This from Fleet Street Invest:

According to one old investment adage, “there’s always a bull market somewhere.” If it isn’t in stocks, it’s in commodities. If not commodities, then bonds, and so on.

Despite the seemingly inescapable credit crunch, that truism lives on today. While stocks and commodities have been pummeled, government bonds have been shining. An almighty flight to safety led investors from stocks, commodities and property markets to cut their losses, sell up and retreat to the safety of “risk-free” government bonds.

That bull market could come to an abrupt end sooner than many were expecting. In its place a new bull market in corporate bonds is building up steam.

Government yields are practically zero

Despite the guarantees across market sectors across international regions, it has been incredibly tough to convince investors, banks and pretty much all market players to put their cash into risky assets, like shares.

According to Société Générale, cash rich companies and investors alike have been seeking the safety of the short-term government debt market. In so doing, as is always the case with too much demand, the yields on these bonds has been pushed to dramatic lows. The yield on 3-month gilts is just 0.92%, down from 4.3% 12 months ago, and interest rates are still falling. That means that any new bonds issued by the Debt Management Office will carry even lower yields.

In the US it’s even worse, with yields on the equivalent bond actually at a pathetic 0.11%. Such was the fear in the market, investors were willing to earn just $1 for every $1,000 invested, effectively just parking money in a safe and liquid place.

While appropriate in the wake of the Lehman Brothers collapse, this behaviour no longer makes sense.

Risk-free cash is earning zero interest. The desire for some return will force investors to seek other places for their money. However, this is not a reason for stock market investors to get excited. It’s unlikely that the money market crowd is going to make the extreme leap from risk-free bonds to stocks. This could, however, be good news for the middle ground, corporate bonds.

Why good quality company debt could be an outstanding opportunity

When bond yields are so low, and investors are less panicked, they begin looking for higher yields again.

Sensing a turn in the market, corporate bond issuance soared last week to its highest weekly tally in 8 months, Bloomberg data show, with $41 billion worth of bonds issued. Last week’s tally was roughly double that seen before the credit crisis began, and roughly equal to the tally for all of last September and October when the credit markets froze. And, as bond specialist Tony Crezcensi from investment firm Miller Tabak notes, “there were a host of companies selling to yield-hungry investors.”

So what’s the smartest play on this trend? Don’t go straight in, dip your toe into the risk pool by following the Government. Look at government guaranteed bonds such as Lloyds TSB or Nationwide. I’m no bank bull, but if these companies boast the same guarantees as a government bond and offer better yields, it seems like a good opportunity. These bonds carry a AAA credit risk rating and offer 4.2% and 4.6% more yield respectively.

Without risk, there is no return, and right now that is truer than ever. Today, the only reason to stay in the government bond market is irrational fear. As investors get a little bit braver and a little bit greedier, a bull market in corporate bonds could form in 2009.

Source: Why Corporate Bonds Could Be The Trade Of 2009

The economists that prophesied China would become the world’s biggest economy by 2015 have changed their tune. Those that recommended investing in China have quickly gone broke.

Believe it or not, China could be next on the credit crunch’s hit list.

The City still doesn’t buy it though. To quote arch-bear Albert Edwards:

“The consensus still touchingly believes that despite a deep economic downturn in developed economies, continued rapid emerging market growth will keep overall world growth resilient.

“My view is that outright contraction of global growth is entirely possible next year.”

I think he’s right. A sharp slowdown in China growth could be the catalyst to global recession.

Ignore the herd

Everyone is agreed that the UK, Eurozone and US are going into recession. They are right about that much.

However, The Fleet Street Letter has been predicting this since August 2007. The “experts” have finally joined us in this prediction. It only took the collapse of Northern Rock, 11 trillion pounds of stock market losses and five interest rate cuts for them to join us.

We must ignore the harmony of opinion, get defensive and harness our inner contrarian.

And that inner contrarian is telling us that even the emerging markets – including the supposedly bullet-proof China – will not be safe in what could be the world’s worst year for economic growth.

Over-heating, social instability, war have always been hypothesised as catalysts of a China meltdown. However, it’s the Credit Crunch that poses the biggest risk to the world’s fourth largest economy.

I, too, was a China bull. However, the landscape has changed so much in the last 12 months that I have had to re-evaluate what I once took for granted. And it is the idea of China’s unstoppable growth that makes me uncomfortable.

With the speed and force of the recession in other developed-world economies, I am not sure that China will be able to weather the storm as well as most are hoping.
What could knock China off course?

The gears are not turning as they once were.

China is slowing down. At the last count, it was growing at 9% a year. That may not immediately strike you as bad news. But, it’s all relative. Last year it was close to 12%, so it has fallen a long way. And that’s not the only bad reading.

PMI, or the Purchasing Managers’ Index is a measure of new orders, inventory levels, production and employment in the manufacturing sector. A reading of below 50 indicates a fall.

At 41.2, China’s PMI didn’t just fall, it crashed to a record low. Forbes Magazine puts it well:

“The economy of the so-called world’s factory is now decelerating.”

Two international surveys measuring PMI independently corroborated the evidence of a cooling Chinese industrial economy.

China bulls argue that the steep falls have been exacerbated by the Olympics, during which the country was officially ordered to a halt. However, even if we see a slightly stronger growth recording in December, the bigger picture is clear… China, like the rest of the world, is slowing down.

Is this a bad thing?

Yes.

China accounts for a quarter of global growth and 5 per cent of global consumption.

If it stops pulling its weight then we could realistically see a global recession as soon as 2009. A China slowdown directly smashes corporate growth for companies in nearly every sector in the stock market.

Now, sceptics will argue that China’s two stimulus packages will help China to spend its way out of recession. That’s right, China has been doing some bailouts of its own. The impact of these multi-billion dollar bailouts remains to be seen and is probably the global economy’s one lifeline.

I hope that this will be enough to re-energise growth in the world’s leading growth market.

However, I fear we may be on the cusp of global recession, and China’s worse-than-expected slowdown will be the catalyst. Unless we’re very fortunate or the Chinese policy makers are very clever then the only question that “China” is the answer to will be:

“What turned the recession global?”

This from Fleet Street Invest:

As investors, we must take a step back from the spectacle of this historic event and ask a more pressing question. What does this mean for the world economy and the world’s stock markets?

First the economy…

Almost 70 per cent of Americans named the economy as the number one motivation behind their vote.

A vote for a man that has so much influence on us all.

After all, when America sneezes, the rest of the world catches a cold. And when the US subprime bubble burst, we caught pneumonia. We are caught in a storm of macro crises: the credit crunch, housing slumps, recessions and bear markets across the globe. The responses by the world’s leaders affect all of the above and all of us.

As leader of the free world at such a low ebb, Barack Obama’s next move is so important.

President Obama wasted no time, addressing the economy in his acceptance speech:

“Even as we celebrate tonight, we know the challenges that tomorrow will bring are the greatest of our lifetime — two wars, a planet in peril, the worst financial crisis in a century.

“There is new energy to harness and new jobs to be created; new schools to build and threats to meet and alliances to repair.”

The President must, in the coming weeks, outline a convincing plan of action to help the world’s biggest economy get back on its feet.

What’s next for the economy?

A big recession bailout.

The last intervention by the US was the $700 billion bank bailout. That was about the financial system, not the recession.

The last recession bailout was the $150 billion of rebate cheques handed out to ordinary Americans. This fiscal injection was a bad call, one that the new President-elect opposed, and it had an artificial effect on the economy.

The money could have been much better spent and the next round of monies will be better spent.

How much money?

$300 – $500 billion is being touted as the size of the next injection. That’s what is estimated as necessary for America to spend to offset the downturn of the private sector.

- $300 billion is equivalent to a 2% boost to GDP.
- $500 billion is equivalent to a 3.4% boost to GDP.

The expectation is that rather than give everyone $600 to fritter away, they’ll put the money into big infrastructure projects to spur “job creation.”

Digging holes in the ground, building bridges… the Keynesian approach.

The good news is that it should all now happen a lot faster.

We have a Democratic President and a Democratic Congress. That means that we are unlikely to face the same sentiment-crushing political hurdles that we encountered with the $700 billion bailout.

SocGen Cross Asset Research

The bad news is that it only delays the inevitable. The US, the world’s largest recession and an economy that affects the UK heavily, is still going into recession. Even a supersized deal would not prevent recession in the US and, if anything, will probably push debt levels over 50% of GDP.

It’s a bad move in the long term, but having led his campaign on the economy, Barack Obama has no choice but to spend, spend, spend.

Source: Even Obama Can’t Fix The Economy

Their research showed that returns from October to April were great, while returns from May to September were poor. Hence the rhyme, ‘Sell in May and go away, don’t come back until St. Leger’s Day,’ which is a horse race at Doncaster taking place tomorrow.

So how has selling in May and going away fared this year?

It was on the money. Between the time of writing that piece and now the market has fallen 11%.

Does that give it any credence?

No, none at all.

The reason for this is because it suggests that now is time to go racing back in… and to buy the market.

And that’s probably the worst advice of all…

Don’t come back on St Leger’s Day

According to followers of Sell in May, the market does worse in the summer because all the market’s investors go on holiday for three months.

A novel idea, but it conflicts with the complexity and hyper-competitive reality of the financial markets. As I said in May:

“If the market is going to fall this summer, which it probably will:

“Blame the deteriorating property market;

Blame the deleveraging investment banks; Blame the volatile debt markets;

Blame the stingy UK consumer; Or blame HM Revenue & Customs’ ill-conceived proposals.

“But leave St Leger out of it”

However, I take no pleasure in having made an accurate bearish prediction. If you have any negative prediction to make between now and the end of the year, chances are you’ll be right.

We are simply in the middle of a deep bear market.

Instead of dwelling on this… let’s do something a bit more constructive. Next week, I will be unveiling a mini-series, available exclusively to subscribers, that will tell you how to know when it is truly time to come back to the market.

How to time the market

So, over the next four weeks, the Fleet Street Letter is presenting a potential solution. These indicators might just give us the green light to know when confidence is coming back to market.

The spectacle of the credit crunch must not distract us from planning ahead. If we can spot the sea change, we stand to win big…

With this assembly of indicators, we’ll have a better idea of when it is safe to get back into the water.

When this time comes, we buy big.

And when that happens we return to the luxury of investing in a bull market. Don’t get me wrong, there are good investments in any condition. But, naturally, caution dominates our current agenda.

The indicator mini-series is designed to help us gain a potentially lucrative first mover advantage, when the pendulum swings from caution to exploiting the coming bull market.

This will be hitting your inboxes early next week. Stay tuned.

By the way, if you are partial to a flutter on St Leger’s Day, the radio tells me that Doctor Fremantle is in with a shout with odds at 7/1.

Have a great weekend,

Theo Casey
Investment Director
The Fleet Street Letter

Source: It’s Still Too Soon To Come Back to the FTSE

Well, we are now fighting a bear market… one that all the brains of the investment community did not see coming six months ago.

According to a report last December from the Association of Investment Companies, nearly two thirds of fund managers and three quarters of financial advisers were bullish on the prospects for the market in 2008.

Popular opinion thought that UK stocks would have turned the corner and we’d be back in the black.

How those views have changed!

Now, according to the FT, professional investors “are betting that the credit crunch will still be hurting banks at the end of 2010.”

Until 2010!

What a U-turn. Good lord.

This should serve as a warning as to the fallacy of predictions.

I don’t know where the FTSE will finish at the end of the year, nor do I pretend to.

Nonetheless, in this market it isn’t difficult to better the “experts’” predictions… even if using an Astrological forecast as my guide!

Not to be flippant (well, to be very flippant actually), but I reckon my astrological reading could compare favourably with the schizophrenic investment bankers at predicting the rest of the year’s market outlook.

And with the advent of the Olympics as well as the rise of emerging markets, this forecast has a Chinese twist.

2008 is the year of the rat, but personally I’m a bear… something I’m sure those of you with money in the markets can identify with in these tumultuous market conditions.

Courtesy of ProAstro (providers of astrology forecasts, lunar calendars and I-Ching predictions) here is the forecast for stock market fortunes this year:

Your sign is Bear…

“Bears are prone to be agitated this year.

“You are likely to experience instability in your financial relationship and will most probably end your current relationship and start afresh with a new paramour.”

Translation: Sell those bank stocks!

“This year is going to be one of huge changes in the lives of all bears and it is likely to make you feel gloomy and pessimistic.

“Instead of giving in, you should take charge of your life; travel abroad, learn something new. This will help alleviate your financial problems.”

Translation: Invest in overseas markets less exposed to the credit crunch.

“Bears born in autumn and winter should head either South or East. In order to lessen your financial problems it is vital that you take a trip in the recommended direction.”

Translation: Sell those bank stocks and invest in overseas markets less exposed to the credit crunch.

Spooky, eh?

I think the astrologists at ProAstro said it better than many of the analysts we’ve been entertaining over the past year.

And that alone demonstrates that we can’t waste time fretting over some prediction when there is the hard work of investing to be done here.

Making predictions that no one will hold you to is easy. It’s making stock picks that is the real challenge.

When opinion is so uncertain over where our market is going, focussing on companies not dependent on the UK economy is vital.

You may have noticed that bias towards overseas markets, like China, in my astrological reading. I’m not advising that you plump your money straight into the Chinese stock market. Instead, I’m recommending you invest in stocks that are tapping into the economic growth in these international markets.

The rising superpower grew by 7% last year, nearly double that of “advanced economies” — like the UK and US — that are looking recessionary this year.

In fact, economist Albert Keidel thinks this trend will run for years. The former World Bank and US Treasury Department reckons that by 2035 China will overtake the US as the world’s biggest economy.

So how do we play this indisputable boom?

By investing in companies exposed to Chinese demand.

Where can you find such opportunities?

Not through the investment banks whose skills are bettered by fortune-tellers, that’s for sure!

You can let fundamentals be your guide… weighing up profits to losses and assets to liabilities. Done properly, this produces a detailed picture view of a firm’s strengths, weaknesses and prospects for the future.

Then we have technicals… the analysis of price charts. Sceptics liken it to reading tea leaves but as a former practitioner (of technical analysis, not reading tea leaves!) I can attest to its successes. Over long and short time horizons, it offers a powerful read of sentiment on the trading floor.

And that’s just the tip of the iceberg.

From economics to statistics to inter-market analysis, it’s tough to know where to start when looking for investments.

That where we come in and shine our light.

You name it, Fleet Street Research covers it. Think of us as your very own troop of number crunchers. Our team of boffins are here to give you the final word on all the big issues. Plus, we give you snippets of our proprietary investment indicators.

We’re not afraid to roll up our sleeves and plough through the numbers to bring you the best in new research. And, we find time and time again that the best advice is often the simplest.

Believe it or not, we’ve uncovered a buy and sell routine so simple a caveman could use it. But despite its plain appearance this technique has actually averaged a double digit profit in four of the last five years.

What is this trick you ask?

We call it the FTSE Promotion Premium and it may just be the best strategy that you’ve never heard of.

What is the FTSE Promotion?

The FTSE 100 index of leading shares reshuffles its pack four times a year. At each interval a few stocks, those whose market value has tumbled, get relegated to the mid cap index. In exchange, a few mid cap stocks get promoted to the FTSE 100.

The Promotion Premium works like so:

1. Mark a place in your diary, out for quarterly reshuffles. These happen in the first week of March, June, September and December.
2. Buy stocks that are promoted.
3. Sell stocks at beginning of next reshuffle.
4. Repeat.

And how has it fared?

2007: -21%
2006: 16%
2005: 11%
2004: 10%
2003: 26%

Average performance: 8.4% 1

It couldn’t be simpler.

But still, this strategy outpaced what you’d pick up in the bank. Adjusted for bull-market years, where this approach performs best, it returns an average of 16%2 , outstripping the performance of the FTSE 100 by nearly 6%.

Looking at our exclusive research you can see that this is a pretty handy tool.

How’s it faring so far in 2008?

Well for the first quarter, running from March 8th to June 7th turned a 5% profit. The second quarter has started shakily as the FTSE 100 balances on the edge of bear market territory, but there is still over two months to go.

What’s behind this phenomenon?

Index reshuffles are big business.

When companies get promoted, they get bought. This isn’t anything to do with the FPP, but part and parcel of the way the investment management industry works.

There are two types of investment funds, active funds and passive funds.

An active fund buys particular stocks to try and outperform the market. Passive funds simply try to mirror the performance of the market, or ‘track the index,’ as it is known.

By far, the largest pool of index trackers revolves around the FTSE 100. This means that every time a few firms get promoted into the top tier, those companies get heavily bought by the growing number of index funds.

When stocks are added to an index, funds have to buy these shares, this way the funds still accurately reflect the ongoing performance of the market.

As a result, promoted shares go up in value as a response to all this buying activity. This is a common pattern in the share prices of candidates for change in the FTSE indices, and the short-term trading opportunities attract speculators to those stocks.

There’s a mountain of academic and investment literature on this strategy. It pours over the best times to get in and the best times to get out, the consideration of volume and all sorts of other convoluted issues.

The hedge funds call this strategy ‘index rebalancing arbitrage’… we just call it easy money.

The only raincloud on this profit parade, and unfortunately it is a big one, is recent performance… judging by the most recent returns, the ‘hedgies’ look to have all clocked onto this phenomenon and taken what advantage there is to be had.

Once enough people are wise to the game, those ‘in-the-know’ tend to move the goalposts. Our goal at Fleet Street Research is to counter this by keeping you in the loop of what works, when it works and how it works.

Now is not the opportune time but this is not the last you will hear of the FTSE Promotion Premium.

Theo Casey

1 Includes dividend payments
2 All figures taken from Bloomberg Professional Service and Google Finance. Subject to survivorship bias.

Source: How to Play the FTSE Promotion Premium

Dragged down by the service sector, the fading heartbeat of UK PLC, our national growth slowed to a miserly 0.3% for the first three months of the year. Don’t hold your breath for a turnaround as forecasts for the rest of the year have raised the odds of recession.

And, it’s not just growth. Inflation, pushed by food and oil prices — two things that the government can do little to counter — is also on the up. It presents a very grim reality…

The UK is in stagflation, a rare disorder where people are no richer but prices rise anyway. On the foreign exchange markets things are no better, with the pound carving out a role as “the whipping boy of international currency markets,” as John Authers neatly puts it.

“But the pound is strong against the US dollar.”

Get over it!

Barring Zimbabwean dollars, you’d be hard pressed to find a currency that wasn’t strong against the US. On a trade-weighted basis, the pound is deteriorating. This is a very problematic situation for consumers and for the economy, but it is not universally bad news.

In fact, some well placed investments — away from the risky foreign exchange market — will actually help you take advantage of sterling’s slide.

To understand this, think about multinational businesses.

Exchange rate risk is a problem for these firms. Fluctuations in exchange rates can wildly affect costs. If the value of the base currency goes down, all associated costs go up… the cost of foreign purchases rise and cost of foreign wages rise.

However, this is only one side of the coin.

Many companies actually profit from their foreign currency exposure, and with the help of a forthcoming special report from the Fleet Street Letter’s investment team, it’s a trend we can safely play from the UK markets…

Successful breeds success

Investing in firms that profit abroad provides crucial diversification to a portfolio. The argument was laid out in Friday’s research note:

“These companies have managed to actually grow their profit margins at a time when the UK, the country they are listed in, dwindled. That is because they boast significant operations with increasing customer bases in these [foreign markets].”

But wait, there’s more!

Not only does a savvy investor get the benefit of a ravenous foreign customer base but they get the knock-on effect of investing in a country with a strengthening currency.

Selling a constant amount of products to Brazil creates more and more money if the Brazilian real strengthens or the pound weakens. As Brazilian profits are eventually converted back to the base currency, the firm can lock in a profit that has nothing to do with an increase in sales.

And this is exactly what happened to British American Tobacco (LON: BATS) last month.

The cigarette giant is active in 180 markets and over the past 12 months, most of these markets’ currencies gained against the pound. As a result “currency swings” added £54m to operating profit… more than a third of overall profit growth!

Burberry (LON: BRBY), Inchcape (LON: INCH) and Standard Chartered (LON: STAN) are other such examples of UK stocks that have made sterling’s slide work for them… but looking long-term, which regions are going to continue to gain against the pound.

As with so many other investment questions, the answer is emerging markets.

Emerging market currencies lead the way

Currencies are priced in pairs. In order for the pound to fall against a foreign currency one of following has to happen.

1. Trader sentiment towards the UK worsens and traders sell pounds.
2. Trader sentiment towards the foreign country improves and traders buy foreign currency.
3. Both 1 and 2 happen.

We are seeing the third case here with sentiment toward the UK falling and towards emerging markets improving. But how can that be so when you look at inflation, a major determinant of exchange rates?

Inflation in emerging markets is even higher than in the UK… 7.1% versus 4% according to the OECD. So why is the pound flagging? Well, there’s more to currencies than just inflation.

Emerging markets top the global growth and global surplus rankings. To take China as a case in point, China boasts the world’s largest trade surplus, the government budget is in the black and GDP growth estimates for the year average around 9.6%.

By way of comparison, the UK is deep in the red, on the verge of recession and money is leaving the country faster than it ever came in.

This demonstrates that a bet against sterling is a good idea in most directions, just don’t look at America, they’re even worse than we are.

Theo Casey

Source: Sterling’s Demise Good News for Blue Chips