And what now?

Rally in equities since March already brought enough presents for those who had guts to invest in March (I was deemed mad when I was saying in March: buy equities. Shame on those who were too scared to make bold decision and missed one-in-century opportunity). Secondly, economy is disappointing. Even taking under consideration low base effect, there are no signs of steep recovery of V shape. Such recovery would justify 50-70% returns on equities across the globe since March 2009. With unemployment on historical highs, retail sales flat, anaemic growth of GDP and fluctuating ISM/PMI, investors cannot be optimistic. However, not everything is lost. Assuming that equities are (still) perceived as a gauge of how economy is going to perform around 6 months from now, next two quarters will make it or break it for equities. Further deterioration in economy plus potential decrease in companies’ earnings will make the situation very nasty. Do not forget that during last three quarters, earning season was a key driver of equities returns. The base effect was very generous however. It’s easy to jump over a paddle. Try the same with a river.

Next two quarters will not be the same. Expectations are flying high, there will be no such spectacular surprises in earnings on the upside, no more stars paying of government loan and earning nice fat billions of dollars, no more government support and printing of trillions of dollars pumping up in asset classes and less people eager to be hurt again as they were in 2007 and 2008 (although I’m not that sure about the last one – it’s again psychology rather than rationale). On top of that there are analysts that follow the market rather than examining it. They tend to rise expectations when they are high and temper them further when market has already done so. Therefore this time around, analyst keep chasing higher figure. They started to see things that are hard to see even in your dreams. Hence, do not expect easy earnings season.

What I can see at this moment, investors are sidelined again, awaiting clear signs of further direction. They don’t know what’s going on. People keep saying about correction from early May. But nothing of that sort actually happened. Since November markets are awaiting. Awaiting of clear signals from economy and from governments. On one hand, there are countries such as Greece or Dubai emirate that add to risk averse. On the other hand we still don’t know when and how governments will withdraw from printing the money (officially called quantitative easing) and leave companies on their own. And finally, strange and highly unsupportive of future growth potential policy of ‘too big too fail’ is looming over markets. Two years into financial crisis and we still don’t know how much money are needed to clear balance sheets of fallen angels. Recent additional support for RBS is the best example of how to loose money without even properly investing them!

All in all, the only way the situation of awaiting and uncertainty can be balanced out, is by economic figures. Anything more than that would be a beginning of new speculative bubble.

Jingle Bells - the thing about beliefs

Many investors tend to look at the end of year with high expectation and hope. Those who lose money during a year keep believing that next year will be better. We keep pretending that it can’t be worse, can it? And probably many of us repeated the same formula at the end of 2007. Some of us even start counting chickens. It’s a rule of thumb that December must be better than any of eleven previous months. As such, we speak about window dressing, December, January effect etc. Plenty of investors have been disillusioned especially this year, judging that extremely profitable year since March combined with December and then January effects will bring abnormal returns. Let us see what the trend is over last ten years for seven markets perceived as global ones, from both developed and emerging countries.

Exhibit 1. December returns.

Indeed, the whole December story is not that short of reasonable basis isn’t it? I’d even say that investors believe so much in December that it’s been hardly possible to find any strong bear since 2003 (bar Russian Siberian bear of 2004, Polish Brown bear, American Grizzly and Japanese Black bear – all of exceptional 2007).

How serious is December effect? Statistician would say, results are significant. But come on, for them everything with chances greater than 5% is significant. I doubt, investors would agree with statisticians. Judging from Exhibit 2, on average, returns in December outperformed remaining 11 months during the year in last 10 years examined. However, it all depends on individual level of sensitivity. In case of Nikkei 225, December returns were better than returns in any other months during the year in 67% of cases. Similar ratio has been observed for FTSE 100, DAX and Bovespa. On the other hand, Micex December yield outperformed only in slightly more than 50%.

Exhibit 2. Number of months when index outperformed or underperformed in December during last 10 years.

What does it mean in practice? I’d say, that trading on the base of December effect is nothing more than something between randomness and luck. And with increasingly higher correlation between indices, investor are moving towards randomness even more than they think they are. And here we touch the magic of behavioural finance. At the end of the day it’s this warm feeling inside you that make you buy or sell. And when during the year it’s better time to feel good about life, money and investment if not during Christmas and New Year?

Be aware however, this year it’s going to be no Santa Clause in equities if not in the whole market. But this is a story for next blog which will follow soon. Not to end at bad note, there is always January effect. From what I can see, exactly the same story as December effect. But come on, we need to believe in something. All in all, this is what investment is all about!

The story of men and their weakness

It’s this time during the year when people should be in great mood. Firstly, it’s Christmas. Or how in this country it’s called festive period – however strangely it sounds, it’s sadly true expression in the joy of something special around the corner.

Secondly, chances for snow and nice white cushion across our streets and cities significantly improve. Last year was fun, wasn’t it! People were so excited that they’ve seen 5cm of snow, that some of them decided to leave at home for almost a week or so. Obviously they contemplated this one-in-a-century opportunity to blame the weather of not being able to get to work. I guess it’s called work from home...Good news though: this year we are going to experience similar one-in-a-century snow.

And lastly, it’s Bonus time! The joy this year is even greater. The real fight of The City against Vox Populi (represent by The UK Government) is taking more tense and larger impetus. In history men keep fighting. That’s been their nature. Women, food, money, power. It’s always been like that. This ego-syndrome has been driving men’s behaviour. The bigger the fight the better reward and the greater the taste of it. What else can taste better and drive a man to the moon if not showing in his tribe that he is the One?

So who is fighting this time around? It looks like the government and a few city-guys. Ok, to be precise, its Alistair Darling, Tullett Prebon and Gordon Brown (the order is not accidental). The first one, as this is his job – be a nasty guy with a case full of tax ideas. Tullett Prebon is the first company offering relieve to crucified bonuses. And the last one is trying to win the bigger battle. Battle of his life – general elections in 2010.

How serious is this battle then? I would say, not that much. And to be honest, it’s boring at least as East Enders. Everybody knows bonuses are as old as the City and Wall Street summed up, squared and continuously compounded. Everybody knows that money is one of key drivers of taking or rejecting the job. And everybody knows that nobody and nothing will stop men from pursuing the number One myth (remember Jose Mourinho? This chap was by a mile in his own league of Number One). So dust will not settle soon (if ever). However, what seems to be significant and long forgotten is the one in a lifetime opportunity to make your name in economy and politics. As Baroness Thatcher did in 80s. ‘It is economy, stupid!’

So what’s this battle about? Not about money at first place. Mere £0.5bln of estimating additional income to state’s treasury is not worth of paper it’s been written on. More money government would save by cutting benefits and improving efficiency in public sector. It’s not also about doing right things. Making the whole country pursing few witches at City is not helping anybody. Making your rivals stronger is not tactically wise either. It’s not about rules either. Contractual bonuses are being left without special taxation. There is, however, one carefully crafted goal of this battle. It’s a proper support for players’ ego - old story alive again. Gordon Brown and Alistair Darling are obsessed with being first in Europe (it must be due to the trauma of XX century bringing to the end oversees conquest competition of XVIII and XIX century). They keep working to be thought as leaders of innovation in Europe (French and German must be rolling on the floor laughing out loud). No mater what this innovation would bring in. We’ve already heard that Germans and French very strongly support tax measure. But only in the UK. They just can’t see any similar point on their life-after-crisis agenda. Guess why? Hold on, breaking news: it’s Greek that joined hunt-the-bonus-guy game. And they even killed Mr Darling and Brown with one single move: 90% taxation of bonuses. Greek people would love that! Who can score more? Any other contenders?

Few city-boys are hurt as well. Their ego is too big to let them share anything. So they’ll leave. Can somebody check how many employees of Tullett Prebon will leave UK and whether Tullett Prebon itself move to Switzerland or Singapore as recently declared leaving their clientele in London? I may not be that right, but I can see similarities to - not that remote - history dated back to April 2009 – Alistair Darling announcing 50p tax rate on earnings above £150k. How many people were leaving there and how many left in reality? Living in Aberdeen (for the sake of the argument) is cheaper and nicer than London. I know if for a fact. But again people are not that interested in living up north of Scotland. For some reason they prefer London to Aberdeen. They even prefer London to nicer and sunnier Madrid, Rome, La Valetta, name it. Nevertheless we will be entertained by few newspapers shipping here and there this kind of threat. But be aware! Snow is coming! And it is able to grab all the headlines! Even more, it can completely paralyse jets and lorries taking us all to Singapore (or Switzerland or whenever). At least for next 5 months, up until April 2010. Then the whole story will die away. Until next Christmas at the latest. Apologies, festive period – to be politically correct.

Ok, so we know winners. And the real looser of this battle? I guess it would be Porsche and prime property dealers. Oh, and judging from the past, sometimes when those who were demanding blood and Olympics were ‘honoured’ by Cesar to fight against wild beasts at coliseum arena themselves.

This is it!

Hi All

This is it! I've just kicked it off. You'll find here all my thoughts on what's going on around so-called finance. But do not be disillusioned, it's not going to be mainstream thoughts. For that, go to Financial Times or whatever you prefer. Here, I will be sharp and to some extent cynical. But overall it's going to be fun. So enjoy! And if you don't, well thanks to Google you can create your own blog. And it's absolutely free! (first free lunch for City boys for).