from DR just now ..."Imagine receiving this phone call: “I’m your new bank manager and I’ve been looking over your account. There’s a problem. Due to the shortcomings of my predecessor, you were mistakenly told that the amount outstanding on your loan was £100k. It is in fact £400k. Please take remedial action.”Well, that’s what the ONS (Office for National Statistics) has just told UK taxpayers. And amazingly, this ‘big news story’ isn’t being told…Run that one by me again please…Up until now, the ONS has always maintained that the UK’s debt is just under £1trn (that’s a mere one thousand billion).But this week, they’ve updated us. They now tell us that the real Government deficit is about four times larger than this! They say that the previous figure is selective and incomplete. And now they’ve decided to come clean.This is dramatic stuff. The ONS tell us that if Osborne wants to pay off the real debt, we’d be looking at tax rises of around 30%.Yes! That’s 30%...So first, what are these debts? According to The Independent, the ONS figures show:
Around a trillion in state old age pensions
Around a trillion in public sector pensions
Around a trillion in PFI & bank deposit guarantees
Around a trillion for the financial sector
These aren’t just some fudged accounting errors. These are serious liabilities that have to be honoured. PFI companies expect to get their share. Pensioners can’t be ignored… they’ll need the cash to live from.
If a business had been hiding these sorts of off-balance sheet figures, directors would be struck-off, or imprisoned...Somebody’s raided the piggybankIn many ways the last few generations have been lucky. Since the war, the standard of living has gradually increased. Education, houses, cars, retirement… we’ve had it all.These were ill-gotten gains. We’ve been living on borrowed money from future generations says the ONS.If trying to level the £1trn deficit wasn’t hard enough, how on earth are we going to settle this much, much larger claim lurking off balance sheet? The big issue is pensions. Public sector pensions are one great big Ponzi scheme and like any good Ponzi scheme, it works well for a while…The organiser (government in this case) pays the original investors dividends (pensions in this case) with fresh money from new investors (current workforce). But then you reach a tipping point. A point where you’re paying out more than you bring in.That’s where we are today. The future liabilities have been swept under the rug and now the rug’s bulging at the edges.What’s an investor to do? We’ve been discussing government’s off balance sheet finances for a while here at The Right Side and finally the debate’s reaching Main Street. By next year, the ONS has even promised us a comprehensive balance sheet for government finances based on proper accounting standards.In the meantime, I’ll keep you up-to-date on my disaster avoidance strategy. Gold, defensive stocks and emerging markets form the moat around our capital.Stay tuned for developments." ***yup..par for the course...the finances are in the same shape as immigration stats...one asian stockbroker told me this week he thinks there are 10m illegals in London alone...makes you think where our taxes have been going for years and who/what we've all been paying for...I've been highlighting these failings for years yet most UK citizens shrug their shoulders & don't want to think or admit that the system has been malfunctioning...next stop = property crash down -70% imo***
Tuesday, 20 July 2010
Tuesday, 6 July 2010
Review 2Q 2010 6th July 2010
China’s property market is beginning a “collapse” that will hit the nation’s banking system, said Kenneth Rogoff, the Harvard University professor and former chief economist of the International Monetary Fund.
In a quarter that has been dominated by a UK election outcome, the fate of the Euro, the notion that there may be a ‘double-dip’ after all, the BP (beach polluter) Gulf of Mexico saga and China’s depegging of the Yuan the current call by Rogoff suggesting that the biggest problem facing global markets may be the Chinese banks exposure to Chinese property is arguably the final piece of the ‘juggernaut scenario’ that I highlighted in my previous review. Chinese property prices rose +12.4% in 1H2010 on a reduction of -25% in sales whilst Standard Chartered predict a -30% price correction for 2H2010 to follow the stock market correction to date of -25.6% 1H2010.
Furthermore Mark Mobius, the Emerging Markets (Templeton EM) guru suggested recently that the $600trillion exposure in global derivatives presented a systemic danger to markets and banks especially which again does not bode well for China & EM’s for the forseeable future. The global bailout program started in 2008/9 has failed to stimulate bank lending that has recently tailed off badly (US bank losses have reached $703bn versus a stress-test prediction of $1.1.trillion). The stark contrast between US (where around 200 banks have failed) and UK does not look good either; the US banks appear to be two-thirds down the road whereas UK support has left the sector with nowhere to turn with 12% reduction in UK bank loans since Oct 2008.
The first major test for Cameron & Clegg’s Cons/Lib Coalition without doubt must be how to protect UK pension funds and investors from the onslaught from Obama as a result of BP’s oil spill following the explosion on the TransOcean rig. Admittedly the emergency budget predictably kept markets on an even keel with CGT shifting to 28% and plenty of scope for public sector spending cuts but now BP poses a more serious problem for any UK recovery. In essence I believe that the fall in the share price has been grossly overdone as estimates for the clean-up, repair and damages for local southern businesses (many of whom didn’t get the promised aid after Katrina) as well as penalties incurred rise to $30bn-$300bn estimates (mostly from the US). Looking at Piper Alpha (today is the 22nd anniversary of the fatal rig explosion in the North Sea) and the Exxon Valdez disasters it would appear that the top-end estimates are a little over-stretched and after insurance/reinsurance as well as a fairer sharing of blame (TransOcean, Anardarko,etc) the cost to BP could be less than $30bn. Suffice to suggest that there are a few of us who are concerned at the lack of fiduciary duty shown by BP directors in effectively giving the US authorities an open cheque book for $20bn; anyway to date the costs have amalgamated to $3.1bn so the suspension of the dividend for 2010 is arguably prudent as the market awaits asset sales and possibly equity and bond fund-raisings. I’m of the view that UK government should intervene here and pump say £20bn into BP rather than see dilution via other sovereign funds (Kuwait, China & Singapore have been mentioned). It’s an ongoing scenario but doesn’t deflect the fact that oil stocks (majors & explorers) are arguably cheap on a 2 year + view. The approach for Dana Petroleum by the Koreans (Dana rose c.20% on the initial approach) has highlighted the hidden value across the whole global sector regardless of extra compliance burdens. Nomura suggests that one of the side effects of the oil spill in the Gulf of Mexico “may be that companies have a higher risk appetite for non-US assets.” Hence my commitment to Heritage, Dana, Hardy and Tullow which ostensibly are outside the clutches of Obama who clearly is on some type of crusade with BP.
With constant debates about the state of economies and markets one stable story has been ‘Gold’ against the threat to the Euro, $ despite the relatively low global inflation rates. The age of deflation may well be nearing an end so I’m still actively bullish on gold shares and think that an overweight strategy in precious metals and oils should be maintained. One star amongst global equities is Apple Inc. with the recent launches of its iPad and new iPhone4 with its applications (known as ‘apps’) such as Pandora (effectively a personalised online radio station only open to US users for the time being). The Apple fight with Google’s competitor the ‘Nexus One Android’ should be interesting hereon!
I continue to hold BP despite its problems and Royal Dutch Shell ‘B’ (safe dividend), and miners Yamana Gold, African Barrick (now in FTSE100), Randgold (although the p/e is very high), Petropavlovsk (the former Peter Hambro), Newmont Mining and ASA (US listed closed-end fund focusing on precious metals) buying them on the dips. UK equities such as BAE Systems, British Land, GlaxoSmithKline, Sainsbury , Greene King, Standard Life, Foreign & Colonial Asset and Tullett Prebon can still be bought whilst Dana below 1450p, Heritage Oil, Hardy Oil, etc appear attractive for appreciation in the oil sector. Ashmore Global Opportunities Trust is an interesting play on sovereign and corporate debt and the company has been buying in its own stock to close the discount gap to net asset value. I am still very cautious on the equity market generally as I see valuations and expectations being too high and bullish. A dead cross on FTSE100 is in place and several chartists predict a test to 4,000 and much lower; I wouldn’t want to bet against their expertise as I see little that’s good value other than those stocks previously mentioned.
In a quarter that has been dominated by a UK election outcome, the fate of the Euro, the notion that there may be a ‘double-dip’ after all, the BP (beach polluter) Gulf of Mexico saga and China’s depegging of the Yuan the current call by Rogoff suggesting that the biggest problem facing global markets may be the Chinese banks exposure to Chinese property is arguably the final piece of the ‘juggernaut scenario’ that I highlighted in my previous review. Chinese property prices rose +12.4% in 1H2010 on a reduction of -25% in sales whilst Standard Chartered predict a -30% price correction for 2H2010 to follow the stock market correction to date of -25.6% 1H2010.
Furthermore Mark Mobius, the Emerging Markets (Templeton EM) guru suggested recently that the $600trillion exposure in global derivatives presented a systemic danger to markets and banks especially which again does not bode well for China & EM’s for the forseeable future. The global bailout program started in 2008/9 has failed to stimulate bank lending that has recently tailed off badly (US bank losses have reached $703bn versus a stress-test prediction of $1.1.trillion). The stark contrast between US (where around 200 banks have failed) and UK does not look good either; the US banks appear to be two-thirds down the road whereas UK support has left the sector with nowhere to turn with 12% reduction in UK bank loans since Oct 2008.
The first major test for Cameron & Clegg’s Cons/Lib Coalition without doubt must be how to protect UK pension funds and investors from the onslaught from Obama as a result of BP’s oil spill following the explosion on the TransOcean rig. Admittedly the emergency budget predictably kept markets on an even keel with CGT shifting to 28% and plenty of scope for public sector spending cuts but now BP poses a more serious problem for any UK recovery. In essence I believe that the fall in the share price has been grossly overdone as estimates for the clean-up, repair and damages for local southern businesses (many of whom didn’t get the promised aid after Katrina) as well as penalties incurred rise to $30bn-$300bn estimates (mostly from the US). Looking at Piper Alpha (today is the 22nd anniversary of the fatal rig explosion in the North Sea) and the Exxon Valdez disasters it would appear that the top-end estimates are a little over-stretched and after insurance/reinsurance as well as a fairer sharing of blame (TransOcean, Anardarko,etc) the cost to BP could be less than $30bn. Suffice to suggest that there are a few of us who are concerned at the lack of fiduciary duty shown by BP directors in effectively giving the US authorities an open cheque book for $20bn; anyway to date the costs have amalgamated to $3.1bn so the suspension of the dividend for 2010 is arguably prudent as the market awaits asset sales and possibly equity and bond fund-raisings. I’m of the view that UK government should intervene here and pump say £20bn into BP rather than see dilution via other sovereign funds (Kuwait, China & Singapore have been mentioned). It’s an ongoing scenario but doesn’t deflect the fact that oil stocks (majors & explorers) are arguably cheap on a 2 year + view. The approach for Dana Petroleum by the Koreans (Dana rose c.20% on the initial approach) has highlighted the hidden value across the whole global sector regardless of extra compliance burdens. Nomura suggests that one of the side effects of the oil spill in the Gulf of Mexico “may be that companies have a higher risk appetite for non-US assets.” Hence my commitment to Heritage, Dana, Hardy and Tullow which ostensibly are outside the clutches of Obama who clearly is on some type of crusade with BP.
With constant debates about the state of economies and markets one stable story has been ‘Gold’ against the threat to the Euro, $ despite the relatively low global inflation rates. The age of deflation may well be nearing an end so I’m still actively bullish on gold shares and think that an overweight strategy in precious metals and oils should be maintained. One star amongst global equities is Apple Inc. with the recent launches of its iPad and new iPhone4 with its applications (known as ‘apps’) such as Pandora (effectively a personalised online radio station only open to US users for the time being). The Apple fight with Google’s competitor the ‘Nexus One Android’ should be interesting hereon!
I continue to hold BP despite its problems and Royal Dutch Shell ‘B’ (safe dividend), and miners Yamana Gold, African Barrick (now in FTSE100), Randgold (although the p/e is very high), Petropavlovsk (the former Peter Hambro), Newmont Mining and ASA (US listed closed-end fund focusing on precious metals) buying them on the dips. UK equities such as BAE Systems, British Land, GlaxoSmithKline, Sainsbury , Greene King, Standard Life, Foreign & Colonial Asset and Tullett Prebon can still be bought whilst Dana below 1450p, Heritage Oil, Hardy Oil, etc appear attractive for appreciation in the oil sector. Ashmore Global Opportunities Trust is an interesting play on sovereign and corporate debt and the company has been buying in its own stock to close the discount gap to net asset value. I am still very cautious on the equity market generally as I see valuations and expectations being too high and bullish. A dead cross on FTSE100 is in place and several chartists predict a test to 4,000 and much lower; I wouldn’t want to bet against their expertise as I see little that’s good value other than those stocks previously mentioned.
Tuesday, 20 April 2010
Review 1Q 2010 15th April 2010
Respected billion pound fund manager, Tim Price (PFP Wealth), has the perfect solution for UK investors: “Any sane investor who buys into the gold bull should be buying ……. – while it’s still relatively cheap. The rise in bullion prices could yet prove extraordinary by comparison to the recent past …….”
Just as the ink is drying on what could prove to be another disastrous European merger (British Iberian Airways! -although I hear International Airways Group has been chosen) I’ve been pondering how to lighten up this report as the fiscal situation globally worsens. With employment data looking bleak the only way I can add a little sparkle to the proceedings is to continue to suggest that GOLD and related investments are increased forthwith. Our beloved leader, his henchmen and the media continue to press upon us the speed of the recovery but it seems only a smokescreen to protect the status quo. With the 1Q10 UK GDP growth number remaining at +0.4% markets remain buoyant but it’s questionable if the party can continue much longer.
I’m trying very hard to put anything in the Pro column right now for most domestic, all fixed income and a great many international securities as p/e’s look around 20% too expensive to me. As you know I have been recommending that investors focus on precious metals and oil stocks for some years now. On the Against side I continue to scribe the usual suspects (banks, builders, retails, service groups, in fact anything consumer orientated). Like many of us with a few grey hairs I’ve missed most of the rally we’ve been having on FTSE100 (ex-Randgold, BP & Royal Dutch of course) since March 2009. Isn’t this just a great tonic and confirmation of the great success of the stumulae that our great leaders, regulators, chancellors, bankers et al have undertaken on all our behalves? It’s fixed! I’m referring to the economies of course although reading the varying reports that cross my desk from market analysts I’m beginning to hear my builder “Chappers” who’s doing such a splendid job on my barn roof shout “wolf, wolf Hoblyn” from on high when I regularly return to my desk after having delivered him his regular cuppa and good news about the few stocks he owns. But for these people who actually work for a living and the regular missives from Mr Bonner and his colleagues at the “Daily Reckoning” I’m sure that I would be spoon feeding everyone with tales of fortune and great hope in the stock market. Except of course my judgment suggests that despite billions of $’s, Euros & £pounds later many of the balance sheets of these (banking) establishments are in fact still encumbered with large amounts of debt, toxic derivatives and who knows what. Now in addition to this many of our household blue chip companies are still looking very sick around the edges. They might be able to persuade us by their recently improved profits but looking a little closer many things don’t appear that rosy. After the bedlum of 4Q08 all market analysts went very quiet and slashed their forecasts (the Americans call this low-balling, a baseball expression) only to see many companies exceed these forecasts in 2Q09, 3Q09, 4Q09, 1Q10 but as we approach the summer there are many pundits now suggesting that the current “high-balling” (where analysts have upgraded and are ahead of real events) is going to leave the markets looking very flat sometime very soon. China itself is a major bubble (stocks, property and you guessed it CREDIT) and with current GDP growth at a staggering 11.9% the debate re the revaluation of the Yuen will likely recommence. The possible fall out and trade war could well be the trigger for a market correction of 10-25% replicating the events that unfolded back in the ‘30s when everyone back then thought that the bull rally that started after ‘29 had all the answers.
It’s clear that the Yuen/US Treasuries issue (the Chinese own $2.4trillion of treasuries) is the big storm cloud on the horizon and yet there are so many other storm clouds appearing too. I described the juggernauts heading in different directions and yet all meeting at the same crossroads scenario to one or two people recently and everyone seems to agree on this and yet no-one can predict which juggernaut or storm cloud will arrive first. The Greek debt issue and the extraordinary entanglement between the Greeks, the EU (Trichet just looks utterly out of depth to me!), the IMF and bond markets is clearly fazing currency dealers. Recently the Euro has taken some punishment and instead of speculators rushing to reserve currencies it would appear that many singled out GOLD, the new (actually it’s the oldest) currency, as the best bet driving it back to around $1,150pto. The key level to look for is $1,163 then $1,332, $1,461 but why should most of us worry about these moves? It is very early days for GOLD, very very early days in my professional opinion. One pundit recently predicted $15,000pto for the yellow metal once the entire unwinding process pans out and investors globally throw in the towel on paper currencies and many over-leveraged equities.
Inflation at (rising) c.3% in UK and the extraordinary core deposit rates for cash investors in UK is a honey trap that many will regret. I can see the flaw in these absurd Cash ISA rates (1.90% up to 2.67% at C&G for variable & a staggering 3.44% to 4.46% for fixed term ISAs) as there is something seriously wrong with the banking system when rates obtainable to the public exceed the current ½% Bank Rate and exceed the purile base deposit rates provided commercially which are on Call money circa 0.4% and on Short Term circa 0.85% (note 3 month LIBOR is 0.6484%). Depositors (“the public”) are being over optimistic with regard to the support programs and fail to take on board that a systemic risk is still intact. Another IceSave/Northern Rock could easily occur at some juncture so investors do need to wise up (the old wives tale “you don’t get something for nought”) to what really is on offer and FSA really should (but of course they wont) instruct financial institutions to publish clear health warnings on deposits that can apply rates over and above centuries obtained commercial reality. The counter argument may be that banks can take these deposits in at these rates and lend at 8%+ (all the way up to 20-25% I hear) but the actual lending levels are marginal I suspect and the true derivatives mix is allowing for some splendid creativity inside the banking halls. Albeit interest rates have been held last week (1/2% UK & 1% for Eurozone) although should inflation surface I can see a rude awakening. So is there any great merit in depositing funds at 2/3 ½% when inflation is at 3%?
Other future calamitous issues which markets and voters (ahead of what could well be a disastrous hung parliament and low turnout on 6th May) should be aware are (in very approximate chronological order);-
• Increasing likelihood of a stalemate in the Greek baleout leading to possible default
• California solvency issues (Los Angeles County too)
• Likelihood of a credit downgrade on UK (after 6th May) leading to severe test for £stg. UniCredit has alerted investors in a client note that Britain is at serious risk of a bond market and sterling debacle and faces even more intractable budget woes than Greece
• An increase in Quantative Easing beyond the existing £200billion level
• Continual fraction within EU on the back of EU debt worries
• Chinese inflation rate increases and China continues to build up Gold Reserves
• Chinese rate hike knocking the stuffing out of stock & property markets
• Chinese CREDIT bubble pricked leading to realization that Emerging Markets are no longer immune to downturns
• Ongoing stress within Eurozone (Portugal, Spain, Ireland & smaller zones)
• US Government stalls on Citigroup $35bn 7.7 billion shares sale IPO and triggers concerns as to how US & UK governments can sell/reduce their stockholdings (why should investors buy into banks when governments sell & withdraw support?)
• More forensic detailed evidence that Lehman and other banks used “balance sheet manipulation” to mislead investors and regulators (Goldman’s & JPMorgan under the spotlight more as the year unfolds). Note the City of Milan has filed irregularities against 3 int’l banks for the sale of derivatives (just the tip of the iceberg)SEE ***STOP PRESS BELOW***
• A complete failure by regulators to get to grips with the derivatives market that is still around $500 trillion exposure
• EU’s Directive on hedge fund and private equity firms blows up in everyone’s face (war of words between the anglo’s & Sarkozy/Merkel)
• More pain for householders in US & elsewhere (Spain & quite possibly UK) as mortgage defaults rise against a higher tax universe
• Oil to retest $100pbo 2nd & 3rd Q’s ; leads to slowdown and dip (note petrol in UK is already 120p per litre)
• Scrutiny over IMF’s role and it’s financial expertise after Greece
• Detroit rescue plan derails as consumers stay away from hybrid motors & especially US motors
• Facebook IPO plans disappoint as serious flaws in advertising revenue emerge for Google and other social networking sites
• Microsoft continues to lose ground to Apple and serious concerns surround those companies that sell add-on’s to Microsoft universe
• Institute for Fiscal Studies issue ongoing reports that debt interest payments will exceed by some margin the £73.8bn figure by 2014/15 as reported in the recent Darling Budget (or 10p in the pound of all UK earnings)
• Public sector net debt (excluding financial interventions) was £741.6 billion (equivalent to 52.6 per cent of GDP) at the end of February 2010 with forecasts approaching £1trillion prevalent
• Pension burden on the UK taxpayers will stand at an unaffordable £1trn (this is going to come to a head alongside compensation for Equitable Life policyholders)
If one has managed to digest just some of these (potential) headaches then need I mention the 8m Americans (several million in UK) out of work with no job prospects, the extraordinary tax burden on US taxpayers after Obama’s HeathPlan, the increasing likelihood that more Public Sector jobs will be created everywhere thus penalizing hard working people through accelerating income tax and other (stealth) tax rises, excessive and unnecessary regulation which will stop entrepreneurs and investors from making decisions that might just create job opportunities, the ongoing dramas unfolding with Iran/Israel/North Korea, the realization that UN aid and response programs are ineffective and very costly and that world food shortages are going to get worse, further climate change tensions, global water supply and purification issues, african AIDS HIV timebomb clicks……..it all seems an uphill struggle as politicians and power players try to dampen the grip that youngsters have on the Internet which used properly and openly could create more opportunities and just possibly solve many of the world’s problems.
Looking again at GOLD I notice that Hinde Capital, a precious metals specialist, has been telling its clients that it expects GOLD to climb to $5,000pto over the next few years. Interestingly there are 160,000 tonnes above ground and this is split roughly as follows; governments 30,000**, private sector as bullion/jewellery 110,000, industrial use 20,000. Another 50,000 is accounted as mining reserves (around 2,500 tonnes is recovered each year). In financial markets ETF’s (Exchange Traded Funds) are becoming more popular and the largest ETF, Spyder Gold Shares now accounts for 1,140.43 tonnes increasing roughly 10 tonnes per day. Central banks** exact figure is 30,116.9 tonnes with China, Russia and India being the biggest buyers. It seems to me that sovereign states are beginning to recognize that GOLD can underpin their currencies more and more and although there is no need for a return to the Gold Standard some nations have taken it upon themselves to safeguard their economies by hoarding for a rainy day. As for the price I still believe that a range of $2,000-2,500 can be achieved over the next year.
I reiterate that one should focus on oils, precious metals and companies that have relative low gearing and intact business models. Domestically the UK is far too exposed to a severe downturn when one factors in the scale of the UK government’s problems. Stockpicking in 2nd & 3rd quarters should remain selective and mainly international and special situations focused. I continue to hold BP and Royal Dutch Shell ‘B’ (safe dividends), Yamana Gold, Randgold (selling into strength circa £60 as the p/e is very high), Newmont Mining and ASA (US listed closed-end fund focusing on precious metals). UK equities such as GlaxoSmithKline (buy below £12, yield 4.8%), Sainsbury (yield 3.9%), Greene King (yield 4.9%), Marstons (yield 7.3%), Standard Life (yield 6%), Foreign & Colonial Asset (yield 8.8%) and Tullett Prebon (bid situation, yield 4.2%) could be examined for income (inside ISA’s) whilst Dana Petroleum, Heritage Oil, Dominion Petroleum appear attractive for appreciation alongside the recently listed miner African Barrick (Mkt Cap £2.5bn). The recent recommendation regarding WisdomTree Emerging Markets Currencies Fund ETF listed on NYSE epic: CEW $22.39 appears to be working as a hedge against western currencies whilst Ashmore Global Opportunities Trust is an interesting play on sovereign and corporate debt. To hedge one’s portfolio Proshares Ultra SHORT China also listed on NYSE epic: FXP $7.23 could still reap terrific rewards should China top out. Like many out there I think the surge in precious metals mining could be the one area that really blossoms out of the ’08 crisis and subsequent recession which many are still calling The Greater Depression.
I recently asked a friend what life was like in Thailand. Marvellous was the reply. There was no mention of unrest which is all that the UK media want to project to us. Indeed he described how his satellite dish (a South African system that sits in his garden) was erected in 1 day; he ordered in at 10am in the morning, men came to his house in Chiang Mai that afternoon and it was up & running by 3pm. Everyone is very courteous and everything works. People are happy and their Income Tax rate is 1%. If they want a doctor they pay for it from their savings. Everything is driven from the belief that people matter. It seems to me that the Welfare State has forgotten this and the sooner the West reverses this trend the better. It may be that the early cracks in this process are coming to fruition.
The sun has just come out and a hot summer is predicted in Western Europe by the farmers. I think a sound investment in new deckchairs is necessary and having read this ghastly review a soft drink or something stronger may be tempting. Best wishes!
*********STOP PRESS***********
This quarterly report has been delayed due to my having to assist in some funeral arrangements in UK last week followed by a bout of severe flu so please accept my apologies for any inconvenience caused. Of course the events that unfolded on Friday regarding Goldman Sachs have only confirmed my cautious stance hereon.
Just as the ink is drying on what could prove to be another disastrous European merger (British Iberian Airways! -although I hear International Airways Group has been chosen) I’ve been pondering how to lighten up this report as the fiscal situation globally worsens. With employment data looking bleak the only way I can add a little sparkle to the proceedings is to continue to suggest that GOLD and related investments are increased forthwith. Our beloved leader, his henchmen and the media continue to press upon us the speed of the recovery but it seems only a smokescreen to protect the status quo. With the 1Q10 UK GDP growth number remaining at +0.4% markets remain buoyant but it’s questionable if the party can continue much longer.
I’m trying very hard to put anything in the Pro column right now for most domestic, all fixed income and a great many international securities as p/e’s look around 20% too expensive to me. As you know I have been recommending that investors focus on precious metals and oil stocks for some years now. On the Against side I continue to scribe the usual suspects (banks, builders, retails, service groups, in fact anything consumer orientated). Like many of us with a few grey hairs I’ve missed most of the rally we’ve been having on FTSE100 (ex-Randgold, BP & Royal Dutch of course) since March 2009. Isn’t this just a great tonic and confirmation of the great success of the stumulae that our great leaders, regulators, chancellors, bankers et al have undertaken on all our behalves? It’s fixed! I’m referring to the economies of course although reading the varying reports that cross my desk from market analysts I’m beginning to hear my builder “Chappers” who’s doing such a splendid job on my barn roof shout “wolf, wolf Hoblyn” from on high when I regularly return to my desk after having delivered him his regular cuppa and good news about the few stocks he owns. But for these people who actually work for a living and the regular missives from Mr Bonner and his colleagues at the “Daily Reckoning” I’m sure that I would be spoon feeding everyone with tales of fortune and great hope in the stock market. Except of course my judgment suggests that despite billions of $’s, Euros & £pounds later many of the balance sheets of these (banking) establishments are in fact still encumbered with large amounts of debt, toxic derivatives and who knows what. Now in addition to this many of our household blue chip companies are still looking very sick around the edges. They might be able to persuade us by their recently improved profits but looking a little closer many things don’t appear that rosy. After the bedlum of 4Q08 all market analysts went very quiet and slashed their forecasts (the Americans call this low-balling, a baseball expression) only to see many companies exceed these forecasts in 2Q09, 3Q09, 4Q09, 1Q10 but as we approach the summer there are many pundits now suggesting that the current “high-balling” (where analysts have upgraded and are ahead of real events) is going to leave the markets looking very flat sometime very soon. China itself is a major bubble (stocks, property and you guessed it CREDIT) and with current GDP growth at a staggering 11.9% the debate re the revaluation of the Yuen will likely recommence. The possible fall out and trade war could well be the trigger for a market correction of 10-25% replicating the events that unfolded back in the ‘30s when everyone back then thought that the bull rally that started after ‘29 had all the answers.
It’s clear that the Yuen/US Treasuries issue (the Chinese own $2.4trillion of treasuries) is the big storm cloud on the horizon and yet there are so many other storm clouds appearing too. I described the juggernauts heading in different directions and yet all meeting at the same crossroads scenario to one or two people recently and everyone seems to agree on this and yet no-one can predict which juggernaut or storm cloud will arrive first. The Greek debt issue and the extraordinary entanglement between the Greeks, the EU (Trichet just looks utterly out of depth to me!), the IMF and bond markets is clearly fazing currency dealers. Recently the Euro has taken some punishment and instead of speculators rushing to reserve currencies it would appear that many singled out GOLD, the new (actually it’s the oldest) currency, as the best bet driving it back to around $1,150pto. The key level to look for is $1,163 then $1,332, $1,461 but why should most of us worry about these moves? It is very early days for GOLD, very very early days in my professional opinion. One pundit recently predicted $15,000pto for the yellow metal once the entire unwinding process pans out and investors globally throw in the towel on paper currencies and many over-leveraged equities.
Inflation at (rising) c.3% in UK and the extraordinary core deposit rates for cash investors in UK is a honey trap that many will regret. I can see the flaw in these absurd Cash ISA rates (1.90% up to 2.67% at C&G for variable & a staggering 3.44% to 4.46% for fixed term ISAs) as there is something seriously wrong with the banking system when rates obtainable to the public exceed the current ½% Bank Rate and exceed the purile base deposit rates provided commercially which are on Call money circa 0.4% and on Short Term circa 0.85% (note 3 month LIBOR is 0.6484%). Depositors (“the public”) are being over optimistic with regard to the support programs and fail to take on board that a systemic risk is still intact. Another IceSave/Northern Rock could easily occur at some juncture so investors do need to wise up (the old wives tale “you don’t get something for nought”) to what really is on offer and FSA really should (but of course they wont) instruct financial institutions to publish clear health warnings on deposits that can apply rates over and above centuries obtained commercial reality. The counter argument may be that banks can take these deposits in at these rates and lend at 8%+ (all the way up to 20-25% I hear) but the actual lending levels are marginal I suspect and the true derivatives mix is allowing for some splendid creativity inside the banking halls. Albeit interest rates have been held last week (1/2% UK & 1% for Eurozone) although should inflation surface I can see a rude awakening. So is there any great merit in depositing funds at 2/3 ½% when inflation is at 3%?
Other future calamitous issues which markets and voters (ahead of what could well be a disastrous hung parliament and low turnout on 6th May) should be aware are (in very approximate chronological order);-
• Increasing likelihood of a stalemate in the Greek baleout leading to possible default
• California solvency issues (Los Angeles County too)
• Likelihood of a credit downgrade on UK (after 6th May) leading to severe test for £stg. UniCredit has alerted investors in a client note that Britain is at serious risk of a bond market and sterling debacle and faces even more intractable budget woes than Greece
• An increase in Quantative Easing beyond the existing £200billion level
• Continual fraction within EU on the back of EU debt worries
• Chinese inflation rate increases and China continues to build up Gold Reserves
• Chinese rate hike knocking the stuffing out of stock & property markets
• Chinese CREDIT bubble pricked leading to realization that Emerging Markets are no longer immune to downturns
• Ongoing stress within Eurozone (Portugal, Spain, Ireland & smaller zones)
• US Government stalls on Citigroup $35bn 7.7 billion shares sale IPO and triggers concerns as to how US & UK governments can sell/reduce their stockholdings (why should investors buy into banks when governments sell & withdraw support?)
• More forensic detailed evidence that Lehman and other banks used “balance sheet manipulation” to mislead investors and regulators (Goldman’s & JPMorgan under the spotlight more as the year unfolds). Note the City of Milan has filed irregularities against 3 int’l banks for the sale of derivatives (just the tip of the iceberg)SEE ***STOP PRESS BELOW***
• A complete failure by regulators to get to grips with the derivatives market that is still around $500 trillion exposure
• EU’s Directive on hedge fund and private equity firms blows up in everyone’s face (war of words between the anglo’s & Sarkozy/Merkel)
• More pain for householders in US & elsewhere (Spain & quite possibly UK) as mortgage defaults rise against a higher tax universe
• Oil to retest $100pbo 2nd & 3rd Q’s ; leads to slowdown and dip (note petrol in UK is already 120p per litre)
• Scrutiny over IMF’s role and it’s financial expertise after Greece
• Detroit rescue plan derails as consumers stay away from hybrid motors & especially US motors
• Facebook IPO plans disappoint as serious flaws in advertising revenue emerge for Google and other social networking sites
• Microsoft continues to lose ground to Apple and serious concerns surround those companies that sell add-on’s to Microsoft universe
• Institute for Fiscal Studies issue ongoing reports that debt interest payments will exceed by some margin the £73.8bn figure by 2014/15 as reported in the recent Darling Budget (or 10p in the pound of all UK earnings)
• Public sector net debt (excluding financial interventions) was £741.6 billion (equivalent to 52.6 per cent of GDP) at the end of February 2010 with forecasts approaching £1trillion prevalent
• Pension burden on the UK taxpayers will stand at an unaffordable £1trn (this is going to come to a head alongside compensation for Equitable Life policyholders)
If one has managed to digest just some of these (potential) headaches then need I mention the 8m Americans (several million in UK) out of work with no job prospects, the extraordinary tax burden on US taxpayers after Obama’s HeathPlan, the increasing likelihood that more Public Sector jobs will be created everywhere thus penalizing hard working people through accelerating income tax and other (stealth) tax rises, excessive and unnecessary regulation which will stop entrepreneurs and investors from making decisions that might just create job opportunities, the ongoing dramas unfolding with Iran/Israel/North Korea, the realization that UN aid and response programs are ineffective and very costly and that world food shortages are going to get worse, further climate change tensions, global water supply and purification issues, african AIDS HIV timebomb clicks……..it all seems an uphill struggle as politicians and power players try to dampen the grip that youngsters have on the Internet which used properly and openly could create more opportunities and just possibly solve many of the world’s problems.
Looking again at GOLD I notice that Hinde Capital, a precious metals specialist, has been telling its clients that it expects GOLD to climb to $5,000pto over the next few years. Interestingly there are 160,000 tonnes above ground and this is split roughly as follows; governments 30,000**, private sector as bullion/jewellery 110,000, industrial use 20,000. Another 50,000 is accounted as mining reserves (around 2,500 tonnes is recovered each year). In financial markets ETF’s (Exchange Traded Funds) are becoming more popular and the largest ETF, Spyder Gold Shares now accounts for 1,140.43 tonnes increasing roughly 10 tonnes per day. Central banks** exact figure is 30,116.9 tonnes with China, Russia and India being the biggest buyers. It seems to me that sovereign states are beginning to recognize that GOLD can underpin their currencies more and more and although there is no need for a return to the Gold Standard some nations have taken it upon themselves to safeguard their economies by hoarding for a rainy day. As for the price I still believe that a range of $2,000-2,500 can be achieved over the next year.
I reiterate that one should focus on oils, precious metals and companies that have relative low gearing and intact business models. Domestically the UK is far too exposed to a severe downturn when one factors in the scale of the UK government’s problems. Stockpicking in 2nd & 3rd quarters should remain selective and mainly international and special situations focused. I continue to hold BP and Royal Dutch Shell ‘B’ (safe dividends), Yamana Gold, Randgold (selling into strength circa £60 as the p/e is very high), Newmont Mining and ASA (US listed closed-end fund focusing on precious metals). UK equities such as GlaxoSmithKline (buy below £12, yield 4.8%), Sainsbury (yield 3.9%), Greene King (yield 4.9%), Marstons (yield 7.3%), Standard Life (yield 6%), Foreign & Colonial Asset (yield 8.8%) and Tullett Prebon (bid situation, yield 4.2%) could be examined for income (inside ISA’s) whilst Dana Petroleum, Heritage Oil, Dominion Petroleum appear attractive for appreciation alongside the recently listed miner African Barrick (Mkt Cap £2.5bn). The recent recommendation regarding WisdomTree Emerging Markets Currencies Fund ETF listed on NYSE epic: CEW $22.39 appears to be working as a hedge against western currencies whilst Ashmore Global Opportunities Trust is an interesting play on sovereign and corporate debt. To hedge one’s portfolio Proshares Ultra SHORT China also listed on NYSE epic: FXP $7.23 could still reap terrific rewards should China top out. Like many out there I think the surge in precious metals mining could be the one area that really blossoms out of the ’08 crisis and subsequent recession which many are still calling The Greater Depression.
I recently asked a friend what life was like in Thailand. Marvellous was the reply. There was no mention of unrest which is all that the UK media want to project to us. Indeed he described how his satellite dish (a South African system that sits in his garden) was erected in 1 day; he ordered in at 10am in the morning, men came to his house in Chiang Mai that afternoon and it was up & running by 3pm. Everyone is very courteous and everything works. People are happy and their Income Tax rate is 1%. If they want a doctor they pay for it from their savings. Everything is driven from the belief that people matter. It seems to me that the Welfare State has forgotten this and the sooner the West reverses this trend the better. It may be that the early cracks in this process are coming to fruition.
The sun has just come out and a hot summer is predicted in Western Europe by the farmers. I think a sound investment in new deckchairs is necessary and having read this ghastly review a soft drink or something stronger may be tempting. Best wishes!
*********STOP PRESS***********
This quarterly report has been delayed due to my having to assist in some funeral arrangements in UK last week followed by a bout of severe flu so please accept my apologies for any inconvenience caused. Of course the events that unfolded on Friday regarding Goldman Sachs have only confirmed my cautious stance hereon.
Wednesday, 13 January 2010
GOLD prediction by CEO of US Gold Inc (UBX)
CEO of US Gold Mckewen predicts $2,000pto end 2010 & wait for it....$5,000pto towards 2012/2013
Review 4Q 2009 6th January 2010
“There are bulls, bears, stags, lambs and giddy goats”
– a Market Maxim c/o W. Dennis Heymanson
After the FTSE All-World index had, by mid-November, surged more than +75% from the bottom and the FTSE Emerging Latin America index prospered +123% the global equity rally started to falter in December. With questionable signs of economic recovery in the US that could mean the end of almost zero interest rates and other attempts to stimulate the economy there are clear danger signs flagged in markets worldwide. The FTSE100 ended the year +22% at 5412 and +53% from its March low of 3512; the percentage gain of 2009 numerically matched its loss for the decade -22% having fallen from the all-time dot.com high of 6930 on 30th December 1999 (although if one includes dividend income then the FTSE100 returned a total of less than 7% over the decade). The following factors drove the market in 2009;
• Quantitative easing (QE) and concerted support for banks internationally (TARP) which boosted confidence.
• Dramatically reduced interest rates and increased money supply have enabled companies to borrow very cheaply; capital raisings strengthened balance sheets in the process.
• Drastic cost-cutting has helped stabilise company profits forcing analysts to upgrade previously downbeat projections.
• A change in sentiment from fear end 2008 of a global depression towards more measured concerns merely about the speed of recovery.
It’s clear that many global shares are beginning now to look expensive. If profit improvements and economic recovery don't materialize then the market may surrender some of the 2009 gains. The limited shock from the Dubai debt crisis in 4Q 09 served as a reminder of the fragility of the recovery but more worryingly the recently announced Chinese manufacturing numbers imply an acceleration of GDP growth to circa 10-11% from 7% approx. in 2009. If China is overheating then some knock on effect will be felt in emerging markets and through commodity markets at some juncture. I have been flagging this for some months and still see little real value at this time and continue to maintain high cash reserves. Last year the driving debate was whether the shape of the economy would be a ‘V’ (investors may be misguided for backing the quick fix prescribed by Bernanke), ‘W’ (double dip), ‘U’ or ‘L’. Although the jury is still out it’s clear that international money supplies are over-extended and interest rates may well reverse the trend earlier than most analysts predict. The double dip looks the most likely scenario to me and a sharp correction in China may be the catalyst for this.
Looking forward hereon I continue to focus on oils, precious metals and companies that have relative low gearing and intact business models regardless of the impending tax hikes and slowdown. Clearly the UK domestic scene is far too exposed to a severe downturn when one factors in the scale of the UK government’s problems. Thus I believe that 1Q 2010 is (yet again) one to remain cautious. My favourite stock picks are BP, Royal Dutch Shell ‘B’ (safe dividends), Yamana Gold, Newmont Mining and ASA (US listed closed-end fund focusing on precious metals). I am still avoiding banks/financials (although HSBC & Standard Chartered can be examined on any fallback) and recommend a selective few UK equities (Sainsbury, Greene King/Marstons, Imagination Technology, Dana Petroleum/Heritage Oil/Dominion Petroleum) although generally speaking I remain very cautious and suggest selling into strength where feasible and sensible. The big investment issue really surrounds bonds and when best to offload US$, £sterling and Euro instruments. Sometime in this quarter it will be sensible to diversify into alternative currencies (I have been recommending WisdomTree Emerging Markets Currencies Fund ETF listed on NYSE epic: CEW $22.21) or to hedge one’s portfolio through Proshares Ultra SHORT China (also listed on NYSE epic: FXP $8.02). Gold is likely to re-examine $1,200pto quite soon and possibly test the next resistance level of $1,332pto by the summer; my hunch is that further testing of $1,461pto resistance could be achieved by 3 Q with oil moving up simultaneously to $90pbo+.
Warren Buffett recorded his worst performance against the stock market in a decade last year after committing $44bn to a takeover of Burlington Northern Santa Fe railroad and lowering his expectations for investment returns. Berkshire Hathaway Inc. the company Buffett has led as chairman for more than four decades, rose +2.7% on the New York Stock Exchange in 2009, less than the +23% return in the Standard & Poor’s 500 Index. This year is likely to be the toughest for many years for tax payers and small businesses and I expect unexpected volatility at times. As the Sage of Omaha, Warren Buffett has found out himself it is extremely difficult to measure short-term performance versus long-term strategy. He believes in his acquisition of Burlington in the same way I believe in gold and oil related investments for the first half of this new decade.
– a Market Maxim c/o W. Dennis Heymanson
After the FTSE All-World index had, by mid-November, surged more than +75% from the bottom and the FTSE Emerging Latin America index prospered +123% the global equity rally started to falter in December. With questionable signs of economic recovery in the US that could mean the end of almost zero interest rates and other attempts to stimulate the economy there are clear danger signs flagged in markets worldwide. The FTSE100 ended the year +22% at 5412 and +53% from its March low of 3512; the percentage gain of 2009 numerically matched its loss for the decade -22% having fallen from the all-time dot.com high of 6930 on 30th December 1999 (although if one includes dividend income then the FTSE100 returned a total of less than 7% over the decade). The following factors drove the market in 2009;
• Quantitative easing (QE) and concerted support for banks internationally (TARP) which boosted confidence.
• Dramatically reduced interest rates and increased money supply have enabled companies to borrow very cheaply; capital raisings strengthened balance sheets in the process.
• Drastic cost-cutting has helped stabilise company profits forcing analysts to upgrade previously downbeat projections.
• A change in sentiment from fear end 2008 of a global depression towards more measured concerns merely about the speed of recovery.
It’s clear that many global shares are beginning now to look expensive. If profit improvements and economic recovery don't materialize then the market may surrender some of the 2009 gains. The limited shock from the Dubai debt crisis in 4Q 09 served as a reminder of the fragility of the recovery but more worryingly the recently announced Chinese manufacturing numbers imply an acceleration of GDP growth to circa 10-11% from 7% approx. in 2009. If China is overheating then some knock on effect will be felt in emerging markets and through commodity markets at some juncture. I have been flagging this for some months and still see little real value at this time and continue to maintain high cash reserves. Last year the driving debate was whether the shape of the economy would be a ‘V’ (investors may be misguided for backing the quick fix prescribed by Bernanke), ‘W’ (double dip), ‘U’ or ‘L’. Although the jury is still out it’s clear that international money supplies are over-extended and interest rates may well reverse the trend earlier than most analysts predict. The double dip looks the most likely scenario to me and a sharp correction in China may be the catalyst for this.
Looking forward hereon I continue to focus on oils, precious metals and companies that have relative low gearing and intact business models regardless of the impending tax hikes and slowdown. Clearly the UK domestic scene is far too exposed to a severe downturn when one factors in the scale of the UK government’s problems. Thus I believe that 1Q 2010 is (yet again) one to remain cautious. My favourite stock picks are BP, Royal Dutch Shell ‘B’ (safe dividends), Yamana Gold, Newmont Mining and ASA (US listed closed-end fund focusing on precious metals). I am still avoiding banks/financials (although HSBC & Standard Chartered can be examined on any fallback) and recommend a selective few UK equities (Sainsbury, Greene King/Marstons, Imagination Technology, Dana Petroleum/Heritage Oil/Dominion Petroleum) although generally speaking I remain very cautious and suggest selling into strength where feasible and sensible. The big investment issue really surrounds bonds and when best to offload US$, £sterling and Euro instruments. Sometime in this quarter it will be sensible to diversify into alternative currencies (I have been recommending WisdomTree Emerging Markets Currencies Fund ETF listed on NYSE epic: CEW $22.21) or to hedge one’s portfolio through Proshares Ultra SHORT China (also listed on NYSE epic: FXP $8.02). Gold is likely to re-examine $1,200pto quite soon and possibly test the next resistance level of $1,332pto by the summer; my hunch is that further testing of $1,461pto resistance could be achieved by 3 Q with oil moving up simultaneously to $90pbo+.
Warren Buffett recorded his worst performance against the stock market in a decade last year after committing $44bn to a takeover of Burlington Northern Santa Fe railroad and lowering his expectations for investment returns. Berkshire Hathaway Inc. the company Buffett has led as chairman for more than four decades, rose +2.7% on the New York Stock Exchange in 2009, less than the +23% return in the Standard & Poor’s 500 Index. This year is likely to be the toughest for many years for tax payers and small businesses and I expect unexpected volatility at times. As the Sage of Omaha, Warren Buffett has found out himself it is extremely difficult to measure short-term performance versus long-term strategy. He believes in his acquisition of Burlington in the same way I believe in gold and oil related investments for the first half of this new decade.
John Paulson & GOLD 30th Dec 2009
John Paulson, a presenter at the Grant’s Fall Investment Conference and undoubtedly the richest man in the room. Portfolio magazine dubbed him “The Man Who Made Too Much” after he made $3.7 billion by betting against mortgage-backed securities (MBS). He is one of the greatest hedge-fund managers ever.Gold is his favourite today. As to why, Paulson presented a simple, but compelling case. First, the monetary base has exploded in a way we’ve never seen before. The monetary base is essentially the Federal Reserve Bank’s currency and reserves. The Fed, by buying up securities in this crisis, has pumped a lot of money into the economy.As Paulson explained, that’s because this base money has not yet been lent out and multiplied throughout the economy. Yet the monetary base and money supply are highly correlated, “almost 1-to-1 between the two,” Paulson said.That means that as the monetary base expands, the money supply surely follows, though there is a lag. (Money supply is a broader measure of money than just the monetary base, as it includes personal deposits and more. The monetary base is like a kind of monetary yeast. It makes money supply rise.)If money supply grows faster than the economy, that will create inflation, says Paulson. As it is impossible for the economy to grow anywhere near that vertical spike in the monetary base, Paulson contends inflation is coming The U.S. is not alone in its money-printing exercise. The supply of most currencies is expanding rapidly – even the normally tame Swiss franc. In the race of paper currencies, they are all dogs. Hence Paulson’s interest in gold, which no government can make on a whim. Therefore, in the context of the exploding monetary base, gold seems relatively cheap. In other words, as the money supply rises, so does the price of gold, eventually. As a result, says Paulson, “gold has been a perfect hedge against inflation.” There is some slippage over time. The gold price can change faster or slower than the money supply. But when the market gets worried about inflation, the gold price usually changes much faster – as happened in the 1970s. In 1973 – to pick a typical year – inflation was 9% and gold rose 67%. That was a pattern common in the 1970s. The potential for inflation this time around is greater than it was in the 1970s, given that the growth in the monetary base is so much greater than it was in the 1970s. Gold could do much better this time around, reaching “$3,000 or $4,000, or $5,000 per ounce” as Paulson said. ***my thoughts exactly***
Tuesday, 6 October 2009
Review 3Q 2009 6th October 2009
“Markets have gone up too much, too soon, too fast” - ROUBINI 5th Oct 2009
Nouriel Roubini, dubbed Dr Doom after he predicted the financial crisis, yesterday warned stock and commodity markets will fall as the slow pace of recovery disappoints investors. “Markets have gone up too much, too soon, too fast,” said the New York University professor. “I see the risk of a correction, especially when the markets realise the recovery is not rapid and V-shaped, but more like U-shaped. That might be in the fourth quarter or the first quarter of next year.”
Since March this year the sentiment in the markets has changed dramatically from the dark days of the credit crunch allowing for a thinly traded rally to occur (S&P up around 60%). Many financiers minds have been bewildered somewhat and find it incredulous that Wall Street and Main Street could disconnect so alarmingly. Today the bulls still hold the market by the scruff of the neck but as I highlighted in my ‘market warning’ email of 11th September investors globally have entered dangerous territory. Alarmingly markets and investors are ignoring consumer confidence statistics alerted to the fact that unemployment is actually rising (see US non-farm pay roll numbers recently) and production is suffering as businesses fail to come to terms with lower revenues and fewer customers. These same consumers, many of them cash investors, are hardly showing much faith in the stock market either. Cash net inflows into US equity funds is a measly $2.6bn in the last 6 months whereas bond fund inflows have increased appreciably. Politicians crow about the supposed success of various measures especially the scrappage schemes and yet GM report a drop of actual car sales end-Sept as -47% year on year. This is hardly good news.
In UK banking sector many tax-payers (self-employed & SME’s mainly) complain that lending has stalled or at least when proffered is wholly unreasonable. Despite a bank rate of ½% most banks are still profiteering from their entrapped customers (one can count the number of UK retail banks remaining on one’s fingers leaving the thumbs free). With FSA now calling for 3 x more capital amongst UK banks (to be held in Gov Bonds) one wonders where the money is coming from or how the lending practices and practicality thereof can be improved and ignited. Elsewhere billions have been raised in discounted rights issues where many household names have stiffened resistance by bolstering over-geared balance sheets but as I’ve highlighted since joining Redmayne’s in January 2005 the (dis)trust in universal accounting practices whereby companies are being encouraged (by accountants, consultants and investment bankers) to spuriously withhold detailed information concerning derivative positions and suchlike from shareholders is still very much in evidence. With regulators, politicians and market commentators calling for better transparency in the mature economies the opposite still seems to be the case when it comes to treating shareholders fairly. This and unfathomable corporate governance is the most damaging aspect of the latter stages of the long bull run that encompassed dot-com and then a global base metals stampede. In essence the continued prospects in the BRIC’s and other emerging markets are keeping mature markets alive but the real concern should be that practices adopted by western banks might just be replicated in the final engines of growth which the ‘emerging/emerged’ markets appear to represent. With very little growth in mature markets being translated to the bottom line it’s likely that more dividends are cut in problematic sectors as businesses struggle to manage and profit in an increasingly slowing global economy. Over-regulation could easily kill off many more smaller businesses unless incoming governments can get to grips with curbing the Public Sector and the nonsense that goes with it. Obama, Cameron, and Blair (in anticipation of the Fettes boy’s rise to head boy of the EU Senate) may just find that trying to translate jobs from the public to private sectors is virtually impossible in the current unreal regulatory universe. The domestic outlook for investors and young people is truly depressing and it’s not surprising that the pessimists are suggesting that the so called recession may well migrate towards The Greater Depression.
With £175 billion of Quantitative Easing in UK and some similarly shocking US$ numbers over the pond the real result of all this regulatory and governmental interference in capital markets is that debt levels across the private and public sectors is still spiraling (out of control?). I heard the other day that every citizen in UK may well have to pay directly/indirectly £25,000 per person for years to come just to stall the overall public sector debt. This frightening scenario just hasn’t been taken on board by most of the electorate (yet). Nor by most politicians either nor the vast numbers of spin doctors by the judge of it.
A further major sell-off of global equities is likely quite soon. Multiples (price earnings ratios) and valuations on all accounts appear over-cooked (see 20 & 30 day moving averages). A nasty surprise may come from China very soon as the 10s of millions there embrace all the creature comforts of rapid growth <=Rapidly rising property prices, extraordinary sales in domestic goods -computers, mobiles, iPods, etc, new factories (cars), greater mobility and a stock market in the stratosphere, etc, etc.> Where has one heard that before?
When will equities become attractive (again)? Well, some think they already are but markets don’t just retrace and rise constantly and consistently. It may be a worrying loss of faith in the $, it may be a shock in taxes, it may be a black swan event (Iran, Korea, Afghanistan), an implosion of growth in China &/or emerging markets, a major corporate scandal and failure (& this is quite possible), but something will happen that brings markets back to reality.
Going forward hereon the shrewdest way to position one is to focus on oils, metals (mainly of the precious variety) and the odd gem amongst traditional equities. To date those investors holding blue-chips may indeed have had a good run but when the train slides off the track or enters the siding the repairs or replacements may be very laboursome and cumbersome.
To summarise then I continue to believe that the next quarter is (yet again) one to batten down the hatches! My favourite stock picks are BP, Royal Dutch Shell ‘B’ (safe dividends), Randgold, Harmony Gold and Yamana Gold; the latter 3 are ‘insurance viz-a-viz capital protection’ against a severe downturn predicted. I am still avoiding banks/financials and thinking seriously about pharmas (Glaxo), water (Northumbrian) and grocers (Sainsbury). Whether Noudini is right about the ‘U’ shape is open to conjecture as others predict ‘L’ & ‘W’ patterns but a wake up call similar to what happened when Lehman failed is a virtual certainty. Detroit still is in a mess and western industries are struggling to maintain momentum. The stock markets, of course, aren’t looking at Main Street just yet but I detect an undercurrent of doubt creeping in. As you know I have been advocating high cash positions throughout the last Q and exposure in ‘gold’ where appropriate as inflation can be spotted on the horizon.
Nouriel Roubini, dubbed Dr Doom after he predicted the financial crisis, yesterday warned stock and commodity markets will fall as the slow pace of recovery disappoints investors. “Markets have gone up too much, too soon, too fast,” said the New York University professor. “I see the risk of a correction, especially when the markets realise the recovery is not rapid and V-shaped, but more like U-shaped. That might be in the fourth quarter or the first quarter of next year.”
Since March this year the sentiment in the markets has changed dramatically from the dark days of the credit crunch allowing for a thinly traded rally to occur (S&P up around 60%). Many financiers minds have been bewildered somewhat and find it incredulous that Wall Street and Main Street could disconnect so alarmingly. Today the bulls still hold the market by the scruff of the neck but as I highlighted in my ‘market warning’ email of 11th September investors globally have entered dangerous territory. Alarmingly markets and investors are ignoring consumer confidence statistics alerted to the fact that unemployment is actually rising (see US non-farm pay roll numbers recently) and production is suffering as businesses fail to come to terms with lower revenues and fewer customers. These same consumers, many of them cash investors, are hardly showing much faith in the stock market either. Cash net inflows into US equity funds is a measly $2.6bn in the last 6 months whereas bond fund inflows have increased appreciably. Politicians crow about the supposed success of various measures especially the scrappage schemes and yet GM report a drop of actual car sales end-Sept as -47% year on year. This is hardly good news.
In UK banking sector many tax-payers (self-employed & SME’s mainly) complain that lending has stalled or at least when proffered is wholly unreasonable. Despite a bank rate of ½% most banks are still profiteering from their entrapped customers (one can count the number of UK retail banks remaining on one’s fingers leaving the thumbs free). With FSA now calling for 3 x more capital amongst UK banks (to be held in Gov Bonds) one wonders where the money is coming from or how the lending practices and practicality thereof can be improved and ignited. Elsewhere billions have been raised in discounted rights issues where many household names have stiffened resistance by bolstering over-geared balance sheets but as I’ve highlighted since joining Redmayne’s in January 2005 the (dis)trust in universal accounting practices whereby companies are being encouraged (by accountants, consultants and investment bankers) to spuriously withhold detailed information concerning derivative positions and suchlike from shareholders is still very much in evidence. With regulators, politicians and market commentators calling for better transparency in the mature economies the opposite still seems to be the case when it comes to treating shareholders fairly. This and unfathomable corporate governance is the most damaging aspect of the latter stages of the long bull run that encompassed dot-com and then a global base metals stampede. In essence the continued prospects in the BRIC’s and other emerging markets are keeping mature markets alive but the real concern should be that practices adopted by western banks might just be replicated in the final engines of growth which the ‘emerging/emerged’ markets appear to represent. With very little growth in mature markets being translated to the bottom line it’s likely that more dividends are cut in problematic sectors as businesses struggle to manage and profit in an increasingly slowing global economy. Over-regulation could easily kill off many more smaller businesses unless incoming governments can get to grips with curbing the Public Sector and the nonsense that goes with it. Obama, Cameron, and Blair (in anticipation of the Fettes boy’s rise to head boy of the EU Senate) may just find that trying to translate jobs from the public to private sectors is virtually impossible in the current unreal regulatory universe. The domestic outlook for investors and young people is truly depressing and it’s not surprising that the pessimists are suggesting that the so called recession may well migrate towards The Greater Depression.
With £175 billion of Quantitative Easing in UK and some similarly shocking US$ numbers over the pond the real result of all this regulatory and governmental interference in capital markets is that debt levels across the private and public sectors is still spiraling (out of control?). I heard the other day that every citizen in UK may well have to pay directly/indirectly £25,000 per person for years to come just to stall the overall public sector debt. This frightening scenario just hasn’t been taken on board by most of the electorate (yet). Nor by most politicians either nor the vast numbers of spin doctors by the judge of it.
A further major sell-off of global equities is likely quite soon. Multiples (price earnings ratios) and valuations on all accounts appear over-cooked (see 20 & 30 day moving averages). A nasty surprise may come from China very soon as the 10s of millions there embrace all the creature comforts of rapid growth <=Rapidly rising property prices, extraordinary sales in domestic goods -computers, mobiles, iPods, etc, new factories (cars), greater mobility and a stock market in the stratosphere, etc, etc.> Where has one heard that before?
When will equities become attractive (again)? Well, some think they already are but markets don’t just retrace and rise constantly and consistently. It may be a worrying loss of faith in the $, it may be a shock in taxes, it may be a black swan event (Iran, Korea, Afghanistan), an implosion of growth in China &/or emerging markets, a major corporate scandal and failure (& this is quite possible), but something will happen that brings markets back to reality.
Going forward hereon the shrewdest way to position one is to focus on oils, metals (mainly of the precious variety) and the odd gem amongst traditional equities. To date those investors holding blue-chips may indeed have had a good run but when the train slides off the track or enters the siding the repairs or replacements may be very laboursome and cumbersome.
To summarise then I continue to believe that the next quarter is (yet again) one to batten down the hatches! My favourite stock picks are BP, Royal Dutch Shell ‘B’ (safe dividends), Randgold, Harmony Gold and Yamana Gold; the latter 3 are ‘insurance viz-a-viz capital protection’ against a severe downturn predicted. I am still avoiding banks/financials and thinking seriously about pharmas (Glaxo), water (Northumbrian) and grocers (Sainsbury). Whether Noudini is right about the ‘U’ shape is open to conjecture as others predict ‘L’ & ‘W’ patterns but a wake up call similar to what happened when Lehman failed is a virtual certainty. Detroit still is in a mess and western industries are struggling to maintain momentum. The stock markets, of course, aren’t looking at Main Street just yet but I detect an undercurrent of doubt creeping in. As you know I have been advocating high cash positions throughout the last Q and exposure in ‘gold’ where appropriate as inflation can be spotted on the horizon.
Subscribe to:
Posts (Atom)