Thursday, 30 June 2011

Your summer could turn cold.

The US runs out of money on 2 August. Unless Congress agrees to raise the $14.3 trillion ceiling sometime before D-day there's an excellent chance that the ratings agencies will cut the US credit rating to a notch or two above junk.

The consequences are two-fold. One; the US defaults on its debt payments. Two; large sums of cash will be withdrawn from the US treasury market prompting the US to increase interest rates to attract investment. Higher rates in the US would ultimately kill-off any hope. Forget the eurozone, Chinese PMI, Greece or Mayan calendar. This is the big one.

Wednesday, 29 June 2011

The commodity outcome is inevitable...

Five (5) new independent BUY recommendations for Glencore International Plc. were presented in Europe this morning. Unless you're a shareholder or potential shareholder of Glencore, who cares, right? Wrong!

Glencore, the global leader in commodities marketing, has three principal business segments: Metals & Minerals; Energy Products and Agricultural Products. China is the world's biggest consumer of commodities and given that the latest Chinese PMI (50.1) is one bip away from a suggested economic contraction, why the unanimous optimism? The CRB index, a commodities price index, broke down through its 200dma on Monday earlier this week. It's an amusing BAD news + BAD data = BUY equity.

So what are we missing?

  1. Obama authorised the release of oil from the SPR (Strategic Petroleum Reserve) which negatively affected crude prices. It's a short-term aberation.
  2. China's forecast GDP growth for 2011 is 9.3%.
  3. India's forecast GDP growth for 2011 is 8.75%
  4. The FFPI, a food price index, is a touch below its all-time high. Politics, weather and limited arable land continues to plague food supply. Demand for food as the world's population explodes will inevitably outstrip supply.
  5. Oil reserves will eventually run out... 
  6. The earth is not replenishing its metals & minerals...
  7. More people will eat more food...
Some cynically suggest that Glencore's recently timed listing signalled the top of the commodity market. Even so, if we agree that price is a function of supply and demand, then you might want to pay more attention, long-term, to Glencore's comings and goings. 

Being patronised isn't regulation..

Politics and politicians hold the key to the success of your investments, like it or not.

The formal press is inundated with examples of political influence. One of the more frustrating is the ‘intense negotiation’ on The Hill w.r.t the possible increase of the US $14.4 trillion debt ceiling. If the ratio of US debt to GDP is tapering off why are markets subjected to all the political posturing? Incidentally, excluding the mayhem in the bond markets which could cost investors up to $100 billion, the direct cost for every notch the US gets downgraded would cost an extra $20 billion, give or take, in interest payments.  

Goldman’s O’Neill coined the grouping acronym BRIC which makes reference to the emerging economies of Brazil, Russia, India and China, in itself a collective nonsense given their disparities in socio-economic development. Surprisingly, South Africa was recently appended to this illustrious group. It is now moot whether SA is still considered the Gateway of Africa for FDI, which remains consistently low. Internalised political debate on the merits of nationalisation continues to haunt SA; a political variable difficult to account for in assessing investment risk.

Elsewhere ordinary Greek people, thoroughly confused by the antics of their 'leaders' demonstrate their displeasure in the streets. Greek banks have run out of cash and contagion in the region has become a real possibility. Yet Greek politicians hesitantly consider the consequences of their self-indulgence at the expense of the populace at large…

Australia's Prime Minister Julia Gillard now fancies a crusade against the tobacco companies. Perhaps it’s political pandering to populism? Even so, wherever you find yourself on the moral spectrum it's obvious that the consequences for companies like Philip Morris are profound.

Political negligence or omission is equally financially destructive. Seems to me that the current intention to increase capital adequacy for banks at the expense of growth is three years too late and smacks of patronisation rather than regulation. Who elects these idiots anyway? 

Tuesday, 28 June 2011

More than one way to skin a cat..

Inevitably some countries will have to pull out of the euro. The current Eurozone quandary is less complicated than originally envisaged assuming that leaders show some backbone for a change and look to the region's future. Not surprisingly therefore, there are more ways than one to resolve the current Eurozone problems. Hand-outs are politically-popular but it's not best practice. Assuming German tax-payers are thrilled to continue supporting their Greek friends I suppose it's the easiest way. (ie: It's quite simple to lay-off the region's problems on unassuming, 'less-financially-astute' people with better things to do than understand the financial ineptitude of their neighbours...)

There is a better way...

The Eurozone has approved a large sum of money to 'bail-out' Greece. Even so, the Greeks find the Ts & Cs  a little 'austere'.. Like Oliver, our Hellenic friends have asked for more. We've given them more but they don't like the added spice...

Let Greece go. Use the money approved by the EU for Greece to prop up exposed European banks who might suffer loss from a Greek default. Kill two birds with one bail-out, so to speak. That way the EU has a reasonable chance of being repaid by REGULATED institutions (OCHI chance that the Greeks will repay their debts). Greece can 'cry-freedom' and pour themselves another shot..

Friday, 24 June 2011

It's the land of the free & the home of the brave.

Let's not forget that the US Gross Domestic Product (GDP) for 2010 was a measured $14.66 trillion. Simplifying what is in fact a very difficult formula, China's figure for comparison was a 'paltry' $5.85 trillion. (In case you're interested, Greece's GDP was $305 billion. The GDP sum total of Portugal, Ireland and Greece (PIG) for 2010 was $740 billion. If you add Spain ($1.4 tn) and Italy (2.1 tn) to that figure it's $4.2 trillion. So what's really got Trichet pressing the 'red panic button'?) Those who know these things will tell you that the size of the world stock market is conservatively estimated at $40 trillion. The size of the global derivatives book is about $800 trillion, give or take...

So when Chairman Benanke announced that US mutual funds / lenders have little or no exposure to Greece and 'neighbours' what he really means is that US banks aren't exposed to derivative instruments linked to those countries. You'll read that European banks have direct exposure in Greece to the tune of $135 billion. Their collective direct exposure in Spain is an exciting $2 trillion.

NOBODY, however, is saying much about the exposure of these institutions to PIGS-linked geared instruments. Watch the share prices of BNP and Socgen for clues.... 

Thursday, 23 June 2011

Premature speculation..



Act 1 Scene 1     (Enter court jester) Greece's Papandreou survives a confidence vote last night. Were there any doubts? [A smattering of applause]
Act 1 Scene 2     (Enter stage 'far-left') EC president Jose Manuel Barroso 'suggests' an immediate 1 billion euro emergency fund for Greece.
Act 1 Scene 3     (Enter his lordship & lady of the Exchequer) Trichet and Merkel parody their relief. Sarkozy nods knowingly.

[Meanwhile unbeknownst to the cast at large; 'Speculator', a dashing and accomplished villain bumps the currency markets for a day. Commodities trade predictably higher and then drift off. (Sniggering laughter).]


Act 2 Scene 1  (On cue enter village idiot - 'IMF') 'Spain is next...' 
Act 2 Scene 2 (Enter villain - 'Speculator') Sell Spain, I said Sell dammit and then SELL again!!

[Sadly Spanish paper is sold to lavatory levels. Amazingly, Spain can't raise money cost effectively in the capital markets (No? Really?). Sniggering laughter]

Act 2 Scene 3 (Enter second village idiot {yes, it's a village of idiots} - 'Ratings company') Downgrade Spain... We BELIEVE that Spain has insufficient resources to meet its obligations...' 
Act 2 Scene 4 (Enter his lordship & lady of the Exchequer) We must ACT on Spain's behalf....!

[Speculator sniggers quietly......]

Act 3 Scene 1 (Enter all village idiots) 'Portugal is next'
Act 3 Scene 2 (Enter villain) ......................

This is not the end...

Wednesday, 22 June 2011

There's life but not as we know it..

This is what we know:
  1. Greece, Spain, Italy & Portugal are at or on the 'brink' of financial collapse.
  2. The Federal Reserve's $600 billion stimulus program is almost at an end.
  3. China has raised its interest rates it an effort to curb spending.
  4. GDP predictions have been cut from 3.2% to 2.6%
As a result the S&P 500 has erased this year's gains.

What you might not know:
  1. The Standard & Poor 500 average price to earnings over the last 20 years is 20.
  2. The current average S&P 500 price to (last year's) earnings is 15.
  3. Ave. S&P price to book currently is 2.1 or lower than it has traded 90% of the time since the early nineties.
  4. Ave. forecast growth for 2011 earnings on the S&P 500 is somewhere between 16 - 18%.
You could say that equity valuations for companies listed on the Standard & Poor's 500 index are cheap... In fact, the valuations are at levels last seen some 25 years ago. 

Monday, 20 June 2011

What's the smart money doing?

Taken at face-value this Morgan Stanley chart (published June 2011) is intriguing, to say the least.

Even though nominal US debt continues to rise, US total debt-to-GDP is deleveraging. ie: it's becoming more sustainable... Conversely, the Eurozone's in a little more trouble. There are, however, signs of a more subtle decline in Europe's debt ratio too.

Nevertheless, it's ABUNDANTLY clear that the smart short-medium money is positioning itself away from the euro...

Is Greenspan really Rafiki*?

Former Federal Reserve chairman, Alan Greenspan, is 'almost certain' that Greece will fail to meet its obligations. The consequences of a Greek default are twofold. Contagion would sweep through global banks, US banks included. The probability of a global double-dip recession would be greatly elevated, obviously. More subtly, he says, the US economic recovery would falter on rising apprehension of a negative long-term outlook. Recently published economic data confirms declining confidence. Is it the end of the world as we know it?

Elsewhere, Germany's Merkel and France's Sarkozy are 'discussing' the prospect of further aid to Greece. It's political posturing, nothing more. Everybody knows that Germany and France can ill afford the failure of the Euro...

Incidentally, the Greeks may choose to default anyway...The longer this EU indecision drags on the higher the risk to other countries. If European and other banks haven't already taken the necessary steps to mitigate exposure risk given that the ENTIRE market suspected, some months ago, that a Greek default was likely, then put your money under your mattress. It's the end of the world as we know it.

*Disney's Rafiki knows what he knows.. He's a wise, mystical, wandering baboon no less vocal even in his dotage.

Friday, 17 June 2011

S&P is a moody fitch!

Who would dispute that rating agencies are a contradiction in proposition? These 'leaders of financial-market intelligence' supposedly provide investors with credit ratings, risk evaluation and fundamental investment research. Investors are therefore 'better informed' when making investment decisions..

The agencies are ostensibly independent, which is a concern, to say the least. It's seemingly a 'run with the hare & hunt with the hounds' business model. It's also patently illogical to accept that ALL three agencies understated the risks associated with the 'complex' instruments that resulted in the financial crisis.

So if it's garbage in - garbage out, should investors really care whether S&P 'downgrades' the debt outlook for Greece, the US, Liechtenstein or Frankenstein?

Tuesday, 14 June 2011

A drachma for the road, anyone?

In ancient Greece it was said that the truth is heard from angry enemies or from good friends. So who then fits in where in contemporary Greece? Who's on the coveted party invitation list? Who's overstayed their welcome and who's left early?

Paradoxically, the Greek merrymakers are seemingly unconvinced that the party is over......

Trichet is predictably neither friend nor foe.  Like the IMF he covets his status. Social networking is not always friendly. Theirs is a relationship less intimate than friendship. Germany's Weidmann is seemingly p*ssed and wants his gift back. Merkel's smile lingers.... her banker friends long gone once the ouzo ran out.

Besides the Greekshs, the ECB is still toasting the wake because there's nothing more boring than a sanctimonious ex-drunk..

Monday, 13 June 2011

Hands off, Harvard.....

Africa and her peoples give comedians and ex-colonialists enough material to make her the butt of many jokes. 'The trouble with Africa is it's full of Africans..... etc. ad nauseum'. Corruption, poverty, crumbling-infrastructure, disease, illiteracy, political instability and poor service delivery are just a few of many seemingly insurmountable problems that Africa has to endure.

There's a fine line between capitalism and exploitation. Taking unfair advantage of corruption or illiteracy doesn't justify the capitalistic nature of the transaction, even if legal. Plato said 'One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors'. He could also have said 'Capitalism benefits from inferior governance' and that is exactly what some US 'Institutions of higher learning' are exploiting.

Profit-driven institutions including Harvard, Vanderbilt and Iowa Universities, some of which, perversely, find the need to front their land ('grab') purchases through agents in London, have acquired extensive tracts of land in Africa for pittance. 49-year leases for £25000, 25-year tax waivers and the displacement of thousands of Africans reliant on subsistence for survival, are just a few of these 'deals' which require international scrutiny.

...and you call us corrupt..!

Friday, 10 June 2011

Sharp knives, tears & onions.

OPEC's [+/- 34% of global crude production] 12 member countries fail to reach an agreement on production levels. Interestingly whilst Iraq & Iran warned on an oil-price collapse, the Saudis voted for an increase in production. Nevertheless, oil futures spiked on the usual expectations that the northern hemisphere's seasonal (summer) demand would drive prices higher. 

The FED Chairman, Bernanke, expects a global economic recovery in the second half of this year. The prediction, to some extent, depends on a decline in the price of oil..

So your broker calls you up and recommends a trade: 'Buy 'KSA Oil (fictitious)', the P/E is historically low....' Typically you'll ponder the usual problems: Do I 'do nothing'? Do I buy? What do I buy? When do I buy? Considering OPEC's impasse and Bernanke's prediction of lower prices, what do you do? *

Like an onion the financial markets are complex and multi-layered. Occasionally the trade is less obvious than it seems.

Understanding onions is a skill. Use a sharp knife or you'll cry....

*pro-traders would buy volatility, not oil nor 'KSA Oil' (fictitious)

A Dimon' in the rough

How many 'homeowners-in-default' and or the recently economically disenfranchised understand the term credit default swap? What about securitisation, sub-prime paper or toxic mortgage? Better yet; what about risk model reliability? These terms are fashionably random, arbitrary and used casually by the 'too-big-to-fails'.

What about debt-traps, food inflation and homelessness? Real people understand these terms and they are painful and never used casually. 

Jamie's intelligent, educated and a potential literary giant...Some books he might consider writing might include illustrated light relief such as 'Once upon a time we fooled the world' or 'You, your assets and my $5 million cash bonus'. For the children a short story 'Pinocchio and the million hungry kids'. Professionals might enjoy a personally autographed copy of 'TARP money in commodities and how we made a fortune' or perhaps a copy of 'Risk modelling - The illusion'. 

For the animated-movie buffs 'What I taught the FED', (a literary failure) starring SjIT (Super James in tights).

Wednesday, 8 June 2011

Garde against touts selling tricks.

Reducing poverty and improving equity are currently considered the core objectives of the IMF; a far cry from its founding mandate of international monetary cooperation. People change; so too global circumstance. Technology aids & abets the process. Institutions slow on the uptake quickly fade into history. [Nokia is, perhaps, the most modern example.] If we are to assume therefore that the IMF promotes progression, why then should we accept more of the same? For the prospective IMF candidates that famous French proverb 'Ce n'est pas la vache qui crie le plus fort qui donne le plus de lait.'* 

Incidentally, traders living in the past reliant on 'established' support levels squander opportunity. Look to the future, it's progressive.

*(Quite literally) It is not the cow who shouts the loudest who gives the most milk...

Monday, 6 June 2011

'It wasn't me' is still legal..

Legal victory rarely reverses a fall-from-grace. Strauss-Khan, previously of the IMF, may prove his innocence but his resignation predisposes a self-inflicted fall-from-grace. Mathematics might save Goldmans but the writing's-on-the-wall. Invincibility is ephemeral and like the school-yard bully beaten to the punch, the word soon gets out. 

For traders it's just the same. 'First loss, best loss' is a trading principle most traders learn the hard way. Hoping against the odds and holding a trade beyond first loss may eventually prove correct but the moral victory costs in opportunity lost. More importantly it takes you out the game whilst you 'watch and wait', a trading inefficiency you can least afford.

Voting NO, confidently.

The Japanese Prime Minister survives a vote of no confidence but should we care? Politicians come and go, surely? Are there not far bigger fish to fry?

The Peter Principle states that in any hierarchy 'every employee tends to rise to his / her level of incompetence'. This notion conjures up all sorts of possibilities, not so? Goldman's hot-seat would not be Blank; Mugabe's a wannabe, a rung or two too high; Moody's, S&P & Fitch might have heard the exit bell before QE one, two and three. Watchdogs would have unearthed their Madoff and so on...

Between us, confidentially, incompetence seems the order of the day.


Thursday, 2 June 2011

Eisbein mit Tzatziki

Times have changed and in most respects, for the better. Nevertheless, it can be argued that respect for discipline has diminished with work ethic. Authoritative figures live in fear of 'harming the people' by imposing restraints upon their instincts... leading, inevitably, to a breakdown of personal responsibility.

When accepted / published standards of 'good behavior' are ignored and not reprimanded, the transgressor is not given the opportunity to develop a sense of responsibility... The authority [ie: institution, government, common union etc] therefore fails in its own responsibilities.

There is ONE market certainty and that is that traders will always sell short the instruments they think will uncover the most stops. Inevitably (unsurprisingly) prices will fall. Artificial stimulation merely 'kicks the can down the road' and confirms the trade.

In these modern times the EU must inspire Greece and serve her best interests by refusing more aid or traders will not 'spare the rod', which is a thoroughly violent, old-fashioned idea...