blog | ebi

Extinction Event or Process?

By Alistair Meadows

“Capitalism requires a structure and value system that people believe in and can depend upon.” — John C. Bogle

It is commonly supposed that the Dinosaurs were wiped out by the Chiucxlub asteroid that landed in Mexico around 65 million years ago, but it is possible that the die had already been cast- they had been declining in numbers and diversity over several million years, and the Asteroid may well have been akin to the knock-out punch that floored an already wobbly boxer. So may it be with Hedge Funds- there have been a number of high profile “blow-ups’ recently, which has caused even the mainstream media to wonder aloud why Investors still use them.

Read in full

Mind the GAAP

By Alistair Meadows

[Up-date: This morning,(18/4) Pepsi announced results: by the magic of Accounting, it managed to convert an $0.64 EPS number into a non-GAAP EPS of $0.89 on a non-GAAP basis. Voila, a $0.25 improvement, with only a little effort required !! ]

“Never attempt to win by force what can be won by deception.” ― Niccolò Machiavelli, The Prince…

Read in full

Running a Deficit

By Alistair Meadows

“Truly, the real black swan problem of stock market busts is not about a remote event that is considered unforeseeable; rather it is about a foreseeable event that is considered remote. The vast majority of market participants fail to expect what should be, in reality, perfectly expected events.” Mark Spitnagel, The Dao of Capital.

This applies equally well to ALL assets, not just stocks.

Some of the most malign consequences of QE, ZIRP, NIRPand so on have fallen on savers. It is now practically impossible to live off the interest from savings (unless you are Donald Trump, in which case you’re a bit busy at the moment), which forces Investors to “Reach For Yield”, with potentially dangerous implications. However, they are not the only victims- Pension Funds are under assault on two fronts, one more technical, one very practical.

Read in full

It’s a Game of Two Halves, Brian…

By Alistair Meadows

A new phenomenon of the 2000s and beyond has been the rise of Financial Television. As the markets have soared, so has interest in them, to the point where even Channel 4 news (not an outlet known for its pro-capitalist views), now feel compelled to announce how stock markets have done that day. Meanwhile, at Bloomberg TV, CNBC, Fox Business News etc, they maintain a hectic pace, often spending as long as 3 minutes covering in depth the latest news stories of the day (hour?), and discussing economic issues with all the gravitas they can muster. One of the first casualties in all this is thought, which they replace with cliches of varying vacuity. Below are some of the best (or worst, depending on your view).

1): “China will have a Hard/Soft landing”.

It is by no means clear how a country can get airborne in the first place.

Read in full

2015 from an EBI perspective

By Alistair Meadows

[We intend to repeat this exercise (hopefully, in a more timely fashion), every year. The next up-date will be in January 2017. This will be in addition to the regular Quarterly Review].

Review of 2015:

We at EBI thought it might be useful for Advisors to have an overview of the last year to help them show clients how our Portfolios performed, and more importantly, why they did what they did. Of course, one year is of little relevance in ascertaining the effectiveness or otherwise of a particular strategy, but it is important to understand the drivers of returns so that we can make any adjustments should the Investment landscape change. Below is an overview of what happened to our Portfolios and a brief discussion of the factors behind this performance.

Read in full

Bringing Down the House (of Saud)?

By Alistair Meadows

“If you want to know what God thinks about money, just look at the people He gives it to.” — Dorothy Parker

[This post was prompted by a discussion with an Oil- industry employed client, who was speculating on the motivations behind the Saudi policy on production etc. and what it meant for the future price of oil. We thought it worth weighing in on the subject, as the oil market is still one of the most important cost inputs into economic decision-making, and thus growth]

The oil market continues to confound expectations. Since the low point in mid-February, it has risen nearly 40%, leading some to call the oil bear market over. This may prove to be premature however.

Read in full

Losing Momentum?

By Alistair Meadows

There is nothing permanent except change

– Heraclitus

In the early 1990’s Fama and French demonstrated that Company Size and Price-to-Book (Value) explained the majority of investment returns, in what was dubbed the Three Factor model. This was the addition of two factors to the market risk (Beta), that the CAPM stated was the cause of stock returns. These have since expanded to 5 (operating profitability and investment policy), and more recently to 6, as investors have judged Momentum to be a “factor”. It is the last of these that has had the most influence on market behaviour over the past few years, in both directions.…

Read in full

Brexit Stage Left?

By Alistair Meadows

[Update: in a further sign of the Elite trying to “steer” opinion, the British Chambers of Commerce have announced the suspension of it’s former Director General, John Longworth after he voiced pro Leave views. The Government have denied putting pressure on the BCC to remove him. When an official denies something, it is normal a sign that it is true].

Your imagination is your preview of life’s coming attractions.

Read in full

The SpOILs of War

By Alistair Meadows

Monkey killing monkey, killing monkey

Over pieces of the ground.

Silly Monkeys, give them thumbs

They make a club and beat their brother down.

“Right in Two”- Tool

Things appear to be hotting up in the Middle East once again. The European refugee crisis has focussed attention on the on-going civil war raging in Syria, and the potential for escalation in fighting if the Turks and the Saudi’s get drawn into the battle for control of the country.

Read in full

Connections

By Alistair Meadows

Last week’s imposition (taking effect this week) of the Bank of Japan’s negative interest rate policy, could represent the last throw of the dice for central banks. The premise is that savers are to be so heavily punished for so doing that they feel compelled to spend money to avoid paying interest on their savings. Central banks appear to have run out of ideas, and are resorting to one that cannot work. If one is living off savings, and rates are negative, one will be more likely to save yet more, to avoid future impoverishment. Of course, this policy has been in operation for a while in Europe and one has to wonder for whom this policy is being enacted. One economics professor thinks he knows; the chart below may also provide a clue:

[Disclaimer: I have always wanted an excuse to show this chart]

Read in full

Losing by Default

By Alistair Meadows

The markets are starting to exhibit signs of economic stress: from oil to stocks across the globe, investors appear to be in full “risk off” mode.

One portfolio manager described the situation thus:

“Credit default swaps continued to soar last week, particularly among European banks. Given that risks surrounding China and the energy sector are widely discussed, European banks continue to have my vote for “most likely crisis from left field…in the fixed income market, we wouldn’t touch low-grade credit at present [nor would we — only in our case it would be full stop]. Once credit spreads widen sharply, the default cycle tends to kick in several quarters later. The present situation is much like what we observed in early 2008, when we argued that it was impossible for financial companies to simply “come clean” about bad debts, because then as now, the bulk of the defaults were still to come.”

Read in full

The surety of Uncertainty

By Alistair Meadows

Everyone has a plan ’til they get punched in the mouth.

– Mike Tyson

Analysts have got off to an inauspicious start in 2016: “The current stock market level is disconcertingly well below not just the Wall Street forecasts for 2016 (made a couple months ago), but also below those made for 2015… or for even 2014!” (via Zero Hedge).

All investors, including those in EBI Portfolios, have taken a bit of a beating recently. Nearly everything has fallen sharply in the last six weeks, and equity market correlations are once again approaching one, as the table below highlights. …

Read in full

Banking on Trouble?

By Alistair Meadows

The last month or so has seen a gut-wrenching fall in oil prices (and most asset prices in general). Declines so far have been (relatively) orderly — a 5% move for oil for example is par for the course — but some strange things have been happening in ETFs and ETNs . They should trade at fair value — that is, at a zero premium to the value of their assets. If they didn’t, there would be an opportunity for risk-free profits (known as arbitrage). But, as this Barron’s article relates, this has not been happening.

First, let’s remind ourselves what an ETF is and what it does…

Read in full

The Value of Everything

By Alistair Meadows

Value Investors have had a hard time in recent years — what was cheap has remained so for what seems like an age. Does it still exist, or like the Betamax, Walkmans and the Lib Dems has it become a relic of a bygone era?

Read in full

The Lure of Certainty

By Alistair Meadows

A fanatic is one who can’t change his mind and won’t change the subject.

– Winston Churchill

OK, I know I have covered this before (here), but in the cacophony of market forecasts arising from the brokerage industry, and dutifully repeated by the financial media, I feel the need to purge myself of the temptation to listen to them. (This may be a form of therapy — bear with me.)…

Read in full

Stand or Deliver?

By Alistair Meadows

The new year has not started brightly — geopolitics in the Middle East, literal rumblings in North Korea and the chaos in Chinese asset markets has put equities on the back foot. The real concerns, however, may lie elsewhere.

Read in full

Reminiscences of a Stockbroker

By Alistair Meadows

[The title of this blog is penned with apologies to Edwin Lefevre, the writer of what is possibly the greatest book on the stock market ever written]

In February next year, I shall have worked in stock markets in various guises for 29 years, and will have to up-date the bio below. In the meantime, in what will be our last blog of 2015, I shall attempt to describe the similarities that have endured and the differences that have emerged in that period. It is by no means exhaustive, merely a personal account of what it was, and is, like to work in the City of London.

Read in full

Liquid(ity) Gold

By Alistair Meadows

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price

Read in full

Safe as Houses?

By Alistair Meadows

A couple of weeks ago we looked at the European interest rate situation in the context of the Fed’s dilemma over Interest Rates. Today, we look at one of the consequences of these super-low rates, as a result of the efforts to avoid currency appreciation: house price appreciation.

Read in full

Seeking Consensus

By Alistair Meadows

Contrarian Investing is an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time.

Read in full

Breaking up is (not so) hard to do

By Alistair Meadows

Events in Europe appear to be moving in a decidedly dangerous direction. The initial huge sympathy for the migrants has given way to concern (and in some cases alarm) amongst the local populations. From welcoming refugees unconditionally a few weeks ago, Angela Merkel has changed tack, limiting their “rights” and preventing further inflows (as far as possible). This puts them on a par with the likes of Hungary, Croatia, Slovenia and others who are actively seeking to offload the problem to others. Meanwhile the EU itself, according to the Washington Post, predicts

Read in full

From ZIRP to NIRP — The Monetary Twilight Zone

By Alistair Meadows

ZIRP- Another Japanese innovation, this time from the Bank of Japan, whose aim was to stimulate the Japanese economy by having a Zero Interest Rate Policy: so far (15 years and counting), it has had an extremely limited effect.

NIRP- A variation on the above theme, whereby Central Banks (particularly the ECB, but not limited to them ) employ a strategy of Negative Interest Rate policy: the likely economic result will be much the same.

Read in full

A Sequence of Errors?

By Alistair Meadows

The future depends on what you do today.

– Mahatma Gandhi

There has been much talk recently about “Sequence Risk” (a more detailed description of the opposing views can be found here and here ), as both sides ponder the Safe Withdrawal Rate (SWR) for retiring investors, and the effect of market returns on Retirement Pot longevity. …

Read in full

Till Debt Us Do Part?

By Alistair Meadows

Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.

– Ogden Nash

This week we shall focus on a number of (partially) related stories in lieu of a major theme. The common denominator is debt — how companies, states and even countries deal with the issue will shape the economic landscape for years to come.…

Read in full

Is the Tide Going Out?

By Alistair Meadows

Only when the tide goes out do you discover who’s been swimming naked.

Read in full

The End Game for the Fed…?

By Alistair Meadows

In the wake of the Fed’s non-decision on Interest rates last week, the markets have remained highly volatile and there are now questions being raised about the Fed itself.

As Vanguard’s Chief US economist put it, “we are concerned with the Fed’s acknowledgement of recent market volatility in its decision. The Fed runs the risk of being held captive to the markets as, paradoxically, much of that volatility is due to the anticipation and uncertainty around when the Fed will move”.

Read in full

Can Corbyn win, and what if he does?

By Alistair Meadows

[The following is NOT a forecast — according to some bookies, Corbyn has only a 14% chance of being the next Prime Minister. What follows is an unlikely potential scenario which would have a high impact on markets — a so-called Black Swan event]

There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.

– Donald Rumsfeld

Black Swan: An outlier event, with an extreme impact…

Read in full

Risk Aversion: A Crowded Trade?

By Alistair Meadows

There is always an easy solution to every human problem — neat, plausible, and wrong.

– H.L Mencken (writer, 1880–1956)

Declines in markets over the past three months have, as usual, led to an inquest into what went “wrong”, conveniently ignoring the reality that losses go with the territory, and at around 10% is no more than a run of the mill correction. Some suspects have been hauled up in front of the court of public opinion: Hedge funds (a usual suspect if there was one), Factor investing in general (smart beta, alternative beta etc.), and risk parity in particular.

Hedge funds can be (partly) absolved of this charge. Losses, whilst large in some cases, were not generalised, and they may well not have been the catalyst for the chaos, but merely caught up in it all.

Read in full

The Long Term view on EM

By Alistair Meadows

It hasn’t been a great period for all things Emerging recently.

Predictably, analysts have turned negative co-incidental with the market falls. EPS forecasts have collapsed as this chart shows.

As this article points out, however, that is a bullish sign for investors. Warren Buffet is often quoted as saying, “Be fearful when others are greedy, and greedy when others are fearful”, and this may be one of those moments. Meanwhile, aggregate Developed Market Bond and Stock valuations are at their highest level of all time, according to Deutsche Bank.

Read in full

Keeping your Balance

By Alistair Meadows

You’re not really diversified if you don’t hate something in your portfolio at the moment.

– A Wealth of Common Sense, Ben Carlson 1/9/2015

Would you want to buy this market? We think that it can make sense…

Source: Bloomberg

One of the most important tasks in Long Term Investment is that of maintaining one’s asset allocation. Once a risk tolerance level has been set, one invests in a portfolio of assets, but that Portfolio will “drift” over time as the investments will generate differing returns. If stocks outperform bonds, for example, an original 60/40 (e.g. EBI 60) could morph into EBI 75 or even higher, which may be above the clients risk tolerance. The Tech bubble and subsequent crash will have pushed the Portfolio weighting above (and then below!) the client’s true risk level…

Read in full

This Too Shall Pass

By Alistair Meadows

[This post is intended to try to explain current market trends and what it means looking forward. As Yogi Berra said, “its tough to make predictions, especially about the future”, so we won’t try. But, we can try to understand what is causing this huge shift in investor sentiment, as it may help us withstand whatever lies ahead. The views expressed are my own.]

Read in full

The Value Premium — Missing in Action?

By Alistair Meadows

In investing, the value premium refers to the greater risk-adjusted return of value stocks over growth stocks. Eugene Fama and K. G. French first identified the premium in 1992, using a measure they called HML (high book-to-market ratio minus low book-to-market ratio) to measure equity returns based on valuation.

“The value factor clearly works, but the explanations for why vary. Historically, value stocks have outperformed growth stocks. The evidence is persistent and pervasive, both around the globe and across asset classes. While there’s no debate about the premium, there are competing theories to explain its existence”.

Notwithstanding the above quote there is definitely a debate to be had on the existence of the “Value Premium”, not least because it has been conspicuous by its diminishing presence in the recent past. The chart below shows the returns to value over the past 20 years.

As of 28/2/15…

Read in full

Small Caps — Is there still a premium?

By Alistair Meadows

Are Small Caps a truer proxy for UK plc?

The performance of UK Small Cap shares has outshone both the overall market and the widely quoted FTSE 100 Indices as the chart below shows.

It is worth going over the make-up of the various Indices.

  • The FTSE 350 Index is the sum of the FTSE 100 and the FTSE 250 Indices (in Market Cap terms)
  • The FTSE All Share Index is the sum of the FTSE 350 Index and the FTSE Small Cap Index (in Market Cap terms)
  • FTSE 100 Aggregate Market Cap £1.71 Trillion
  • FTSE 250 Aggregate Market Cap £354 Billion
  • FTSE 350 Aggregate Market Cap is thus £2.06 trillion FTSE Small Cap Aggregate Market Cap £77.05 billion.
  • FTSE All Share Aggregate Market Cap is therefore £2.14 trillion.

Read in full

Emerging or Submerging Markets?

By Alistair Meadows

Emerging Markets had a torrid month in July. Only 5 out of the 23 EM markets made gains, as worries over falling Commodities and rising political tensions prompted Investors to withdraw large amounts from both Fixed Income and Equity funds. According to ETF.com, $15.9 billion has been redeemed from ETF’s in 2015. The banner image above shows that losses were concentrated in Commodity and Emerging market Indices. The Chinese market has seen a 28% intra-month range (High to Lows) as Authorities have tried to contain almost panic-selling, whilst Brazilian equities have fallen 4% in July too.

Read in full

UK Rate Rise — A Done Deal?

By Alistair Meadows

Is a UK Base Rate rise a done deal and if so, what should one do?

At a speech at Lincoln Cathedral 10 days ago, Mark Carney, the Governor of the Bank of England gave a clear hint that interest rates are going up, maybe as soon as the New Year. If one believe the media, it is a certainty, (“a done deal” in City parlance). But is it that simple and what factors are at play in this process?

Although Mr Carney is presumably only speaking for his own voting intention, the voting record of members shows a high degree of consensus, with (unlike the Federal Reserve) no strong and consistent block of dissent, and so his views deserve attention.

The arguments for a rate rise are well rehearsed, as the Guardian notes:

Read in full

Greece is (Not) the (Only) Word

By Alistair Meadows

As the increasingly farcical Greek debt saga staggers on, away from the spotlight a potentially bigger crisis is brewing in the US. The Island of Puerto Rico, led by Democrat Governor Alejandro Padilla has declared their $72 billion debt “un-payable” and is looking to “re-structure” (aka reduce) the debts.

The problems experienced in Puerto Rico are not unprecedented — New York and Cleveland in the 1970’s, and Orange County in the 1990’s faced similar problems, but subsequently recovered. The problem for the local authorities is that they cannot just declare bankruptcy-under US Law, neither Puerto Rico nor its “sub-state entities” (public corporations, judicial districts etc.) can do so, unlike in US cities such as New York or California. Public Corporations, such as the PR Electric Power company owe between $20–25 billion. For comparison, New York, the most indebted US State, owes $29 billion in total, despite having a population five times that of Puerto Rico.

Read in full

Greece — The Fallout

By Alistair Meadows

The seemingly endless Greek saga looks to be close to denouement today (9/7/15) as Prime Minister Tsipras appears to be set to acquiesce to the terms demanded by the Troika, the ECB, (and most importantly), Angela Merkel. Indeed, they are likely to be harsher than those originally rejected by the Greek people in last Sunday’s referendum. In return, there is the prospect of a new long-term aid programme, but one that will expressly not include “haircuts” for the various creditors. The question is, who are those creditors, and how much will they lose if Greece were to go bankrupt, and exit the Euro Zone (the so-called “Grexit”).

Read in full

Staying the Course

By Alistair Meadows

The media frenzy is in full swing today as markets see sharp falls, especially in China (and today Hong Kong). But what will this all look like in 10 (or even 20) years? The chart below shows the FTSE All Share Index on a log basis. Without knowing when it occurred, it may be difficult to see the “crash”, when shares fell 21% in one day(!). This underscores the crucial importance of not over-reacting (or over-analysing) market movements. There is a distinction between the map and the terrain — volatility is the norm, not the exception, and those who can ignore the news, the hype, the scaremongering of the financial media will survive and prosper.

Read in full

The Perils of Market Timing

By Alistair Meadows

This is an example of a report I was asked to prepare for a client who was interested in the oil market. It was written on the 27th March 2015 when the oil price was less than $50 per barrel. Post this report, the oil price rose relentlessly, reaching $64 within a month. It clearly demonstrates the limits of using “fundamental analysis” to gauge future market movements. The fact that it was almost completely wrong, despite the wealth of data to support it, reminds one that trying to foretell markets’ behaviour is a fool’s errand. Markets are designed to wrong-foot the majority, and so it is much more sensible to just take what the market gives you. That is what Index Investing is all about.

The Oil Market: How to Profit from Price Moves

There are several ways to gain exposure to a rise in oil prices:

  • Buy low cost oil producers
  • Buy oil service companies…

Read in full

Coutts and the Orbita Fiasco

By Alistair Meadows

In what seems to be a depressingly familiar story, we have been made aware of another banking scandal involving the mis-selling of unsuitable products to investors, this time by the venerable institution Coutts. It is by no means the first (or last) time this will happen — a Forbes article highlights the biggest scandals of 2012 (what does it say about an industry that can have at least 10 “scandals” per year?). Typing in scandal to ETF.com produces circa 6,000 hits, so it can be truly said that Industry has a FIFA-like track record in mis-behaviour. The question is therefore begged as to why investors still use (let alone trust) these firms to work on their behalf. We shall get to that later, but first the details.

Read in full


Originally published at ebip.co.uk.

One clap, two clap, three clap, forty?

By clapping more or less, you can signal to us which stories really stand out.