and $725 billion for those in the eurozone.
Richard Hoblyn; It's quite clear that the efforts of Tim Geithner and other practitioners is having little impact on Main Street. It's also quite clear that Wall Street has made a classic Hospital Pass to the US (& UK) tax-payers. I said in January that the losses between 2009 and 2025 could spiral to £17tn in UK alone and I see no reason to change my estimate. Rather than looking at the way that derivative packages could be unwrapped (allowing for the actual core derivatives and mortgages etc to be traded out) the authorities have simply passed the problem to the tax-payer. What no-one seems to explain is what the UK tax-payer should do with these toxic assets now that the banks have offloaded them. I doubt very much whether UKFI has the skills, resources or imagination to do anything positive going forward. Regarding QE I'm wondering if Bank of England rather than buying gilts (the reverse auctions)should be bidding for the IMF's 400 tonne impending gold sale. This seems far more sensible to me as governments get more cajoled into re-examining a form of gold standard years down the line.
Confirming massive loss estimates first revealed by The Times two weeks ago, the IMF says that the mounting toll on banks from the worst global recession since the Second World War is leading write-offs from loans to spiral.
In an analysis, the fund has sharply increased its estimate of losses on lending first made in the US for a second time, to $2.7 trillion. That is up from an initial forecast of slightly less than $1 trillion and an updated $2.2 trillion estimate released six months ago.
For the first time, the IMF has also produced estimates of likely losses inflicted on banks across key economies from lending originated in Europe and Japan.
It now puts likely total losses due to European lending at $1.19 trillion, and those for Japan at a comparatively modest $149 billion.
Two thirds of the total $4 trillion in write-offs are set to be made by banking groups, the IMF believes, with the rest affecting insurance groups and other types of financial institution.
Losses by British banks in 2009-10 alone are put at $200 billion, compared with $750 billion for European banks, and $550 billion for those in the US.
The vast scale of the losses and writedowns, released by the fund today in its twice-yearly Global Financial Stability Report, will massively increase the need for banks across the West to raise huge amounts in new capital, or be given capital injections by national governments.
To restore banks’ financial strength, measured by the amount of capital they have to back outstanding lending, to levels immediately before the present crisis erupted, the IMF says that banks need a total of $775 billion in fresh funding.
British banks would require $125 billion, US banks $275 billion, and eurozone institutions some $375 billion.
But the IMF warns that the capital needed could be very substantially larger.
To restore banks’ financial strength to the more secure levels of the mid-Nineties, it puts the capital required at almost $1.5 trillion — $250 billion for UK banks, $500 billion for US banks, and $725 billion for those in the eurozone.
Richard Hoblyn; It's quite clear that the efforts of Tim Geithner and other practitioners is having little impact on Main Street. It's also quite clear that Wall Street has made a classic Hospital Pass to the US (& UK) tax-payers. I said in January that the losses between 2009 and 2025 could spiral to £17tn in UK alone and I see no reason to change my estimate. Rather than looking at the way that derivative packages could be unwrapped (allowing for the actual core derivatives and mortgages etc to be traded out) the authorities have simply passed the problem to the tax-payer. What no-one seems to explain is what the UK tax-payer should do with these toxic assets now that the banks have offloaded them. I doubt very much whether UKFI has the skills, resources or imagination to do anything positive going forward. Regarding QE I'm wondering if Bank of England rather than buying gilts (the reverse auctions)should be bidding for the IMF's 400 tonne impending gold sale. This seems far more sensible to me as governments get more cajoled into re-examining a form of gold standard years down the line.
Tuesday 7 April 2009
Toxic Debts accelerate according to IMF
Toxic debts racked up by banks and insurers could spiral to $4trn, new forecasts from the International Monetary Fund (IMF) are set to suggest. The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2trn by the end of next year, but it is understood to be looking at raising that to $3.1trn in its next assessment of the global economy. In addition, it is likely to boost that total by $900bn for toxic assets originated in Europe and Asia, reports the Times.
Richard Hoblyn says; It would appear that uncovering these losses hidden off-balance sheet is going to be a long drawn out process. My take is that taxpayers, primarily US & UK, are being palmed off with toxic debts as the banks trade out their synthetic derivative positions. The effective black holes that investment and commercial banks may indeed have may be much larger than at first thought. My own calculations based on assumed global derivative risk ($600 trillion) gave me a UK figure alone of £17 trillion compounded to 2025. I think the next stages of the crisis are about to occur; it's interesting to note that IMF received $1 trillion of packages from G20 last week and at the same time indicated a massive sell-off of bullion reserves depressing Gold in the short-term. The picture is indeed gloomy!
Richard Hoblyn says; It would appear that uncovering these losses hidden off-balance sheet is going to be a long drawn out process. My take is that taxpayers, primarily US & UK, are being palmed off with toxic debts as the banks trade out their synthetic derivative positions. The effective black holes that investment and commercial banks may indeed have may be much larger than at first thought. My own calculations based on assumed global derivative risk ($600 trillion) gave me a UK figure alone of £17 trillion compounded to 2025. I think the next stages of the crisis are about to occur; it's interesting to note that IMF received $1 trillion of packages from G20 last week and at the same time indicated a massive sell-off of bullion reserves depressing Gold in the short-term. The picture is indeed gloomy!
Thursday 2 April 2009
Review 1 Q 2009 2nd April 2009
An American President once said, “Oh for a one-armed economist so he cannot say, on the one hand, etc…”
As the new American President joins the other 19 leaders at G20 in London I have been trying to fathom JM Keynes’s jargon and decide if Quantitative Easing is going to succeed and reignite the world economies fuelling the new BULL market or whether this is just a dress rehearsal for the hardships to come. It’s a pretty confusing picture not helped by the media hoping for the odd scrap on Threadneedle Street as well as in the Excel Centre, arrive left “Sarko” with his new maiden “Merkel”. Poor Carla seems to have been rudely sidelined; she’s probably entertaining the wags.
What is clear to me is that the safety nets put in place by Central Banks to kick-start lending and presumably the investment climate isn’t working. The ongoing debate about “mark-to-market” and the calculations concerning “toxic debt” may have come to a head by now if liquidators had been forced to dispose of these failed bank derivative positions but of course the tax-payers have effectively bailed out these banks (pirate vessels). Lehman and Bear Stearns didn’t receive their bonuses so I’m at a loss to understand why politicians, non-executive directors, regulators and all and sundry think it perfectly acceptable to allow for failed businesses to reward those who’ve been at the centre of the toxic mess. Those who work for General Motors, Ford or Chrysler (Chapter XI is inevitable I think for Detroit), CitiGroup, JP Morgan Chase, RBS, Lloyds Banking (notice how it has reverted to it’s pre-TSB HBOS name) and a plethora of other names should not (never?) receive a penny in bonuses until all the tax-payers debt is repaid. Sorry to be brutal and blunt but what we are witnessing is hardly capitalism but more reminiscent of piracy in its heyday. Well done to Obama for his comments on this matter to date. So is QE going to work? Well, I don’t know the answer to that (and no doubt that will still be debated 30 years from now) but I keep reminding myself of my first economics lesson (age 13) and can hear my teacher drumming into me Keynesian doctrine and the definition of inflation as “too much money chasing too few goods”. Looking at Wikipedia and reminding myself of the definitions of Demand-Pull Inflation and Cost-Push Inflation I’m not sure I fully understand the extent of what he said then and I’m even more certain that he wasn’t sure of what he was saying back then either. With the global markets being far more elastic than back in the ‘30’s it seems to me that the current inflationary outlook is a combination of both types as the Monetary Supply accelerates. The Governor, Mervyn King, is clearly aware of the QE implications but as for our SocioCapitalist leaders in Downing Street it seems to me that they’ll do everything in their powers to maintain property prices in UK at the still absurd heights safeguarding their futures long enough till the next General Election. Inflation by then may have started to rise further along with interest rates (they can hardly stay at this level as there’s not much evidence of excessive lending and depositors are getting increasingly impatient) and thus the outlook for ordinary businesses, tax-payers, SME’s is truly depressing. Sorry to use the “D word” but when I see the levels of Public Sector abuse in France my toes curl up at the thought of some hapless Guardian reader responding to a highly paid job for some neo-socialist county council. Have you all noticed how the issue of “productivity” in the private sector has been replaced by job securitisation for the public sector? So where exactly is the productivity in paying someone £40,000 pa to cycle around the neighbourhood checking to see if one’s colleagues yesterday completed their paintwork, testing whether it’s dry and returning to base (a Chesterfield sofa and a glass of Irn-Bru) to instruct a second-paint job the following day? The UK should change it’s name to The Forth Railway Bridge Paintshop because that’s what everyone will be doing if the Public Sector is empowered any further!
The shares strategy for 2009 has worked pretty well so far with one notable exception being Anglo-American which cut its dividend out of the blue; I am holding them for now. The position with other base miners has been confusing too; in particular Rio Tinto has over-run itself at present and I am pleased to have exited it (albeit early) due to its high gearing. Although the volatility has diminished I am still recommending Hochschild (still my favoured pick for 2009 recommended at 138p in January now 243p), Randgold (HOLD- touching £39-40), Royal Dutch & BP (probably the cheapest and safest stocks in the market as oil rises back above $50pbo and perhaps is destined to rise back to $100pbo very soon), Templeton Emerging (risky but this is where the world’s engine is right now) and Yamana Gold (a Canadian precious producer recommended at 525p) at 680p. In the UK domestic market I have been trading Ladbrokes, Tate & Lyle and Marstons recently but one has to have pretty nifty footwork to keep pace with events at the moment. I don’t believe that many UK domestics provide solid and sound Buy and Hold strategies at present and would expect a market sell-off quite soon (sell in May & run like…). What has been surprising throughout the crisis is that very few large capitalization businesses have failed and unlike the aftershock of the ’87 crash none of the Treasury divisions of large caps have announced drastic trading losses as a result of excessive trading in derivatives, f/x, etc. So far there have been a catalogue of trading failures amongst banks and brokers and very few public statements regarding hedge fund losses (although clearly many have closed their doors). In other words there hasn’t been an Enron-esque fatality on main street although it’s predicted that Detroit will fail. The markets seem to be discounting Detroit anyway and a surprise is on the cards in my view. The next leg of the Greater Depression may only just be starting and I believe precious metals and oil stocks may be the only way to safeguard the £ in the pocket. I recollect an ex-colleague broker during ’87 continually remind his clients that equities are the best way to combat inflation so some further analysis (looking for solid earnings lowly geared businesses) is required on my part.
I continue to favour portfolio weightings such as 30% Fixed Interest (incl Index-Linked), 20% cash, 50% equities (overseas earners mainly incl. up to 25% in precious metals) throughout 2009. Keep an eye on gold test levels of $963, $1163, $1332 & $1461; a trading range of $1200-2000 is still predicted for 3rd and 4th Q’s 09.
I wonder what JM Keynes, JK Galbraith and Milton Friedman would have made of it all? Let’s all hope the summer arrives early; that way the paint can dry better.
As the new American President joins the other 19 leaders at G20 in London I have been trying to fathom JM Keynes’s jargon and decide if Quantitative Easing is going to succeed and reignite the world economies fuelling the new BULL market or whether this is just a dress rehearsal for the hardships to come. It’s a pretty confusing picture not helped by the media hoping for the odd scrap on Threadneedle Street as well as in the Excel Centre, arrive left “Sarko” with his new maiden “Merkel”. Poor Carla seems to have been rudely sidelined; she’s probably entertaining the wags.
What is clear to me is that the safety nets put in place by Central Banks to kick-start lending and presumably the investment climate isn’t working. The ongoing debate about “mark-to-market” and the calculations concerning “toxic debt” may have come to a head by now if liquidators had been forced to dispose of these failed bank derivative positions but of course the tax-payers have effectively bailed out these banks (pirate vessels). Lehman and Bear Stearns didn’t receive their bonuses so I’m at a loss to understand why politicians, non-executive directors, regulators and all and sundry think it perfectly acceptable to allow for failed businesses to reward those who’ve been at the centre of the toxic mess. Those who work for General Motors, Ford or Chrysler (Chapter XI is inevitable I think for Detroit), CitiGroup, JP Morgan Chase, RBS, Lloyds Banking (notice how it has reverted to it’s pre-TSB HBOS name) and a plethora of other names should not (never?) receive a penny in bonuses until all the tax-payers debt is repaid. Sorry to be brutal and blunt but what we are witnessing is hardly capitalism but more reminiscent of piracy in its heyday. Well done to Obama for his comments on this matter to date. So is QE going to work? Well, I don’t know the answer to that (and no doubt that will still be debated 30 years from now) but I keep reminding myself of my first economics lesson (age 13) and can hear my teacher drumming into me Keynesian doctrine and the definition of inflation as “too much money chasing too few goods”. Looking at Wikipedia and reminding myself of the definitions of Demand-Pull Inflation and Cost-Push Inflation I’m not sure I fully understand the extent of what he said then and I’m even more certain that he wasn’t sure of what he was saying back then either. With the global markets being far more elastic than back in the ‘30’s it seems to me that the current inflationary outlook is a combination of both types as the Monetary Supply accelerates. The Governor, Mervyn King, is clearly aware of the QE implications but as for our SocioCapitalist leaders in Downing Street it seems to me that they’ll do everything in their powers to maintain property prices in UK at the still absurd heights safeguarding their futures long enough till the next General Election. Inflation by then may have started to rise further along with interest rates (they can hardly stay at this level as there’s not much evidence of excessive lending and depositors are getting increasingly impatient) and thus the outlook for ordinary businesses, tax-payers, SME’s is truly depressing. Sorry to use the “D word” but when I see the levels of Public Sector abuse in France my toes curl up at the thought of some hapless Guardian reader responding to a highly paid job for some neo-socialist county council. Have you all noticed how the issue of “productivity” in the private sector has been replaced by job securitisation for the public sector? So where exactly is the productivity in paying someone £40,000 pa to cycle around the neighbourhood checking to see if one’s colleagues yesterday completed their paintwork, testing whether it’s dry and returning to base (a Chesterfield sofa and a glass of Irn-Bru) to instruct a second-paint job the following day? The UK should change it’s name to The Forth Railway Bridge Paintshop because that’s what everyone will be doing if the Public Sector is empowered any further!
The shares strategy for 2009 has worked pretty well so far with one notable exception being Anglo-American which cut its dividend out of the blue; I am holding them for now. The position with other base miners has been confusing too; in particular Rio Tinto has over-run itself at present and I am pleased to have exited it (albeit early) due to its high gearing. Although the volatility has diminished I am still recommending Hochschild (still my favoured pick for 2009 recommended at 138p in January now 243p), Randgold (HOLD- touching £39-40), Royal Dutch & BP (probably the cheapest and safest stocks in the market as oil rises back above $50pbo and perhaps is destined to rise back to $100pbo very soon), Templeton Emerging (risky but this is where the world’s engine is right now) and Yamana Gold (a Canadian precious producer recommended at 525p) at 680p. In the UK domestic market I have been trading Ladbrokes, Tate & Lyle and Marstons recently but one has to have pretty nifty footwork to keep pace with events at the moment. I don’t believe that many UK domestics provide solid and sound Buy and Hold strategies at present and would expect a market sell-off quite soon (sell in May & run like…). What has been surprising throughout the crisis is that very few large capitalization businesses have failed and unlike the aftershock of the ’87 crash none of the Treasury divisions of large caps have announced drastic trading losses as a result of excessive trading in derivatives, f/x, etc. So far there have been a catalogue of trading failures amongst banks and brokers and very few public statements regarding hedge fund losses (although clearly many have closed their doors). In other words there hasn’t been an Enron-esque fatality on main street although it’s predicted that Detroit will fail. The markets seem to be discounting Detroit anyway and a surprise is on the cards in my view. The next leg of the Greater Depression may only just be starting and I believe precious metals and oil stocks may be the only way to safeguard the £ in the pocket. I recollect an ex-colleague broker during ’87 continually remind his clients that equities are the best way to combat inflation so some further analysis (looking for solid earnings lowly geared businesses) is required on my part.
I continue to favour portfolio weightings such as 30% Fixed Interest (incl Index-Linked), 20% cash, 50% equities (overseas earners mainly incl. up to 25% in precious metals) throughout 2009. Keep an eye on gold test levels of $963, $1163, $1332 & $1461; a trading range of $1200-2000 is still predicted for 3rd and 4th Q’s 09.
I wonder what JM Keynes, JK Galbraith and Milton Friedman would have made of it all? Let’s all hope the summer arrives early; that way the paint can dry better.
Market Abuse or Regulatory & Exchange Failure
LONDON (Dow Jones)--The U.K. Financial Services Authority, or FSA, said Thursday that it has won its market abuse case at the Financial Services and Markets Tribunal against Winterflood and two of its traders, Mr Sotiriou and Mr Robins.
Winterflood is an FSA authorised firm and the largest market maker in AIM securities.
In June 2008, the FSA found that Winterflood and its traders had played a pivotal role in an illegal share ramping scheme relating to Fundamental-E Investments (FEI), an AIM listed company.
In particular, the market maker had misused rollovers and delayed rollovers thereby creating a distortion in the market for FEI shares and misleading the market for about six months in 2004, the FSA said.
The FEI share trades executed by Winterflood had a series of unusual features which should have alerted the market maker to the clear and substantial risks of market manipulation. Rather than taking steps to ensure that the trades were genuine, Winterflood continued the highly profitable trading.
Winterflood made about GBP900,000 from trading in FEI shares, its single most profitable stock at the time.
As a result of their conduct, the FSA decided to impose fines of GBP4 million, GBP200,000 and GBP50,000 on Winterflood, Mr Sotiriou and Mr Robins respectively, the regulator said.
Winterflood did not challenge the findings of the FSA investigation at the Tribunal but referred the matter on a point of legal interpretation.
Winterflood, Sotiriou and Robins are now seeking permission to appeal the decision at the Court of Appeal, the FSA said.
Other parties involved in the scheme have referred their cases to the Tribunal.
Richard Hoblyn comments as follows;- Although it's impossible to deduce exactly the extent of the alleged market abuse as per above I, like many of my colleagues around the market, am dismayed at the sheer size of the penalties given here especially to the 2 individuals concerned. Throughout the period concerned the LSE & FSA conducted inadequate guidance to practitioners regarding the use of "roll-overs". Although personally I've never countenanced the use of roll-overs for any clients many brokers have sought to throughput business with market-makers on this basis. Perhaps if there had been stronger monitoring of roll-overs by LSE & FSA earlier and clearer guidelines set (I recollect seeing confusing and contradictory memorandums at the time) this situation would not have arisen. Furthermore, if as is alleged, there was a false market in the said shares then this is more pertinent to the fact that neither the LSE nor the FSA has sought to address the extraordinary poor liquidity in all AIM stocks. By allowing market-makers to put up firm quotes on the "yellow strip" in sometimes a few hundreds pounds of stock is it surprising then that volatile share price movements occurred whilst market-makers were conducting albeit profitable and at the time perfectly legal roll-over trading. Better leadership at the helm is what is required here and I fear that the current misguidance is here to stay unless brokers and market-makers unite and request a self-administered market place with rule books that are adhered to as per the old LSE dealing guidelines which appear to be generally ignored by the current crop of dealers/traders.
Winterflood is an FSA authorised firm and the largest market maker in AIM securities.
In June 2008, the FSA found that Winterflood and its traders had played a pivotal role in an illegal share ramping scheme relating to Fundamental-E Investments (FEI), an AIM listed company.
In particular, the market maker had misused rollovers and delayed rollovers thereby creating a distortion in the market for FEI shares and misleading the market for about six months in 2004, the FSA said.
The FEI share trades executed by Winterflood had a series of unusual features which should have alerted the market maker to the clear and substantial risks of market manipulation. Rather than taking steps to ensure that the trades were genuine, Winterflood continued the highly profitable trading.
Winterflood made about GBP900,000 from trading in FEI shares, its single most profitable stock at the time.
As a result of their conduct, the FSA decided to impose fines of GBP4 million, GBP200,000 and GBP50,000 on Winterflood, Mr Sotiriou and Mr Robins respectively, the regulator said.
Winterflood did not challenge the findings of the FSA investigation at the Tribunal but referred the matter on a point of legal interpretation.
Winterflood, Sotiriou and Robins are now seeking permission to appeal the decision at the Court of Appeal, the FSA said.
Other parties involved in the scheme have referred their cases to the Tribunal.
Richard Hoblyn comments as follows;- Although it's impossible to deduce exactly the extent of the alleged market abuse as per above I, like many of my colleagues around the market, am dismayed at the sheer size of the penalties given here especially to the 2 individuals concerned. Throughout the period concerned the LSE & FSA conducted inadequate guidance to practitioners regarding the use of "roll-overs". Although personally I've never countenanced the use of roll-overs for any clients many brokers have sought to throughput business with market-makers on this basis. Perhaps if there had been stronger monitoring of roll-overs by LSE & FSA earlier and clearer guidelines set (I recollect seeing confusing and contradictory memorandums at the time) this situation would not have arisen. Furthermore, if as is alleged, there was a false market in the said shares then this is more pertinent to the fact that neither the LSE nor the FSA has sought to address the extraordinary poor liquidity in all AIM stocks. By allowing market-makers to put up firm quotes on the "yellow strip" in sometimes a few hundreds pounds of stock is it surprising then that volatile share price movements occurred whilst market-makers were conducting albeit profitable and at the time perfectly legal roll-over trading. Better leadership at the helm is what is required here and I fear that the current misguidance is here to stay unless brokers and market-makers unite and request a self-administered market place with rule books that are adhered to as per the old LSE dealing guidelines which appear to be generally ignored by the current crop of dealers/traders.
Wednesday 1 April 2009
Keynes WHY THE GREAT DEPRESSION DID NOT RETURN
Prof. John P. Jones has written
"Keynes's Vision: Why the Great Depression Did Not Return" (Routledge).
(Amazon Hardback £75).
John Maynard Keynes dealt with Hoblyn & King, Members of the London Stock Exchange during his lifetime.
"Keynes's Vision: Why the Great Depression Did Not Return" (Routledge).
(Amazon Hardback £75).
John Maynard Keynes dealt with Hoblyn & King, Members of the London Stock Exchange during his lifetime.
An email sent to my clients on 7th June 2007
Like many stockbrokers I am sitting at my desk and pondering these markets and wondering just what to say to those clients who keep remarking that I sold such and such stock at such and such price and yet it is higher today and everything appears so rosy. There is so much CASH about so the markets must go up mustn't they? When comparing valuations today with such and such stock and such and such market everything looks so cheap according to most market observers. Then there was a technical analyst on Bloomberg only this week explaining to the millions watching that the Put/Call Ratio albeit being the highest ever (well since 1931) is in fact bullish if everyone holds their nerve as the shorts must get closed out.....eventually.....only he would be concerned with higher roll-over positions if that happens.
Picture left. I am no longer looking at Proquote nor at Bloomberg TV nor reading any more tip sheets predicting the next growth stock, sector, market nor being sidetracked by analytical research telling me that for instance, Alliance Boots (ahead of Guy Hands and KKR) looks overbought at £8 and investors should sell down (target 740p Dresdner recommendation 18th Dec), hold (target 670p Panmure Gordon 12th March), sell (Citigroup 29th March)...to my knowledge not a single analyst in the UK retail sector recommended BUY prior to the surge to £11+ and in my opinion this is one of the best sectors covered here in UK with men like Ratner and Bubb on top of things. So when Guy Hands's Terra Firma failed with Alliance Boots he simply traded over to EMI, a company in a totally different industry. It will be interesting to see how EMI pans out as I can't help thinking observers are missing out on the real value of mixing digital distribution with a large breadth of content. The answer to my fears and thoughts is on my wall of course. Read on....
I have the following share certificates framed in no particular order; "The Beaumont (Texas) Petroleum & Liquid Fuel Co Ltd" (cert 1903); "The Ripanji Quicksilver & Silver Mines Co Ltd" (1889); "The Underwriters Trust Ltd" (1898); "The Oil & Asphaltum Co Ltd" (1904); "The Olympic Music Hall Ltd" (1893) and my favourite "The Non-Poisonous 'Strike Anywhere' Match Syndicate Ltd" (1899)-perhaps the world's first eco-friendly stock! All very interesting you might say and highly amusing. Well, it would be but for the name on all 5 certificates, is that of my great great grandfather, CD Hoblyn who founded a stockbroking firm in 1872 (apologies to Messrs R & B who arrived on the scene 3 years later) on the basis that he was a "wealthy chap" from a "wealthy family" and had a friend at the Prudential who by all accounts used him ferociously for his dealing in tandem with a certain Revd.FW Parkes who managed a startling 1046 transactions in the April-September 1896 dealing book plus countless contango transactions. What is the point I am making? Well, many of you have guessed that it is easy for investors to be taken in by tips, bubbles, excessive trading etc but even easier for "market professionals" and that many of the current market topics are simply being repeated after excessive repackaging by our American cousins. As a minor scripopholist I have other framed certificates to match those of CD Hoblyn Esq, Threadneedle Street. Ones that I bought rather than lifted from old safe custody safes incidentally. They are "British Butte Mining", "El Gallao (Bolivia)" and "Russia Tobacco" amongst others still sitting in their files. So you can ascertain (possibly) what I am getting at. Many of the themes prevalent today are on my wall and the hedge fund managers and dealers acting for them are possibly repeating the same mistakes of the many stockbrokers who survived the boom and bust periods prior to WW1 and WW2...and since.
I learned this week of a piece of research penned by Execution Research (who?) entitled "Win Win Win" subtitled "Undervalued in every outcome" with a target price of 835p. The stock in question is Royal Bank of Scotland. RBS has been tabled as a BUY by virtual every broker in the market but I'm NOT going to read it. And the reason why? I keep pinching myself to remind myself of an article I read a few years ago in the "Evening Standard" written by a Professor (whose name escapes me) from London School of Economics I think who highlighted the real reasons why Enron Corporation and others failed in US markets in the latter part of 20th century (LTCM was another casualty but for trading reasons). In essence it was due to "irregular" and "creative" accounting and the Professor called for an harmonisation of International Accounting Rules and Regulations which I would question has happened. The proliferation of leveraged deals (you'd think that Michael Milken formerly at Shearson would have taught investors a few harsh lessons) conjured by US investment banks, unregulated private equity houses and hedge fund operators is more than just alarming. It is no wonder that traditional analysts using methods tried and tested for generations are being sidelined by "nouveau analysis" care of KKR and their followers suitably nurtured by excessive lending by commercial banks,etc.
Why should clients and advisers ......care or give a jot about all this you might ask? Well, it goes back to "Big Bang" and the super-regulatory regime that has evolved since. Today the London Stock Exchange is run and ruled by Foreign Companies with no real intent nor interest in building or rebuilding a nation that empowered and created the phrase "globalisation" long before the term was reincarnated by Merrill Lynch and their US counterparts. No, 9 out of the top 10 securities operations in the London market are American and the 10th is European. Their only interest is to profit and profiteer from British Industry and by rejigging the accounts and bundling and rebundling the debt and playing pass the parcel someone is going to be left holding the proverbial baby and politicians as usual will be throwing out the bath water. So is London really a success as it becomes a trading home for countless overseas stocks? No wonder then that the Trades Unions are shouting "blue murder" at the hedge funds and private equity houses, etc. It's jobs in the UK and for the UK that count and in this sense RBS's assessment on the Barclays bid for ABN-AMRO is spot on. I for one don't subscribe to the "Wimbledon Effect" and would like all tennis to be played on grass as it was invented years ago. In the same fashion I would like more emphasis placed on real cash, proper real investment and precious metals rather than spiralling debt (please don't get me on the subject of property prices either in UK, Spain, Florida, Ohio or even Tin Pan Alley) and derivatives. Even our kids understand the basics of Monopoly so why are these US investment banks being allowed to smokescreen Dickensian and Keynesian (***) principles today?
It won't be long before Boots splits with Unichem and private investors will be asked to stump up premium cash for a stock market return (see Debenhams and its rising debt levels). Who really profited from KKR's takeover? It wasn't UK private nor UK institutional investors. Like Branson demanding an investigation into Sky's monopoly and a break-up of the UK digital TV industry it is about time UK investors tabled the motion that we'd like our market back. The back-slapping in the financial media and within the LSE & FSA must stop but I fear it will take more than just an Enron to make people wake up to what is really happening. By pretending that the City is a separate money centre to the rest of the UK economy must be very disheartening for industrialists and SME's. Life is not all about "Big Business" and the spin coming from within the City in this regard seems to me to conflict with what "Big Bang" was supposed to do to regenerate and catalyse back in the late '80's. UK City firms were supposed to benefit from the influx of foreign competition. I don't think that has happened when one compares the Capitalisation's and Profits of the US versus UK players although the UK lawyers have done very nicely ("Win Win Win").
Hearing that the esteemed UK economist Tim Congdon is predicting 5% inflation within a year or so because the Bank of England has lost control of prices I can't help feel that giving the Old Lady so much power has only allowed our American cousins to spoon feed the old girls with meaningless data and strategy ideas simply designed to feather their own nests.
So back to markets and what one should do when everything goes pear-shaped which ultimately it will. The demise of the US$ is very likely, as is a bubble pricking on a grand-scale in China (the recent 8% correction and tripling of stamp to 0.3% is hardly going to scare any capitalistic communist) but more alarming is what might happen if Putin severs the western influence in Russia and FSU. The recent political and military rumblings over the old cold war misgivings could be the one piece of the jigsaw that no-one has predicted. With a Russian girlfriend (yes, she's got a British passport) I am aware of the extraordinary climate changes in Southern Russia at the moment (25 degrees at night I understand with unprecedented day time temperatures of 35-40 range) which have yet to be highlighted in the media as G8, Diana and the demise of WIndies cricket hits the headlines. A failed harvest in 1978-1979 triggered an invasion of Afghanistan fuelling the surge in gold to US$855 pto (I was a young silver clerk at the time) allowing the Soviets access to western grain. History has a habit of repeating itself although I'm not suggesting that the latest Russian battle tank will be seen in Kabul later this year. Furthermore Russia has a $100 bn+ budget surplus thanks to the oil and commodities boom so it no longer has to plead poverty for grain from US. How the tide has turned? Anyway it would appear that Gold is in the ascendancy again and should be treated as a real currency again.
The real tragedy of Capital Markets is how the spin has moved away from real things towards an almost guaranteed profit-making universe invented and subscribed by the likes of Goldman Sachs, JP Morgan Chase and Merrill's,etc. As a sixth generation broker with a 1* year old son I cannot see him working in one of those Canary Wharf workhouses as I cannot see the attractions other than financial. There is more to life than just $, £ and euros and I'm beginning to understand what Scargill fought for all those years ago. My late mother used to say "think before you leap, it is not always about win, win,win"! Trading bullion or cash as I once did or even shares as I do now is real whereas trading a basket of derivatives surrounding aesthetic instruments that don't exist is tantamount to disaster. But then a global $370 trillion exposure in derivatives is proof indeed that I may be out of touch as indeed Warren Buffett might be. With his track record I wouldn't want to bet against him though.
I am recommending Randgold (RRS) and Hochschild (HOC) at present, both well managed London traded established gold shares and generally remains cautious on the outcome for the remainder of 2007.
Picture left. I am no longer looking at Proquote nor at Bloomberg TV nor reading any more tip sheets predicting the next growth stock, sector, market nor being sidetracked by analytical research telling me that for instance, Alliance Boots (ahead of Guy Hands and KKR) looks overbought at £8 and investors should sell down (target 740p Dresdner recommendation 18th Dec), hold (target 670p Panmure Gordon 12th March), sell (Citigroup 29th March)...to my knowledge not a single analyst in the UK retail sector recommended BUY prior to the surge to £11+ and in my opinion this is one of the best sectors covered here in UK with men like Ratner and Bubb on top of things. So when Guy Hands's Terra Firma failed with Alliance Boots he simply traded over to EMI, a company in a totally different industry. It will be interesting to see how EMI pans out as I can't help thinking observers are missing out on the real value of mixing digital distribution with a large breadth of content. The answer to my fears and thoughts is on my wall of course. Read on....
I have the following share certificates framed in no particular order; "The Beaumont (Texas) Petroleum & Liquid Fuel Co Ltd" (cert 1903); "The Ripanji Quicksilver & Silver Mines Co Ltd" (1889); "The Underwriters Trust Ltd" (1898); "The Oil & Asphaltum Co Ltd" (1904); "The Olympic Music Hall Ltd" (1893) and my favourite "The Non-Poisonous 'Strike Anywhere' Match Syndicate Ltd" (1899)-perhaps the world's first eco-friendly stock! All very interesting you might say and highly amusing. Well, it would be but for the name on all 5 certificates, is that of my great great grandfather, CD Hoblyn who founded a stockbroking firm in 1872 (apologies to Messrs R & B who arrived on the scene 3 years later) on the basis that he was a "wealthy chap" from a "wealthy family" and had a friend at the Prudential who by all accounts used him ferociously for his dealing in tandem with a certain Revd.FW Parkes who managed a startling 1046 transactions in the April-September 1896 dealing book plus countless contango transactions. What is the point I am making? Well, many of you have guessed that it is easy for investors to be taken in by tips, bubbles, excessive trading etc but even easier for "market professionals" and that many of the current market topics are simply being repeated after excessive repackaging by our American cousins. As a minor scripopholist I have other framed certificates to match those of CD Hoblyn Esq, Threadneedle Street. Ones that I bought rather than lifted from old safe custody safes incidentally. They are "British Butte Mining", "El Gallao (Bolivia)" and "Russia Tobacco" amongst others still sitting in their files. So you can ascertain (possibly) what I am getting at. Many of the themes prevalent today are on my wall and the hedge fund managers and dealers acting for them are possibly repeating the same mistakes of the many stockbrokers who survived the boom and bust periods prior to WW1 and WW2...and since.
I learned this week of a piece of research penned by Execution Research (who?) entitled "Win Win Win" subtitled "Undervalued in every outcome" with a target price of 835p. The stock in question is Royal Bank of Scotland. RBS has been tabled as a BUY by virtual every broker in the market but I'm NOT going to read it. And the reason why? I keep pinching myself to remind myself of an article I read a few years ago in the "Evening Standard" written by a Professor (whose name escapes me) from London School of Economics I think who highlighted the real reasons why Enron Corporation and others failed in US markets in the latter part of 20th century (LTCM was another casualty but for trading reasons). In essence it was due to "irregular" and "creative" accounting and the Professor called for an harmonisation of International Accounting Rules and Regulations which I would question has happened. The proliferation of leveraged deals (you'd think that Michael Milken formerly at Shearson would have taught investors a few harsh lessons) conjured by US investment banks, unregulated private equity houses and hedge fund operators is more than just alarming. It is no wonder that traditional analysts using methods tried and tested for generations are being sidelined by "nouveau analysis" care of KKR and their followers suitably nurtured by excessive lending by commercial banks,etc.
Why should clients and advisers ......care or give a jot about all this you might ask? Well, it goes back to "Big Bang" and the super-regulatory regime that has evolved since. Today the London Stock Exchange is run and ruled by Foreign Companies with no real intent nor interest in building or rebuilding a nation that empowered and created the phrase "globalisation" long before the term was reincarnated by Merrill Lynch and their US counterparts. No, 9 out of the top 10 securities operations in the London market are American and the 10th is European. Their only interest is to profit and profiteer from British Industry and by rejigging the accounts and bundling and rebundling the debt and playing pass the parcel someone is going to be left holding the proverbial baby and politicians as usual will be throwing out the bath water. So is London really a success as it becomes a trading home for countless overseas stocks? No wonder then that the Trades Unions are shouting "blue murder" at the hedge funds and private equity houses, etc. It's jobs in the UK and for the UK that count and in this sense RBS's assessment on the Barclays bid for ABN-AMRO is spot on. I for one don't subscribe to the "Wimbledon Effect" and would like all tennis to be played on grass as it was invented years ago. In the same fashion I would like more emphasis placed on real cash, proper real investment and precious metals rather than spiralling debt (please don't get me on the subject of property prices either in UK, Spain, Florida, Ohio or even Tin Pan Alley) and derivatives. Even our kids understand the basics of Monopoly so why are these US investment banks being allowed to smokescreen Dickensian and Keynesian (***) principles today?
It won't be long before Boots splits with Unichem and private investors will be asked to stump up premium cash for a stock market return (see Debenhams and its rising debt levels). Who really profited from KKR's takeover? It wasn't UK private nor UK institutional investors. Like Branson demanding an investigation into Sky's monopoly and a break-up of the UK digital TV industry it is about time UK investors tabled the motion that we'd like our market back. The back-slapping in the financial media and within the LSE & FSA must stop but I fear it will take more than just an Enron to make people wake up to what is really happening. By pretending that the City is a separate money centre to the rest of the UK economy must be very disheartening for industrialists and SME's. Life is not all about "Big Business" and the spin coming from within the City in this regard seems to me to conflict with what "Big Bang" was supposed to do to regenerate and catalyse back in the late '80's. UK City firms were supposed to benefit from the influx of foreign competition. I don't think that has happened when one compares the Capitalisation's and Profits of the US versus UK players although the UK lawyers have done very nicely ("Win Win Win").
Hearing that the esteemed UK economist Tim Congdon is predicting 5% inflation within a year or so because the Bank of England has lost control of prices I can't help feel that giving the Old Lady so much power has only allowed our American cousins to spoon feed the old girls with meaningless data and strategy ideas simply designed to feather their own nests.
So back to markets and what one should do when everything goes pear-shaped which ultimately it will. The demise of the US$ is very likely, as is a bubble pricking on a grand-scale in China (the recent 8% correction and tripling of stamp to 0.3% is hardly going to scare any capitalistic communist) but more alarming is what might happen if Putin severs the western influence in Russia and FSU. The recent political and military rumblings over the old cold war misgivings could be the one piece of the jigsaw that no-one has predicted. With a Russian girlfriend (yes, she's got a British passport) I am aware of the extraordinary climate changes in Southern Russia at the moment (25 degrees at night I understand with unprecedented day time temperatures of 35-40 range) which have yet to be highlighted in the media as G8, Diana and the demise of WIndies cricket hits the headlines. A failed harvest in 1978-1979 triggered an invasion of Afghanistan fuelling the surge in gold to US$855 pto (I was a young silver clerk at the time) allowing the Soviets access to western grain. History has a habit of repeating itself although I'm not suggesting that the latest Russian battle tank will be seen in Kabul later this year. Furthermore Russia has a $100 bn+ budget surplus thanks to the oil and commodities boom so it no longer has to plead poverty for grain from US. How the tide has turned? Anyway it would appear that Gold is in the ascendancy again and should be treated as a real currency again.
The real tragedy of Capital Markets is how the spin has moved away from real things towards an almost guaranteed profit-making universe invented and subscribed by the likes of Goldman Sachs, JP Morgan Chase and Merrill's,etc. As a sixth generation broker with a 1* year old son I cannot see him working in one of those Canary Wharf workhouses as I cannot see the attractions other than financial. There is more to life than just $, £ and euros and I'm beginning to understand what Scargill fought for all those years ago. My late mother used to say "think before you leap, it is not always about win, win,win"! Trading bullion or cash as I once did or even shares as I do now is real whereas trading a basket of derivatives surrounding aesthetic instruments that don't exist is tantamount to disaster. But then a global $370 trillion exposure in derivatives is proof indeed that I may be out of touch as indeed Warren Buffett might be. With his track record I wouldn't want to bet against him though.
I am recommending Randgold (RRS) and Hochschild (HOC) at present, both well managed London traded established gold shares and generally remains cautious on the outcome for the remainder of 2007.
Tuesday 31 March 2009
John Maynard Keynes
With the publication of my uncle's book on JM Keynes I thought it opportune to mention that JMK had an interesting pedigree in investing. READ ON;-
You will probably know John Maynard Keynes as one of the great economists. What is often forgotten is that he was also one of the greatest investors of the Great Depression era. Given what markets are now going through, it’s well worth looking at how exactly he achieved that. Keynes managed Cambridge’s King’s College Chest Fund. The Fund averaged 12% per year from 1927–1946. That is a remarkable record given that the period included the Great Depression and World War II. The U.K. stock market fell 15% during this stretch. It’s even more impressive when you consider that the college spent all the income earned in the portfolio. That means the Fund’s returns only included capital gain. Keynes also made a personal fortune as an investor. When he died, he left an estate worth some $30 million in present-day dollars. How he did it is a fascinating story.
From speculator to investor
Keynes began as a run-of-mill speculator and trader, trying to anticipate trends and forecast cycles. Things didn’t go too well. The Great Crash of 1929 wiped out nearly 80% of his personal net worth.
That proved to be his epiphany. The crash turned Keynes from a speculator to a genuine investor. Trading the market demanded “abnormal foresight” to work, he concluded. “I am clear,” he wrote, “that the idea of wholesale shifts [in and out of the market at different stages of the business cycle] is for various reasons impracticable and undesirable.” He now focused more on individual securities and less on trying to forecast the market. He summed up his new philosophy in a note to a colleague: “My purpose is to buy securities where I am satisfied as to assets and ultimate earnings power and where the market price seems cheap in relation to these.”
He also became more patient in his pursuit of returns. Keynes decided it was easier and safer in the long run to buy a 75-cent dollar and wait, rather than to buy a 75-cent dollar and sell it because it became a 50-cent dollar — and hope to buy it back as a 40-cent dollar. When the market fell, Keynes remarked: “I do not draw from this conclusion that a responsible investing body should every week cast panic glances over its list of securities to find one more victim to fling to the bears.” He learned to trust more in his own research and opinions, and not let market prices put him off a good deal. Investing, he said, is “the one sphere of life and activity where victory, security and success is always to the minority, and never to the majority. When you find anyone agreeing with you, change your mind.”
How Keynes cleaned up after markets had tanked
One of his greatest personal coups came in 1933. The Great Depression was on. Markets had tanked. Keynes noticed that American utilities were extremely cheap in “what is for the time being an irrationally unfashionable market.” He bought the depressed stocks. In the next year, his personal net worth would nearly triple. He learned to hold onto his stocks “through thick and thin” to let the magic of compounding boost his investments. “‘Be quiet’ is our best motto,” he wrote. By that he meant you should ignore the short-term noise and let the longer-term forces assert themselves. It also meant limiting his activities to buying only when he found intrinsic values far above stock prices.
Keynes also concluded that it is better to own fewer stocks than spread yourself too thin. You should concentrate only on your very best ideas. This goes against conventional investing wisdom and he was repeatedly criticised for making big bets on a smaller number of companies. In one witty response to his critics, Keynes suggested that he was “...suffering from my chronic delusion that one good share is safer than 10 bad ones.”
He preferred to mix up the risks he took. So while just five names might make up half of his portfolio at a time, they wouldn’t be all gold stocks, for instance.
Keynes’s long-term, contrarian strategy delivered investment returns far superior to those of the broader market. In the 1920s he generally trailed the market. But he was a great performer after the crash. However, his methods did also mean his portfolio was more volatile.
As an investor, you are going to have to get used to higher volatility in your portfolio in the years ahead. But as Keynes’s career shows us, that also opens up the opportunity for much higher returns.
***comment from Fleet Street Daily***
I was very pleased to read the investment tribute to JMK. According to his university his investment papers included papers from the following firms. I believe I may be the only surviving business from the box!
Statements of account and share settlement notes. This file includes documents from the following brokers: W. Harold Brett; Capel, Cure and Terry; B.C. Fry and Co.; Hoblyn and King; Whiteheads and Coles. It also includes receipts for admission fees to the Society of Inner Temple, 1905.
8 items in envelope; paper.....
***they've all disappeared except.....me***
Richard Hoblyn says: of course he needed a good stockbroker or two to assist him....Hoblyn & King and Capel Cure Myers I believe
You will probably know John Maynard Keynes as one of the great economists. What is often forgotten is that he was also one of the greatest investors of the Great Depression era. Given what markets are now going through, it’s well worth looking at how exactly he achieved that. Keynes managed Cambridge’s King’s College Chest Fund. The Fund averaged 12% per year from 1927–1946. That is a remarkable record given that the period included the Great Depression and World War II. The U.K. stock market fell 15% during this stretch. It’s even more impressive when you consider that the college spent all the income earned in the portfolio. That means the Fund’s returns only included capital gain. Keynes also made a personal fortune as an investor. When he died, he left an estate worth some $30 million in present-day dollars. How he did it is a fascinating story.
From speculator to investor
Keynes began as a run-of-mill speculator and trader, trying to anticipate trends and forecast cycles. Things didn’t go too well. The Great Crash of 1929 wiped out nearly 80% of his personal net worth.
That proved to be his epiphany. The crash turned Keynes from a speculator to a genuine investor. Trading the market demanded “abnormal foresight” to work, he concluded. “I am clear,” he wrote, “that the idea of wholesale shifts [in and out of the market at different stages of the business cycle] is for various reasons impracticable and undesirable.” He now focused more on individual securities and less on trying to forecast the market. He summed up his new philosophy in a note to a colleague: “My purpose is to buy securities where I am satisfied as to assets and ultimate earnings power and where the market price seems cheap in relation to these.”
He also became more patient in his pursuit of returns. Keynes decided it was easier and safer in the long run to buy a 75-cent dollar and wait, rather than to buy a 75-cent dollar and sell it because it became a 50-cent dollar — and hope to buy it back as a 40-cent dollar. When the market fell, Keynes remarked: “I do not draw from this conclusion that a responsible investing body should every week cast panic glances over its list of securities to find one more victim to fling to the bears.” He learned to trust more in his own research and opinions, and not let market prices put him off a good deal. Investing, he said, is “the one sphere of life and activity where victory, security and success is always to the minority, and never to the majority. When you find anyone agreeing with you, change your mind.”
How Keynes cleaned up after markets had tanked
One of his greatest personal coups came in 1933. The Great Depression was on. Markets had tanked. Keynes noticed that American utilities were extremely cheap in “what is for the time being an irrationally unfashionable market.” He bought the depressed stocks. In the next year, his personal net worth would nearly triple. He learned to hold onto his stocks “through thick and thin” to let the magic of compounding boost his investments. “‘Be quiet’ is our best motto,” he wrote. By that he meant you should ignore the short-term noise and let the longer-term forces assert themselves. It also meant limiting his activities to buying only when he found intrinsic values far above stock prices.
Keynes also concluded that it is better to own fewer stocks than spread yourself too thin. You should concentrate only on your very best ideas. This goes against conventional investing wisdom and he was repeatedly criticised for making big bets on a smaller number of companies. In one witty response to his critics, Keynes suggested that he was “...suffering from my chronic delusion that one good share is safer than 10 bad ones.”
He preferred to mix up the risks he took. So while just five names might make up half of his portfolio at a time, they wouldn’t be all gold stocks, for instance.
Keynes’s long-term, contrarian strategy delivered investment returns far superior to those of the broader market. In the 1920s he generally trailed the market. But he was a great performer after the crash. However, his methods did also mean his portfolio was more volatile.
As an investor, you are going to have to get used to higher volatility in your portfolio in the years ahead. But as Keynes’s career shows us, that also opens up the opportunity for much higher returns.
***comment from Fleet Street Daily***
I was very pleased to read the investment tribute to JMK. According to his university his investment papers included papers from the following firms. I believe I may be the only surviving business from the box!
Statements of account and share settlement notes. This file includes documents from the following brokers: W. Harold Brett; Capel, Cure and Terry; B.C. Fry and Co.; Hoblyn and King; Whiteheads and Coles. It also includes receipts for admission fees to the Society of Inner Temple, 1905.
8 items in envelope; paper.....
***they've all disappeared except.....me***
Richard Hoblyn says: of course he needed a good stockbroker or two to assist him....Hoblyn & King and Capel Cure Myers I believe
Thursday 26 February 2009
Who is "Hoblyn"?
That is a difficult question to answer but let me try....
"Hoblyn" or "Hoblyn's" or "The Limping Monarch" is a trading name synonymous with the City of London for 136 years. In 1974 the partnership "Hoblyn & Co" was the largest casualty of the '74 slump being the largest firm on the Stock Exchange in London to cease trading on a voluntary basis. With the Tower Block being completed c.1972 "Hoblyn's" moved into 2 floors paying £170,000 per floor in rent. With income tax bands approaching equivalent 98p in the £1 and a surcharge to boot it became abundantly clear to the partners (of around another 50 firms during that period as well)that the writing on the wall was imminent so the firm ceased in October of '74. But the "Limping Monarch" awakens as the latest global markets crunch unwinds and brings a few gentle reminders to how Capital Markets should operate.
"Hoblyn" or "Hoblyn's" or "The Limping Monarch" is a trading name synonymous with the City of London for 136 years. In 1974 the partnership "Hoblyn & Co" was the largest casualty of the '74 slump being the largest firm on the Stock Exchange in London to cease trading on a voluntary basis. With the Tower Block being completed c.1972 "Hoblyn's" moved into 2 floors paying £170,000 per floor in rent. With income tax bands approaching equivalent 98p in the £1 and a surcharge to boot it became abundantly clear to the partners (of around another 50 firms during that period as well)that the writing on the wall was imminent so the firm ceased in October of '74. But the "Limping Monarch" awakens as the latest global markets crunch unwinds and brings a few gentle reminders to how Capital Markets should operate.
RBS or paraphrasing a famous rock star, the "THE GOVERNMENT INSTITUTION FORMALLY KNOWN AS THE ROYAL BANK OF SCOTLAND"
I have just read this
The market has reacted favourably to the big announcement by Royal Bank of Scotland this morning, with losses not as bad as feared.
Broker Panmure Gordon believes the favourable pricing of the asset protection scheme, along with the £25.5bn capital increase, “will remove the immediate capital concerns about RBS”, and also bodes well for Lloyds Banking Group, although Lloyds has said it may not get the same bail-out terms as RBS.
“While we do have concerns about further losses and capital strains, particularly in the £991bn of derivatives, we expect these concerns will crystallise over the next six months; for now, the markets will probably focus on the favourable terms of this bailout,” suggests Panmure analyst Sandy Chen.
Nevertheless, the broker retains its “sell” recommendation on RBS.
***this is quite incredible; I love the so matter of factness on the numbers and the fact that the derivatives number is just thrown in as an aside***
Richard Hoblyn says; Sandy Chen of Panmure's is probably the most respected banking analyst in London but even his take on the scenario unfolding appears understated. Notwithstanding that he has a reiterated SELL on RBS (personally I think the stock is worthless) it should be noted that today RBS has passed over to the UK government scheme (beautifully described as The Asset Protection Scheme) circa £325bn of toxic assets which only a matter of months ago this bank, like many others, claimed they didn't have. Nothwithstanding the fact that the taxpayer is effectively bailing out these huge bank positions (and it's unclear whether losses have been realised as yet on this transfer) it should be noted that there is no guarantee that these positions, these toxic assets, will protect the government nor indeed the tax-payer. The bravado of this ill-conceived rescue plan dwarfs anything that even Hollywood could dream up. But to really put the icing on the cake, it has been stated, now in BLACK & WHITE, that the derivatives totalling £991bn (where did that come from Sir Fred?) may yet be crystallised in the coming months. I doubt any principal asset manager would entertain any of these positions now that we know the on-balance position (& I expect there are still £trillions off-balance that we have yet to hear about; until it is too late) and presuming RBS, like all the other banks, is trying to offload these positions in an orderly way as possible the omens for further extreme losses dwarfing today's record loss of £24.1bn for 2008 is highly likely. With a bank now effectively being run by Gordon Brown I wouldn't want to bet my City umbrella on RBS surviving in its present format too much longer. With a Market Capitalisation of £11.4bn I think the London Stock Exchange has a responsibility to ask the RBS board to clarify its financial position because on the face of this travesty it would appear that a false market is being maintained which may impact badly on the status of the London Stock Exchange. As Mr Levett, the former SEC Chairman, suggested only yesterday describing the US intervention in Bank of America and Citigroup, "these banks are all but nationalised already with governments representatives on the boards". If this indeed is the case then surely the respective "Global" Stock Exchanges should suspend dealings in these rotten "BAD BANKS" shares forthwith as I don't believe there is a remit in any FREE market enterprise to maintain a market in this sort of (in)security.
Ou est la grenouille de Threadneedle Street audjourdhui?
The market has reacted favourably to the big announcement by Royal Bank of Scotland this morning, with losses not as bad as feared.
Broker Panmure Gordon believes the favourable pricing of the asset protection scheme, along with the £25.5bn capital increase, “will remove the immediate capital concerns about RBS”, and also bodes well for Lloyds Banking Group, although Lloyds has said it may not get the same bail-out terms as RBS.
“While we do have concerns about further losses and capital strains, particularly in the £991bn of derivatives, we expect these concerns will crystallise over the next six months; for now, the markets will probably focus on the favourable terms of this bailout,” suggests Panmure analyst Sandy Chen.
Nevertheless, the broker retains its “sell” recommendation on RBS.
***this is quite incredible; I love the so matter of factness on the numbers and the fact that the derivatives number is just thrown in as an aside***
Richard Hoblyn says; Sandy Chen of Panmure's is probably the most respected banking analyst in London but even his take on the scenario unfolding appears understated. Notwithstanding that he has a reiterated SELL on RBS (personally I think the stock is worthless) it should be noted that today RBS has passed over to the UK government scheme (beautifully described as The Asset Protection Scheme) circa £325bn of toxic assets which only a matter of months ago this bank, like many others, claimed they didn't have. Nothwithstanding the fact that the taxpayer is effectively bailing out these huge bank positions (and it's unclear whether losses have been realised as yet on this transfer) it should be noted that there is no guarantee that these positions, these toxic assets, will protect the government nor indeed the tax-payer. The bravado of this ill-conceived rescue plan dwarfs anything that even Hollywood could dream up. But to really put the icing on the cake, it has been stated, now in BLACK & WHITE, that the derivatives totalling £991bn (where did that come from Sir Fred?) may yet be crystallised in the coming months. I doubt any principal asset manager would entertain any of these positions now that we know the on-balance position (& I expect there are still £trillions off-balance that we have yet to hear about; until it is too late) and presuming RBS, like all the other banks, is trying to offload these positions in an orderly way as possible the omens for further extreme losses dwarfing today's record loss of £24.1bn for 2008 is highly likely. With a bank now effectively being run by Gordon Brown I wouldn't want to bet my City umbrella on RBS surviving in its present format too much longer. With a Market Capitalisation of £11.4bn I think the London Stock Exchange has a responsibility to ask the RBS board to clarify its financial position because on the face of this travesty it would appear that a false market is being maintained which may impact badly on the status of the London Stock Exchange. As Mr Levett, the former SEC Chairman, suggested only yesterday describing the US intervention in Bank of America and Citigroup, "these banks are all but nationalised already with governments representatives on the boards". If this indeed is the case then surely the respective "Global" Stock Exchanges should suspend dealings in these rotten "BAD BANKS" shares forthwith as I don't believe there is a remit in any FREE market enterprise to maintain a market in this sort of (in)security.
Ou est la grenouille de Threadneedle Street audjourdhui?
Sunday 15 February 2009
UK Banking -SPECIAL REPORT UPDATE & UK property
UK Banking Report UPDATE & the outlook for UK Property
Since subscribing to the view in my previous report of 20th January 2009 the state of UK banking as predicted has indeed got worse. Not only have Cattles Finance (see previous report) been forced to withdraw their application to FSA (extraordinary that the regulator is responsible for new applications in the first instance) for a retail licence but the Sir James Crosby fiasco has arisen dwarfing any other issues. In essence the former HBOS architect was recruited as Deputy-Chair of the City regulator, FSA even after HBOS apparently received criticism of its handling of risk some years ago. The revelations of HBOS’s former Head of Regulatory Risk, Paul Moore, are poised to expose Gordon Brown’s involvement in the Lloyds TSB/HBOS merger. In addition to the impending failure this week of Lloyds Banking Group after the continuing worsening property and lending climate it has emerged that RBS, the main provocateur in the banking crisis, has involved itself with tax-payers money in £200m of sports sponsorship. Furthermore the revelation in the Mail on Sunday last weekend that Barclays had secreted nearly £700m bonuses for its executives has only cemented the extraordinary level of corruption and greed within the UK banking industry. Despite unprecedented losses the ‘guaranteed bonus culture’ is still with us. There seems to be a total disconnect between the legal responsibilities that Directors of banks have and the rights of shareholders (many of whom now are the UK tax-payers indirectly). The repurcussions for the future of the City of London are indeed frightening if these bankers are not brought to book and held account for their actions. In essence the bankers have turned into ‘Dick Whittington-esque’ characters with no morals and as it turns out with no idea of their responsibilities or any ideas of how to retreat from this mess.
As I have suggested repeatedly one cannot expect the architects of the global financial crisis to sort out the problems that they themselves have created. I was reminded this week of Albert Einstein’s quote; “Never expect the people who caused a problem to solve it.”
Much has been said of the ineffectiveness of the UK regulator, the FSA in all of this and it should be remembered that it was the Conservative Party under Margaret Thatcher who created the concept of external regulation for City firms. There were many (and my former stockbroking colleagues in small private firms I worked with were in unison on their views in this at the time) who believed that having non-practitioners regulating City traders brokers and financiers would just create more havoc eventually and indeed this has been the result. The case for better investor protection and improved professional conduct from City employees has not transpired and personally I find it absurd that I should need to have to constantly prove to regulators the level of my own ‘integrity’. The new bonus culture within the FSA shows that like the very bankers previously aforementioned the regulators themselves have disconnected from their responsibilities. Just this week the FSA made public its economic forecast. Time and again the FSA has proved that it no longer aspires to regulatory status but to a dictatorial policy status that at times is more than just a little Stalin-esque. In my view the whole application process for corporate membership of FSA and London Stock Exchange needs to be re-examined before entrepreneurial practitioners move elsewhere. After all in a global interactive financial world (as I’ve proved myself) the domicile of practitioners can be pretty elastic as investors flock to the global online universe.
Well what is the solution to the banking crisis? There is no easy fix but a responsible government working with the regulators could encourage new banks and brokers to be formed; certainly the rules (see Cattles experience and those of private stockbrokers since Big Bang) could be fast-tracked to do this but what probably is required first and foremost is for the government’s banks to hive-off the customer lists, trading names (TSB, Bank of Scotland, Coutts, National Westminster, etc) and staff as quickly as possible. I really do believe that brokers and funds would rather invest in purer banks and avoid having to analyse derivative exposures that RBS etc have. We’ll see what transpires but in this environment where so many people seem to have forgotten what their roles are as well as the raison d’etre for these businesses in the first place I think it may take some years for confidence to return. Certainly as every small businessman knows full well that unless the City encourages entrepreneurs from within to form new banks and brokers the outlook is even more Stalin-esque with MiFID and other EU regulations knocking on the doors of City firms.
My views on property have not changed. I still believe that a top to bottom depreciation of up to -70% in values throughout the UK is still possible. At this juncture official statistics seem to have disconnected from reality. Land registry and building society statistics showing executed transactions since August 2007 probably indicate a -15/20% decline to date but looking at www.propertysnake.co.uk a near -40% fall in values is being experienced by many who cannot simply sell at any price. Obviously with a malfunctioning banking system, a failing credit checking operandi, a liquidity crunch in the money markets and new stricter lending criteria then the outlook is truly dismal. Whilst looking at www.primelocation.com this week it is clear that many developers have buried their heads in the sands and that estate agents are walking around completely dazed by economic and financial events that they simply don’t understand. The outlook for £sterling is truly dire (gold and precious metals investments are the only sound areas to consider at the moment) and the need to arise £200bn in the gilt market is going to rear up in the not too distant future. In my view the property market is on the edge of a cliff and if RBS and Lloyds do join Northern Rock and Bradford & Bingley in the government bank (has anyone got a brand name that suits yet?) then the prices could collapse dramatically as estate agents and valuers enter a ‘no bid’ universe where intrinsic or build value is the only way to evaluate property values going forward.
As I write this banking blog I have just heard Lord ‘Roy’ Hattersley on Sky News call for more tighter regulation in the UK financial services suggesting that regulation has been far too light. Well Roy can I suggest that you visit any private client stockbroker and try and do his job for a day.
Since subscribing to the view in my previous report of 20th January 2009 the state of UK banking as predicted has indeed got worse. Not only have Cattles Finance (see previous report) been forced to withdraw their application to FSA (extraordinary that the regulator is responsible for new applications in the first instance) for a retail licence but the Sir James Crosby fiasco has arisen dwarfing any other issues. In essence the former HBOS architect was recruited as Deputy-Chair of the City regulator, FSA even after HBOS apparently received criticism of its handling of risk some years ago. The revelations of HBOS’s former Head of Regulatory Risk, Paul Moore, are poised to expose Gordon Brown’s involvement in the Lloyds TSB/HBOS merger. In addition to the impending failure this week of Lloyds Banking Group after the continuing worsening property and lending climate it has emerged that RBS, the main provocateur in the banking crisis, has involved itself with tax-payers money in £200m of sports sponsorship. Furthermore the revelation in the Mail on Sunday last weekend that Barclays had secreted nearly £700m bonuses for its executives has only cemented the extraordinary level of corruption and greed within the UK banking industry. Despite unprecedented losses the ‘guaranteed bonus culture’ is still with us. There seems to be a total disconnect between the legal responsibilities that Directors of banks have and the rights of shareholders (many of whom now are the UK tax-payers indirectly). The repurcussions for the future of the City of London are indeed frightening if these bankers are not brought to book and held account for their actions. In essence the bankers have turned into ‘Dick Whittington-esque’ characters with no morals and as it turns out with no idea of their responsibilities or any ideas of how to retreat from this mess.
As I have suggested repeatedly one cannot expect the architects of the global financial crisis to sort out the problems that they themselves have created. I was reminded this week of Albert Einstein’s quote; “Never expect the people who caused a problem to solve it.”
Much has been said of the ineffectiveness of the UK regulator, the FSA in all of this and it should be remembered that it was the Conservative Party under Margaret Thatcher who created the concept of external regulation for City firms. There were many (and my former stockbroking colleagues in small private firms I worked with were in unison on their views in this at the time) who believed that having non-practitioners regulating City traders brokers and financiers would just create more havoc eventually and indeed this has been the result. The case for better investor protection and improved professional conduct from City employees has not transpired and personally I find it absurd that I should need to have to constantly prove to regulators the level of my own ‘integrity’. The new bonus culture within the FSA shows that like the very bankers previously aforementioned the regulators themselves have disconnected from their responsibilities. Just this week the FSA made public its economic forecast. Time and again the FSA has proved that it no longer aspires to regulatory status but to a dictatorial policy status that at times is more than just a little Stalin-esque. In my view the whole application process for corporate membership of FSA and London Stock Exchange needs to be re-examined before entrepreneurial practitioners move elsewhere. After all in a global interactive financial world (as I’ve proved myself) the domicile of practitioners can be pretty elastic as investors flock to the global online universe.
Well what is the solution to the banking crisis? There is no easy fix but a responsible government working with the regulators could encourage new banks and brokers to be formed; certainly the rules (see Cattles experience and those of private stockbrokers since Big Bang) could be fast-tracked to do this but what probably is required first and foremost is for the government’s banks to hive-off the customer lists, trading names (TSB, Bank of Scotland, Coutts, National Westminster, etc) and staff as quickly as possible. I really do believe that brokers and funds would rather invest in purer banks and avoid having to analyse derivative exposures that RBS etc have. We’ll see what transpires but in this environment where so many people seem to have forgotten what their roles are as well as the raison d’etre for these businesses in the first place I think it may take some years for confidence to return. Certainly as every small businessman knows full well that unless the City encourages entrepreneurs from within to form new banks and brokers the outlook is even more Stalin-esque with MiFID and other EU regulations knocking on the doors of City firms.
My views on property have not changed. I still believe that a top to bottom depreciation of up to -70% in values throughout the UK is still possible. At this juncture official statistics seem to have disconnected from reality. Land registry and building society statistics showing executed transactions since August 2007 probably indicate a -15/20% decline to date but looking at www.propertysnake.co.uk a near -40% fall in values is being experienced by many who cannot simply sell at any price. Obviously with a malfunctioning banking system, a failing credit checking operandi, a liquidity crunch in the money markets and new stricter lending criteria then the outlook is truly dismal. Whilst looking at www.primelocation.com this week it is clear that many developers have buried their heads in the sands and that estate agents are walking around completely dazed by economic and financial events that they simply don’t understand. The outlook for £sterling is truly dire (gold and precious metals investments are the only sound areas to consider at the moment) and the need to arise £200bn in the gilt market is going to rear up in the not too distant future. In my view the property market is on the edge of a cliff and if RBS and Lloyds do join Northern Rock and Bradford & Bingley in the government bank (has anyone got a brand name that suits yet?) then the prices could collapse dramatically as estate agents and valuers enter a ‘no bid’ universe where intrinsic or build value is the only way to evaluate property values going forward.
As I write this banking blog I have just heard Lord ‘Roy’ Hattersley on Sky News call for more tighter regulation in the UK financial services suggesting that regulation has been far too light. Well Roy can I suggest that you visit any private client stockbroker and try and do his job for a day.
Tuesday 20 January 2009
UK Banking -SPECIAL REPORT
UK Banking
SPECIAL REPORT
20th January 2009
When I joined the Chartered Bank (then part of Standard & Chartered Banking Group) in 1976 the UK banking scene offered customers huge competitive opportunities both in the domestic and international markets but as banking consolidation accelerated it became abundantly clear that customers became third choice after shareholders and bank employees as City bonuses magnified. With the advent of ‘big bank’ in 1986 the UK regulator (now FSA) started interfering in the mechanics of how the London Stock Exchange operated but also in other areas such as the banking industry. Whilst reading the recent finance group, Cattles PLC statement I was appalled to discover that Cattles application for a retail banking licence was made to FSA and NOT the Bank of England. For many of us the Labour government’s antics with referring interest rate policy to the Bank of England has resulted in the ‘Old Lady’ failing in it’s role to police and supervise the UK banking industry. As “lender of last resort” there is clearly an impartial role here as senior bankers debate interest rate policy and try to appease the money market rates and forces of the market whilst supposedly acting as chaperone to UK banking. If the City of London’s credibility is to survive the overhang of recent events I believe that the UK government needs to return this interest rate process to HM Treasury immediately, strengthen the bank’s oversight role and investigate the actions of the London Stock Exchange for allowing a continuous repetitive backwardisation since 12noon till yesterday’s close whereby it was almost impossible for an orderly market in RBS’s shares to be conducted. A suspension of RBS’s listing should have prevailed but in fact only those with SETS (Stock Exchange Automated Trading System) access could deal preventing many investors from transacting business in the security. Notwithstanding this the extraordinary lack of transparency in bank balance sheets and off-balance has clearly torpedoed any attempts to stabilise the system since October last year.
The real problem that politicians, regulators, auditors and other practitioners need to address is that the derivatives tail globally is now estimated at US$600 trillion (£428 trillion @ 1.40). Assuming that UK businesses have say 10% exposure to this and conservatively control another 10% acting in their capacities as agents/advisors then the UK’s exposure to CDO’s, SIV’S and a host of other predominantly synthetic derivative instruments could be calculated at £86 trillion. Now it’s fair to say that not all these derivative positions are necessarily toxic but taking a conservative estimate of say 20% problematic, 50% possibly problematic then UK’s banking exposure could be somewhere in the £17 trillion to £43 trillion ball park (from now till 2025). Madness? Perhaps not! With RBS potentially putting £2 trillion transparently onto UK plc’s depleted balance sheet in the foreseeable future the likelihood is that if that happens and an orderly unwinding of RBS’s toxic positions took place alongside non-toxic assets (the sale of 4% stake of Bank of China was a typical fire sale valuation) then a liability to UK plc and tax-payers could easily accelerate to nearer £20 trillion of losses alone. Realistically massive banking write-offs need to happen hereon but the accounting mechanisms and laws governing insolvency are being severely tested and many believe as I do that these banks should enter into administration allowing for rump asset sales going forward (eg Coutts is a great brand within RBS; HSBC could off-load First Direct). The expected time-frame of offloading the government investment in banks such as RBS, Lloyds TSB, Northern Rock are totally unrealistic and UK shareholders do need to see that creditors and investors may actually retrieve a 1p or so per share rather than being absorbed into the UK plc p&l and balance sheet.
As at today the UK banking industry is on its knees and the resulting reaction to the level of £sterling internationally could be disastrous. Closer collaboration with ECB could again be disastrous as EU bankers struggle to cope with their own severe problems. More consolidation is likely but shouldn’t be encouraged for competitive reasons. In fact the reverse should happen and the sooner ABN can be restructured and hived-off from RBS the better; ditto National Westminster. What really needs to happen hereon in Europe (and there are those like myself who were saying this back in October) is that new stock banks are formulated asap with the backing of the central banks with green lights from the regulators. For regulators to hold up new banks and brokerage licences in the modern financial era is totally unacceptable. Good business plans with credible managements should be backed and supported by central bankers, the stock exchanges and the regulators immediately. I don’t think that LSE and FSA in London have any idea the damage their onerous application processes are having and in this regard I would expect Swiss banking to benefit from further backlashes in UK.
As I write Barack Obama is being inauguarated as 44th President and Lloyds TSB are languishing down -15 at 50p after a far from convincing discussion on Sky News last night between Sir Victor Blank, Chairman of Lloyds TSB and Jeff Randall, the City commentator. The outlook for Lloyds TSB is stretched indeed after the extraordinary acquisition of HBOS which surprised many in the City for its illogical and risky nature. The opportunities of a combined 30% share of the UK mortgage market looks ill-conceived to me as property ownership in UK comes full circle. Similarly arab investors are nursing terrible losses (as yet uncrystallised) in Barclays which may be in the sights of Standard Chartered who appear to better placed than any of their competitors including their main rival HSBC. Further cash calls, government aid, and insurance are more than likely but without new banks being allowed to pitch for a share of the UK market then the outlook looks horrendous for citizens and businesses. There are still some good names in banking left (Arbuthnot, C Hoare) and a host of names that could be rejuvenated and it is imperative that some modern competition is created asap. There are some great opportunities for corporate financiers if only the regulatory regime could fast-track new applications.
Hold tight for a rocky ride!
I continue to recommend that clients buy fixed income and precious metals rather than deposit balances in excess of £50,000 into UK banking system at present.
SPECIAL REPORT
20th January 2009
When I joined the Chartered Bank (then part of Standard & Chartered Banking Group) in 1976 the UK banking scene offered customers huge competitive opportunities both in the domestic and international markets but as banking consolidation accelerated it became abundantly clear that customers became third choice after shareholders and bank employees as City bonuses magnified. With the advent of ‘big bank’ in 1986 the UK regulator (now FSA) started interfering in the mechanics of how the London Stock Exchange operated but also in other areas such as the banking industry. Whilst reading the recent finance group, Cattles PLC statement I was appalled to discover that Cattles application for a retail banking licence was made to FSA and NOT the Bank of England. For many of us the Labour government’s antics with referring interest rate policy to the Bank of England has resulted in the ‘Old Lady’ failing in it’s role to police and supervise the UK banking industry. As “lender of last resort” there is clearly an impartial role here as senior bankers debate interest rate policy and try to appease the money market rates and forces of the market whilst supposedly acting as chaperone to UK banking. If the City of London’s credibility is to survive the overhang of recent events I believe that the UK government needs to return this interest rate process to HM Treasury immediately, strengthen the bank’s oversight role and investigate the actions of the London Stock Exchange for allowing a continuous repetitive backwardisation since 12noon till yesterday’s close whereby it was almost impossible for an orderly market in RBS’s shares to be conducted. A suspension of RBS’s listing should have prevailed but in fact only those with SETS (Stock Exchange Automated Trading System) access could deal preventing many investors from transacting business in the security. Notwithstanding this the extraordinary lack of transparency in bank balance sheets and off-balance has clearly torpedoed any attempts to stabilise the system since October last year.
The real problem that politicians, regulators, auditors and other practitioners need to address is that the derivatives tail globally is now estimated at US$600 trillion (£428 trillion @ 1.40). Assuming that UK businesses have say 10% exposure to this and conservatively control another 10% acting in their capacities as agents/advisors then the UK’s exposure to CDO’s, SIV’S and a host of other predominantly synthetic derivative instruments could be calculated at £86 trillion. Now it’s fair to say that not all these derivative positions are necessarily toxic but taking a conservative estimate of say 20% problematic, 50% possibly problematic then UK’s banking exposure could be somewhere in the £17 trillion to £43 trillion ball park (from now till 2025). Madness? Perhaps not! With RBS potentially putting £2 trillion transparently onto UK plc’s depleted balance sheet in the foreseeable future the likelihood is that if that happens and an orderly unwinding of RBS’s toxic positions took place alongside non-toxic assets (the sale of 4% stake of Bank of China was a typical fire sale valuation) then a liability to UK plc and tax-payers could easily accelerate to nearer £20 trillion of losses alone. Realistically massive banking write-offs need to happen hereon but the accounting mechanisms and laws governing insolvency are being severely tested and many believe as I do that these banks should enter into administration allowing for rump asset sales going forward (eg Coutts is a great brand within RBS; HSBC could off-load First Direct). The expected time-frame of offloading the government investment in banks such as RBS, Lloyds TSB, Northern Rock are totally unrealistic and UK shareholders do need to see that creditors and investors may actually retrieve a 1p or so per share rather than being absorbed into the UK plc p&l and balance sheet.
As at today the UK banking industry is on its knees and the resulting reaction to the level of £sterling internationally could be disastrous. Closer collaboration with ECB could again be disastrous as EU bankers struggle to cope with their own severe problems. More consolidation is likely but shouldn’t be encouraged for competitive reasons. In fact the reverse should happen and the sooner ABN can be restructured and hived-off from RBS the better; ditto National Westminster. What really needs to happen hereon in Europe (and there are those like myself who were saying this back in October) is that new stock banks are formulated asap with the backing of the central banks with green lights from the regulators. For regulators to hold up new banks and brokerage licences in the modern financial era is totally unacceptable. Good business plans with credible managements should be backed and supported by central bankers, the stock exchanges and the regulators immediately. I don’t think that LSE and FSA in London have any idea the damage their onerous application processes are having and in this regard I would expect Swiss banking to benefit from further backlashes in UK.
As I write Barack Obama is being inauguarated as 44th President and Lloyds TSB are languishing down -15 at 50p after a far from convincing discussion on Sky News last night between Sir Victor Blank, Chairman of Lloyds TSB and Jeff Randall, the City commentator. The outlook for Lloyds TSB is stretched indeed after the extraordinary acquisition of HBOS which surprised many in the City for its illogical and risky nature. The opportunities of a combined 30% share of the UK mortgage market looks ill-conceived to me as property ownership in UK comes full circle. Similarly arab investors are nursing terrible losses (as yet uncrystallised) in Barclays which may be in the sights of Standard Chartered who appear to better placed than any of their competitors including their main rival HSBC. Further cash calls, government aid, and insurance are more than likely but without new banks being allowed to pitch for a share of the UK market then the outlook looks horrendous for citizens and businesses. There are still some good names in banking left (Arbuthnot, C Hoare) and a host of names that could be rejuvenated and it is imperative that some modern competition is created asap. There are some great opportunities for corporate financiers if only the regulatory regime could fast-track new applications.
Hold tight for a rocky ride!
I continue to recommend that clients buy fixed income and precious metals rather than deposit balances in excess of £50,000 into UK banking system at present.
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