Changing the rules to suit themselves .....again.

Very few equity investment-models, if any, are consistently accurate. Large derivative-based hedge books attest to that fact.

Why then do investors rely so heavily on research when ALL research is, in one form or another, subjectively predictive? So why bother? If the rules of the game stayed constant, then that would be a different ball-game altogether. Research would be more substantive. Investment reality, however, is a very different animal and the devil's always in the fine-print. Turn the pretty glossy document over and you'll notice in nondescript terms one important caveat. Paraphrased most claim:  'blah blah bulldust ...more blah and loads more bulldust. This research report is based on our interpretation of current circumstances only..ceteris paribus (all things being equal)... blah blah bulldust'; disclaimer, disclaimer. 

Therefore, equity research interprets and forecasts a company's / sector's prospects based on current variables only, of which regulatory stability is just one of many and the most ephemeral. Take Africa for example. (..or Australia or South America or China or whatever...). Some of the world's largest mining houses have significant investments in Africa. Most of those investments generate significant ROI and constitute a large proportion of the miner's earnings. Those investments only yield significant returns, assuming the investing miner has done its homework, if the regulatory conditions remain constant. It's when the rules are changed, either in a regime overhaul or a significant change in policy, that forecast returns become nothing more than blah-blah-bulldust! 

So when Zimbabwe, on a whim, demands the transfer of 51% of a miner's listed equity or South Africa talks of a 51% super-tax on profits, it doesn't matter much what Bloomberg's- Best (No.1 rated analyst) predicted prior to the change in rules, now does it? 

The media's talking heads; a hard-landing and the US dollar

Economists define a hard landing as the resultant economic recession a country endures from overtly aggressive macroeconomic policy, usually against inflation. Fairly straightforward then. Get to hell out of the market...Right? Wrong.

So what is a recession really? It's defined, inter alia, to be.. a fall in GDP growth, a rise in unemployment and a drop in household income; exactly the scenario China finds itself in today. JP Morgan concludes, rather gravely, that China is, de facto, in a hard landing..... 'It's not a debate, it's a fact', JPM tell us. Predictably Bloomberg cites the notable credentials of the JPM analyst holding resolutely firm in his conclusions. It's obviously, an unequivocal confirmation of the prognosis. China is, undeniably, in a hard landing. For the bulls invested in the global equity markets the empirical evidence justifies, perhaps, the rising gnaw of panic in your pockets.. 

Herein lies the investment rub. Read in micro isolation, JPM's 'hard landing' theory, would collapse commodities... Asian and 'primary-resource' equity markets would tumble, cash holdings would rise and the US $, would soar into the stratosphere. Don't forget the US $ is still the globe's most liquid currency and all that cash must find a home... 

Investors who operate within a microcosm usually find themselves out of context in, what has become, a global economic macrocosm. Don't forget, a decline in GDP growth from 10% to a forecast growth of 7.5% meets the definition of recession... Steel and cement sales would be commensurately lower too. If the US GDP is forecast at 2.2% this year, rising from 1.7% last time round then China's 7.5% is not too bad...

Glencore / Glenstrata or even Xstracore steals your bacon..

The proposed merger between Xstrata and Glencore is about as useful as an arthritic, one-legged man at an arse-kicking contest. Yes it's a mega deal. So what? Big deal!

Let's have some breakfast and I'll tell you why!

Caffe' latte, cappuchino or filter coffee? Filter? Good choice. Roast or instant? Milk? Fine. Hot or cold? Hot. Okay. Sugar? Two spoons do for you? You'll have to excuse me a minute I need to make it myself. I had to let the staff go. Times are tough! Whilst you wait pull up a chair and make yourself at home. The central-heating's a little low I know; energy prices are through the roof... Bloody OPEC! Eggs & bacon? One rasher or two? Benedict, poached, fried, boiled or scrambled? Soft, medium, hard, over-easy or sunnyside up? Good. Excuse me a minute....

That's a pretty standard conversation these days in most homes, yes? It's a farce and you've been fooled....

Let's start with your coffee. The price of coffee, roughly speaking, doubled from mid-2009 to mid 2011. It has subsequently crashed back down to pre-2009 prices. Whilst the world's economy and its equity markets faced the toughest conditions since the Great Depression the price of coffee doubled. Your sugar? Prices of raw sugar FOB tripled (yes that's 3x) over the same period. How about your eggs; your bacon? Don't forget you have to feed corn to the chickens and pigs or there won't be any eggs or bacon, right? The price of corn FOB (free on board: a shipping term) tripled, roughly, over the same period. Getting the raw commodity to your plate requires energy, heat, butter, oil etc. Prices? Yes, you guessed it; - through the roof!

Now, if the economy was bad and it was and if I had to let the staff go and they've let theirs go which means less money is spent by all on coffee, bacon or eggs why have food prices (soft commodities) climbed exponentially? Crops we know haven't failed. Arable lands are not eroded and farming technology is progressive. To coin a common phrase, WTF?

Doesn't make much sense, does it? So why? I'll tell you. Johnny Glenstrata, a speculative trader, surrounded by his adoring fans, [the media, the proprietary desks of the too-big-to-fails and the other CBOT muck] has TRADED the price of food, coal and energy higher (exponentially and artificially); for speculative profit. Stealing lunch at the playground is fairly straightforward when the other kids are half your size...

Don't scoff; sit up and smell the coffee. The stink of it is monopolised greed. Brazil, currently the world's largest food producer, is, as we speak, implementing the prohibition of ALL speculative trade in soft commodities...

Turkeys give thanks the day after Thanksgiving*...

Turkey-gobblers caught doing the futterwacken the day after Thanksgiving usually end up trussed and golden-brown just a few weeks later on the Christmas-table.. It's an amusing silly-season reminder that surviving an anticipated negative event doesn't necessarily mean that all is well indefinitely!

The same applies in the global markets. Very few market-professionals (if any) can claim that the last six months have been smooth-sailing. It's been a perfect storm of unanticipated economic shock and political ineptitude. Worse still, the confusion has been compounded in the real world by the exposure of the structural inefficiencies in the banking-model considered sacrosanct and against which none of us could draw on much experience. Even so, if you're reading this you've probably survived the toughest markets in living memory but dancing the victory-fandango is more than likely a dance-too-soon.. The weak global economic climate, structural headwinds, accelerated global deleveraging and high levels of debt prevalent in September which led to the last asset-price blow are still synonymous today however your interpretation.

In a two-sided financial tale and on a more positive note there are, as we speak, trillions of disenchanted dollars in cash or cash-equivalents earning negative real returns.... That's a status quo that will NOT endure indefinitely.



*Wishing our US friends a Happy Thanksgiving!

You, me, a German & an economist walk into a bar...

Buy a German a drink and you'll be told that the economy is wundenbar, prices are robust and unemployment is at a generation-low. Change seats, if you have the stomach for it, and do the same for an economist and he'll be squealing like a bag-full of pigs... You could argue that the economist is highly-skilled, well-educated and therefore worth the price of a beer but more often than not you'd be wasting your money..!

The disconnect between the economy and stock-market performance is not always fully understood. The supposition that the stock-market reflects the economy is false, palpably so! If anything, the stock-market tries to predict the future, usually one year out, which is why traders and professional money-managers will talk about the '12-month economic lag' on current pricing. That means current stock-market prices reflect the predicted conditions 12 months hence... The variables we scan from which we make our predictions are mostly the subjective interpretations of the current circumstances we find in 'the real world'. Euphemistically, these predictions elevated in status to FORECASTS by analysts or economists are nothing more than, well, predictions and unless the forecaster has divine authority it's nothing more than, yes you guessed it, a prediction! Extrapolating this theory in the media, a Bloomberg or a Reuters or any other similar financial-media company would then collate these FORECASTS (ie: predictions), calculate the middle-ground (an insipid concept at best) and elevate the average FORECAST (ie: prediction), to unimaginable status by renaming this number the CONSENSUS FORECAST (ie: the average prediction). In reality that's the same as buying lukewarm tea because half the world likes ice-tea and the other half like their tea hot. 

These CONSENSUS FORECASTS (ie: average predictions) are applied to a company specifically, a sector broadly, an economy generally and in recent times to the global economy as a whole. Investment strategy is a discussion for another time. Even so, applying CONSENSUS as reality to your personal investment strategy is, quite simply, intellectually poor... You'd be selling yourself short. 

Returning to our two lechers above, whilst the German lives in the now, the economist lives in the future. One lives in ignorant bliss and the other is blissfully ignorant for everybody knows that today's reality is not always tomorrow's certainty. The same applies to markets, today's prediction is not always tomorrow's reality. One more thing, three years ago the US financial crisis heralded the end of America and by implication the rest of the world. Surprisingly then we're still here. We'll say the same about Europe...

2011/11/11 11:11 - Once in a lifetime!

It's another extraordinary day in an extraordinary year in these extraordinary times. Those who are spiritual or esoterically-inclined will record this day as a day of reckoning; the coming-together of humanity across ethnic & religious chasms; a changing of the guard, so to speak, from attitudes of indifference and suffering to a rekindling or ignition of what once made us great; the rejuvenation of the human spirit...

For the rest of 'we-the-unimaginative-many' the 11th day of the 11th month of the 11th year at 11 minutes past eleven is perhaps, at best, an intriguing number and at a stretch, considered lucky.

In these spiritually-impoverished times, crippling economic strife and religious intolerance perhaps even we, the life-weary many, should recall our humanity; toss a small coin into the fountain of hope and perhaps, just maybe.. we might just spark the start of something weird...; an auspicious reawakening ... 

Europe awake!

For the attention and consideration of Europe's leaders

What has happened to Europe?

You've told us that the EU stands as a select body of nations believing in social and economic freedom. Circumstances have proved that the interests of individual nations are not identical. At the same time the separate identities have, until now, been seen as a strength rather than weakness. With the region's experience and expertise now is not the time to hide your heads in the sand....

New problems are looming.. Live not under any illusions. You cannot opt out of the world!

Your capacity to play a constructive role in world affairs is related to economic strength. If you hope to guarantee your way of life, the question you must ask yourselves is whether the present leadership is fulfilling their duty. The battles are being fought in your territory, not ours.

This is the moment - a moment when your decisions will determine the life or death of your kind of society; - and the future of your children.*





* With apologies to Margaret Thatcher whose words roused the nation's collective spirit. Will Chancellor Merkel be hailed as Europe's new Iron Lady?