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The Ultimate Guide to 2010 Investment Predicitons and Outlooks
I have recently come across this guide which I find to be very useful as TPC has compiled a comprehensive list. They have included reports from analysts, gurus, hedge fund managers, and investors. Enjoy at your own risk.
Wall Street Banks
Hedge Funds & Investment Gurus
Actionable Ideas, Alternative Assets & Potential Potholes
The Outlook Abroad
You can find more information about TPC here.
Al-Hamour’s List: 2008 Doves of the Year
First and foremost, I would like to welcome all of you to 2009 and hope that you have enjoyed the holidays. After being away for so long I thought it best to start the year with a light but meaningful post.
As a follow up to 2008: Year of the Dove I have decided to create a list that gives the reader a snapshot of global central bank policy in 2008. Some of these men may have been named ‘most influential’ people by Newsweek, but on Al-Hamour these men are merely doves incognito. They are commended for their dovish efforts in trying to quell their respective financial markets and economies by using interest rates as their weapon of choice.
I have ranked each central bank by the percentage change for the 2008. This means that if at the beginning of 2008 the interest rate was 10% and finished the year at 5%, I would consider this a 50% drop in rate as opposed to an absolute 5%. In addition, interest rate cuts during the first quarter of 2009 will not be taken into consideration but it looks like the European Central Bank and the Bank of England are in the lead for this year’s list.
The list includes 55 entries but I have decided to only provide more detail on a few.
Source: Al-Hamour, Bloomberg
Source: Al-Hamour,Bloomberg
Source: Al-Hamour, Bloomberg
Source: Al-Hamour,Bloomberg
Source: Al-Hamour, Bloomberg
Source: Al-Hamour, Bloomberg
Source: Al-Hamour, Bloomberg
If you would like the sources of all the rates used for the different countries please email me and I will send you the information.
2008: Year of the Dove
The Chinese zodiac is quite unique in its construction. Based on a cyclical perception of time, the twelve animal signs are structured around a 12 year cycle. Starting with the Rat, they each represent various characteristics of people that are born during the Chinese year. [1] In China it is currently the Year of the Rat, a year symbolizing hard work, shrewdness, and ruthlessness. 2008 is also considered a lucky year as the number 8 is very auspicious and in Chinese, sounds similar to the word for prosperity or wealth.
The white dove and olive branch is arguably the most recognized worldwide symbol for peace. References of the dove range from The Holy Qura’an to Pablo Picasso’s artwork. [2] You can even purchase a War & Peace watch with a rotating Dove from the United Nations online bookshop for US$45.95. [3]
In the finance world however, references to doves are not exactly meant to illustrate peace. Instead, financial jargon defines these words as follows:
- Dovish: A Central Bank that is cutting (reducing) interest rates
- Hawkish: A Central Bank this is increasing interest rates
Simply put, a Central Bank that reduces the interest rate at which commercial banks can borrow at is said to be Dovish and vice versa. In general, interest rates lower debt cost. For example, in Kuwait, loans are usually quoted as a percentage over the CBK rate and most of the loan terms are actually pre-determined by the Central Bank of Kuwait. That means that if you took out an Al-Afdal loan from Gulf Bank today [4% + CBK rate] your interest would be 8.5%.
As we all have come to know, 2008 has been terrorized by the banking and financial crisis and according to the latest SMS circling Kuwait, a year where only two banks are expected to remain - the Blood Bank and the Sperm Bank. However, the Central Banks have many tools at their disposal to deter such an event from becoming a reality. Increasing or decreasing interest rates are one of the many gadgets used to promote financial and economic stability. During these moments of crisis the Central Bank policy makers have joined together in a coordinated effort to reduce interest rates hence making this year a Dovish one.
The graph below highlights the year to date interest rate for the US Federal Reserve, Bank of England, and the European Central Bank. The US has been more aggressive than its peers in reducing interest rates as it struggles to keep its economy afloat.
Interest Rates - YTD %
- Source: Bloomberg
- ECB: 3.75%
- US FED: 1.00%
- BOE: 4.50%
Policy Effectiveness:
Merely noting the net change in the interest rates does not give a clear picture as to whether the policy was effective in achieving its objective. One measure of credit and liquidity risk in the banking system is the TED spread. It is calculated by taking the 3 month London Interbank Offer Rate [LIBOR] and subtracting the 3 month T-Bill yield.
- LIBOR: It is a measure of how much banks are willing to lend US dollars to each other. The reported rate is an average of participating banks.
- T-Bills: The interest rate at which you can borrow, essentially risk free, from the US government.
As a rule of thumb, when the TED spread is:
- High: Banks are less willing to lend to each other as they believe other banks are not safe
- Low: Banks are more willing to lend to each other as they expect to get their money back
In this particular case, policy makers reacted to a nosedive in global equities during September and scrambled to take action. From September until about mid October, the TED spread continued to rise as banks simply stopped lending to each other. However, after interest rates were reduced globally the TED spread started to come off its high.
- All time High: 4.57% [October 10, 2008]
- All time Low: -0.034% [September 12, 2001]
TED Spread
- Source: US Federal Reserve. Bloomberg. Al-Hamour.
We can see that the coordinated rate cuts were effective in reducing the credit risk in the banking system as banks became more willing to lend to one another. As of November 1, 2008 these are where things stand:
- TED Spread: 2.41%
- LIBOR: 3.02%
- T-Bill: 0.61%
However, when comparing the TED spread to the May 1987 average of 1.7% and the October 1987 average of 2.26% we are still at higher levels. This is somewhat anticipated as the current crisis is far greater in depth and breadth than The Crash of 1987 which started on October 19, 1987 in Hong Kong. [4]
TED Spread
Source: US Federal Reserve. Bloomberg. Al-Hamour.
In summation, I would like to leave you with a recap of the main points discussed in this post and what you can anticipate going forward:
- Dovish Central Banks help reduce the overall cost of debt and aid in de-leveraging of the economy
- The TED Spread is a measure of credit and liquidity risk in the banking system
- Expect LIBOR rates to decrease as liquidity is injected into the system and inter-bank trust is restored
- Expect Central Banks to continue to reduce interest rates
- Consider making a deposit at your local Blood Bank and/or Sperm Bank
I will be posting a follow up to this topic later this week and will discuss the various Central Bank actions year to date.
Please do not hesitate to leave a comment or send me an email if you have any inquiries or would like to discuss the post.
[2] Dove of Peace. Pablo Picasso.
[3] Online Bookshop. United Nations.
[4] Investopedia
Living under a rock
I would like to start by saying that this is in no means a research piece on the markets, but a commentary that will hopefully shed light on the current frenzied global situation.
Deciding to spend more time with my family this weekend is the main reason I was inspired to write this piece. In fact, it was my father’s birthday and I got to spend a few hours discussing various topics, among which was the ‘Dead Cat Bouncing Theory’ – a theory he introduced me to. So before I begin, I just wanted to say ‘Thanks Dad’.
Trying to make sense of current capital markets is like trying to understand someone speak during a rave: the music is deafening and you are being shoved around to the point at which you feel that you are in a pinball machine. There is so much ‘noise’ that you lose track of the conversation’s crux and end up feeling very confused. Therefore, it is important that you remove yourself from the situation and quietly assess the events taking place. As I mentioned before, I am not here to predict the outcome of the global marketplace; I simply want to block out some of the noise and share my two sense.
For those of you who have not been following the financial news and have been living under a rock, the global markets have experienced a downturn over the past few months with an estimated $7.9 trillion of wealth just vanishing into thin air[1]. To put this into perspective, imagine the site of destroying 26 Airbus A380’s! The US Federal Reserve Bank Chairman, Mr. Ben Bernake, is taking drastic measures to try and quell the markets by slashing interest rates and rescuing financial institutions, and in the process coining the term the Bernanke Helicopter. The reason why so much attention is being given to the US market is simply because it represents roughly a quarter of the world’s GDP output equating to the largest share amongst all the other countries. The phobia has always been related to the notion that if the American economy sneezes then the rest of the world will catch a cold. Now although I believe in that statement, I am not sure it is completely true.
Today’s financial and economic markets are facing paradigm changes in the underlying fundamentals they were based on for the past half a century. China, currently the world’s third largest contributor to the global GPD, is estimated to overtake the United States’ 23% contribution to global GDP by the year 2020. In addition, the Middle East economies, benefiting from an insane $100 per barrel oil price have a combined reserve account relative to that of China’s currency reserve of $1.5 trillion[2]. Both regions are facing continuous inflation, which pressures the respective Central Banks to behave in a more hawkish manner, cubing their double digit GDP growth. The contagious effect from the US sneeze will also have a lagged effect on the rest of the world’s economies but nothing that a shot of fresh lemon juice and spoon full of honey won’t fix. So although the Asian and Middle East economies are slowing down, the strength of corporate balance sheets aided by strong government surpluses and spending will lessen the extent of the overall cold and will aid in a swift recovery, relatively speaking.
In other parts of the world – in places where there are more burger joints and hot dog carts than shawarma stands and noodle bars – the situation is quite different. In an economy driven by consumption, any hiccup to the average American’s ability to spend has a material effect on the overall growth of the economy. Just try to imagine a scene in which a woman who is out on a mission to find that perfect dress finally succeeds, only to realize that her husband’s VISA card was declined. Trust me, it is not a pretty sight. To give more color to the magnitude of the situation I should remind you that the 213 million middle class (those with annual income of $18,000 - $55,000) Americans, representing approximately 70% of the population, are already witnessing their savings plans – and, more importantly, their home values – dwindle away like the strong scent of a beautiful woman in a cool summer breeze. Additionally, in a flat to negative savings rate environment where the average American is no longer able to borrow in order to quench the never ending thirst of the US economy, the canvas is starting to look more like Edvard Munch’s The Scream rather than an exquisite Monet. I am not implying in any way that the sky is falling but simply want to prepare myself for the strong gales ahead.
From an economic standpoint, the current situation is being compared to the Great Depression in the 1930s, a tragic event that left the US economy crippled for many years. The reason for the resemblance is highlighted in the anticipated similarities to the extent of the damage. Although the current situation has also been compared to the late 1980’s market crash and Dot-com bubble crash in the earlier part of the 21st century, I do not agree that they are comparable.
During the mid 1980s, the scene on Wall Street was filled with high powered investment bankers driving around in exotic sports cars, buying up anything that tickled their fancy. The introduction of junk bonds enabled corporate to issue large amounts of debt at high interest rates which gave birth to the leveraged buyouts, merger and acquisition mania, and an era of hostile takeovers. I highly recommend watching Barbarians at the Gate and Wall Street to get a sense of what was going on during that time. On October 19, 1929 a day later know as Black Monday, the Dow Jones Industrial Average Index (DJIA) tumbled 22.6% translating into $500 billion of value evaporating like a puddle of water on a hot summer’s day in Kuwait. The Fed intervened and scrambled frantically to stabilize the situation and the market retraced back to post new historical highs.
As for the bursting of the Dot-com bubble, this is another example of an industry specific situation in which the actions of the Fed had managed to mitigate and contain the spillover effects that would affect the rest of the economy.
I will follow up with an article explaining how the Dead Cat Bouncing Theory conveys the resemblance between the current crisis and part of the Depression.
[1] World Federation of Exchanges. July 2008
[2] IMF