This feature is part of our FREE daily Money Morning email. If you’d like to sign up, please click here: Sign up for Money Morning
It’s not a crisis, it’s a buying opportunity
At least, that’s what Goldman Sachs says. The investment banking giant pumped $2bn into its Global Equity Opportunities fund after it slumped by more than 30% in just one week, with outside investors pumping in a further $1bn. To put that into perspective, the total bail-out package for Long-Term Capital Management was just $3.6bn, although LTCM was much more highly leveraged.
The fund was a victim of the recent market turmoil. Chief financial officer David Viniar assured the markets: “This is not a rescue… this is a good investment opportunity for us.”
But as The Telegraph’s Damian Reece points out, this “sets a dangerous-looking precedent.” What will they do when the next “Goldman fund dives?”
How many more investment banks will find themselves confronted with “good investment opportunities” – or disastrous fund wipe-outs – in the weeks and months ahead? And more to the point – how many can they buy into – or bail out – before the money runs out?
Goldman Sachs isn’t the only investment bank that sees buying opportunities at the moment.
Morgan Stanley analysts – who did a pretty good job of calling the top of the market in mid-June – are now calling the bottom. Teun Draaisma, chief European equity strategist, tells The Telegraph: “This is still a bull market and we see no recession in sight… Sure there are risks, and we may be too early… We do not know who owns what financial vehicle and who sits on how big a loss. But one has to buy at the moment of maximum uncertainty, and in our judgement, now is close to such a moment.”
It’s an interesting point – and there may well be some good buying opportunities out there, as we’ve pointed out in recent emails and in the current issue of MoneyWeek. But we’re not so sure on Morgan Stanley’s decision to buy into financial stocks – after all, these would be hit hardest by any more shock revelations, which seems all too likely.
Oddly enough, analysts at Goldman Sachs – even as their bosses are stumping up billions to prop up their own ailing funds – are also far less bullish than the MS team. “It would be a mistake to be complacent. Just as market participants in late 1997 and early 1998 were too quick to overlook problems in Asia, we are not inclined to be cavalier about the risks associated with the current episode of deleveraging.”
They’re right to be cautious. There’s a lot of bad debt still to be uncovered – at least $300bn in subprime debt has been identified, according to Philip Aldrick in The Telegraph, but no one knows exactly where it is.
Panmure Gordon analyst Sandy Chen reckons that UK banks could have quite heavy exposure to the market through yet another arcane set of initials – ABCP, or asset-backed commercial paper. To cut a long story short, he reckons – to take a couple of examples – that Barclays has £20-£25bn of such exposure, while HBOS has £20bn. Even a small write-down in such a large amount could represent a substantial hit for those banks.
Bankers are trying to reassure people that the strength of the ‘real economy’ will mean that this is just a ‘blip’ and that the liquidity crisis will pass without severe consequences.
Robin Menzel of Augusta & Co tells Aldrick that “there is still a lot of liquidity out there and banks will still lend out because economies are booming.”
But then, you have to wonder why economies have been booming. Certainly in a country like the UK, the economy has been growing because of cheap debt. Consumption accounts for a whopping 74% of British GDP. Easy lending has enabled surging house prices, which has also helped fuel a consumer spending and borrowing binge, which in turn boosts retailers’ profits. Cheap debt drives consumption; consumption drives the UK economy; ergo, a rise in the cost of debt will hammer the UK economy.
We can already see this happening in the UK housing market, which is starting to look distinctly peaky. The latest report from the Royal Institution of Chartered Surveyors found that the number of people looking for a home fell at the fastest rate in three years last month, while the number of unsold properties rose to its highest this year.
The Rics survey was one of the first to show evidence of a slowdown during the last big tremor in the housing market in 2004 – which was also accompanied by rising interest rates.
And if you’re still sceptical about the idea that house prices in the UK can ever fall, just take a look across the Irish Sea. House prices in Ireland fell for the fourth month in a row in June, and were down 2.6% on an annual basis during the first half of the year. The falls are down to rising eurozone interest rates cutting into the amount that Irish homebuyers can borrow.
Even in Ireland, vested interests are still trying to talk up the market. “On the whole the market remains solid and is underpinned by the twin fundamentals of a strong economy and strong demographic growth,” said Niall O’Grady, head of marketing at banking group permanent tsb.
But given the Irish economy’s reliance on construction, the cooling housing market will rapidly knock one of those ‘fundamentals’ away. As for demographics, according to Morgan Kelly of University College Dublin, 15% of Irish homes are sitting empty.
Don’t believe the investment bankers. Cheap money has been propping up the ‘real economy’ – certainly on this side of the world – for most of this millennium. As it disappears, we’ll find ourselves in a much less forgiving world. You can find out more about what kind of investments you should be looking at to preserve your wealth in this week’s issue of MoneyWeek, out on Friday. If you’re not already a subscriber, you can sign up for a three-week free trial by clicking here: Sign up for a three-week free trial of MoneyWeek.
Turning to the wider markets…
Enjoying this article? Why not sign up to receive
Money Morning FREE every weekday? Just click here: FREE daily Money Morning email
In London, blue-chip stocks closed sharply higher, led by the mining and leisure sectors. The FTSE 100 index ended the day 180 points higher, at 6,219 – a gain of 3% – and the broader indices were also higher. Miners Antofagasta and Kazakhmys topped the FTSE risers with gains of over 10% . For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 was 120 points higher, at 5,569, and the German DAX-30 was 131 points higher, at 7,474.
Across the Atlantic, stocks gave up early gains to end the day slightly in the red as the news from Goldman Sachs led to renewed concerns about the state of financial institutions. The Dow Jones was 3 points lower, at 13,236. The S&P 500 was a fraction of a point lower, at 1,452. And the tech-hevay Nasdaq had fallen 2 points to end the day at 2,542.
In Asia, stocks closed moderately higher although the banking sector remained weak. The Japanese Nikkei was 44 points higher, at 16,844, whilst in Hong Kong the Hang Seng had added 61 points to end the day at 21,952.
Crude oil had adged up to $71.83 this morning and Brent spot was flat at $69.99.
Spot gold was steady at $669.20 this morning, as was silver at $12.78.
Turning to currencies, the pound had fallen to a five-week low against the dollar this morning, last trading at 2.0077. Sterling was also at 1.4792 against the euro. And the dollar was at 118.08 against the yen and 0.7365 against the euro.
And in London this morning, shares in supermarket chain Morrison’s had fallen by as much as 4.9% after it announced that it had stopped selling selling cold meats at two Scottish stores following a fatal outbreak of e.coli. Officials are conducting an investigation into the source of the infection which has left one person dead and two others in hospital.
And our two recommended articles for today…
Is gold still a safe haven?
– Given gold’s status as a ‘safe haven’ investment, some investors may be wondering why, during last week’s market turmoil, demand didn’t kick in until Friday afternoon. Click here for James Turk of goldmoney’s explanation of what’s been keeping the gold price down – at least until now:
Is gold still a safe haven?
What the City
won’t say
– We all know that the City has its own language. Take the experts who said that the subprime mortgage collapse had been ‘contained’ only for the fallout to spread as far as Tunisia. So how can you be sure that the funds you invested in are as ‘low risk’ as you thought? For Merryn Somerset Webb’s advice on how to invest during these times of stock market turbulence, click here:
What the City won’t say
If you have any comments about this piece, please email
editor@moneyweek.com
’s>