July 16, 2008 | posted by Michael Baxter in Markets | comments (0) |

Well, we know Ben Bernanke is good at spelling.   He was after all the champion speller of all of South Carolina, when he was a boy.   We also know he knows a lot about the 1930s depression.  As an academic he made his name for his work on that sad economic epoch.   But now his list of skills has grown.  For yesterday he added to that list the “ability to talk the bleeding obvious.” 

He was speaking to the Senate Banking Committee, and really he said nothing that all but hopeless optimists and residents of Mars who had just popped down for the day didn’t already know.  But it was enough.    Carnage on Wall Street continued. 

When markets are optimistic they only need the slightest excuse to buy.    Last autumn, the view circulated around economic circles that the economic prospects were so bad that the rate of interest may need to be slashed to get the economy moving.    “What was that?” asked the markets.  “Did someone say rates are going to be slashed? We better buy.”   And so it was, that on the brink of economic and banking disaster, markets went out to play as if all their Christmases had come at once.

But now, it just takes a whisper, a tiniest hint that maybe things are really not all that good, and down go markets, falling like a brick over a very steep cliff.

This is what Benrnake said: “The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and some other commodities.”    Ummm, oh yeah, so it is.

He added: “The financial headwinds on spending and economic activity have been compounded by rapid increases in the prices of energy and other commodities.”   Lets think about that.  Ahhh, yes, that is right too.

Then, in a brilliant leap of intuition that mere mortals can only dimly comprehend, Bernanke linked the high price of oil and food to consumer spending, and said he expects this to “be restrained over coming quarters.”

And that was it. With words like that it was panic.

Actually, it wasn’t really a freefall so much.  The Dow was down 93 points, the FTSE 100 fell 129 points.    These days falls like that seem quite modest.  But the point is this.  The Dow is now down almost 400 points this month.  The FTSE 100 has fallen 454 points.   Both indices are around 23 per cent lower than their 2007 highs.

It was banking that was really feeling the heat.    The FTSE all share banking index fell to its lowest level in ten years, the time of the collapse in Long Term Capital Management.   RBS was down 7.1 per cent, HBOS 4.4 per cent, Barclays 3.4 per cent. 

But it wasn’t just in the UK.  Some European banks would have been delighted to only suffer falls of that scale.  Fortis, the Belgian–Dutch bank, saw shares fall 11.2 per cent.

As banks keep finding their cupboards are bare, they look elsewhere for more money.  Now fears are growing  that sources of finance are drying up.  That is why Alliance and Leicester couldn’t say yes to Santander fast enough.  That is why Bradford and Bingley was so grateful to see its big bank shareholders cough up with some money.

And you know that in times like these, all kinds of problems will come out of the cupboard.     It is always that way.  After the 1929 crash, wave after wave of scandal hit the headlines.  After the stock market crash earlier this decade, WorldCom and Enron made the headlines.   Now, traders are nervously looking every which way for the next scandal. 

Yesterday, Fortis denied Dutch authorities were carrying out an investigation into the bank.  It is irrelevant if the rumour is true or false; all it takes is a rumour, no matter how unfounded, and shares fall.

It seems that right now, news is bad for the markets.  It doesn’t matter what the news is.   If the news is bad, markets fall;  if the news is quite good, markets fall.  If the news is Bernanke still thinks the same as what he thought last month, the markets fall.

In his book, Age of Turbulence, Alan Greenspan said: “History is replete with waves of self-reinforcing enthusiasm and despair, innate human characteristics not subject to learning curves.”

And that is what we are seeing now.  Bernanke may speak the obvious, but markets never seem to see the underlying, but obvious, truth.    It is human nature that exaggerates trends and creates economic cycles.  And market reaction to news, be it good or bad, just illustrates that this is so.

July 14, 2008 | posted by Michael Baxter in Markets | comments (0) |

And so the FTSE 100 hit bear territory. At close of play on Friday, it was 21 per cent below last year’s high point.

It is a little curious, but the Dow Jones is also down from its high point by almost exactly the same margin.

When you think about it, the US economy is in a right royal mess. The latest mess to come on the heels of the previous mess is, of course, the troubles of Fannie Mae and Freddie Mac.

And the amount of money entailed is just staggering. The US government is to ask Congress for unlimited authority to prop up the two financial institutions. It may need an awful lot. The not so dynamic duo guarantee more than $5.3 trillion worth of mortgages. To put that in context, US national debt is only $9 trillion.

It is not surprising they are in so much trouble. As mortgage defaults surge, they are left picking up the bill. But, they really can’t be allowed to fail. At least, not go bust. That really would be a disaster for the US economy that could set back an economic recovery for years and years. So, money has to be dished out – money that makes the Northern Rock bail out seem like a walk in the park. Even the US government will notice this one.

And yet, with the terrible fear dangling like the sword of Damocles, the Dow Jones suffers no more of a disaster than the FTSE 100.

In fact, in a way, the Dow’s performance is better. Last year, the Dow hit an all-time high. The FTSE still failed to climb above the 6,930 mark seen on the last day of the last millennium.

Right now, the Dow is 21.6 per cent down from its all-time high, set last year. The FTSE 100 is 24 per cent down from its all-time high, set on 31 January 1999.

The truth is, the FTSE 100 has not just entered bear territory at all; it never left it in the first place. And its dreadful performance of the last few weeks is a reflection of the lack of confidence by the City in the banks and builders. And that, in turn, is a reflection of how much faith the City has in house prices.

July 3, 2008 | posted by Michael Baxter in Markets | comments (0) |

Down went the Dow Jones yesterday, falling to a level which is now 20 per cent below last October’s high.  Down went shares in GM, the world’s largest automobile manufacturer yesterday, with the share price falling to its lowest level since 1954.  Down went shares in Marks and Spencer yesterday, falling 25 per cent.  Down went shares in Taylor Wimpey, Britain’s largest builder, falling 45 per cent.

The falls follow recent sell-offs in Asia, which have seen the Chinese and Indian bubbles, apparently burst.

It was yet another day of carnage.

For Taylor Wimpey, the problem lies in its ability to raise money. It wants £½ billion. Yesterday, its plans were supposed to be announced.  But, when it asked its shareholders to look into their piggy banks to dish out more money, the piggy bank was empty.  

“However,” went a Taylor Wimpey statement, ”in light of current market conditions we have not been able to conclude a satisfactory transaction.”

So it’s off to the bank to tap them for some more money, while they look around for some more ideas.  “We think that we’ve got the time and options to complete the capital raising in the near future,” said Pete Redfern CEO at the company… “We don’t rule out any funding options,” he added.

The problem right now is this.  It is still profitable to build; house prices would need to fall an awful lot more before the price of homes is lower than the cost of building them.    The snag is the cost of land.  The builders have already bought the land, and perhaps paid over the top for it.  They could build and sell properties, and boost their cash flow, but that would play havoc with their balance sheets.    It would also mean a rise in supply, and that would prompt a full blown property market crash too.

The banks, presumably, are aware of this.  So they must, surely, give the likes of Taylor Wimpey all the support they ask for.  If they don’t, well, let’s put it this way.  If the UK’s builders went bust, some investors, sovereign wealth funds most likely, will buy the land on the cheap, and will start building, prices will fall to a level that makes buying attractive to first time buyers.  This will leave many bank’s customers with negative equity, meaning banks will find less of their loans are covered by securities, prompting further big write-downs, making them reluctant to lend.     You can see the downward spiral, that will follow.   The banks dare not let builders fail.

As for Marks, well, Stuart Rose set the alarms ringing when he talked of “stormy times ahead.”  As was told here yesterday, like-for-like sales at the retailer were down 5.3 per cent over the last three months, and analysts didn’t like the sound of that at all.    Shares fell 78p to 240p.

Incidentally, the Marks and Spencer share price is now less than a third of the price it hit during the first half of last year.

When Philip Green made his offer for Marks, he was wiling to fork out 400p, and initially he was willing to pay cash.  Sir Stuart has done a wonderful job for Marks, and maybe the brand is stronger today than it would have been under Green.  Maybe if Green really had forked out all that money, he would now be regretting it.  But, to be quite mercenary about it, right now it seems shareholders would have been better off selling.

There are no prizes for guessing the main reason why GM is doing so badly.   The high price of oil has hit auto sales in the US hard, and GM was far too slow to read the signs.    Far too slow to ditch the pick up trucks and SUVs and go for fuel economy.  GM, like the other two big US car makers, Ford and Chrysler, has its fair share of structural problems too of course.   There are pension commitments, and massive disagreements with trade unions who want to cling to the agreements made in happier days. 

But then yesterday, Merrill Lynch didn’t help much it when it put out a note saying the company may need to raise $15bn to shore up its balance sheet, or bankruptcy was “not impossible”.

Funnily enough, GM did better in June than analysts had expected.  Sales fell, but not as much as feared, and for once, Toyota saw even bigger falls.  Ford and Chrysler outdid it too.

But then, Toyota’s falling sales were in part due to a shortage of hybrid cars, so that’s fixable.  The ‘Detroit’ three, on the other hand, seem to be battling against the tide.

As for the Dow, it fell to 11,215, meaning over the last week it has lost nearly 600 points.  It is around 1,800 points down from the start-of-year position, and 2,948 points down from its all-time high set last October.     It is also 506 points below the pre-dotcom crash peak. 

But frankly, the real puzzle with the Dow is not so much why it has fallen so far, but why did it rise so high in the first place.     It was quite early in 2007 that Alan Greenspan warned of a one-in-three chance of a US recession, yet from the time he made that comment, the Dow just soared.

Last October, he said: “The world has gone mad. Everywhere you look you see valuations that suggest insanity has become endemic amongst the world’s traders. Whether it’s oil, property or shares, prices just seem to keep going through the roof. And, as every investor will tell you, what goes up must come down, so presumably it will all go pop.”

“Take the US. Of late,” we said, “the country’s biggest export seems to have become woe, and yet markets continue to flirt with all-time highs.”

Some people blame the media for the current crisis, saying the media has talked up the gloom.  That is not true.   The problem was lack of realism in the first place. 

June 30, 2008 | posted by Michael Baxter in Markets | comments (0) |

Hearing the latest scores from the markets seems more interesting then listening to the football results these days, such is the frequency with which records get broken.  Then again, when you look at the daily changes, these seem more like the cricket results.

The Dow Jones had another bad day in the field on Friday, seeing another 106 runs scored against it.  This follows a 358 innings put in by the bears on Thursday.

It certainly seems to be the case that the bears have got some fast bowlers in their side at the moment, while the Dow has got a batting line up which could not even make the England team.

In fact, with just one day to go, the Dow appears to be on course for suffering its worst June since the 1930s. At close of play on Friday, the Dow stood at 11,346; that’s 1,291 points below the end-of-May price, or 10 per cent down.   It is also 2,817 points down on the all-time high set last October, meaning it is 20 per cent down.

But, frankly, the real surprise should surely be that the market rose so high in the first place.

Last autumn, the economic news was pretty grim, but the traders on Wall Street seemed to have their head firmly buried in the sand.

They returned their head to that position in April and May this year, when the Dow shot up, at one point passing 13,000.   George Soros warned at the time he expected markets to see another dip, and he was dead right – although, frankly, you didn’t need to be a financial guru to think markets had gone too high.

And so the comparisons with the 1930s continue.  And yes, it is like that decade; there are many parallels, but, really, there is no reason yet to think it will get anywhere near that bad.

The 1930s saw a series of quite inept policy mistakes.  Banks went bust in their droves, authorities were far too slow to grasp the seriousness of the situation.  No one can accuse Mervyn King and Ben Bernanke of not taking it all seriously.  In fact, Bernanke probably knows more about the 1930s depression than anyone else alive; that is what he specialised in during his days working in academia. 

The bail-out of Northern Rock, criticised though it was, shows why this is not like the 1930s.

If banks were allowed to collapse, leaving depositors with no way of getting their money back, then it would be like the 1930s.   Fortunately, it seems unlikely this will happen.

June 27, 2008 | posted by Michael Baxter in Markets | comments (0) |

Down went markets yesterday.  Up went the price of oil.     

It was a day of carnage.  A day when shares in the world’s largest automobile maker fell to their lowest level in 33 years.    A day when Libya said there was too much oil in supply and it was to CUT production.    A day when the Bank of England governor Mervyn King called for us all to “face up to reality,” and said he had no idea how much house prices were going to fall.    In banking land, Tim Bond, chief equity strategist at Barclays Capital said: “We are going into tortoise mood and are retreating into our shell.”

But here is the strangest comment of the day.  On the BBC web site it was said: “Some analysts believe a bear market, in which shares fall for a prolonged period, has already taken hold.”

It’s just words:  correction, bear market, crash.  A correction is defined as when shares fall by more than 10 per cent.  A bear market, when shares are more than 20 per cent down from a recent high.  A crash is normally considered to have occurred when prices are more than 30 per cent down.

But the truth is this.  The bear market began at the end of the last century.   At close of play last night the FTSE was 1,400 points, or 20 per cent, lower than the level it stood at on the 31 December 1999.

Not only did the Dow fall by 358 points yesterday, the second-biggest daily fall in this year of extraordinary volatility, not only did it fall to the lowest level in 21 months, but the Dow also fell below the Dotcom boom peak of 11,722 set on 14 January 2000. 

In other words, both the FTSE 100 and Dow Jones Industrial average are below levels set eight years ago.

This is no new bear market, it is the continuation of an old one.

But we were fooled into believing it had ended, we were fooled by the most transitory of illusions, rising house prices.

Some idiots have laughed off the dotcom crash and said prices just got out of hand; and described the housing boom as a proper boom based on solid fundamentals.

This analysis was wrong.

The dotcom boom promoted innovation.  And it’s the innovation sparked off during that period which gives the best hope for today.

Robert Solow, a famous Nobel prize winning economist, credited as being one of the leaders in the theory of economic growth, once said: “Technology is everywhere but in productivity.”  In other words, we had witnessed a period of dramatic change in technology, but it was not being shown up in the productivity statistics.    Mr Solow was not wrong, but he seemed to have failed to grasp the time lags involved.    The boom of the late 1990s, which took place many years after Solow’s observation, was down to technological innovation finally showing up in the productivity data.  

And that’s what it all boils down to.  Productivity is what creates wealth.    The comings and goings of economic cycles, or bull and bear markets, are like whispers on the wind.    Prosperity is down to how much we produce, and how much we produce is determined by innovation.

The last few years have seen countries such as India and China piggy back on innovation that had already occurred.    The next few years will see the recent strides made in technology filter through into genuine wealth creation.

But right now, we are simply in the midst of an economic period that began when dotcoms crashed. 

June 23, 2008 | posted by Michael Baxter in Markets | comments (0) |

As the green shoots of spring first started to show, the roller coaster ride that is the stock markets seemed to come to a halt.

On the 10 March, the Dow fell to 11,740, just 18 points up on the 14 December 2000 level, the peak from the previous boom, before dotcoms bust.

But then, the index just went up. Talk was that we had passed the halfway mark in the credit crisis, that more than half of all the total number of related write-downs which would eventually be announced had been revealed.

And the Dow soared– hitting 13,058 in early May. Sure, the index was well down on its all-time high of 14,164 set last October, but at least it was within 10 per cent of that peak.

The FTSE 100 hit its nadir a week later. On 17 March it had fallen to just 5,414, 1,500 points below the all-time high of 6,930 set on the last day of the last century.

By 19 May, the FTSE was standing at 6,376.

It seemed the great bear run was over.

But one dissenter was George Soros. You may recall, at the time he made headlines when he talked about the worst financial crisis since the 1930s, about how we were paying the price for 25 years of policy mistakes – of over reliance on the rate of interest.

He also predicted a second dip in the stock markets.

Well in some parts of the world, in China for example, the markets have just gone down and down since then. But then the Chinese stock market was a bubble. It had bubble written all over it. We said so. Lots of people said so. Some Chinese people said, “In China it is different, you are applying Western ideas to China.” But, of course, it was a bubble, and it has burst.

But it was supposed to be like that in the UK and US. P/e ratios are low. In fact, so low have p/e ratios fallen, that Barratt actually saw its market capitalisation fall below projected profits for the year.

But while house builders have seen their share price fall – quite ridiculously, really; people say Gordon Brown did not fix the UK’s roof when the sun was shining, but what about house builders. They have had ten years of plenty, and now analysts are panicking over their stability.

But, at close of play on Friday, the Dow stood at just 11,842, just 140 points above the year low. The FTSE 100 was down to 5,620, 200 points above the year low.

And this is one of the curious things of this saga. It is now eight and a half years since the FTSE 100 peaked. The Dow is only just over the peak from eight years ago. This, at a time of falling house prices.

The collapse of asset prices is symptomatic of a 1930s-type crisis – which was characterised by deflation.

Now, stock markets are not good at telling the future. Economist Paul Samuelson once famously said: “The stock market has forecasted 9 of the last 4 recessions.”

The recent surge in stock prices, on the verge of such a major economic slowdown, also seemed daft.

It took 25 years for the stock market to recover from the 1929 crash. It does sometimes feel as though the stock market has still not recovered from the 1999/2000 crash.

The housing boom that followed that crash may have just disguised the true story.

May 2, 2008 | posted by Michael Baxter in Markets | comments (1) |

As the new mood of optimism deepens, the Dow went within a whisker of its start-of-year price last night, while the biggest single reason yet for optimism emerged from the US, as Warren Buffett struck.

Last night the Dow closed at 13010 points, the highest level since the 3rd January.

Latest official figures revealed that the US managed to avoid recession in the first quarter after all, with annualised growth coming in at 0.6 per cent.  And with all those measures we spoke about above – Dubya’s tax give-away and Bernanke’s money drop, markets have concluded the worst is over and that maybe the US will avoid recession after all.

There are reasons why they might be wrong – that is a story for another day, but the world’s richest man at least seems to think now is the time to buy.

Remember, the Dow peaked at over 14,000 points last year, so if a recovery is beginning – the shares have got plenty of room for growth.

According to Bloomberg, Buffett is set to go on a buying splurge –with $40 billion earmarked.

Buffett enjoys an advantage others lack – he has got lots cash he can draw upon.       As the Bank of England said earlier in the week, in its financial stability report, it is possible that risk is suddenly being priced too high.

In fact, the faithful are descending on Omaha at the moment, because it is that time of the year when the world’s most popular AGM will begin.

Each year, Mr Buffett ascends his mount, and gives a sermon to the eager ears of shareholders in his Berkshire Hathaway.

He appears to know his stuff.  When he bought the company in 1965, shares were trading at $1278 a share, now they are worth over $133,000.  And the great man is buying again – reason for hope.

But before you get too carried away, bear in mind Capital Economics is still predictinig a contraction in GDP for the current quarter.    Right now, there are clearly opportunities for the savvy buyers – and Mr Buffett is as savvy as they can get – but don’t fall into the trap of thinking it’s a one way street – upwards from now on.  Uncertainty has not gone away.