I am pleased to announce the launch of my website – http://www.waverleycc.co.uk
After much work, reviews, re-writing and editing my website is now live. Let me know your thoughts on the content, design and presentation. Personally, I am most pleased with the Testimonials sections – every one who kindly provided their comments presented their views of our relationship.
Stockpicking has been a style that can prosper even in the most difficult markets.
You have to give George Osborne his dues…we all knew there were failings in the assumptions from the Summer Budget. He didn’t duck the bullet. Rather than just guidelines and review of the Summer Budget (normally what seems to be the Autumn Budget), it was more an introduction to the Spring Budget 2013, giving details of some of the fiscal changes ahead.
A benefit of knowing about tax policy to be introduced from a future date is, it gives us a chance to plan now.
Registered Pension Schemes
George Osborne made proposals to cut back on the tax advantages of registered pensions.
The bad news :-
• Annual allowance to be reduced from £50,000 to £40,000 from tax year 2014/15.
• Lifetime allowance to be reduced from £1.5m to £1.25m from 2014/15
The good news :-
• Allowances to remain unchanged for 2012/13 and 2013/14 (at up to £50,000)
• Carry Forward remains unchanged for tax years 2010/11, 2011/12, 2012/13 and 2013/14 (at up to £50,000)
• Fixed protection available – enabling benefits to be taken up to the greater of the standard lifetime allowance and £1.5m without any lifetime allowance charge
1. Election by 5 April 2014
2. Protection lost where further accrual/contributions on or after
6 April 2014
• Personalised protection option – a possible additional transitional protection
1. Provides a lifetime allowance of the greater of the standard lifetime
allowance and £1.5 million, but without the need to cease
accrual/contributions on or after 6 April 2014.
2. Available to individuals with pension benefits with a value of at least
£1.25 million on 5 April 2014.
• Maximum capped drawdown income to be increased from 100% to 120% of the relevant annuity rate determined from the GAD tables – date to be confirmed.
Planning Opportunities
The reduction in the annual allowance was expected and was only to £40,000 (it could have been worse). The reduction doesn’t apply until tax year 2014/15. Carry Forward of unused annual allowance of up to £50,000 for each of tax years 2010/11, 2011/12, 2012/13 and 2013/14, is available.
It gives a high earners the chance to maximise contributions before the reduction in the allowance bites. Also, for very high earners, if action is taken before the end of this tax year, they may be able to secure the 50% tax relief.
The changes to the lifetime allowance will mean that any one likely to be affected by the reduction and looking to retire in the near future will need to consider all means to reduce/avoid any lifetime allowance charge. This includes :-
Income Tax
So, it seems fair to say, there is actually only a very small change in the potential tax bill payable. Personal allowance has increased and the basic rate band has shrunk. The unlucky few are worse off but in most cases the situation seems to either be neutral or possibly a slight improvement.
The personal allowance is to increase by £1,335 to £9,440 in 2013/14 – an improvement in the terms announced in the Summer Budget.
In 2013/14, the basic rate tax limit will reduce from £34,370 to £32,010. This is offset by the increased personal allowance.
The result of these changes is that all taxpayers who are fully entitled to a personal allowance (where net income is less than £100,000) will be better off. At the lower end, the extra increase in the personal allowance will lift a quarter of a million people out of tax altogether.
From 6 April 2013, additional rate income tax will reduce from 50% to 45%. This rate applies for those who have taxable income of more than £150,000. For those affected, there is an incentive to make investments before 6 April 2013 and defer the resultant income until after that time.
In terms of planning for married couples/registered civil partners, this will mean that:
• There is scope to shelter income from tax if a higher/additional rate taxpayer is prepared to transfer income-generating investments (including possibly shares in a private limited company) into a non-taxpaying spouse’s name
• There is an incentive for lower rate taxpayers to make increased contributions to registered pension plans with a view to ensuring that any resulting pension income falls within the personal allowance.
Age Allowance
As the personal allowance increases, the age allowance is gradually being phased out. The amounts of age allowance are frozen at £10,500 for those born between 6 April 1938 and 5 April 1948 and £10,660 for those born before 6 April 1938.
For those who satisfy the age conditions, the age allowance is still currently worth more than the personal allowance. However, the allowance is cut back by £1 for each £2 of income that exceeds the income limit. The income limit will increase from £25,400 to £26,100 in 2013/14.
For those who are caught in this income trap, you should take appropriate planning i.e. reinvesting income-producing investments into tax-free investments (ISAs, VCTs, EISs, SEISs) or possibly tax-deferred investments (single premium bonds) or by implementing independent taxation strategies.
Business Tax
The Government will reduce the main rate of corporation tax by an additional 1% in April 2014 to 21% in April 2014.
The small profits rate of corporation tax for companies with profits of less than £300,000 will remain at 20%.
The capital allowance known as the Annual Investment Allowance will increase from £25,000 to £250,000 for qualifying investments in plant and machinery for two years from 1 January 2013. This is designed to encourage and incentivise business investment in plant and machinery, particularly among SMEs.
A simpler income tax scheme for small unincorporated businesses will be introduced for the tax year 2013/14 to allow:
Eligible self-employed individuals and partnerships to calculate their profits on the basis of the cash that passes through their business. Businesses with receipts of up to £77,000 will be eligible and will be able to use the cash basis until receipts reach £154,000. They will generally not have to distinguish between revenue and capital expenditure.
All unincorporated businesses will be able choose to deduct certain expenses on a flat rate basis.
Tax Avoidance and Evasion
As expected the Government unveiled a bundle of measures aimed at countering tax avoidance and tax evasion.
Areas of particular interest are:-
• The introduction of the General Anti-Abuse Rule. This will provide a significant new deterrent to people establishing abusive avoidance schemes and strengthen HMRC’s means of tackling them. Guidance and draft legislation will be published later in December 2012;
• Increasing the resources of HMRC with a view to:
• Dealing more effectively with avoidance schemes
• Expanding HMRC’s Affluent Unit to deal more effectively with taxpayers with a net worth of more than £1 million
• Increasing specialist resources to tackle offshore evasion and avoidance of inheritance tax using offshore trusts, bank accounts and other entities, and
• Improving technology to help counter tax avoidance/evasion
• Closing down with immediate effect for loopholes associated with tax avoidance schemes.
• Conducting a review of offshore employment intermediaries being used to avoid tax and NICs. An update on this work will be provided in the Budget 2013.
• From 6 April 2013 the Government will cap all previously unlimited personal income tax reliefs at the greater of £50,000 and 25 per cent of an individual’s income. Charitable reliefs will be exempt from this cap as will tax-relievable investments that are already subject to a cap.
Inheritance Tax
The inheritance Nil Rate Threshold is to increase, although by only 1% in 2015/2016 to £329,000. Currently, the Nil Rate Threshold is £325,000 and has been frozen since 2009 until 2015. This means, from 6 April 2015, if the first of a married couple to die does not use any of his/her nil rate band, then the survivor will have a total nil rate band (including the transferable nil rate band) of £658,000.
We await the outcome of the consultation on the taxation of discretionary trusts which is due to be released in December. Hopefully this will incorporate some simplification to the current complex system.
Capital Gains Tax (CGT)
The CGT Annual Exemption (£10,600 in 2012/2013) will increase to £11,000 in 2014/2015 and £11,100 in 2015/2016. We do not know what it will be in 2013/14.
Gains that exceed the annual exempt amount in a tax year will continue to be subject to CGT at 18% and/or 28% depending on the taxpayer’s level of taxable income.
Trustees pay a flat rate of 28% on gains that exceed their annual exemption.
Individual Savings Account
The current maximum investment in an ISA is £11,280 in a tax year (maximum of £5,640 in cash). With effect from the tax year 2013/2014, the maximum will increase to £11,520 (with the cash content not to exceed £5,760). Use of the allowance should always be maximised as any unused allowance cannot be carried forward.
The Junior Isa and Child Trust Fund maximum annual contribution limit will move from £3,600 to £3,720 from 6 April 2013.
The Government will consult on expanding the list of Qualifying Investments for stocks and shares ISAs to include shares traded on small and medium enterprises (SMEs) equity markets such as the Alternative Investment Market and comparable markets. This could lead to ISAs becoming even more appealing as a tax shelter.
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS)
The rule changes, mostly approved months ago, revolved mainly around opening up more companies for investment from VCTs and EIS, and increasing how much can be invested.
The size of companies that the schemes can invest in has been increased from £7 million to £15 million and the number of employees from 50 to 250.
The limit on the amount an individual can invest in an EIS has increased from £500,000 to £1 million, while the amount an EIS or VCT can invest in an individual company has increased to £5 million.
Ian Sayers, director general of the Association of Investment Companies (AIC), commented, ‘The proposed rule changes allow VCTs to invest in a wider range of companies which is a welcome boost to the sector and businesses desperately seeking finance.
‘The Chancellor’s removal of the £1million limit on VCT investment in a single company will ensure more efficient support to smaller businesses in the UK.’
However, the Budget also finalised plans to subject VCTs and EIS to further scrutiny in relation to the investments that they make.
The government will introduce a ‘disqualifying purpose test’, designed to exclude VCTs or EIS that do not invest in qualifying companies and are set up solely for the purpose of giving investors tax relief.
Although the schemes escaped any changes to their individual tax benefits, the Budget introduced a cap on tax relief, in an effort to prevent high income taxpayers getting away with very low tax rates.
The new rules will set a cap of 25% of income on anyone seeking tax relief of over £50,000 but, while the proposals are not particularly clear, it appears EIS and VCTs will be exempt.
Paul Latham, managing director of Octopus Investments, explained, ‘The good news is that the government’s new cap only applies to tax reliefs which are currently classed as “unlimited”. This means that tax-efficient investments, such as EIS and VCTs, are unaffected by this legislation.’
Up until the end of last week, the market had given up a little more than 8.0% since the September peak (an 8% pullback is about the average size of a normal bull market correction), and while that could imply a reversal of fortune may be due, more downside may be in store before a good technical floor is found.
This is a tricky situation. On the one hand, stocks are oversold and due for a bounce. On the other hand, the momentum is still pessimistic, and we have to assume that trend will remain in motion until we clearly see it isn’t.
The bullish case is bolstered by this weeks positive results, which stopped the previous declines. The market’s previous fall of 8.8% from the September high is right around the normal bull market correction. So, the reversal clue materialized right where it theoretically should have.
The bearish case: There’s still no assurance that the bullish days will continue. In fact, the stockmarkets could carry on gaining and still not snap the losing streak ( as compared to September’s highs).
Any additional clues from the CBOE Volatility Index? No, not really.
Just for some perspective, there’s still plenty of room and reason for the stockmarkets to keep tumbling. Point being, if the bulls are serious here, there’s not much of a foundation they can use as a push-off point. Then again, the VIX is clearly hitting a ceiling at its 52-week moving average. Until and unless it can be hurdled, the bulls don’t have an enormous amount to worry about (they just have a little to worry about).
So could the recent corrections and this weeks swing be the formation of a swing low of an intermediate market-bottom being formed?
Typically the stock market will rally fairly aggressively out of one of these major intermediate bottoms, often gaining 6%-8% in the initial phase. At that point the market will dip down into a half cycle low that will establish the trend line for this particular cycle.
The Dollar (USD) is now, based on its daily cycle, overdue for a move down into a short-term low . This, I would expect, should help drive the first half of that 6%-8% move, followed by a short corrective move (as the dollar bounces) and then rolls over quickly into a another phase down.
If this is the case, I believe the cycle would be due to bottom around the first of the year and should drive the stock market generally higher into early January 2013.
We could continue to see the dollar generally heading lower with intermittent bear market rallies until it puts in a final three year cycle low in mid-2014. This should keep the stockmarket generally moving higher at least until the point where commodity inflation collapses Consumer Spending. Once that occurs the stock market will stagnate. The fear is that the US Federal Reserve may continue to print money, and this may cause the environment of artificially high money supply, which could lead to creating the conditions for the next recession.
As has been the case in the 1970s and also during the last cyclical bull market in 2007, I think we will probably see the stockmarket at least test the all-time highs, if not a marginal break above them, before rolling over into what I expect will be a very complex bear market bottoming sometime in 2015.
As with all predictions. They are dependent on sentiment, market forces and behavioural economics and as such I reserve the right to change my views and expectations, based on information as and when it arises in the future. The scenarios suggested and dates predicted are based on current information. The future is unknown and will change the potential outcome as estimates become actuals.
This is why we carry out sensitivity analysis, stress-test portfolios and incorporate diversified portfolios because the one fact we can be sure of is everything will change.
It has been the argument for many years – Does active fund management generate better investment returns? The general accepted conclusion has been yes but only for the best managers whereas the rest under-perform. So the question as an investor is it worth the additional cost?
Personally, I agree with the above points and believe a combination of strategies is best – the point is, if active fund management generate above sector average returns on a consistent basis then by selecting, monitoring and reviewing we will achieve the best risk adjusted returns. The question is which sectors to combine and this is where my expertise adds value and my expectation of betters risk-adjusted returns.
Premier Fund Management has challenged the opinion that average fund managers always tend to under-perform the associated indices.
Conventional measures of the “average” fund manager’s performance – the use of fund sector averages based on the mean performance of all funds in the sector – have long appeared to support this view. Many experts have tended to attribute the under-performance to the effects of active fund management fees on the funds’ performance.
However, research by Premier Asset Management based on ‘weighted averages’, which give bigger funds a greater influence on sector average calculations to reflect the true average return in the sector, shows that in most cases this is not the case.
In the IMA Asia Pacific excluding Japan sector the conventional sector average return of funds in the past five years was 27% – far lower than the FTSE World Asia ex-Japan index gain of 34.8%. However, when the amount of assets in each fund is taken into account, the actual weighted average performance experienced by investors was 37.4% – better than the index, the research shows.
In the IMA Global Emerging Markets sector the conventional average performance was a 23.9% gain, compared with an MSCI Emerging Markets gain of 27.4 per cent. However, the weighted sector average gain from funds was actually 32.2%, the research shows.
It also shows that, while the weighted average fund performance was not necessarily better than stockmarket indices in all sectors, it was better than the conventional sector average in seven out of the eight sectors that were examined. This suggests that the existing reported sector averages published to investors understate the returns enjoyed by most clients of actively managed funds.
The one sector where the conventional sector average was higher than the weighted average was IMA North America – suggesting that the biggest funds in that sector actually under-perform the smaller funds on average.
Simon Evan-Cook, investment manager on Premier’s multi-asset team and author of the research, said the weighted average calculations were a better method of judging funds because more investors were affected by the performance of larger funds. “As a whole, the industry is understating the performance and value of active management,” he said.
Ed Moisson, head of UK research at Lipper, said Premier’s method was “logical” and demonstrated the strength of larger funds’ track records, but added it did not tell the whole story.
After months of waiting, investors now have one less uncertainty to deal with. The election is over, and voters decided to give President Obama another four years to lead the country.
In addition to winning, the Democratic Party retained a majority in the Senate, picking up 2 seats. However, the Republican Party also maintained its majority in the House of Representatives. This means that the political leadership will not change significantly. That doesn’t mean everything will stay the same. Voters decided to retain many of the same leaders, but recent polls suggest many people want to see different legislative results.
Looking ahead, the new Congress and President Obama must now find a way to boost economic growth and create jobs. Along the way they need to avoid the fiscal cliff, foster trade with other countries and maintain the security of the United States in an increasingly threatening world. Unfortunately, avoiding the fiscal cliff and promoting economic growth are immediate problems. If Congress fails to take action, the Bush-era tax cuts and the Obama payroll tax cuts will expire at the end of this year. At the same time, mandatory federal spending cuts are scheduled to begin (as lawmakers could not agree on a compromise to reduce the deficit during last-years’ debt-ceiling negotiations). The Congressional Budget Office estimates that the economy could go into recession and contract 0.5% next year if all the tax hikes and spending cuts take place as scheduled.
We believe there are several scenarios that could unfold around the fiscal cliff. The most likely outcome would be that lawmakers would find acceptable middle ground including some tax increases and spending cuts but not the full measure scheduled to occur at the end of the year. Modest tax hikes and federal spending cuts would not severely hurt the economy but would be a drag on economic activity next year.
Recent economic news shows that the U.S. economy is slowly recovering from the 2008-2009 recession. Fortunately, the housing market has finally turned up after six years of subtracting from economic growth. The country will face some fiscal drag if Congress allows some tax increases and spending cuts to reduce the deficit next year. This fiscal drag will most likely be offset by the recovery in housing and continued increases in consumer and business spending. As a result, we believe that the economy is likely to grow in 2013.
Many investors may be concerned that the election outcome will lead to continued political gridlock that has existed during the past two years. However, both parties recognize the risk to the economy if lawmakers do not address the fiscal cliff. Therefore, during the next few weeks we are likely to see both parties talk about a willingness to work together, but start the process by stating the pre-conditions for cooperation. We believe this would just be the first step toward addressing policy differences. Obviously, the process will not be quick and easy.
Some strategists are suggesting that Congressional Leaders could allow the country to go over the fiscal cliff as a way to force a compromise. If this happened we would expect any compromise after the first of the year would be retroactive to the start of the year and the economic impact would not necessarily be that severe. The outcome would be volatile financial markets.
So what do the elections mean for investors? We believe that the underlying U.S. economic fundamentals remain favorable. The economy is growing, and the uncertainty of the election is behind us. If Congress and the President can find some middle ground and compromise over tax hikes and spending cuts, the outlook for the economy would be better than the worst-case scenario of allowing all the tax hikes and spending cuts to be implemented as scheduled.
The economy is expected to start the year on a weak note until the fiscal cliff issue is addressed, but we expect economic momentum to build as the year progresses. In this environment, the stock market would be volatile during the next few months. The positive seasonality during November and December could support stocks if investors see Congressional Leaders trying to work together. Longer-term, we look for the stock market to have modest gains next year.
Fortunately, the Federal Reserve’s easy money policies will partially offset the fiscal drag of reducing the deficit. The government may borrow and spend a little less next year if a compromise is reached but net lending in other sectors of the economy has increased, and this increase in credit in the private sector is likely to support economic growth. In addition, the credit markets are likely to benefit if the Fed continues to provide liquidity to the economy by buying bonds until the unemployment rate declines.
My clients have been positioned with asset preservation and potential of positive returns in mind during the past year. This was in order to deal with the uncertainty of the global environment, the Eurozone debt Crisis, slowdown in China’s GDP, the US election outcome and the pending fiscal cliff (to name just a few). Finally, businesses appear to have delayed capital spending and hiring until the direction of governments policies becomes clearer. After waiting much of this year, next year could potentially be a year of action and less worsening situations (possibly even improving situations). Investors may take a less defensive position, assuming investor sentiment improves (on a relative basis, this is anticipated) and this could lead to stocks outperforming bonds in 2013. If this scenario ends out being true then cyclical sectors of the stock market are likely to perform better than defensive sectors. Although this is only an “if”.
What a Difference Five Years Makes – 10 Years Makes – 15 Years Makes
With this week marking the five-year anniversary of the stock market’s record high, much of the attention will and has been devoted to the market’s steep drop and sharp rebound. The chart below shows, the S&P 500 has been swinging in a wide range for the last 15 years. The pattern has been quite extreme – doubling and then falling by half over and over again.
Five years ago, the S&P 500 closed at a peak of 1,565.15. Since then the index has seen a huge decline followed by a huge rally. After all those swings, the S&P 500 has declined 7.9% over the last five years (annualized the decline works out to a loss of 1.63% per year). If we extend the period to the last 10 years, the S & P 500 has increased by 85.6% (6.38% per year).
SPX 5 & 10 Year Return Table
Some people may not remember, is that five years prior to the S&P 500’s all-time high made on October 9th, 2007, the index bottomed out from the 2000-2002 bear market at a level of 776.76. Following the post-Internet bubble low on 10/9/02, the index rallied more than a 100% before dropping more than 50% from 2007 to 2009. After bottoming out in March 2009, the index has since rallied more than 100% once again.
S&P 500 15 Year Performance Chart
With the S&P 500 about 7% away from its all-time high of 1565.15, I am skeptical the market is poised for another multi-year decline. The stronger earnings, higher dividends, reasonable valuations and an improving US economy are four main catalysts why I currently doubt the rally won’t fall off the edge of a cliff.
Conversely, I don’t expect double-digit returns in the coming years.
I believe that stocks may produce below historic average returns in the years ahead and in the near-term the market and associated economies face daunting challenges in the coming months. This includes – a sluggish global economy, European financial stress, U.S. budget battles and the looming fiscal cliff. However, with better fundamental drivers of value than at similar points in the past 15 years, stocks are likely to weather most potential outcomes better than they have in the past, making a return trip to the lows of the 15-year range unlikely, at least for now. Plus, if history is to repeat itself we are three years into the five-year cycle – but that is a very big “if”.
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.
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.
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 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.
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.
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.
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