Wednesday, 31 August 2011

BRICS - Why all the fuss?

Coined by Goldman's rock-star Jim O'Neal, the acronym BRIC conjures up images of easily-attained fat returns. It's an illusion or a load of crock, whichever way you look at it. The recent addition of South Africa, somewhat contentiously, adds to the allure..

As a South African I don't deny the kudos of the association but has it changed the capital inflow? For now, at least, it's still too early to tell. What I do know, however, is South Africa's claim to some of the finest natural resource reserves anywhere on earth. Her infrastructure is Africa's most advanced. Corporate governance is entrenched; technology is current and management skills are innovative. Finding attractive investment opportunity in this country is relatively simple and with a very stable banking system settlement risk is greatly reduced. SA's problems lie in her politics and the socio-economic difficulties associated with her political past. Simmering rumours of resource nationalisation, constantly denied by government, is a variable of risk which is difficult, if not impossible, to quantify. Our economically disenfranchised youth are also becoming more militant. GDP growth of 1.3% is concerning. Even so, the so-called Japanese carry-trade, still views SA as one of its preferred investment havens. That assumes a stable currency and for now that's true.

That accounts for the S in BRICS but what about the rest?

B for Brazil is fast becoming the globe's bread-basket and with its associated infrastructure-spend and the price of soft commodities ie: food, you can't deny its importance. Dig a little deeper and you'll note that Brazil has a history of fiscal inefficiency and as a consequence more than its fair share of financial volatility. You wouldn't want to bet against another fiscal shock..

Russia pretends stability readily denied by its infamous disregard for corporate governance. Her oil and other natural non-renewable resources aside, her political instability and a virtually decrepit banking system make selective investment vital.

Ask any foreign businessman how difficult it is to operate effectively in C for China and you might begin to understand the cultural difficulties of 'the east'. Nevertheless, her infrastructure-spend and the extent of her peoples; more precisely her people's work-ethic exchanged for small reward, makes China an obvious investment choice. Even so, it's China's people, currently an economic strength, which adds disguise to her biggest weakness. I can't imagine that a highly educated people won't want more inclusion.. Socio-economic problems are just a click or two away.

Of the five associated countries India is the most interesting and also the most difficult to quantify. Tax-evasion is legendary. Entrenched ethnic segregation either geographically or on grounds of religion adds to political risk. Vast chasms between the rich and the poor are not socially sustainable particularly given the advanced levels of education her peoples generally enjoy. Nevertheless, India is vastly populated and demand for basic goods and resources will rise; her infrastructure is selectively sound, if only in the major urban metros; work-ethic is eastern rather than western ie: economically efficient and her peoples, generally, are well educated and ambitious. India like China, does have imminent socio-economic problems. Add internal religious intolerances and the risks escalate...

Assuming that emerging markets, BRICS the flagship, are a haven for fat returns is wrong. As always, do your homework and make selective choices. Inherent risks, well disguised, can be difficult to price.

Tuesday, 30 August 2011

It's the chicken; no the egg.... perhaps the chicken...

So what came first? The economy or the market? Take the financial crisis as a point of departure. Until Lehman all was well with the world - then surprise, then panic; then global stock-markets collapsed, confidence withered, interbank lending 'jammed' and 'For sales' signs mushroomed around the world. Today, some two years later, the global economy teeters on the brink.. Markets roar ahead, then falter, then recover, then falter..

So who came first? Greenspan or Bernanke? Over-exuberance had Alan holding rates too low. Printing presses roared around the clock. 'Treasonous' Bernanke's QE1, 2, 2 & a half, 3 and 4 ad infinitum, has Stiglitz in a bubble.

S&P cuts the States, admits the maths was poor. "Our downgrade's good.." but senior S&P executives fall on their swords and are asked to leave. US treasuries go viral on inflow demand..?

Democrats or Republicans? Bush slashed taxes, Barack's spent too much. Revenue suffered first; expenses are now too high.. Companies slash jobs and cut spending. Politicians urge them the other way. 'Spend more, hire more and win the future..' The world's awash with idle capital and idle skill...

They do or they don't need funding? "We DO NOT need external help..." - Bank of America [BAC] sells preferred stock and a 10 yr open call on wads of deep in-the-money discounted stock to clever Warren. Costs BAC 6% to fund.. That's not cheap. You might even say that's deceptively desperate..

"I never had sexual relations with that woman..." Enough said!

Obama's WPA...

Will Obama conjure up the imagination in his economic plan due on 5 September? The yes-we-can-man has, until now, been a contradiction in terms. In Obama's defence, the structural no-you-wont inefficiencies of Congress does effectively hamstring any change. Even so, for Barack it's now or never.

President FDR, the last great US democrat, rejuvenated the US national spirit and soon had the world singing his 'happy days are here again' ditty. To this day President Roosevelt remains the only US president to serve more than two terms.

Faced with crippling unemployment and global economic strife at the height of the Great Depression, FDR introduced his New Deal plan in his first 100 days in office, a program some considered wildly optimistic. Nevertheless, New Deal introduced relief and reconstruction programs which included paid jobs for millions of the unemployed. History records the economic recovery and the lift in national spirit as extraordinarily successful... Even so, FDR's greatest success and key to the economic recovery was his cross-party coalition which realigned American politics for decades.

So Obama has the recipe and the catchy ditty. What he lacks, perhaps, is the clarity of foresight, some political compromise and a little courage. If I was Barack I would look to Irene as the catalyst / excuse for my own New Deal / WPA plan..

Bernanke claims the farm

Last week traders 'built-in' a $500 billion FED-induced stimulus they colloquially nicknamed QE3. Equity prices clawed back some lost ground. As a consequence gold-bulls got hung up by the meat-hocks as the herd swung wildly this way and then the other. Risk on! Mr Buffett helped himself to a plate-full of BofA and coolly made a paper profit of $1.5 billion in less time than it took to say 'clever Warren..'

Amusingly, from a macro perspective at least, nothing much had changed.

When Chairman Ben rang for lunch at Jackson Hole, famous for its fine cuisine, we were served instead of rib-eye steak only fortune-cookies; without much salt.. Unappetising fare and tears were shed! So we-was-robbed ...or were we? Breaking the cookie open revealed a lesson for us all - 'tread careful-like; ranching isn't a piece of cake..'. You'll agree, steak served medium rare would be fine but if we don't see to the farm the cows will run out and it would be the hunger-jive for us all.

Chairman Ben's got my vote. Let's fix the problem properly this time.

Thursday, 25 August 2011

Apple to the core!

Apple Inc. without Steve Jobs is like Berkshire without Buffett. It's eggs-benedict without the hollandaise. It's okay but lacks pazazz ..

Apple's vision and innovation is legendary; unusually fine dinner-conversation fare..Who can deny the remarkable transformation / impact the iPod, iPad, iPhone & Mac has had on our daily activities. Amazingly Apple's success is distilled down to the brilliance, ethos and extraordinary appetite for risk of one man, Steve Jobs. To make the assumption that Apple will continue to evolve with the same energy without Jobs, even in his new role as Chairman, seems fanciful. No doubt Apple has enough pipeline technology to carry it through for a few years. The question then would be whether Apple has the strategic ability to maintain momentum. Only time will tell.

It's a risk some investors might not like.

Wednesday, 24 August 2011

Macro vs. micro - The disconnect!

Few, if any, professional money managers / traders have experienced the current market volatility at any time before. If the movements in global financial markets are unprecedented, the obvious question we should be asking is why..

The growing dissonance or disconnect, if you like, between macro economics and micro corporate performance is concerning. Most of us accept that the global economy is faltering. Confidence has declined in Europe. Austerity programs to address deficits will impact growth. Unusual dissent within central banks compounds the broadly inept leadership response. Educated predictions of a break-up in the Euro zone adds to the soup of confusion. On the flip-side, corporate profits are robust. Companies have cash, lots of it. Corporate fundamentals are sound and on that basis 'value-managers' (Warren Buffett most famously) and other 'bottom-pickers', Blackrock included, have been buying equity.

Given current economic conditions economists have, rightly, adjusted their growth forecasts lower and yet financial analysts forecast average earnings growth of 17% for S&P listed companies. 

So what's the missing ingredient? In a nutshell, CONFIDENCE! Until traders / investors accept the economically-negative medium-term consequences of the financial crisis, the most serious financial shock since the Great Depression, as part and parcel of the recovery process and that these things take time and money to rectify, volatility is here to stay.  

Tuesday, 23 August 2011

The Arab Spring

Since that now infamous suicide in political protest in late December 2010 a wave of demonstrations in the Arab world has led to revolution in Tunisia and Egypt; uprisings in Syria, Bahrain and Yemen; civil war in Libya and fears of ‘Arab –inspired’ violence by Palestinians on Israel. Sadly, countless lives have been lost. More will follow.

So what is at the heart of the unrest?

A popular yearning for democracy; improved representation in the leadership and decision- making processes of government and a share in their country’s wealth is commonly cited as causal. Ultimately though, people want an improved standard of living. The issue is more likely, therefore, to be socio-economic rather than an enforced change in political ideology i.e.: economic rather than political disenfranchisement.

These politically-contrived economic barriers imposed on the populace by government is a common thread in the Arab world. Even so, the impact of revolution is far-reaching. Quite distinct from the moral implications of violent protest are the structural deficiencies in leadership these countries now face. Although still in its democratic infancy there is little discernable economic improvement in Egypt. The same can be said for Tunisia. Concerns of a leadership void are real as the people battle their feudal differences. Only time will record the economic success of the regime changes rather than the short-lived political joy of victory in armed conflict.

Friday, 19 August 2011

Who understands the US bond market?

Would I sell equity at these levels to buy gold and US treasuries? No chance in hell; on paper anyway. Even so, smart investors are doing exactly that and it seems, amazingly, that a new chapter is being written in modern investment theory. Generally accepted conventional theory dictates the sale of bonds, (after a sovereign downgrade) and the purchase of equity on strong corporate fundamentals. Yet the reality is different.

So what's going on? The first thing I noticed was very little change, if any, in the dollar / euro cross. Why? Who's buying US treasuries then? The same can be said for the yen. If the Japanese were buying US treasuries they would be selling yen and yet the yen continues to strengthen against the cross. That's also strange.. The S&P 500 is already discounting a substantial collapse in corporate profits in the short / medium term on fears of a decline in global demand. Equities are, conventionally speaking, severely oversold on current fundamentals. International dividend yields, particularly in Europe, have become very attractive; some of the best multinationals paying as much as 6%. As long as companies pay the dividends (cash on balance sheets is high) I see NO reason whatsoever to buy US treasuries yielding almost nothing. So that doesn't make any sense either.. There is, however, a very real technical possibility that the US 10yr will test new yield lows of 1.8%. If that's true, then US equity prices should fall, on average, 6-8% given recent mathematical correlations between equities and bonds in the US. That would be strange too..

Marginal downward adjustments in growth have been penciled-in for emerging markets. Growth levels of 6%, on average, are still expected.

The interbank rates in Europe are high but nowhere close to levels seen in the financial crisis late last decade. Notwithstanding, smart investors, whoever they are, still see the US 10yr as the ONLY acceptable safe-haven investment left anywhere in global markets and yet currency markets remain static or even counter-intuitive. That's interesting if not a little unconventional..

Thursday, 18 August 2011

Equities are not always for the 'long-term'

One of the interesting dynamics of investment is the concept of buying and holding for the long-term. It's very often this dynamic that most affects your absolute performance or real return, net of fees, over a specific period. 

Take the S&P500 for example. Had you bought the index ie: it's constituent stocks, in January 2006 you would have paid 1300 or so 'for' the index. Today the index trades at 1145 approximately. Your real return, excluding dividend income, if any, would have been a real loss of 11% over the five years. Compounding the loss, realised or otherwise, is the concept of opportunity cost ie: the return you could have made in an alternative investment. Too many investors make the error of accepting a benchmark against which portfolio performance is measured which is too close in asset class to their own investment. Using the S&P500 as the example; had you accepted an annual benchmark of S&P +1% against which to 'measure performance' and your equity portfolio performed accordingly, you still would have lost money over the 5-year period. Even so, your financial manager would have 'out-performed' according to the mandate and would be entitled to charge a performance fee

By the way if you think this doesn't affect you, where do you think your pension is invested? 

Tuesday, 16 August 2011

A guilty conscience is political suicide

If your tax bill for the last financial year was only $7 million at an effective rate of 17%, your taxable income would have been approximately $41 million. Now, if your net assets are an estimated $50 billion that would equate to a ROE ('return on equity') of approximately 0.084%. It isn't top draw....

The equation is grossly simplified; assets don't necessarily generate a tax event each year and it's obviously a little tongue-in-cheek. We all respect the man. The pursuit of tax efficiency as opposed to tax-evasion is neither a crime nor a character-defect. There's also nothing wrong in securing the services of a LARGE team of accountants to mitigate personal taxable income...

Volunteering to pay more individual tax is admirable. Even so, the moral 'bang-for-buck' impact is forfeit when the party you actively support is advocating a general hike in taxes for ordinary people already hopelessly overburdened.

Monday, 15 August 2011

Vexed by the VIX?

If short-term trading strategies are influenced by the subjective, if not emotional, interpretation of risk, who then can deny the benefits of the VIX? The VIX or volatility or 'fear & greed' index, whichever way you like it, although reactive, does give investors a transparent market prognosis.

One of the interesting things about the VIX which you might not know is the accuracy of its 'prediction'. The VIX peaked at 49 in ALL but one major market sell-off. If you take the 6 equity sell-offs of the last 20 years ie: the October 1997 Asian crisis; the Oct 1998 LTCM hedge-fund crisis; the September 11 'terrorist -attack'; the July 2002 bear-market; the 'financial crisis' of 2008 and the first European solvency failure in May 2010 all but the 'financial crisis' in 2008 bottomed-out at a VIX of 49. The VIX peaked at 49 early last week and has subsequently turned down and consolidated in the lower 30s. 

So, if history is to be believed, when the VIX moves close to or at 49 and turns back down, markets generally consolidate and build a base. You could, quite conceivably, make a case for a consolidation in global equity markets. Conversely, if the VIX breaks 50 in the next few days or weeks then expect trouble, very big trouble...

Global leaders might just 'walk-the-talk'.

In this vortex of confusion isn't it nice to know that some sanity prevails. 'Global leaders' have not exactly covered themselves in glory and have, until now, had the propensity to do, well, nothing; and yet I can't help but hope that tonight's emergency summit 'walks-the talk'. Even so, it's difficult to see just what can be done. Nevertheless, those who pretend to know these things will conjure up an economic rabbit of sorts but can we really afford the crutch of a temporary fix?

If global leaders have a small measure of courage they will forego the illusionary band-aid promises of Greenspan, Trichet & Benanke and implement some meaningful change. I for one would follow such a leader. 

Friday, 12 August 2011

Let's call a spade a spade

Why have the Germans been so generous and why is the eurozone so important to Germany?

Over the last ten years external demand generated almost 70% of the growth in overall demand for German goods. Today, Germany is a touch off being the world's 2nd largest exporter...

Some will argue that the free-trade area we call the eurozone, gives Germany an exclusive competitive advantage. Exchange rates have been favourable and more importantly, Germany has enjoyed a captive market. The EU buys almost half of Germany's exports or just over 8 times the goods exported to China. In today's crisis other EU countries faced with rising costs are unable to control imports or devalue their currencies. Germany continues to export without restriction whilst the economic conditions in most of the remaining EU countries deteriorate..

Thursday, 11 August 2011

Taking stock: Risk on - risk off?

As the western world moves into either a 'soft-patch' or even a double-dip recession, you have to wonder where-to from here. Deleveraging seems to have surpassed our assumptions of an expansion in income. You could in fact argue that central-bank stimulus hasn't worked. Global growth, corporate earnings and end-of-year index projections have, generally, been revised lower. Currency intervention is prevalent but ineffective. It's becoming difficult to see what else can be done.

So we're at a crucial crossroads. Risks to the downside are seemingly insurmountable. The recent divergence between equities and the credit markets, as evidenced by swap prices, is a clear indication that banks could be facing a post-Lehman type freeze in the interbank exchange. The VIX, a measure of volatility or the 'fear-index' as it's called colloquially, trades at levels not seen since the financial crisis.

We all know this. Nevertheless, the merits or consequences of QE3, eurobonds and intervention in the currency markets are moot if CONFIDENCE in 'the system' doesn't improve. Companies aren't hiring; private & public debt-levels are not serviceable; commodity prices are too high; inflation is price-driven rather than wage driven and unemployment is rising. The lack of political transparency exacerbates the issue.

The message is simple and it's for ALL global leaders. Yes we know stocks are historically cheap but who really cares unless you make us believe in the system and prove to us that your plans are tangible in which we, the ordinary people, feature. Give us jobs. That's crucial. Address financial regulation and incentivise the 'hiring' of people. Don't accept the imminent layoff of another 100000 people in the banking sector. Prioritise spending on infrastructure and development. Most importantly, look to your own people first

Wednesday, 10 August 2011

Economic distress motivates desperation

Nobody condones the looting and the rioting in the UK. Opportunists, usually cowards, are by nature quite content to take advantage of any chaos for their own enrichment. The legality and moral disquiet aside, I wonder if the rioting is symptomatic of something much more dangerous.

Unemployment is here to stay unless some of the structural issues are addressed correctly. Even so, on balance, the 'reality- disconnect' between policymakers and 'the people' will enforce the status quo. If that's true, the youth are usually the demographic most at risk. The unfortunate outcome of unemployment and ineffective welfare in an inflationary environment is survival distress. We could well be at that tipping point where the economically-disenfranchised i.e: our youth, take matters into their own hands and challenge the status quo and sadly, who can blame them!

Tuesday, 9 August 2011

Golden baubles

Indians do it, the Chinese too. You might do it and I bet you know someone else who does. It's a cultural thing and it's socially acceptable. Yes, we've all bought gold at some stage in our lives either for ourselves or for loved ones. Even so, buying gold as a hedge against future trouble & strife seems fantastical, if not a little silly.

At face value a case can be made for an investment in gold but is it the safe-haven investment it's made out to be? For one thing there's not enough gold above or below ground to make it a meaningful asset class. It's insecure, expensive to transport and difficult to 'move' in any quantity when you 'need-the-money'. If you think volatility and risk levels are too high in equity, just wait and see what happens when gold loses it's speculative lustre. Selling a tangible product with intangible 'value' into a vacuum is, well, difficult.

Is gold worth buying? Yes it is. Long-term natural demand outstrips supply. Would I sell everything, forego re-balancing my current assets and buy into the fallacy that is gold? No I wouldn't and neither should you. 

Sunday, 7 August 2011

It's time to speak with one voice.

Confirmation that the sell-off in global markets is a vote of no confidence in Global Leadership seems to have escaped our politicians. In fact half of them are on a 'well-earned' break...

We now know that the global economy requires a decisive, cohesive, centrally coordinated plan to address its structural deficiencies / inefficiencies. Relying on Bernanke and or Trichet to inject liquidity into markets will only, as has been the case over the last two years, delay the inevitable. Hoping against hope that China will pull us out of this mess is a little naive..

Some difficult decisions have to be made. Cutting spending is not necessarily the right way. Let us call on Global Leaders, in open discussion, to place jobs on the agenda; put politics on the back-burner and just this once, remember their 'fiduciary' duties in the interests of our sanity and for the future of our children.

Thursday, 4 August 2011

Dragon children of China.

Now, why would you 'downgrade' US debt if you're holding $1.2 trillion's worth already? A 'prudent' investor would talk his book, surely? Isn't that what we've always done?

If you're Russian why would you 'downgrade' US debt if the short-term reaction is negative for the price of oil? Why too, if you are Russian, would you be buying more US fixed-assets than at any other time in living memory if the 'downgrade' results in a weakening of the US dollar?

If you're the good-sumaritan you say you are, why would you not assist Italy who had asked for help directly? If Italy goes then Europe falls.... You promised! I'm confused?

It's said that if you are a child of the Dragon, then going after what you want would be second nature to you. You might even destabilise the dollar, shake global markets, end the commodity 'super-cycle', weaken international bargaining power and buy more at severely reduced prices.

Monday, 1 August 2011

Unprecedented unemployment will drive humanity to the next evolutionary rung..

Somewhere in HSBC's reported pre-tax earnings of 7 billion pounds is the announcement that the bank will cut 30000 jobs before 2013. It's a shame. Cutting costs, as apposed to increasing revenue, is easy. A case could be made for weak-minded management or overtly influential, demanding shareholders or the ever-increasing reliance on technology. Either way 30000 lost jobs seems outrageous.

Nevertheless, it's in times of adversity that humankind finds the energy to 'take-it-up-a-notch'. Harnessing this strife-induced energy is key and yet perversely it's always the comfortably-employed and therefore generally less-motivated who make the structural decisions. i.e: tax-breaks, access to cost-effective funding etc.  It's an unfortunate flaw in our humanity. Even so, I suspect this time will be different. There are too many highly-skilled individuals being forced into an entrepreneurial environment by a more restrictive formal market. By definition these individuals must be innovative and or cutting-edge to compete. That takes imagination which is an inherently unique and exciting concept!

Interestingly then, it is these individuals who hold the key to GLOBAL prosperity and NOT the 'too-big-to-fails'. These have failed us already.

Zun Zhong* - my master....

It's 'Amazing Africa Season' on BBC Knowledge this week. In case you hadn't noticed it's been 'amazing Africa season' in China for years.  [indicative perhaps of how far behind the curve the western world now finds itself....] China's quest for resources knows no bounds and like good subjects it's STD practice to show them the way.. Nevertheless, moving forward, some will say that China's influence on Africa's infrastructure has been positive. Time will tell.

Africa's dependence is established. But what of China? Recent data shows that manufacturing activity expanded in May but at its weakest pace in three quarters. New orders are declining. Our mother ails... or does she?

China recently tightened its monetary policy, stirred the pot and 'turned down the heat' on inflation concerns. Chased from the kitchen, Western penchant for fast food screamed foul. Temporarily, commodity prices sold off....

Connoisseurs know, however, that the freshest resources cooked slowly, make the finest dish. A 'kitchen-sneak-peek' will prove that 'Mother knows best'.

*Zun zhong - respect