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
Sunday, 16 August 2009
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-Test investment thesis regularly and if no longer valid, sell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
Wednesday, 10 June 2009
Impact of China's rise on the world economy.
Impact of China's rise on world economy
1) huge increase in global current account imbalances
2) global decline in nominal and real yields on all forms of debt
3) increase in equity risk premium (gap between earning yield on equities over bonds)
4) increase in global returns on physical capital
1 and 2 can be explained by the global saving glut, loose monetary policies, but a massive increase in global labour supply and extreme risk aversion of creditors from emerging economies explains 3 and 4.
We have seen that the accumulation of net overseas assets are entirely accounted for by public sector acquisitions and channeled principally into reserves.
The global balance of trade and economic power has been tilted by the resurgence of the Chinese economy, and this will have a large impact on global trade and growth in the future. China has already started acquiring raw materials directly by buying into companies with large reserves and will continue to do so in a larger way to secure its vast needs for growth.
We will continue to see the expansion of their growth and there will be opportunities for investors who manage to identify targets that are aligned with the Chinese interests for raw marerials.
Eric Tan,
London
1) huge increase in global current account imbalances
2) global decline in nominal and real yields on all forms of debt
3) increase in equity risk premium (gap between earning yield on equities over bonds)
4) increase in global returns on physical capital
1 and 2 can be explained by the global saving glut, loose monetary policies, but a massive increase in global labour supply and extreme risk aversion of creditors from emerging economies explains 3 and 4.
We have seen that the accumulation of net overseas assets are entirely accounted for by public sector acquisitions and channeled principally into reserves.
The global balance of trade and economic power has been tilted by the resurgence of the Chinese economy, and this will have a large impact on global trade and growth in the future. China has already started acquiring raw materials directly by buying into companies with large reserves and will continue to do so in a larger way to secure its vast needs for growth.
We will continue to see the expansion of their growth and there will be opportunities for investors who manage to identify targets that are aligned with the Chinese interests for raw marerials.
Eric Tan,
London
Friday, 29 May 2009
Dr. Friedman VS. Dr. Keynes
This is not a boxing match within the scientific arena nor is it an episode from the popular British science fiction television series.
The Federal Reserve seemed to think that prescribing massive injections of liquidity to avert the kind of banking crisis that caused the Great Depression of the early 1930s (Friedman-style) and coupled with another course of running of massive fiscal deficits in excess of 12 percent of gross domestic product this year, and the issuance therefore of vast quantities of freshly minted bonds (Keynesian-style) will give the economy a double dosage of drugs to pull the patient out of E.R.
But there is a clear contradiction between these two approaches and the central bank is trying to have it both ways.
Question is : can we be a monetarist and a Keynesian simultaneously?
The aim of the monetarist policy is to keep interest rates down, to keep liquidity high, the effect of the Keynesian policy is to drive interest rates up.
However, both of them have the same objective of trying to stimulate demand:
A) Monetary easing increase the money supply and flows to a liquidity constrained economy and reduces the cost of borrowing, leading also to restoration of credit.
B) Fiscal stimulus from the government replaces the components of our economy that are falling sharply such as consumption, investment, construction, capital spending, inventories, exports etc. when economy is suffering not just from a lack of liquidity but also problems of solvency and a lack of credit.
Real concern is that lenders may start to grow dubious about the financial solvency of governments and that would lead to a fresh push for the interest rates to head north as we have observed in government bond yields this week. After all, $1.75 trillion is an awful lot of freshly minted treasuries to land on the bond market at a time of recession, and we don’t quite know who is going to buy them. It's certainly not going to be the Chinese. Maybe only the Fed can buy these freshly minted treasuries, and there is going to be, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realize just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates, which will also have an effect on mortgage rates, which is precisely what the central banks have been trying to avert.
Bottom-line: lock in your 2.5% mortgage rates for the next 10 years!
Eric Tan, London
The Federal Reserve seemed to think that prescribing massive injections of liquidity to avert the kind of banking crisis that caused the Great Depression of the early 1930s (Friedman-style) and coupled with another course of running of massive fiscal deficits in excess of 12 percent of gross domestic product this year, and the issuance therefore of vast quantities of freshly minted bonds (Keynesian-style) will give the economy a double dosage of drugs to pull the patient out of E.R.
But there is a clear contradiction between these two approaches and the central bank is trying to have it both ways.
Question is : can we be a monetarist and a Keynesian simultaneously?
The aim of the monetarist policy is to keep interest rates down, to keep liquidity high, the effect of the Keynesian policy is to drive interest rates up.
However, both of them have the same objective of trying to stimulate demand:
A) Monetary easing increase the money supply and flows to a liquidity constrained economy and reduces the cost of borrowing, leading also to restoration of credit.
B) Fiscal stimulus from the government replaces the components of our economy that are falling sharply such as consumption, investment, construction, capital spending, inventories, exports etc. when economy is suffering not just from a lack of liquidity but also problems of solvency and a lack of credit.
Real concern is that lenders may start to grow dubious about the financial solvency of governments and that would lead to a fresh push for the interest rates to head north as we have observed in government bond yields this week. After all, $1.75 trillion is an awful lot of freshly minted treasuries to land on the bond market at a time of recession, and we don’t quite know who is going to buy them. It's certainly not going to be the Chinese. Maybe only the Fed can buy these freshly minted treasuries, and there is going to be, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realize just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates, which will also have an effect on mortgage rates, which is precisely what the central banks have been trying to avert.
Bottom-line: lock in your 2.5% mortgage rates for the next 10 years!
Eric Tan, London
Monday, 11 May 2009
Shift in Chinese Economics
With a sharp slowdown in global growth projected by the International Monetary Fund (IMF) for 2009 and 2010, the chinese economy is undergoing a fundamental shift in design. No longer is it expecting the export driven growth to support its economy, but evidence is showing that China is now looking inwards to drive the country's huge capacity that was once known as "the world's factory floor".
The world's most populous country is leveraging its internal demand to propel it's economy. Indicators showing year on year increases in domestically bound cargo is driving corporates to make a rush to capture the spending power of inland consumers in sectors. Retail sales number have held up and property transactions are surging across the country. China's plan to implement a healthcare reform of $125bn will raise disposable income and reduce need for high saving levels.
If China suceeds in unlocking their domestic demand and coupled with a Rmb4tn fiscal stimulus, it is increasing positive that they have seen the worst of the financial crisis.
Eric Tan, London
The world's most populous country is leveraging its internal demand to propel it's economy. Indicators showing year on year increases in domestically bound cargo is driving corporates to make a rush to capture the spending power of inland consumers in sectors. Retail sales number have held up and property transactions are surging across the country. China's plan to implement a healthcare reform of $125bn will raise disposable income and reduce need for high saving levels.
If China suceeds in unlocking their domestic demand and coupled with a Rmb4tn fiscal stimulus, it is increasing positive that they have seen the worst of the financial crisis.
Eric Tan, London
Thursday, 30 April 2009
Can spending hold up?
Overview of the the current state of the US economy
The American economy is contracting at its steepest pace in 50 years, the government reported on Wednesday, but an unanticipated rise in consumer spending since January suggested to many economists that the worst of the recession might have passed
Output fell at a 6.1 percent annual rate in the January-through-March quarter after falling at a rate of 6.3 percent in last year’s fourth quar
Analysts are expecting that as tax breaks and government stimulus spending kick in, the decline in the gross domestic product could be cut in half by summer by federal spending and on various small windfalls for consumers
The looming question remains the severity of job losses. More than five million jobs have disappeared since the recession began in December 2007. As their wages disappear, households spend less, and business, in response, reduces the output of goods and services, cutting more jobs in the process.
Eric Tan
The American economy is contracting at its steepest pace in 50 years, the government reported on Wednesday, but an unanticipated rise in consumer spending since January suggested to many economists that the worst of the recession might have passed
Output fell at a 6.1 percent annual rate in the January-through-March quarter after falling at a rate of 6.3 percent in last year’s fourth quar
Analysts are expecting that as tax breaks and government stimulus spending kick in, the decline in the gross domestic product could be cut in half by summer by federal spending and on various small windfalls for consumers
The looming question remains the severity of job losses. More than five million jobs have disappeared since the recession began in December 2007. As their wages disappear, households spend less, and business, in response, reduces the output of goods and services, cutting more jobs in the process.
Eric Tan
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