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Saturday, September 29, 2012
The Eurozone once more found itself at the heart of the matter this week, as concerns over rising debt and falling economic numbers marched front and centre. And marches were the order of the day in both Spain and Greece, where workers demonstrated against further austerity measures. With the honeymoon period after the ECB QE action just four weeks old, markets seem to doubt the long term effectiveness of the measures, and reacted negatively to further poor news from the region, despite China’s central bank joining in the global cash giveaway.
On Thursday Spain announced further austerity measures, confirming some already passed through into the law of the land and adding some new. The spending cuts and tax rises confirmed for 2013 now stand at €13 billion (though mostly part of the €65 billion austerity package announced earlier this year). As the announcement was made, yields on Spanish bonds, which had been falling since the ECB’s promise to buy €40 billion of member countries bonds each month, rose above 6% again. Protestors flooded the streets of Madrid, in scenes that were replicated on the streets of Athens, where a nationwide strike on Wednesday was used to protest against another €13.5 billion of austerity measures currently moving its way through the Greek parliament.
On Friday, the independent audit of Spanish banks confirmed that capital adequacy needs were in the order of €60 billion. The country has already been pledged up to €100 billion from central European coffers earlier this year to recapitalise its banking sector that is struggling under the weight of Spain’s failing property market.
Meanwhile, as Greece and Spain struggle to swim against the tide of their faltering economies and still increasing debt, economic figures from Germany paint a gloomy picture of Europe’s largest economy. Jobless claims rose for the sixth straight month and business confidence fell for the fifth month in succession.
Over in China, the economy continues to falter. From roaring strength a year ago, the pace of slowing growth is gathering. Increasing costs and a tightening export market has now begun to damage corporate profits significantly. For five months now, profits at China’s major industrial companies have been falling, and in August now stand 6.2% below a year earlier. However, China injected around $58 billion into the money market in an attempt to lower rates and spur growth.
In the United States, economic numbers have turned south again. The GDP growth in the second quarter was downwardly revised from 1.7% annualised to 1.3%, and durable goods orders fell by a whopping 13.2% in August, despite a rise in non-defence goods of 1.1%. Business activity in the US declined for the first time in three years, according to the Institute for Supply Management, with its key index falling from 53 in August to 49.7 in September indicating a marked slowdown on its way. Despite this, home prices rose by around 1.5% in July, making a 12 month gain of some 17% for new homes, and new home sales were nearly 28% up on this time last year (though August did see a small retraction from July).
Over the week, the Dow Jones Industrial Index fell by 1% to close at 13,437.13, and the S&P slipped by 1.4% to 1440.67. Technology shares were hardest hit, with the Nasdaq 100 falling by more than 2% to 2799.19. In the UK, shares as measured by the FTSE 100 Index fell by 1.9% to stand at 5742.07 at the close of business on Friday.
China’s move in the money markets has followed central bank action by the ECB, Fed, and Bank of Japan in the last few weeks. Despite huge quantitative easing programs to date, the economies of both the US and Europe have failed to show consistent and sustainable progress to growth. Indeed, the announcement of a sizeable downward revision in second quarter US growth figures indicate the precarious situation that the world’s largest economy is in.
QE has, in fact, done little else other than help house prices recover in the US. This has fed through to some better consumer confidence numbers, but the follow through to sales has not been robust enough to promote a marked turnaround. Hence unemployment continues to hold stubbornly high.
Governments – both local and central – around the world will continue to be forced to cut spending and raise taxes in efforts to bring debt under control. QE is merely a ‘papering over the cracks’ exercise that will increase pent up inflation - already being seen in US housing stats – and delay the inevitable.
The European Finance Ministers’ meeting on October 8th, when Greece’s request to delay the meeting of its budget targets by another two years will be discussed, could prove important in the short term market momentum. I expect the meeting to ratify Greece’s request, with a stern warning of dire consequences should the budget deficit reduction target not be met in two years. Markets may move higher in the short term on the back of any such announcement, but without solid financial proof of an improving debt and economic situation in Europe, the inevitable is just being delayed.
Equity markets have trod water for several years, though the waves have been choppy. I expect they will continue to do so as corporate profits, which have been bolstered by job cuts and cost cutting measures, are squeezed over the coming years. It would not surprise to see dividend growth slowing and equity valuations react accordingly.
Wednesday, September 26, 2012
After their rally through September, Facebook shares have slipped away again. Not surprising really. They were overpriced by quite some margin going into the IPO, and are still around 45% below the public offer price of £38.
Unfortunately the price was ramped by greed, corruption, and fraud going into the IPO. In fact, the stock price has been overplayed for a good few years. In my opinion its still a deal higher than fundamentals and the business dictate.
Brokers made hundreds of millions from dealing Facebook shares before you even got a look in. Friends of the firm made even more. Facebook didn't tell you about its waning advertising revenue. Investment advisers never questioned the numbers. All the insiders with influence sold a bucket load of shares to the public, and increased those numbers just before the issue. It was a great marketing job.
But the real story began in 2007, when ex-employee Vince Thompson wanted to sell his shares. So a new market opened up that would allow billions to be made from deceit, lies, and even thin air!
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Sunday, September 23, 2012
As widely forecast last week, the Bank of Japan followed the lead of the ECB and the Fed by announcing an increase in its quantitative easing program. The world’s markets are now in a phase of treading water as they wait to see what effect the massive proposed injection of cash around the globe will have.
Over the last three weeks the ECB has announced a never ending bond buying program, and the Fed that it will buy $40 billion of mortgage backed securities every month with a ‘zero’ interest rate policy through to 2015: the so called QE3 Program. Now the BoJ has increased its own asset buying program to 80 trillion Yen form 70 trillion, and extended it through to the end of 2013.
Recent economic figures for Japan have pointed to a marked slowdown in activity, and a worsening of its trade balance. The BoJ move has been taken in an attempt to stimulate the economy and force its exports up by driving the value of the Yen down.
Meanwhile, markets ignore the latest statistical releases as being lagging and historic, taken before the actions of the triumvirate of the world’s dominant central banks.
In China, manufacturing PMI data has now shown a decrease in activity for 11 straight months.
Economic releases were somewhat mixed in Europe. The PMI for manufacturing and services across the Eurozone fell once more, to stand at 45.9 in September. However, the trade surplus grew in July and wages are rising. These last numbers were taken before the summer period that has seen German industrial activity slide, and the world economy decline. It’s likely that slowing world demand will damage export numbers for the region.
In the UK, recession is biting into government finances hard. August’s budget deficit was the largest on record as spending on welfare ballooned and tax revenue shrank.
In the United States, the housing market continues to respond to stimulus. Housing starts rose by 2.2% in August from July, and sales of previously owned homes rocketed by 7.8%. Overall, sales were 9.3% higher than the same period last year.
With central bank stimulus growing, and the winter period drawing close, it might be expected that oil prices would rise again. However, after touching $100 per barrel last week, crude futures retreated to $93. The fall has been attributed to a lack of conviction that central bank action will have a lasting impact and a rise in supplies as Middle East concerns ebb. However, gold has risen to 6 month highs as the QE measures taken globally seem likely to stoke pent up inflation.
The Dow Jones Industrial Index fell by just 14 points to 13579.47 this week, while the S&P 500 sagged by 5 points to 1460.15. The Nasdaq put on 6 points to end the week at 2861.64. In Europe the FTSE shed 63 points to close on 21 September at 5852.62.
The BoJ’s move is clearly part of a concerted and pre-arranged global effort to stimulate the economy. However, domestic demand remains subdued. Massive boosting of money supply by QER, and the relaxing of monetary policy, would be expected to devalue a currency. However, when all central banks are taking similar action, surely devaluation will remain a pipe dream – a new state of multi-devalued currencies will exist and equilibrium remain at a lower level.
I expect that the overall idea is to excite the housing markets, and promote further building (as seen in the US). If house prices can recover, then this will generate a healthier sentiment among consumers and promote economic growth. The problem is, we’re seeing a recovering housing market in the US but with no follow through to the wider economy and job creation.
I have to question if the world’s governments are simply putting off the inevitable and moving us more slowly and more painfully to another, even deeper and harmful, financial crisis, when the world realises the extent of the new debt build-up coupled with pent up inflation.