CHRIS BURRELL ’ S BLOG
Other investors have shaken off these types of concerns , labelling them as permabears who have failed to grasp the shift in markets away from value investing towards growth-oriented stocks that have soared on easy monetary policy and the shift to digital consumption .
The pitfalls of cheap money flooding financial markets became apparent when USA and Japanese investment banks were stung by margin calls for Archegos family office investment management run by Bill Whang , former hedge fund manager for Tiger Management . It is estimated that the subsequent selling being the liquidation of the Archegos $ US 50B portfolio has resulted in losses to Credit Suisse of $ US 4-6B and across the industry of $ US 10B +.
Again , the parallel with 2000 is drawn with the demise of the hedge fund Long-Term Capital Management ( LTCM ) which was subsequently followed by Lehman Brothers . Lehman Brothers Holdings Inc . was a global financial services firm founded in 1847 . Before filing for bankruptcy in 2008 , Lehman was the fourth largest investment bank in the USA .
Another financial market matter of current concern is the Greensill administration caused by concentration risk on a trade finance model particularly with respect to the steel mill assets of Gupta . Credit Suisse again appears in the cross hairs and may be liable for losses in the bond funds used to fund the trade credit of Gupta and others . Of local concern , is IAG Insurance who insured the trade credit up until March 2021 , although they had advised the market of their exit much earlier . It is what IAG was doing in this role that is somewhat inexplicable . Again , there does appear some parallel with AIA insurance in the USA during the global financial crisis where it insured mortgages and was subsequently held liable because the mortgages were never of investment grade . Greensill has a bank called the Greensill Bank in Germany , where a number of municipal councils and individual investors have deposits . Those deposits are guaranteed by the German Government up to a certain limit , as is the position in Australia . It is likely the German Government will be looking beyond Greensill to all parties involved in these transactions .
Another risk during the 6 weeks to the end of April , which was clarified to an extent , concerned the business interruption insurance policies . Such policies were always intended to exclude pandemics , because the insurer could not have the whole of its balance sheets at risk over one event . To effect this exclusion the law would require a clearly worded exclusion . The technical issue , which arose is that the old Quarantine Act was replaced by the Biosecurity Act . Suncorp through its business insurance brand Vero changed their policies to refer to the new Biosecurity Act and advised the market during the February reporting season that they were 80 % under the new definition and with policies maturing , now 90 %. In contrast , IAG and QBE appear to have been left floundering and the presentations from both companies were not impressive .
Beware Sentiment and Momentum
So what is the appropriate strategy going forward ? The Australian stock market pushed above 7000 briefly on the 8th of April only to fall back and has again pushed through the 7000 level to be 7021 on 14th April . Given the clouds gathering over the technology sector including valuations , corporate taxes increasing from 21 to 28 % or an alternative minimum tax of 15 % applied in each country in which the multinational trades , rising 10 year bond rates , anticompetitive penalties applying to FANG ( Facebook , Amazon , Netflix and Google ) and privacy concerns of consumers , caution is recommended with the respect to sentiment and momentum investing . Increased weighting should be given to asking not only is it a good company , but what is its FVE i . e . fair value .
Ultimately , the stock market is a weighing mechanism that will take future cash flows , inflate them forward by expected growth rates and then discount them back by the weighted average cost of capital ( discount rate ). If some of the factors mentioned in the previous paragraph result in lower growth in earnings , this has two effects viz : the earnings reduce but also because the future growth rate reduces , valuation multiples contract . This double whammy can be quite dramatic . The September blog included the graph below from the 2000 tech-bubble .
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