Sample Sections

Below are some samples of regular sections found in the Mountain Investor Report.

Notable Quotes [January 2011]

Chris Whalen - 27 November 2010 "There are a couple of things going on in the background that most investors and most members of the public don't understand: when the crisis began we changed the accounting rules, so while most people think we have a fair value or a mark-to-market regime in place, in fact the banks are actually able to hide a good bit of their losses. So what the industry has been doing is trying to deal with the flow of charge-offs, the flow of expenses related to the housing crisis over time, by stretching it out. But this means that the banks have to shrink slowly and they're not going to be aggressive lenders."

Editor: Chris is referring to the decision in April 2009 by the Financial Accounting Standards Board (FASB) to relax mark-to-market accounting rules. The move allowed companies to use 'significant' judgment when valuing so-called 'impaired securities' on their books. It also allowed them to defer reporting losses. The amended accounting standards affected a broad range of derivatives including mortgage-backed securities.

While mark-to-market is by no means a perfect system of valuation, its suspension means that investors today are finding it difficult to determine a company's actual assets, equity and earnings, which are likely to be overstated since they are not allowed to be marked down to today's market value.

Charts [August 2011]

Technical Analysis: Trading the FTSE 100 with the CCI

As this chart show, the CCI or Commodity Channel Index has been providing some excellent buy and sell signals for those trading the FTSE.

Developed by Donald Lambert the CCI was first introduced in the October 1980 issue of Commodities magazine (now known as Futures magazine). The CCI is useful for identifying market trends, not only in commodities but also equities and currencies. It is also very good at identifying extreme conditions, i.e. when markets are overbought or oversold.

The CCI measures the current price level relative to an average price level over a given period of time meaning that CCI is high when prices are far above their average and low when prices are far below their average.

The CCI can be adjusted to the timeframe of the market being followed by changing the averaging period. Here I have set the averaging period to 25 days.

A trader could buy the FTSE 100 when the CCI moves back above 200 (the green line and arrows) and sell it when the CCI dips back under 100 (the red line and arrows). It's by no means perfect since it has issued back to back sell signals twice in the past six months but it's still a very useful technical indicator.

Debt Watch [August 2011]

McKinsey Reveals Britain as Most Indebted Nation in the World

The McKinsey Global Institute has published an update to its January 2010 study entitled 'Debt and deleveraging: The global credit bubble and its economic consequences'. The update reveals a startling fact: Britain's total debt, that is, private, public and financial sector debt, is the highest in the world, far exceeding that of the eurozone countries being bailed out.

Over the past twenty years our debt burden (the orange line on the chart below) has gone from about average for a developed economy to top of the leader board.

Historically such a huge build up of debt is followed by a prolonged period of deleveraging. This deleveraging typically sees consumers and businesses reduce spending in order to pay down debt - a process that puts a big drain on economic growth.

The McKinsey study looks at 45 historical examples of such deleveraging and finds that it typically lasts for six or seven years and ultimately reduces a nation's debt to GDP by around 25%. In the case of the UK this would be equivalent to an entire year's GDP and it's a process that hasn't yet begun.

Recommended Reading [January 2011]

Reminiscences of a Stock Operator by: Edwin Lefevre

"Edwin Lefevre's classic stock market text Reminiscences of a Stock Operator centers on Larry Livingston, a thinly veiled depiction of Jesse Livermore, one of the most famous traders of all time. Lefevre's book takes place in the early twentieth century and gives a first-person account of Livingston's journey from quotation-board boy in a bucket shop to stock-price scalper to large-position trader. Readers follow Livingston as he sharpens his trading chops in a process that leaves him dead broke more than once, but each time even more dedicated to catching his white whale."

Editor: This captivating novel provides an excellent introduction to the world of trading. The book captures the essence of a time when grifters, bucket-shops, and manipulators ruled the market and is an interesting examination of human nature. This book is a classic and is still must reading on Wall Street even today.

The Search For Yields [March 2011]

With the UK inflation rate hitting 4% in January protecting your savings from the ravages of inflation is more important than ever. And that's according to the CPI (Consumer Prices Index). If we look at the annual rate as measured by the RPI (Retail Prices Index), which includes rents and mortgage payments, which most of us have to pay, inflation is at 5.1%. In short, if you're not getting a return on your money of at least 5.1% you're losing money. Those paying the 40% tax rate needed to find an account paying 6.67%.

Today the top savings accounts pay around 2.9%, assuming you are on an introductory rate, and a top fixed rate bond around 4.0% provided you lock up your money up for three years. In these examples your money is losing value or purchasing power at 2.2% and 1.1% per annum.

While there were 23 accounts for basic rate taxpayer that beat CPI (21 of which are ISAs) the average savings rate being paid is just 0.83%. Banks are very happy with this since they are able lend out your money at 6 or 7% and collect the difference.

This, now regular, section of the MI Report will profile investments that allow investors to keep ahead of inflation and get a real return on their money.

High quality dividend paying stocks represent an excellent investment alternative for some investors, especially for those in retirement who are reliant on fixed income investments. In these volatile times allocating a portion of your portfolio to dividend paying stocks provides a good level of comfort.

The case for dividends: £100 invested in UK equities at the end of 1945 would be worth just £197 in real terms without the reinvestment of dividend income. With dividends reinvested, the value would have grown to £3,182 - over 16 times more.

Back in March 2009 when the FTSE was down 47% and the DOW was down 52%, this month's company was down 35% and was still paying out over 5%.

The rest of this article is reserved for subscribers only.

Market Meaning [August 2010]

The terms Bull and Bear markets, meaning an up-trend and down-trend respectively, get their names from the way the two animals fight.

A bull will thrust its horns into the air while a bear swipes its paws in a downward motion. These actions are metaphors for the movement of a market.

The Big Picture [March 2011]

Escaping the global debt trap

According to Her Majesty's Treasury the UK's total debt as of the end of December 2010 was £2322.7 billion, equivalent to 154.9% of gross domestic product (GDP).

This is the first time that the official figures released by the Office for National Statistics have included the cost of bailing out Royal Bank of Scotland and Lloyds. This has impacted considerably on the measure of public sector net debt. Without the bailout numbers the figure is 'just' £889.1 billion, equivalent to 59.3% of GDP. This number is still way above the government's sustainable investment rule of a maximum 40% and neither of these numbers includes pension contributions and Private Finance Initiatives (PFI) which the government is obliged to pay.

Typically when nations find themselves stuck in a debt trap such as this there are six options for escaping it:

1. Grow your way out: This would take something of an economic growth miracle. Normal levels of economic growth simply wouldn't be enough and such a miracle simply isn't on the cards. Neither the US nor Europe has in place the kinds of sound growth oriented policies that would be required.
2. Major interest rate cuts: With interest rates near-zero there is no more room for major cuts and the cuts to date haven't stimulated spending to anything like the degree necessary to give us a growth miracle. And given that 61% of GDP comes from consumer spending, this approach only works if consumers are both willing and able to spend. Today the average adult in the UK owes £29,875 (which is 126% of average earnings) and simply isn't in a position to spend, especially given that banks still aren't lending.
3. A bailout: This option is possible only if the country to be bailed out is small enough. It may work for Greece, Ireland and maybe even Spain but it definitely will not be possible for the UK or the United States.

These first 3 options are the ones that do not 'hurt'. These are only possible if they are carried out early enough (before the debt gets too large) but unfortunately they are no longer available as we have left it much too late.

1. Outright default: When a nation defaults on its debt someone has to incur the losses and since the government debt is held by the financial sector - by banks and insurance companies - we would immediately see another systemic banking crisis. Clearly this option is one politicians want to avoid.
2. Austerity measures: Cuts big enough to bring down the deficit have never been tried before and the protests we have seen in Greece, France and Ireland show just how hard implementing austerity can be. Although the UK is going down this road, under current government spending plans, spending in 2015-16 will be £686 billion in real terms which is higher than it was in 2009. Spending in 'unprotected' departments will fall in real terms over the period, but only by 7%. A recent report by the Centre for Policy Studies states that "this level of cuts should not be described as swingeing, savage or draconian. They are modest". In reality these cuts will only reduce our debts in nominal terms, which brings us to the final option.
3. Money printing/ inflation: This is by far the most politically palatable option and it's the one that is being pursued both here and in the US. We hardly need rely on the CPI (Consumer Prices Index) - which hit 4% in January - to tell us that our cost of living is rising, we see and feel it every time we buy food, petrol or pay our bills. If you print money, sooner or later you get inflation, and in the same way that inflation erodes our savings, it erodes the government debt.

Across the world I expect to see a mix of each of these last three options, however option 6 is likely to be the one favoured by most politicians. This is the subject of an excellent new book 'The Global Debt Trap' by Claus Vogt.