Kaboom is what happened in Europe yesterday especially the banks possibly triggered by a 66% decline in Royal Bank of Scotland after announcing the biggest loss ever in the UK.Just about every European bank has been caught up in this mess including Barclays Bank (BCS). I've disclosed in the past that I used to own BCS but sold it in late 2007 at about $41.80. Generically speaking the banks are a great way to own Europe--they capture what is happening economically and usually have very high yields.
Don't take that as this is a good time to buy European banks, I don't own any now and don't know when I will. But the banks are capturing what is going in Europe, it's just that what is going on now is not good.
The latest news from the UK is a good reminder of a point I have tried to make before about top down portfolio construction. In owning stocks from various countries it is important to stay current on the big picture in those countries. Selling Barclays when I did was more about things I was reading that lead me to believe that the housing market in many European countries (including the UK) was worse than the housing market in the US which made the European banks (including the UK) riskier than the American banks. I don't recall now finding much from the company back then that would have warned me that the drop was just the beginning, even though it was already down 30%
If you read enough things written by people smarter than you, eventually you'll take the hint.
This brings up another point about caring more about where it is going than where it has been. When I sold BCS it was down about 30% from it's peak. That it had been as high as $60 meant nothing. I was concerned about it going down a lot more and doubted that I could quantify how much further it could drop--in fact it is down way more than I would have thought. You can read more about the trade here on the post from December 2007. The stock I bought with the proceeds was a Chilean bank.
To be clear I don't get all of these right. I still have exposure to Australia through a bank that in hindsight has been a bad hold. Australia's economy has puhlenty of problems but I do not believe it is as bad off as Europe or the US--bad housing issues notwithstanding.
Portfolio management is a series of decisions; some will be right and some will be wrong. That is just how it is but you have a chance of adding value over the duration of the stock market cycle if you can be right a little more often.
9 comments:
Anyone have an idea how much of Britain's bank problems are caused by the U.S. (subprime, etc.) and how much are caused by factors in Britain (real estate, recession, etc.)?
If Roubini is only partly correct, things look worse than bad. Banking system insolvent??? Holy S#@t!!!
RBS
STT
WFC
BAC
et al.
Lookout below!
Can anybody spell S-K-F ?
Further to anon 7:40's point--the difficulty I have is deciding who to believe among all the so-called experts out there. Roubini? Kudlow? Cramer? Hussman? Buffett? Paulson? Or (gasp) CEOs? They're sure all smarter than I am.
Everyone agrees more or less that things are mighty bad right now, but their points of view on what actions to take can be wildly divergent. Would Roubini recommend buying a bank today? Abby Cohen did. Buffett did.
And who in the world am I gonna listen to about the situation in Chile or China or Norway?
Please keep sharing your insights, Roger. You've got your feet on the ground and your ego doesn't get in the way of your common sense.
Abby Cohen said buy BAC. It lost 50%!
Anybody that follows the Barron's piece every year knows not to buy Cohen's recommendations.
Hi Steve.
I’m UK based so I thought I’d do a quick reply to your question. The quick reply however has subsequently turned into a bit of an essay, but one that I hope may provide a greater insight into the current UK situation.
Assume a British bank at the time of making a loan in say 2007 had figures of :
1 UKP/$2 USD exchange rate
Lent a borrower 100,000 UKP to buy a $200,000 house in the US, at a 7% interest rate.
Received a 100,000 UKP matched deposit (perhaps $200,000 from a US investor) against which the payout was a 5% interest rate
Property purchaser defaults. House repossessed.
Seeing the repossession and at a 1/1.5 UKP/USD exchange rate level the matched depositor withdraws their 100,000 UKP deposit in fear of bank failure and/or declining pound (taking a hit of a $50,000 loss due to the difference in exchange rates between the time of depositing and the time of withdrawing the deposit).
Due to the loss of deposits the Government step in to loan the bank £100,000 at 0% to cover the £100,000 withdrawn funds until the asset is sold (part nationalisation of the bank). It may take a year or more to sell the illiquid asset (house). The house may never be sold and have to be totally written off.
0% base rate forces pound down lower (no inward flow as no one wants to deposit when at 0%).
For the repossessed house - if the asset is actually sold at half its original price - $100,000, then if the pound/dollar at that time had declined to parity (1/1) - then at that level the 100,000 UKP original loan is fully recovered due to the 1/1 currency exchange rate.
Where no recovery is made at all, then the loan is written off into a newly formed Junk Bond Bank funded by the Government to be covered by Sovereign debt.
Once the full (and global) effect of declines/write off's are known and x% of the original loans recovered, y% written off, then stability will return and the pound will again rise to an appropriate level.
Its worth noting that prior to the financial crisis the UK deposit rate was one of the higher rates compared to US and Euro and as such the UK has likely benefited from currency exchange rates against foreign withdrawals due to more recent events.
Applied on a larger scale - then currently we have - according to Bank of England, figures of the gross foreign currency liabilities of British banks being around 4,400bn UKP. Much of the final outcome is therefore subject to just how much bad debt is contained within that 4,400bn. A lowering UKP however will help write out a considerable amount of the bad debt as per the previous example.
An additional benefit is that during the low pound/dollar exchange rate period, then labour is cheaper on a global basis and attracts inward investment, potentially aiding in the economy being one of the first out of the decline.
Yet another strength is that the large majority of large cap stocks listed in the UK are global companies, such that revenues are derived from across a global base.
Of course its not all roses and much more complicated than the above trivial case, and the low pound will instil higher commodity costs (imports) fewer jobs and is inflationary.
I suspect you might be asking your question after Jim Rogers saying on Bloomberg "I would urge you to sell any sterling you might have...It's finished. I hate to say it, but I would not put any money in the UK."
I think “finished” is a poor/strong choice of word.
In one context yes - if you buy 66 UKP with $100 at around current exchange rate levels to later see the pound/dollar fall to parity he’s right.
In another context when the pound/dollar starts bottoming out then a shift into 100 UKP from $100 will likely see a subsequent benefit from a rising pound over the mid to longer term relative to that bottom.
Much of the real estate declines over here are a consequence of buy-to-let’s. Many people owning two, three or more houses in order to rent out for an income and (perceived) potential strong capital gain in the process.
A decade or so ago, obtaining 2.5 times or perhaps 3.0 times your wages as a mortgage was about the maximum limit, and for that you had to put down a substantial deposit. People only generally owned the one house. More recently (prior to the financial crisis) the property speculation and low financial controls have seen debt much easier and considerable in excess of the 2.5 to 3.0 wages levels. As such recent property issues aren’t as great as encountered during the 1980’s.
Yes property prices have fallen back somewhat, but nothing particularly excessive as in most cases its people trying to trade out of buy-to-lets and not principle homes. Which for those not on the property ladder is a good thing as house prices are becoming more affordable whereas previously they were excessively overpriced. Many owners are sitting on their hands, renting out to cover their mortgage, and from my personal travels I haven’t noticed anywhere near the glut of sellers as was seen in the 1980’s.
Best. Clive.
Sorry but feel obliged to add a short story of UK pre-crisis.
A year ago or so my mother had a sizeable amount in a single bank and in light of the impending crisis and the 32,000 (or so) UKP government guarantee per single bank account that applied at that time, I took her up to our local shopping high street and we shifted funds across a range of five different banks. The process took just a morning due to having bank after bank practically next door to each other.
On an economy of scale having so many banks adjacent to each other in the single town was madness. The same equally applies to cell phones - four shops next door to each other etc etc. Across all towns and … well speaks for itself.
The natural progression is for a few giants to rise out of the crisis. Yes redundancies will occur but only because of a consequence of having so many redundant people anyway.
We’re in a phase of rebuilding a six trillion dollar man over here, to be leaner, meaner faster, stronger (or whatever the Steve Austin saying was). Just to get there we have to endure a period of pain.
“Finished” – no – just temporarily down and rebuilding for the better.
A quote today from Mish...
On overall market conditions Hussman writes:
In recent sessions, we have observed a troublesome deterioration in credit default swap spreads among a number of major financials, which has prompted us to tighten our hedges in response. From a statistical perspective, what I've referred to as “early improvement” in our measures of market action has now been lost. The Strategic Growth Fund is fully hedged here, about half with pure long-put / short-call option combinations, and about half with what amounts to in-the-money put options (allowing the Fund to obtain a moderate positive exposure to market fluctuations in the event that the market recovers more than a few percent)
If we get the S&P 500 back down toward the 700 level or below, I would expect that we will begin taking on more market exposure on the basis of valuation, as we did in October and November. That said, I would expect that we'll be somewhat slower to do so, given the generally poor follow-through that we've observed in the recent market recovery.
As always, we'll respond to market conditions as they evolve. I recognize that my tone regarding the stock market has taken a quick turn toward a defensive posture, but that quick turn reflects what we've observed in various measures of credit distress and market internals. This is why I avoid forecasts. We move as the evidence moves.
I side with Hussman, on both snips.
Sitka Pacific is holding a position in TIPS and Treasuries via the treasury ETFs, (TIP, TLT, IEF). However, our position is cut by more than half from what it was for most of 2008. For us, at least right now, treasuries and TIPS are more of a hedge to other things we are doing as opposed to believing they are irresistibly cheap.
As for market conditions, it certainly does pay to be flexible. Sitka went from net long to fully hedged on January 7th as noted in S&P 500 Crash Count - Wave Four Triangle.
Sitka Pacific Hedged Growth Strategy is back to a market neutral strategy as of two days ago, as is Sitka Pacific Absolute Return.
This is a defensive position for us. We reserve the right to change out mind, without notice, at any time.
Please bear in mind that E-Wave is just one tool we use and it is not even the predominant one. We take a large variety of technical and fundamental factors into consideration and caution against over-reliance on any one thing.
Fundamentally and technically the market is flashing huge caution signs. Neither the market nor TIPS are "breathtakingly cheap". Caution is warranted.
Hi Steve, an even quicker answer - it's the U.S. subprime and only the U.S. subprime problems.
The UK economy's growth is certainly negative, as are house prices. The prices of many properties are relatively stable, with 'family' homes of 3/more bedrooms resilient. Most of the larger losses are from the over-building of apartment blocks in city centres, which have also often been the target of organised gangs of fraudsters, building and selling these at hugely inflated prices that were not in line with supply and demand, until demand rocketed because of the percieved capital gains made from investing in these tower blocks.
These cases are isolated and a nuisance but haven't in any way led to billions being lost!
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