At the end of the 1st week of Q3 earning reporting, we have seen the entire spectrum of what to expect in the forth coming weeks.
Goldman and JPMorgan announced stunning results to the world ($3.2b and $3.6b respectively), whereas Bank of America posted a $1b loss as continuing consumer credit hurt earnings. General Electric, the bellwether conglomerate of the US ecnonomy reported earnings falling 47% to $2.5b.
However, most of the attention went to the amount put aside as bonuses for Goldman employees, a whopping $16.7b so far for this year. Given the record unemployment number and poor consumer sentiment, this is going to be hard to swallow for the public, especially as recent as just a year ago, Goldman received help for the government to get it through the financial crisis.
Eric Tan,
London
Sunday, 18 October 2009
Sunday, 11 October 2009
Parallel Universes
Investors diametrically opposed views on everything in the markets from growth prospects, inflationary fears and deflationary pressures are all causing simultaneous rises in assets.
Since March, we have witnessed a surge in the equities markets. Oil,gold, commodities are rising in antipation of a global recovery. On the other hand, bond yields are falling steadily and reports of US mutual funds are increasing net inflows to fixed income funds. In the world of forex, Australian and Brazilian currencies are reflecting the increase in risk appetite and yet Japanese Yen and gold typically reflecting a safe haven currency are at record highs.
The markets have been reflecting the inconsistent economic data with rising unemployment and recovering growth.
With a strong boost provided by Alcoa earnings, over the next few weeks, US companies is likely to announce strong earnings supported by exports and continued cost cuts, but inability to demonstrate revenue growth may result in a fall in momentum leading to a reality check for investors.
Eric Tan
London
Since March, we have witnessed a surge in the equities markets. Oil,gold, commodities are rising in antipation of a global recovery. On the other hand, bond yields are falling steadily and reports of US mutual funds are increasing net inflows to fixed income funds. In the world of forex, Australian and Brazilian currencies are reflecting the increase in risk appetite and yet Japanese Yen and gold typically reflecting a safe haven currency are at record highs.
The markets have been reflecting the inconsistent economic data with rising unemployment and recovering growth.
With a strong boost provided by Alcoa earnings, over the next few weeks, US companies is likely to announce strong earnings supported by exports and continued cost cuts, but inability to demonstrate revenue growth may result in a fall in momentum leading to a reality check for investors.
Eric Tan
London
Sunday, 4 October 2009
Why waste a good crisis?
This week, London Business School celebrates Worldwide Alumni Celebration 2009. A series of lectures and events are held all over the world. In London, a lecture in Lloyds iconic building fired off a series of events - "Where does it go from here?"
The most interesting idea I personally thought was : Why waste a good crisis?
The panel spoke about how we can see the policy makers doing the "easy-but-irrelvant" bits such as targeting the tax haven status of some economies, or pursue the "crowd-pleaser" bits of slamming bonuses and hedge fund/private equity regulations.
However, the big-big issues have not been formally addressed.
- How should banks be sized?
- Taxing by size to discourage too big to fail financial institutions
- Reviewing the Glass-Steagall act
- Tobin Tax
- Living Will
- Ratings agencies
- Cross border issues
Macro prudential regulations have also not been openly addressed. Spain managed to largely avoid the US subprime crisis by having a countercyclical capital ratio which looks increasingly likely to be adopted in the rest of Europe, but the currently prescription may get nowhere near high enough for it to be effective.
So it seems like there are many thoughts to take away from this week of Alumni celebrations in London Business School, but one thing is for sure, the regulators have a lot more work to be done before this crisis is over.
Eric Tan,
London
The most interesting idea I personally thought was : Why waste a good crisis?
The panel spoke about how we can see the policy makers doing the "easy-but-irrelvant" bits such as targeting the tax haven status of some economies, or pursue the "crowd-pleaser" bits of slamming bonuses and hedge fund/private equity regulations.
However, the big-big issues have not been formally addressed.
- How should banks be sized?
- Taxing by size to discourage too big to fail financial institutions
- Reviewing the Glass-Steagall act
- Tobin Tax
- Living Will
- Ratings agencies
- Cross border issues
Macro prudential regulations have also not been openly addressed. Spain managed to largely avoid the US subprime crisis by having a countercyclical capital ratio which looks increasingly likely to be adopted in the rest of Europe, but the currently prescription may get nowhere near high enough for it to be effective.
So it seems like there are many thoughts to take away from this week of Alumni celebrations in London Business School, but one thing is for sure, the regulators have a lot more work to be done before this crisis is over.
Eric Tan,
London
Tuesday, 22 September 2009
A weaker dollar. Markets for the week ending 25-Sep-09
The dollar has been falling steadily against its main trading currencies for the last 8 weeks. So, what does a weaker dollar imply and what kind of policy responses might that provoke in the EU given the euro has more to lose with a weaker dollar.
A super weak USD could risk exporting deflation to the rest of the world
since central banks around the world are now enagaged in managing the recession with a cocktail of a) quantitative easing, b) loose monetary policies, and c) low interest rates and it leaves them very little to combat a sudden appreciation of their currencies against the dollar. This could lead to a liquidity trap and result in them being unable to dig their economies out of a deflationary scenario.
Looking back into the history books, in the last 30 years the world has witnessed several instances of central bank intervention:
1985, G7 signed the Plaza accord to weaken the dollar
1987, G7 pledged to support falling dollar
1995, G7 intervened to help dollar
1998, Americaand Japan sold dollars to prop yen
2000, ECB, Fed, BOJ and UK, Canada supported the Euro.
So, does this mean we're going to see another round of central bank intervention in 2009?
Maybe. Coordinated intervention can work(as seen in the past), but needs to be consistent with changes in interest rates globally.
So why not do it straight away?
Central bankers hate to mess around with free markets, besides it's difficult to predict the precise consequences of interventions.
Eric Tan,
London
A super weak USD could risk exporting deflation to the rest of the world
since central banks around the world are now enagaged in managing the recession with a cocktail of a) quantitative easing, b) loose monetary policies, and c) low interest rates and it leaves them very little to combat a sudden appreciation of their currencies against the dollar. This could lead to a liquidity trap and result in them being unable to dig their economies out of a deflationary scenario.
Looking back into the history books, in the last 30 years the world has witnessed several instances of central bank intervention:
1985, G7 signed the Plaza accord to weaken the dollar
1987, G7 pledged to support falling dollar
1995, G7 intervened to help dollar
1998, Americaand Japan sold dollars to prop yen
2000, ECB, Fed, BOJ and UK, Canada supported the Euro.
So, does this mean we're going to see another round of central bank intervention in 2009?
Maybe. Coordinated intervention can work(as seen in the past), but needs to be consistent with changes in interest rates globally.
So why not do it straight away?
Central bankers hate to mess around with free markets, besides it's difficult to predict the precise consequences of interventions.
Eric Tan,
London
Sunday, 16 August 2009
Is the worst over for the US economy ? Week ending 14-Aug
This week, the Fed announced that the longest period of US economic decline is coming to an end and the top economic outlook supporting that was that headline unemployment rate in Jul-09 fell from 9.5% previously to 9.4%.
In the US. the monthly rate of job losses in July has slowed to 250,000 from 600,000 at the start of the year, but the statistical computation of unemployment only improved because 400,000 workers dropped out of the labour force and are no longer looking for work.
So, the thing is, if the state of the economy is getting worse at a slower rate than before, can one argue that the worst is over?
I foresee that given the high rates of foreclosure in the US mortgage market and the continuing high unemployment rates, US household income is going to continue to be put under pressure and any economic recovery will be sluggish for the rest of the year.
Eric Tan, London
In the US. the monthly rate of job losses in July has slowed to 250,000 from 600,000 at the start of the year, but the statistical computation of unemployment only improved because 400,000 workers dropped out of the labour force and are no longer looking for work.
So, the thing is, if the state of the economy is getting worse at a slower rate than before, can one argue that the worst is over?
I foresee that given the high rates of foreclosure in the US mortgage market and the continuing high unemployment rates, US household income is going to continue to be put under pressure and any economic recovery will be sluggish for the rest of the year.
Eric Tan, London
Wednesday, 15 July 2009
Investment Philosophy
Strong fundamental analysis on companies has never been more important during these testing times.
A good framework provides some downside protection on portfolio investments which could be competitive advantage against peers.
Here are some useful points I've recently picked up at a talk given by Anthony Bolton, which my opinion even if you’re not a research analyst, can be used as a framework for investment philosophy
1) Companies
- always start by looking at the company
- how good/strong is the franchise?
- note that businesses vary in quality and can change over time
- prefer strong franchise and simple businesses
- what are the key variables that affect the business?
- MEAN REVERSION
2) Management
- Integrity and openness are the most important
- Avoid questionable or untrustworthy management
- Meet them, if possible several times (first impressions may be misleading)
- Has detailed knowledge : Strategically, operationally and financially
- Are management and shareholders interest aligned?
- Do their trades conflict with or confirm their statements?
- People rarely change…
3) Shares
- Every stock you own should have an investment thesis
-Test investment thesis regularly and if no longer valid, sell
- Look at a share price the same way you’d look at buying the whole business
- Forget the price you pay, take a loss to reduce future opportunity costs
- Keep an open mind and know the 'counter' thesis
- Think in terms of conviction rather than price targets
4) Sentiment
- Sentiment is the stock market's extra dimension
- The stock market is both a weighing (time-value) and voting (short term) machine
- In the shorter term, perception is very important
- Sentiment extremes suggest major opportunity or risk
- Stand your own ground but also listen to the market
- Not what you know, but what you know versus what everyone knows
- How many people have already heard this story?
5) Portfolio
- Position size should as much as possible reflect conviction
- Portfolio should be close to a start from scratch portfolio (if you were to start from scratch)
- Don’t pay too much attention to index weights
- Make incremental rather than large moves
- Never become emotionally attached to a holding
- Investment is an odds game and about making fewer mistakes
- Sell if the investment thesis is broken, you lose conviction or you find something better
- Compare new holdings against existing. which is more attractive?
6) Risks
- Win by not losing too often or too much
- Poor balance sheets drives main source of mistakes
- One loses the most in these companies when business deteriorates
- H- Scores or Z-scores (Company watch)
- Look at a stock differently if it does well for several years
- Avoid 'Pass-the-Parcel' stocks, e.g. momentum. Don't be the last one holding
- Poor management and poor business franchise are also risky
- Not just debt, look at pension deficits
7) Financials
- Read the original company documents for important news (IPO and Rights Issue documents are verified)
- Look at the notes to the accounts
- Models are only as good as their assumptions
- Dislike capital intensity
- If in doubt, follow the cash
8) Valuations
- don’t look at only one valuation such as P/E
- Newer valuation methods
- PEGs and Dividend discount models can be misleading
- As bull market progresses, valuation method can become conservative
- Never forget absolute valuation
- Look at today's valuations in context of at least 20 years of history
9) Technical Analysis
- The first thing is the share chart
- Cross check fundamental views
- Find an approach that works for you and use it consistently
- More useful for larger stocks
- Run profits, cut losses
10) Information Sources
- Use brokers
- Meet face-to-face
- Use lots of inputs
- Choose a delivery system (hardcopy/online)
- Use non-broker research e.g. consultants, specialists
- Balance monitoring what you own with working on new ideas and prospects
11) Market timing
- Consistently successful market calls are very difficult to make
- Market is a excellent discounter, anticipates events
- Need to be contrarian to successfully time the market
- Use patterns of history; valuations and sentiment
- Don’t just use economics and think about how your view differ from consensus
- Be most on your guard after a long upward move of four to five years
- Investing is generally for 3 years plus
Eric Tan,
London
A good framework provides some downside protection on portfolio investments which could be competitive advantage against peers.
Here are some useful points I've recently picked up at a talk given by Anthony Bolton, which my opinion even if you’re not a research analyst, can be used as a framework for investment philosophy
1) Companies
- always start by looking at the company
- how good/strong is the franchise?
- note that businesses vary in quality and can change over time
- prefer strong franchise and simple businesses
- what are the key variables that affect the business?
- MEAN REVERSION
2) Management
- Integrity and openness are the most important
- Avoid questionable or untrustworthy management
- Meet them, if possible several times (first impressions may be misleading)
- Has detailed knowledge : Strategically, operationally and financially
- Are management and shareholders interest aligned?
- Do their trades conflict with or confirm their statements?
- People rarely change…
3) Shares
- Every stock you own should have an investment thesis
-Test investment thesis regularly and if no longer valid, sell
- Look at a share price the same way you’d look at buying the whole business
- Forget the price you pay, take a loss to reduce future opportunity costs
- Keep an open mind and know the 'counter' thesis
- Think in terms of conviction rather than price targets
4) Sentiment
- Sentiment is the stock market's extra dimension
- The stock market is both a weighing (time-value) and voting (short term) machine
- In the shorter term, perception is very important
- Sentiment extremes suggest major opportunity or risk
- Stand your own ground but also listen to the market
- Not what you know, but what you know versus what everyone knows
- How many people have already heard this story?
5) Portfolio
- Position size should as much as possible reflect conviction
- Portfolio should be close to a start from scratch portfolio (if you were to start from scratch)
- Don’t pay too much attention to index weights
- Make incremental rather than large moves
- Never become emotionally attached to a holding
- Investment is an odds game and about making fewer mistakes
- Sell if the investment thesis is broken, you lose conviction or you find something better
- Compare new holdings against existing. which is more attractive?
6) Risks
- Win by not losing too often or too much
- Poor balance sheets drives main source of mistakes
- One loses the most in these companies when business deteriorates
- H- Scores or Z-scores (Company watch)
- Look at a stock differently if it does well for several years
- Avoid 'Pass-the-Parcel' stocks, e.g. momentum. Don't be the last one holding
- Poor management and poor business franchise are also risky
- Not just debt, look at pension deficits
7) Financials
- Read the original company documents for important news (IPO and Rights Issue documents are verified)
- Look at the notes to the accounts
- Models are only as good as their assumptions
- Dislike capital intensity
- If in doubt, follow the cash
8) Valuations
- don’t look at only one valuation such as P/E
- Newer valuation methods
- PEGs and Dividend discount models can be misleading
- As bull market progresses, valuation method can become conservative
- Never forget absolute valuation
- Look at today's valuations in context of at least 20 years of history
9) Technical Analysis
- The first thing is the share chart
- Cross check fundamental views
- Find an approach that works for you and use it consistently
- More useful for larger stocks
- Run profits, cut losses
10) Information Sources
- Use brokers
- Meet face-to-face
- Use lots of inputs
- Choose a delivery system (hardcopy/online)
- Use non-broker research e.g. consultants, specialists
- Balance monitoring what you own with working on new ideas and prospects
11) Market timing
- Consistently successful market calls are very difficult to make
- Market is a excellent discounter, anticipates events
- Need to be contrarian to successfully time the market
- Use patterns of history; valuations and sentiment
- Don’t just use economics and think about how your view differ from consensus
- Be most on your guard after a long upward move of four to five years
- Investing is generally for 3 years plus
Eric Tan,
London
Thursday, 2 July 2009
US non-farm payrolls: Employers cut 467,000 jobs in Jun
So, given the government stimulus so far, it looks like employment is still weakening and consumer deleveraging, crimping demand.
Reflation efforts by governments worldwide helped boost risky assets such as commodities and equities in the last 3 months and in the process trashed treasuries and bonds.
10-year US benchmark rates rose from 2% at the start of 2009 to a peak of 4% last month, despite the Fed announcing plans to maintain its purchase plans.
Popular belief has it that the negative sentiment is drawn from the potential indigestion of a trillion more dollars of issuances bound for the doorsteps of willing investors in the coming year.
Scenario:
Say Bernanke's "green-shoots" of recovery was stunned by the high oil prices and the economic recovery widely expected by the end of this year doesn't materialise, we could once again face the swings of the oil price cycle and see bond yields revisit the 2% levels.
Eric Tan, London
Reflation efforts by governments worldwide helped boost risky assets such as commodities and equities in the last 3 months and in the process trashed treasuries and bonds.
10-year US benchmark rates rose from 2% at the start of 2009 to a peak of 4% last month, despite the Fed announcing plans to maintain its purchase plans.
Popular belief has it that the negative sentiment is drawn from the potential indigestion of a trillion more dollars of issuances bound for the doorsteps of willing investors in the coming year.
Scenario:
Say Bernanke's "green-shoots" of recovery was stunned by the high oil prices and the economic recovery widely expected by the end of this year doesn't materialise, we could once again face the swings of the oil price cycle and see bond yields revisit the 2% levels.
Eric Tan, London
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