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.
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