This week’s comment is a quick summation of the current push and pull forces acting upon markets and our two-penneth worth on what we are thinking.
One of the low grumbles over the last few years (which are getting louder and will be an election hot topic both in the UK and US) is the widening disparity between the “haves” and the “have not’s”.
Low interest rates and the forced reflation of asset prices (bonds, property and equities) have produced large gains for the “haves”.
Below inflation pay rises coupled with insecure jobs, reduced social benefits and increasing cost of energy and food have left the “have not’s” increasingly struggling.
Ed Miliband’s inelegant “zero-zero” observation using Sports Direct as an example is not actually without merit. The US and the UK allow businesses to employ with much lower costs and protections than does say France, this is economically advantageous and creates greater productivity (French labour laws undoubtedly stifle economic growth) but people do end up being used and sometimes abused.
It’s a balancing act between naked commerce which does not factor in human contentment, and economic and social policy engineering which forces it to be done.
If the “have not’s” majority watch the “haves” minority enjoy increasing benefits whilst they flounder more it causes resentment, especially if it’s prolonged and extreme.
So it’s the battleground of maximising economic utility versus workers benefits and rights; we have seen this play out many times before, it’s long lasting and seldom resolved peacefully.
Now that QE has finished in the US it’s all about when rates begin to rise. All markets in all parts of the world will be effected.
As we have never seen the current zero interest rate policy no one knows what happens when it’s normalised, but logically it can’t be good for fixed interest assets.
The catchphrase “we’ve started so we’ll finish” applies exactly to Japan.
They are hugely indebted, they have to lower the Yen, raise wages, increase corporate taxes and drive up inflation.
They are already doing a lot but they can’t be timid or backtrack, if they don’t affect a profound course adjustment they are going off a cliff.
At this point in time the strongest opportunity to benefit from this is to invest in the yen decreasing in value (called a ‘short’) and to be invested in multinational Japanese exporters (called a ‘long’).
I have told this story before but back in 2008/9 oil prices went to around $150, a major investigation was made into why the price spiked and it concluded ……….no clue!
So oil is now at $75 and falling, why? ……. No clue.
There are theories including OPEC trying to drive US producers to shut down rigs as lower prices make them uneconomic; same for the Canadian oil sands but really everyone’s guessing.
What we do know is that lower oil prices are good for petrol prices (consumers end up with more disposable income), and it’s great for industrials that use oil and transport such as airlines whose main cost is fuel, a lower price creates pure profit.
Share prices of the above sectors are rising and probably have further to go.
Buy outs back alright
One of the signs of a bullish market is increased mergers and acquisitions activity.
There have been multiple such deals recently but they look more strategic than hubristic in the main.
Most are in the pharmaceuticals sector where biotech advances fuelled by the Genome discoveries are creating new major players such as Gilead and Abbvie with $100 billion plus valuations.
As with older tech names such as Yahoo and Microsoft, the older pharma giants such as Merck and Pfizer need to incorporate the new companies into their portfolios to stay relevant.
This appears a different dynamic to the late cycle mega acquisitions based on management’s belief they can make lemonade from lemons (they usually ended up making something brown not yellow).
All looks reasonably set fair for a little more “up” into year end with the delightfully named Santa Claus rally coming into effect.
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.