Hugh Hendry Reflects on Lehman Anniversary

Wednesday, September 16th, 2009

Hugh Hendry, perhaps the UK’s most eclectic hedgie, reflects on the anniversary of the year following the Lehman Brothers bust.

Click play to listen:

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

Hendry has been keeping his powder dry since late March as he is conflicted by the rally and happy to sit out the innings. He remains of the mind we are in for a W-shaped double dip in the market (and economy), and he is being cautious. Last year, his flagship fund captured a 40% return by focusing on investments in long dated bonds in the US and UK, while yields tumbled. In March when the bond market peaked and long term yields began to rise against a violent quick turn in the equity markets, Hendry back out of his bond investments, but has chosen to remain underinvested, and believes that this is nothing but a bear rally. Hendry says that he is quite happy at this stage to have a small loss year-to-date, and to wait and be in an advantageous cash position in this market.

Hendry embraced deflation at the core of his recent investing strategy, and crusaded during numerous visits against those who dismissed the economic threat, of the big D, on CNBC in London. which we covered. Some of the debates were hilarious, yet eye opening, and Hendry is a must see/must listen to commentator.

Source: Bizcast.co.za

Tags: 09 Mp3, Anniversary, Big D, Bond Investments, Bond Market, Bonds, Bust, Cash Position, Cnbc, Commentator, Debates, Double Dip, Economic Threat, Flagship, Hedgie, Hugh Hendry, Lehman Brothers, Rally, Rise Against, Term Yields, Wp, Year To Date, Za
Posted in Markets | No Comments »

Hendry: Fears of inflation could trigger bigger downturn

Tuesday, June 30th, 2009

We have followed Hugh Hendry, the outspoken and bold CIO of Eclectica Asset Management, and one of the few profitable absolute return hedgies during the last 12 to 18 months, as he built his high conviction case for deflation, and invested as such, in long dated government bonds, Gilts and 30-year US treasury bonds. Last year, it was Hendry who pointed out that 10-year US treasury bonds were signalling deflation, and that in a sea of risky assets, they were the only asset that was up, and up by 15%, while stocks declined in value by 20% or more, the first half of 2008. Falling interest rates, a flattening yield curve, which came as a result of investors flight from risk in equities and commodities, paid off, with Hendry ending the year up some 40% in his flagship Eclectica hedge fund.

In the months since the beginning of March, however, his thesis has been challenged by the market’s renewed embrace of inflation risk, and stocks recovered off brutal lows, as a result of the deemed “risk” trade. By April, Hendry, who is not known for being a buy and hold investor, despite his standing beliefs, reduced his positions in long duration government bonds, treasurys and gilts in the short term, challenged by yields returning to last year’s levels as the economic “green shoots” teased.

We recently posted Hendry’s June 2009 letter to investors in which he re-iterates his view on inflation/deflation, and explains in fair detail that rough waters lie ahead for stocks and commodities as a result of the markets’ over-anticipation of the effects of the whirring central banks’ printing presses. He has avoided investing in stocks for most of the last year, making almost all of his fund’s returns from owning long duration government securities.

Hendry, an avid market historian, believes it possible that we have already experienced the very inflation and hyperinflation the market fears, during the 2002-2007 period where creditor nations (BRIC) amassed enormous forex reserves in the trillions, while gold broke out of a 27-year trend and oil skyrocketed to $147 per barrel. In yesterday’s interview, he also points out that during in the last 7 years the US dollar lost 40% of its value, an occurrence which is often overlooked or underplayed, but that he calls unprecedented. He explains this view in yesterday’s CNBC interview. As usual Hendry’s clarity on the matter is enlightening, as he has a mastery of the complexity of currency effects arising from carry trades and currency crosses.

One year ago, Hendry warned the Hungarian finance minister that the Hungarian economy, and others like it in Eastern Europe, which were financing their growth with Yen and Swiss Franc crosses and/or carry trades, would be unable to keep up with the spectre of cyclical currency fluctuations which could rapidly destroy the monetary liquidity they were awash in during the “strong Euro” era.

Click play to watch the June 29, 2009 interview:

CNBC: Fears about inflation and hyperinflation could create another economic downturn, bigger than the one the world went through, Hugh Hendry, chief investment officer at hedge fund Eclectica, told CNBC Tuesday.

The stock markets are due for a correction after having risen dramatically this year, but this is not likely to come in the summer and another rally is possible, Hendry, who said he was remaining risk-adverse this year, told “Squawk Box Europe.”

“We have a huge intellectual conviction… that this is a more profound downturn that we’re experiencing and markets will be under pressure,” Hendry said.

“People get more get more concerned about government debt… and it sows the seeds of its own destruction,” Hendry said. “We’re actually tightening the screw, we make monetary policy tighter and tighter.”

Long-term yields on government bonds have been rising, as investors fear central banks, especially in the US and the UK, will have to absorb excess liquidity from the system and raise interest rates to fend off inflation once an economic recovery takes hold.

“I think this paranoia today that inflation is happening today I think it puts in place a motion for a decline in the economy,” Hendry said. “I think they’re not printing enough money… with regards to the wealth destruction that has been happening over the past 18 months.”

“We raised interest rates and actually we killed the golden goose,” he added.

Stock Market Correction

A correction in the stock market is likely, but it will not come over the summer, and the S&P 500 index may even hit 1,000 before the downturn, according to Hendry, who admitted he is not stepping in to catch the tail of the rally.

“It’s kind of fun watching it from the sidelines, I must say I’m not participating,” he said. “My flower opens in the winter, not in the summer.”

There is a tight correlation between the oil price and the Chinese currency, the yuan, with oil prices rising as the yuan was strengthening, Hendry said. This is because Chinese speculators had borrowed in dollars as the yuan firmed, and all that liquidity was thrown into the oil market last year.

“The one non-confirmation in the world is that, since July, the Chinese currency has done nothing, it was flat vis-à-vis the dollar,” he added.

Hendry said he still prefers conventional government bonds, and admitted they were the cause his fund was 3 to 4 percent down on the year. But, he added, government bonds were down 20 percent – although he doesn’t think they will end the year like this.

China and other countries with a current account surplus are not as safe as they seem at first glance, because their economies are still hugely dependent on exports to the US, which is still “down on its luck,” he said.

“If that’s the case, the last place you want to be is the surplus countries,” Hendry said.

Source: CNBC, June 29, 2009

http://www.cnbc.com/id/15840232/?video=1167997692&play=1

Tags: Absolute Return, BRIC, Central Banks, Chief Investment Officer, Cnbc, Cnbc Interview, Commodities, Creditor Nations, Duration Government, Economic Downturn, Excess Liquidity, Finance Minister, Flattening Yield Curve, Forex Reserves, Gilts, Government Bonds, Government Debt, government securities, Hedgies, Hugh Hendry, Hyperinflation, Inflation Deflation, Inflation Fears, Inflation Risk, Intellectual Conviction, Investing In Stocks, Lows, oil, Printing Presses, Risky Assets, Rough Waters, Squawk Box, Stock Markets, Stocks And Commodities, Term Yields, Treasurys, Trillions, Us Treasury Bonds
Posted in Gold, Markets | No Comments »

Sideline Money Relative to Market Capitalization at Record Levels

Thursday, March 12th, 2009

The following charts are real eye-openers. By now, its no secret, its been widely reported, that there are some $8-trillion dollars sitting in cash and cash equivalents; record levels. What’s been less discussed is what this cash balance is relative to the total market cap of the S&P500 and Wilshire 5000 indices.

According to chart #2 below, cash relative to the market cap of S&P500 is over 100%, and, chart #3, over 90% relative to the Wilshire 5000. This is remarkable, as these numbers hold the key to a recovery in equity markets.

The question remains though, where will cash be deployed, when the market decides to reinvest? The record proportion of cash and cash balance relative to market capitalization does suggest that we may raise our optimism levels, but it seems clear the equity market will require reassuring signs or catalysts to nudge it back into a long bias, where sell volumes cease to outweigh that of buyers. And equities are not the only choice for investors these days. The longer equity markets take to provide investors reassuring signs the greater the likelihood that investors will opt for a larger share of their savings into the bond market, to move further along in duration for the yield.

You see, Washington must amortize trillions of dollars in short term liabilities, the war, bailouts and stimulus, over the longer term, as well as retire some of the additions to the money supply, thanks to quantitative easing. Over the next year or two, poor conditions in the stock market will, on an increasing basis could help crowd-in a larger share of the market’s cash into the the longer end of the bond market.

Take a look at global bonds or global bond funds. They have been outperforming, as a result of flight to quality, and falling long-term yields, but the aversion to invest in them has been the result of post- quantitative easing fears of hyperinflation. We may however, have much more time than we realize right now before we have to worry about hyper-inflation, while the G6 world continues to deleverage itself from its enormous debt obligations. Remember, deleveraging is not simply a retirement of debt, it entails the liquidation of assets. This is mostly the reason for the ongoing asset deflation that we have been experiencing.

Therefore, the areas of the market that are more likely to do well are those that do not require credit to thrive. Credit-hungry or credit-burdened, cash poor sectors, companies and country bets will continue to be troubled by credit tightness. Cash-rich, under-levered sectors, companies, and country bets will likely be favoured for their clean balance sheets and under-requirement of credit and soundness as part of their business model.  The flow of funds to the latter, the beauty contest winners, could be unbalanced in their favour when the time comes.

Charts: Todd Sullivan, ValuePlays

Source: Thomson Reuters Datastream

Hat tip: MarketFolly.com

Tags: Aversion, Bond Funds, Bond Market, Cash And Cash Equivalents, Cash Balance, Catalysts, ETF, Eye Openers, Global Bond, Global Bonds, Hyperinflation, Market Cap, Market Capitalization, Money Supply, P500, Sideline, Stimulus, Term Liabilities, Term Yields, Trillions, Wilshire 5000
Posted in Bonds, Credit Markets, Markets | No Comments »

The Yield Curve is Flattening?

Wednesday, December 17th, 2008

Long-term government bond yields are dropping everywhere. Is anybody going this way?

Here is what some of the folks in the bond market are saying:

Eric Lascelles, Chief Economic and Rates Strategist,  TD Securities Inc.: “It is remarkable, the speed at which this is happening,” said Eric Lascelles, chief economics and rates strategist for TD Securities Inc.

Stewart Hall, currency and fixed-income strategist with HSBC Securities (Canada) Inc.: “I think one of the overarching themes today is global recession.” On a positive note, “You have the Fed and other government agencies operating in an imaginative and innovative fashion to throw as much as necessary [at the problem] to get the economy back in track.”

Mark Chandler, fixed-income strategist with RBC Dominion Securities Inc.: “Long-term rates are playing catch-up in terms of the decline in yields we have seen in short-term bonds.  There is limited downside in short-term yields.”The relatively greater drop in yields on long-term bonds compared with short-term bonds is a theme that could continue into the first half of 2009, Mr. Chandler said. In the parlance of bond traders, this is known as a yield curve flattener, as the difference in yield between short-term and long-term bonds narrows.

The decision by the Fed last week to buy $500-billion (U.S.) of agency guaranteed mortgage-backed securities, along with $100-billion of other agency (government-sponsored enterprises) debt, is a force acting to push yields down.

On an increasing basis, the Fed has been taking steps to manage through the U.S. housing crisis. The plan injects liquidity into the system, and frees up cash available for mortgage lending, as well as serving to lower U.S. mortgage rates. The rate of 30-year mortgages has fallen to 6 per cent last week from 6.5 per cent.

Less than two weeks ago, Federal Reserve Board chairman Ben Bernanke indicated that the Fed could also decide to buy longer-term U.S. Treasuries, which would reduce bond supplies, resulting in higher prices and a decline in yields.

From Bloomberg:

The 10-year note’s yield fell as much as 14 basis points, or 0.14 percentage point, to 3.37 percent. It traded at 3.40 percent at 3:04 p.m. in Toronto. The price of the 4.25 percent security maturing in June 2018 advanced 84 cents to C$106.86.

The yield on the two-year government bond dropped six basis points to 1.77 percent. The price of the 2.75 percent security due in December 2010 rose 12 cents to C$101.95.

The 10-year bond yielded 163 basis points more than the two- year security, down from 168 basis points yesterday. The so- called yield curve reached 184 basis points on Nov. 6, the steepest since May 2004.

Our thoughts are that Government of Canada bond yields which are still higher than those of comparable US treasuries will also come down over the next year, as investors seek the refuge of government securities (and Canada’s higher yields), on the Canadian as well as global recession trend. The current blows to the Canadian economy come as the Auto industry copes with the difficulties of the Big Three automakers, and in the commodities sector, with the decline in commodities prices that has led producers to consider shutting in mining and exploration projects, and laying off employees. On this basis, it seems far more likely that Canada’s yield curve could continue to flatten along with the US treasury yield curve, leading to higher bond prices and lower yields.

Levente Mady, a fixed-income strategist at MF Global Canada Co.: “Inflation doesn’t matter any more. It’s deflationary concern that’s underpinning the bid in the long end of the market. Yields are literally gravitating towards zero. It’s almost like it doesn’t matter if the news is good, bad or indifferent.”

Sources: Globe and Mail, Bloomberg

Tags: Array, Ben Bernanke, Bond Traders, Bond Yields, Canada, Canada Inc, Federal Reserve Board, Federal Reserve Board Chairman, Global Recession, Government Bond, Government Sponsored Enterprises, Hsbc Securities, Lascelles, Mark Chandler, Mortgage Backed Securities, Other Government Agencies, Rbc Dominion Securities, Rbc Dominion Securities Inc, Td Securities Inc, Term Bonds, Term Yields, Yield Curve
Posted in Bonds, Canadian Stocks, Commodities, Economy, Markets | No Comments »