"The Chinese authorities have decided that margin trading is not good. In other words, borrowing money in order to own securities, using the securities as collateral. You know how it works, you just pay the interest portion and enjoy enhanced upside, of course as highly leveraged currency speculators found out, you can lose your shirt in an instant. The Shanghai stock exchange fell the most in a single day in over six years this morning in the trading session, down over 7.7 percent. Bearing in mind that it is up a lot in that time too, this is a correction of epic proportion, everyone rushes for the exits at the same time. Phew, if anything we have learnt that you should a) not rely on the status quo and b) leverage is not bad, too much is however very bad."
To market, to market to buy a fat pig. What a weekend on the sporting front, on the personal front both my youngest and wife had a birthday on Saturday, we snuck to the fairest Cape of them all to have a couple of days away from Jozi. Joburg is on fire from traffic, size and scale relative to Cape Town, the weather is also better here. The scenery absolutely smashes what passes for scenery here. I always maintain that tourism should and could be our biggest industry, you cannot replicate natural beauty as hard as you may try. We boast some amazing places here, amazing people too, we are mostly friendly and easy. And pretty cheap, ironically that would change if there were a lot of people that came here, it would become more expensive. Personally I do not care who owns all of the properties around, if they cost X or Y and that is a LOT more than what it was before, that means people want to live here and spend their money here. Rich people by extension employ many more people around them, indirectly and directly. We should encourage rich people to come and live here, enjoy the better weather and employ people. Enough about me and my personal observations, back to the small matter of markets.
Markets across the sea and far away, in the US, were much higher on Friday in a volatile week. I read this blog post from Ben Carlson, Observations on the Investment Process, this particular piece struck a chord with me:
"These days I almost find it amusing when people are surprised by short-term market outcomes. Last week after three straight days of big losses, stocks rallied yet again. I saw a few snarky comments like, "Yeah this is totally healthy behavior." People are in constant search of an explainable narrative on the markets. There's never going to be a "normal" or "healthy" market."
I agree, if you want healthy markets, go to the vegetable market and look out for the freshest tomato. In the very short term markets can "do" almost anything. The market is not a beast conspiring to work against you, or "on your side" ever, the equities market is quite simply a collective of company prices. It is what investors are willing to pay for them today, based on all the news that you have at your disposal, for future earnings. You are buying part of a company, based on the news you know, for earnings that you think will be much better than today. And continue to grow and get better.
The local market here saw a monster rebound again for the resource stocks, the stocks as a collective were up nearly three percent, industrials however had a poor day, leading to a market marginally lower. I am still absolutely amazed by the wild moves in the gold companies, how is it possible that as a collective they are nearly 30 percent up on the year? The GLD gold trust is up nearly 8 percent year to date. The GoldFields ADR is around 26.5 percent higher, was it just a case of being priced for being broken, not so much any more? It is still a market that I am going to ignore forever as an investor, the end product might be very exciting for historical investment reasons (it is shiny, our ancestors thought so too, there is just enough of it, not too much of it), it just has no utility.
Reading more about the Swiss National Bank and their decision to drop the 3 year Euro peg, what is interesting is that only the folks that got smashed are being pointed out. In other words, I am only hearing about the fellow from Everest, Marko Dimitrijevic, who has had to close his flagship fund. As a result of the Swiss Franc's violent moves, if you have ever followed the history of this guy, you will know that he specialised his investments in emerging markets. Hmmm... Wait, there is more! The WSJ has an article titled Swiss Franc Bets Turned on a Dime. If you read the story you wonder why anyone trades in currencies at all, private individuals that is. Only 30 percent of folks achieve positive returns. The folks that know what they are doing (it turns out not all the professionals did either) are larger in size and scale. It seems that mom and pop investors suddenly had turned into currency specialists and carried out the back door, as a result of too much leverage.
Adding on from that part, too many little speculators at the fringes in a massive pool of liquidity, the giant swimming pool of 5 trillion Dollars of liquidity, once again it turned out that counter-party risk was most important. In some cases there was no liquidity, even though it was supposed to be provided. Always make sure that there can be a way out, easily in should not mean no exit. And too much leverage really is a very bad thing, I suspect that there are going to be rules changed. This "problem" has now gone mainstream, the West Ham (the Hammers) shirt sponsor Alpari UK is now insolvent. True story. And their clients are lying in the gutter. I might not agree with the types of trading and the allures of riches in the currency markets, I do not think that it requires more regulation however. Let everyone, including the institutions take their chances. Nothing like a good washout to crystallise the thought process.
Leverage has taken another pasting. Or wait, no, that is all wrong. The Chinese authorities have decided that margin trading is not good. In other words, borrowing money in order to own securities, using the securities as collateral. You know how it works, you just pay the interest portion and enjoy enhanced upside, of course as highly leveraged currency speculators found out, you can lose your shirt in an instant. The Shanghai stock exchange fell the most in a single day in over six years this morning in the trading session, down over 7.7 percent. Bearing in mind that it is up a lot in that time too, this is a correction of epic proportion, everyone rushes for the exits at the same time. Phew, if anything we have learnt that you should a) not rely on the status quo and b) leverage is not bad, too much is however very bad. Learn to keep a level that factors in worst case scenario.
Things we are reading, we think that you should read them too
Arguably our generations greatest innovator, Elon Musk keeps pushing the boundaries on many fronts. This time he is trying to make the internet accessible to everyone - Elon Musk wants to spend $10 billion building the internet in space
Having a look at Google's innovations - From driverless cars to pills that sniff out disease, these are Google's biggest moonshots.
Low fuel prices help this trend - Scientific Proof that Americans are Completely Addicted to Trucks. Ford sold more F-series last year than the entire new car market in RSA last year, having a large middle class and low fuel taxes helps (cheap fuel).
These charts are well worth your time - 29 Charts Worth Your Time. The topics range from investing to climate change and a few others.
Home again, home again, jiggety-jog. Markets are marginally higher here, that is possibly a catch up to the US markets there. Remembering however that US markets are closed today, Martin Luther King day today, the third Monday in January each and every year, there are many times that I think that it is much more sensible to have public holidays the day before or after a weekend. It would make life so much easier.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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