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How To Save Yourself From The Next Madoff Ponzi Scheme

“Don’t invest in anything you don’t understand – beware of anything that seems too good to be true and where noone is able to explain to you why it isn’t…”

In the below clip, Smart Money Expert Gemma Godfrey quickly explains how to avoid another Madoff – how a Ponzi scheme works, how to spot one and how to be smarter with your money.

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What may drive markets this week?

Inflation, hard-to-beat expectations and political stalemate provide a significant downward risk to market this week. (Quoted in the Weekend edition of the Financial Times)

Last week was dominated by disappointing manufacturing data from Europe and China, whilst markets shrugged off a less than impressive Budget. After such a substantial rally year to date, this correction is healthy.

Graph showing the correction in world equity markets over the past week (S&P 500 in white, Eurostoxx 600 in orange, FTSE 100 in yellow); put in context of the substantial upward move year to date. Source: Bloomberg

Graph showing the correction in world equity markets over the past week (S&P 500 in white, Eurostoxx 600 in orange, FTSE 100 in yellow); put in context of the substantial upward move year to date. Source: Bloomberg

This week, issues concerning Europe’s firepower, the US consumer and broader economic growth will determine the direction of markets. Inflation, hard-to-beat expectations and political stalemate provide a significant downward risk to market, although upward momentum could always drive them further.

As fuel price inflation dents sentiment in the US, the consumer may be squeezed and figures for income and spending may disappoint. Furthermore, the opportunity for upside surprises in durable goods orders and Q4 GDP growth is limited as forecasted figures are already high.

A two-day meeting of Europe’s finance ministers will be closely watched for signs of an expansion in the firepower of the rescue fund. The deadline to do so draws near and the pressure for progress grows. However, Germany remains staunchly against such a move and, even if achieved, the figure reached may still not be enough.

The ‘Surprises’ of the Japanese Crisis and the Investment Lessons to Learn

Success is not final, failure is not fatal: it is the courage to continue that counts – Sir Winston Churchill

The human suffering of the earthquake and following tsunami in Japan is well documented. Exceeding the magnitude of Kobe both in strength and structural damage, the final cost is unknown and the aftershock which occurred yesterday did nothing to abate the concern. Surprise consequences have revealed significant weaknesses in both the word of politics and business and from an investment point of view, there are lessons we can learn…

A Political Surprise – Germany

The ruling party in Germany was voted out of office in one of its most prosperous states after almost 58 unbroken years in power. If they lose one more state election in September, Merkel could face a “blocking majority”. Despite voter concerns over the EU rescue fund (which they see as a potential ‘bottomless pit’) and claims leaders are out of touch with business, the surprise came as instead the loss was blames on Japan. After extending the life of 17 nuclear power stations and then calling a 3 month ‘thinking period’, politicians claimed the nuclear crisis swayed voters towards a Green anti-nuclear coalition.

 

A Business Surprise – Car Makers

The other surprise came to the heads of car making companies. Reliant on tight inventory management and a high proportion of electrical components, the supply chain interruptions from suffering Japanese suppliers hit these firms hard. What surprised them the most was the fact that a lot of these electrical components came from a single source. Since these were often parts sold to previous firms to be built into other parts then sold onto car makers, this concentration risk was not identified. In reaction Peugeot, Europe’s second largest auto maker by volume was forced to slow production at 7 plants in France and Spain. Japan’s Nissan saw the affects lasting for at least a month and started importing engines from their US plants – a reversal of a trend.

 

Source: Bloomberg – Since March 11 2011, the date of the earthquake, Peugeot (white) has caught up with the MSCI Wold Index (yellow) whereas Nissan (orange) is still struggling at a 13% lower level – all performance normalised.

The ‘Crisis Effect’– Luxury Goods

In reaction to the devastation, many in Japan are spurning conspicuous spending. Tiffany lowered their earnings expectations and expects Japanese sales (a fifth of their total) to fall by 15% in Q1 against retail demand rising 11% on average across the rest of the globe. Bulgari has now re-opened all but one of their 40 stores but, as one of their biggest markets, sees sales remaining weak for at least 6 months. This 6 month figure may have been derived from a comparison with the Great Hanshin earthquake, Kobe, back in 1995 where the after-effects were felt for approximately this length of time. However, this time around there have power cuts affecting populous areas, supporting concerns this is over-optimistic.

 

Source: Bloomberg – Bulgari (orange) hardly moved post-earthquake despite earnings concerns whereas Tiffany (yellow) was hit hard (-11%) but has also staged an impressive recovery (+11%)

The Bottom Line – Heightened Uncertainty

What this all highlights is the heightened level of uncertainty we are dealing with. There remains the potential for events few of us could predict, with consequences which come as a surprise and, those that are temporary, with a hard-to-forecast end date.

 

Investment Insight: The Lessons we can Learn

There are clear lessons we can learn. With a global recovery still open to macro shocks, it is prudent to remain active with an ability to protect your portfolio, whether through managers that can reduce their net exposure to markets or otherwise. And from a more stock specific point of view, know companies in which you invest well, including the full length of their supply chain and the true resilience of their client base. It’s true that crucial, often overlooked details are often only realised during times of stress, and this is by far one of the most tragic. Never stop learning.