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Archive for the ‘Crispin Odey’ Category

A right old mess

The risk that the sovereign debt crisis could spiral out of control in the face of inadequate political will to resolve the crisis is clearly growing the longer that the impasse in the Eurozone (over peripheral country debt) and the United States (over lifting the debt ceiling) continues. Suggestions that we are in danger of a rerun of 2008 are not, alas, fanciful, and are growing by the day.

This is how the hedge fund manager Crispin Odey summed up the situation today, noting first the standoff in the United States, where both political parties seem blissfully unaware of the stakes for which they are playing.

The markets should be scared of such political madness, but instead the dollar benefits from greater madness emanating out of Europe. Greece is bust. Easy. However Germany and the Netherlands need to realise the necessity of recirculating the savings flows back into Spain and Italy. This current malaise provides an anvil upon which those countries can be hammered. A Euro in which deposits from southern Europe flood to Germany and are not re-exported except reluctantly by the ECB is ultimately doomed to expire. The timing of this is dangerous. Politicians are going away on holiday, but the markets will not wait. Read the rest of this entry »

Written by Jonathan Davis

July 19, 2011 at 10:48 AM

Too Early To Panic (Though Some Are)

After another turbulent week in the markets, it seems a good point at which to stop and take stock of where we are. Equity markets are now oversold and will certainly have a bounce soon, for sure. Readers of Independent Investor will know that Jim Rogers thinks this is just a normal market correction, after the strong run from February to April.

Crispin Odey thinks the trend is still upwards. Ken Fisher does so likewise. Sanjeev Shah, Anthony Bolton’s successor at Fidelity, also thinks the market is oversold and has bought some more units in his own Special Situations fund – always an encouraging sign.

In a short Q and A last week, Richard Oldfield, the founder of Oldfield Partners, a specialist equity fund manager which has no public profile but is much admired by those who know it, is keeping his pro-equity bias in place, though he also said that he has learnt to ignore at this peril technical indicators such as Investors Intelligence’s bullish/bearish sentiment indicator, which has been flashing a clear warning sign.

So, at the very least, even if you don’t dare to be bullish, don’t be fooled by dramatic media headlines into thinking that the equity market rally is necessarily yet over. The crisis in the eurozone is real enough, and has been confounded by the unimpressive response of Europe’s political leadership to date. There is no doubt that there is an element of investor panic out there in the response to the unfolding eurozone crisis.

You can see this in a number of different indicators. The VIX index, which is often used as an indicator of fear in the market, has risen sharply in the last two weeks.

More worryingly, so too has the Libor rate, the key interbank lending rate which can also be interpreted as an indication of how willing banks are to lend money to each other.

This underlines the fact that behind the worries over the eurozone is the fear of further banking collapses. The rescue of the Spanish bank this weekend underlines how weak many lenders in the eurozone still are.

If banks start to stop lending to each other again, and liquidity dries up again because of fears over bank solvency, we will heading back towards a new crisis.

The technical condition of the stock market has deteriorated in the last few weeks. Richard Russell, the doyen of all technical analysts, now in his ‘80s, reports from his San Diego home in dramatic tones that the stock market has entered a primary downtrend.

All this may help to explain why Philip Gibbs, the financial expert at Jupiter, moved a lot of his funds out of equities and into cash earlier this year, fearful of the impact that the new crisis over sovereign debt might have. Against is the fact that Jupiter has announced last week its intention to float on the stock market, not something the firm would presumably try if the hugely influential Mr Gibbs was as bearish as he was in the run up to the 2008-09 banking crisis.

The risk of a new financial crisis, as has been noted here before, has never gone away, but the odds against it happening have been lengthening. Now the odds have taken a hit back in the opposite direction. A new crisis can still be avoided, but investors need to be aware that the possibility remains, even if it is still more likely that the equity market will start to pick up, as it was clearly beginning to do on Friday before news of the Spanish bank rescue.

While I remain confident that the case for equities remains robust, therefore, it is clearly sensible to remain alert to the danger of a new crisis, and be prepared to act accordingly if the market fails to bounce back. The next couple of weeks will give us more clues as to whether another dramatic stock market crisis is imminent.

Written by Jonathan Davis

May 24, 2010 at 8:33 AM

Crispin Odey: Bullish Again

Crispin Odey has yo-yo-ed in his views about markets, as hedge fund managers are prone to do. He thinks we are in a trading market, but makes some good points in his latest monthly report (see below).

In keeping with my view that this is a trading market, I find that I have again changed my mind and feel rather bullish about the prospects for stock markets over the next six months. Partly this reflects that markets make up their minds in the spring and the fall.

It is now too late for the markets to get bearish. And yet, people are wanting these markets to go down. For all of the fall in the percentage of cash held by institutions signifying that they have become more enthusiastic, the numbers merely reflect that equity markets are up over 50% from their March 10 lows of a year ago whilst cash, (and most people!) are unmoved. There is the first signs of retail investors tickling their way back into equities but again in this season of ISA’s it is worth remembering that over 80% of ISA’s are in cash.

My own optimism for stock markets has a dark side too, but it is based on the fact that equities, at least in Europe, are still so cheap against bonds and property. Ten year government bonds are yielding just over 4%, prime UK property is yielding through 6% whilst the FTSE is on a gross earnings yield of 10%. There is no good reason for the bigger, better, quality equities yielding anything more that high quality property.

The changes in the UK which imposed rates on empty commercial property makes the case for equities stronger, whilst the bigger stocks have the advantage of liquidity. If, and I know that it is a big if, the dangers to this massive build-up in government debt do not make themselves manifest immediately, the strongest trend around will be the arbitraging of bonds, property and equities.

That arbitrage could return over 30% even from here. The dark side is that a period of respite that allowed equities to re-rate, would also mean that when we meet again with inflation, equities will fall just as far and fast as other asset classes. As a trader that makes me excited too!

My view is that while the markets continue to look for direction, there is as yet no reason to think that an end to the market rally is imminent. Although more people are coming round to the case for equities, they are not yet such a majority as to justify a contrarian change in stance.  

Written by Jonathan Davis

March 25, 2010 at 12:10 PM

The Odds on Market Recovery

This year’s market action has been a perfect advertisement for the Rip van Winkle school of investing: trade little, go to sleep for a year or two, and come back to find that nothing much has changed (FT Column, published May 11th 2009). At the time of writing, both the S&P 500 and the FTSE 100 index are up around 1% for the year. Yet what a ride it has been for those condemned to follow it day to day since the beginning of the year – from falling knife to what may be a runaway bull market in the space of little over two months.

If the March lows prove to be the lows for this phase of the equity market, as now seems very possible, it will be the third time in a decade for UK investors that the middle of March has proved a decisive turning point in the market. That should provide plenty of ammunition for researchers anxious to uncover a new statistical anomaly. “Change tack in March – and don’t turn back”, or something to that effect.

We don’t know for certain that we won’t see new lows again this year, of course. In his latest quarterly letter, Jeremy Grantham of GMO, one of the few asset allocators who sensibly acknowledges that market calls really are probabilities at best, never certainties, puts the odds of the market finding a new low this year or next at slightly better than evens. In practice, so he told me last week, these odds have been improving by the day, the longer the market recovery continues.

If the US economy picks up later this year, as he thinks it probably will, then the odds on the markets avoiding a new low will rise even further. It is only if the economic reality turns out to be disappointing later this year that the odds will go the other way. He thinks that this year’s market recovery could easily take the S&P 500 as high as 1100 before the recovery is done, although fair value in his view is only around 900. That looks possible to me too.

On the other hand, if that outcome does happen, it will certainly not stop us entering a new period of what Mr Grantham calls “long, drawn out disappointment” in the economy and the stock markets of the developed world. He is surely right that the fallout from the financial crisis cannot be wished away so easily. His view is that this market revival, which he has backed with a big chunk of his clients’ money in two big calls over the past six months, represents a “last hurrah” for the bulls.

If we are now past the markets’ turning point, it looks as if Governments the world over will have not just their massive stimulative efforts to thank for the revival in market sentiment, but also, paradoxically, the hedge fund community that they so love to malign. The smart bets that Odey Asset Management and Lansdowne Partners, among others, placed on UK banking stocks a couple of months back have been the starting gun that has fired bank shares on their current upwards trajectory.

On April 28th the newly bullish Mr Odey, in his quarterly call to investors, declared that shares in Barclays, his biggest call, then at £2, could go as high as £4, or five times what he paid when he made his first move into the banks. Ten days later the shares were already halfway to his target figure, as those who were short or still gloomy about the banks scrambled to cover their positions and catch the big move – the point being that if you have decided that the banks aren’t going to go bust, then it is no longer crazy to start valuing them on their earnings capacity and potentially fat margins. That assumption could still be tested on the GMO worst case scenario.

The last month’s market activity has been a textbook example of how bear markets, when they end, have an enormous capacity to catch out the unprepared and mentally rigid. It is unlikely that whatever they may say in public, Mr Bernanke or Mr Brown will on this occasion begrudge the handful of hedge funds who have profited from the banking sector revival their outsize gains. Although at least half the overgrown hedge fund sector will in due course disappear, the experienced hard core that will survive can at least now point to a genuine example of a periodic useful social function.

The biggest surprise of the market rally so far is not that it has happened, but that it has been that it has been led so aggressively by riskier assets, including emerging markets and midcap stocks. This appears to be proof, if proof were needed, that Warren Buffett was right when he said earlier this year that the world has moved from underpricing to overpricing risk. The fact that none of the four professional investors he selected a couple of years ago as potential successors for his CIO role at Berkshire Hathaway managed to beat the S&P 500 last year also tells its own story – which is never write off a great investor, especially one who still owns such a big chunk of his own investment vehicle.

Written by Jonathan Davis

May 20, 2009 at 9:57 AM