Broomer's Blog

From the category archives: Markets


Why are companies cutting dividends?

Dividends are normally a reliable indicator of company health. Most of the time, dividends are paid, and are only cut in the direst of circumstances. Company shares frequently suffer very badly when this happens and so during most market crises dividends across the market are very rarely reduced. To put this into context, in 2008 they fell by about 10%, which by historical standards was an exceptional fall.

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Have markets got ahead of themselves?

We find ourselves in the midst of a striking rally in the S&P 500 which has retraced 27% since the market lows on the 23rd of March, regaining over half the losses since its peak in February. The FTSE 100 has been more pedestrian in comparison being only up 13% from its lowest point. The US government has been busy pulling together packages to help prop up businesses. Congress has released $2 trillion to help individuals and businesses directly affected by the virus and the Fed more recently has created a $2.2 trillion bundle of loans and liquidity support to help markets and businesses through these difficult times. We are now entering the first quarter earnings season, but most investors will be expecting widespread bad news which will largely be ignored by the market. One development that seems to be supporting the market at the moment are signs that the epidemic is being suppressed. We are perhaps passing the worst here in Europe while the US appears to be approaching the peak of this outbreak. Ho ...

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How is the economy going to bounceback?

Markets continue to be amazingly volatile with the S&P climbing 7% on Monday this week. In general, we do not expect to see market changes of that magnitude in a bull market; they are much more associated with bear markets and we are probably not out of the woods yet. In addition, we are facing a material collapse in GDP as large swathes of the economy are closed down. We are beginning to consider the extent of any bounce-back once these controls are lifted. It is perhaps easiest to put these considerations in the context of individual businesses. Take for example hairdressers. The longer people are confined to their homes, the more dishevelled they will start to look. Hairdressers have lost custom as their clients are prevented from going to salons but once the quarantine restrictions are lifted, people are likely to rush back, and hairdressers can expect to experience a surge in demand as a result. Nonetheless, the longer the lockdown remains in place, the more business hairdressers will miss out on. Th ...

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How the Global Financial System is plumbed and the strains that it is under

We have seen some strange moves in financial markets over the last two weeks. The dollar has slumped, then soared. Governments have basically underwritten corporate credits yet credit spreads have widened out to levels not seen since the GFC. Gold prices tumbled by 10% and are now climbing once again. Government bond prices have swung wildly, gilt prices slumped by over 10% at one stage. What is going on? Below are 10 observations: 1. Adverts: Watching TV over the weekend, it is almost comical to watch adverts for cruise holidays and to see offers for two frozen pizzas for £5 – as if supermarkets have any left in stock. However, this underlines how rapidly the situation is moving. This crisis has not developed in weeks, but in days. The global financial system is struggling to deal with the speed and magnitude of the changes.. 2. Loo rolls: Are we not using the same amount? Admittedly wholesale supplies (offices, restaurants etc) now need to be redirected through the retail system and t ...

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Coronavirus: how long will the disruption last?

Last week, global stock markets endured their worst trading since the 1987 crash. On Thursday alone, the FTSE 100 fell by 10% and the index has slumped by over 31% so far this year. Is this as bad as 2008? Certainly, the speed of the market adjustment is beginning to feel like the nadir of that crisis. However, in distance travelled global markets are only off 20-30% compared to the 40-45% falls in ’08. What is very different is that the financial system is not at risk. The main costs of this outbreak will fall upon governments and business will face a period of disruption. The key question is how long this period of disruption will last and markets are likely to become more settled once this is determined. Action against the outbreak is being moved to one of managing and slowing rather than elimination. Isolating and suppressing outbreaks involves very significant economic costs that largely fall on businesses. Managing and mitigating will also have costs but these will be largely borne by what is ...

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Coronavirus: markets taking the hit?

Stock markets around the world have plunged earlier this week as the coronavirus spreads. Over the weekend, large parts of Italy's industrial heartland were placed in quarantine and the oil price has slumped by 20%. The FTSE 100 has fallen by 6% on Monday morning. The virus has now infected people in over 50 countries and appears to be becoming established in several places. There have been successes in constraining its spread, however. A few weeks ago, new cases in China were measured in thousands each day. Now they are measured in the tens (44 to be precise). It would appear to be over optimistic to hope that the disease can be eliminated, and when outbreaks occur, the spread can be very rapid. This is increasingly looking like something that we must learn to live with. We have been a lucky generation. Our forefathers had to handle a host of epidemics such as smallpox, diphtheria, and cholera. Society continued then as it will do today. Covid-19 is nas ...

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Coronavirus: is the market’s reaction overblown?

Action to contain the new coronavirus, involving travel restrictions and quarantine areas, is economically damaging. Recent falls in stock market reflect this. We do not have full details of the disease and its severity but it is becoming increasingly clear that it is most dangerous to the elderly and infirm. Unusually, young children do not appear to be particularly susceptible and reported infections among the young appear surprisingly low. We have no wish to dismiss the human tragedy involved, but the groups most at threat are largely economically inactive. Health care services will come under pressure and care costs will be high, however, this burden will largely fall on the public sector. Taxes could consequently rise or, more likely, public borrowing will increase. Global central banks have cut interest rates to support the economy. This should help offset the damage wrought to supply chains and demand. Economists’ estimates of the costs of the virus range anywhere between 0.5% and 10% of G ...

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Coronavirus in perspective

The expansion of the coronavirus outbreak is frightening but needs to be placed into perspective. So far, there have been 3,000 cases out of a population of 6,000,000,000 if we exclude China. There will be further cases, but the disease appears to be containable. Some nations, including poor ones, have been quick to isolate those infected and nip their outbreak in the bud. Even China, with nearly 80,000 recorded cases, appears to be winning its battle as the number of new infections falls. For the moment, we have confidence that other nations such as South Korea and Italy will take the steps necessary to isolate the disease. Sadly, we are less sure about Iran where the authorities have been in denial. The country's links to Afghanistan and Syria seem to leave a high probability that the virus will find a base in the Middle East (though the arrival of summer could stem the rate of infection). If established in the Middle East, outbreaks will continue to pop up around the world as a consequence. The human tr ...

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I attended a presentation by a firm last week, considering asset allocation in a low yield environment. The firm in question is a US based quant shop (they style themselves as ‘systematic investors’), who employ some highly regarded market practitioners as well as banks of PhDs. They run a range of strategies including risk parity.

The presentation was elegantly crafted and engaging. Its central theme was that bonds still have a full role to play as diversifiers in balanced portfolios and that investors should continue to rely upon capital values to appreciate despite the paltry yields on offer. This argument is almost entirely reliant on the assumption that there is no lower bound to interest rates.

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Looking Back at the Credit Crisis and the 1,2,3 Banking Model

I am in the process of transferring into the office some of my investment related books. Within the pile, I came across a couple of books which I had purposely set aside unread. Having worked at a bank during the credit crisis, I had little desire to revisit those traumatic days through Andrew Ross Sorkin's 'Too Big to Fail' and Greg Zuckerman's 'The Greatest Trade Ever'. Ten years on, I thought that I was finally composed enough to read them. Of the two, Sorkin's is the better, but Zuckerman's is a useful complement by describing the other side of the trade. Sorkin's book is a gripping read, but even now I found it as soothing as a Stephen King horror story and stressful to recount what happened.

I came away from the books with some interesting observations. The crisis was very slow moving in the early stages, many people recognised that something was seriously afoot but it took a long while for the storm to build up to its full force. Subsequent to the Bear Sterns/BNP hedge fund collapse in 2007, bids for sub-prime paper essentially evaporated. Yet prices remained high as no holders of the dodgy paper dared to sell. When the underlying fundamentals of illiquid assets change, it can take a long time to discover what the true price is. Especially when the counterparty with the power has a strong incentive to mask the news.

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