Crispin Odey
Founding Partner | Portfolio Manager
Current Outlook
Remember that at the end of June, the S&P had broken down, creating a dead cross technically which meant the imminent decline in stock markets. One month later and markets have had their best ever month for some time, but the bears can still point to both one year and ten year bonds hitting new highs, to show that nothing has really changed. Thus the bonds and equity markets do seem to be telling different stories.
The bond market is going with the double dip, believing 2011 will be a very difficult year for the world, with therefore all the risks to corporate profits. The stock markets believe nothing of the sort.
My view is that whereas I found it hard to sleep from 2005-2007, because no assets yielded me more than 6% gross and I could see consumer spending over-inflated by Ponzi credit, today I look at a world that is half way through its recovery programme. The policy mistakes of 2002-2007 demanded this massive bail out of the banks in 2007-2009 which saw private liabilities taken on by governments. Today the wiser governments are in the process of cutting public expenditure and following a flight path back to stability within 5 years.
Of course it feels quite scary because we are only half way through, but the understanding of the problem is now well known, and most importantly I am now being paid to take risk. My portfolio of shares must be at most on a P/E of 9 times net profits. What July did was to show that the authorities understand the problem. Both Basle III and the stress testing of the European Banks shared one thing. Banks have got enough capital for the job. This is important because no one has doubted, especially in the UK, the earnings power of these banks since the crisis. My favourites Barclays and Lloyds, trade on 5 times my earnings forecast. Along with BP, they are the highest yielding assets. But my BSkyB is on a 10% yield on my numbers. Glaxo, having navigated a tricky patent cliff for its major drugs is on an 11% yield. Avis is on a 12% earnings yield with a deleveraged balance sheet. Ericsson is on a 10% earnings yield after coming out of a 10 year Telecom capital spending Sahara.
Why do I think this is a bull market? Because I find myself talking numbers and strategy with companies and feel that their targets are achievable and not priced in by markets. I still maintain that stock markets can't go higher unless led by the banks. Who has led this recovery in July? Yes, the banks. Can it continue? Let me give you one example. JP Morgan, when they reported their earnings the other day, said they had surplus capital equal to 42% of their market capitalisation.
I think that this is still a self help environment. Companies need to buy back their shares with all this surplus cash. But it is also potentially a great time to be investing. US fixed assets have never been older. China is enjoying a wage boom which we should cheer to the skies because it will make investing in the western world that much more attractive.
The only thing that was needed was governments who were aware that their job was to create the environment conducive to investment. In the UK we appear to have one, the USA don't. No wonder sterling has risen 12% against the dollar since the election.
30th July 2010.
For performance, holdings & analysis, visit My Odey