An independent professional's take on the latest news and trends in global financial markets

Archive for the ‘Pundits’ Category

The disaster that was RBS: an Independent Investor event

What really caused the spectacular collapse of the Royal Bank of Scotland in 2008? Why have no senior bankers ever been prosecuted for their part in the reckless lending spree that required a huge taxpayer bailout to resolve? How did it happen and what can we do to prevent this kind of corporate disaster happening again? Why was the Blair government so keen to encourage RBS in its breakneck expansion strategy? What are the risks of another major bank collapse in future? You can hear and debate answers to all these questions at an Independent Investor event I am hosting in central London at 9am on December 2nd 2014.

The guest speaker is Ian Fraser, the award-winning Scottish author and journalist, whose book Shredded: Inside RBS, The Bank That Broke Britain has been long-listed for this year’s FT/McKinsey Business Book of the Year. Tickets for this event – an hour of discussion and debate, including Q and As from the audience – are now on sale. You can find out more – and reserve a ticket – by following this link to the event website, which is being organised jointly by Independent Investor and the How To Academy. Light refreshments available. Read the rest of this entry »

Written by Jonathan Davis

November 5, 2014 at 5:56 PM

Beyond the stock market correction

The current stock market correction is likely to be over quite soon, the fund manager Neil Woodford suggested yesterday, and I suspect that he is right for now. His view, sensible as always, is that the main reason for the market’s fall is that investors have taken fright at the evidence of slower than hoped for global economic growth, particularly in Japan and Europe, plus a number of other contingent factors. The market correction, the sharpest for over two years, is long overdue, given increasing investor complacency in the face of Federal Reserve and other central bank manipulation of market prices. Read the rest of this entry »

Written by Jonathan Davis

October 17, 2014 at 10:28 AM

The biggest investment question of all

What I like about the market analyst James Montier  is the honesty of his approach to following markets. He thinks deeply about the issues and although he is best known as a behavioural finance expert, his analysis is more wide-ranging than just that. In an interview earlier this year he was asked about the single most important challenge facing any investor at the moment – namely, how to build a portfolio in a period when everything seems to be too expensive. This is how he answered: Read the rest of this entry »

Written by Jonathan Davis

July 7, 2014 at 1:02 PM

Stock market bubbles under the microscope

My thanks to Tim du Toit, founder of EuroshareLab, an excellent Europe-wide stock screening service, for alerting me to this interesting and sensible academic perspective on stock market bubbles – how to measure them, what to think about them, how to react to them.  The author is Aswath Damodoran, a professor at the Stern School of Business at New York University.  His article includes a number of spreadsheets which readers can usefully adapt to make their own calculations of PE ratios and future returns.

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Repeating “the principles of investment success”

Following two successful outings I am repeating the third instalment of my two-hour seminar on the basic secrets of investment success at 9.30 am on Thursday September 25th 2014, at the highly convenient Conde Nast Fashion Institute in Soho in central London. More details can be found by following link. The seminar is organised by the How to Academy, the latest brainchild of tireless entrepreneur John Gordon, and is slated to last for two hours. The seminar falls into two parts: in the first hour I outline what I call the ten key principles needed to become a successful investor, drawing both on 30 years of  personal experience in the financial markets and my research into the methods of the greatest investors, from Warren Buffett downwards. In the second hour I take questions from the audience on any topic, including the current market outlook,  and attempt to show how anyone can now use the Internet to find almost all the information they need to make judgments about shares, bonds, funds, investment trusts, gold and anything else that catches their imagination. The seminar assumes little prior knowledge. I believe strongly that understanding a few simple principles – rather than trying to fathom detailed product information from scratch – is what most investors need to make the most effective  use of their money.


Written by Jonathan Davis

April 7, 2014 at 4:29 PM

A pause to this market march?

Andrew Smithers, as he notes in his latest World Market Update, has been saying for ages now that the equity markets are overvalued – but probably going up. In other words, while on long term valuation measures equities are priced to deliver below-average returns over the medium term, in the near term with momentum and other factors, principally central bank monetary stimulus, egging them on, they can easily go on rising for quite some time. (For what it is worth, that has been my basic stance for most of this year too: markets are far more volatile than the fundamental value changes). But is that period now due for  pause?

While we are not yet calling an end to this, we see it drawing to a close. The two key supports for the US stock market are corporate buying of equities and quantitative easing (“QE”). The former is threatened by current fiscal plans and the latter by the need to taper QE should unemployment continue to fall. If the Federal budget is finalised as currently indicated then a decline in corporate cash flow seems highly likely and corporate buying, which has fallen recently, is likely to fall further.

If the current budget is not modified, the economy is likely to slow and this would probably cause the Fed to taper its tapering. If the budget is modified, the impact on corporate cash flow would be reduced but the chances of Fed tapering would be increased. Equities have been pushed up by the combination of corporate buying and quantitative easing. It is possible but unlikely that both will remain in place during 2014.

We all know that equity markets rarely move in a straight line. 2013 has been a great year, with the main US indices driving through their pervious all-time highs early in the year and heading for full year gains of 20%-25%, with almost all the gain coming from positive rerating (higher multiples) rather than from earnings growth. The mid-year “tapering” wobble seems to have passed.  Equity fund flows have been running at their strongest since 2004, with bonds on course to produce a negative return for the year as a whole. A correction would be helpful, though I somewhat doubt we will see it before the second quarter of next year.

Written by Jonathan Davis

November 22, 2013 at 1:17 PM

Two events in October

Two events in my diary which you may be interested in. (1) Face to Face with John Kay: Martin Vander Weyer, Business Editor of The Spectator, and I are hosting an hour-long session of Q and A /debate with the prominent economist, author and FT columnist John Kay in London on October 22nd, starting at 8.45 am. Topics to be covered include banking reform, monetary policy/QE, the future of the Eurozone and investment strategy in an uncertain environment. More details here and ticket information from the Capital Briefings website. (2) The Ten Commandments of Investment Success: I am teaching a two hour seminar on the principles of successful investment on October 24th at 9am, also in central London, organised by the How To Academy. You can find out more by clicking on this link from the Academy website. This is something that I have been working on for a little while and hope to repeat at other venues in future.

Emerging markets: an accident that’s been waiting to happen

Stern words today about the roots of the current emerging markets crisis from Stephen Roach, the former chief economist at Morgan Stanley now less stressfully ensconced at Yale University, where  he is a senior Fellow. You can read the full broadside here, but this is a short extract, highlighting how the huge destabilising capital flows into – and now out of – emerging markets can be directly traced back to the policy of quantitative easing. The countries now suffering most are those, such as India and Indonesia, which have run large current account deficits and/or have failed to make necessary structural reforms during the good times:

A large current-account deficit is a classic symptom of a pre-crisis economy living beyond its means – in effect, investing more than it is saving. The only way to sustain economic growth in the face of such an imbalance is to borrow surplus savings from abroad. That is where QE came into play.

It provided a surplus of yield-seeking capital from investors in developed countries, thereby allowing emerging economies to remain on high-growth trajectories. IMF research puts emerging markets’ cumulative capital inflows at close to $4 trillion since the onset of QE in 2009. Enticed by the siren song of a shortcut to rapid economic growth, these inflows lulled emerging-market countries into believing that their imbalances were sustainable, enabling them to avoid the discipline needed to put their economies on more stable and viable paths. Read the rest of this entry »

Crime and punishment in high frequency trading

Theer is another fascinating article by Michael Lewis in the latest issue of the glossy magazine Vanity Fair, which is fast establishing itself as a must-read destination for students of folly, drama and malfeasance in the world of financial markets (no shortage of good raw material there). His latest piece chronicles the curious case of a Russian computer programmer named Sergei Aleynikov, who was prosecuted for stealing computer code when he left Goldman Sachs to join a rival high frequency trading  operation. Mr Aleynikov’s conviction was quashed on appeal, but only after he had spent a year in jail. The article is interesting not just for the human story that Michael Lewis unfolds with his characteristic verve, but also for the light that it sheds on the phenomenon of high frequency trading. (Students of the phenomenon that is Goldman Sachs will also find plenty of evidence to support their prejudices, good or bad).

Here is one passage from the long article:

By mid-2007……Goldman’s equities department was adapting to radical changes in the U.S. stock market—just as that market was about to crash. A once sleepy oligopoly dominated by NASDAQ and the New York Stock Exchange was rapidly turning into something else. There were now 10 public stock exchanges in New Jersey alone, all trading the same stocks. Within a few years there would be more than 40 “dark pools,” or private exchanges, one of them owned by Goldman Sachs, also trading the same stocks. (Why the world needed 50 places, most of them in New Jersey, in which to buy and sell shares in Apple Inc. is a question for another day.) Read the rest of this entry »

Written by Jonathan Davis

August 5, 2013 at 12:55 PM

The house price/general election nexus

One of the reasons I gave up being a full-time business journalist in favour of a career in investment was the fear that I might be falling prey to the all-pervasive cynicism to which so  many members of the media sadly seem to succumb over time. Excessive exposure to the doings of government can have that effect on you. I could not resist a wry smile however at seeing the attached chart, published by the economics pundits at Capital Economics. It shows the close correlation  that exists between house prices and the political fortunes of the party currently in power. As might be expected the relationship appears to be both powerful and close, and, I fear, is not at all accidental.  Political party strategists know full well that consumer confidence, in which rising house prices are the key component, holds the key to earning electoral victory.

chart2 house

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Debt: still very much in favour

Reports by the Wall Street Journal that officials at the Federal Reserve are drawing up plans for starting to rein in the current programme of QE are worth noting. Jon Hilsenrath, the Journal reporter who wrote the story, is widely held to be the Fed’s favourite unofficial channel for making known its future intentions.  Could it be that even the Fed is starting to get concerned about the runaway effect that its monetary stimulus is having on asset prices? Throw in Mr Bernanke’s warnings about excessive risk-taking last week and it is tempting to suppose that even the Fed would be happy to see a pause in the the advance of risk assets, at least for now.

That would certainly seem to sit quite well with the normal midyear seasonal pullback that we have seen for each of the last three years. The worry with QE has always been that it is easy to get started on it, but very difficult to stop. Now that the Japanese have joined the QE party in an even more dramatic way, the ripples are being felt in financial markets all round the globe, compounding the scale of the eventual problem. Yields in a number of credit markets (eg junk bonds, leveraged loans) have fallen to what look like dangerously complacent levels. Companies such as Apple are obviously happy to take advantage of the ultra-low rates on corporate debt, but whether that achieves any longer term benefit remains to be seen – not so obvious when the purpose of the debt is committed to share repurchases rather than new capital investment. All the while a return to the levels of economic growth we witnessed before the crisis broke in 2008 remains stubbornly distant. Read the rest of this entry »

Rich valuations for the stock market’s global elite

The news that Paul Walsh, the CEO of Diageo, has unloaded a huge amount of stock (£16m) after exercising a raft of share options draws attention to the extent that the prices of high quality companies with strong global business franchises and the ability to generate cash have been bid up to very rich levels. The veteran market-watcher Richard Russell has observed something similar on the other side of the Atlantic.

What do billionaires Warren Buffett, John Paulson, and George Soros know that you and I don’t know?  I don’t have the answer, but I do know what these billionaires are doing.  They, all three, are selling consumer-oriented stocks.  Buffett has been a cheerleader for US stocks all along. But in the latest filing, Buffett has been drastically cutting back on his exposure to consumer stocks.  Berkshire sold roughly 19 million shares of Johnson and Johnson.  Berkshire has reduced his overall stake in consumer product stocks by 21%, including Kraft and Procter and Gamble.  He has also cleared out his entire position in Intel.  He has sold 10,000 shares of GM and 597,000 shares of IBM. Read the rest of this entry »

Even cash is now at risk

Albert Edwards, the lead strategist at Societe Generale, has added some typically forthright (and witty) comments on the latest developments in Euroland. By making explicit the fact that both uninsured bank depositors and all classes of bondholder have been required to take part in the rescue/liquidation of the two largest Cypriot banks, the troika (EU, IMF and ECB) has highlighted the fact that cash itself is now officially potentially an unsafe asset. He wonders also (as do I) how long it will be before a Eurozone country finally decides that remaining in the single currency is not worth the trauma that staying in involves.

Most economic analysis concludes, probably correctly, how much more costly it would be for either a creditor or debtor nation to leave the eurozone system compared to struggling on within it. Indeed for Germany, despite becoming increasingly irritated by having to dip their hands into their rapidly fraying pockets, the crisis in the eurozone has been accompanied by the lowest unemployment rates since before re-unification in 1990. Read the rest of this entry »

Written by Jonathan Davis

March 27, 2013 at 5:42 PM

Cyprus: new fault lines in the Eurozone

What to make of the Cyprus rescue deal announced this morning? Is it necessary? Absolutely: the Cypriot banking system is insolvent, and has been ever since the Greek rescue deal last year, if not before. Is it fair? Probably not. Knowing how weak the Cypriots’ bargaining position was, the troika (EU, ECB and IMF) has played hardball with one of the EU’s smallest member countries, which makes it certain that for every irate mobster or money launderer who loses a chunk of their capital, there will also be many hard luck cases.

The deal administers rough and ready treatment to bank depositors in the country’s two largest banks, while preserving – belatedly, and at the second attempt – the general principle that depositors with less than $100,000 euros are still protected from loss by state guarantee. (Important to note that while the EU has enshrined this principle as a political objective, the guarantees are only as good as the individual state that provides them. Cross-border deposit insurance, under which the EU would collectively guarantee bank deposits in all member states, is necessary if the banking union which the EU is trying to edge towards is ever to become a reality, but it remains so electorally toxic that it won’t be introduced any time soon). Read the rest of this entry »

Written by Jonathan Davis

March 25, 2013 at 4:12 PM

Reality and euphoria in the equity market

In the modern era strong equity market performance in January is not, as used to be believed in days gone by, a reliable forerunner of a good year ahead for the stock market, which is a pity as 2013 has certainly got off to a roaring start, with both the S&P 500 and the world index up by 5.0%, and the main Japanese indices up by nearly twice that amount.  After its lacklustre performance in 2012 the UK equity market produced an impressive 6.4% and China, a dark horse favourite for top performing stock market, a tad more.  However, as this useful corrective note from Soc Gen’s top-rated resident quant Andrew Lapthorne makes clear, there are some curious features of the markets’ generally impressive performance that give cause to doubt quite how enduring this rally will in practice prove to be.

Firstly debt issuance by companies is riding high and a large chunk of this debt is being used to buy back shares. This creates a virtuous circle, where increasing debt issuance supports share prices, pushing down implied leverage and volatility at the same time, which in turn supports ever cheaper credit for the corporate. So, once again, with one of the key marginal buyers of equities the corporate, using capital raised in the debt market means that, as ever, the fate of the corporate bond and equity market are intertwined and as such last week\’s weakness in the high yield bond market is worth keeping tabs on. Read the rest of this entry »

Fools rush in while wise men take their time?

The New Year has started well, with plenty of evidence that professional investors are continuing to rediscover their appetite for risk assets, with the price of equities, corporate bonds and high yield debt all heading higher. The charts for leading equity indices, including the S&P 500 and the FTSE All-Share, have been trending higher ever since Mario Draghi, the head of the European Central Bank, announced last summer his intention to “do whatever it takes” to prevent the eurozone from falling apart. He has every reason to be pleased with the response to his intervention, which to date has been effectively cost-free. Would it were always so easy! European stock markets, having been priced for disaster before, have led the way up as fears of the euro’s fragmentation recede. Volatility, as measured by the VIX, has meanwhile fallen to multi-year low levels. Read the rest of this entry »

A dissenting view on inflation

Has the Bank of England lost control of interest rates? You won’t hear that view from any official source, but it is worth listening to the economist Peter Warburton, the founder of the consultancy Economic Perspectives, whose often dissenting opinions have been more right than wrong over the past couple of decades. He argues differently in this contribution to the Shadow Monetary Policy Committee’s latest review of economic conditions, in which he warns about the incipient threat of price inflation. It is well worth reading: I suspect it will look very prescient when we look back in years to come.

It is becoming increasingly obvious that the Bank of England has lost control of UK retail borrowing costs. During the three years-plus that Bank Rate has been set at ½%, the average interest rate paid on banks’ and building societies’ notice deposit accounts has risen from a low of 0.17% in February 2009 to 1.83% in July 2012.

Admittedly, the quoted monthly rates have bounced around, but the average for 2012 is 1.41%. This is a measure of the average cost of retail funds to the banking sector; the marginal cost is closer to 3%. On the other side of the balance sheet, Santander UK has recently announced a 50 basis point increase in its standard variable mortgage rate, to 4.74% from October. Clearly, the level of Bank Rate has played no role in the evolution of market rates for the past three years. The MPC’s consideration of a cut in Bank Rate is perverse and farcical in this context. As and when the UK economic news flow permits, Bank Rate should be raised in order to reconnect it to the structure of market rates. However, with UK activity indicators currently erratic and weak, now is not a good time to do this. Read the rest of this entry »

Written by Jonathan Davis

September 4, 2012 at 9:41 AM

Looking beyond Greece

We don’t know whether the Eurozone agreement on Greece will hold – let alone for how long. My guess is not for long. In any case, for investors this long-awaited deal looks like a classic case of buy on the story, sell on the news. Financial markets have run up so strongly in anticipation of such an outcome that equities now look massively overbought, implying that the short-term reaction is more likely to be negative than positive. Longer term it is still impoosible to know for certain how this great drama reaches its endgame.

My view remains, as it has done for some time, that the best outcome now, as Bill Emmott was saying in The Times yesterday, is for a managed default (and probable exit) by Greece at some point in the course of this year, as it becomes apparent that the country cannot meet the demands which have now been placed on it. I suspect that this is the outcome which the Germans have been after for quite a while now, without of course being able to say so in so many words. It is also in the best interests of the Greeks themselves over time.

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Written by Jonathan Davis

February 21, 2012 at 9:45 AM

Mark Mobius on the Eurozone crisis

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How does Mark Mobius see the outlook for investors in the light of the ongoing crisis in the Eurozone? You can find out by listening in to my latest podcast interview, which can now be downloaded from the Independent Investor website (link). Dr Mobius, who next year celebrates 25 years running the Templeton emerging markets funds business, with $40 billion of assets under management, discusses the threats and opportunities which the crisis has created.  This is the first of a series of podcast interviews with leading professional investors and advisers. Other to be interviewed in the series include the global investor Jim Rogers, author and economist John Kay and Guy Monson, the Chief Investment Officer of the Swiss private bank Sarasin.

Written by Jonathan Davis

December 11, 2011 at 6:58 PM

Why are company profits so high?

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An interesting note today from Andrew Smithers, the always stimulating independent economic strategist in London. He tackles the question: why are corporate profits as strong as they are at the moment – and can they be sustained? His analysis suggests that profits in the United States are three times the level they would be if they had reverted to average historic level. The wonder is that profits have widened dramatically over the past three years despite a sharp contraction in GDP – something that has rarely if ever happened before.

His conclusion is that the chief cuprit is not fading union power, nor the rise of China. It lies in the revolution in the way that corporate managements are now hired and rewarded. Short tenures and bonus-rich remuneration schemes linked to share price performance have resulted in a dramtic refocusing of management’s efforts away from long term investment towards much risker, short term profit maximisation. We all know this has been happening, but Smithers demonstrates it tellingly with a couple of powerful graphics.

Many managements, he points out, announce absurdly high returns of equity – typically two and a half three times the long run average. As a result it is no accident, he says, that corporate profits have become more volatile, that leverage has increased and that share buybacks have accelerated.  The worry of course is that this new focus is bound to lead to below average share price performance in the future.

Just as Eurozone leaders cannot go on kicking the can down the road with failed sovereign debt initiatives, so corporations cannot expect to sustain their businesses unless they are prepared to invest in new capacity.  “If we are lucky”, Smithers concludes, overdue changes in management remuneration will help to restore the balance towards investment, but “if we are unlucky, the distortions produced by the bonus culture will only be broken by another severe recession”. It is certainly not going to happen overnight.

Written by Jonathan Davis

December 9, 2011 at 5:26 PM

Posted in Andrew Smithers