A Light at the End of the Tunnel?

Tuesday, April 28th, 2009

This week’s Economist cover story discusses the idea that it may be too early to assume that the global economy is in recovery. The illustration really captures this. Our vulnerability right now seems to be that we want the economy (and markets) to recover, so we are looking for the signs to validate our hopes are not just hopes.

“The worst thing for the world economy would be to assume the worst is over”

“THE rays are diffuse, but the specks of light are unmistakable. Share prices are up sharply. Even after slipping early this week, two-thirds of the 42 stockmarkets that The Economist tracks have risen in the past six weeks by more than 20%. Different economic indicators from different parts of the world have brightened. China’s economy is picking up. The slump in global manufacturing seems to be easing. Property markets in America and Britain are showing signs of life, as mortgage rates fall and homes become more affordable. Confidence is growing. A widely tracked index of investor sentiment in Germany has turned positive for the first time in almost two years.

All this is welcome—not least because the slump has been made so much worse by panic and despair. When the financial system was on the brink of collapse in September, investors shunned all but the safest assets, consumers stopped spending and firms shut down. That plunge into the depths could be succeeded by a virtuous cycle, where the wheels of finance turn again, cheerier consumers open their wallets and ambitious firms turn from hoarding cash to pursuing profits.

But, welcome as it is, optimism contains two traps, one obvious, the other …”

Read the complete story here.

Source: The Economist, April 23, 2009, A Glimmer of Hope?

Tags: Brink Of Collapse, Despair, Economic Indicators, Economist, Glimmer Of Hope, Global Economy, Investor Sentiment, Light At The End Of The Tunnel, Mortgage Rates, Optimism, Plunge, Property Markets, Share Prices, Signs Of Life, Six Weeks, Slump, Specks, Stockmarkets, Virtuous Cycle, Wallets, World Economy
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Emerging Markets Versus G7

Thursday, April 23rd, 2009

BCA Research has published the following daily note about the relative strength of Emerging Markets versus G7 equity markets.

Our Emerging Markets Strategy service remains bullish on many emerging stock markets in Asia and Latin America relative to their G7 counterparts.

Emerging market equities bottomed late October and did not break to new lows in March along with U.S. and European indexes. Consequently, emerging market relative performance has been spectacular. Heading forward, there is still risk that renewed weakness in the global equity benchmark will weigh on emerging market stocks. Still, in relative terms, we expect outperformance to persist throughout this year. This is consistent with our bias that the current problems in the developing world are cyclical in nature, not structural as is the case in the U.S. and U.K. Bottom line: A correction in global equities would be a drag on emerging market share prices in absolute terms. However, the relative outlook remains appealing and investors should continue to overweight emerging markets in a global equity portfolio.

Tags: Absolute Terms, Bca Research, Benchmark, Counterparts, Developing World, Drag On, Emerging Market Stocks, Emerging Markets, Emerging Stock Markets, European Indexes, Global Equities, Global Equity, Latin America, Lows, Market Share, Relative Performance, Relative Strength, Relative Terms, Share Prices, Strategy Service
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Crispin Odey: Markets Giving Misleading Signals

Thursday, March 5th, 2009

Crispin Odey, CIO, Odey Asset Management, shares a wealth of insight in his 2008 year-end Letter to Shareholders reflecting, in the following excerpts, on the mixed signals the markets are sending about valuations, and commodities. Unlike his former protege and partner, Hugh Hendry, who is avoiding equities for the time being, and long long-term government bonds, Odey likens the current pricing climate in bank shares, “like trading options,” and believes there will be a bear market in bonds within 12 months. Read on:

“Keynes believed that economics was a polemical science. He made economics popular and powerful because he abstracted ideas that in the workaday world looked sensible and showed them to be dangerous if followed by everyone. Thus he changed the way that policy makers and people thought. Has there been a better time to renew the challenge?”

“Given that all of this is a long way away from being accepted we must reluctantly conclude that the world economy is not yet in a recovery position. The recession only started to get into its stride in September of last year. Most companies will have been guilty of over-trading as they have sought to cover falls in orders by accepting any orders. They will be finding themselves with customers going bust and inventory still rising. Profit numbers will be dire. The only good news is that at some point the survivors will be able to charge more for less, and margins will be higher on the other side of this hill”.

“Current investments come about from the outstanding opportunities being opened up by the pain from the falls in share prices that we have seen over the last year. This anguish is sorely felt by us all but it is also the time to be investing. We have become big buyers of the UK clearing banks. This reflects quite how cheap they are. The shares are trading like options. After Northern Rock and Lehman Brothers, many are now convinced that they will be nationalised. However, the government has realised that nothing is solved by nationalising them, and in the UK’s case, that there is everything to be gained from letting them live. In an election year who else has Brown got to blame?”

“Given that on the other side of this disaster these banks can earn multiples of their current share price, the risk/return is wrong. In many ways these purchases remind me of Marconi, when the share price fell to 10p but the lack of covenants on the £4 billion bank loan meant that it could not be bankrupted for four years. We made 450% on that trade. Hopefully these banks will fare better and for longer. Given time and distance they will be fine”.

“This is because the markets have been giving misleading signals for some time. Wheat is a typical example. There is barely any surplus supply over demand in wheat. Yet last year farmers found themselves with rising input costs, thanks to the oil and fertilizer price hikes, and then falling incomes with wheat prices that were some 60% off their highs. They had one of their worst years ever. As a result this year plantings are way down, farmers are distressed and in Brazil and Argentina facing droughts. The wheat price is likely to soar”.

“All in all I expect that within 12 months government bond markets will go into a bear market which may be long and protracted. The stockmarkets remain good value and would prosper after some worries if inflation came back and my portfolio should do quite well in that environment. However it remains hard work in the main”.

Hat tip: Jonathan Davis, Independent Investor

Tags: Anguish, Asset Management, Bear Market, Better Time, Bust, Clearing Banks, Crispin Odey, Excerpts, Government Bonds, Hugh Hendry, Keynes, Lehman Brothers, Letter To Shareholders, Margins, Mixed Signals, Recession, Recovery Position, Share Prices, Valuations, Workaday World, World Economy, Year End
Posted in Bonds, Commodities, Economy, Markets, Oil and Gas | No Comments »

Rio Tinto/BHP Billiton at parity

Friday, December 19th, 2008

Yep, the share prices of the two mining giants have crossed. After suffering another sickening fall on Thursday, Rio shares (down 10 per cent) are now trading at £10.40, about 4p lower than BHP’s.

This is seriously embarrassing for Rio. After all, BHP’s abandoned bid was pitched at a ratio of 3.4:1.

Of course, the reason Rio is being dragged lower is debt. And Rio has a lot of it - $40bn to be precise, against a market value of $27bn.

The company says it will be able to meet its debt repayments ($8.9bn is due next September) and does not need a rights issue.

But the market doesn’t believe Rio, and the result is a sinking share price.

Since BHP walked away last week, Rio shares have fallen 58 per cent.

Related links:
No respite for Rio - FT Alphaville

Source

Tags: Alphaville, Bhp Billiton, Bid, Debt Repayments, Ft Alphaville, Giants, Lot, Parity, Reason, Respite, Rio 10, Rio Tinto, Share Price, Share Prices, Shares
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Hugh Hendry: Commodities Stocks to Remain Weak?

Tuesday, December 16th, 2008

Hugh Hendry, the eloquent and outspoken CIO, Eclectica Asset Management, in an appearance on CNBC’s PowerLunch (Dec. 10) shares his thoughts on agriculture commodities stocks such as Potash, and Syngenta.

Among other things, Hendry makes a forthright confession that he was wrong earlier this year to make the call to be long commodities stocks. He continues on to say that when he realized he was wrong, he promptly sold them too. Hendry runs a long-only Agriculture fund, as well as his primary hedge fund, and has been controversial in some of his choices to oppose his funds’  mandates at times in favour of cash or government securities.

His main quid pro quo is his caution that although commodity stocks  could revisit highs, we could be waiting as many as 10 years for it. Its a must watch.

In a 7-minute segment earlier the same day, Hendry discussed the idea that as the financial crisis deepens, civil liberties are curtailed by governments eager to put an end to falls in share prices and economies. This is an insightful discussion, a must-watch.

“The government has gone to war, it is an economic war. And in a war the government takes a larger and larger role in the society. That’s fine, you have to accept that,” Hendry said. “What is concerning is the erosion of civil liberties.”

The ban on short-selling financial securities in the UK is one example of erosion of civil liberties, another is a statement made in parliament last week which opens the way to silencing the press during financial crises.

The Treasury Select Committee said that it will look at the role of the media in financial stability and whether financial journalists “should operate under any form of reporting restrictions during banking crises”.

“We’re only a year into this and suddenly, already, our liberties are being brought back, brought in,” Hendry said.

Tags: 10 Years, Agriculture Commodities, Array, Asset Management, Caution, Choices, Civil Liberties, Cnbc, Commodity Stocks, Confession, Economic War, Erosion, Favour, Financial Crises, Financial Crisis, Financial Journalists, Financial Securities, Financial Stability, government securities, Hedge Fund, Hugh Hendry, Mandates, Minute Segment, Potash, Powerlunch, Role Of The Media, Share Prices, Syngenta, Treasury Select Committee
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Resurgent Yen is Scary News

Wednesday, January 16th, 2008

Jan. 16, 2008 - Back on January 4, 2008, we wrote that “On days the yen falls to the euro [or dollar], stocks almost always rise; when the yen strengthens to the euro [or dollar], stocks fall. Its almost always a short term concern and the volatility it brings with it can be dramatic, but opportunistic.

Well, here we are facing the latter, as recessionary winds are putting pressure on the US dollar. This article provides a very good overview and it may be that some of this weeks heavy selling across the strongest sectors in the market could be attributed to the pressure on Yen/Dollar carry trade. Read on…

*** 

At a time where all the news looks grim - from awful results that forced Citigroup to cut its dividend, to bad US retail sales figures that deepened recession fears, to the ZEW survey showing German business confidence at a 15-year low (and, we might add, Wednesday’s FT report that confidence in the UK property market has hit its lowest level since the housing crash of the early 1990s) - the “potentially scariest news of all” is the resurgence of the yen, according to John Authers in Wednesday’s Short View column.

Some analysts are more sanguine, predicting the yen’s surge will be temporary. But Authers points out the Japanese currency’s jump on Tuesday to less than Y107 to the dollar - for the first time since June 2005 - broke what Nomura called the trend of “reasonably steady weakening against the dollar that had been happening since 1994″.

This is important, in Authers’ view, because the yen has become a gauge for risk aversion in the markets.

When traders feel confident, they borrow in yen to fund investments elsewhere. This yields easy profits unless the yen suddenly appreciates. A rising yen betokens fear.

Hence its close correlation with the equity indices, and with equity volatility. Share prices fall, and volatility rises, when the yen does well

The yen’s rise has “nothing to do with fundamentals”, notes Authers. Indeed, the Bank of Japan on Tuesday reduced its economic assessments of four of its nine regions and admitted the economy was slowing, reducing the chances of a rate rise.

A strong yen is not good news for anyone — including the Japanese, he warns. Falls this year have left the Nikkei 225 stock index in a bear market, down 23.4 per cent from its high of July last year. Fears that the revived yen will damage exporters have contributed to the damage.

Are there any signs of light?, asks Authers.

Tags: According To John, Bank Of Japan, Bear Market, Blog, Business Confidence, Carry Trade, Citigroup, Correlation, Currency, Dividend, Dollar, Dollar Stocks, Economy, Euro, FT.com, German Business, Investment, January 4, Japan, Japanese Currency, John Authers, Markets, Nikkei 225, Nomura, Recession, Recession Fears, Resurgence, Retail Sales Figures, risk, Risk Aversion, Share Prices, Technical Analysis, UK, US Dollar, Volatility, Y107, Yen Dollar
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