Raven Markets - 15th May

Raven markets…
*It’s been a tough week for markets. Doomsayers have had to sit quietly in the corner for the last month or so as global investors shed their negative thoughts and delved into stocks to bring P/E ratios back to levels in line with the pre-Lehman collapse last year – but the none-believers, like a bunch of swirling, waiting, hungry ravens (Nouriel Roubini wears a lot of black), are looking for their next opportunity to swoop in and unleash a “we told you so” torrent of abuse on the pool of return-hungry-and-cash-rich-money-managers.

*This week, we’ve had Chrysler shut out its creditors and provide a dangerous precedent. One of the world’s most respected and held-in-awe companies, Toyota, announce the replacement of its management team - and this for a company in a country where life-employment is still the norm, and the recipe for making noodles has not changed one bit in 1,000 years. India held its elections, one-month long, 1 billion people or so voting, and the winner is? – a split decision three ways – that can’t be good. Even our man Obama has disappointed slightly by reversing a decision not to ban photos of alleged abuse by US soldiers – no one is perfect, but he’s still pretty close. The Brits have let us down with the banality of revelations of excess unwarranted member of parliament spending on expenses over the last four years – at least here in the UAE a Sheikh really knows how to shock, by torturing and running over a man that he isn’t too fond of – the Brits really are too reserved I guess!

*On the markets, we’ve seen them stutter, stumble, recover and then stutter again – that twilight zone theory holding steady and proving a haven for some short-term week-on-week trading. Asia has essentially ended the week flat, with a couple of days of trading where gains across the board were an avg. of +3%, but equally there were days where losses balanced things out. Europe has been a mixed bag but the majors mostly off small amounts for the week so far. The US has seen the S&P fall three days in a row, but futures so far (S&P +1.5pts, DJIA +23pts) pointing to Friday continuing Thursday’s gains.

As aforementioned, stocks appear correctly priced now, avg. 15x (far higher than the lows of avg. 8x in November). Long-term managers have to question whether having future earnings estimates quite as low as they are, makes for a rational bet to outguess the timing and strength of the market recovery – a bet now on the markets is not a declaration of faith in a company and its management, but an eyes-wide-shut view of the macro world ahead of us. Continuing to invest in stocks when technicals indicate fair-value, is an optimistic outlook on the speed of the economic recovery. With a number of potential blow-up factors still lurking in the shadows (mono-line insurers) it would be a brave soul to push for greater exposure to US and European markets right now. Asia is a different story though, and even the Economist this week has published a report on how the “crouching” Tiger economies will be the greatest examples of strong, sharp recoveries.

Sell in May and go away – but will you ever come back?
*Anecdotally, from conversation held with money managers across the continents, no one seems to really believe that we are out of the worst of the crisis – but few also believe that there are many negative shocks to send markets hurtling lower once again. On the more insightful discussions though, there is a sense that the huge amounts of cash that many had been sitting on were being put to good use for the time being in the knowledge that certain markets, the Asian economies again, are well on their way to re-shaping their financial growth models away from trade and export dependent industries to a more focused domestic consumption environment. Basically, Asian economies really will start to trade with another for the benefit of a local end-of-the-line consumer, China. The days where record levels of inter-Asian-nation trade simply led to 85% of the end-product being re-exported out to the US are over.

*So what will happen over the summer? Where will the still vast amounts of cash be deployed? Were the last couple of months the final hurrah by those seeking to plant their seeds and hope the crops come in before the thaw returns? Summer will provide a lot of time for investors to reflect and consider just how deep and structural this crisis really is. The longer-term minded will begin to read the many books currently being penned and awaiting final touches before summer publishing schedules – all waxing lyrical about the end of capitalism and how the western banking model destroyed the rest-of-the-world. The period of reflection and thought that normally follows a knee-jerk reaction to a crisis (the sell off between November and February) and then the first tentative steps at recovery (March till now) are the most crucial in any period of uncertainty. It may prove to be a case of too much time on people’s hands leads to too much time to contemplate the difficulties still ahead for the western world’s current financial system. Will they return to the markets when they return to their desks?

Here in the Middle East, they have the right idea come summer time. Normally, entire departments shut-down as the heat sets-in and those fortunate enough to be able to fly to the Mediterranean do so – and stay there, for a long time. This year however, Middle Easterners have the double whammy of a longer (in terms of number of hours of sunlight) earlier, and hotter, than previous years, Ramadan. With the start date firmly in the middle of the summer-holiday calendar of mid-August - investment banking movers and shakers will have their work cut-out for them if any financial institution is thinking of possibly blowing-itself up and requiring the deep-pockets of a white-knight - the sovereign wealth funds will be more than happy to leave it to western governments to deal with it as they lay by the pool in Cannes.