#$iev

[financialorbit]

Equity market inspiration...from my first Yahoo Finance Contributors article

Shall we get the inevitable Buffett quote out of the way early?  Well yes it is correct to be ‘greedy when others are fearful’.  Easy to say, difficult to do with all the psychological pressures from the wall of market commentary out there.  

Thinking about this I drew some inspiration from my very first Yahoo Finance Contributors posted way back in...late-ish October last year.  Remember that time?  Back then the most troubled part of the world was Europe and even the mighty (relatively speaking) German DAX index was on its knees and kicking around below the 8,800 level when I wrote:

‘The new 52 week low is another signal for change.  It feels and looks so bad that it is going to be not just ok but good. An updated chart in a year’s time is going to look a lot better’

I barely had to wait six months for the payback with the DAX rallying 35%+ from this point by April.  By June I was lampooning the amazing statistic that 100% of European strategists were bullish.  Never ever back a 100% poll: it is bound to be false.  

So here we are now once again at a time of market fear and strife with the German DAX index below the psychologically important 10,000 index point level and my thoughts turn once again to my first Yahoo Finance Contributors posting as European (and many other global indices) remain on track for their worst month since 2008 and the time of the Global Financial Crisis.  

Mix in the continued application of quantitative easing by the European Central Bank with some better-than-average individual companies who actually are global leaders and depressed sentiment and to conclude once again for both Europe and more general global equity markets that... 

An updated chart in a year’s time is going to look a lot better’

...feels reasonable to me.  After all even a rollercoaster ends up where it starts...

(h/t @IvanTheK)

Chris Bailey is the Founder of Financial Orbit Limited.  More of his global macroeconomic and related thoughts can be found on www.financialorbit.com and @financial_orbit 

Top image sourced from here

[financialorbit]

Europe: low growth and difficult decisions ahead

Even with the help of a full quarter of quantitative easing, today’s eurozone second quarter economic growth estimates are downright dull and France - typically regarded as the eurozone’s second most important economy - did not even grow at all. Meanwhile only Greece and Spain grew by more than 0.5% quarter-on-quarter and the whole region grew by an underwhelming 0.3%.  

Yes you did read that correctly: Greece and Spain led the growth charts. When the Greek economy - which suffered economically cataclysmic banking sector shutdowns and capital controls from the start of the third quarter onwards - is the only geography to beat growth hopes you know things are bad. Let’s face it Greek growth numbers - flattered during the second quarter by a panicky push to buy something rather than leave too many spare cash balances in the bank - are going to fall off a cliff in the next disclosure.  

As for Spain, the IMF in a report issued earlier today whilst observing some general progress noted that

‘...deep structural problems limit Spain’s growth potential going forward and vulnerabilities remain. The high structural unemployment and pervasive labor market duality, and the lack of economies of scale of Spain’s many small firms hold back medium-term growth’.

Ahhhh.  Structural reform. Still the bugbear of the eurozone (EA) economies as nicely shown below for the critical enforcing of contracts: 

And how this has helped impacted economic growth rates way beyond just the second quarter 2015 numbers: 

Source: IMF

Revitalization strategies are never easy to implement especially when a good chunk of Europe has a lot of debt...

...and there is still huge debate about whether to write it down or not.  The Greek Parliament today may have agreed to necessary changes to receive bailout monies today but as to whether the required help to reduce the overriding debt burden will be agreed given ‘Berlin isolated’ as noted in this front page headline from today’s Financial Times is another issue...

Source: Financial Times

Europe - on hopes of the impact of the imposition of QE, a weak euro and growth bounceback potential - has attracted material fund inflows over the last year.  

The challenge going forward is that such optimism needs something to underpin it.  Today’s poor growth numbers and still ongoing debate about how to solve structural and debt issues is not a great backdrop.  In short best to stick with individual global competitive European listed stocks and not buy European indices.  

Chris Bailey is the Founder and Chief Investment Officer of Financial Orbit Limited.  More of his research work can be found at www.financialorbit.com and on Twitter @financial_orbit

Top image sourced from here. 

[financialorbit]

Macro summary: Greece plunges, Europe swoons and the US? Dull.

Today there was another sign of headline financial normality returning to Greece: the stock market reopened.  Of course it plunged around 20% in a catch-up move but with recent Greek Parliamentary votes accepting ongoing economic reform in exchange for bail-out funds and a higher withdrawal limits at the banks it is tempting to assume Europe - and Greece specifically - has seen the economic nadir. 

If only this were true. 

Today is also global manufacturing PMI day and the shocking underlying reality state of the Greek economy is best shown by the record low of their July manufacturing PMI metric at barely above the 30 level.  Yes in a measure where the 50 level is neutral, 30ish is simply shocking and tells you that the economic reality on the ground is dire.  

As shown by the chart above there is some linkage between the manufacturing PMI and GDP.  It is fair to assume that Greece is going to rank worse in the below table by the end of 2015 than currently anticipated: 

And then there is the rest of Europe.  Despite a weak euro, the imposition of quantitative easing over the last few months plus easy comparisons from years of general regional below historic trend growth rates not only are the manufacturing PMIs today desperately mixed but amongst the weaker countries include the heavyweight German and French economies.  

Source: Markit

Here is the reality: Europe is not recovering in any proper or sensible fashion which means global growth needs to continue to be driven  by the US.  Yes that’s the same US which - from a growth perspective - is noticeably more muted.  

Anyone for negative S&P 500 earnings growth for 2015 yet? 

Stay stock specific. 

Chris Bailey is the Founder of Financial Orbit Limited.  More of his thoughts can be found at www.financialorbit.com and on Twitter @financial_orbit

Top image via @RANsquawk 

[financialorbit]

Greece: today’s deal is not going to work

When do you make your best decisions?  Answers undoubtedly will differ but I doubt if it will be after an all night session where emotions ran high.  

Today’s tentative Eurogroup agreement came after such an all night session and plenty of emotionally charged rhetoric, tweets and rumors. Whilst the headlines may talk about a ‘Grexit’ being averted the underlying reality is that the deal is yet another kicking of the can down the road with the inevitable outcome of another looming crisis even if (and it remains a big IF) Parliamentary approval in Greece, Germany and other countries is achieved.  

Despite all of this global equity markets have positively celebrating the deal and shorter-term Greek bonds are trading noticeably tighter (at a mere 30%+ annualised yield!) 

Much of the core ‘financial support for structural reforms’ deal makes sense but as I discussed last week the the prevarication and delay in the talks has materially hurt the Greek economy and raised the bill to support it and help sort it out.  Many figures are floating around today but to roll over debt maturing over the rest of the year and re-open the Greek banking system will use up much, if not all, of these monies.  

When then puts the attention on one of the key elements of the agreement forged earlier today: a Euro50bn sized privatization receipts fund.  

The notion of selling off various Greek assets to raise money to help repay or reschedule the country’s debts is attractive at a number of levels. Greece will not be short of potential buyers (China, Russia) for key infrastructure assets such as access and ownership rights to its ports.  However the idea that a mere Euro50bn could be easily raised is fanciful.  As the below graphic from the IMF notes the current projection from privatization receipts is just a couple of percent of this level - and too many previous reviews and plans have been sorely disappointed.  

Source: IMF, @jsphctrl

With little capability of hitting such a target without a sweeping privatization drive encompassing the heart of the country’s remaining assets and financial system, in a handful of months, fears over the sustainability of Greek debts will once again grow.  Whilst the fears from the #ThisIsACoup fraternity appear overly provocative they do highlight that without a proper debt restructuring the only way for this plan to work is to sell off large chunks of the Greek economy to the highest bidder.  

Source: @jodigraphics15

That creditors have not yet blinked is a real worry. Ultimately in recognition that this agreement has not taken Grexit - or further Europe volatility - off the table the European governments and institutions will blink, just as they have done with ultra low interest rates and quantitative easing, and a proper debt restructuring will follow.  But that is in the future - and that will take time.  In the meantime whilst the European governments fiddle, the Continent’s economy will burn - or at least continue to underwhelm against the US or Asia.  There will be individual companies - probably with a global presence and focus - of interest to international investors but otherwise it is hard not to agree with Jim Cramer (@jimcramer) when he observed:

‘Bottom line: Europe=clown show’

Chris Bailey is the Founder of Financial Orbit Limited.  More of his thoughts on the global macro scene can be found at www.financialorbit.com and on twitter @financial_orbit 

Top image sourced from here

[financialorbit]

Europe versus Greece: if they snooze, both lose

‘Woman of the ruins’ is undoubtedly not the moniker German Chancellor Angela Merkel would like as the tenth anniversary of her leadership of Europe’s largest - and most successful economy - gets ever closer. But the above Der Spiegel front cover highlights the growing skepticism about her leadership.  

Of course it is not just Mrs Merkel who has shown a lack of leadership over recent weeks.  Did you read the response to the Greek ‘No’ vote yesterday evening from the Eurogroup President?  

‘I take note of the outcome of the Greek referendum. This result is very regrettable for the future of Greece. For recovery of the Greek economy, difficult measures and reforms are inevitable. We will now wait for the initiatives of the Greek authorities. The Eurogroup will discuss the state of play on Tuesday 7 July’

This strikes me as tremendous arrogance at a time when the essential ingredient for pushing Europe forwards and not backwards is a speedy compromise deal.  As I discussed a week ago (’Greece: without compromise a tragedy awaits’ - link here) a reform for restructuring deal is good for all. The resignation of the talented but provocative finance minister Mr Varoufakis earlier today is in my view the Greeks clearing the decks to help facilitate a deal.  

With no sustainable chance of re-opening their banks tomorrow (Tuesday) as hoped without the support of European Central Bank monies the newly emboldened Greek government knows that its bargaining power will probably not be higher. Now is the time to cash in any chips earned given a Greek economy without a proper functioning banking system is only going one way...and it is not up.  

Source: The Financial Times 

Of course the same is true for the rest of the Eurozone.  If you let Greece slide away it hurts everyone in terms of direct loan and liability exposure:

If you want to take this issue off the front pages then a deal needs to be struck sooner rather than later.  If both Europe and Greece snooze, then both lose. It is as simple as that. 

A final point.  I’ve heard plenty of comment observing that a debt restructuring deal for the Greeks opens up a similar outcome for other countries struggling in the Eurozone such as Portugal, Spain or even Italy.  The notion that a restructuring will be cost less is unfortunately an erroneous one and the high interest rates that will follow around any future Greek money raising and debt refinancing will pay testimony to this. The biggest fear in financial markets is often fear itself and even a hint of a shift closer to a need for a restructuring will see a longer-term price paid.  After all nothing is as big as the bond market...

Chris Bailey is the Founder of Financial Orbit Limited and more of his analysis can be found at www.financialorbit.com and on Twitter @financial_orbit

(Cover image via Der Spiegel)