Archive | July, 2012

The Markets, Fear and Investments On Tuesday

17 Jul

It seems that the optimists in the markets are rallying and so seem to have taken the technical helm at the moment.

The good news – corporate reports are looking attractive compared to forecasts with more than a few market heavyweights topping views.

The bad news – today’s results are finding it harder to impress or influence the broader market with any strong conviction.

On the economic front, a trio of economic reports came in mostly better-than-expected and has provided some anecdotal support for optimistic market trading, though this failed to draw any real reaction from market participants.

 
Chart forVOLATILITY S&P 500 (^VIX)

From Germany and The Eurozone ZEW Economic Sentiment surveys came up short of views. Australia’s Reserve Bank’s minutes noted “China may not be slowing much further, although the outlook remained uncertain”. If that sounds unsatisfying, you’re with me on that – my opinion.

And finally, the VIX (commonly called the fear index) is down 4.75% near 16.25%. The sentiment gauge is marginally below its one month lows and roughly 6% below its 10 Day Simple Moving Average.

Overall, the price action creates an environment (at least in the short-term), which looks conducive to market optimism. Investors should remain wary of any potential complacency.

What’s Happening To The Global Growth Story?

17 Jul

The International Monetary Fund states the global economic recovery is still at risk, and Eurozone economies remain in a “precarious” situation.

Indian economic recovery1 Finance Friday : India To Lead Global Recovery

With the backdrop of the financial crisis, issues around the world including China, US and especially the Eurozone – the figures are relatively good, as at least they’re positive. Yes, compared with forecasts in April 2012 the figures are worse but is that due to a decline or the previous figures being overly optimistic. Personally, I believe the latter to be the case but that doesn’t mean all is well – rather the results are within the expected range – not bad news, not great but rather feared and anticipated.

A major concern as current is  a delayed or insufficient response from European leaders to the crisis would further derail the recovery. This looks unlikely when one reviews the decisions and actions so far – but nothing is impossible.

The IMF has downgraded its forecast for global growth for 2013 to 3.9% (from the 4.1%).

One of the biggest downward revisions was to the UK, now expected to grow by 1.4% in 2013. In April it predicted 2%. The forecast for growth in 2012 was also reduced for the UK, down to 0.2% from the 0.8% cited in April. These are now more in-line with my personal expectations – in my speak I would say these figures now look realistic rather than the previous forecasts were significantly more optimistic.

The IMF’s prediction for world output this year – as measured by gross domestic product – was little changed at 3.5%.

In its updated World Economic Outlook, which is published twice each year, the Washington-based lender said: “Downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action.”

 
The Eurozone

The fear over Europe and the Eurozone is the sovereign debt crisis and the need for its’ leaders to :-

  • take further action to avoid an escalation in the debt problem 
  • prevent a market meltdown
  • there must be the utmost priority to resolve the crisis in the euro area

 

The 17-member Eurozone economy is expected to contract by 0.3% this year before rebounding by 0.7% next year.

The IMF, the European Central Bank (ECB) and the European Union, has demanded austerity measures in the struggling economies of Greece, Spain and Portugal in return for bailouts.

The crisis has led millions of people to lose their jobs and benefits. There were also concerns that runs on bank deposits would trigger a Eurozone-wide bank run and banking crisis.

Recently, Eurozone leaders agreed to bail out Spanish banks directly and unveiled a plan to implement a fiscal and banking unification. But the proposals for such a decision will not become concrete until later this year, and it is not yet known how long it will take for such a union to take shape.

The ECB last week cut its benchmark lending rate below 1% to 0.75%. In addition, the IMF has called on the ECB to use less orthodox monetary tools – possibly providing the region’s banks with additional unlimited loans, or long-term refinancing operations (LTROs) – but there are risks associated with such actions.

 

United States

The IMF also urged US lawmakers to solve their “fiscal cliff”. This refers to a set of fiscal deadlines at the end of the year, including deciding whether to extend tax cuts for the wealthiest Americans.

If policymakers fail to reach consensus on extending some temporary tax cuts and reversing deep automatic spending cuts, the US structural fiscal deficit could decline significantly – IMF suggests possibly 4% of GDP in 2013. Whatever the actual figure, the risk is if this is resolved, US growth could stall next year, with significant spillover into the rest of the world.

 

Emerging Markets

Growth in emerging economies was also revised downwards. The IMF has forecast growth slow down to 5.6% in 2012 before picking up to 5.9% in 2013.

Growth momentum dropped particularly in Brazil, China and India, considered to be the drivers of a global recovery.

That was aggravated by risk aversion among investors who pulled out their money out of these economies, causing domestic share prices to drop.

 

My Outlook

I believe we are on track for weak growth but at least there is growth. With the back-drop of the economic and fiscal world we now find – I don’t believe we could expect for more.

As for the markets – the concern being are we trading in a range? Or will there be actual headline growth?

I am defensive in my general outlook and feel that to manage portfolios with the plan of positive returns. My chosen overall strategy is to focus on diversity, strong dividend and income growth, global and niche exposure, take advantage of opportunities as and when they exist and be realistic.

Market Update On 13 July 2012

13 Jul
So lets summarise the last couple of weeks  – alot and yet nothing has happened. There has not been a new crisis, failure or collapse. There  are dire issues but with proactive action, fiscal pain and possibly the effects of inflation and a change in perspective of normality – I think the endeavours will eventually be successful admittedly with many hicups, breaking news of the latest banking fiasco, mistakes and corrections – and with the odd (maybe more than odd) panic.
 

Barcelona events april 2012

Some of the major recent events which have caught my eye :-
 
1.  Bank of England – High Street Bank Lending Scheme Details Due
 
Sir Mervyn King said there was “a great black cloud of uncertainty” hanging over global business. He has announced in his Mansion House speech, the launch of a scheme aimed at boosting High Street bank lending – to be unveiled later by the Bank of England.

The aim is to make billions of pounds of cheap funds available to banks but only if they use the money to boost loans to businesses and consumers. The move is part of a raft of measures taken to try to increase lending. This is the first initiative which makes loans to banks conditional on the money being passed on through mortgages or business loans.

The belief is the bank of England could initiate circa £80bn to be available if High Street banks increase lending by 5%.

Crucial to its success will be whether it really does persuade banks to make affordable credit widely available.

2.  Republic of Ireland growth in 2011 Double Original Estimate

Irish Prime Minister Enda Kenny has been cutting spending to meet bailout conditions. The Republic of Ireland’s growth rate last year was double previous estimates at 1.4% but this year started badly, official figures show.

It means Ireland escaped technical recession last year – two consecutive quarters of negative growth, although the economy shrank by 1.1% in the first three months of this year.

The figures were produced by the Central Statistics Office (CSO).

3.  Euro falls to it lowest against the US Dollar since 2010

The euro has fallen to its lowest level against the dollar for two years on worries over Eurozone prospects and as minutes from the US Fed dampened hopes of any new stimulus measures.

The euro fell to $1.2165, its lowest level since mid-2010.

US Fed minutes released on Wednesday from its June meeting suggested it was not planning any imminent additional moves to boost the US economy. In contrast, the European Central Bank cut interest rates last week from 1.00% to 0.75% (a record low for the Eurozone). It also cut its deposit rate, from 0.25% to zero.

The value of the euro has also been hit by worries over growth prospects for the Eurozone and whether it can tackle the current debt crisis.

4.  China’s GDP Glows at its Slowest in Three Years – 2nd Quarter 2012

China’s GDP grew at its slowest pace in three years in the second quarter, but other less-cited indicators are already signaling that the world’s second-largest economy may be starting to turn around.

The economy grew 7.6% in Quarter 2. This is slower than the 8.1% in Quarter 1 and 8.9% in Quarter 4 2011. There are fears of a hard landing but the Chinese economy is still relatively strong.

JPMorgan’s Chief Asian equity strategist Adrian Mowat has stated that he expects China’s GDP to come in at 7.7% for the year overall and 6.6% quarter over quarter. That would make Quarter 2 the weakest quarter since the final quarter of 2008.

5.  Moody’s Downgrades Italy by Two Notches

Moody’s Investors Service downgraded Italy’s government bond rating by two notches to Baa2 from A3, and warned it could cut it much further if the country were to lose access to debt markets.

The move left Italy’s rating just two notches above junk status and could raise its borrowing costs ahead of a bond sale due later on Friday.

6.  LIBOR And The Banks – Fines Estimated At $22 Billion

Twelve global banks that have been publicly linked to the Libor rate-rigging scandal face as much as $22 Billion in combined regulatory penalties and damages to investors and counterparties.

The analysis, which the authors admit is “crude”, assumes that 11 more banks will be penalised like Barclays, which paid $456 Million in June to US and UK authorities for attempting to manipulate the London Interbank Offered Rate, the benchmark for $360 Trillion in derivatives, loans and mortgages.

The calculation excludes the potential fallout from ongoing US and European Union cartel investigations, which could result in multibillion-dollar fines.

7.  Markets Await JPMorgan Report on Its Derivatives Trading Losses

Later today, J P Morgan will reveal details of its controversial derivatives trading loss along with second-quarter earnings.

Analysts expect JPMorgan to take anywhere from a $4 to $6.5 billion trading loss, resulting from a trade put on by the  major traders in its London office.

8.  US Cracks Down on Iran’s Use of Front Companies

The U.S. tightened the screws on Iran Thursday, imposing additional sanctions targeted at Iran’s use of front companies to subvert Western sanctions on oil exports.
 
The U.S. identified dozens of Iranian front companies, ships and banks that it said were helping Iran avoid sanctions aimed at stopping it from acquiring nuclear weapons. The Treasury identified Noor Energy, Petro Suisse, Petro Energy and Hong Kong Intertrade as companies used by the National Iranian Oil Company. U.S. official are also working with the maritime industry to identify Iranian ships, by number, even if they are reflagged or repainted.
 
 
9.  Market Savior? Stocks Might Be 50% Lower Without Fed
 
A report from the Federal Reserve Bank of New York suggests that the bulk of equity returns for more than a decade are due to actions by the US central bank.

Theoretically, the S&P 500 would be more than 50 percent lower, if the bullish price action preceding Fed announcements was excluded, the study showed.

This was posted on the New York Fed’s website on Wednesday. The study sought to explain why equities receive such a high premium over less risky assets such as bonds. What was found was the Federal Reserve has had an outsized impact on equities relative to other asset classes.

10.  Fear of Year-End Fiscal Stalemate

With the economy having slowed in recent weeks, business leaders and policy makers are growing concerned that the tax increases and government spending cuts set to take effect at year’s end have already begun to cause companies to hold back on hiring and investments.

Economists say the magnitude of the effect remains unclear and the fiscal uncertainty is probably not the economy’s main problem, but is instead one of several factors — along with Europe’s troubles, the spike in oil prices and a continuing hangover from the housing bubble — restraining growth.

11.  Markets Expected To Rebound in Second Half

When we exit the current soft patch in the second half of the year, markets are expected to benefit.

I think in the next couple of months, what we will see is the battle between earnings and how bad is this news? or we will start to see signs the soft patch is ending and we’re bouncing. If that happens I don’t think we’ll worry about earnings in the last quarter. We’ll care about where the market is going.

But if the economic data remains soft, the earnings seasons news will take on more significance.

Global policymakers should also succeed in bolstering the worldwide economy. This is the first time in this recovery that you have almost every policy official around the globe easing.

This recovery is like the last longer – it’s rolling out much slower, but each time in the last two recoveries it took three years before we decided that we are in recovery. Years 4 of the economic cycle things started to gear, confidence finally went up, the job market finally came to life. I think this is likely to follow a similar trend.

How To Invest In A Crisis?

12 Jul

There is no simple answer as to what to do –

 

Scenario 1 – there are those who say if I don’t look at my investments it will go away and everything will be fine – maybe but which decade is the question.

Scenario 2 – do nothing and the markets will return – maybe but not sure if that will be in my lifetime

Scenario 3 – convert all investments into cash (cash is king?) – but then inflation runs at a higher rate than the net rates of interest typically available but at least the capital value doesn’t drop just its buying power

Scenario 4 – structured products but what about Lehman Brothers – who could be next? Anyway how say are these investments?

 

How I Approach This For Clients

Investments are split theoretically into three defined areas – deposit based, structured products and investment portfolio.

Some of the questions to ask (this is an infinite list so her are just a few) :-

1.  When do you need access to the money? (This will have differing lengths depending the facility, your needs, goals and wishes)

2.  How long is the investment period for each of these investments?

3. Taxation – what tax structure would help minimise tax payable (i.e. if you pay less in tax then you can, assuming you make a profit, retain more of the profits)

4.  Attitude to Investment Risk – risk of inflation eroding the buying power of the capital value, risk of corporate actions and failures, volatility of the capital value

5.  Goals and Expectations – keep them realistic

6.  Your age and earning potential

7.  Changes to personal circumstances – coming up to retirement, changing jobs, losing your job, career development, periods of retraining, etc.

8.  Capital protection, income and/or growth

9.  Make a plan, follow the strategy through – review and be ready to change depending on outcomes – only factual not emotive

 

Outcome

The point is there are many-many issues to consider and this will alter the structure and the inclusion of assets in your investment portfolio. The important point is to minimise costs and tax wherever possible and maximise potential risk adjusted returns.

So don’t leave cash money in a fixed term or bonus related deposit facility post maturity date as the proceeds will be, in most cases, placed on a low-interest bearing account awaiting your further instruction. If you have a variable rate facility – check the rate you are receiving (rates change).

Structured products – not suitable for all but may be a good investment portfolio diversifier but care is needed as the range, success and risks linked to these products are diverse. The potential is to include an asset that behaves in a different way to both cash and portfolio – with a clear idea to potential returns (assuming product criteria are met).

Portfolio – in my opinion this has the greatest potential to positive returns but over a medium to longer term. In the short-term especially, volatility is a major issue and the capital value will fluctuate both up and down. This is the reason why risk profile is so important. By combining assets and asset classes in the portfolio this will design a level of volatility to match your outlook. This is designed to narrow the range of possible outcomes to match your tolerance to volatility and losses but in the fullness of time to hopefully achieve the planned returns.

The point with investing is – review on a regular basis and changes may be needed over time but will depend on many variables.

The focus is make a profit but be realistic – never get caught up in the euphoria of success – i.e. if something is doing exceptionally well why? and it may be the fore-runner of a boom (and or bust) market – a glitch or something else. In the same vent – if something is underperforming and looks unlikely to perform – should this be retained? Investing is not about always being right but rather putting right what went wrong and quickly.

Alas, I am yet to meet anyone whose crystal ball which works any better than mine and my crystal ball has never worked anyway.

With investing – remember never panic, don’t buy on a whim or when everyone says – you can’t make a loss – be logical and sensible.

I rely on expertise, constantly reviewing and assessing, making recommendations and implementing changes when suitable and listening to many market experts opinions, many-many market indicators, trend analysis, market research and most important COMMON SENSE.

Good luck investing – let me know if I can help.

Welshmoneywiz (Darren)