Archive | September, 2012

Investor Snapshot

29 Sep

We are in a volatile market, the news and information is conflicting (good and bad) and relevant institutions are stepping in to save the day.

Personally, I believe the current climate is the “new normal” and the data will remain weak – requiring brave and effective strategy from the ECB, IMF, US Federal Reserve, etc. I believe and expect this will happen – and my thoughts are the only solution to the debt scenario on a macro scale is time and inflation (eroding the value, if not the size, of the debt). This is not a quick solution but in time I believe will be effective.

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Ben Bernanke, chairman of the US Federal Reserve has announced on Thursday 13.09.2012 extending the Quantative Easing Programmes and launches QE3 – the buyback of mortgage related securities – a further $40 Billion each month. This is in addition to the $45 Billion Twist Programme already in existence. This is hoped to bolster buying by the American people as they see signs of prosperity through house valuations and a better environment. This coupled with low-interest rates and accepting higher inflation – a loose monetary policy beyond 2014 into 2015 – he plans will lead to improving prospects in 2013 & 2014.

Growth in the US economy between April and June has been revised downwards. Gross domestic product (GDP) in the second quarter grew at an annual rate of 1.3% in the second quarter, down from the previous estimate of 1.7%.

Most of the UK’s major banks sign up to the new Funding for Lending scheme, which aims to stimulate the economy by making cheaper loans available. 

The UK economy shrank by less than thought in the second quarter (0.4% in the April-to-June period), the Office for National Statistics (ONS) said in its  third estimate of gross domestic product (GDP). The ONS had initially estimated a contraction of 0.7%, before revising that to 0.5% last month. 

UK service sector bounced back in July, raising hopes of an economic recovery in the third quarter of this year. The ONS said services output, covering a range of sectors from retail to finance, rose 1.1% on the month. However, this followed a decline of 1.5% in June which was affected by the extra Diamond Jubilee bank holiday. The service sector accounts for about 75% of UK economic output (GDP). Its performance is an important guide to the direction of the overall economy. All the main areas registered increases in activity in July, with the category covering retail, hotels and restaurants showing the biggest rise of 1.8%. Business services and finance output was up 1.2%.

French unemployment has topped three million for first time since June 1999, as the economy continues to struggle. 

France has unveiled its budget for 2013, avoiding big austerity spending cuts in favour of higher taxes on the wealthy and big businesses. French Prime Minister Jean-Marc Ayrault confirmed that there is to be a new 75% tax rate for people earning more than 1m euros (£800,000; $1.3m) a year. But he insisted that nine out of 10 citizens will not see their income taxes rise in the new budget. The government plans to raise 20 Billion Euros in extra revenue. That compares to 10 Billion Euros in spending cuts. The emphasis on tax rises is a policy of the new French President Francois Hollande that is against the prevailing mood of Europe where countries from Ireland to Greece are slashing spending to try to placate investors and lower borrowing costs.

Spain has set out its austerity budget for 2013, with new spending cuts but protection for pensions, amid a shrinking economy and 25% unemployment. There are expectations that the country will soon seek a bailout from its Eurozone partners. 

Spanish police ringing parliament in Madrid fire rubber bullets at protesters taking part in a mass rally against austerity. 

Spain’s banks will need an injection of 59.3bn euros ($76.3bn; £47.3bn) to survive a serious downturn, an independent audit has calculated. The amount is broadly in line with market expectations of 60 Billion Euros, and follows so-called stress tests of 14 Spanish lenders. Much of the money is expected to come from the Eurozone rescue funds, the current EFSF and the future ESM. Spain said in July that it would request Eurozone support for its banks. The Spanish banking sector has been in difficulty since the global financial crisis of 2008, and the subsequent bursting of the country’s property bubble and deep recession.

Greek police fire tear gas to disperse anarchists throwing petrol bombs near Athens’ parliament during a day-long strike against austerity measures. Greek finance minister Yannis Stournaras says the three parties in the country’s governing coalition have reached a “basic agreement” on the austerity package for 2013-14.

International Monetary Fund head Christine Lagarde has warned Argentina it could face sanctions unless it produces reliable growth and inflation data. 

The International Monetary Fund looks likely to cut its forecast for global growth next month when it updates its projections for the world economy.

Japan’s industrial output fell more than expected in August, as cars and electronics suffer from weak global demand. 

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Investment/Pension Portfolios – we are well positioned for this volatility and expect this to lead to profitability. I am in the process of a client by client investment audit and in some cases we are adding additional asset classes to diversify the investment risk. To all my clients, either thank you for your involvement and help; and to all of those I will see shortly – I will explain my thoughts to you in our meeting.

Four Years Since The Lehman Brothers Collapse

24 Sep

Four years ago, Lehman Brothers, a Wall Street investment bank collapsed. The shockwaves are still reverberating through the global financial system. The collapse of Lehman Brothers was the Pearl Harbor moment of a financial crisis that almost brought down the entire U.S. and Global financial systems.

The eurozone’s inherent weakness has been ruthlessly exposed, while here in Britain the crash ensured the death of a discredited regulatory architecture. By the end of 2012, a new regime in the UK will put responsibility for financial stability back in the hands of the Bank of England. 

Many still debate the blame for the collapse. People bought homes they couldn’t afford, peddled by lenders who knew (or should have known) that the loans were destined to fail. Stock Markets sucked up these loans and sold them off in bundles to investors.

Everyone should have known better. At the top of this list were the government regulators who are supposed to protect the economy from these Stock Market excesses, but who instead sat and watched as a global bubble built of rotten subprime loans kept expanding.

Financial institutions, each indebted to the next via complex financial products whose value outstripped that of the banks themselves, threatened to topple like dominoes.

After regulators forced the shotgun wedding of the investment bank Bear Stearns to JPMorgan Chase in March 2008, the Federal Reserve Bank of New York and the Securities and Exchange Commission sent teams of observers to Lehman Brothers to gather information and monitor the company’s condition. Like Bear Stearns, Lehman Brothers had invested heavily in mortgage bonds.

Instead of sharing their findings, as they had agreed to do, they did not. Had they shared information, they would have discovered that Lehman’s statements about the robustness of its liquidity were false, according to an independent examiner appointed by the bankruptcy court to determine what had gone wrong at Lehman.

When it finally became clear in the week before Lehman fell apart that disaster was imminent, regulators claimed that they didn’t have the tools to prevent its collapse. Lehman’s lawyers warned that an unplanned bankruptcy would lead to “armageddon.” Regulators let it fall, only to watch in horror as the entire financial system began to unravel, and lending of all sorts came to a halt.

It is impossible to say how the last four years would have unfolded had regulators, upon discovering Lehman’s failings, sounded warnings earlier about the instability of the nation’s largest banks. It is also not clear whether an orderly unwinding of Lehman from world financial markets would have significantly altered future events.

But here is a safe bet, economists and financial crisis scholars say: The financial system hasn’t yet been purged of greed, irrational exuberance or wilful misconduct. Another crisis will come.

Are regulators now better equipped to sniff out and prevent a disaster in advance (and/or manage the collapse of a major bank if they don’t)?

The risks to the financial system of a bank collapse have only grown. That’s because the banks themselves are even bigger than they were four years ago.

Size is no insulation against a full-fledged panic. The biggest banks are tied together through an endless series of loans, bets, side bets and even bets on whether each other’s financial products,investments that they don’t even own, will succeed or fail. 

Banks have the cushion to weather a storm as the government will prop them up.

Balance sheets were ravaged and in the UK both HBOS and Royal Bank of Scotland had to be bailed out with more than £65bn of taxpayers’ money just weeks after Lehman’s fall from grace. 

As Lehman staff filed out of their Canary Wharf tower for the last time, any sympathy soon evaporated at the sight of their office gear stuffed into boxes stamped with the logos of Chateauneuf-du-Pape and Cristal champagne.

Within six months, thousands of protestors overran the City of London, staging furious protests targeting London’s once-proud financial sector. 

Today’s banking landscape, at least in Britain, looks very different. Lenders must hold much higher cash buffers to absorb future financial shocks, while the City have been forced to rein in executive pay.

The Independent Commission on Banking is considering some form of split between investment and retail banking to accompany the regulatory shake-up.

As far as the safety of Britain’s banks goes, Investec analyst Ian Gordon thinks we’re on the right path.

Market Outlook On Wednesday 19 September 2012

20 Sep

Last week started in typical pessimistic terms, this changed abruptly on Thursday when the ECB’s President Mario Draghi said the central bank would be willing to buy as much Eurozone Bad Debt as necessary to recapitalize the Union’s struggling banks. Stockmarkets soared on the news and continued to move higher on Friday.


The question being – will it be enough to keep the market rising?  There is a good chance that this will help fuel the long-term recovery but in the near future volatility will be a factor of the investment markets’ landscape.

Economic Calendar

There’s little doubt as to last week’s economic focal point… employment (or nearer the lack of improvement).

The US unemployment rate dropped from 8.3% to 8.1%, which is better, but as expected a slow reduction. This is in-line with optimistic expectations but means the recovery is slow, unspectacular and muted.

The other piece of impressive (potentially) data were auto sales.  The U.S. saw an increase in August of 19.9% vehicles sold. If this moves from an exception to a trend (we will see the results over the next few months), this could bode well for 2013 – auto sales have been a good future indicator of retail sentiment but typically a lead indicator of 9 – 15 months.

Market outlook: Hammerson, Rexam, Centrica

Stock Market

The question everyone wants answered – did last week’s strength reignite the bigger uptrend? Some feel, the market is overbought, and we still haven’t seen what one could consider a healthy and expected pullback following the recent rises – this would set up a big move for the fourth quarter.  

Currently, I’m maintaining a modestly bearish view on things and say we could have more downside to go before ‘the’ current bottom has been made. That leads to the next question…. where will that bottom be?

For reference, the average recent-market corrective move is circa 9% from the peak (as, for example, happened earlier this year). I am aware that only with hindsight can we forecast the “bottom”. Personally, I believe it to be a wasted effort and prefer to focus on the performance relationship between asset classes and their propensity for profit and loss based on the current circumstances. Correctly combined, this will steer you towards holding assets when combined have the best chance to minimise losses and strong chances of realising profits.

CBOE Volatility Index

One other factor working against several indices right now – the upper 50-day Bollinger band has stepped in again as a ceiling.

Does anything change when you take a few steps back and look at the longer-term weekly chart? Not really.

There’s still room for the longer-term trend to keep rolling before hitting a major ceiling.  That’s probably going to be somewhere around where the six-month and 52-week Bollinger bands will likely be converged.  

Once again, the CBOE Volatility Index (VIX) (VXX) is back to oddly-low levels.  The market continue to drift higher even with the VIX this low, but it’s going to be unlikely to see a strong and prolonged market rally with the VIX at these low levels.


Market Trouble?

6 Sep

I am pleased with the positioning of the portfolios I manage and believe we are well placed for the current volatility. We have made healthy profits over the last three months and during the previous market declines were well insulated against and retained our position well relative to the investment markets.

The recent dip is expected to lead to the third losing week in a row, following six straight weeks of gains.  While that may have bled off some of the over-bought pressure, the bears may not be done yet.  We’re headed into one of the weakest periods of the year, and the floors the bulls are hoping will hold up are going to be tested soon.

First things first though – last week’s and this week’s major economic data.


US Economic Data

Most of last week’s economic numbers were bigger-picture items

On the consumer sentiment front, the Conference Board’s confidence score fell drastically in August. The Michigan Sentiment Index, rose to a three-month high.  It does make you question how two seemingly – so similar measures can end up with wildly different results.

Real estate continues to look stronger.  The Case-Shiller home price index was up and July’s pending home sales are expected higher.

The surprise positive last week was Quarter 2 GDP growth rate – up above estimates; and, if July’s Factory Orders are any indication, then the trend may actually be improving rather than decelerating.


Some potential market-movers:

Construction Spending – this number has been generally healthy of late. 

Auto Sales –  Car sales have been relatively firm of late

Job Cuts and ADP Employment Change – this is the prelim before Friday’s unemployment rate figure and official jobs-created figure.  

Nonfarm Payrolls and Unemployment Rate – economists are looking for 145,000 new private payrolls; and most expect the unemployment rate is not going to move from last month’s 8.3% figure. 

If these figures fail to achieve estimates – this would create uncertainty and an expected decline in the markets – although the expectations are low and that may not inspire a positive move either.


Market Movements

After everything is said and done, the imminent path of least resistance is still downward-pointing. I am not anticipating a major correction but rather some sell trades, most likely just enough to fully burn off the overbought condition.



South Korea

The South Korean economy is starting to lose steam as the European debt crisis remains unresolved and export markets remain weak.

The latest figures show the country’s economy grew by 0.3% between April and June, down from 0.9% growth in the previous quarter.

The government is therefore looking at ways of boosting domestic demand to compensate for weakening exports.


UK Rises in Competitive Rankings

Leaders from 2008 World Economic Forum

The UK has risen to eighth from 10th place in an annual study of global competitiveness.

The World Economic Forum’s (WEF) Survey said the UK had benefited from a more efficient labour market compared with more “rigid” European economies.

The US economy fell from fifth to seventh place, although WEF said it remained the top innovator.

Switzerland topped the table, followed by Singapore and then Finland in the survey of 144 economies.

The ratings are compiled using public data as well as executive opinion.

The survey placed China as the most competitive major emerging economy.


‘Innovative businesses’

The WEF said the UK had benefited from “clear strengths such as the efficiency of its labour market” and praised the UK’s “sophisticated and innovative businesses”. However, the UK’s macroeconomic economic environment – ranked 110th, down from 85th last year – was hindering competitiveness.

The Treasury said it “welcomed” the report, saying the UK’s improvement was down to the government’s reforms.


Europe’s north-south divide

The WEF survey showed a clear divide between Europe’s northern countries and the troubled periphery economies which are suffering from recessions.

In total, six European economies are in the top 10 – Switzerland (1st), Finland (3rd), Sweden (4th), the Netherlands (5th), Germany (6th) and the United Kingdom (8th).

But the southern Eurozone economies are ranked much lower, with Spain in 36th place, Italy 42nd, Portugal 49th and Greece 96th.

The southern economies, which are at the heart of the Eurozone sovereign debt crisis, have suffered a chronic lack of competitiveness and low levels of productivity that led to unsustainable imbalances in the economy, followed by rising unemployment.

The WEF urged an overhaul of labour regulations “sooner than later” as one of the necessary reforms to restore growth.

Switzerland maintained its top position thanks to its scientific institutions, a strong collaboration between academia and business sectors, high spending on research and development as well as its high rate of patenting per capita, the WEF said.


US political gridlock

The US ranking has continued to fall due to weakness in the overall economy as well as worries among businesses towards what they perceive as government meddling in the private sector and distrust towards politicians.

The WEF warned that in the US, despite being the world’s top innovator with the likes of Google and Facebook, political gridlock over fiscal tightening could dampen growth prospects.

The survey cited an inefficient government bureaucracy and tax rates as the two biggest impediments to doing business in the US.