26 February 2011

Market Update:  VF Macro Outlook, or "The Big Picture of the Big Picture"

On 28th of January we put a note stating the Return of the Bears.  DJ was approaching 12,000, and as we find ourselves again at 12,130 it might be time to accept that our view was largely rushed, as despite growing problems, ballooning oil prices, general lack of world political stability. the markets remain largely unchanged and this is only due to the small 3% correction of last week.  We accept that it is not good to be wrong, but it is always good to quickly admit to the mistakes.  The world is an ever evolving place and the set of data and parameters is constantly changing.  Please note however on our disclaimer: no refunds for decisions based on our ideas.

                                         source Google Finance. Please click for interactive version

Our change of equity view to that of buy is based on the expected inflation and lack of relativity of the index - what we mentioned before (Harare stock exchange was nominally the best performing exchange in the world this century).  Our view is also based on a significant change of view on the overall growth prospects of the Developed Countries. More on that below.

Investors should however note, that our now half of year very strong view of being long commodities,  and especially long oil and gold has however remained unchanged, and would have gained our investors a very significant returns (especially if invested with the smart strategy - contact VF for details). 

World Growth:  Change of Key Assumptions for the Developed World

During the last three weeks we also had a revision on the outlook for the global economy.  While we continue to maintain that growth in Emerging Markets will outstrip that of the “developed economies” by the scale of few thousand % over the coming decade (it is difficult to put a real number on such forecasts), our view on the long term prospects of the developed economies has been significantly improved.  In essence, while in the New World the economies are likely to grow at later compounded annual steady rates of 5%  - 10% annually, this does not mean that the economies of the “developed world “ will need to stagnate.  Economic growth and prosperity is not a limited resource.  Indeed, we maintain that while in the short run, the economies of the "developed countries", gripped with immediate fiscal issues and 4% inflation in some of these countries (UK), should see some real contraction (one could even see a recession – as one has to remember that high inflation means high need of nominal growth rate just for the GDP to remain unchanged, and with the reality being that inflation is in the imported sectors, with the domestic ones remaining largely unchanged – in the case of UK it will not surprise as at all if there is another set of bad results for this quarter, bringing the UK economy into official recession). 

Nonetheless as fiscal concerns are eliminated with the debasing of the economy, largely at the expense of the Pensioners, savers and Sovereign Wealth Funds, perhaps with few years of stagflation, one has to bare in mind that the “developed world”, just as any other part of this world, is still immensely benefiting from the improvements in productivity, of both logistic and technological nature, of literally costless communications, of the globalisation in general, and it will hence grow just on the basis alone (albeit slower than its EM peers.  Indeed it is difficult to estimate the impact of technology on our long term supply abilities, but we are likely to be still a long way from actually capitalizing on what we have at our disposal today, and never mind what we will have tomorrow (hologram technology meaning end of transport, voice activated lives, free energy, etc).  Look at Facebook, twitter, google apps, google chrome, new era of notepads, iphones – this technology is only about to start to set in, and its effects are visible everywhere, from the way we buy our groceries and book our holidays, to the social changes in form of changing values and at least for now Middle East and North Africa revolutions.   While at Vision Finance we do not like to mix politics with economy (its just difficult to understand the politics sometimes) , we were very surprised to learn about how Libyan opposition used a dating website Mawada to seed the revolution (as facebook and twitter were monitored by the secret police... nobody looked at the Mawada – a dating agency).  Well the profile of the key protester, advocating the “arrival of jasmine”, has led him to have 171,323 admirers (what anyone who has ever used a dating agency will know that is totally impossible – especially for a man).  Unite such number of people , agree the "R" hour and you have a revolution (it also means that the current fears of the impact of changes on the ME are largely totally wrong - as people who tend to use online dating agencies are very rarely suicide bombers (definitely not bombers.. though maybe suicides - not my field).


Indeed the same rules apply to business, and the events of the last month has made us at Vision Finance realise that despite our already very bullish view on technology, we were still underestimating it.  Please revisit our special topic on Facebook from August 2010.


As the result our model for the world growth has largely been adjusted to take into account the impact of technology and efficiency gains on the global scale, which will include the western world, and which will in many ways also give an opportunity for the western world to actually benefit of the increased cross border dividend paying capital flows.  Our previous estimates were merely analysing the differentials in labour costs.   

Summary:  our immediate financial recommendations are:

1.       Commodities to continue to go up, especially oil and gold, as they are absolutely 100% not renewable and in most simple way of looking at it there is a population and GDP growth and maybe even technological efficiency gains – but absolutely less gold or oil around the world than there was five years ago

2.       Fiscal imbalances and inflation will continue to impact the results of the Western World, yet this might mean that DOW will not be 12,000 but 24,000 within few years, as first of all this is not a real inflation adjusted measure, and second of all it is in many ways much more long term analysis than say the credit markets

3.       Yes there are immense fiscal imbalances in the Western World, which are totally unsustainable and will lead to the significant (x 2 / x 3) debasing of the currency. Absolutely sell all developed world currencies and debt. This is not a correction or a technical move - we are brace for a move of historical like proportions (at par with that of John Law in the 18th century (link below so that you understand better who he was)


4.       We feel that given 3. It is wise for investors to seek refuge in Safe Heavens, and the irony is that statement is that Safe Heavens are the more stable and predictable Emerging Markets like Malaysia, Indonesia, Philippines, and overall the area of SE China and South America, as well as parts of Africa, though depending on the jurisdiction and speculative capital flows the investments should be either in local currency or USD (please contact Vision Finance for more details)

5.   For the first time we are taking on a sectoral view on equities, as we are particularly keen on pharma sector.  This is admittingly not our own conclusion, but at times when we read something of particular logic and sense we like to bring it out to you, our clients (more below)


Quick Pharma sector analysis:

In my career there were few trades that make an instant sense when I learn about them.

The Pharma trade is based on the total underestimation of key parameters:

   - money invested into R&D will lead results - something that is simply discounted at zero today

   - changing population patterns

   - significant increased availability of drugs

   - large barriers of entry

   - technological shift enabling ever improved development of drugs

An extract from Neil Woodfords comment:

"Woodford said AstraZeneca is a good example of this, highlighting an analysis that investors will get their money back over 10 years and still hold the firm while AstraZeneca will spend $50 billion on research and development.

He said: “Analysts are assuming you will spend $50 billion (£31 billion) in 10 years on the pipeline and get nothing back. I have never seen valuations like this. Pharmaceuticals is a very strong and powerful industry that is being given away by the stockmarket at the moment. I do not think the market will ignore valuations for very much longer."

And frankly this is a good trade, a so called "no brainer trade".  Go long pharma, short general equity, and with right leverage (contact Vision Finance for details).

Other "no-brainer trades" of today and the past (our experience):

  - Many relative value trades in the equity trades are such trades.

            - EasyJet + RyanAir   vs British AIrways et al was such trade in the 2000s

  - Long dated carry trades are such trades (if you have the liquidity to support potentially large mark to market views), like trades based on interest rate differentials over the period of 20 - 30 years

  - variance trades on US vs European stock markets volatility (difference only due to a nature of stock markets)

  - of course Emerging Markets trade is all its format (cath-up, Rostow, Balasa-Samuelson, call it what you want)

  - Municipal trade in US on tax advantages (top confidential I am afraid)

  - the break down of the pattern in the valuation of equity of oil companies vs oil price (this was a massive trade and opportunity and remains that)

  - of course Facebook trade today

Single biggest trade I would reject and would lose big:

Admittingly I would have never bought Google back in 1998 - as I would see very little superiority of Google engine over Yahoo! established engine - albeit the reality is that Google search engine is not technically marginally better enough*  to take on 90% market share) but that it was utterly lucky (yes there is a concept luck in business), as Google was unique only as it was solely a search engine without any graphics or data, news or other marketing attempts to make cash - and for those who remember, our dial up internet connections,  back in 1998 it took me approximately 30 seconds to load up a front page of Yahoo / Excite or Lycos (who remembers them? - sceary), where as data free Google page took only 5 seconds to load up - and that was the main reason of Google's success - the assumption to capture market share without any revenues steram until the technology gap closes enabling them to then release their true force (and I mean google analytics, google apps, all the work these guys do - largely pro bono as they make no money from 20 language translator - is exceptional - thank you Larry).  However I would have missed this concept - as frankly today we have designed in house a much better search engine, and yet there is no chance to make it work.  Ever heard of CUIL?  Ever heard who designed the predictive text function that Google now has implemented on its page?

Well in any case - get ready for the landing of Facebook.  These guys did not raise 1.5bn USD to buy jets and planes you know.  They must be working on something truly awesome (or if they are hedging their bet they are not as cool as I though they were).

* concept of need of critical difference to make a change possible, as only slightly better technology will not be able to replace an already established worse technology (vide CDs vs MDs, or MP3s vs MP4s)