Old songs which have stood the test of time always seem to have the best lyrics.  When thinking of a suitable title for this blog the following seemed relevant :

Men grow cold
As girls grow old,
And we all lose our charms in the end…

There may come a time
When a hard-boiled employer
Thinks you’re awful nice,
But get that ice or else no dice.

He’s your guy
When stocks are high,
But beware when they start to descend.

It’s then that those louses
Go back to their spouses.
Diamonds are a girl’s best friend.

These simple lyrics encapsulate marriage, unemployment and what happens when the money dries up.  All timeless themes relating to life, the business cycle and bull & bear markets.

I have targeted this blog at the UK private investor (whom I believe is far more intelligent & sophisticated than generally given credit for).  Terms which may be unfamiliar are expanded upon in the ‘Glossary’ articles which, when they are written, are published on Tuesdays.  Articles covering markets, sectors and commentary on FTSE 100 stocks are published on Friday mornings.  Commentary on likely turning points in the Dow, S&P and FTSE will be published when dictated by market movements.  Do not expect much to be published during the school summer holidays & Christmas holiday periods as I do like to take a holiday or two.

In general I try to write commentary which is a bit more level-headed and longer-term in nature than other commentary which can be found in newspapers.  Newspapers have to write something about the markets every day and much of their commentary inevitably focuses in great detail upon reporting current events.  I try to step back a little and focus on what the market may do over the longer-term and not worry too much about whether a share price has moved 10% up or down recently.  I firmly believe that the greatest advantage the private investor has over institutional fund managers is that the private investor can take a long-term multi-year view and is not bothered about how their portfolio has performed relative to the fund manager’s in the office next door at the end of the next quarter.  Hence I will tend to be more optimistic when markets are low and more cautious in my commentary when markets are high.

The general idea, after all, is to buy low and sell high.  Buy during panics and sell amidst euphoria.

What is Ebitda?  Whilst the acronym stands for earnings before interest, tax, depreciation & amortisation; ebitda can be thought of as essentially as the cash flowing into a company.  Capital expenditure (capex) is the extra item that needs to be subtracted from ebitda (as well as interest, tax, depreciation & amortisation) in order to arrive at earnings which remain to pay down debt and also be divided amongst shareholders as dividends.  Any money left is kept by the company as retained earnings and goes towards boosting the company’s Net Asset Value.

With the next bull market due at some stage, the focus will surely move away from absolute return products.  Is this the real reason why the Wellcome Trust is currently trying to sell its £3.5 bln private equity portfolio so as to be able to re-invest in equities and/or corporate debt in time for the next upswing?  They have found a plausible excuse with Sterling’s recent collapse from $2.00 to $1.50, claiming that they are trying to lock in a currency gain on their dollar-denominated private equity portfolio…

This bear market will end one day and hedge funds have not provided much protection from the bear.  The key idea behind hedge funds is wonderful (actively-managed funds which aim to beat the return offered by a savings account) but maybe Warren Buffett was right when he concluded that they were compensation structures first & foremost.  In order to participate in the next bull market you do not want to be stuck in a fund which may not fully participate in the upside (due to past scars from the bear they may not dance fully with the bull) and is going to take away 20% of that upside in fees anyway.

Note :  In theory hedge funds which suffer a decline in NAV are not paid their (typical) 20% fee on profits until the fund’s NAV exceeds its prior “high-water mark”.  Therefore investors who choose to stay aboard for the potential ride back up would not suffer 20% of the upside being taken away from them in fees.  However in practice what tends to happen is that hedge funds which perform badly close down and investors then have to invest any money they may be lucky enough to get back in a different fund which then takes 20% of the upside.

Always pay special attention when the market rallies on bad news.  One of the clues that a significant rally is about to kick-off comes when the market rallies after bad news is released.  This indicates that the market had already priced in the bad news and that the news release failed to spark enough fresh selling to push the market lower.

Yesterday the monthly US employment report was released for November 2008.  It was bad news – the FT ran the headline “Shock US job losses…” and a notable economist was quoted describing the 533,000 jobs lost in November as “almost indescribably terrible”.  For the first hour of the session the Dow did indeed sell off and broke briefly below the 8,141/43 lows posted earlier this week.  However that was the end of the selling and the Dow then rallied 7% to close above yesterday’s high on the highest volume of the week at 346 mln.  The S&P ended the day up 3.7%, outperforming the Dow which closed net 3% higher.  The odds now favour a rally but these hopes will be extinguished with a Dow close below yesterday’s intra-day low of 8,118. 

Note :  The US markets also closed higher after last month’s employment report (7 Nov) but that performance was less noteworthy as the markets had fallen 10% over the prior two days and the rally was on comparatively lower volume of 246 mln.  It looked more like the dead-cat bounce which it eventually proved itself to be as the Dow fell below 8,000 later in November.  Also note that economists are experts in the subject of economics as opposed to stockmarkets.