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.
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