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Mon 3rd Aug 08.00 GMT UK Halifax House Prices (MoM/YoY) July
Mon 3rd Aug 08.30 GMT UK Purchasing Manager Index Manufacturing July
Mon 3rd Aug 14.00 GMT US ISM Manufacturing July
Tues 4th Aug 04.30 GMT Aus RBA Interest Rate Decision
Tues 4th Aug 12.30 GMT US Personal Income (MoM) June
Tues 4th Aug 12.30 GMT US Core Personal Consumption Expenditure (MoM/YoY) June
Tues 4th Aug 23.00 GMT UK Nationwide Consumer Confidence July
Thur 6th Aug 11.00 GMT UK BoE Interest Rate Decision
Thur 6th Aug 11.45 GMT EMU ECB Interest Rate Decision
Northern Rock, the mismanaged bank, collapsed in 2007. Early in 2008 the global banking sector started to creak on its foundations before reaching near implosion in September 2008. Enough time has passed, you would think, for the UK regulatory bodies to have replaced the risk management by “box-ticking” process with something more robust. Wrong.
100 weeks have passed since it was blindingly obvious that a total over-haul of financial regulation was required and the latest government sponsored report, from the Treasury Select Committee, has described the current supervisory framework as a “muddle”. The committee also suggested that the measures to date were “merely re-branding” and that there remains a void of ownership in “strategic decisions and executive action”. They are not referring to the old system. They are describing the current structure.
Britain wasn’t always a 2nd class nation in terms of financial and economic leadership. 80 years ago we were lucky enough to have possibly the most gifted economist that ever lived, John Maynard Keynes, to advise the government on economic and financial matters.
A couple of years ago, earnings growth obsessed investors and banking analysts treated Banco Santander almost as an after-thought. For every mention of Banco Santander in the UK investment press there were 10 articles on each of the other big banks; Barclays, RBOS, LloydsTSB, HBOS and HSBC. Santander just wasn’t very exciting. Plus, the London investment community, deeply in love with its own Anglo Saxon model of capitalism was ever so slightly amused at the thought that our European cousins in the Mediterranean might articulate banking management skills equal, or god forbid superior, to those in London or Edinburgh.
Now, as the country continues its efforts to formally exit the worst financial crisis in living memory the enigma that is Banco Santander is better appreciated.
But in all logic the bank should be suffering a maelstrom of problems. Santander is domiciled in Spain, arguably the most vulnerable economy in Western Europe. The group also, in 2004, acquired one of the largest British banks, Abbey National, and it would be fair to expect Abbey to have a similar depth of exposure to struggling UK consumers and the housing market as the much maligned Northern Rock, RBOS, HBOS or LloydsTSB do, (the latter two now forming Lloyds Group). But Santander isn’t in a mess, nor was it on the verge of collapse like so many banks late in 2008. It didn’t dominate the headlines with news of government bail-outs or queues of panicking savers urgently trying to extract their cash. Quietly, professionally and with minimum fuss the Spanish bank has consolidated it position, strengthened its brand in the eyes of risk-averse consumers and built a reputation amongst banking sector observers for financial integrity and stability that most other Western banks can only dream of.
Santander’s strategy of geographical diversification and a commitment to building a relatively prudent book of loans and mortgages has protected its balance sheet from the worst excesses of the debt bubble, though obviously some additional bad debt provision has been necessary. The bank should be congratulated for having paid close attention to the Good Risk Management textbook, the book HBOS management left on the shelf, collecting dust, thinking it was a secret Martian code too complex to be deciphered.
Reviewing the financials from the latest quarterly report also reassures. The group’s attributable profit in Q2 has progressed to Euro 2,423m from Euro 2,096 in the prior quarter, whilst year on year performance is a modest 4% lower. The UK contributed 16% of profits, Latin America 34% and Continental Europe 50%. H1 2009 loan provisions rose 61% to Euro 4,626 from Euro 2,880 in H1 2008 causing a 19% descent in earnings per share which otherwise would have made strong progress. A proportion of the bad debt provision maybe ‘returned’ to the P&L if actual bad debts are less than the provision. Of course it is also possible that the provision is inadequate but with a diversified business model and exposure to the relatively healthy Latin America region, the future remains brighter for Banco Santander than many of its competitors.
The chart below highlights the growth in the bank’s NYSE listed ADR (Banco Santander Cent Hisp) which is deep in over-bought territory with a 14-day RSI of 77.38, so investors should add the firm to their watch list and reconsider the question of buying if better value returns.
Banco Santander STD to 29th July 2009
Great companies exit recessions leaner, fitter and stronger for the experience. Or to put it another way; form is temporary, class is permanent. BP is arguably one of those great companies. Predictably, during the recession revenues have been hit, the collapse in the oil price from $147 per barrel to the $30’s saw to that (current price $68), but the cost base has been reduced significantly, production is growing and capital expenditure remains strong to help build reserves – the embedded value of energy companies.
The most recent quarter has seen further progress in the reorganisation of BP. Production has risen to more than 4 million barrels of oil equivalent a day, the full year target of $2bn in cost reductions has already been achieved with another $1bn in savings predicted for 2H 2009, relative to 2008 and 2nd quarter replacement costs profit rose 32% QoQ to $3,140m. Sterling investors also saw their dividend rise by 21% due to favourable exchange rate movements. The dividend for the quarter is 14 cents. Capex for Q2 was $4.8bn and $9.4bn year-to-date.
Looking forward, BP forecasts the global economy could stabilise further through the summer but that “any recovery, whenever it comes, would likely be sluggish”. Management appear to be more satisfied with their upstream progress and reassured investors that the firm would continue to focus on streamlining their alternative energy operations and securing more group wide efficiencies.
BP closed the update commenting: “Our view remains that the right current balance is to continue to pay the dividend and maintain investment to grow the company. We will continue to use the capacity of our balance sheet while the industry cost structure adjusts.”
Analysis of the chart, below, fails to provide obvious clues as to the near-term direction of the stock, with a brief correction slightly more likely than a continuation of the recent bullish run. Traders should therefore pay close attention to the oil price, which in the absence of surprise stock specific news, is likely to be the dominant factor in BP’s share price through the summer.
BP weekly to 27th July 2009
Wolseley, the plumbing and building products supplier, has provided investors with a comprehensive update ahead of its 31st July year end. Of all the companies reviewed in this column over the past 6 months, Wolseley, at first glance is uniquely vulnerable with extensive debt on the balance sheet and a perceived collapse in demand for its merchandise. The firm indeed has faced a mountain of challenges but entered the recession strong and adaptable and will therefore survive, albeit beaten-up and smaller. Many other building product suppliers have collapsed under the financial stress and fall in demand.
A brief look at the financials sums up Wolseley’s predicament. Revenue from continuing operations is thought to be 16% lower, year on year. Trading profit is likely to be 56% weaker than the prior year. Profit before tax, amortisation and impairment charges is to slide a painful 60% (continuing operations).
In response the firm has cut costs vigorously, £200m in the current year and £392 in annualised savings. Further efforts to de-leverage the balance sheet has also seen net debt fall £108m to £1,426m since April 30th and from £2,711m a year ago.
Strategically Wolseley has also cut a swathe through its non-core markets. Its interests in Belgium, the Czech Republic and Slovakia are to be sold. The firm has lost market share in France whilst management, distracted, grappled with onerous local employment law in an effort to cut the cost base. The Irish business is to be down-sized, possibly permanently, with the firm viewing the market as “unlikely to return to the levels of activity experienced in the past decade”.
Key markets remain grim also. The UK offers promise but a return to strong growth is unlikely before 2011. Their US operations remain strained suffering from weak demand and intense competition.
The management are committed to cutting costs further and focusing on improving their competitive advantage by “enhancing customer service”. Watching Wolseley fight the competition in an attempt to secure a larger share of a shrinking market sometimes feels like observing bald men fight over a comb, but 2009 isn’t about winning, it’s about surviving and Wolseley look set to achieve that objective through its effective and ongoing strategic review, debt reduction and cost controls.
Wolseley will probably never experience such challenging markets again.
An understanding of economics is greatly enhanced by the study of great economists, men who formed original and ground-breaking theories regarding economic management, foreign exchange mechanisms and monetary and fiscal policy.
If Adam Smith was the founder of economic theory as we understand it today (The Wealth of Nations, 1776) then John Maynard Keynes was the father of modern monetary and fiscal policy. His brilliance, soon to be obvious, went largely unnoticed in his formative years of study and examination. “The examiners presumably knew less than I did”, he famously remarked.
Later, in the years between the two great wars, his work focused on developing theories better able to achieve full employment – in response to the deflation and poverty caused by the global depression. His work relating to interest rate controls and government led stimulus, obvious and accepted now as a cure for recessions, were at the time revolutionary, misunderstood and unproven.
Morally robust, he resigned in protest against the First World War reparations policy, a thorn in the side of Europe for 20 years and a key grievance which led to the rise of militarism across Europe, and the Second World War.
In 1943 Keynes was fundamental to the original proposal for an international monetary authority. In 1944 he led the British delegation in the Bretton Woods Agreement. Late in 1945 he was accredited with almost single-handedly negotiating the American Loan Agreement which helped rebuild Britain, bankrupt in all but name, following six years of war.
The stress and burden of the US loan negotiations contributed to the demise of his health. Americans found Keynes to be “irritatingly brilliant”. But the war, Britain’s earlier guarantee for financial help, was already over. Military cooperation had been replaced with a new economic order. Keynes secured a loan for $3.75bn agreed at a 2% rate of interest. Any other man would have returned to the UK empty-handed. The final loan repayments were made 61 years later by Tony Blair’s government.
Keynes remains famous for his theories tackling monetary deflation and trade depression. His policies embraced the economy as a whole. His understanding of the relationships between money supply, fiscal intervention, investment and job creation were unrivalled. His suggestion that increased economic activity could be best achieved via centralised intervention and sponsorship of capital projects was proved successful during the 1930’s.
During the process of financial market de-regulation from the 1980’s to 2007 the policies of John Maynard Keynes were increasingly viewed as out-dated, too interventionist. Economists cited the modern free market economy to be self-controlling, self-moderating and a capitalistic self-fulfilling prophecy of wealth creation. The past year has seen a return to centralised intervention, all-encompassing economic policies and a return to the theories that were first realised by Keynes 75 years ago.
Born on 5th June 1883, a student of Eton and Cambridge, a renowned teacher committed to helping others learn and a reputation for speed of mind that few could cope with, Keynes’ theories again form the bed-rock of solutions used to resolve recessions and stimulate economic growth.
The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. Now through August 10, Elliott Wave International is offering a special 45-page Best Of Trader’s Classroom eBook, free.
Aspiring traders typically go through three phases in this order:
Methodology. The first phase is that all-too-familiar quest for the Holy Grail – a trading system that never fails. After spending thousands of dollars on books, seminars and trading systems, the aspiring trader eventually realizes that no such system exists.
Money Management. So, after getting frustrated with wasting time and money, the up-and-coming trader begins to understand the need for money management, risking only a small percentage of a portfolio on a given trade versus too large a bet.
Psychology. The third phase is realizing how important psychology is – not only personal psychology but also the psychology of crowds.
But it would be better to go through these phases in the opposite direction. I actually read of this idea in a magazine a few months ago but, for the life of me, can’t find the article. Even so, with a measly 15 years of experience under my belt and an expensive Ph.D. from S.H.K. University (i.e., School of Hard Knocks), I wholeheartedly agree. Aspiring traders should begin their journey at phase three and work backward.
I believe the first step in becoming a consistently successful trader is to understand how psychology plays out in your own make-up and in the way the crowd reacts to changes in the markets. The reason for this is that a trader must realize that once he or she makes a trade, logic no longer applies. This is because the emotions of fear and greed take precedence – fear of losing money and greed for more money.
Once the aspiring trader understands this psychology, it’s easier to understand why it’s important to have a defined investment methodology and, more importantly, the discipline to follow it. New traders must realize that once they join a crowd, they lose their individuality. Worse yet, crowd psychology impairs their judgment, because crowds are wrong more often than not, typically selling at market bottoms and buying at market tops.
Moving onto phase two, after the aspiring trader understands a bit of psychology, he or she can focus on money management. Money management is an important subject and deserves much more than just a few sentences. Even so, there are two issues that I believe are critical to grasp: (1) risk in terms of individual trades and (2) risk as a percentage of account size.
When sizing up a trading opportunity, the rule-of-thumb I go by is 3:1. That is, if my risk on a given trading opportunity is $500, then the profit objective for that trade should equal $1,500, or more. With regard to risk as a percentage of account size, I’m more than comfortable utilizing the same guidelines that many professional money managers use – 1%-3% of the account per position. If your trading account is $100,000, then you should risk no more than $3,000 on a single position. Following this guideline not only helps to contain losses if one’s trade decision is incorrect, but it also insures longevity. It’s one thing to have a winning quarter; the real trick is to have a winning quarter next year and the year after.
When aspiring traders grasp the importance of psychology and money management, they should then move to phase three – determining their methodology, a defined and unwavering way of examining price action. I principally use the Wave Principle as my methodology. However, wave analysis certainly isn’t the only way to view price action. One can choose candlestick charts, Dow Theory, cycles, etc. My best advice in this realm is that whatever you choose to use, it should be simple. In fact, it should be simple enough to put on the back of a business card, because, like an appliance, the fewer parts it has, the less likely it is to break down.
For more trading lessons from Jeffrey Kennedy, visit Elliott Wave International to download the Best of Trader’s Classroom eBook. It’s free until August 10.
Jeffrey Kennedy is the Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15 years of experience as a technical analyst, he writes and edits Futures Junctures, EWI’s premier commodity forecasting service.
Some weeks ago, the NIESR (National Institute of Economic and Social Research), released a relatively upbeat review of Q2 economic activity. Their thoughts, that Q2 Gross Domestic Product could be flat or marginally positive, were broadly in line with the growing number of cautiously optimistic predictions. March was to be the trough, the bottom, of the British economic cycle and April through June was to see expanding output and the start of the recovery after a year of contraction. The prediction was not a shoot from the hip exercise. Data across the economy had been improving for some months encompassing retail sales, the housing market, risk appetite, merger and acquisition activity, corporate profits and the back bone of every recovery, confidence.
Friday’s first official estimate of UK GDP is therefore a kick in the teeth for optimists. The Office for National Statistics reported a -0.8% decline in Q2 GDP quarter on quarter, against consensus forecasts of a -0.3% contraction. It’s highly unlikely ongoing revisions to the data will retrospectively propel the economy from contraction to growth, the gap is too big. The UK economy has therefore contracted for 5 consecutive quarters and has fallen over the period by -5.7%, resulting in the worst 12-month decline in economic output since 1955.
Predictably, analysts rushed to speculate. The Bank of England would have to re-think its stimulus policy. The £125bn quantitative easing program, recently put on hold, would have to be expanded. Interest rates would have to stay low, for longer.
In currency and bond markets guess-work was not required. Sterling fell against the dollar and government bonds rose as investors exposed to the UK economy de-risked their portfolio. Trading rooms across London were consistent in their analysis of the GDP data with “awful” being the singular opinion.
ROC Oil is listed on the junior UK AIM market as well as the ASX Australian stock exchange and is a fasting growing and acquisitive upstream oil and gas producer. The firm has assets in four regions, Australia, Africa, China and the UK. The key assets are Asian focused with 80% of current production in Australia and China. ROC’s strategic preference is to secure large stakes in assets and to manage day to day operational matters.
Some basic financial statement analysis supports the firm’s claim that it is on track to becoming a serious production player. Revenue over the 3 years to 2008 has grown spectacularly from $109.7m to $358.2m, a compound growth rate of 80% whilst trading profit has progressed even more impressively from $22.7m to $163.8m over the same period. Net cash flow from operations, an even more useful measure, rose from $47m to a very healthy $182.5m. Due to ongoing investment, balance sheet debt has increased from $137.5m to $168.7m 2006-2008 though the burden appears to be more than manageable considering operating cash flow growth.
ROC has also built strong strategic alliances with global producers and interestingly is the only foreign company that has an operating contract with PetroChina (Source: ROC Oil).
The ROC share price (AIM listed) has faded over the past two years and the market wide recovery since March has failed to re-coup the majority of those earlier losses. The price is now loitering under 40p, compared to a grossly oversold low of 13.5p seen in January 2009 and a somewhat optimistic 165p seen late in 2007. Even taking recent and temporary production cuts into consideration and possible future dilution, (in the event the firm needs to raise equity capital to fund further expansion or acquisitions), the downside risk seems limited. ROC is as likely to receive a bid, as make one, over the course of the next year as global players with deep pockets seek to boost their reserves and secure ROC’s valuable strategic and commercial influence in China.
