Published on January 27, 2009
MODEL PORTFOLIO SEEKING ABSOLUTE RETURNS 27th January 2009 Sound Advice EquityBell Securities was set up in October 2008 to provide outstanding investment advice to clients running non-discretionary portfolios through direct market access brokers and wealth managers. The credo is absolute returns by giving sound advice in asset classes that are individually appropriate to the risk appetite and base currency of each particular client. The EquityBell Securities leveraged model portfolio was started on Portfolio NAV £100,000 January 2009 as a paper trade with an initial value of £100,000. Profit £0 0% Only our most robust investment ideas will be placed into the portfolio explaining the rationale, entry price with comments on reasons for holding Current Positions and explanation of the exit and price and net profit and loss. FX Short €100k EURJPY @ Opening trades 118.606 Commodities Looking to buy Gold @ a limit Date Asset size FX price £ value margin Price £value P/L of US$865 now 26/1/2009 EURJPY Short EUR100k 118.606 93,773 2,800 118.606 93,773 0 Fixed Income FX Short June 10 yr Gilt Future 26/1/2009 June Gilt Short 1 GBP 118.71 118,710 3000 118.71 118,710 0 Future 26/1/2009 MRW Long £50k GBP 258.00 50052 7,500 258.00 50052 0 Equities shares CFD’s Food Retail Spread 26/1/2009 SBRY Short GBP 309.75 50024 7,500 309.75 50024 0 Long Morrison CFD 258p shares £50k CFD’s Short Sainsbury CFD 26/1/2009 Carrefour Long €50k EUR 26.495 47,200 7,000 26.495 47,200 0 309.75p shares CFD’s 26/1/2009 LVMH Short €50k EUR 43.42 47,200 7,000 43.42 47,200 0 Luxury/Staple Spread shares CFD’s Long Carrefour CFD @ €26.495 Short LVMH CFD @ €43.42 THIS IS A MARKETING COMMUNICATION FX This note has not been prepared in accordance with legal requirements or offer to to promote any independence of Intended for information only and should not be construed as an invitation buy or sell investment vehicle. designed the investment research; and is not subject to any prohibition on dealing ahead of the dissemination of this marketing note.
MODEL PORTFOLIO SEEKING ABSOLUTE RETURNS 27th January 2009 Sound Advice FX The US and UK economies have borrowed and spent with impunity from 2001 to 2007 using low interest rates and extra money supply created out of thin air by default guarantees and credit swaps. We have never had a financial crisis before where governments, corporations and individuals are all heavily indebted at the same time. The resulting collapse in consumer spending is pushing all central bank rates towards zero. Governments are picking up the slack with fiscal stimulus packages that will have little effect until banks can start lending again and consumer confidence returns. As the UK is probably the most perilous economy (with the US a close second), quantitative easing in the form of printing money is the only way to fund expansion programs. While we see sterling and the US$ continuing to decline in the longer term, the vicious losses over the past year may consolidate in the near term. Japan has been in a deep fiscal funk since December 1989 with the Nikkei 225 index down 80% over the past 18 years. However, Japan is still the world’s second largest economy with a GDP of US$4.3 trillion and also has the second largest current account surplus. The BOJ will make lots of noise about the strength of the JPY, but as the Western economies with the weak currencies cannot afford their goods anyway, it will not halt the advance. The EUR is beset with overburdening debt in Ireland, Spain, Portugal, Italy and Greece and the ECB will most likely need to print money, keeping the JPY stronger. The following graphs show the JPY advanced most against the USD, GBP then EUR. USDJPY since 2002 - very weak US$ since 2002 Source: Saxo Bank GBPJPY since 2002 – GBP has halved since July 2007 Source: Saxo Bank
MODEL PORTFOLIO SEEKING ABSOLUTE RETURNS 27th January 2009 Sound Advice EURJP Y since 2002 – JPY back to 2002 levels, but not as weak as US$ and GBP . Source: Saxo Bank As the EURJPY is a less volatile pair than the USDJPY and GBPJPY, we would therefore suggest selling EUR100,000 to buy JPY @ 118.606 as a foreign exchange transaction Commodities The US and UK governments will probably have to print money in quantitative easing to provide liquidity to banks who have to deleverage loans made using credit guarantees over the past four years. Trust in paper (or fiat) money is waning and gold is emerging as the currency of choice. Central banks printing money coupled with fraud and mismanagement at leading financial institutions and corporations may cause a flight to safety. Once greed gives way to fear in the equity markets as failing banks are nationalised, gold is likely to become the currency of choice and could significantly appreciate, even in the face of deflation. As the chart on the right shows, gold was in a long term bull market until last year when inflation failed. As faith in fiat money is disappearing and governments poised to lose their AAA ratings, gold in being sought as the currency of first choice. The UK (among others) could soon ask the IMF for help and we should remember they back all their loans with gold. If extra money is ploughed into the IMF to extend rescue packages, they have to buy gold as the collateral . Source: Saxo Bank Gold has broken out higher to US$905 as we were writing this report and we suggest setting a limit to buy 100 ounces of gold as a currency against the US$ @ a limit of US$865 per oz on a pull back.
MODEL PORTFOLIO SEEKING ABSOLUTE RETURNS 27th January 2009 Sound Advice Fixed Income For the UK and US economies to recover, individuals need to have the cash and confidence to start spending, which is going to take a while. The initiation of a UK government sponsored “Troubled Asset Repurchase Plan” (TARP), as they have in the US has revealed just how bad the economy is and the prospects for sterling is getting worse as the Bank of England will need to print more money in quantitative easing. UK banks are reported to be pro-actively retiring leveraged structured debt lent on (now worthless) credit guarantees from distressed sellers who need the cash to shore up their tattered balance sheets. Gordon Brown has finally realised that throwing “rescue package” credit at the banks is not going to kick start them lending while they still need to deleverage the 30% extra money supply created out of thin air that they lent out on credit insurance so as to maintain the capital adequacy ratios. Even a UK TARP program may not allow UK banks to start lending soon, which is an ill omen for businesses and equity prices. The Federal Reserve, Bank of England and European Central Bank interest rates are all converging towards zero at the short end. As investors, governments and corporations all need cash that the banks are not able to lend them, bonds are getting sold, which should significantly steepen yield curves as long rates climb. Rumours that Gordon Brown may ask for IMF help are fuelling UK government bond (Gilt) sales. Below is the chart of the price of the Long Gilt (10 years) futures (which is an inverse of interest rates) showing how rates have fallen and bond prices risen over the past 9 months. As we are looking for bonds to be sold as people have better use for the money (as the banks will not lend), these futures should decline from the current 118.00 to a target of 111.00. With a contract size of £100,000 per contract, this is a targeted profit of £7,000 per contract. 10 yr Gilt front month Futures price 10 year Gilt yield and BOE Official Bank Rate 10 yr Gilt yield BOE rate 6 5 4 3 2 1 0 2002 2003 2004 2005 2006 2007 2008 2009 Source: Saxo Bank Data Source: Bank of England Therefore we would suggest selling 1 contract of the June UK Long Gilt Bond futures (FLGM9)
MODEL PORTFOLIO SEEKING ABSOLUTE RETURNS 27th January 2009 Sound Advice Equities Equity markets are at a fulcrum point, with inactive bulls and bears watching events. Having not confirmed a breach of the November 2008 low, price action would still point to a bear market rally back to the mid December highs of 4,400 on the FTSE and 900 on the S&P500. Commercial paper and bank deposit are close to zero suggesting there is cash waiting to be invested. However, event risk makes us cautious as bad news like a German insurer going bust would push equity indices through support levels and down to our longer term targets of 2,000 on the FTSE and 500 on the S&P500 in the next 18 months. This short term uncertainty makes it difficult to suggest outright longs or shorts with any degree of certainty, which is why we prefer suggesting relative value “pairs” trades as follows. Food Retail Spread Morrison 258.00p on a 12.15 PE and a 1.87% div yield, 2009 est EPS 16.77p Sainsbury 309.75p on a 15.96 PE and a 4.05% div yield, 2009 est EPS 20.03p As UK consumers tighten their belts, there is a clear trend towards lower cost retailers. We have seen a pick up in Waitrose food sales as the people that previously ate out at restaurants every night are now cooking premium ready meals at home. Also higher cost food/staple retailers like Sainsbury are seeing customer migration to cheaper brands like Morrisons and Asda. Performance Chart of Morrisons vs Sainsbury and the % spread (in black) Morrison Sainsbury 600 500 400 300 200 100 0 Data Source: Yahoo Finance Sainsbury looks to be more generous with their dividend than they might be able to afford given the state of the economy. As Sainsbury are trading on a higher price and multiple than Morrisons we are looking for a convergence in equity prices. We therefore suggest buying Morrisons CFD’s for £50,000 with shares @ 258.00p against shorting Sainsbury CFD’s for £50,000 with shares @ 309.75p which a market neutral spread trade with approximately £50,000 exposure on each leg.
MODEL PORTFOLIO SEEKING ABSOLUTE RETURNS 27th January 2009 Sound Advice Luxury/Staples Spread Carrefour €26.495 PE 9.70 and a 3.57% div yield, 2009 est EPS €2.61 LVMH price €43.42 PE 10.25 and a 1.70% div yield, 2009 est EPS €4.41 LVMH, is a French holding company and one of the world's largest luxury goods conglomerates. It is the parent of around 60 sub-companies that each manage a small number of prestigious brands. These daughter companies are, to a large extent, run autonomously. They run Moët et Chandon and Hennessy, Louis Vuitton, Christian Dior, Château d'Yquem and sales of De Beers. Carrefour is Europe’s largest food and staples distributer (2nd in the world) operating hypermarkets, supermarkets, hard discount stores and convenience stores. They own other brands such as Shopi, Champion, Norte, Dia and ED, and has 11 000 shops in 32 countries, including China serving more than 2 billion customers. As the full scale of recession bites, we see luxury spending continuing to contract while staple buying of food and budget clothing will remain constant or increase as consumers downgrade. LVMH’s EPS has come under scrutiny for being optimistic, while Carrefour appear to be growing into the slowdown. Performance Chart of Carrefour vs LVMH and the % spread (in black) Carrefour LVMH % Spread 120 100 80 60 40 20 0 10/07 12/07 02/08 04/08 07/08 09/08 11/08 Data Source: Yahoo Finance Therefore we suggest buying Carrefour CFD’s for €50,000 worth of shares @ €26.495 against shorting LVMH CFD’s for €50,000 worth of shares @ €43.42 which a market neutral spread trade. EquityBell Securities Quay House, 2 Admirals Way, Canary Wharf, London E14 9XG Tel: +44 (0) 20 3189 2108 www.equitybell.com Risk Warning Notice: Equity Bell Securities is a trading name of Equity Bell Limited (registered office: Talbot House, 8 – 9 Talbot Court, London EC3V 0BP. Registered in England and Wales No. 6725781) is an Appointed Representative of London Islamic Investment Bank Limited, which is authorized and regulated by the Financial Services Authority. Whilst every attempt is made to ensure the accuracy of the information provided, no responsibility can be accepted for any inaccuracy. The information provided cannot be relied upon as constituting a recommendation, nor construed as any offer to sell, or any solicitation of any offer to buy investments. No liability is accepted for any loss whether direct or indirect, incidental or consequential, arising out of any of the information being untrue and / or inaccurate, except caused by the wilful default or gross negligence of EquityBell Securities, its employees, or which arises under the Financial Services and Markets Act 2000.
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