Back in October we wrote that we were looking for three things to happen to encourage us to get more positive on stock markets: signs of stronger US employment, some prospect of an end to monetary tightening in China and some real progress (if not final resolution) to the European debacle.
As Meatloaf memorably sang in 'Bat Out Of Hell', two out of three ain't bad, even if the third (Europe) still has plenty of potential to throw a large spanner through a more cautiously optimistic picture.
The US numbers are improving across a range of different data: employment is up, credit delinquencies are down, manufacturing export orders have picked up, labour costs are down (implying corporate margins and productivity are up), housing affordability has increased (because housing prices have collapsed). All pretty decent sounding news. Combine that with confirmation from the Fed that low interest rates are going to be with us for a while, and you have the makings of a good story.
In China, too, the focus on beating inflation seems to be easing off, with the result that fears of a hard landing seem to have receded somewhat.
All of this is cheery stuff, particularly when compared with the worries that dogged markets in mid 2011.
And that brings us on to Europe.
The surprise in the last few months is how quickly markets have been to assume that a deal will be done over Greece that will push the European crisis on to the backburner for a while. The moves by the ECB to ease credit to banks from mid December was an undoubted and major factor behind this and seemed to suggest that banks would be underpinned unconditionally. Even the Germans seem to have given up grumbling (in public).
Nevertheless the skeptics remain unconvinced, simply because the debt numbers are so large whilst the impetus for major structural change - not just in Greece, but the US, France and elsewhere - seems to have stalled. Without this major structural change (which involves acknowledging that previous commitments on pensions and health care provision are unaffordable), debt levels will continue to grow until they reach the point at which bond investors vote with their feet and force change by their actions. So far, of course, bond markets outside of the obvious basket cases in Europe have chosen to ignore all of this.
Where do we stand in this?
We've ceratainly been adding some equity exposure for some clients over the last month or so, but still have cash in reserve: too frequently have we seen declarations from Europe that a line has been drawn under the crisis. We therefore skeptically feel the need to see the detail before being convinced. So at present, we regard the current market jumps as being more driven by short-term trading impulses than longer-term investors. It may well be that when the latter get involved, the nimble money may be making it's way out again, happy in its quick profits. The question then will be whether or not the longer term money has enough room to benefit.
However, with a 66% positive signal on our "Meatloaf Index" and with deposit rates in the cellar, this trading rally could continue for a little while, particularly if the Europeans find a large band aid for Greece to see them through for another few months. They still can't afford it, but at the moment markets are behaving as though it's better to keep eyes tight shut.
Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577186
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.
Wednesday, February 8, 2012
Friday, January 13, 2012
The Germans have a cunning plan...
One of my previous postings encouraged one of our friends, a long-term resident in Germany, to get in touch: he felt that we would benefit from the Berlin perspective. His thoughts are interesting, so I have, with his permission, paraphrased them here...
The Germans are playing a complex political end game in order to ensure that they are able to push through a restructuring of Europe’s economic machinery, based on German principles. They feel that they made a compromise when the foundations of the Euro were laid during the 1990’s in the interests of political expediency (common interest rate setting, despite the lack of common fiscal or debt mechanisms – the Bundesbank definitely “knew better”).
They clearly hoped – wrongly as it has turned out – that the Euro would run for longer without meeting with a structural crisis. Now that it has happened, they don’t want to make this type of compromise again in which expediency, rather than logic, drives policy.
The political manoeuvring which seems endemic within the current structure of the EU is very complex and often seems both chaotic and smacking of incompetence and indecision.
However, the German elite has a very clear idea where it wants Europe to go: towards fiscal union for an appropriate set of countries (my italics).
Having now successfully absorbed a defunct country – East Germany – with 25 million people, produced a DAX which is well represented by world leading companies, and developed a unique breadth of mid-sized, export orientated companies in many industries (the famous Mittelstand), DAX listed companies are some of the most globalised in the world, and look both to Asia and the US for their continued growth.
All this manufacturing success has engendered a new sense of self-confidence in Berlin, leading to the explicit belief that they actually do know something about business and economics, and don't need any lessons from the Brits or the Americans.
It is clear, however, that German leaders do not feel comfortable with overt displays of such confidence, given sensitivities to the "Don’t mention the war…" creed. Basil Fawlty would be proud.
Despite this, there is a clear view that the German business model, as opposed to the debt fuelled Anglo-Saxon one, needs no further apology. But nor does that mean that Germany should act as the banker for everyone else in Europe.
When Cameron visited Berlin in mid-November, he told his German counterpart that as much firepower as possible had to be used to combat the euro crisis. To which the Chancellor responded coolly: "One shouldn't pretend to have power that one doesn't actually have”.
From the German perspective, the only way to remain relevant in a world economy dominated by the USA & China is for Europe to make a rapid dash for size via full fiscal union.
Chancellor Merkel is a quantum chemist by training and spent the first 12 years of her professional life in a Physical Chemistry institute in the DDR. She might not be as strong on media and communication skills as many of her contemporaries, but it’s doubtful that many of them can match her in the analysis of complex problems.
Her preferred approach to politics can be compared to experimental particle physics. She engineers collisions between other particles and sees what happens. After the experiment, she moves in to fill the vacuum.
Poor particles.
Thus all of her contemporary competitors for leadership in the CDU/CSU were masterfully able to discredit themselves in the maelstrom of personal rivalries and their subsequent disputes. These direct competitors for leadership ten years ago have long since left politics for business, leaving the field clear for Frau Merkel.
And now she is applying the same tactics in the EU.
Let Berlusconi discredit himself. Let Sarkozy hog the limelight in public disputes with Cameron. Frau Merkel will watch from the sidelines whilst engineering the desired end result. Very Machiavellian (if one is allowed to reference the work of a 16th century Italian).
So – you have a major player in the EU crisis playing a long-term strategy, whilst everyone else is focused on short-term tactics: hence the friction, and hence the appearance of indecision in the face of huge challenges. The Germans are playing the long game.
Note also that German politicians don't care what the stock market does - due to limited share ownership, it is electorally irrelevant. This provides us with an interesting contrast to the US: Ben Bernanke has frequently emphasized that he uses the stockmarket as a key indicator for the success or otherwise of his Quantitive Easing and other policies.
With many thanks to our friend in Berlin.
It remains to be seen whether or not the German Chancellor's long game will pay off, or, in the words of another British prime minister, be sidetracked by the challenges posed by "events".
Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577186
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.
Wednesday, December 21, 2011
Backwards and forwards for 2011 and 2012
As we enter the closing week of 2011, a quick review of this year's markets reveals the following:
(1) The US has outperformed. The S&P500 and NASDAQ are virtually flat for the year, whilst the DJIA is up 4.6%.
(2) The USD is still around. The USD has confounded first half predictions of its demise by rising 1% for the year so far, but has bounced nearly 9% from the low it recorded at the end of April. As always there is a direct inverse relationship between the number of forecassers predicting its collapse and its subsequent strength. Look for the same to apply in reverse. There has been a strong inverse relationship between the USD and global stockmarkets.
(3) Asia & Emerging Markets have slumped. In inverse proportion to the rise of the USD, other previously favoured risk assets such as Asia and the Emerging Markets have slumped in local currency terms, and even more so in USD terms. With AAXJ up as much as 5.5% for the year as at the beginning of May, they are looking likely to end the yeardown 17% in USD terms. Some markets, notably former BRIC darlings India and Brazil, have done even worse with declines of nearly 40% and 28% respectively in USD terms.
(4) Europe has done less badly than it should have. Relative to Asia and EM, the main European indices (just to recap, Europe is the place where all the main problems are) have actually performed less badly, with Germany down by about 18% in USD terms, and France by about 22%. Obviously some of the peripherals have done much worse, as have the financial stocks in these countries. However, the UK (which we're not sure should be included as part of 'Europe' any more) is down by only 8% or so. It seems bizarre that the markets where austerity will bite hardest and where the financial problems are most grave, have outperformed their EM growth 'peers', but there you are: "Markets can remain irrational for longer than you can remain solvent..."
(5) Gold has lost a bit of its lustre. Although Gold is still up by more than 13% for the year, it was up as much as 33% at its high point in early September. Margin restrictions on various commodities exchanges were the catlyst for the sell-off but so was an increasing view that deflation, rather than inflation, is more of a problem. As with Asia and EM stockmarkets, Gold also demonstrated that a stronger USD is negative for commodity prices overall.
(6) The US Economy held up better than feared and despite the best efforts of US politicians. This may simply be because the US consumer remains in denial and because everyone was more worried about Europe.
(7) Oh, and European governments haven't got a clue. Enough said.
Looking ahead to 2012, it seems strange to think that the prospects for the year to come look much the same as they have done for the second half of 2011, with many of the same issues seeming likely to dominate. However, our view is that much of the bad news seems likely to be concentrated in the first half (which could reverse the old adage "sell in May and go away"):
(a) The Eurozone will be forced to restructure and rebuild. If they are determined to support the Euro at any cost, then they'll have no choice but to craft a rescue package that finally looks credible with some sort of joint and several guarantee. Maybe this week's action by the ECB to offer 3 year unlimited funding to Eurozone banks is a foretaste of this: the ECB may not be guaranteeing countries, but it is increasingly acting as the lender of last resort to the banks. Once this restructuring happens, although austerity will be the key and widely adopted policy prescription, markets will bounce in the short-term, and probably by a long way out of simple relief that a solution (of some sort) is finally in place. As one of my clients has said, "hope is not a strategy", and its more than likely that more damage will be done on the way there (maybe that's what's needed to get the German government and its voters over the line), but this 'hope' still seems the most likely outcome.
(b) There's a lot of cash out there and markets are vulnerable to good news. A good piece from Merrill Lynch (entitled "I'm so bearish, I'm bullish") this week highlighted that in the 5 weeks leading to December 15th, global long-only fund outflows amounted to $23bn, putting the amount of cash raised close to ML's previous 'buy' signals on a money flow basis. By the same token, $94bn in inflows to money market funds (which produce a zero return currently) over the same period have been the largest such cumulative inflow since the bad old days of January 2009 (6 weeks before the bottom of the market was reached). As we have seen repeatedly, it doesn't take much to get markets moving upward - sharply (even if the reasons for such moves seem impossible to explain at the time).
(c) When risk returns, you'll want to buy Asia & EM, but not before. As in 2008/9, the worst performers turned into the best performers when risk appetite eventually came back.
(d) A slowdown in China may be good news. Slower growth in China is likely to lead to significant easing, and although the impact of such easing will not be as great as was the case in 2009, it will still have a positive impact on the margin.
(e) Beware US politics. The Europeans have set a new standard for political incompetence in 2011, but the divided government of the US has come in a close second. The willingness of US politicos to hold the economy hostage by taking key decisions over the budget, the debt ceiling and taxes to the brink, should not be underestimated.
So, another year of uncertainty and volatility beckons. Although a recent poll of analysts by Barron's shows an average forecast for +12% growth in the US stockmarket next year, the same analysts said the same thing about 2011 at the back end of 2010. So, I think, did we: our mistake was assuming that just because we knew things were tricky, we assumed that this view had been fully discounted by stockmarkets.
What's the potential for yet more mistaken and utterly unjustifiable optimism in 2011?
Probably quite high. There are certainly plenty of "risks to the downside" as they like to say on CNBC. For that reason, for the time being, we are comfortable in maintaining a much lower exposure to equity than normal, and a much higher exposure to cash than usual. Perhaps we also need to be a bit more nimble to book profits as and when they exist and to cut losses on the other side.
However, if the Mayans are right, the world is going to end in 2012 anyway, so what's the point of worrying? Here's hoping that we're all still around to read more drivel from all and sundry (and yours truly) on December 31st 2012!
With best wishes to you and your family for a Merry Christmas and a Happy New Year.
Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577186
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.
(1) The US has outperformed. The S&P500 and NASDAQ are virtually flat for the year, whilst the DJIA is up 4.6%.
(2) The USD is still around. The USD has confounded first half predictions of its demise by rising 1% for the year so far, but has bounced nearly 9% from the low it recorded at the end of April. As always there is a direct inverse relationship between the number of forecassers predicting its collapse and its subsequent strength. Look for the same to apply in reverse. There has been a strong inverse relationship between the USD and global stockmarkets.
(3) Asia & Emerging Markets have slumped. In inverse proportion to the rise of the USD, other previously favoured risk assets such as Asia and the Emerging Markets have slumped in local currency terms, and even more so in USD terms. With AAXJ up as much as 5.5% for the year as at the beginning of May, they are looking likely to end the yeardown 17% in USD terms. Some markets, notably former BRIC darlings India and Brazil, have done even worse with declines of nearly 40% and 28% respectively in USD terms.
(4) Europe has done less badly than it should have. Relative to Asia and EM, the main European indices (just to recap, Europe is the place where all the main problems are) have actually performed less badly, with Germany down by about 18% in USD terms, and France by about 22%. Obviously some of the peripherals have done much worse, as have the financial stocks in these countries. However, the UK (which we're not sure should be included as part of 'Europe' any more) is down by only 8% or so. It seems bizarre that the markets where austerity will bite hardest and where the financial problems are most grave, have outperformed their EM growth 'peers', but there you are: "Markets can remain irrational for longer than you can remain solvent..."
(5) Gold has lost a bit of its lustre. Although Gold is still up by more than 13% for the year, it was up as much as 33% at its high point in early September. Margin restrictions on various commodities exchanges were the catlyst for the sell-off but so was an increasing view that deflation, rather than inflation, is more of a problem. As with Asia and EM stockmarkets, Gold also demonstrated that a stronger USD is negative for commodity prices overall.
(6) The US Economy held up better than feared and despite the best efforts of US politicians. This may simply be because the US consumer remains in denial and because everyone was more worried about Europe.
(7) Oh, and European governments haven't got a clue. Enough said.
Looking ahead to 2012, it seems strange to think that the prospects for the year to come look much the same as they have done for the second half of 2011, with many of the same issues seeming likely to dominate. However, our view is that much of the bad news seems likely to be concentrated in the first half (which could reverse the old adage "sell in May and go away"):
(a) The Eurozone will be forced to restructure and rebuild. If they are determined to support the Euro at any cost, then they'll have no choice but to craft a rescue package that finally looks credible with some sort of joint and several guarantee. Maybe this week's action by the ECB to offer 3 year unlimited funding to Eurozone banks is a foretaste of this: the ECB may not be guaranteeing countries, but it is increasingly acting as the lender of last resort to the banks. Once this restructuring happens, although austerity will be the key and widely adopted policy prescription, markets will bounce in the short-term, and probably by a long way out of simple relief that a solution (of some sort) is finally in place. As one of my clients has said, "hope is not a strategy", and its more than likely that more damage will be done on the way there (maybe that's what's needed to get the German government and its voters over the line), but this 'hope' still seems the most likely outcome.
(b) There's a lot of cash out there and markets are vulnerable to good news. A good piece from Merrill Lynch (entitled "I'm so bearish, I'm bullish") this week highlighted that in the 5 weeks leading to December 15th, global long-only fund outflows amounted to $23bn, putting the amount of cash raised close to ML's previous 'buy' signals on a money flow basis. By the same token, $94bn in inflows to money market funds (which produce a zero return currently) over the same period have been the largest such cumulative inflow since the bad old days of January 2009 (6 weeks before the bottom of the market was reached). As we have seen repeatedly, it doesn't take much to get markets moving upward - sharply (even if the reasons for such moves seem impossible to explain at the time).
(c) When risk returns, you'll want to buy Asia & EM, but not before. As in 2008/9, the worst performers turned into the best performers when risk appetite eventually came back.
(d) A slowdown in China may be good news. Slower growth in China is likely to lead to significant easing, and although the impact of such easing will not be as great as was the case in 2009, it will still have a positive impact on the margin.
(e) Beware US politics. The Europeans have set a new standard for political incompetence in 2011, but the divided government of the US has come in a close second. The willingness of US politicos to hold the economy hostage by taking key decisions over the budget, the debt ceiling and taxes to the brink, should not be underestimated.
So, another year of uncertainty and volatility beckons. Although a recent poll of analysts by Barron's shows an average forecast for +12% growth in the US stockmarket next year, the same analysts said the same thing about 2011 at the back end of 2010. So, I think, did we: our mistake was assuming that just because we knew things were tricky, we assumed that this view had been fully discounted by stockmarkets.
What's the potential for yet more mistaken and utterly unjustifiable optimism in 2011?
Probably quite high. There are certainly plenty of "risks to the downside" as they like to say on CNBC. For that reason, for the time being, we are comfortable in maintaining a much lower exposure to equity than normal, and a much higher exposure to cash than usual. Perhaps we also need to be a bit more nimble to book profits as and when they exist and to cut losses on the other side.
However, if the Mayans are right, the world is going to end in 2012 anyway, so what's the point of worrying? Here's hoping that we're all still around to read more drivel from all and sundry (and yours truly) on December 31st 2012!
With best wishes to you and your family for a Merry Christmas and a Happy New Year.
Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577186
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.
Sunday, December 11, 2011
Ummmm... so that's it?
The much vaunted EU summit has produced exactly the same sort of result that all the previous summits have produced: a lot of hot air but very little by way of concrete results.
For all the sound and fury generated by Britain's use of a veto over potential treaty changes (it seems strange to base the use of the veto on various regulatory issues for the financial services sector, rather than the broader issue of the sovereignty of national parliaments, but never mind), the actual outcome has done little to address the immediate problems.
The ECB will not be acting as lender of last resort, there will be no collectively guaranteed Eurobonds and there is no significant expansion of the EFSF to provide funding for debtor nations. There have been some moves on the margin to allow greater involvement of the IMF but these moves are exactly that: marginal.
Once again, markets will be left to speculate about individual banks and their exposure to sovereign debt, with the likelihood of a messy Greek default in 2012 looking higher. Once again, the very same banks will be reluctant to buy more European sovereign bonds, and once again, they will focus on cutting balance sheets and shrinking lending. The likelihood of a bank collapse remain pretty high, as most banks will remain reliant on their central bank or the ECB for short-term funding support.
The EU rule changes will focus on national budget rules, but there is little detail as to enforcement and penalties for non-compliance. Bearing in mind that France & Germany were among the first to breach the original Stability and Growth Pact and one doesn't hold out much hope that "this time it's different".
Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577186
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.
For all the sound and fury generated by Britain's use of a veto over potential treaty changes (it seems strange to base the use of the veto on various regulatory issues for the financial services sector, rather than the broader issue of the sovereignty of national parliaments, but never mind), the actual outcome has done little to address the immediate problems.
The ECB will not be acting as lender of last resort, there will be no collectively guaranteed Eurobonds and there is no significant expansion of the EFSF to provide funding for debtor nations. There have been some moves on the margin to allow greater involvement of the IMF but these moves are exactly that: marginal.
Once again, markets will be left to speculate about individual banks and their exposure to sovereign debt, with the likelihood of a messy Greek default in 2012 looking higher. Once again, the very same banks will be reluctant to buy more European sovereign bonds, and once again, they will focus on cutting balance sheets and shrinking lending. The likelihood of a bank collapse remain pretty high, as most banks will remain reliant on their central bank or the ECB for short-term funding support.
The EU rule changes will focus on national budget rules, but there is little detail as to enforcement and penalties for non-compliance. Bearing in mind that France & Germany were among the first to breach the original Stability and Growth Pact and one doesn't hold out much hope that "this time it's different".
Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577186
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.
Sunday, November 20, 2011
Jean-Claude Van Damnation
The Prime Minister of Luxembourg, and current President of the Euro Group, Jean-Claude Juncker, summed up the problems of the Eurozone in 2005 with regards to economic reform. His comments remain just as valid today, as the EU confronts the never-ending crisis of sovereign indebtedness within the Eurozone: “We all know what to do, we just don’t know how to get re-elected after we’ve done it.”
As the recently departed Prime Ministers of Greece, Spain and Italy will be able to attest, voters do not respond well to economic crises, and reward the incumbent leaders with a negative verdict at the next election, or parliamentary putsch. The fact that the incoming guys are proposing to implement exactly the same policies seems to make little difference. This approach presumably guarantees ongoing political instability as politicians of various stripes continue to promise the undeliverable (i.e. a pain free restructuring).
The issue, then, seems to lie as much with voters as the politicians themselves, with both moving to the lowest common denominator. Whether its Congressional gridlock in the US (and anyone who thinks that things will change after next year's Presidential election must be delusional), or European politicians who are unwilling to talk publicly about the blindingly obvious (a common currency without common fiscal and monetary policies can't work), each group is running scared of those constituents who seem to think that there is some magic pill for overnight success.
So is dictatorship the answer? As some cataclysmic doom-mongers attest, the last time this sort of thing happened, the only thing that caused a shake out was the Second World War: a cheery prospect.
For the time being, a lot of recent data, particularly out of the US, has erred on the side of "better than expected", whether it be employment / unemployment data, corporate earnings or industrial output. Maybe this is a temporary bounce back from the Japanese Tsunami affected "soft patch" in the middle of this year. However, as a recent note by JP Morgan put it, the fact that interest rates are so low pretty much guarantees that investors won't hold cash long-term, and will be encouraged to dive into risk assets on the merest flicker of good news: hence the current gyrations of stockmarkets between optimism and pessimism between one day and the next.
Not a good environment in which to make long-term investment decisions.
We currently advise continuing patience, hoarding cash, and looking for opportunities on those occasions when pessimism gets overdone. This is not easy nor stress free, and as a consequence those who prefer an easy life should probably retire to Luxembourg.
The Prime Minister there has just continued to notch up records as the longest standing democratically elected head of government in the world (nearly 17 years) - presumably because he hasn't actually done anything worth criticising (in Luxembourg, that is).
Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577186
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.
As the recently departed Prime Ministers of Greece, Spain and Italy will be able to attest, voters do not respond well to economic crises, and reward the incumbent leaders with a negative verdict at the next election, or parliamentary putsch. The fact that the incoming guys are proposing to implement exactly the same policies seems to make little difference. This approach presumably guarantees ongoing political instability as politicians of various stripes continue to promise the undeliverable (i.e. a pain free restructuring).
The issue, then, seems to lie as much with voters as the politicians themselves, with both moving to the lowest common denominator. Whether its Congressional gridlock in the US (and anyone who thinks that things will change after next year's Presidential election must be delusional), or European politicians who are unwilling to talk publicly about the blindingly obvious (a common currency without common fiscal and monetary policies can't work), each group is running scared of those constituents who seem to think that there is some magic pill for overnight success.
So is dictatorship the answer? As some cataclysmic doom-mongers attest, the last time this sort of thing happened, the only thing that caused a shake out was the Second World War: a cheery prospect.
For the time being, a lot of recent data, particularly out of the US, has erred on the side of "better than expected", whether it be employment / unemployment data, corporate earnings or industrial output. Maybe this is a temporary bounce back from the Japanese Tsunami affected "soft patch" in the middle of this year. However, as a recent note by JP Morgan put it, the fact that interest rates are so low pretty much guarantees that investors won't hold cash long-term, and will be encouraged to dive into risk assets on the merest flicker of good news: hence the current gyrations of stockmarkets between optimism and pessimism between one day and the next.
Not a good environment in which to make long-term investment decisions.
We currently advise continuing patience, hoarding cash, and looking for opportunities on those occasions when pessimism gets overdone. This is not easy nor stress free, and as a consequence those who prefer an easy life should probably retire to Luxembourg.
The Prime Minister there has just continued to notch up records as the longest standing democratically elected head of government in the world (nearly 17 years) - presumably because he hasn't actually done anything worth criticising (in Luxembourg, that is).
Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577186
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.
Tuesday, November 1, 2011
Now for Act 3....
Last week, the European "comprehensive" package of bailout measures for Greece, the European banks and everything else, was touted by the French and the Germans as the final answer to those doubters who feared that the Eurozone members would never be able to get their act together and agree on anything.
The headline numbers seemed big, at 1 trillion Euros for the leveraged bailout fund (although not as large as the pre-announcement rumours had suggested), and 110 billion Euros or so in new capital for Europe's banks. At the same time, the willingness to acknowledge that Greece is indeed bankrupt and that a default is inevitable, seemed to highlight a new sense of realism, as illustrated by the acknowledgement that a 50% write-down of the face value of Greek debt would be appropriate.
All this helped to boost markets hugely last Thursday. Those sitting on lots of cash were feeling extremely uncomfortable since they were not participating.
However, as so often in the past, a more detailed reading of the terms showed up the usual lack of Eurozone clarity and the presence of plenty of Eurofudge. Exactly how the 1 trillion EFSF is going to be funded seems open to question and reliant on extensive use of derivative products sold to foriegn sovereign wealth funds. Not surprisingly the latter have been decidely luke-warm in their response. The 110 billion in new capital for European banks looks too low, whilst the question about where the new funds will come from also remains unclear.
All this has been followed up by last night's surprise announcement by the Greek government that it is now offering a referendum to its people on the terms of the latest bailout. This laudable exercise in democracy comes at the worst possible time, and takes the whole Eurozone debt crisis into a new realm of uncertainty and worry: if current opinion polls are to be believed, 60% of the Greek voting public would vote against the package.
Clearly a "No" vote would trigger a disorderly Greek default, would represent the death knell for Greece's banks and, most probably, the country's continued involvement in the Euro, along with much else besides. One hopes that the Greek government will be able to get this message across to the voters before the actual vote is held sometime in January.
This then begs the question: why hold a referendum at all? Europe has hardly been a model for democratic affirmation over anything EU related in recent decades, so why start now?
Obviously the poisonous mix of domestic Greek and international Eurozone politics proved too much for the Greek government, faced as it is with increasingly violent street protests and a cratering economy. Maybe this gambit represents the last move in a Greek attempt to extract better concessions from its European paymasters (viz. the Germans). If so, we are now faced with the prospects of seeing which side blinks first: a modern day sword of Damocles.
The European crisis looks as though its going to keep running for a while...
Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577186
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.
The headline numbers seemed big, at 1 trillion Euros for the leveraged bailout fund (although not as large as the pre-announcement rumours had suggested), and 110 billion Euros or so in new capital for Europe's banks. At the same time, the willingness to acknowledge that Greece is indeed bankrupt and that a default is inevitable, seemed to highlight a new sense of realism, as illustrated by the acknowledgement that a 50% write-down of the face value of Greek debt would be appropriate.
All this helped to boost markets hugely last Thursday. Those sitting on lots of cash were feeling extremely uncomfortable since they were not participating.
However, as so often in the past, a more detailed reading of the terms showed up the usual lack of Eurozone clarity and the presence of plenty of Eurofudge. Exactly how the 1 trillion EFSF is going to be funded seems open to question and reliant on extensive use of derivative products sold to foriegn sovereign wealth funds. Not surprisingly the latter have been decidely luke-warm in their response. The 110 billion in new capital for European banks looks too low, whilst the question about where the new funds will come from also remains unclear.
All this has been followed up by last night's surprise announcement by the Greek government that it is now offering a referendum to its people on the terms of the latest bailout. This laudable exercise in democracy comes at the worst possible time, and takes the whole Eurozone debt crisis into a new realm of uncertainty and worry: if current opinion polls are to be believed, 60% of the Greek voting public would vote against the package.
Clearly a "No" vote would trigger a disorderly Greek default, would represent the death knell for Greece's banks and, most probably, the country's continued involvement in the Euro, along with much else besides. One hopes that the Greek government will be able to get this message across to the voters before the actual vote is held sometime in January.
This then begs the question: why hold a referendum at all? Europe has hardly been a model for democratic affirmation over anything EU related in recent decades, so why start now?
Obviously the poisonous mix of domestic Greek and international Eurozone politics proved too much for the Greek government, faced as it is with increasingly violent street protests and a cratering economy. Maybe this gambit represents the last move in a Greek attempt to extract better concessions from its European paymasters (viz. the Germans). If so, we are now faced with the prospects of seeing which side blinks first: a modern day sword of Damocles.
The European crisis looks as though its going to keep running for a while...
Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577186
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.
Tuesday, October 4, 2011
Our 3 buy signals...
We've been asked a lot about what we would need to see before starting to deploy cash and get back to being fully invested (or more heavily invested) in equities.
We have three signals we're looking for, and these are:
(1) It's all about growth: Given the sluggishness of the US economy, and the Fed's repeated comments that it is running up against the limits of what it can achieve with monetary policy, we'd need to see a degree of bi-partisan political agreement that has so far been sadly lacking. This would manifest itself in an agreement that the longer term budget and debt issues of the US economy can only be met by pragmatic, longer-term, cuts in spending and increases in tax. These would be balanced by a shorter term job friendly policy initiatives, such as reform of the tax code to encourage companies to start investing again. On a score out of 10 as to how likely this is to happen over the next 6 months, we'd give this a 4/10 since expecting politicians to agree on anything with their opponents in an election year would seem a triumph of putting hope over experience.
The same issues apply in Europe and elsewhere: it goes without saying that if most major economies are cutting spending and raising taxes at the same time, a recession is almost certain. To avoid this, governments need to show a bit more creativity in addressing the issues of restraining debt and deficits longer-term, whilst promoting and supporting growth in the short.
(2) It's all about Europe: The main solutions to the European mess seem obvious: a well structured Greek default, a recapitalisation of the European banking sector and the ECB, and a unified and much larger bailout fund to cope with sovereign debt pressures.
As in the US, however, politics is getting in the way, with the current incremental approach bringing the Eurozone ever closer to a systemic crisis. Maybe that's what is needed in order for (German) politicians to bring their voters with them. Given the immediacy of these issues, the likelihood of this crisis reaching a head before Christmas seems high, although much blood seems likely to be spilt in the meantime. Likelihood over the next 6 months? 7/10
(3) China easing: China has been tightening steadily for the last 18 months, and this has triggered a steady sell off in Emerging Markets equities. If market pundits are correct that China's growth will slow to as low as 0-3% in 2012 from 7-8% this year, the likelihood of easing by China next year seems high, although it's clear they'd like to see property prices lower before that happens. Likelihood over the next 6 months? 6/10 (but 10/10 by the end of next year).
The latter is a big one for Emerging Markets, and would trigger a significant flood back into markets which have underperformed notably in the last three months with foreign investors taking a painful dual hit from the decline in share prices and the decline in currencies against the (recently loathed) USD.
We want to position ourselves for this return of investor interest, but think it's likely we'll see some further weakness in the interim as markets adjust to the anemic global growth story (US analysts are still forecasting 10% EPS growth for 2012...).
Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577186
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.
We have three signals we're looking for, and these are:
(1) It's all about growth: Given the sluggishness of the US economy, and the Fed's repeated comments that it is running up against the limits of what it can achieve with monetary policy, we'd need to see a degree of bi-partisan political agreement that has so far been sadly lacking. This would manifest itself in an agreement that the longer term budget and debt issues of the US economy can only be met by pragmatic, longer-term, cuts in spending and increases in tax. These would be balanced by a shorter term job friendly policy initiatives, such as reform of the tax code to encourage companies to start investing again. On a score out of 10 as to how likely this is to happen over the next 6 months, we'd give this a 4/10 since expecting politicians to agree on anything with their opponents in an election year would seem a triumph of putting hope over experience.
The same issues apply in Europe and elsewhere: it goes without saying that if most major economies are cutting spending and raising taxes at the same time, a recession is almost certain. To avoid this, governments need to show a bit more creativity in addressing the issues of restraining debt and deficits longer-term, whilst promoting and supporting growth in the short.
(2) It's all about Europe: The main solutions to the European mess seem obvious: a well structured Greek default, a recapitalisation of the European banking sector and the ECB, and a unified and much larger bailout fund to cope with sovereign debt pressures.
As in the US, however, politics is getting in the way, with the current incremental approach bringing the Eurozone ever closer to a systemic crisis. Maybe that's what is needed in order for (German) politicians to bring their voters with them. Given the immediacy of these issues, the likelihood of this crisis reaching a head before Christmas seems high, although much blood seems likely to be spilt in the meantime. Likelihood over the next 6 months? 7/10
(3) China easing: China has been tightening steadily for the last 18 months, and this has triggered a steady sell off in Emerging Markets equities. If market pundits are correct that China's growth will slow to as low as 0-3% in 2012 from 7-8% this year, the likelihood of easing by China next year seems high, although it's clear they'd like to see property prices lower before that happens. Likelihood over the next 6 months? 6/10 (but 10/10 by the end of next year).
The latter is a big one for Emerging Markets, and would trigger a significant flood back into markets which have underperformed notably in the last three months with foreign investors taking a painful dual hit from the decline in share prices and the decline in currencies against the (recently loathed) USD.
We want to position ourselves for this return of investor interest, but think it's likely we'll see some further weakness in the interim as markets adjust to the anemic global growth story (US analysts are still forecasting 10% EPS growth for 2012...).
Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577186
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.
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