Blog Archives

The Falling Oil Price

11/29/2014

After staying so high for so long it now looks like oil prices are falling and the bottom may be at least on a temporary basis as low as $50 a barrel. This is because it tends to overshoot both to the upside and downside. Many people forget that in 1998 at one point it was as cheap as $10 a barrel ! Many factors are at play, a slowdown in countries like China and Japan a rising supply due to record US production of shale oil and new supply from countries like Libya, Iran and Iraq . However if we do hit $50 I still believe it will be only on a temporary basis. What is interesting is that many oil producers need $80 a barrel or more so as to finance their fiscal expenditure. The recent decision by OPEC to keep production at 30 million barrels per day seems to be motivated at putting pressure on some US shale oil producers who might struggle with oil at below $60 a barrel. My feeling is we are likely to settle in the $80 - $95 a barrel range (for 2015) but short term expect a further fall as wrongly positioned players (i.e. those long futures or with call options at high strike prices) suffer real pain as the price continues to fall. The is a nice VOX post on developments in the oil market here LINK

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Technology helping to overcome significant disabilities

11/21/2014

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I have recently become aware of the fact that in the United States there are a few companies that are currently trading on the US stock exchange that are attempting to use technology to help people that cannot walk to be able to walk and even people that are blind to be able to gain some sight. One of the companies helping people to walk again is Rewalk and the company attempting to give people some of their sight back is SecondSight. I think that these type of companies might well become major businesses in the future, these are early days so don't expect the results to be too dramatic. But the ability to stand and walk a bit is a major benefit to people that would otherwise be confined to a wheelchair all day and even partial sight is a significant benefit to someone who would be otherwise totally blind. Such companies are quite risky investments as they will have high research and development costs and initially revenues will be weak until their products get regulatory approval and they can demonstrate their products have significant benefits relative to the price they are charging for their products. But there may be unexpected new markets and applications for these types of products - for example second sight products might have applications in the world of gaming or rewalk products might have applications in the world of robotics. I think a small exposure to such risky companies makes sense on a risk-return basis as the winners will eventually reap huge rewards.

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Global Asset returns versus GDP

11/10/2014

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The world economy (as represented by the G-7 economies) has grown in nominal terms by a factor of 4 since 1986 while the total value of bonds has grown by 7 and the value of equities by a factor of nearly 11 over the same time period. This means that while the debt to GDP ratio has increased by some 75% over this period, the claim to GDP ratio of share owners has increased by a factor of around 175%. I suppose that over time in a stable system you might expect the ratios to be fairly constant. It may well be the case that we need a wipeout in the bond and equity markets to restore some sort of equilibrium. If bond yields were to spike upwards then bond values would fall and so presumably would equity valuations. The problem is that in such a wipeout then global nominal GDP would also take a hit or grow less rapidly than in the past. The adjustment may be gradual with disappointing returns for both equity and bond holders below the rate of nominal GDP growth rate. Whatever there are clear warning signals in this chart for both bond and equity holders ! The one sign of hope is that the "global economy" includes emerging markets which have grown faster than the G7 and they have scope to raise the size and value of the bonds and equities.

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The Pharmaceutical Industry

11/6/2014

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Occasionally when I lecture, I make some comments from time to time about the Pharmaceutical industry. I know a few basic facts like a new drug on average can cost $1 billion plus, that patents expire around the 20 year mark, that the vast majority of drugs fail to pass the necessary clinical trials to reach the market place, the fact that patent expiration leads to massive falls in sales of the original as generics steal market share etc. But I was not aware of the fact that there are lots of dirty tricks going on in the industry. That is why I am very pleased to link to two fascinating articles by the BBC on the industry LINK1 a LINK 2. I also had not realised the size of the fines being imposed on firms in the industry when found guilty of wrongdoing ($3 billion GSK, $2.3 billion for Pfizer etc). As we have ageing populations in the West the industry as a whole is likely to continue to do quite well as far as profit margins are concerned but they also need to worry about patent expiration periods and develop new truly innovative efficient drugs to replace the revenue stream those that are expiring.

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JP Morgan Chase sets aside $5.9 billion and there may be criminal charges in Forex rigging scandal

11/4/2014

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This forex rigging scandal is now beginning to come home to roost BIG TIME according to Bloomberg LINK1 JP Morgan Chase is setting aside up to $5.9 billion for legal expenses and fines in relation to the forex rigging scandal. Many other banks such as Citigroup, UBS, Royal Bank of Scotland, HSBC, Barclays and Deutsche Bank are likely to be in trouble as the full extent of the rigging scandal become clear. Yes Criminal investigation of the traders involved may well be appropriate in this case.

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