Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: marginnayan who wrote (72348)	12/15/2007 1:37:50 AM
From: marginnayan	Respond to of 116555

Capitulation has not yet happened; consensus forecasts for US and UK earnings in 2008 are still for double-digit growth. Cue flying pigs. What a fabulous (financial) year 90% of the world’s population has just enjoyed. This majority is either employed in primary products - such as farmers, who have been making out like bandits - or are serious savers - where higher deposit rates from Beijing to Bogota have been a huge plus - or are involved in manufacturing, where employment globally has been robust. Truly, it has been the best of times for the bulk of the world’s population. 5%, of course, have had a miserable time; Darfur and Burma are but two examples. The key issue, however, concerns the final 5% - vociferous, wealthy and in denial. They are already in trouble and should expect more of the same. This tiny minority are involved in the financial services industry, and are still failing to remember what they well know. First, lightning always strikes twice, be it watching Citigroup go cap-in-hand to the Middle East for the second time in 15 years, or Mizuho blowing away shareholders’ funds on loans to areas where it has no knowledge (or reason to be there) for the third time, or serial offender UBS scrabbling around to repair its capital base (after issuing some highly dubious ‘positive’ statements). This is indicative of how banks really work; many have a culture which can best be described as RCS (‘Repetitive Cock-up Syndrome). The only difference this time around is that the rescuers are that much smarter. Citi is effectively borrowing at a rate of 11%; last time they suckered their saviour with dilutive equity. UBS is effectively borrowing from Singapore at 9%. Thus in both cases they are borrowing at three times their local one year interbank rate. So how will they lend that on (as banks must, that being their business) at a profit, without taking even greater risks? We still maintain a zero banks weighting because they remain un-analysable. “Under-owned” and unloved sectors are so exciting we’re almost dribbling. On every recent market fall, fixed line telephone companies, widely held across each fund, have ticked higher; hardly surprising, with yields 30% more than 10-year government bond rates. Three quarters of all broker recommendations on pharmaceutical stocks remain ‘hold’ or ‘sell’. What more do you need to know about a sector which has just completed a five-year bear market? The significant weightings in agricultural-related shares are still being run, but with some nervousness given their growing popularity. Their key driver remains, however - the outlook for grain prices is that they remain ‘high’ (although 90% less in real terms than 40 years ago) - so we’ll stay on for the ride. Media and Entertainment is also still unpopular, yet the earnings cycle is bottoming. Lots to buy. The near-panic in central banks and treasuries is simply excellent for gold, as is their turning on the printing presses. Go with the trend. There is no ‘sub-prime’ crisis, and never has been. What there has been is a total meltdown in lending controls by all banks, primarily with respect of property. The implosions in many national residential markets are so well covered in the press they need no repetition here, save that they have only just begun. A singular example is offered by Greater London; house prices at end June were 11x average income. If they fall to 7.5x average income, this hugely optimistic low will be higher than the two previous peaks of 1972 and 1988, and over twice the previous lows. Redeem those property funds while you can (and instruct a good lawyer now, before the rush). But banks also have giant commercial property loan books; here discipline has been worse. Note that UK commercial property prices have suffered their largest quarterly fall in over a decade, yet still yield 40% less than three-month money. It’s the same overseas; i.e. Manhattan is sick as a parrot, and in booming Shanghai commercial tower blocks have large numbers of floors with their lights off, despite being 100% occupied, according to the agents. Lightning strikes twice in fund management too; many of those who brought you exciting split capital investment trusts at the start of the decade, are now slashing the value of their property funds and barring investors from redeeming. How many times do they need to be mugged before they come to know their enemy? (The only property shares held in the funds are in Germany and Japan). In the 12 months to June, the value of leveraged buy-outs was 10x the previous peak year of the TMT boom. In the 12 months to October, the total value of share buy-backs by companies in the US (similarly to other countries) was 2.5 times the TMT peak, also the previous all-time-high. These have been key after-burners, propelling markets; now they have been switched off. Yet capitulation has not yet happened; consensus forecasts for US and UK earnings in 2008 are still for double-digit growth. Cue flying pigs. Tea leaves favour that rare event, a year-on-year fall. Co-ordinated central bank intervention in the money markets is creating a belief that the credit crunch could be over quite soon. Be careful what you wish for; the rule is that the shorter the time duration of the crunch, the greater in percentage term the fall in asset prices. The trigger was pulled on options, with all UK and European positions being covered through a 5% put spread, fortuitously taken out just as markets bounced to within a whisker of their all-time-highs. The target is simply to add 0.5% to 1% to the NAV over the next few weeks as markets roll over. - Bedlam Asset Management - Investment Bulletin 14.12.07 - Live update from my reliable sources