Anthony Peters, Swiss Invest Strategist
Today is the last of August and therefore, for the sharpest among us, tomorrow is the first of September. Whether that represents the end of the summer lull and a return to rational markets is possibly debatable. The British reckon that the summer ends with the Bank Holiday. The Americans reckon it’s Labor Day which is a week later. Many suggest it’s the Monday after Labor Day because too many people on Wall Street don’t return until after the short week… and so on and so forth. Nevertheless, it is never too early to begin to ask oneself what awaits us in the three key months until we formally put our pens down again at Thanksgiving an November 24.
Harold Wilson, the British Prime Minister with the pipe and the Gannex raincoat, famously said that a week was a long time in politics. In the current markets, a week is both an eternity and the bat of an eye-lid. The levels of volatility which a mere week can bring are staggering and yet at the end of that period we tend to be no wiser than we were at the outset. August has certainly provided some volatility but this is not the first time that the “quiet summer period” has been all but quiet.
Traditionally, August volumes are low which always adds to bouts of volatility but for years this has been put down to the key decision makers being on San Tropez or Portofino while the junior lunatics were left to run the asylum. This has certainly not been the case this year but the absence of the political classes has not helped. Not that the politicos would have added much of value to the mix but the very fact of their absence has only reinforced the view that they neither understand nor care about what is going on.
The great peril
“Jiminy Cricket” recently reminded me of the Sorcerer’s Apprentice, the great ballad written by German Johann Wolfgang von Goethe, put to music by Frenchman Paul Dukas and subsequently animated by America’s Walt Disney featuring no one less than Mickey Mouse (Germany, France, America and Mickey Mouse…..hmmmm) in which the despairing apprentice cries “Herr, die Not ist groß! Die ich rief, die Geister, werd ich nun nicht los”, which roughly translates as “Master, the peril is great, I called upon the spirits which I can no longer control…” (I read a rhyming translation that misses the point here completely) which so neatly encapsulates the sovereign debt crisis and the politicians’ warped relationship with the markets. I digress.
Forecasting the autumn is probably harder than usual and even then it’s not a walk in the park. It is probably fair to suggest that the intraday yields we saw on August 18 with 10-year Treasuries at 1.975% and Bunds at 2.03% will mark the lows for the year as will have been the 10,604 points on the Dow which we touched on August 9.
However, all that becomes dependent on the way money flows from now to year-end. Funds are sitting on cash and at near zero returns it is burning a hole in the portfolio managers’ pockets. However, zero return is better than losing money in falling markets. I sense that the desire to buy in is great but sensible investors would be happier to miss the first 10% of a rally than own the last 10% of a sell-off.
With investment banks strapped for capital and the market-making process in a bit of trouble, customary liquidity is missing and both banks and investors have to become accustomed to working a bit harder to make trades happen. Nowadays, when you push the panic button all you get is the “on hold” music. I don’t think that that will change in the short term. Therefore, as crazy as it sounds, institutions would probably be well advised to devise their year-end portfolio strategies now and to begin executing them as soon as possible. What little liquidity there is will be strained by early November which is only nine weeks away and as I suspect we will continue to fly in and out of air pockets, it would be best to be able to act if, as and when the opportunity arises; it might not last for long and, more to the point, it might not come back.
Don’t get short of equities despite what they’re all saying and steer clear of alternatives, in the hedge fund but especially in the private equity space
Meanwhile, the key themes will remain the same. At these levels the market has priced in a Greek default and any major wobble from here forward is probably a buying opportunity. On the other hand, Irish 10 years have rallied just shy of 23 points since they hit their lows in July which represents a drop of 530bp in the yield from just over 13-1/2% to just under 8- 1/2% – there is something irrational in this too and anything below 8% has to be a sell.
Credit looks cheap and with a likely flood in issuance beginning next week, the early bird will catch the worm. However, banks will struggle capital-wise and with them some of the high-yield borrowers might have a spot of trouble refinancing their roll-overs. Don’t get short of equities despite what they’re all saying and steer clear of alternatives, in the hedge fund but especially in the private equity space.
I have spoken. Good luck for the rest of the year. I’m going to have a cup of coffee now after all the heavy thinking.