Exploiting the dollar's drop

Friday, November 26, 2004 | 0 comments »


You have £50 to invest and, amid the currency turmoil, wonder "what to do?"

No-brainer number one is to look at US exporters at the expense of their Asian counterparts; and number two is to consider Asian (and, for the eternal optimists) euro domestic firms - that is, the non-tradeables. Sectors like telecoms, real estate, banking and the like spring to mind as candidates able to profit from cheaper imported inputs and/or the relative decline of value to be found in alternative foreign investments.

Consider a couple of Asia plays to test the thesis.

KT Corporation (aka Korea Telecom before marketing convinced everyone that the new name was a great way to sex-up the firm) is a no growth enterprise that dominates its home market but pays a handsome dividend. It bears the weight of an unpredictable regulator on its shoulders and faces increasing competition. Oh, and it's up over 10% since 11 November on the back of this currency rotation and an analyst upgrade. That's some serious gunslinging. [Editor: you did confirm that peace hadn't broken out with N Korea before coming up with that, right?]

How about Asian banking, then? Fortunately, some sanity prevails here. HSBC, Standard Chartered and the lesser known but striking prospect Bank of East Asia Ltd have not gone mad on the dollar's swoon. But, alas, they were already so generously valued (relative to many international peers) that they remain glued to the non-gunslinger's "watch" list.

And it goes on thus, leading mostly back to "what to do?" Frankly, if this is the long-heralded unwinding of the international current account imbalances, it's distinctly underwhelming. There is surely greater fall-out to come.

Amid all the early shooting, hold your fire.

The author has no investments in any companies mentioned in this article.

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Il faut sortir un peu les dimanches say the French, and indeed the scribe must be living a sheltered life not to have heard of this corner of the investment industry before now.

Particular admiration is reserved for the use of the phrase "...the combined, multi-layered, and non-homogeneous networks with activation (or transfer) rates that re-adjust themselves as a part of the learning process." Terrific stuff, but why, oh why, spoil a great sales pitch with defeatist talk of a learning process?

From our friends at "The Fund of Temporal Researches."

Classic.


Neuro Hit! 1.0
Author: The Fund of Temporal Researches
Supported languages: English Supported OS: Win95 / Win98 / WinME / Windows2000

Free Neuro Hit! download - 5.09 Mb Neuro Hit! is a fully functioning advanced Financial Astrology program based on a sophisticated neural net. It can be used for the NN forecasting of financial indices and for the quotations of bonds, stocks and other securities based on astrological data. This system helps to create combined, multi-layered, and non-homogeneous networks with activation (or transfer) rates that re-adjust themselves as a part of the learning process. Neuro Hit! boasts an 70-80 % accuracy rate for forecasts of basic securities indices and quotations for a three-week period. The accuracy rate drops for longer periods. In this program, traders will find familiar analysis tools used in the technical evaluation of financial markets. Be one step ahead of the market!

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...and the same is true for tops." Jim Rogers

This being a serious political economy blog (well, some of the time) readers will know that Jim Rogers was not challenging the orthodoxy of a different, entirely unrelated and politically incorrect topic. In fact, the point Jim was making is that in excessively depressive or ecstatic circumstances actors in the economic and financial markets temporarily forget the laws of supply and demand and become blinded to changes in trends.

Last week Alan Greenspan spoke at the European Banking Congress in Frankfurt and traders used his comments about the potential dangers of the American current account deficit as an excuse to sell the US dollar. This was slightly odd. The great majority of what was said was yet another repetition of earlier speeches such as that Mr Greenspan made in March to the Economic Club of New York. But here's the thing. Right at the top of his remarks Mr Greenspan said "I should emphasize that I speak for myself and not necessarily for the Federal Reserve."

What? This is the first time in 2004 that in discussing the current account deficit Mr Greenspan has invited his audience to guess which sections of his remarks might not be endorsed by the Fed. However, since he also spoke for the first time this year of the dangers of "cumulative" deficits, reasonable guesses can be made. But who knows for sure.

In the greater speculative scheme of things, though, might this evolution of Chairman Greenspan's current account rhetoric mark a step towards fulfillment of the Large Bottom Law? In other words, now that even America's Central Banker has tossed fodder to dollar bears, there will be yet more folks on the already crowded sell-side of dollar trades.

Speaking of a turn is premature: right now it's a struggle looking at a picture of the euro/dollar rate to spot even a pert Minogue-esque dollar bottom (see below), much less anything of J-Lo proportions. In fact, it's been pretty much a dollar slide since the euro's introduction. Nonetheless, it is the case that to sell dollars is to sell the world's largest, most resilient and most dynamic economy.

And that's why it's long been the view of this correspondent that the unwinding of the current account deficit in the US represents a great opportunity for steady buyers of a weakening dollar to position themselves for eventual US equity purchases.

But it's a long game.



Note that Jim Rogers has been recently quoted as being a dollar bear too, and that for the next 20 years .

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RJH writes...

My youngest son, two, is ill. He's been in hospital for five days; he's suffered a battery of blood tests; he's exhausted from seven days of constant fever; he's unable to eat without pain, so does not; he's on two drips; he's lost over 6% of his body-weight; and is still having more blood tests. Yet, pre-hospital, he had already seen three doctors, all of whom diagnosed him with reassuring certainty, but none correctly.

How curiously similar this medical compulsion for certainty is to that frequently manifested by market experts. Financial journalists daily offer up to audiences the old saw "markets hate uncertainty" and summon experts to diagnose matters. And, lo, the duck-call scarcely warbled but the sky darkens as the experts touch down, waddle up to the mike and - the bulk of the flock anyway - quack their way through a few eminently forgettable minutes of air-time.

Now, some of the quacking is entertaining; some informative; some thought-provoking; and so on. But not one of the experts wants to appear indecisive: after all, they are selling - either their reputation, or their service, or both. That bias is built-in, and it is exceedingly rare that it does not get in the way of the expert. The result? Frequently under-thought, but reassuringly orthodox and confident, quack-bites.

Where the notion of an alternative hypothesis is admitted by an expert its probability is frequently lightly-weighted by the language of presentation: "barring a force majeure event", "there are always unknowables", "historically unlikely" and that old reliable "on current trends". Sometimes the speaker utters these as a warning (good); but more often as reassurance (not good).

Difficult, then, to escape the conclusion that many experts are more interested in covering themselves and attracting clientele than in admitting to any ignorance. On the rare occasions there does appear an expert prepared to use the vastly under-rated words "I don't know, but here are the probabilities", we should listen carefully: those who recognise their own fallibility reveal open minds and a willingness to both study and learn.

So there it is. Markets may love certainty, but uncertainty is all they have. "The market will fluctuate" was the extent of JP Morgan's classic market diagnosis and it's still valid. The rest is research, an open mind, probability and cutting losses early when the plan goes awry.

Tell your doctors. Please.

The confluence in this article of the words "doctor", "quack" and "expert" is obviously purely coincidental and implies nothing, although it may appear to. Seriously expert specialists exist in all fields. But they are thin on the ground.

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    Capital Chronicle writes on the likely demise of the Queen's broker as it seeks to consummate its joint venture with JP Morgan...

    Sold on the cheap appears to be the consensus opinion of City comment over the weekend.

    Contrary to some of the gushing and fatuous PR comment reported at the week-end ("it looks like we're taking them over"), reaction through much of the company was muted and the deal was not immediately regarded as a cause for celebration. The Extraordinary General Meeting, when it comes, may well be very interesting if, as one suspects, there are a number of unhappy shareholders.

    Some points of note:

    * the process leading to this point was kicked-off, apparently, by a McKinsey report; and what makes the consultants qualified brokerage experts this time around is questionable;

    * it appears the business rational has not been effectively articulated to some members of staff who ought to have been briefed; and

    * joint ventures (JVs) are operationally challenging to make effective, to put it mildly.

    Many of the stated aims of the exercise could have been achieved without the JV and it's associated costs in fees to lawyers and accountants. The same goes for the minimisation of the stated risks - what now, for example, is the career path for the young stars at Caz to be? Equally, much of the financial reward could be have been passed to the existing owners by means of a special dividend of, say, 50p per share in addition to the normal dividend. Further, some of the other excess capital (convertible preference shares) could have been repurchased early, further improving the ROE.

    In addition, the protagonists allege that the sum of the parts will be greater. Well, maybe. What they haven't addressed is that there is nothing really wrong with the current business model. Impartial advice is a key niche.

    Indeed, what might have been examined properly by Cazenove are the huge opportunities there will be in Germany as middle sized firms sell up and the likes of Commerzbank retreat; and in the newly emergent countries in Eastern Europe - in particular the Czech Republic, Hungary, Poland and Romania. Granted, Cazenove has an office in Germany, but it is small, and opened only in late 2000.

    Finally, the Mayhew succession. This is a non-issue - he could easily become a part-timer and supervise the Company for years to come. But, frankly, no one is indispensable and, sadly, it looks like his legacy will be the one of the man who sold the bank on the cheap.

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    Carnival of the Capitalists

    Monday, November 08, 2004 | 0 comments »


    The November 8th edition is up and over Incite, and this week there's alot of breadth of topic to enjoy.

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    Well, it had to happen. The Sod's Law/Murphy's Law equation made it certain. Wachovia called 110,000 and the sound of poultry wings flapping on arrival at their headquarters was heard.

    Non-farm payrolls swooped in at 337,000, much higher than the consensus of 175,000. Maybe that optimistic model was not so bad after all.

    Follow this link for background.

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    This Friday sees the monthly release of non-farm payroll data. The consensus is for an increase of 175,000 jobs.

    Wachovia are forecasting an increase of 110,000. Clearly, a virulent strain of pessimism has hit the firm given the inaccuracy of their recent previous calls. But if it's broke, try to fix it.

    Perhaps this is an appropriate time to re-introduce all forecasters to Sod's Law. In this context it states that Wachovia, having called much too high several times in sequence and then adjusted the model severely downwards to compensate, will now see Friday's non-farm payrolls number come in much stronger than even the 175,000 consensus. Thus validating their previous approach. Or so it may seem.

    Helpfully, British Gas Plc (an energy supplier, not a national characteristic) have spent shareholders money commissioning the development of a formula for Sod's Law. The firm's Board having decided wisely they cannot invest the cash more profitably. Here's the result:

    ((U+C+I) x (10-S))/20 x A x 1/(1-sin(F/10))

    where:

    U=Urgency
    C=Complexity
    I=Importance
    S=Skill
    A=Aggravation (a constant 0.7)
    F=Frequency

    Excel was rolled out to apply the formula to the concept of persistently successful economic forecasting. Despite using reasonable sensitivities, the results were not promising.

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