How China Sees the World

Thursday, March 11th, 2010

Source: The Economist, May 19, 2010 (hat tip: Atlantic Asset Management).

Tags: Asset Management, China, Economist, Hat Tip, World Source
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Deleveraging Through… Deflation? Has Ending QE Been The Ulterior Motive All Along? Andrew Smithers Thinks So

Wednesday, February 17th, 2010

This article is a guest contribution by Tyler Durden, ZeroHedge.com.

Confused by recent proclamations by Hoenig, Plosser, and other unnamed Fed members, who want an end to QE? Even more confused that this could actually happen? Andrew Smithers, former head of SG Warburg asset management before starting Smithers & Co., may have some iconoclastic insight into this development, which at its core is fundamentally deflationary, and a stark refutation to everything the Fed (presumably) stands for. A paradox? Smithers breaks the “Econ 101″ mold in this fascinating interview with Kate Welling. The most provocative perspective: Smithers goes against the grain of every economic textbook which says the only way to inflate debt away (deleverage) is by, well, inflation. Instead, what Smithers suggests is a slow, gradual process of deflation, in which incremental cash flow is converted into equity, and pushes debt out. Indeed, this is precisely what we have been seeing especially in the REIT sector where numerous names, courtesy of BofA, have raised equity on the basis of imaginary valuations, which may just become a self-fulfilling prophecy if enough people buy into them, and by throwing cash at these companies, allow them to lower their debt-to-capitalization ratios. Then again, with another half a trillion in equity needed for the REIT sector to fund itself out of a mid-term funding crisis, that’s purely a pipe dream. However the bigger picture of the Smithers perspective is that this deflationary approach is exactly what the Fed may be engaged in. By distracting the increasingly more vocal inflation hawks, who anticipate that inflation is and always will be the driving motive of the Chairman, Bernanke could very well be pursuing just the opposite: a slow-bleeding deflationary trend.

The clincher from the interview which took place in November 2009:

I think that you will find that several economists over the next few weeks and months will be expressing concern about quantitative easing…Because the most damaging thing that could happen to the world economy would be a third asset bubble collapse…Probably the best way of ensuring that is by making sure that asset prices simply don’t go up much more.  What we need over time is a rebalancing of the economy in which we get deleveraging going on. And there are only two ways to delever: One is by generating cash flow and the other is by replacing debt with equity, either through bankruptcy, via the banking system, or directly, through the corporate sector. Now if you have deleveraging as the main driving force, you can only achieve that goal, really, if you switch the debt from the private sector to the public sector. Otherwise, you get the attempt for everybody to save more and everybody to invest less and you fall clearly into one of those problems that Keynes identified, where the adjustment process, rational on the individual level, just digs the economy, as a whole, deeper into a recession… [For this plan to be effective] we now want a period of slow contained growth, in which we can get a lot of deleveraging going on - without it having to burden the public sector debt by too much. For that, you need time and helpful markets. The sort of ideal market is one that down a bit - that has periodic bounces. So people can take advantage of the bounces to issue a great deal of equity, which also, of course means that the market is more likely to go down thereafter?

Is the entire equity market merely a plaything in one giant Fed-controlled deleveraging ploy? Are equity prices indicative of anything besides what the Fed wants them to be? Some day, when all the Fed’s secrets are revealed, we will know for sure. For now, all we can do, is to continue speculating and pointing out the obvious and ever more increasing irregularities in what was formerly at least passable for an efficient equity market.

Full Smithers interview.

Smithers 2009 November -

Source: ZeroHedge.com, February 17,2010

Tags: Andrew Smithers, Asset Management, Bofa, Capitalization, Clincher, Deflation, Economists, Hawks, Incremental Cash Flow, inflation, Pipe Dream, Proclamations, Provocative Perspective, Qe, Refutation, Self Fulfilling Prophecy, Sg Warburg, Trillion, Tyler Durden, Ulterior Motive, Valuations
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Embry: Why Gold Will Keep Going Up

Wednesday, February 3rd, 2010

Below is the link to a recent speech by John Embry, Chief Investment Strategist of Sprott Asset Management, on the outlook for gold bullion (courtesy of GATA).

Embry concludes his address as follows:

“I now firmly believe the chances of gold ever trading below $1,000 per ounce are remote. The only caveat I would offer is that if the world suffered a catastrophic deflationary collapse, gold could briefly be swept under but would then re-emerge with even greater relative strength as the only true safe haven. However, in a world of pure fiat currency, I think a near-term deflationary outcome is highly unlikely. In fact, I strongly suspect gold is going to stage a parabolic rise from current levels in the not-too-distant future, a development that will come as a shock to the many detractors of the world’s only real money.

“Gold is the only real money because it isn’t someone else’s liability.

“This remains one of the best supply-demand imbalance stories I have encountered in my long career and it will only be enhanced by the existence of massive short positions that will be impossible to cover amid myriad paper claims on gold that dwarf the physical supply, which, by the way, is a subject for another day.”

Click here to read Embry’s interesting and educational speech.

Source: GATA, February 29, 2010.

Tags: Asset Management, Caveat, Chief Investment Strategist, Deflationary Collapse, Detractors, Distant Future, Existence, fiat, Fiat Currency, Gold, Gold Bullion, Gold Trading, John Embry, Money Gold, Ounce, Real Gold, Real Money, Relative Strength, Safe Haven, Shock, Speech Source
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Velocity of US money supply at long last edging up

Friday, November 20th, 2009

Despite ballooning Fed reserves to bail out banks, money supply as measured by the growth in money supply with a zero maturity (notes and coins, check accounts, savings deposits and money-market accounts collectively) continues to slow.

The slowing growth is contra to what normally happens when the Fed lowers the Federal funds rate.

In real terms the growth rate is also slowing.

The slowing in MZM growth is a consequence of US banks’ tight lending standards. The trend is likely to continue until the banks relax these standards.

Velocity of MZM is at long last picking up after it started falling in the first quarter of 2007 - six quarters before economic growth slumped. The increase in MZM velocity effectively points to increased economic activity. Further increases in this velocity are essential for sustained economic growth.

Bottoms in consumer sentiment and MZM growth coincide, emphasizing the importance of improved consumer sentiment to get the economy going.

Lastly, the US bond market is an excellent indicator insofar as MZM velocity is concerned. Currently the yield on the 10-year note is pointing to further improvements in money velocity. The US bond market therefore also suggests that consumer sentiment is likely to continue improving and that the current improvement in the economy is sustainable, albeit probably at a slow rate.

Note: The source for all graphs is Plexus Asset Management, based on data from I-Net Bridge.

Tags: Asset Management, Banks, Bottoms, Bridge, Coins, Consequence, Consumer Sentiment, Economic Activity, Federal Funds Rate, First Quarter, Graphs, Improvements, Money Market Accounts, Money Supply, Money Velocity, Mzm, Quarters, Sustained Economic Growth, Us Bond Market, Zero Maturity
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Global stock market moving averages hit full house

Wednesday, August 5th, 2009

I often refer in my posts to the use of moving averages as indicators of the stocks market’s secondary and primary trends. Although not stand-alone indicators, the moving average lines add a certain discipline to the investment decision-making process when used in conjunction with other fundamental and technical measures.

Just to recap: The 50-day moving average is an indicator of the secondary trend. However, the longer-term 200-day moving average is of more importance as an indicator of the primary trend. Although it is a lagging indicator by construction, it fulfils a useful role in keeping investors on the right side of the long-term trend.

It is important to note that three conditions must be met in order to call an equity bull market, namely (1) the index in question must penetrate the 200-day average, (2) the 50-day average must cross the 200-day line, and (3) the 200-day average must turn upwards.

Following the surge in global stock markets since the March 9 lows - and earlier lows in the case of a number of emerging markets - one after the other has started fulfilling the above conditions. This is fodder for the bull argument, especially when considering the following:

(1)   The benchmark indices of every single mature and emerging market that I monitor are above both the 50- and 200-day averages, as can be seen in the two graphs below (only the 200-day lines are shown).

Source: Plexus Asset Management

Source: Plexus Asset Management

(2)   The 50-day lines are in all instances above the 200-day lines.

(3)   The 200-day averages have turned up in all instances with the exception of the Athens Composite Index and the Karachi 100 Index.

But also bear in mind that some of the movements have been quite extreme when weighing up the following:

As far as mature markets are concerned, 76% are trading more than two standard deviations above their 50-day averages and 56% more than two standard deviations above their 200-day lines.

Among emerging markets, 59% are trading more than two standard deviations above their 50-day averages and 68% more than two standard deviations above their 200-day lines.

Interestingly, the Wellington NZSZ 50 Index is trading more than three standard deviations above its 200-day line and the Istanbul Index likewise its 50-day line.

Although these figures support the bullish case, they also argue that some degree of reversion to mean looks overdue. This could take the form of either a pullback or a consolidation (i.e. ranging) pattern. Caution seems to be in order.

Tags: Asset Management, Bull Argument, Composite Index, Emerging Market, Emerging Markets, Fodder, Full House, Global Stock Market, Global Stock Markets, Investment Decision, Lagging Indicator, Lows, Management Source, Mature Markets, Moving Average, Moving Averages, Standard Deviations, Stocks Market, Technical Measures, Term Trend
Posted in Emerging Markets, Markets | No Comments »

Hugh Hendry Walks the Streets of China

Thursday, July 30th, 2009

This home-made clip features Hugh Hendry, founder of Eclectica Asset Management, walking around the streets of  China (Central Business District, Guangzhou), earlier this year, March, and pointing out numerous empty buildings. Huge debt must have been incurred in erecting these buildings and without tenants there is no prospect of servicing the debt. What’s more, the workmanship also seems shoddy as a nearly-completed 13-story building in Shanghai collapsed last month.

Who will pick up the tab for creating all the overcapacity in the Chinese economy?

Hendry has perhaps looked at only a limited sample, but the video provides food for though in the greater economic scheme of things.

Source: YouTube, March 27, 2009 (hat tip: Edward Harrison, Credit Writedowns).

Tags: Asset Management, Central Business District, China, China Business, Chinese Economy, Clip Features, Edward Harrison, Empty Buildings, Guangzhou, Hat Tip, Hugh Hendry, Limited, Overcapacity, Sample Video, Scheme Of Things, Shanghai, Workmanship
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Face to Face with Hugh Hendry

Thursday, July 9th, 2009

Hugh Hendry, founder of Eclectica Asset Management, shares his views on a number of topical issues with the Financial Times’s Gillian Tett in a three-part interview. He is not only outspoken, but also a top-notch investment manager - just the right ingredients for compelling viewing material.

Part 1: Bond bull, equity bear
Hendry explains why he remains bullish on bonds and worried about deflation.

Click here or on the image below to view the video clip.

Part 2: Fed hasn’t done enough
Hendry explains why record issuances will still see bond yields fall, and how politics is tying the Fed’s hands.

Click here to view part 2 of the interview.

Part 3: Bearish on China and gold
Henry argues that China is too dependent on US consumption for real recovery.

Click here to view part 3 of the interview.

Source: Financial Times, July 5, 2009.

Tags: Asset Management, Bond Yields, Bonds, Bull Bear, China, Consumption, Face To Face, Financial Times, Gillian Tett, Gold, Hasn, Hugh Hendry, Image View, Interview Source, Investment Manager, Source Financial, Top Notch, Topical Issues, Video Clip
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Hugh Hendry: June 2009 Letter

Thursday, June 18th, 2009

Here, below, in its entirety is Hugh Hendry’s latest letter to investors. Its both enlightening, and highly educational, as the outspoken and brash Hendry has a great handle on market history as well as the English language.

Hendry, founder of Eclectica Asset Management, is one of the hedge fund industry’s true luminaries, and often goes out of his way to argue his convictions as well as make his bets publicly known, and while his theses often get tested, as does his durability, he has yet to be proven wrong.

Hendry has made for some of the most incredible intellectual arguments as well as hilarious direct-attack moments regarding the markets and the ongoing inflation vs. deflation debate during European Squawk Box and Power Lunch gatherings. Here, here, and here (whaling moment of the year).

We got our hands on his hard-to-get letter thanks to Tyler Durden at Zero Hedge.

THE ECLECTICA FUND
Hugh Hendry, JUNE 2009

Warning, I am about to repeat myself.

I have been keeping a low profile and have reduced the length of my reports. There has been little to note: my favourite asset class is long duration bonds; not index linkers. These have performed poorly so far this year. I have not fought this trend aggressively. By March I had rebuilt a modest sized position owing to the severity of the weak economic data. However this was mostly eliminated by the first week of April out of respect for the formidable price correction that was ongoing. As a result the Fund is down modestly on the year to date following last year’s surge. However, with the long bond yield in America now not far off 5pc, it is my contention that the trend may be approaching another extreme. I therefore thought it appropriate to once more outline my thoughts: what if the trend in the charts below continues; what if this year is a re-run of last year?

The decision to reduce the book in April reflected an unpleasant seasonality in our preferred trade. The second quarter in four out of the last five years has simply not been kind to risk aversion. Furthermore, markets continue to swing from the binary outcomes of inflation and deflation. At this point last year inflation was in the ascendancy. Backwards, forwards, since July of last year the same investors had to adjust to profound deflationary forces as all risk asset classes fell precipitously. Can we be any more confident that the market has it right now?

Let’s swallow a frog

I do not have the requisite level of confidence to make such a commitment. Better I would contend to always have a vivid image of the worst that might happen in our uncertain future and have this shape our behaviour today. So let’s consider the “bad things” which might initiate another dramatic rotation towards deflation.

My greatest angst is reserved for the four-fold rise in private sector, non-financial, leverage in America. In just 60 years, the private sector increased its debt from 43pc of GDP to 175pc. To put this into perspective, the UK is on the verge of having its formidable tax raising franchise downgraded because its debt may reach 100pc in two years time. And yet, until last year, there was little hand wringing about the private sector having borrowed more than 4x the public sector’s then debt.

Don’t get me wrong, I am sympathetic to the plight of America’s debtors. I understand why they came to believe that they were invincible. In truth, something without precedent occurred earlier this decade. Fearing the fall out from the tech bubble, businesses across all sectors of the economy set about cutting costs and laying staff off to prepare for the impending deep recession. Unemployed workers should have cut back on spending and rebuilt their savings. Instead they leveraged themselves against appreciating home prices to maintain their spending habits. Corporate revenues should have fallen. Instead, with disposable income boosted by home equity extraction, sales rose and profits boomed like no time before.

Today, by comparison, the corporate sector is threatened not so much by its own debt but rather by the loss of spending in the economy from the debt laden workers it has fired. Businesses are slashing costs and letting staff go. American unemployment is at a 26 year high of 9.4pc and total nominal wage payments have fallen for the first time in at least 50 years. This time around the economic orthodoxy is reasserting itself. Companies are discovering that in their quest to contain costs (by firing the economy’s consumers), they are suffering from a loss of revenue in future quarters; because of this I am wary of most prospective profit forecasts and not tempted by trailing 10 year earnings multiples.

My second concern relates to the willingness of governments to use their own leverage as a remedy for asset deflation. Policy makers seem to believe that the only way to reverse the tide in asset prices is to issue vast sums of ‘money-like pieces of paper’, aka government bonds. In doing so they are mimicking the previous decade when investment banks were able to boost the housing market by issuing trillions of dollars of mortgage backed paper, or the 1990s when it was new internet share issuance which drove the TMT bubble and so on back to John Law and his endless printing of Banque Générale certificates which financed the Mississippi stock bubble.

However there is a glaring flaw. Government debt is very visible; certainly more so than the paper previously issued by investment banks. Increase the issuance of mortgage backed securities, from $0.5trn in 1996 to $3.2trn in 2003, and no one bats an eyelid; house prices boom. Suggest issuing a corresponding amount of Treasuries and the bond market quickly fears inflation and frets over who will possibly buy all these bonds. Today bond prices are falling and there is the possibility that economic activity may be subdued by the rising cost of money. US mortgages are now dearer than at the end of last year.

Stimulus, what stimulus?

So prices are falling on the high street, total nominal wages are in retreat and yet the sovereign debt markets are in open revolt on the premise that “inflation is always and everywhere a monetary phenomenon”. Panic has taken over. Marc Faber is asserting that the US will definitely have hyper-inflation, one investment manager recommends an 89pc balanced fund allocation to inflation-proof Treasuries and CLSA’s Christopher Wood is recommending that US pension funds hold 40pc of their portfolio in gold. In other words people are convinced that inflation is the future.

What is less certain is when rising government bond yields begin to remove credit from the mortgage market and so close the door on the exit route of cheaper refinancing; today this is still seen as a distant prospect. The other pertinent question is whether “deficit nations” like the US and UK will be forced to moderate their ambitious spending targets. No one likes criticism and the reprobation of the German Chancellor and the Governor of the Bank of China must produce some soul searching; after all, central bankers are not renowned for their non consensual habits.

I keep thinking that it would be ironic if history were to show that US policy makers were right to fear the prospects of a $54 trillion debt deflation and that they should have been more ambitious in their monetary expansion. The bond vigilantes believe that the double dip deflation of the 1930s will ensure that the Fed will be slow to raise interest rates this time around. But what if the economy stalls because the credit markets are premature in tightening monetary policy for them?

I am beginning to sense another paradoxical twist. What if the Fed is right and Angela Merkel, Zhou Xiaochuan, Warren Buffet and James Grant are wrong? And that contrary to their inclinations the American authorities are forced to moderate their monetary expansion in order not to undermine the confidence of the international community. Whilst at the same time the bond market pushes long rates higher.

Under such a scenario the debt reduction efforts of the private sector would usurp the government’s attempts at stimulus; the economy would falter once more. Back in 1931 the same thing happened. Bond prices dropped and yields rose to the level that had prevailed for the previous ten years; a feeble economy lapsed back into a deflationary spiral. Perhaps if this were to happen again, and we were once more confronted by a truly dire economic outcome, then it is conceivable that the authorities could gain the vital legitimacy necessary to engage in an unquestionably large monetary response which finally purges the system of deflation. That is when I would choose to let rip on buying commodities and cheap equities.

The key is the economy’s sensitivity to bond yields. Russell Napier argues that it would require ten-year yields of 6pc (vs. 4pc today) to knock the economy and stock market from their perch and reassert the deflationary trend. But he bases his assertion on observations taken since the early 1960s. My quibble is that today’s leverage is unprecedented and prices are falling. May’s American CPI is forecast to contract by 0.9pc YoY; they fell in April. We never had falling prices in the 1960s, 70s, 80s or 90s. I therefore maintain that it is feasible that some unquantifiable but certainly lower nominal rate could choke the economy.

Regardless, it is my contention that many are investing in risk once more almost oblivious to the notion that a heavily indebted economy is confronted by a very real tightening of monetary policy. It is not inconceivable that the macro compass could swing violently towards deflation and wrong foot them again.

Will it happen? As I suggested at the beginning, it really comes down to whether we are trading in a groundhog version of last year. By last summer, oil had been bid up to $147 per barrel and markets were anticipating that central bankers like the Bank of England would be forced to raise (not cut!) rates by 200 basis points. The pressure was intense. I recall philosophical conversations regarding short sterling; what did it really represent? And with oil spiking I was taking my gross long position down but replacing it with $200 call option premium; not $50 put strikes. As Robert Prechter reminds his readers, “the news at turning points is just too strong for most people to act contrarily to it…fundamentals so intensely support the continuation of a trend just when it is ready to reverse”; mea culpa.

I have had cause to think long and hard about what caused the turnaround last July in the commodity spectrum. I believe the persistent and government approved appreciation of the Yuan played a prominent role. Forget quantitative easing, I believe this was the printing press that propelled risk asset prices higher. Chinese speculators could borrow in dollars knowing that their loans could be repaid for less in their local currency. And when the US entered the global recession first, and began cutting rates, the Chinese were emboldened to ramp up their overseas borrowing further; they had to buy something and as we know oil went parabolic. But then the Yuan stopped appreciating. Perhaps the central planners didn’t like spending so much on commodities? I suspect it was more that they became fearful of their competitive position vis-à-vis the Koreans and other mercantilist trading countries. Whatever the reason, it is clear that since last July their currency stopped appreciating vs. the dollar. This provoked an immediate response: speculators rushed to reverse their trade and we immediately went from inflation to deflation.

Since early March the price of risk assets has again risen considerably; the Yuan has gone sideways. Perhaps the Chinese don’t want to re-price their scarce exports amidst the economic weakness? I see this as a non-confirmation of the move in equities and commodities and it reinforces my bearish slant on the year. However, I happily contend that should the Yuan begin to appreciate once more and establish a new high vs. the dollar then I am just plain wrong with risk aversion and I will change the Fund’s posture; but so far it has been almost a year and nothing.

Rapidly Decreasing Pessimism?

I have been very fearful of fighting this stock market rally, taking the view that we could see something vigorous enough to convince the majority that we were in a new bull market. I did not expect anything like new absolute highs; more like 1930 when the Dow Jones rallied 52pc from its 1929 bottom. I was therefore heartened to hear, “History says fill your boots, sell your wife, dive in…” from David Schwartz, the self styled stock market historian, in an article from The London Times on the 9th of May, one day after the European stock futures had completed a 50pc rally from their intra day lows back in March. Furthermore, it was taken from a piece entitled, “Investors bet that worst of recession is over and predict new bull market”. These are early days but clearly the process of social herding and higher prices is succeeding in tempting many investors to risk their capital again.

I have written previously of life imitating art and continue to take inspiration from Will Self’s collection of short stories, “The Quantity Theory of Insanity”. In one tale a plucky undergraduate succeeds in locating his missing college professor by determining a pattern from a collection of integers copied from homosexual graffiti lifted from the cubicles of London lavatories. But it’s just a lucky coincidence. This got me thinking about Soros and Paul Tudor Jones plotting where the Dow might trade in 1987 from the entrails of the Dow in 1929. They thought the “great crash” of 2008 was due in 1987. They were wrong. But their pattern of integers, by coincidence, matched perfectly and Tudor Jones made 50pc in October 1987. In this business it doesn’t matter if you get lucky; just stay lucky.

Investment Strategy

So here I am in June 2009. My favourite asset class is down over 20pc on the year and is popularly derided. But I am feeling lucky. My gut feeling is that this year could follow last year. If I am right then it is time to re-engage tentatively with deflationary trades. Remember, I am fearful that the next few months could still contain further euphoric moments. My preference is therefore to start modestly and go for low delta but big pay-off option trades.

Such opportunities are rare today. However, over the last couple of weeks we began purchasing out of the money call options on the current 30 year US Treasury bond. Do not be too concerned, we have only used about 20 basis points of the Fund’s NAV on such option premium so far. However it is our intention to add to this amount should the elevated levels of fixed income volatility subside. Given the capacity of this market to thrash around from extremes, it is not unrealistic to imagine that yields could match their lows of just six months ago. Should this happen before the year end, our options would payout 14 times our investment.

Similar asymmetric payouts are achievable in the short sterling interest rate market where investors are pricing in a 2pc hike in Bank of England base rate by the end of 2010. This is eerily like this time last year when they were expecting a 2pc hike for the second half of the year. If this time around the market again reverses its opinion by December, and takes the view that this is unlikely to happen, then our option package could payout over 10 times our money.

I also like German sovereign CDS at this level: an annual fee, paid quarterly, of just $30k (a total outlay of $150k if held for 5 years) to insure $10m of notional debt should something truly calamitous happen to the finances of the German Republic. Could it happen? No. However, those who underwrite credit default swaps today can only see Germany’s formidable strengths and laud it for its high savings, fiscal prudence and large trade surplus. But as I wrote to you previously, I fear the “surplus” nations of China, Japan and Germany have been duped by the West’s borrowing binge.

I fear they have over-estimated the global economy’s demand and are confronted with huge pools of surplus marginal capacity. A prolonged and feeble recovery in America’s nominal GDP would have especially dire consequences for such economies; Germany is already on course to contract by 5pc this year. It could be that with a moribund export market (traditionally two-thirds of economic growth) and the likelihood that politicians change the constitution to ban state and local deficit spending, investors might prove willing to pay more for their German bond insurance. Remember it only has to trade at the highs of earlier this year and I would double our money.

Sovereign defaults are today priced as black swan events despite the fact that more than half of all governments defaulted on their external debt back in the 1930s. Already in this decade we have seen both Argentina and Ecuador default. In both cases the recovery rate was 25pc. This is low; historically 40pc is more typical. Perhaps 25 is the new 40? Today it seems likely that Latvia will join them. Their sovereign CDSs trade at €750k per €10m of notional protection. What this means is that should Latvia default tomorrow, or within the next 12 months, you would receive €10m minus the assumption of recovery (25pc) and minus any CDS payments incurred; or 10x your money. I own Hungarian protection which is priced at €340k per €10m of equivalent sovereign protection. Again, assuming a 25pc recovery, a default this year would return us 22x our money, 11x if it is next year, 7x in 3 years and so on.

Lastly, in an effort to help fund the cost of carrying these risk-averse trades, I have been selectively buying corporate bonds in the tobacco, agriculture, and utility pipeline industries. This portfolio has an average yield of 8pc and I would be happy to take you through its finer details on request.

Here is hoping that I get lucky.

(Legal)

This document is being issued by Eclectica Asset Management LLP (”EAM”), which is authorised and regulated by the Financial Services Authority. The information contained in this document relates to the promotion of shares in one or more collective investment schemes managed by EAM (the “Funds”). The promotion of the Funds and the distribution of this document in the United Kingdom is restricted by law. This document is being issued by EAM to and/or is directed at persons of a kind to whom the Funds may lawfully be promoted. No recipient of this document may distribute it to any other person. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of, and no liability is accepted for, the information or opinions contained in this document by any of EAM, any of the funds managed by EAM or their respective directors. This does not exclude or restrict any duty or liability that EAM has to its customers under the UK regulatory system. This document does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe or purchase, any securities mentioned herein nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract therefor. Recipients of this document who intend to apply for securities are reminded that any such application may be made solely on the basis of the information and opinions contained in the relevant prospectus which may be different from the information and opinions contained in this document. The value of all investments and the income derived therefrom can decrease as well as increase. This may be partly due to exchange rate fluctuations in investments that have an exposure to currencies other than the base currency of the relevant fund. Historic performance is not a guide to future performance. All charts are sourced from Eclectica Asset Management LLP. Net Asset Values are as at the date of the document. © 2005-09 Eclectica Asset Management LLP; Registration No. OC312442; registered office at 6 Salem Road, London, W2 4BU.

Tags: Ascendancy, asset class, Asset Classes, Asset Management, Aversion, Bond Yield, Contention, Deflationary Forces, Durability, Eclectica, Economic Data, Hedge Fund, Hugh Hendry, Inflation And Deflation, Letter Thanks, Low Profile, Luminaries, Lunch Gatherings, Market History, oil, Power Lunch, Preferred Trade, Seasonality, Severity, Squawk Box, Theses, Tyler Durden, Whaling
Posted in Gold, Markets | 1 Comment »

Baltic Dry Index - more than a snap-back rally

Friday, June 5th, 2009

The Baltic Dry Index - a measure of freight rates for iron ore and bulk commodities - rose non-stop for 23 sessions until Wednesday, before declining somewhat yesterday. This surge represents a gain of 517% from its low on December 5. But one needs to put this in perspective: the Index fell by 94% from its high in May 2008, and therefore still needs to rise by a further 188% to match the previous peak.

More importantly, this rise seems to be more than a snap-back rally and points to better economic tidings. This becomes apparent when considering the close relationship between China’s Purchasing Managers Index (PMI) for New Export Orders and the Baltic Dry Index, showing both indices turning sharply higher.

Source: Plexus Asset Management (based on data from I-Net Bridge)

Also, the improvement in China’s PMI (with the composite Index back in expansionary territory above 50) and the Baltic Dry Index is consistent with the improvement in the Metals Index. (See my recent post “Secular bull in commodities remains intact“.)

Source: Plexus Asset Management (based on data from I-Net Bridge)

Tags: Asset Management, Baltic Dry Index, Bridge, Cape Town, Commodities, Composite Index, Export Orders, Freight Rates, Higher Source, Iron Ore, Metals Index, Perspective, Pmi, Postcards, Purchasing Managers Index, Relationship, Sessions, Snap, Target, Tidings
Posted in Commodities, Markets | No Comments »

Big money poll - the long view (Barron’s)

Monday, May 4th, 2009

Barrron’s magazine has published the results of its Big Money Poll of sentiment among money managers. Here is an excerpt and some and a summary of the results:

“After the worst stretch for stocks in decades, America’s money managers say they’re bullish. But do they really believe it? Based on the results of our latest Big Money poll, the pros are hoping for the best, but … hold on! Aren’t those fresh bear tracks in the mud?

“Nearly 60% of our respondents call themselves bullish or very bullish about the stock market’s prospects through the end of 2009, a significant increase from the 50% who proclaimed themselves bulls last fall. Yet, signs of unease abound. For one, just 56% of today’s poll participants think the stock market is undervalued, down from 62% last fall. Thirteen percent say stocks are overvalued, up from a prior 7%. And an alarming 58% say the market hasn’t bottomed yet, even though the Dow Jones industrials hit a low of 6,469 in March, before recovering to a recent 8,100.

“The managers are similarly wary about the outlook for the economy, at least through the end of this year. And they are downright doubtful that the government’s first stimulus package, announced with fanfare shortly after the Obama administration moved into the White House, will be the last.

“Given these and other concerns, only 26% of the Big Money men and women expect to be net buyers of stocks in the next six months, although 66% say they will be putting more money to work in the 12-month span. But don’t look for fresh dough to flow solely to US equities. Just 44% of our respondents think the US will be the strongest market in the next year; 42% expect emerging markets to take the baton and lead. As Keith Wibel, a money manager at Foothills Asset Management in Scottsdale, Ariz., put it, ‘Confidence has been fractured. The psyche is slow to heal.’

“The market isn’t much faster. Big Money’s bullish cohort expects the Dow to end 2009 at 8,676, about 7% above current levels but flat for the year. Things, or at least stocks, will pick up thereafter, with the blue chips rising another 10% or so, to 9,488, by mid-2010. In concert with their short-term-skittish, long-term-sunny stance, more than 40% of bulls predict the Dow industrials will reach or breach 10,000 by the middle of next year.

“The optimists see the Standard & Poor’s 500 jogging to 906 by December 30, en route to 1,003 next June. The popular benchmark closed Friday at 866. Their mean predictions for the Nasdaq Composite: 1,683 by year end, and 1,841 by mid-2010, up from last week’s 1,694.

“Some big money managers are notably upbeat even - or especially - after a global financial meltdown has cut most stock indexes in half. ‘They don’t ring a bell when they announce a sale on Wall Street, but prices are as good as I’ve seen them in my entire career,’ says David Corbin, president of Corbin & Co. in Fort Worth, Texas.”

Additional notes from Seeking Alpha:

59% of the money managers it polled are bullish on the market through year end. But, as Barron’s notes, it’s unclear how much of that bullishness is only in theory. To wit, 58% concede we’ve yet to see the bottom, and only 26% of them expect to be net buyers of equities over the next six months.

Below are a range of selected comments.

David Corbin - Corbin & Co.

“They don’t ring a bell when they announce a sale on Wall Street, but prices are as good as I’ve seen them in my entire career.” He sees Dow 11,000 by year end, fueled by “a mountain of cash on the sidelines,” high dividend yields, and M&A. His favorite stocks: UPS (UPS), Pfizer (PFE) and Medtronic (MDT). “These companies have low price/earnings ratios and decent yields, and franchises that are unlikely to be damaged in a downturn.”

Steve Ethridge - Stewart & Patten

“We’re nibbling here and there, but we still feel there might be some hiccups around the corner.” Normally, his firm is 60% invested in stocks, but for now he’s at a more conservative 50%.

David Ware - Barrington Capital

Presciently, Ware went almost all cash last September. He’s still 65% cash, awaiting another downdraft and a better entry point.

Peter Scholtz - Scholtz & Co.

“They will be walking a tightrope. If they don’t get it right, there is going to be a big inflationary problem. We are at a turning point, and I don’t think the Fed has the dexterity to handle it.” Scholtz, and most of his peers, think inflation, not deflation, poses the greater short-term risk to the U.S. economy. He sees oil regaining $100/barrel.

David C. Hartzell - Cornell Capital Management

“Five years from now, people are going to look back and find it hard to believe GE (GE) sold for $5 or $6 a share.” Despite the recent controversy, GE is Big Money’s favorite stock. Other favorites include Berkshire Hathaway (BRK.A), Wells Fargo (WFC), Apple (AAPL), Chesapeake Energy (CHK), Monsanto (MON) and Loews (L). Most overvalued stocks include Amazon.com (AMZN), Google (GOOG), Netflix (NFLX), Goldman Sachs (GS) and Citigroup (C).

Other tidbits

• 99% see unemployment rising. 56% expect a peak rate of 10%.
• 74% expect another stimulus package.
• 55% believe the government’s PPIP toxic asset purchase plan will stabilize banks and spur lending.
• 44% peg the U.S. as the top global performer over the next 6-12 months. 42% like emerging markets. 13% chose developed Asia.
• 43% foresee GDP going positive again by Q4.
• 34% think we’ll see signs of a housing recovery within six months.
• 32% favor large-cap growth stocks over the next 6-12 months. 15% like large-cap value. 9% prefer mid-cap growth.

Source: Jack Willoughby, Barron’s, April 27, 2009.

Tags: Asset Management, Barron, Bear Tracks, Cohort, Dow Jones, Dow Jones Industrials, Emerging Markets, ETF, Fanfare, Money Manager, Money Managers, Money Men, Money Poll, Psyche, Respondents, S Poll, Scottsdale Ariz, Sentiment, Stimulus Package, Stock Market, Unease
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Nouriel Roubini: A night with the Bears

Saturday, April 18th, 2009

A big bear: Markets ‘way too optimistic’

Nouriel Roubini, from NYU and founder of RGE Monitor presents the keynote speech at A Night with the Bears. The other guest speakers at the event hosted by Sprott Asset Management, held in Toronto last week included Meredith Whitney, and Ian Gordon, and Eric Sprott.

The accompanying article from the Globe and Mail can be read here.

Tags: April, Asset Management, Bear Markets, Bears, Big Bear, Canada, Dr Doom, Eric Sprott, Event Management, Globe And Mail, Globe Mail, Guest Speakers, Keynote Speech, Long Dark Night, Meredith Whitney, Night Mail, Nouriel Roubini, Nyu, Roubini, Toronto
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Rob Roy: Homo Economicus

Tuesday, April 7th, 2009

This post is a guest contribution by Rob Roy President of Atlantic Advisors Asset Management.

Beauty in the Details

The only way to teach economics in a semester or two is to simplify it beyond recognition. But the beauty of life is often in the details. And so in this letter we focus on the intangible and hard to measure but massive effects of human psychology in the markets. Bennet used to say that to be good at understanding markets you shouldn’t get an MBA with a finance concentration but instead should learn history, psychology, sociology and macroeconomics.

The concept of a rational human who makes economic decisions with a full set of data, and pursues enlightened self interest is personified by Homo Economicus[1. Wikipedia ‐ Homo economicus is a term used for an approximation or model of Homo sapiens that acts to obtain the highest possible well‐being for himself given available information about opportunities and other constraints, both natural and institutional, on his ability to achieve his predetermined goals. This approach has been formalized in certain social science models, particularly in economics.]. It is just such a mythical economic figure that allows us to simplify our models of the economic world. The concept is enticing because it has a hint of emotion (self‐interest), but is a complete failure to describe reality because this emotion is masked by a false stability. In other words, there is no ability for homo economicus to adjust its emotions in a pendulum fashion from greed to fear and then back to greed again. But this pendulum of emotion is precisely what happens in markets that are comprised of real humans, not economic models of humans.

Two common market axioms that you may have heard are based on this very idea. “Buy from the fearful and sell to the greedy”, and “The crowd is always wrong at extremes” are useful because psychology is always important.

Changes in Behavior

Simple: When you were young and learning how to use a hammer, you swung with abandon at that nail until you hit your finger for the first time. Suddenly, your method of swinging the hammer changed and has remained changed even up to today.

Not as Simple: When you were young, you may have feared roller coasters. But then your friends liked them and so you tried them, and whadd’ya know? It was fun. But then maybe you started to get older and roller coasters started to make you feel queasy or your bones rattled too much and your neck hurt afterwards. You changed your behavior a few times, but now you probably have made up your mind whether you like‘em or not.

Complex: That string of condos that you flipped sure was sweet. It was a lot of fun making money without doing any real work. Thank goodness that the loss you took on the last one only wiped out all of your previous profits, and didn’t really put you under. Now how will you decide to take risk in the future? Are you chomping at the bit with all of these new “cheap” prices, or have you changed forever?

Changes in behavior typically occur after consequences are revealed and absorbed. The amount of change in behaviour and the permanence of the change is a function of the amount of pain felt and the length of the pain endured during the learning process. Trying to get us to go back to our previous behavior is nearly impossible if the consequences suffered are severe enough.

To me, this is one of the most pressing questions facing us in regard to our markets and how they will evolve in the next period. Will the consequences of our previous actions lead us to a changed behavior? Or will the government succeed in trying to get us to go back to our former practice of wild consumption?

Please click here for the full report.

*Prior to joining Atlantic Advisors, Rob Roy was the Chief Investment Officer at Adventist Health System (AHS) from 1998 to 2007. While with AHS he was responsible for the development and management of a global portfolio containing both traditional and alternative exposure. During his tenure the portfolio grew from $600 million to over $2.5 billion while he led radical changes in the portfolio structure, investment policy, and board oversight committee.

Prior to AHS, Rob was a hedge fund risk manager, futures trader on the floor in Chicago, fixed income portfolio manager, municipal bond and derivatives trader, and a mutual fund accountant. Rob holds a BSBA in Finance from Suffolk University - Boston, and a MSc. in Financial Markets and Trading from Illinois Institute of Technology - Chicago.

Tags: Abandon, Approximation, Asset Management, Axioms, Beauty Of Life, Common Market, Economic Decisions, Economic Models, Economic World, Emotion, Extremes, Finance Concentration, Greed, History Psychology, Homo Economicus, Homo Sapiens, Human Psychology, Pendulum, Rob Roy, Roller Coasters, Self Interest, Social Science Models, Sociology, Wikipedia
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