Month: November 2010

Political Turmoil in Ireland

Geographically, Ireland is a medium-sized rural island that is slowly but steadily being consumed by sheep.” Dave Barry quotes (American Writer and Humorist b.1947)

Got this picture this morning from a friend of mine and think it sums up the situation in Europe perfectly.

To clarify the situation – Ireland has accepted a multi-billion pound bail-out which may trigger a cut in the country’s credit rating. But that isn’t even the worst of it. The Government is threatening break-up with calls for General Election and claims of exiting the coalition from the Green Party. And to increase the amount of political uncertainty, the PM himself is under pressure to quit. From an investor’s point of view the risk is an exit of those in the market. Last Monday, after the announcement, the EuroStoxx closed down 1.2%.

Putting the situation in the context of the “Greece Crisis” – the Ireland bail-out package is 60% of GDP versus “only” 47% for Greece.

INVESTMENT INSIGHT: Watch the Contagion – Exploit


Update since initial draft (29th November 2010)

  • The Green Party have now exited the coalition,
  • Ireland’s Sovereign Bonds have been downgraded (Aa2 from Aa1 by Moody’s)
  • We have seen public disapproval
Market Reaction

The Irish Stock Exchange rebounded by 1.8% from relief senior bond holders will not be forced to take a haircut under rescue package. However, in the bond markets the premium investors demand to hold Irish government debt over the German benchmark bunds remains near record highs after the spread only narrowed by 6bps.

“We are hopeful that a little more calm and a reality will come back to the markets’ valuations,” G finance minister told German radio station Deutschlandfunk.

Irish Public Reaction

Majority (57%) of those polled by Quantum Research for the Sunday Independent newspaper want State to default on debts, believing it cannot support the debt burden it has taken on which would involve annual interest payments of around €5bn over 9 years.

Opposition was taken to the streets with around 50,000 people registering their disapproval of the Government’s 4Y plan to cut the budget deficit to 3 per cent of GDP by 2014.

\”The ECB f**ked us,\” one government official in Dublin was reported yesterday to have said.

With respect to future easing

French economy minister has come out saying the bailout package is sufficient because that will keep Ireland afloat for three years,”

BOTTOM LINE: This all adds to political uncertainty as we approach the publication of an austerity Budget on December 7.

INVESTMENT INSIGHT – Watch the Contagion – Opportunity to exploit the irrationality

Possible Contagion: Portugal remains under pressure – Nouriel Roubini (Economics professor, Chairman of Roubini Global Economics), believes that the Lisbon government should seek a bailout quickly.

Market Irrationality: Lagarde has said the market was wrong to price the cost of Spanish debt at the same level as more risky countries such as Pakistan and Romania.

“Europe is difficult to understand for the markets. They work in an irrational way sometimes,” Christine Lagarde, French economy minister

Second Update (30th November 2010)

Governments fail to allay market concerns of future defaults – historical moves in yields….

Spanish Government 10 Year Bond Yield. Source: Bloomberg

Is There Hope From Emerging Markets – Are we being too G8-centric? Radio Clip

“Risk of acronym over-exuberancea pithy abbreviation does not necessarily equate to a profitable investment!” (Me!)

Click the image below to here my views on Emerging Markets (and the global economic outlook). It was broadcasted just the other week on “The N@ked Short Club” on Resonance FM – (2m+ listeners and growing!). Follow-on comment from Mike Gasior, CEO of AFS.

The Long-Term Case Summarised

  • Strength of balance sheets (10% D / GDP vs. 400% in UK)
  • High levels of savings to deploy rather than build (33% vs 17% of GDP)
  • FX reserves (75% of global forex)
  • Wider range of policy tools available

Most crucially

  1. The growth of emerging consumer class: an estimated 1bn are to join by 2030 , with the Chinese middle class to exceed the US population within a few yrs
  2. We have seen resolve: Industrial Production is above its pre-crisis peaks in emerging Asia and there are increasing levels of intra-regional trade (see chart below) – leading to countries becoming more insulated from pullbacks in demand from developed markets
  • From export-led to domestic-demand (and neighbor-demand) led
  • In just 14 years, Emerging Market exports to other developing countries (light blue) increased by 10%.

Although valuation and reputation concerns remain

Source: Automatic Trend Lines by the Ramp Pattern Recognition Program. MSCI EM has risen 135% above March low although still below previous peak for those who believe the long term trend is up.

A word of warning

  • As ever, DIFFERENTIATE between markets – they aren’t all as strong.
  • And market RISK OF CONTAGION remains – if international investors get spooked, they will  take risk off the table across the board regardless of fundamentals
  • INVEST IN QUALITY – should add value over longer-term.

We have had the “BRICs” (Brazil, Russia, India and China) and the calls just keep coming. Now the term “Chindonesia” (China, India and Indonesia) has been coined or even the “Civets” (not just cat-like mammals from Africa and Asia but Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa). But as my above quote states, there is a risk of acronym over-exuberance – a pithy abbreviation does not necessarily equate to a profitable investment! Often there are discrepancies between international investor excitement and the fundamentals of the economy and sentiment on the ground.

Specific Stock Example

Avoid anything with “Chinese Consumer” in the name, a beneficiary of this “over-exuberance” and have potentially, in some cases, become over-priced. Instead look for more indirect access to value and growth.

One such example – to be taken within the context of an admission of having spent little time evaluating the fundamentals sufficiently, is Want Want China Holdings, listed on the Hong Kong Stock Exchange – maker of rice cakes and flavoured milk in China as well as snack foods. Has rallied 24% YTD to a PE, according to Reuters, of around 33x, above that of its sector. A different angle is Olam International, listed in Singapore, – global leader in supply chain management of agriculture products and food ingredients, which has underperformed Want Want by almost 7% YTD and cheaper than the sector average (PE 19x).

Flaws of Fund Manager Regulation – the 5 points you should know… Radio Clip

“The text is not perfect but texts are never perfect.” (MEP Jean-Paul Gauzès at a press conference in Brussels, October 2010)

Follow the link below to hear a 1.5 minute radio clip of my views on the The Alternative Investment Fund Managers (AIFM) Directive – Regulatory Standards for the industry. As you can hear from the intro, it was broadcasted on “The N@ked Short Club” on Resonance FM (2m+ listeners and growing!). Follow-on comment by Sophie van Straelen, Managing Partner of Asterias – check out her blog SVS. My main concerns are highlighted below.


2. COSTLY – Increased compliance costs (+32%) – passed on to investors – higher fees lower returns – reduce European competitiveness and leave. Already hearing about delayed launches. Could boost rather than end offshore – may lead to costly changes of legal structures and domicile.

3. REDUCED INVESTOR CHOICE – restrictions on those based outside the EU

4. MAY TRIGGER PROTECTIONISM, such as the US. Contradiction to conclusion from the April G20 summit, instructed world leaders to “promote global trade and investment and reject protectionism.”

5. INDISCRIMINATE – including small AUM funds and others of no relevance to stability of financial system or ‘systematically important’ funds – contradicting EU principal of ‘proportionality’); multinationals exempt – making others uncompetitive – costs do not match benefits for certain funds

BOTTOM LINEA SIGN OF A MORE INTRUSIVE REGULATORY REGIME – start forming a plan of action ahead of 2103 implementation (not carried out by enough yet)

Worth Remembering:

The Swedish Central Bank (The Riksbank) says of short selling:

“The benefits of short selling clearly outweigh the drawbacks. Short selling allows investors with a negative view on the value of a company to take a position that reflects that view. By doing so their information will be incorporated in the prices and thus, the price formation will be more efficient.” (June 09)

4 Smart tips for online stock trading

If you need fast cash, stock trading can help you achieve this by providing you with the profit you want. If you have an access to the internet, you do not even need to go out for trading your stocks; you can trade your stocks directly from home. However, this article provides you with some tips you need to know for a successful stock trading online.

Tips for online stock trading

Here some tips for successful stock trading that you need to know.

1. Kind of online stock trading –Decide upon the kind of online stock trading you want to do. Think if you want to go for day trading where you close every trade at the end of the day or do you want to go for short-term trading. You can also be a weekly or a monthly trader.

2. Select a broker – Select a broker that matches your stock trading style. The success you will attain in your stock trading is dependant on the online stock broker that you choose. Thus, make a careful selection of your stock broker. Make sure the broker matches your trading style. If you are a day trader, you need high speed direct access technology. However, you can use less sophisticated discount brokers if you are short-term daily, weekly or monthly broker.

3. Analyze the best stocks – Make sure you analyze your stocks carefully before you trade. Choosing the right kind of stocks is the ultimate success for your online stock trading. In order to choose the best stock, you need to do a thorough research and have advanced skill. Thus, if you do not have the expertise or time to go into such details it is better you seek the advice of a professional.

4. Know the perfect time – Another important thing in order to achieve success in your stock trading is that you must know when to sell your stocks. Apart from focusing when and what stocks to buy, you must also know the best time to sell your stocks.

Along with the tips mentioned above, you must also follow a strategy while trading your stocks, monitor your portfolio regularly, be aware about the upcoming stock related news and lastly you must have enough dedication in order to be a successful stock trader. Thus, follow these tips when you go for stock trading online and easily earn some extra cash.

Commodities – Looking for diversification? Your search doesn’t end here!

Wide diversification is only required when investors do not understand what they are doing – Warren Buffett

The above quote is a key support for my view that investing in index-wide vehicles is merely an exercise in di-worse-ification. It’s time to get specific. Commodities have often been lauded as a “key diversifier” but within the last 18 to 24 months, the case has broken down. Investors using commodity ETFs to enhance the risk-adjusted return of their portfolios may be falling foul of Buffett’s quote. Here I provide a warning to those who may be taking on more risk in their portfolios than they realise…

When constructing a portfolio, diversification is a key focus. Capital is allocated across asset classes in an attempt to produce an attractive risk / return profile. The search is made for investments which post returns completely uncorrelated to other investments, thus helping reduce the volatility of the portfolio since at times when one market may be experiencing a pull-back, another may be exhibiting strong returns entirely unaffected by the input moving the first market.

Historically the commodity markets have been used as such an asset class. An essential ingredient to a well-diversified portfolio, especially one heavily invested in equities. The commodity markets were used mainly by commodity producing companies to lock-in the price for their output (by taking the other side of the trade using options) and enable management to budget adequately.

However, recently this relationship appears to have been contaminated. In speaking to George Zivic (Managing Partner of Almanac Capital) to get a better insight, he maintained that this is a structural change. The increase of investors speculating in the commodity markets has led to a higher percentage of the traders treating the instruments inline with any other risk asset.

Source: Bloomberg. The price movements of the S&P Index (white) and the S&P GSCI Commodity Index (orange), a composite index of commodity sector returns. Note the recent high correlation highlighted in blue

As you can see from the above the movements in the price of the US equity index and that of the commodity index have exhibited a heightened level of correlation.

Furthermore, as you can see from the below chart, the differential between the winning and losing commodity returns has been a great trade for an investor wishing to minimise net exposure to a highly volatile market



Source: Capital Economics. Selected Commodity Prices in 2Q10 (% Change, $ terms). Note the dispersion in returns, again highlighted in blue.


It is no longer the time to gain exposure via passive investing / ETFs etc. The smart money will be making smarter investments – DIFFERENTIATE between commodities, with their different supply / demand characteristics – again, EXPLOIT CONTAGION when some will be over-punished or over-pushed. With the majority of an “all-commodity” ETF invested in the energy markets, at least for the short term alpha generation will focus on the markets with far less visibility, less research focus and less investor attention. “Niche”-type investments in weather derivatives, agriculture etc. offer less correlated returns and greater diversification benefits.



The EU – Without growth how can we prosper?

Without continual growth and progress, such words as improvement, achievement, and success have no meaning.” Benjamin Franklin

There has been much debate about whether the EU should be classified as a success or failure – no prizes for guessing in which camp the majority lie! We’ve heard calls for the dissolution of the euro and a public outcry from the German people [see their newspaper headline “we are once again the schmucks of Europe” (Bild, May 11th 2010) in reply to their hefty contribution to the fiscal package which gave support to the fledging Greek community and the subsequent hammering Chancellor Merkel then received in the regional election.] In terms of growth, the EU has an envisaged growth rate of 1% this year (World Economic Forum 2010). So lets look at what the data is telling us by the same criteria we judged the UK in the previous post…

  1. Stimulus? Are we seeing money growth feeding through to the wider economy?  NO

    Source: Bloomberg – although ticking up, still posting only a 4+ decade low annual growth rate

  2. Spending? NO – Domestic demand is suffering

Source: Capital Economics. EC Consumer Sentiment – low / falling (most hurt unsurprisingly in the periphery) - not the environment of encouraged and motivated spending.

3. Job creation and self sustaining recovery? NO! Structural issues remain

Youth unemployment rates EU.PNG. Source: European Commission – Eurostat. Euro-Zone Unemployment – remains a key structural issue


Note – most worrying is that this chart refers to youth unemployment! Who will drive the economy going forward?

Source: Capital Economics. EC Consumer Sentiment – low / falling (most hurt unsurprisingly in the periphery) - not the environment of encouraged and motivated spending.

INVESTMENT INSIGHT – the conditions for a self-sustaining recovery in the EU are also not in place. But in every “crisis” one can find “opportunities” and as requested by Shira at Seeking Alpha – I enclose a stock tip to implement my insights…

In Chinese the word for crisis is composed of two characters, one representing danger, the other opportunity – which is quite apt since my stock pick focuses on the opportunity the growing Chinese top-end consumer will offer to a certain European company whilst I continue to recommend caution with respect to the amount of beta exposure you take – protect from market pullbacks!

The type of stock to pick would be similar to a Rolls-Royce, (now owned by BMW and hence the vehicle to play this theme through – excuse the pun! BMW GR Equity). Please note – this is a theme to be expolited, not an intense bottom-up fundamentals- and valuation-based pick. The theme is exposure to the growing Chinese market, in particular the super-rich – price-insensitive and focused on the prestige purchase. With Rolls-Royce cars positioned as the world’s most expensive, they are “a symbol of wealth and personal success that simply has no real competitor”. (Matthew Alabaster, an automotive expert at PricewaterhouseCoopers)

A good article to explain the other virtues of the company is Sarah Arnott’s report in the Independent, Rolls Royce: The flying lady looks to the east

Chinese Demand: “this year the market for the Phantom in China alone will outstrip total sales in the first year of production in 2003”

Sales versus history: In June of this year, production topped 300 cars for the first time in Rolls’s history, the waiting list was backed up until October at the earliest and the company expects to more than double its sales for the year as a whole.

Sales versus competitors: Well insulated: Demand dropped by 17 per cent in 2009 “versus 50% for some others” (chief exec Torsten Muller-Otvos) and in comparison to the “Detroit giants General Motors and Chrysler file for bankruptcy protection, and a rash of takeovers and job cuts as demand dropped through the floor”. Every car is made to order, as demand drops, so does production – providing some insulation.

Outlook going forward : “Baby Rolls”, the Ghost, aims to take the producer into a broader market – smaller, lighter and cheaper than the traditional Phantom (although still early to determine its success, 30 orders for the car within days of the Chinese launch at the Beijing Motor Show in April is a good sign)

The UK – An impaired lending capacity – What’s the outlook for investment opportunities?

“A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain” (Mark Twain)

Back from a business trip to South Africa. I was flown over to present my investment ideas and during my time being the key note speaker and from the conversations with investors, I noted a recurring question – “what data should I watch?”. Now I always maintain one must not focus too heavily on one data point or information from one source / point of view. Nevertheless, to help give some clarity, I’ve managed to boil down global economic insights into just a handful of key points. Starting with the UK… Short term growth restrained, drivers of growth later on uncertain…

In terms of the three stages required for a self-sustaining recovery…

1. Stimulus – yes, we’ve seen quantitative easing but are we seeing LENDING (to businesses, consumers etc – remember consumption still accounts for a large % of GDP)?

2. Inventory Rebuilding – yes we’ve seen temporary re-stocking but are we seeing consumers SPENDING?

3. Job Creation – are jobs no longer at risk i.e. a SELF-SUSTAINING recovery?

Conclusion: The UK “aint there yet!”

1. Versus stimulus we are to see – THE LARGEST FISCAL SQUEEZE SINCE WW2…

Planned fiscal tightening (2010-13). From adding 0.8% to GDP to subtracting 0.2%

And lending remains muted:

“Despite various forms of support from the Bank of England and from Government, it is clear that the lending capacity of the banking system, in the UK and elsewhere, is impaired and will take some years yet to recover. Some banks need to continue de-risking and de-leveraging.” Paul Fisher – Executive Director Markets and member of the Monetary Policy Committee

Source: Bloomberg. UK Money Supply Growth (yoy) at 3 decade low


2. Instead of spending, governments, households and companies are DE-LEVERAGING, CONFIDENCE IS LOW, household spending restrained

In Rebecca Wilder’s article in her blog Household leverage: what does the US have that the UK does not? in News N Economics (her answer: they still have expansionary fiscal policy) the chart featured below highlights the extent to which households still need to de-lever (and a comparison of the heightened problem in the UK vs. the US)

UK Household leverage (blue) - further to fall, especially when compared to the US (red)

3. Job creation? Following on from the government’s public spending review – 750k public sector jobs are at risk

INVESTMENT INSIGHT – Conditions for a sustainable, strong recovery are “still not there yet”

Returns are to be generated opportunistically – in a lower growth environment, index moves may be range bound – capture alpha from the volatility – quality stocks that are over-punished during pullbacks. Instead of investing in companies focusing on UK sales, invest in those more internationally focused (especially EM).

Stock example – RR/ LN: Rolls Royce Group PLC (more on the car manufacturer next), the global power systems company, “signs agreement with STX Engine Company to further strengthen position in Asia” October 2010 (Rolls Royce Announcement)

“STX Engine, based in Korea, will become a packager of Rolls-Royce industrial gas turbine generating sets in the Asia Pacific region to better serve the growing demand for electrical power generation technology and will further strengthen our position in important Asian markets such as Bangladesh, Philippines, Taiwan, Vietnam and also Korea”.