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Posted On 09  Nov  2015  

Currency as an asset class and as a risk in investing

09/11/2015 It is not only in an internationally diversified investment portfolio that investors encounter currency as a source of returns as well as risk. Currency risks are part and parcel of most investments into stock, bonds, commodities or deposit markets. Here are examples of how currency returns are intrinsic in investment products: FTSE 100, DAX, SMI, CAC, S&P 500, Nikkei, HSI These indexes contains mining, consumer, energy, banks and insurance companies. Most derive very significant parts of their incomes from foreign assets and foreign earnings. One only has to think of BHP, Rio, HSBC, Unilever, Nestle, Roche, AstraZeneca, UBS, WPP, BMW, BP etc. to know that either the commodities they deal with are sourced from outside of the countries in which the shares are listed or the revenues come from a diverse set of countries, as does their cost of operations. Many large companies have more than one listing. BHP,

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Posted On 02  Nov  2015  

Why we are on the cusp of recovery for Brazil stocks?

02/11/2015 By the time an emerging market economy such as Brazil enters a recession a lot of damage is already priced in. This is because emerging markets are expected to grow between 4-8 per cent per annum and the journey to negative growth is a prolonged and painful affair. After the doc com sell off in 2002, the IBOV started its rapid up move from a level below 15,000 to reach 70,000 by May 2008. The financial crisis of 2008 resulted in the market correcting back to less than 32,000 for it to then rally in 2009 back to the old peaks. At the market peaks the Brazilian Real (BRL) was worth ca. 0.60 to the USD. The BRL peaks in July 2011 at 0.65 and since then has declined to the current level of 0.26. In the meantime the stock market has fallen to ca. 46,000. That is a

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Posted On 30  Oct  2015  

Is the commodity Bear Market at an end?

30/10/2015   One of the key lessons that the financial crisis has taught us is that managers and CEOs of our financial institutions usually don’t have a clue about their own businesses and should always be treated with scepticism. This is even truer of the people who run natural resource companies and those who produce materials. They have no idea what future demand is going to look like and how much they should be investing today to meet that demand. Having spent like madmen at the peak of the last commodity cycle, taking supply out of the market has become very tricky. Just as banks became dependent on trading, repackaging derivative and asset backed securities, the miners piled billions into new capacities. It all came unstuck when China decided to change its business model. The ways in which the financial crisis and the resulting troubles in the US and Europe

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Posted On 30  Oct  2015  

Deutsche Bank – the need to go back to its roots

30/10/2015 Many years ago I use to work at Deutsche Bank Capital Markets. Most of the Managing Directors had been shipped from Frankfurt. Their command of the English language was poor and they had little idea about the workings of the London financial markets. But in addition to those staid seniors, I had the privilege of working with some very intelligent Germans. The insights I had into their rather conservative ways has shaped my own thinking over the years. There was some comfort in working for an institution which owned significant stakes in corporate Germany and appeared steady. Driven from a strong German client base Deutsche Bank was a powerful player in global markets. Deutsche Bank was never at the forefront of anything new. They allowed the American banks to test the waters. But when DB started to participate in a given market, it was a force to be reckoned

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Posted On 29  Oct  2015  

Questioning the perceived wisdom of markets

29/10/2015 It is the established wisdom that provided industries are not subsidised by taxpayer money, companies can sell their products in global markets without being accused of dumping. In recent days the Chinese are being accused of dumping cheap steel into the global markets. Apparently there is some proof that the State lenders have been subsidizing the steel producers with cheap loans or other forms of credits. It is common for governments to use all types of incentives to attract foreign investments. These are not materially different from subsidies. Subsidies can take many forms. One can argue that many oil and gas producing nations are dumping. Saudi Arabia is certainly a case in point. They have a free resource in the form of oil reserves. They have decided to dump the commodity in order to take greater market share at the expense of current income. The United States has given

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Posted On 09  Oct  2015  

What could be the inflation outlook for 2016 and beyond?

Fed up with a 2% inflation target? Most developed country central banks are targeting a fixed rate of inflation in their dynamic and evolving global economies. One can argue that this is an unattainable goal. Inflation may stay low for longer and then shoot up substantially beyond their target. But is it even a worthy goal? And what is the inflation outlook for different countries? What CPI measures CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. The basket constituents are revised from time to time. Each country has its own basket of goods and services. In addition there are inflation indexes for regions such as the Pan European

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Posted On 24  Sep  2015  

Volkswagen’s crime has wider implication

Volkswagen (Ticker: VOW3) has done enormous damage to German Inc. Cheating on agreed regulatory standards on emission is a disgrace for German society. This scandal is the same category as Enron, Worldcom, Goldman Sachs front running their clients, Libor fixing by banks in general, BP’s oil spill, sub prime lending and High Frequency Trading. We don’t know if other auto manufacturers will also be found to be rigging emissions. Do BMW or Daimler have the technology? One imagines that it may not have been difficult for VW to figure out what others have and then to copy or license the same. Reducing green house gas emissions is a global responsibility. There is no hope for humanity if big corporations engage in dumping toxins into our environment. One starts to suspect that chemical companies are also leaking toxic materials without our knowing. There have been controversies about the prices paid for

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Posted On 11  Sep  2015  

Brazil – Opportunity in incompetence

September 11, 2015 Dilma Rousseff, Brazil’s president is a lame duck. Suspected of corruption in the mega Petrobras scandal, she is a President who has been hiding from governance, possibly in fear that if she was seen doing something, people might suspect that she will steal again or allows her ministers to take bribes. Her government’s lack of intelligent response to the economic crisis has left Brazil exposed on many fronts. Weak economics begets a weaker government. Let us summarize what has transpired and then try to make sense of where one goes from here. Brazlian Real (BRL) Over the last 5 years the BRL has fallen from 0.64 to the US dollar to 0.26 as of today.  True that at its peak in July 2011 BRL was probably somewhat over valued when WTI was at over USD 100 a barrel.  With a lot of energy devoted to syphoning out

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Posted On 27  Jul  2015  

Gold – a tarnished metal

Here is a link to a pdf file of this post. Click here July 27, 2015 Gold is not a safe asset. Gold is the last asset one should buy when the world economy is getting into deep trouble and the first asset one should sell when it is on the mend. Over a normal economic cycle the time period for which one should be long of Gold is quite short, perhaps 1/8th of the time of the full cycle. The rest of the time, 6/8th of the economic cycle time period, holding on to Gold is likely to not pay dividends. Gold is an interesting financial instrument to trade. But to trade Gold profitably is no easy task. One needs an understanding of the dynamics of the economy as well as the particular factors that impact the price development of Gold.   Gold is not a currency. Gold is

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Posted On 12  Jul  2015  

What if?

How predictable are market responses to emerging risks? Are we prepared for catastrophic events? Here are our initial thoughts: Link The original document:   The Art of Systematic Investing and Trading 12/07/2015 How predictable are market responses to risks? There is no doubt that markets are complex. The recent sell off in the Chinese market and uncharacteristic and potentially harmful response of the market regulator appears to have arrested the slide.  Short sellers have been caught off guard, while many long investors in small cap stocks have been locked out of being able to sell because trading has been suspended. Perhaps the authorities will succeed in forcing prices higher and only then resuming trading. In the meantime people who have borrowed money to buy the shares will have to pay interest. We will find that manipulating markets through policy decisions may be just as dangerous as allowing relatively weak and

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