“There is no news so bad that the market will not get bullish over it.” This remark says it all. The bad news items that the markets are currently ignoring include the rapid fall in the value of a US dollar, the entirely predictable and predicted sub-prime mortgage melt-down and back home, the calamity that is Zimbabwe. Traditional wisdom – which is proving as useless as any other sort – would have us believe that investors should be terrified by these and other events and would be selling at least those shares which appear to be exposed to these kinds of events.
Not a bit of it. The All Share has broken above 30 000 and the hottest investments in Wall Street are the shares being offered by the listing of Private Equity Firms and Hedge Funds. The former businesses specialise in buying companies cheap, shuffling the assets, and then selling them expensive. Surely, their strategy is no different when it comes to selling their own company? Hedge Funds have caught the public imagination with the mega billions in fees they have extracted from their clients. Now can it be that the hedge fund whiz-kids have been seized by a fit of altruism and are going to share that income with shareholders? I doubt it. Rather I think that the clever lads and lasses are exiting the game at the time when they see those fees collapsing.
One of the great luxuries that I enjoy these days is the time to read and think. And I read a great deal. I visit probably upwards of two dozen websites daily. Of course, not all of them concern the markets. I found a wonderful explanation of the mechanics of knitting yesterday. And then I enjoy the sites that are devoted to trashing antipodean rugby referees.
I recently spent a few happy hours learning about the structure of the US mortgage industry and the array of complicated investment products that it has spawned. I was delighted to discover the existence of “toxic waste”, the value of which is certainly a whole lot less than what is shown in the portfolios of the funds that own the stuff. The general idea is that everyone acknowledges and recognizes that within the vast credit industry there are certain to be loans that will not and cannot be serviced. However, the plan is that these worthless credits are mixed thoroughly into a bouillabaisse of other (allegedly) better quality loans. This soup is then ladled into the savings funds of widows and orphans. In theory the risk of default will now be spread so thin so as to go unnoticed! Aiding and abetting this fiction is the whole industry of “Rating Agencies’ who (for a fee, naturally) anoint the gruel with a code that denotes their judgement of the risk that the investment will not pay the promised interest or the principal amount. I have always fretted about the way in which a simple binary “pay’ versus ‘not pay” situation can be captured by a spectrum of symbols ranging from AAA to D with + and – signs sprinkled in for added value! Sadly, now, fund managers and their clients are discovering that their investment grade investments are filled with rather more of that toxic waste than they thought and the rating agencies are not very interested in this development (except, presumably, that for another fee they will downgrade the original rating). I await the next chapter of this story with interest. I think it will not be a comedy.
I am also not finding any humour in this long and deep cold spell. Thank you Mother Nature. You have made your point about climate change. Now please can we have our temperature back? It would also be nice if the All Blacks exhaust themselves with the haka tomorrow morning.
James Greener
13th July 2007
