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.
Sunday, 15 February 2009
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.
Friday, 16 January 2009
**For the record*** My MARKET WARNING letter dated 16th August 2007
I'm not sure why I didn't post this at the time but the following letter was sent to my clients on 16th August 2007;-To ALL Hoblyn Clients
Our ref;- RPH/CT/marketwarning
16th August 2007
Dear Client(s)
Since writing to all my clients on 14th May predicting an unprecedented credit crunch a severe and unprecedented problem has indeed arisen in the US banking system. Although there are many interpretations and reasonings as events unfold it would appear that the inability of low quality (“sub-prime”) borrowers to repay mortgage arrears has led to falling property prices in the Mid-West and Florida starting a spiralling effect into the rest of US market. Doubts remain about the state of the largest mortgager, Countrywide as well as various mainstream Investment Banks, including Bear Stearns, Lehman and Goldman Sachs after hedge funds have been caught out holding illiquid positions. As margin calls persist these same banks are being forced to liquidate elsewhere. For years this type of “down wave” or “domino effect” has been predicted and although it’s impossible to gauge how the fallout will pan out it’s important to realise that the property bubble in UK is still intact. It has been apparent to me for most of the past decade that excessive valuations have been abundant in western retail property markets and I have had grave doubts about the so-called housing shortages as millions of homes remain empty as a result of excessive speculation. A comparison with the early ‘70’s secondary banking crisis and the bear market then could be made today although I fear that the current crisis, one mainly of shaken confidence so far, could lead to a fully blown bear market as the reality of unfathomed losses materialises and a US$500 trillion derivatives market attempts to unwind. It is ironical then that the hedge market could be the creation of the biggest market correction ever. The recommendations made after Enron and LTCM have been mainly ignored. Creative accounting and lack of transparency could well make many of the analysts redundant as cataclysmic financial events unfold.
In essence the bear market is long overdue. A technical double top or head and shoulders may well have formed between the top in December 1999 and June 2007. If this is the case the prognosis for equities is not good. Asset deflation could well accelerate as Central Banks dither on the best way to safeguard investors interests. I fear that any lowering of interest rates hereon could just add fuel to the fire.
As I said in May, “I continue to recommend only UK equities with a reliance on international scenarios, exposure to oil majors (BP & Royal Dutch Shell ‘B’), exposure to London based precious metals stocks (Randgold, Hochschild) and a moderate exposure to general miners, higher cash levels and a review of all property related investments”.
Our ref;- RPH/CT/marketwarning
16th August 2007
Dear Client(s)
Since writing to all my clients on 14th May predicting an unprecedented credit crunch a severe and unprecedented problem has indeed arisen in the US banking system. Although there are many interpretations and reasonings as events unfold it would appear that the inability of low quality (“sub-prime”) borrowers to repay mortgage arrears has led to falling property prices in the Mid-West and Florida starting a spiralling effect into the rest of US market. Doubts remain about the state of the largest mortgager, Countrywide as well as various mainstream Investment Banks, including Bear Stearns, Lehman and Goldman Sachs after hedge funds have been caught out holding illiquid positions. As margin calls persist these same banks are being forced to liquidate elsewhere. For years this type of “down wave” or “domino effect” has been predicted and although it’s impossible to gauge how the fallout will pan out it’s important to realise that the property bubble in UK is still intact. It has been apparent to me for most of the past decade that excessive valuations have been abundant in western retail property markets and I have had grave doubts about the so-called housing shortages as millions of homes remain empty as a result of excessive speculation. A comparison with the early ‘70’s secondary banking crisis and the bear market then could be made today although I fear that the current crisis, one mainly of shaken confidence so far, could lead to a fully blown bear market as the reality of unfathomed losses materialises and a US$500 trillion derivatives market attempts to unwind. It is ironical then that the hedge market could be the creation of the biggest market correction ever. The recommendations made after Enron and LTCM have been mainly ignored. Creative accounting and lack of transparency could well make many of the analysts redundant as cataclysmic financial events unfold.
In essence the bear market is long overdue. A technical double top or head and shoulders may well have formed between the top in December 1999 and June 2007. If this is the case the prognosis for equities is not good. Asset deflation could well accelerate as Central Banks dither on the best way to safeguard investors interests. I fear that any lowering of interest rates hereon could just add fuel to the fire.
As I said in May, “I continue to recommend only UK equities with a reliance on international scenarios, exposure to oil majors (BP & Royal Dutch Shell ‘B’), exposure to London based precious metals stocks (Randgold, Hochschild) and a moderate exposure to general miners, higher cash levels and a review of all property related investments”.
Tuesday, 13 January 2009
Review 4 Q 2008 7th January 2009
A senior partner of a major firm once said- “Look here my boy, if I knew what to do, I would not be here advising you, I would be on a yacht in the South of France” – a UK Private Client stockbroker probably circa 1974
With FTSE100 producing its worst ever performance for 2008 with a decline of 31.49% over the year and mostly factored during the September-November period I am not going to predict how FTSE100 will end in 2009 suffice to say that I do not expect an economic recovery for quite some time yet. Although every Wall Street strategist is ‘bullish’ for 09 it is important to remember that the very same ‘experts’ were bullish for 08; as my stockbroking father always said, “there are no experts in this business!”. My gut feeling though is that FTSE100 may well trade nearer to 4,000 than 4,600 where it is currently hovering and I wouldn’t be surprised to see S&P retest 800 during 09 despite Barack Obama’s economic stimulus.
The last quarter saw some extraordinary events many of them predicted by market observers. The bail out (TARP) of the world banking system was indeed unprecedented (a word that has been overused many times since) but like many market professionals I saw little merit then (and still do) in throwing tax payers future earnings at dubious balance sheets surrounded by black holes and ongoing derivative failures. The credit crunch, albeit predicted by many, did not play out as many thought. Whilst bank shares were crunched and hedge funds were forced to liquidate (where they could) positions the bottom fell out of base commodities dragging even precious metals prices and stocks across all sectors down with them. This was not meant to happen but it did. Furthermore the oil price once touching the high of $147pbo remarkably fell off the cliff next door and lost $100pbo in the same time frame; strangely the two oil majors on the FTSE100, BP and Royal Dutch held up pretty well over this period. The lesson to be learned I think is that many of the falls were liquidity driven so today there are plenty of opportunities for value investors and true fundamentalists adopting technical disciplines alongside differing strategies.
With the ban on short-selling of financials being lifted imminently (and many disagreed with it in the first place including myself) I wouldn’t be surprised if many more financial calamities occur (or get exposed like Bernie Madoff’s ponzi designed to scalp hedge fund investors). Whilst politicians call for more regulation it is important to note that rules are in place already. Although Sir Andrew Large (ex-Deputy Governor of the The Old Lady) calls for a new independent body that would provide early warnings of systemic problems and have the tools to discourage excessive borrowing many other people in the City would say that that is the Bank of England & FSA’s role in the first place. I gravely doubt more regulation is the answer whereas more emphasis on leaving practitioners to adjust the nuts and bolts and more expert oversight by these regulators is what is required. Hedge funds need to be regulated just like asset managers and private client stockbrokers. Quite why it has taken so long for governments and regulators to work out why Hedge Funds grew so alarmingly in the last few years surprises quite a few of us in the industry. The lack of regulation has clearly been the main attraction for boffins to leave investment banks and join the ‘hedgies’ on attractive 2/20 terms. That game is over as investors now try to escape the clutches of these over-priced illiquid operations. The fall out has already started and perhaps many will leave the hedge fund industry and reignite the investment banking industry which has been pulverised (Merrill’s and Goldman’s have become commercial banks; Lehman’s and Bear have disappeared) and written off even by the Sage of Omaha who’s own flame has flickered after he bought $5bn of preferences shares in Goldman’s. I don’t agree that the investment banking model is ‘dead’. The problem occurred when gearing and lending occurred in the late ‘90’s favouring the early birds in the hedge industry and it then outgrew itself; there are clearly skills needed from the redundant investment bankers but any new organisations do need to get back to basics where they fully understand their customers. The same could be said for commercial banks in the UK!
The strategy for 2009 should be therefore for UK domiciled investors to avoid financials, retails and industrials and focus on value plays (companies with strong transparent balance sheets, with well-covered dividends), precious metals stocks and funds, international earners (most base metals and oil stocks should be tradeable throughout 2009 as volatility remains historically high), UK government gilts (switching to Index Linked 2nd or 3rd quarters), selective corporate bond funds, emerging markets trusts; basically solid yield, transparent earnings, modest growth and p/e in single figures is the order of the day. Due to the continued volatility it is extremely difficult to recommend stocks on a 1 year+ view but depending on market conditions I am still recommending Hochschild (my favoured pick for 2009 with c.£90m in cash; Mkt Cap £420m; yield 3.4%; 2008 High 467 Low 65 now 138p), Randgold, Anglo American amongst the metals, Royal Dutch & BP, Templeton Emerging and have added Yamana Gold (a Canadian miner, Mkt Cap £3.5bn) at 525p and Henderson Far East 214p yield 5.6% to my extensive lists of stocks that I follow. Please contact me to discuss any stocks or investments that you may have concerns about or may be interested in.
Generally speaking I would favour a portfolio weighting such as 30% Fixed Interest (incl bond funds,etc), 20% cash, 50% equities (overseas earners mainly incl. up to 25% in precious metals) until a clearer picture emerges throughout 2009. I believe it is too early to make a call for a basket of UK equities; some observers have already made incorrect calls on UK equities (eg. Anthony Bolton ex-Fidelity). There’s every likelihood that an avalanche of earnings downgrades and profits-warnings, rights issues (I suspect Rio Tinto is gearing up for one very soon), other failures (both corporate, hedge funds and even private equity troubles) may sink FTSE100 below 4,000 (possibly as low as 3,300) in 1Q 09 so I remain extremely cautious for long-term investors. There are, however, many trading opportunities presenting themselves at present and in particular I am getting excited by the potential moves in Gold and Silver; Platinum remains difficult to call with the Detroit situation delayed until April/May. Gold resistance is being touted at $936pto (currently $843pto) and I think once this level is breached then the previous $1033 high could be tested quite quickly and the following levels tested, $1163, $1332 & $1461; a trading range of $1200-2000 is forecast for 3rd and 4th Q’s 09. With Woolworth’s and a host of other retailers having already failed I suspect that even the larger operations will be suffering by the summer. The outlook for property is still dire and I would guesstimate that another 20-30% fall could be seen this year but the real eye-opener will be in commercial property where it rather looks as though the semi-national banks have cooked up potential losses in the ballpark of £75-100bn which Mr Darling has to contend with shortly. It rather looks as though the only truly independent UK bank will be Standard Chartered going forward; the outlooks for Barclays, HSBC & Lloyds (with HBOS regrettably) is truly difficult to fathom although it looks as though a full-blown bailout of RBS (NatWest and Bank of Scotland to be repackaged and sold off within 2 years) by UK plc is on the cards.
As the anonymous senior partner mentioned in the above heading implied, if any of us could consistently predict the future we would indeed be spending more time with the successful hedge fund managers who’ve cashed in their chips already and own a fleet of gin palaces in Dubai, Monaco and all points east and west.
With FTSE100 producing its worst ever performance for 2008 with a decline of 31.49% over the year and mostly factored during the September-November period I am not going to predict how FTSE100 will end in 2009 suffice to say that I do not expect an economic recovery for quite some time yet. Although every Wall Street strategist is ‘bullish’ for 09 it is important to remember that the very same ‘experts’ were bullish for 08; as my stockbroking father always said, “there are no experts in this business!”. My gut feeling though is that FTSE100 may well trade nearer to 4,000 than 4,600 where it is currently hovering and I wouldn’t be surprised to see S&P retest 800 during 09 despite Barack Obama’s economic stimulus.
The last quarter saw some extraordinary events many of them predicted by market observers. The bail out (TARP) of the world banking system was indeed unprecedented (a word that has been overused many times since) but like many market professionals I saw little merit then (and still do) in throwing tax payers future earnings at dubious balance sheets surrounded by black holes and ongoing derivative failures. The credit crunch, albeit predicted by many, did not play out as many thought. Whilst bank shares were crunched and hedge funds were forced to liquidate (where they could) positions the bottom fell out of base commodities dragging even precious metals prices and stocks across all sectors down with them. This was not meant to happen but it did. Furthermore the oil price once touching the high of $147pbo remarkably fell off the cliff next door and lost $100pbo in the same time frame; strangely the two oil majors on the FTSE100, BP and Royal Dutch held up pretty well over this period. The lesson to be learned I think is that many of the falls were liquidity driven so today there are plenty of opportunities for value investors and true fundamentalists adopting technical disciplines alongside differing strategies.
With the ban on short-selling of financials being lifted imminently (and many disagreed with it in the first place including myself) I wouldn’t be surprised if many more financial calamities occur (or get exposed like Bernie Madoff’s ponzi designed to scalp hedge fund investors). Whilst politicians call for more regulation it is important to note that rules are in place already. Although Sir Andrew Large (ex-Deputy Governor of the The Old Lady) calls for a new independent body that would provide early warnings of systemic problems and have the tools to discourage excessive borrowing many other people in the City would say that that is the Bank of England & FSA’s role in the first place. I gravely doubt more regulation is the answer whereas more emphasis on leaving practitioners to adjust the nuts and bolts and more expert oversight by these regulators is what is required. Hedge funds need to be regulated just like asset managers and private client stockbrokers. Quite why it has taken so long for governments and regulators to work out why Hedge Funds grew so alarmingly in the last few years surprises quite a few of us in the industry. The lack of regulation has clearly been the main attraction for boffins to leave investment banks and join the ‘hedgies’ on attractive 2/20 terms. That game is over as investors now try to escape the clutches of these over-priced illiquid operations. The fall out has already started and perhaps many will leave the hedge fund industry and reignite the investment banking industry which has been pulverised (Merrill’s and Goldman’s have become commercial banks; Lehman’s and Bear have disappeared) and written off even by the Sage of Omaha who’s own flame has flickered after he bought $5bn of preferences shares in Goldman’s. I don’t agree that the investment banking model is ‘dead’. The problem occurred when gearing and lending occurred in the late ‘90’s favouring the early birds in the hedge industry and it then outgrew itself; there are clearly skills needed from the redundant investment bankers but any new organisations do need to get back to basics where they fully understand their customers. The same could be said for commercial banks in the UK!
The strategy for 2009 should be therefore for UK domiciled investors to avoid financials, retails and industrials and focus on value plays (companies with strong transparent balance sheets, with well-covered dividends), precious metals stocks and funds, international earners (most base metals and oil stocks should be tradeable throughout 2009 as
Generally speaking I would favour a portfolio weighting such as 30% Fixed Interest (incl bond funds,etc), 20% cash, 50% equities (overseas earners mainly incl. up to 25% in precious metals) until a clearer picture emerges throughout 2009. I believe it is too early to make a call for a basket of UK equities; some observers have already made incorrect calls on UK equities (eg. Anthony Bolton ex-Fidelity). There’s every likelihood that an avalanche of earnings downgrades and profits-warnings, rights issues (I suspect Rio Tinto is gearing up for one very soon), other failures (both corporate, hedge funds and even private equity troubles) may sink FTSE100 below 4,000 (possibly as low as 3,300) in 1Q 09 so I remain extremely cautious for long-term investors. There are, however, many trading opportunities presenting themselves at present and in particular I am getting excited by the potential moves in Gold and Silver; Platinum remains difficult to call with the Detroit situation delayed until April/May. Gold resistance is being touted at $936pto (currently $843pto) and I think once this level is breached then the previous $1033 high could be tested quite quickly and the following levels tested, $1163, $1332 & $1461; a trading range of $1200-2000 is forecast for 3rd and 4th Q’s 09. With Woolworth’s and a host of other retailers having already failed I suspect that even the larger operations will be suffering by the summer. The outlook for property is still dire and I would guesstimate that another 20-30% fall could be seen this year but the real eye-opener will be in commercial property where it rather looks as though the semi-national banks have cooked up potential losses in the ballpark of £75-100bn which Mr Darling has to contend with shortly. It rather looks as though the only truly independent UK bank will be Standard Chartered going forward; the outlooks for Barclays, HSBC & Lloyds (with HBOS regrettably) is truly difficult to fathom although it looks as though a full-blown bailout of RBS (NatWest and Bank of Scotland to be repackaged and sold off within 2 years) by UK plc is on the cards.
As the anonymous senior partner mentioned in the above heading implied, if any of us could consistently predict the future we would indeed be spending more time with the successful hedge fund managers who’ve cashed in their chips already and own a fleet of gin palaces in Dubai, Monaco and all points east and west.
Wednesday, 5 November 2008
October Review 2008 SPECIAL REPORT
October Review 2008
With the ink on the September quarterly valuations hardly dry I thought it might be a good idea to try and summarise what has occurred in the last 6 weeks with an aim to review current strategies, etc.
As was clear to many commentators a global credit bubble had grown since the turn of the millennium ably assisted by the Federal Reserve’s emphasis on assisting borrowers rather than protecting the greenback (US$) which in fact is its remit. The gradual implosion of the asset bubble perpetrated by sub-prime and other derivative instruments forced firstly Bear Stearns and then Lehman Brothers out of business. A gradual pandemonium in financial stocks, mainly investment and international banks, subsequently forced some to merge (Merrill Lynch into Bank of America, Wachovia into Citigroup) as well as leaving governments no alternative other than to intervene on an “unprecedented” basis (Northern Rock, B&B, HBOS/Lloyds, RBS, etc just in UK). The utilisation of providing extra liquidity to all types of markets and instruments has arguably created a more stable financial environment with LIBOR (London Interbank Offered Rate) gap narrowing somewhat and many stocks stabilising in the process aided by a global rate cut (the Fed cut rates 0.5% to 1% recently). With the printing presses running flat out a deflationary market in property and commodities has occurred. Of course, the property price implosion and the banks demise has meant that the extraordinary commodities slide has been missed by many pundits although it is clear that price declines in commodities and commodity related stocks has been overstated as hedge funds have become forced (distressed) sellers in this arena. It is far easier to liquidate stocks in these conditions than property and clearly part of this easing of liquidity constraints has left investors nursing serious losses (as yet mainly uncrystallised) in their portfolios. There are many observers who have felt that the billions of $, £’s, Yen & Euros that have been raised would have been better deployed to stimulating core industries/sectors rather than bailing out the very banks who often or not catalysed this crisis of confidence. With balance sheets remaining questionable with off-balance sheet positions (debts?) remaining unquantifiable (the derivatives tail is now estimated at US$500 trillion) some market commentators have suggested that these banks didn’t need saving. Arguably new stock banks should have been created but instead governments have suggested that regulations were weak and have demanded more regulation thus making life more difficult for themselves, the banks and broking houses as well as investors going forward. I would argue that less regulation is needed allowing for new organisations to be formulated by entrepreneurs from any ongoing fallout but I fear that the opposite will happen (Sarkozy has called for more regulation along with other more socialist powermongers). In addition to personal crises several governments have had to go cap in hand to the IMF, notably Iceland, with Hungary, Austria and a host of others illuminating distress flares. The Barack Obama era has finally arrived but the euphoria may die down as the US deficit nears the magic US$1 trillion mark. Steve Forbes, CEO Forbes Inc, the int’l magazine emporium, has suggested that Obama may replace the Treasury Secretary Paulson with Paul Volcker the former Federal Reserve (before Greenspan) man who may be in a better position to stand up to Bernanke. Who knows what will happen or what the new administration will do to reverse the damage that Greenspan did to the US economy by maintaining low rates for too long but one thing is for sure, the bumpy ride is likely to continue as unemployment figures increase dramatically in the western world and a retail slump is forecast. Just how Wall Street reacts hereon is anyone’s guess but it is clear that until financial organisations are allowed to fail, thus cleansing the system, it is very difficult to see the wood for the trees.
I continue to suggest that all investors review their risk profiles and adopt more cash, precious metals, orientated strategies and only adopt domestic investments where there are clear value opportunities present. The intra-day volatility in all securities of all types is extremely unnerving but there are clearly value plays in these markets which are a stock-pickers paradise. Technically speaking all markets are off their lows but I am predicting more downside in the next three months (the ‘double bottom’) testing previous lows (FTSE may reach 3,300; S&P500 around 800). Gold, platinum, silver and most base metals stocks yielding in excess of 3% can be purchased as alternatives to risk deployment persist and as emerging economies grow at GDP growth rates of 4%+. In particular Templeton Emerging Markets, JP Morgan Russia, JP Morgan India, BlackRock Latin America present good long-term value on any further pullbacks. Looking at charts before making trades in these markets are really a necessity that many investors should not ignore.
Please contact me to discuss any aspect of your financial affairs at any time 24/7. A recent valuation is attached for your perusal. I am reminded of another market maxim from W.Dennis Heymanson’s excellent booklet;-
“Buy when the market is oversold, lighten when the market is overbought.”
With the ink on the September quarterly valuations hardly dry I thought it might be a good idea to try and summarise what has occurred in the last 6 weeks with an aim to review current strategies, etc.
As was clear to many commentators a global credit bubble had grown since the turn of the millennium ably assisted by the Federal Reserve’s emphasis on assisting borrowers rather than protecting the greenback (US$) which in fact is its remit. The gradual implosion of the asset bubble perpetrated by sub-prime and other derivative instruments forced firstly Bear Stearns and then Lehman Brothers out of business. A gradual pandemonium in financial stocks, mainly investment and international banks, subsequently forced some to merge (Merrill Lynch into Bank of America, Wachovia into Citigroup) as well as leaving governments no alternative other than to intervene on an “unprecedented” basis (Northern Rock, B&B, HBOS/Lloyds, RBS, etc just in UK). The utilisation of providing extra liquidity to all types of markets and instruments has arguably created a more stable financial environment with LIBOR (London Interbank Offered Rate) gap narrowing somewhat and many stocks stabilising in the process aided by a global rate cut (the Fed cut rates 0.5% to 1% recently). With the printing presses running flat out a deflationary market in property and commodities has occurred. Of course, the property price implosion and the banks demise has meant that the extraordinary commodities slide has been missed by many pundits although it is clear that price declines in commodities and commodity related stocks has been overstated as hedge funds have become forced (distressed) sellers in this arena. It is far easier to liquidate stocks in these conditions than property and clearly part of this easing of liquidity constraints has left investors nursing serious losses (as yet mainly uncrystallised) in their portfolios. There are many observers who have felt that the billions of $, £’s, Yen & Euros that have been raised would have been better deployed to stimulating core industries/sectors rather than bailing out the very banks who often or not catalysed this crisis of confidence. With balance sheets remaining questionable with off-balance sheet positions (debts?) remaining unquantifiable (the derivatives tail is now estimated at US$500 trillion) some market commentators have suggested that these banks didn’t need saving. Arguably new stock banks should have been created but instead governments have suggested that regulations were weak and have demanded more regulation thus making life more difficult for themselves, the banks and broking houses as well as investors going forward. I would argue that less regulation is needed allowing for new organisations to be formulated by entrepreneurs from any ongoing fallout but I fear that the opposite will happen (Sarkozy has called for more regulation along with other more socialist powermongers). In addition to personal crises several governments have had to go cap in hand to the IMF, notably Iceland, with Hungary, Austria and a host of others illuminating distress flares. The Barack Obama era has finally arrived but the euphoria may die down as the US deficit nears the magic US$1 trillion mark. Steve Forbes, CEO Forbes Inc, the int’l magazine emporium, has suggested that Obama may replace the Treasury Secretary Paulson with Paul Volcker the former Federal Reserve (before Greenspan) man who may be in a better position to stand up to Bernanke. Who knows what will happen or what the new administration will do to reverse the damage that Greenspan did to the US economy by maintaining low rates for too long but one thing is for sure, the bumpy ride is likely to continue as unemployment figures increase dramatically in the western world and a retail slump is forecast. Just how Wall Street reacts hereon is anyone’s guess but it is clear that until financial organisations are allowed to fail, thus cleansing the system, it is very difficult to see the wood for the trees.
I continue to suggest that all investors review their risk profiles and adopt more cash, precious metals, orientated strategies and only adopt domestic investments where there are clear value opportunities present. The intra-day volatility in all securities of all types is extremely unnerving but there are clearly value plays in these markets which are a stock-pickers paradise. Technically speaking all markets are off their lows but I am predicting more downside in the next three months (the ‘double bottom’) testing previous lows (FTSE may reach 3,300; S&P500 around 800). Gold, platinum, silver and most base metals stocks yielding in excess of 3% can be purchased as alternatives to risk deployment persist and as emerging economies grow at GDP growth rates of 4%+. In particular Templeton Emerging Markets, JP Morgan Russia, JP Morgan India, BlackRock Latin America present good long-term value on any further pullbacks. Looking at charts before making trades in these markets are really a necessity that many investors should not ignore.
Please contact me to discuss any aspect of your financial affairs at any time 24/7. A recent valuation is attached for your perusal. I am reminded of another market maxim from W.Dennis Heymanson’s excellent booklet;-
“Buy when the market is oversold, lighten when the market is overbought.”
Thursday, 2 October 2008
Review 3 Q 2008 6th October 2008
“Don’t listen to what people are saying about the market, listen to what the market is saying about itself” Market Maxim booklet by W.Dennis Heymanson
“A financier is a pawnbroker with imagination.” AW Pinero 1893
Whilst clearing out my desk I came across a stockbroker’s booklet full of market maxims; many of them most of us have heard many times but I thought I’d share two of them with my clients. The “financier” definition perhaps explains what has happened in investment banking in the last decade whilst the former perhaps focuses one’s attention on deciding where we are going from here. Whilst opening my father’s US dealing book of the ‘80’s I can see cash transactions in many of the household names today (“Microsoft/Apple”) as well as a few that didn’t make it (“Petroleum Helicopters/Countrywide Credit”). Then US brokers operating out of London, New York and all points west phoned him up to ask him to participate in IPO’s on an unprecedented scale. Some of you may recollect participating back then. But then something happened that none of us could predict. Alongside us at many of the roadshows accompanying these IPO’s (Initial Public Offerings) sat small characters describing themselves as hedge fund managers. Making discreet enquiries it transpired that investment banks were financing individuals in the running of these funds and allowing them to gear up many times in the IPO fundraisings. It didn’t take long before cash managers like ourselves were receiving “zero” allocations whilst the new kids dealt in highly leveraged “asks” effectively taking the pot for themselves. It became a simple numbers game for the investment banks albeit one that was highly leveraged; so long as markets rose, so did the commissions for the brokers working there. Cash players like ourselves got left behind. I last received an invitation from a US investment bank around 1998 and haven’t had a call since then. I think this says something about the greed driven climate change that occurred on Wall Street. Around the same time dot-com occurred and property prices started to escalate as the era of self-certified mortgages began. Today the “market” is telling itself, enough is enough.
In crude terms many banks will fail from here, recession could lead to depression and more regulation as suggested by politicians could well stifle competition (new banks and brokers are needed) making life extremely difficult for all concerned.
Looking at my quarterly reviews since January 2005 I have warned of these extravagances in the financial system and suggested to clients that they consider precious metals and oil shares. Today the outlook for most domestic securities is dire. On the positive side emerging markets are still growing but the impact of a major downturn in US followed by a weaker dollar is not yet factored in.
With the current volatility it is ridiculous to contemplate making individual stock recommendations but I have stated to some of you that both Royal Dutch Shell ‘B’ and BP probably both offer sound havens in the current market with yields approaching 5%. I still believe oil will retest its previous highs and that gold will bounce to $1,200pto + before long. For those holding cash the UK government gilt market represents safety; S&P reiterated its AAA rating on UK sovereign paper this week. Please do NOT trust the supposed safety as subscribed by GB & AD, the Laurel and Hardy team. One more major corporate (bank) failure is likely (the ‘Burma’ factor) and this may well call the bottom in equities and I would expect this in the weeks/months ahead.
The final capitulation will occur sometime in the next quarter that I am sure of. The tension is still there in the gulf and between Putin/Medvedev and the west so let’s keep our fingers crossed. One further thought, the Paulson bailout could well cost the US taxpayer up to $2 trillion equating to $50,000 per US household according to Jon Moulton of Alchemy Partners; a UK bailout doesn’t bear contemplating as the nationalized banking system grows disproportionately. The US election may well bring in a new era but I wouldn’t want to bet on the outcome for America over the next 4 years.
“A financier is a pawnbroker with imagination.” AW Pinero 1893
Whilst clearing out my desk I came across a stockbroker’s booklet full of market maxims; many of them most of us have heard many times but I thought I’d share two of them with my clients. The “financier” definition perhaps explains what has happened in investment banking in the last decade whilst the former perhaps focuses one’s attention on deciding where we are going from here. Whilst opening my father’s US dealing book of the ‘80’s I can see cash transactions in many of the household names today (“Microsoft/Apple”) as well as a few that didn’t make it (“Petroleum Helicopters/Countrywide Credit”). Then US brokers operating out of London, New York and all points west phoned him up to ask him to participate in IPO’s on an unprecedented scale. Some of you may recollect participating back then. But then something happened that none of us could predict. Alongside us at many of the roadshows accompanying these IPO’s (Initial Public Offerings) sat small characters describing themselves as hedge fund managers. Making discreet enquiries it transpired that investment banks were financing individuals in the running of these funds and allowing them to gear up many times in the IPO fundraisings. It didn’t take long before cash managers like ourselves were receiving “zero” allocations whilst the new kids dealt in highly leveraged “asks” effectively taking the pot for themselves. It became a simple numbers game for the investment banks albeit one that was highly leveraged; so long as markets rose, so did the commissions for the brokers working there. Cash players like ourselves got left behind. I last received an invitation from a US investment bank around 1998 and haven’t had a call since then. I think this says something about the greed driven climate change that occurred on Wall Street. Around the same time dot-com occurred and property prices started to escalate as the era of self-certified mortgages began. Today the “market” is telling itself, enough is enough.
In crude terms many banks will fail from here, recession could lead to depression and more regulation as suggested by politicians could well stifle competition (new banks and brokers are needed) making life extremely difficult for all concerned.
Looking at my quarterly reviews since January 2005 I have warned of these extravagances in the financial system and suggested to clients that they consider precious metals and oil shares. Today the outlook for most domestic securities is dire. On the positive side emerging markets are still growing but the impact of a major downturn in US followed by a weaker dollar is not yet factored in.
With the current volatility it is ridiculous to contemplate making individual stock recommendations but I have stated to some of you that both Royal Dutch Shell ‘B’ and BP probably both offer sound havens in the current market with yields approaching 5%. I still believe oil will retest its previous highs and that gold will bounce to $1,200pto + before long. For those holding cash the UK government gilt market represents safety; S&P reiterated its AAA rating on UK sovereign paper this week. Please do NOT trust the supposed safety as subscribed by GB & AD, the Laurel and Hardy team. One more major corporate (bank) failure is likely (the ‘Burma’ factor) and this may well call the bottom in equities and I would expect this in the weeks/months ahead.
The final capitulation will occur sometime in the next quarter that I am sure of. The tension is still there in the gulf and between Putin/Medvedev and the west so let’s keep our fingers crossed. One further thought, the Paulson bailout could well cost the US taxpayer up to $2 trillion equating to $50,000 per US household according to Jon Moulton of Alchemy Partners; a UK bailout doesn’t bear contemplating as the nationalized banking system grows disproportionately. The US election may well bring in a new era but I wouldn’t want to bet on the outcome for America over the next 4 years.
Wednesday, 9 July 2008
2 Q 2008 9th July 2008
“3 Wheels on My Wagon” -performed by The New Christy Minstrels December 1971
For the last 6 weeks or so I’ve heard it mentioned occasionally on Bloomberg/Sky News/ITN/Channels 4 & 5/CNN and the BBC that the wheels have fallen off and a total capitulation of equities and bonds may be on the cards. For some reason throughout I’ve been humming an old song from my schooldays and after a quick glance at it on YouTube it brought a fresh smile to my face. It’s the story of some prospectors caught by Cherokee Indians in the mid-west; their wagon kept “rollin’ along” and so long as it did with Cherokees firing arrows at them they kept “singing a Happy Song”. Eventually, as happened to many prospectors, the wagon wheels all came off and in the finale they sang in harmony with the Indians….”I’m singing a Happy Song”. Of course in real life it never ends like that and if you do see the analogy between the Cherokees and the mortgage lenders, bankers and ghastly outfits like Ocean Finance then please have a thought for those who cannot fend off the arrows or stop their wheels from coming off. The attitude in capital markets in the last 20 years has been that wheels (read “loans/overdrafts/mortgages/other monstrous devices”) can be fixed and it will be all right later but then as people are finding there is an end-game. It’s called repossession, IVA, bankruptcy or a trip to the pawn shop.
Much has been spoken about asset deflation/depreciation and I experienced it first hand last month myself. My 3 year VW Passat Estate was hit by a 4wd in a sussex lane. Around £2,500 damage (just a few wings) to a car that I discovered had dropped from over £16,000 when I bought it in 2005 to around £5,000 today. Who needs high fuel costs when car depreciation is this vicious? Our cousins throughout EU rent cars from Avis and Hertz saving on insurance, maintenance and depreciation and I am considering car rental as the way forward hereon. Elsewhere, house prices continue to slump slowly and commentators keep repeating their alarming forecasts about when prices will rise. What none of these experts appear to have fathomed is that the boom was born out of a lie, namely a housing shortage and fuelled by governments intent on cementing this lie by artificially keeping rates low. Now that inflation is here the central bankers have nowhere to go. Rising inflation and flirting stagnation equals stagflation so I think rates are likely to rise as LIBOR (London Inter Bank Offering Rate) seems to be showing us. It comes back to the fact that when an asset, in this case a brick, is dramatically over-priced it eventually comes back down to reality which is a long long way from here (another 50% collapse in retail property prices ex-Central London could be possible). Recently I’ve heard comparisons between the dot-com boom/implosion and the sharp rise in oil prices but I don’t agree with the analogy except it could be argued that the rise in dot-com stocks (some of you may remember Medi@Invest that rose from 3p to 98p and back to a penny!) is similar technically to the rise we’ve seen in oil. Dot-com was a synthetic concept where valuations were ignored and really it was just an over-exuberant extension of a long-term technology boom that went wrong sending zero earnings companies into the stratosphere. To date none of the oil stocks have even remotely performed in line with oil and the price has only nearly doubled after ever-increasing demand. Much has been blamed on speculators but the real issue is that oil demand has overtaken the world’s ability to deliver, refine and sell on this oil downstream effectively. I think $200pbo ++ is on the cards. And it is this pricing drive in oil, soft commodities (grain, rice, most food stuffs) and general commodities kicked into gear by South America, Africa, Middle-East, Asia, Far East and the FSU that worries the west and world capital markets. Some money men like Jim Rogers have embraced these new markets and opportunities whereas most people just fear them.
So what’s the answer?
Well, as many of you know since 2000 I have advocated overweight positions in commodities, oil and gas, precious metals, softs (although there are few equity ways to play this) but more recently have recommended selling out of raw commodities and reducing exposure in the other sectors. A rotational spin back into financials will occur in the next 6 months I believe and I suspect that the Beijing Olympics will open investors eyes to the problems prevalent in China. In fact their stock market has already slumped around 50% from the highs and I think the best way to play the growth game in these areas going forward is through overseas banks like HSBC and Standard Chartered. But not yet!!! It is marginally too early. Another bank failure is pretty likely and a host of a other failures to boot before the worm turns. In 1974 the market rallied very fast at the end of its final capitulation and so having cash on the sidelines in the next few months ready for reinvestment into banks, precious metals, oils, international conglomerates and the occasional housebuilder involved in the London Olympic bid could reap spectacular profits. Some of the stocks that I have sold recently could be re-examined when this happens. They are British Airways, Aviva, Prudential, Taylor Wimpey, etc. Furthermore, a few investment trust investments in emerging markets is great way to stem the inflation we are likely to experience here as governments try to stimulate manufacturing and the almost aimless service industries that are so weighed down by regulation. I continue to recommend Templeton Emerging and suggest also JP Morgan Fleming Indian Investment Trust and Black Rock Latin America, both on further weakness. In addition the following can be looked at; BP, Royal Dutch Shell ‘B’, Thomson Reuters, Randgold, Anglo American, BT Group, Imperial Energy, Fresnillo, Hochschild, and the interesting Blavod Extreme on any pullbacks.
To summarise this second quarter has seen FTSE100 decline 3.87%% although it fails to summarise the real decline as usual failed constituents have been replaced and daily volatility has at times been quite severe. The likelihood of gold recovering from below $900pto appears likely as inflation/stagflation looms and $1,200pto for gold this year is still on the cards. But if I had to make a near certain prediction then I think the short-term profit-taking seen in oil will submit to the bulls who could speculate oil to $150pbo and onwards to $200pbo later this year. Tensions in Middle East (Iran mainly) and between Russia and West continue so the next 6 months could well be even more lively with some great long-term investment and trading opportunities presenting themselves. One positive outcome towards the latter part of this quarter has been the relative stability of the US$ but as John Paulson, the Hedge guru, suggested only last week, the credit crunch maybe only 1/3rd of the way completed. Despite the difficulties in the banks and housebuilders there hasn’t been any noticeable failures amongst hedge funds, private equity groups or large corporations which is a bit surprising.
The recent comments surrounding banking protection have been highlighted and in my view the new intended threshold of £50,000 should NOT be trusted until a more full-proof mechanism is in place should another Northern Rock materialise. I continue to recommend that clients consider UK government fixed interest (gilts) for large capital sums but am happy to comment when required. Some of the attractive rates available at banks and societies should be spread around as previously suggested.
Have a good summer!
For the last 6 weeks or so I’ve heard it mentioned occasionally on Bloomberg/Sky News/ITN/Channels 4 & 5/CNN and the BBC that the wheels have fallen off and a total capitulation of equities and bonds may be on the cards. For some reason throughout I’ve been humming an old song from my schooldays and after a quick glance at it on YouTube it brought a fresh smile to my face. It’s the story of some prospectors caught by Cherokee Indians in the mid-west; their wagon kept “rollin’ along” and so long as it did with Cherokees firing arrows at them they kept “singing a Happy Song”. Eventually, as happened to many prospectors, the wagon wheels all came off and in the finale they sang in harmony with the Indians….”I’m singing a Happy Song”. Of course in real life it never ends like that and if you do see the analogy between the Cherokees and the mortgage lenders, bankers and ghastly outfits like Ocean Finance then please have a thought for those who cannot fend off the arrows or stop their wheels from coming off. The attitude in capital markets in the last 20 years has been that wheels (read “loans/overdrafts/mortgages/other monstrous devices”) can be fixed and it will be all right later but then as people are finding there is an end-game. It’s called repossession, IVA, bankruptcy or a trip to the pawn shop.
Much has been spoken about asset deflation/depreciation and I experienced it first hand last month myself. My 3 year VW Passat Estate was hit by a 4wd in a sussex lane. Around £2,500 damage (just a few wings) to a car that I discovered had dropped from over £16,000 when I bought it in 2005 to around £5,000 today. Who needs high fuel costs when car depreciation is this vicious? Our cousins throughout EU rent cars from Avis and Hertz saving on insurance, maintenance and depreciation and I am considering car rental as the way forward hereon. Elsewhere, house prices continue to slump slowly and commentators keep repeating their alarming forecasts about when prices will rise. What none of these experts appear to have fathomed is that the boom was born out of a lie, namely a housing shortage and fuelled by governments intent on cementing this lie by artificially keeping rates low. Now that inflation is here the central bankers have nowhere to go. Rising inflation and flirting stagnation equals stagflation so I think rates are likely to rise as LIBOR (London Inter Bank Offering Rate) seems to be showing us. It comes back to the fact that when an asset, in this case a brick, is dramatically over-priced it eventually comes back down to reality which is a long long way from here (another 50% collapse in retail property prices ex-Central London could be possible). Recently I’ve heard comparisons between the dot-com boom/implosion and the sharp rise in oil prices but I don’t agree with the analogy except it could be argued that the rise in dot-com stocks (some of you may remember Medi@Invest that rose from 3p to 98p and back to a penny!) is similar technically to the rise we’ve seen in oil. Dot-com was a synthetic concept where valuations were ignored and really it was just an over-exuberant extension of a long-term technology boom that went wrong sending zero earnings companies into the stratosphere. To date none of the oil stocks have even remotely performed in line with oil and the price has only nearly doubled after ever-increasing demand. Much has been blamed on speculators but the real issue is that oil demand has overtaken the world’s ability to deliver, refine and sell on this oil downstream effectively. I think $200pbo ++ is on the cards. And it is this pricing drive in oil, soft commodities (grain, rice, most food stuffs) and general commodities kicked into gear by South America, Africa, Middle-East, Asia, Far East and the FSU that worries the west and world capital markets. Some money men like Jim Rogers have embraced these new markets and opportunities whereas most people just fear them.
So what’s the answer?
Well, as many of you know since 2000 I have advocated overweight positions in commodities, oil and gas, precious metals, softs (although there are few equity ways to play this) but more recently have recommended selling out of raw commodities and reducing exposure in the other sectors. A rotational spin back into financials will occur in the next 6 months I believe and I suspect that the Beijing Olympics will open investors eyes to the problems prevalent in China. In fact their stock market has already slumped around 50% from the highs and I think the best way to play the growth game in these areas going forward is through overseas banks like HSBC and Standard Chartered. But not yet!!! It is marginally too early. Another bank failure is pretty likely and a host of a other failures to boot before the worm turns. In 1974 the market rallied very fast at the end of its final capitulation and so having cash on the sidelines in the next few months ready for reinvestment into banks, precious metals, oils, international conglomerates and the occasional housebuilder involved in the London Olympic bid could reap spectacular profits. Some of the stocks that I have sold recently could be re-examined when this happens. They are British Airways, Aviva, Prudential, Taylor Wimpey, etc. Furthermore, a few investment trust investments in emerging markets is great way to stem the inflation we are likely to experience here as governments try to stimulate manufacturing and the almost aimless service industries that are so weighed down by regulation. I continue to recommend Templeton Emerging and suggest also JP Morgan Fleming Indian Investment Trust and Black Rock Latin America, both on further weakness. In addition the following can be looked at; BP, Royal Dutch Shell ‘B’, Thomson Reuters, Randgold, Anglo American, BT Group, Imperial Energy, Fresnillo, Hochschild, and the interesting Blavod Extreme on any pullbacks.
To summarise this second quarter has seen FTSE100 decline 3.87%% although it fails to summarise the real decline as usual failed constituents have been replaced and daily volatility has at times been quite severe. The likelihood of gold recovering from below $900pto appears likely as inflation/stagflation looms and $1,200pto for gold this year is still on the cards. But if I had to make a near certain prediction then I think the short-term profit-taking seen in oil will submit to the bulls who could speculate oil to $150pbo and onwards to $200pbo later this year. Tensions in Middle East (Iran mainly) and between Russia and West continue so the next 6 months could well be even more lively with some great long-term investment and trading opportunities presenting themselves. One positive outcome towards the latter part of this quarter has been the relative stability of the US$ but as John Paulson, the Hedge guru, suggested only last week, the credit crunch maybe only 1/3rd of the way completed. Despite the difficulties in the banks and housebuilders there hasn’t been any noticeable failures amongst hedge funds, private equity groups or large corporations which is a bit surprising.
The recent comments surrounding banking protection have been highlighted and in my view the new intended threshold of £50,000 should NOT be trusted until a more full-proof mechanism is in place should another Northern Rock materialise. I continue to recommend that clients consider UK government fixed interest (gilts) for large capital sums but am happy to comment when required. Some of the attractive rates available at banks and societies should be spread around as previously suggested.
Have a good summer!
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