down & out

Market very nervous. I mentioned concerns about things like Eastern Europe, PIIGS, etc. in prior blogs. Sovereign debt issues are really weighing on the market. We also had China tightening a few weeks ago. And Obama and other leaders threatening severe regulation of the financial sector. Taken together, we’ve had CDS spreads spike up, risk appetite wane, volatility up and equity markets down.

Nervous markets should not be completely unexpected. Its surprising the severity of the market reaction given each of those things was largely a known issue, not really a surprise.

China needs to be careful of a bubble so it has acted on that issue. PIIGS and Eastern Europe issues were widely forecasted. Stiff financial sector regulation was foreshadowed long ago.

The effects of this could linger awhile and if compounded by more confirmation of expected or new unexpected bad news, the correction could head down another big leg.

Still, monetary policy around most of the world is highly stimulatory.

Happy trading
Tom

Co-Author, Enterprise & Venture Capital, 5th Edition, Allen & Unwin, 2009

Coming back

My notional portfolio took some heavy unrealized losses in the recent correction.  Was down about $350k I think.  Now the markets have recovered a little and my positions are making up some ground, just down $150k or a little less.  That may sound bad but its less than my traded risk mates.  Those guys were hammered in the correction.   I am long S&P 500, short long treasuries, long emerging markets stocks, unhedged on the USD.  Also a couple positions in Electricitie de France and Barclays.

To that I added 3 new small positions today, I think they will be short holding periods.  I went with Hooray and another NASDAQ listed China tech firm plus added British Petroleum.  All three were really a punt, believe it or not, put on because I noticed that despite they were still falling despite the very recent uptick from the correction.  I didn’t do any fundamental analysis.  I did check the news on them and didn’t see a reason for a serious correction for those 3 stocks so I took a punt on them. Fingers crossed.

In my real money, things are still long equities with a decent focus on ethical companies.  Its sagged a bit during the correction but not as severely as my notional holdings in the competition with my mates.

Wipe out!

The past week was pretty rough on my portfolio.  Being long stocks and short treasuries resulted in a loss of about $200k after being up at one stage $80k.  Speaking with my colleagues, they have quite a number of relative value trades on that are losing at the moment too, down $300k plus.  Brad was correct to short the Nikkei but was still down $250k overall. Interestingly, we are all holding to our views for the first half of 2010 and no one’s changing their positions / views yet.   Same for me but I have read some compelling views that US fed funds rate is not going up this year as deflation is still the big worry in the US.   Yet on Bloomberg data, the odds according to the market are in favour of rate rises in 2010.

For now, I am staying long equities and short treasuries in the competition with my mates.  For my retirement money, I am staying long equities, have a good focus on ethical investments and have been reducing bonds in favour of cash (as still expect yields to rise). 

I saw an interview with the CIO of Calpers last week, just before the hiccups.  He also favoured equities, esp. emerging markets, he like corporate bonds but not treasuries and they planned to put more money into infrastructure and private equity.  Most of his views mirrored the positions I had taken.  We will see if it works out.  Calpers can afford to lose more than me and wait longer too!

Happy trading and investing (and Australia Day!)

Tom

Co-author, Enterprise & Venture Capital, 5th Edition, Allen & Unwin, 2009

Panic stations?

Since my colleagues and I started the investment competition a few days ago, the market has had some ups and downs.  The first couple days things were gloomy for all of us. 

In the 24 hours things turned around a bit and most of my positions are winning.  It looks like I am up $70k to $80k on my $2.4m exposure since we started last week.    It changes minute to minute and I expect plenty of volatility.

Treasury yields rose, so that short position made money. Emerging markets and the S&P 500 were up a bit, so those positions moved into the black too.

My VaR limit is $500k and my VaR usage increased about $15k to $400k, still comfortably within my risk limit.

I read a lot and one of  my favourites is John Mauldin.  I strongly recommend his writings.  We do not always agree but his comments offer the clear, sober thinking that helps me make better decisions (or at least better informed, eyes wide-open decisions).   At the moment he’s a pessimistic optimist. 

I have no doubt the economic issues he rates as threats are indeed serious.  2010 is probably going to be choppy but for the moment I still like being long S&P500, EM stocks and short treasuries.  Rationale is EM growth, earnings recovering, interest rates rising.  My view might change but for the moment I am willing to accept the risks and returns that such positions offer.   My real retirement money is pretty much invested along similar thinking to the notional money in the game with my work mates.

Happy investing and trading!

Tom

Co-author, Enterprise &  Venture Capital, 5th Edition, Allen & Unwin 2009

Long S&P500, short US10 Year Treasuries

Yesterday I joined some work mates in a competition to put our trading and investment ideas to the test.  This bit is with play money.  Even with just 4 of us playing, there are a variety of views about relative value, direction, currencies, etc.  And we all work for the same employer.   We are all working within a $500,000 value at risk limit.  We’ve loaded the portfolios into Bloomberg so its calculating the market values and the VaR for us.

Most of myopening  positions are designed similarly to my personal retirement fund asset allocation at the moment.  I put a small amount in Barclays shares.  In two of my larger positions I went long the S&P500 (used a March futures contract) and I shorted 10yr US Treasuries, a sort of relative value trade on the basis of rising yields and decent corporate earnings supporting the share market and the assumption that in the near term we won’t have any extreme bad news of an unexpected nature. 

Will keep you posted as I have a couple more relative value trades ideas I aim to put on next week.

Cheers

Tomthemoneyman

Co-Author, Enterprise & Venture Capital, 5th Edition, Allen & Unwin, 2009

Don’t be enslaved by debt

Beware of too much personal consumption funded by debt. Many will already have learned this lesson the hard way but here in Australia, debt levels are still on the rise.   Use debt wisely to buy things of long term value and income generation, don’t over gear.  Its a real trap. 

 If you want freedom, to pick the job you want, to move where and when you want, then don’t be enslaved by useless debt.  Make sure your borrowings have a real future value for you and don’t over do it. 

Cheers

Tom

Co-Author, Enterprise & Venture Capital, 5th Edition, 2009, Allen & Unwin – Recommended by the Australian Private Equity and Venture Capital Association

Investment ideas

Yesterday a colleague and I ran a simple stock screen for the FTSE. We screened for at least 5 analysts rating buy, PE < 15 and those with the largest gap between current price and the consensus price target.

I generally invest via funds and focus on asset allocation rather than stock picking but the screen yielded some ideas worth exploring, including BAT and Barclays.

Have a go Ben!
Cheers
Tom the Money Man
Co-author, Enterprise & Venture Capital, 5th Edition, Allen & Unwin 2009

Gains for my employer

During the day I work for a bank. A while back I gave my internal client the name of a potential buyer for two unlisted assets they had for sale. My recommended buyer submitted the highest bid for one asset and one of the highest for the other asset. Overall, it led to a very nice couple of realized gains, even in this still recovering financial climate.

It made me feel great that my research helped achieve an excellent result!

Financial disaster heading our way in 2010?

Ambrose Evans-Pritchard of the London Telegraph wrote an interesting but depressing view on the outlook for 2010. Ugly loan books will set off a new wave of Euro banking problems. This isn’t really a surprise to me. I expect some problems. On China he reckons its fiscal stimulus is creating an asset bubble. Duh, there is probably one building up, so I expect some friction over there. Doubts about the EMU? Who doesn’t? Japan facing an immense debt service burden if its cost of borrowing rises? Yep, that’s pretty logical too before the coming decade is out.

My view on this is that he sums up well some of the things I worry a bit about but they are things that I am partially expecting.

What worries me more is the unexpected problem or the simultaneous convergence of all the issues he raises.

And earnings disappointments. My current long equities investment thesis is predicated on strong improvements in earnings in 2010. Its a risk I am comfortable to take but my fingers remain crossed!

Corporate Profits 2010

Businesses globally appear to be adjusting to the New Normal. Analysts are forecasting solid year on year earnings growth (naturally off the bad year in 2009). I agree with this and while some market commentators view PE ratios as high/expensive, I think generally corporate earnings will rise and positively surprise in the near term. While the market is far from cheap, its not yet outrageously expensive either. I am staying long equities although I worry about the withdrawl of stimulus, rising taxes and rising government debt as well as geopolitical risk. While those worry me, I am willing to take the down side risk to get access to the markets’ momentum and the continuing, fragile global economic recovery.