One thing that i've noticed over the past week or so of being in NYC is that the more time you spend with "Finance people" the more depressed you get about the economy and especially the banks. A bunch of my friends also just got fired from banking jobs last week (i hope you guys are ok) which definitely doesn't help to increase "perceived health" of the finance industry. But is it really that bad?
What I am asking myself is - ok, so this is going to be a bad recession, no doubt about it. Fine. But aren't we overdoing it in the market? Have we totally lost faith in banks (Citi below 4.. MS at 9 and change..) forecasting an almost Armageddon-like scenario? Now, funny thing is that from what i remember forecast disasters never happen. I mean, anyone remember the Y2K scare? SARS? Avian flu? Insurance bankruptcy in 03? Terrorism post 9/11? Isn't it in the sheer nature of a catastrophy that noone can see it coming for it to happen? Yeah, the economy is bad but if you look at what the market is telling you at the moment it seems that the expectations are for the world banking system to fail . And I'm sorry but if that happens then my last worry is whether or not my investments are doing well . If you think that's going to happen then you should be buying gold and some ammo, canned food and hope for the best ( doesn't that sound like Y2K all over again?). Loads of it. Coincidentally Gold prices have been declining from a peak of over 1000 USD per troy ounce to now 750ish USD - funny that. Can you still lose all your equity in a government bank bail out? Sure. Doesn't mean that an investment in Citi is safe at the moment. But it doesn't mean that the system will fail. And i am tempted to ask myself how many banks will 1) need to be bailed out 2) have all their equity wiped out 3)be worth 5 times as much once they make it through this crisis? I bet the majority will still be around in 5 years from now. The system is obviously under a lot of pressure. But i continue to believe that it works and the best will survive ( my money is on GS) . And if it doesn't then we are all screwed anyway . With Lehman the case was clear - "too much leverage, equity wiped out by writedowns", no biz from scared customers. Now we've moved on to "could have write downs", "customers might stop doing biz with them" - it's mostly sentiment or why else would banks like MS or GS be down as much when they are still profitable? Unless you think their managements are lying, which given the increased scrutiny on the bank is somewhat unlikely to have remained unnoticed 18 months into the crisis.
If i could find an easy way to do so I'd buy a bank index now (i'm actively searching for an investment vehicle). Yes, some of them will fail - hence the diversified risk of an index- but the rest are trading at bargain prices at the moment. Of course i wont do that with all of my money but possibly 10%. I'm also starting to buy S&P500 now. We're below 800 and i'm moving 50% of my assets into the market. Waiting for the DAX to break the 4000 level to put some of my money to work there as well. When 35 year old journalists start to question Warren Buffet's strategy (again) on 6months performance I think it's a sign that fear is high enough that I should start being greedy.
Saturday, 22 November 2008
Monday, 17 November 2008
Discounting in NYC - consumer observations
Walking through the streets of NYC it's quite obvious that retailers are worried about consumer spending. I don't think I've seen so many "mid-season sales" signs before in my life. And the surprising thing is that people are actually buying stuff. Maybe not at the expensive high end but shops are as busy here as always it seems. Same goes for bars and restaurants where my personal impression has been that the crunch hasn't happened yet. I remember the post '00 blues and how empty some of the hot spots were and that certainly isn't the case. (even though i have to admit that those hot spots were mostly banker hangouts and i haven't been to too many of those this time around).
What does that mean? Well I guess the US consumer will surprise us with it's robustness again - albeit it higher volumes at lower prices (hello Walmart). I wouldn't expect any miracles but maybe we're all a little too pessimistic and underestimate just how shopping happy Americans really are (and you only have to look at my friend's fashion blog to realise that)
What does that mean? Well I guess the US consumer will surprise us with it's robustness again - albeit it higher volumes at lower prices (hello Walmart). I wouldn't expect any miracles but maybe we're all a little too pessimistic and underestimate just how shopping happy Americans really are (and you only have to look at my friend's fashion blog to realise that)
Thursday, 13 November 2008
Is it time to buy Equities ? #2
Another week of doom and gloom with Intel and Walmart cutting forecasts and the US government's bail out package with a somewhat surprising shift in priorities (buying back bank stocks rather than mortgage assets). We'll see what Congress's and the general public's reaction will be to that and how things eventually pan out.
The positive side of that is that prices are back down to the lows (or will be shortly) - so here's another couple of reasons why I haven't joined the "the world is coming to an end" camp.
Commodity prices as a buffer: Let's be honest. In hindsight it was truly remarkable how we could have a nice couple of years of bull market when the world's most important commodity (oil) went from sub 12 USD in '01 to almost 150 USD in July '08. Even if you take out the currency effect for the rest of the world (the USD went from 85c to the Euro to 1.6 over the same period) that's still a massive dent in consumer's real purchasing power. But that also means that now on the way down (Oil at 56 USD today) this purchasing power gets unlocked and back into the market again as oil is in almost every product (either directly or through transport). And we haven't seen that effect fully yet as prices at the pump lag oil moves quite a bit (especially on the way down..surprise). US Petrol prices have fallen an average of 40% from July while Crude is down over 60% . Europe is even worse in passing on the benefits.
Similar price declines happened to other commodities (metals and agriculture) where the impact on the consumer is less obvious but all in all recent price action will lower inflationary pressure on consumers and increase relative purchasing power which in turn should help stabilise the economy (to a certain degree) on the way down.
"Bad debt": It seems like everybody these days talks about it and how the tax payer will have to pick up the tab - cab drivers, hair stylists, journalists that usually only report on celebrity gossip have all become experts overnight (and of course it's only the bankers that are to blame - why should anyone NOT take out a mortgage if it's offered to them even if they can't afford it). Consensus is that there is a lot of it around and that it will take a while to clean up.
First of all, while this is true for the consumer, corporate balance sheets (with the exception of banks) are in solid shape. Investments in this last business cycle were one of the lowest ever relative to earnings. Lending conditions (or lack thereof) do remain a worry, but with governments around the world working hard on restoring banking business I think we've seen the worst liquidity shortages.
Secondly, let's take a look at the situation in Japan when the government stepped in and ended up buying up "bad debt". Over the period of 10 years almost 100% of the original investment could be recovered reducing the bill for the tax payer to almost zero. My bet is that the US economy is in better shape than Japan in the 90ies (demographics to start with - a growing population) and that nationalising stakes in banks at these depressed levels will yield massive profits in the next 5 to 10 years when the sector gets fully privatised again. Europe might not be participate in this as much as the potential for long term government involvement in those political environments is much higher.
So while short term there will be strain on budgets across the globe, government could find themselves awash with cash coming out of this which in turn would lead to some decent spending increases (or have you ever met a politician who wont spend a surplus) and accelerate growth.
Lessons of long term investing: In summary, I don't believe that we'll be able to avoid a full blown recession and yes, things in the stock market might get worse before they get better. But for the reasons mentioned above and my strong belief that the fundamentals of the world economy remain sound I think that the current levels in Equities are starting to look very interesting for any individual with a 5 - 10 year investment horizon. In addition to that I believe that the USD will continue to strengthen vs the European currencies so US investments, like the S&P 500, make the most sense for me. The dilemma for institutional investors at the moment is that they simply cannot be patient. The investment industry by and large gets evaluated on quarterly numbers and a quarter or two too early could be the last quarter for many funds in this environment. As a private investor one should take advantage of the luxury of being able to have a long term view. Buying at the absolute bottom and selling at the top never works.
The positive side of that is that prices are back down to the lows (or will be shortly) - so here's another couple of reasons why I haven't joined the "the world is coming to an end" camp.
Commodity prices as a buffer: Let's be honest. In hindsight it was truly remarkable how we could have a nice couple of years of bull market when the world's most important commodity (oil) went from sub 12 USD in '01 to almost 150 USD in July '08. Even if you take out the currency effect for the rest of the world (the USD went from 85c to the Euro to 1.6 over the same period) that's still a massive dent in consumer's real purchasing power. But that also means that now on the way down (Oil at 56 USD today) this purchasing power gets unlocked and back into the market again as oil is in almost every product (either directly or through transport). And we haven't seen that effect fully yet as prices at the pump lag oil moves quite a bit (especially on the way down..surprise). US Petrol prices have fallen an average of 40% from July while Crude is down over 60% . Europe is even worse in passing on the benefits.
Similar price declines happened to other commodities (metals and agriculture) where the impact on the consumer is less obvious but all in all recent price action will lower inflationary pressure on consumers and increase relative purchasing power which in turn should help stabilise the economy (to a certain degree) on the way down.
"Bad debt": It seems like everybody these days talks about it and how the tax payer will have to pick up the tab - cab drivers, hair stylists, journalists that usually only report on celebrity gossip have all become experts overnight (and of course it's only the bankers that are to blame - why should anyone NOT take out a mortgage if it's offered to them even if they can't afford it). Consensus is that there is a lot of it around and that it will take a while to clean up.
First of all, while this is true for the consumer, corporate balance sheets (with the exception of banks) are in solid shape. Investments in this last business cycle were one of the lowest ever relative to earnings. Lending conditions (or lack thereof) do remain a worry, but with governments around the world working hard on restoring banking business I think we've seen the worst liquidity shortages.
Secondly, let's take a look at the situation in Japan when the government stepped in and ended up buying up "bad debt". Over the period of 10 years almost 100% of the original investment could be recovered reducing the bill for the tax payer to almost zero. My bet is that the US economy is in better shape than Japan in the 90ies (demographics to start with - a growing population) and that nationalising stakes in banks at these depressed levels will yield massive profits in the next 5 to 10 years when the sector gets fully privatised again. Europe might not be participate in this as much as the potential for long term government involvement in those political environments is much higher.
So while short term there will be strain on budgets across the globe, government could find themselves awash with cash coming out of this which in turn would lead to some decent spending increases (or have you ever met a politician who wont spend a surplus) and accelerate growth.
Lessons of long term investing: In summary, I don't believe that we'll be able to avoid a full blown recession and yes, things in the stock market might get worse before they get better. But for the reasons mentioned above and my strong belief that the fundamentals of the world economy remain sound I think that the current levels in Equities are starting to look very interesting for any individual with a 5 - 10 year investment horizon. In addition to that I believe that the USD will continue to strengthen vs the European currencies so US investments, like the S&P 500, make the most sense for me. The dilemma for institutional investors at the moment is that they simply cannot be patient. The investment industry by and large gets evaluated on quarterly numbers and a quarter or two too early could be the last quarter for many funds in this environment. As a private investor one should take advantage of the luxury of being able to have a long term view. Buying at the absolute bottom and selling at the top never works.
Friday, 7 November 2008
Is it time to buy Equities? #1
If you've been following the financial news over the last couple of months chances are that you are really worried about the global economy. And rightfully so. But given the current levels (S&P500 at 920 as I am writing this) the question is when is it time to get back into Equities.
To clarify my general position: I do believe that we'll see a pretty nasty recession both in the US and in Europe and that the lack of easily available funding will make this downturn even harder for a lot of companies. And the consumer (especially in the US) this time around will have to react with spending cuts. No house price increase to pull money out of, no easy bank loans to keep spending like it's 1999. We have just started to see the impact on the real economy.
Nevertheless I am getting more and more interested in buying for the long term. Why?
Long term growth: the S&P has retreated to 1997 levels which means we have had a decade of 0% growth in equities. Nothing entirely new (look at '27 to '49 or '68 to '80 for even longer periods) and the argument might be that we left the long upwards trend in '95 and went into massively overvalued territory. But even if that was the case then the Tech bubble correction brought us back down to more "normal" levels in a historic context and the recent sell off has pushed as far below those. (see chart - S&P '28 to '08). Not a guarantee that things will get back immediately but if we've seen no returns over 10 years and the long term historic growth for US equities is +10% then we are bound to at least get back to that trend at some stage unless fundamentals have changed dramatically (which i don't believe - more about that below)
Productivity gains: I would argue that the last 10 years have witnessed an increase in average productivity and efficiency unseen since maybe the introduction of the car. The impact of the mobile phone and the Internet, overestimated in the short term in the Tech bubble years, is in my view under appreciated for the long term at the moment. No way have close to zero communication costs, super fast time to market, immediate feedback, more transparent consumer behaviour than ever before etc resulted in zero percent growth in the underlying economy over the last 10 years or so. And going forward with more and more "digitally educated" consumers growing up I cannot see productivity growth declining. (to clarify - i am not talking about a "new paradigm" type "we'll all buy 10 PCs" kind of growth but simply a period -like many before- of higher than average productivity growth)
to be continued (next time: Commodity prices as a buffer, Bad debt, Financial crisis, Lessons of l-term investing)
To clarify my general position: I do believe that we'll see a pretty nasty recession both in the US and in Europe and that the lack of easily available funding will make this downturn even harder for a lot of companies. And the consumer (especially in the US) this time around will have to react with spending cuts. No house price increase to pull money out of, no easy bank loans to keep spending like it's 1999. We have just started to see the impact on the real economy.
Nevertheless I am getting more and more interested in buying for the long term. Why?
Long term growth: the S&P has retreated to 1997 levels which means we have had a decade of 0% growth in equities. Nothing entirely new (look at '27 to '49 or '68 to '80 for even longer periods) and the argument might be that we left the long upwards trend in '95 and went into massively overvalued territory. But even if that was the case then the Tech bubble correction brought us back down to more "normal" levels in a historic context and the recent sell off has pushed as far below those. (see chart - S&P '28 to '08). Not a guarantee that things will get back immediately but if we've seen no returns over 10 years and the long term historic growth for US equities is +10% then we are bound to at least get back to that trend at some stage unless fundamentals have changed dramatically (which i don't believe - more about that below)
Productivity gains: I would argue that the last 10 years have witnessed an increase in average productivity and efficiency unseen since maybe the introduction of the car. The impact of the mobile phone and the Internet, overestimated in the short term in the Tech bubble years, is in my view under appreciated for the long term at the moment. No way have close to zero communication costs, super fast time to market, immediate feedback, more transparent consumer behaviour than ever before etc resulted in zero percent growth in the underlying economy over the last 10 years or so. And going forward with more and more "digitally educated" consumers growing up I cannot see productivity growth declining. (to clarify - i am not talking about a "new paradigm" type "we'll all buy 10 PCs" kind of growth but simply a period -like many before- of higher than average productivity growth)
to be continued (next time: Commodity prices as a buffer, Bad debt, Financial crisis, Lessons of l-term investing)
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