Wednesday 13 January 2016

Royal Bank of Shorting



"So what to do now in equity markets? I am getting many emails asking me about the RBS (Royal Bank of Scotland) sell everything except high quality bonds call. What do I think about it? The cynic in me says that the fellow in question who has made the call, Andrew Roberts, has seen several things happen around him."




To market to market to buy a fat pig. Whoa! What happened? Markets sold off sharply in New York last evening after a flat day here in Jozi, as a collective stocks returned to levels last seen in October last year. That does not sound too bad, you start to see the pundits bring forward the idea of a "correction" which is a technical term and therefore I shudder. The definition of a correction is when a market sells off ten percent from the recent high, in the case of the S&P 500 we breached that mark, the headline that I read suggested that the Dow Jones Industrial Average had narrowly avoided it, I read an article that suggested that it is down 9.9 percent from recent highs.

It is always unsettling when the value of ones portfolio is lower, never a *nice* feeling at all. As I tried to explain yesterday, if you are adding to your portfolio long term it is actually welcome news, yet if you are all in (no more to invest) it is not fun to watch. Year to date stocks are down sharply in the US, both the Dow and the S&P 500 are down around 7.5 percent, the NASDAQ is down nearly 10 percent. Spare a thought for the oil producers, we are two weeks into the year and Brent Crude is down a whopping 19 percent whilst Nymex crude is down 18 percent, a market report that I read in the WSJ pointed this out. Astonishing really. In the space of two weeks that the oil price could have sold off one-fifth from the position of already having sold off sharply. I guess multiple worries over the health of the Chinese economy is what is driving the price of oil lower, it does seem a little overdone.

Equally overdone is the Chinese equities markets, should it close a bit lower today, it will be in "bear market" territory, another technical term for a sell off of more than 20 percent from the last high. The market in Shanghai is down over 2000 points to below 3000 since the middle of June last year, that quite simply sounds like a roasting, never mind a bear or correction. Over five years the Shanghai stock exchange is up a mere five percent. Over 10 years it is up 140 percent.

US treasuries are again in high demand. A WSJ article that I read (same as the oil one above) said that indirect bidding on the Wednesday auction, which is a sign of foreign demand, was the second highest in a decade. And that is through the financial crisis. Also attracting a lot of attention, and the company must be thrilled about this, is the AB InBev bond sale (to finance the SABMiller purchase), attracting over 2 bucks for every buck sold.

"Bucks" being Dollars of course. The reference to bucks for Dollars, from my reading, may be traced back to a Dutch settler in the US talking about deerskin, "bucks". Conrad Weiser made the reference back in 1748, four and a half decades before the first US Dollar was actually minted. Bucks = deerskin, which was a regularly traded commodity back then. At least the origins of buck is better than the origins of "grand" (a thousand dollars), the term is said to have come from the mob underworld over a century ago, when a "grand" was worth a whole lot more than today. 1000 Dollars in 1900 on an inflation adjusted basis is worth 28,719 Dollars, according to my Westegg inflation calculator. A sizeable amount of money.

Back to beer and basics. The FT article (Demand soars to record $110bn-plus for AB InBev bond deal) shows that 110 billion Dollars of demand for the 46 billion Dollar offering is a sign that investors are flocking to the relative safety of high grade corporate debt. Good for them (AB InBev that is), this relative wobble in the equities demand. Remember that the company actually opens their secondary listing here tomorrow, as far as I understand it, AB InBev chief Carlos Brito will be in town. Perhaps he flies in tomorrow, toots the horn (vuvuzela) and then heads off. He may confuse vuvuzela with Venezuela. Or not. Paul is considering going to the JSE to perhaps "mingle", get a photo, I am pretty sure that CNBC Africa will try and get an interview with him. Who knows! All I guess will be revealed later tomorrow.

So what to do now in equity markets? I am getting many emails asking me about the RBS (Royal Bank of Scotland) sell everything except high quality bonds call. What do I think about it? The cynic in me says that the fellow in question who has made the call, Andrew Roberts, has seen several things happen around him. And by that I mean colleagues getting pink slips, the bonus pool shrink, risk taking tolerance of his bosses evaporate, compliance levels heightened, meaning more admin, and junkets and jaunts at the shareholder expense end abruptly. Forget not that the UK government owns 82 percent of the business, effectively it is a "peoples bank" in the truest (nearly) form. The example of the government bailout having not worked here with RBS is an understatement. That is the backdrop to the institution where Andrew Roberts works.

I am being unfair, he is probably as professional as the next person. I often think though that for every "big call" like this I see, I see many ignored positive calls. Roberts said that he expected European, US and in particular UK markets (due to their exposure to China) to fall between 10 to 20 percent. Is that a reason to sell everything? Besides, as we pointed out, the Dow and the S&P are three quarters of the way there already, year to date, the NASDAQ is there. Well. Maybe. Whilst it may be a time to strap on the helmets (don't forget your GoPro) and buckle in, remember that you don't need to generate trading ideas for your clients, you own companies. Talking GoPro, the stock is down nearly one-quarter after hours as the earnings and guidance fell flatter than a flip phone low resolution camera pic. GoPro now trades on a multiple of close to 10 times. I am thinking that we will see more of this, not less of this, once were warriors turning into puny nerds.




Linkfest, lap it up

Here is a look at how things have changed compared to inflation - Is Oil "Cheap"? Given the growing number of people on our planet and the growing middle class, property as an investment has done well compared to inflation.



As technology rapidly changes the way the world works and the way that businesses do things, us as the work force needs to bring new skills to the table. The big drive at the moment is to get as much education under our belts as we can, which is great but does it improve creative thinking? In the not too distant future, machines will be able to do the repetitive jobs and also be able to crunch complex data. The one thing that machines are not able to do is be creative and that is where the value in a future employee will lie - What Skills Will People Need In the Future?

If this was planned by Dell it will be a master stroke - Michael Dell in line to make billions as FCC buys back airwaves. Dell has been buying up TV stations since 2011, the government now want to buy back the spectrum to sell to mobile operators like AT&T and T-Mobile. According to records he has "only" spent around $80 million to buy the TV stations, not a bad return on investment!




Home again, home again, jiggety-jog. We are probably in for a bout of selling today, Japanese shares are under pressure as a result of a rush to quality, i.e. the Japanese Yen being a safe haven. Expect more of this, know that it will eventually settle. Stay the course, hold the line.




Sent to you by Sasha and Michael on behalf of team Vestact.

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