Financial Update 9-10

The big news on the stock market right now is the upcoming Alibaba Group IPO. Seeming to come out of nowhere with its quirky business model – putting western businesses and consumers directly in touch with China’s thousands of small manufacturers – it’s now become an e-commerce sensation; the company is expecting to raise up to $21 billion when it floats later this month. It’s a huge and complex offering; Alibaba does more business than Amazon and ebay combined. Markets are definitely buzzing with anticipation.

Not every company is Alibaba Group though, and there are signs that when more normal numbers are involved IPO fatigue is starting to set in. This is becoming obvious in the European markets, which are picking up steam again after the summer. So far this year there’s been a flood of IPOs, raising more than $55 billion in nine months – nowhere near the $160 billion Alibaba could be valued at, but still a significant pile of money. In fact it’s four times the corresponding figure for last year. All this has happened on a wave of enthusiasm for new stocks, a sign of recovering confidence as Europe continues to emerge from the recession.

That enthusiasm looks like it’s wearing off though. A new IPO means a lot of work for investors who take due diligence seriously, and the sheer volume is starting to draw groans instead of excitement. With a big name or exciting business model to play on an IPO can still generate enthusiasm but for more marginal businesses it’s getting a lot harder to attract buyers. The market is basically suffering from indigestion – it’s swallowed too many IPOs this year and its appetite for more is shrinking.

From a company’s point of view there are still good reasons to push ahead with an IPO. Valuations remain strong, and especially for a firm backed by private equity that wants to start feeding some money back to its founders that makes a flotation look tempting. The bar for entry is getting higher though. A few months ago investors would be all over just about any IPO, but now they’re getting selective. Without a unique selling point to attract their interest they won’t do the legwork to investigate the company, and unless that’s done they won’t risk their funds there either.

Another deterrent to investors is the strategy that’s been pursued by a lot of advisers. US hedge funds have been prepared to pay very high prices over the last few months, and that’s forced up valuations. The problem is that a high valuation at flotation doesn’t always translate into continued high share prices later, and several recent high-profile IPOs are now trading well below what they were issued at. That’s making potential buyers increasingly wary, and many are skeptical about how realistic valuations really are.

It looks as if right now the market’s jumped too quickly between extremes – from a shortage of IPOs during the recession to a glut of them now. Market Darwinism should restore equilibrium soon enough, forcing valuations down until the volume of new offerings coming along is at a level the market can comfortably absorb. That should make everyone happier except the bargain hunters.

Financial Update 9-3

The US dollar, which had been looking weak for much of the last year, has picked up quite a bit over the last few weeks and it’s now looking much healthier. Right now it’s at a 14-month high against a basket of the other major currencies and looks set to climb even more in the short term. Last week’s figures put the .DXY dollar index at 83.039, better than it’s been since last July.

Some of the dollar’s resurgence can be put down to weakness in other currencies, especially the Japanese Yen, but that doesn’t account for all of it. The Euro is currently rising but is still hovering near a one-year low against the dollar – and even briefly hit that mark on Wednesday, dropping to $1.3110 before pulling back to $1.3135 as it gained more ground against the Yen. Japanese investors are hesitant right now as they wait for details of changes in the country’s huge public pension fund and that’s pushing many to sell Yen.

At the same time the dollar is showing its best value against sterling for five months, currently trading at around the £1=$1.645 mark. That follows a 0.8 percent fall in the British currency, its biggest one-day loss since the beginning of the year. The Australian and New Zealand currencies also slipped at the same time. Sterling is likely to stay relatively weak in the short term as UK growth slows.

Another poor week to add to the woes for gold for the year.  Gold Bullion sales have continued to slump in the midst of much uncertainty in the world.  Look for continued resistance for the yellow metal to finish out the year.

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It’s All About Interest Rates These Days

One of the big questions in the markets right now is what’s going to happen with interest rates. Investors have been speculating for weeks that the Federal Reserve will raise interest rates, which would drive a move from precious metals and other commodities back to the recovering equities sector. As the Dow has climbed speculation has been steadily increasing about when rates will go up, but it looks like there might be a while to wait yet.

The Federal reserve has just held its annual symposium in Jackson Hole, Wyoming, with guests including bankers and politicians from around the world, and one of the main topics of discussion as the economic recovery and how to keep it on track. Among the major economies the USA and UK are the ones most confident in the strength of their equities markets, so should also be the ones thinking most seriously about raising lending rates. However it looks as if this option is on the table, but not likely to be implemented just yet; policymakers in both countries, and certainly in the Fed, don’t think the time is right yet.

One area of concern in the US economy has been the employment rate. While better than 200,000 net new jobs have been created every month this year, the bad news is that a very large percentage of these have been part-time jobs; the total number of American workers in full-time employment is actually down, possibly by as much as half a million. That has implications for the recovery’s solidity, so the government and the Fed are keen to encourage employers to take on more permanent staff. That makes raising rates too risky to proceed with right now.

New Fed chief Janet Yellen believes that the US labor force still has a lot of slack in it and that even though hiring is improving, and the end of the unprecedented run of low rates has to be planned, the job market still hasn’t fully recovered from the recession. There are dissenting voices, even within the Fed itself – St. Louis president Bullard suggested a tightening of rates might even be brought forward – but Yellen’s vote is likely to carry the day and there probably won’t be any significant raise before early next year at least, and perhaps as late as early summer.

While the way ahead for the USA is up for debate Eurozone finance ministers are looking at cutting rates even further to stave off a deflationary spiral. Given the volume of trade between the USA and EU there are risks in having policies between the two markets diverge too much, so that’s likely to act as a further drag on any rise here. Japan is also planning to hold firm until prices are stabilized, again mainly because their economy is relying too much on part-time workers right now.

It’s always hard to predict rates far in advance and new developments could nudge the Fed into action at any time, but from the point of view of commodity investors it could be time to dial back talk of an increase in the near term. We could be nine months away from that becoming a reality.

Financial Update 8-21

Financial analysts have been talking about economic recovery for over a year now, and it’s been generally agreed that the world was indeed pulling itself out of the mire of the 2008 crash. There have been a few stumbling blocks along the way though, from the USA’s negative growth figures in the first quarter of this year to the recent setback in equities prices. News from Europe also points to the recovery not being as solid as it could be, with the Eurozone’s two largest economies, Germany and France, both reporting that their economies contracted last quarter. Now a new report from the Federal Reserve highlights the continuing effects of the economic crisis on ordinary Americans.

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Financial Update 8-14

Last month the Federal Reserve warned that the values of some stocks and junk bonds were starting to look inflated, a move that many took as meaning the long-running bull market might be starting to run out of steam. This week it’s starting to look as if they were right. Growing wariness of junk bonds has turned into a much wider sell-off that’s seen a whole array of industry benchmark stocks drop sharply. The CBOE Volatility Index – widely known on Wall Street as the “fear gauge” – hit its highest level for nearly four months as more risk-averse investors started moving their money to US Treasuries and other safe havens like gold. However it’s still not clear if the bull run has really come to an end or if other factors are causing a sell-off that could reverse itself in a few weeks.

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Is Immigration Still News? Maybe Not.

Illegal immigration across the USA’s southern border has always been a controversial issue, but it’s taken a massive turn for the worse in recent months. Since late last year more than 50,000 unaccompanied minors have entered the United States, more than three times the rate seen just a few years ago. The massive influx has overwhelmed immigration services, bringing complaints from liberals about slow processing and unsatisfactory accommodation for holding these immigrants while their cases are dealt with. With a genuine human tragedy going on it’s not the right time to point out to these liberals that they’ve always been against investing more money in border control, to the point where ordinary citizens have had to take on the responsibility themselves. Now the government is finally trying to authorize extra funding to sort out the crisis, but it’s a bit late.

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