As Year end draws nearer, the worry is the main positive for 2011 is it’s looking likely to be a whole lot better than 2012…

There is nothing that would indicate the volatility to decrease in 2012. What has changed, however, is the psychology of it all. It is amazing what people, and then in particular market participants, can get used to. An equity index move of 3-5 per cent points is now nearly to consider normal, and at least don’t prompt too much attention. The investors are also a different breed, and trying to learn to take advantage of the volatility to increase earnings, and act counter-cyclically to take advantages of dips in the market.

For the Fixed Income space, the phrases regulatory risk, execution risk and event risk has truly been experienced, and players are adapting to expect to wait for windows for proper transactions depending on the surroundings.

All of this is likely to continue, and the world is bracing for outcome of a break-up of the European monetary union. This coming week the International Swaps and Derivatives Association will hold a webcast with its members next week to discuss what would happen to euro-denominated derivatives contracts in the event of one or more countries leaving the euro zone.

Personally I’m not expecting a full-fledged break-up of the union within 2012 where the Euro completely cease to exist, resulting in a dependence on Lex Monetae for interpretations of contracts, but I do consider it likely to have one or several countries seceding the euro-zone and getting a New National Currency (NNC), which can result in interesting contractual effects and monetary flow control (prohibition of exporting hard cash from a country can result in a foreign governed contract not being enforceable still)

If nothing else 2012 looks to become a very interesting year – but not a year for the weak minded.

The risks to the economy still remains high, but long-term there should be support in possible inflationary pressure (lets be real, the governments needs inflation to get out of the debt crisis) and a possible QE3 (depreciation in USD can only help the US) could contribute to equity buying.

The uncertainties regarding the peripherals in the eurozone, as well as increasing signals of weaker growth in the economies still support an underweight in equities. This is further supported by expectations of rate hikes which should make bonds increasingly attractive, and could reduce liquidity flowing into equities. In the current yield environment, however, the credit spreads found for higher rated debt instruments supports investments in Floating Rate Notes rather than bonds or equities.

In support of buying OSEBX we have a rising 200 daily moving average, currently at 417 (roughly 4.5 per. cent. down from today’s close) which could prove a resistance level. But the risks in the economy in my opinion still provide a poor Risk/Reward.

Updated technical analysis of OSEBX:

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I personally consider this index to be overbought, and with the uncertainty that surrounds the equity markets alongside what looks to be a reduced risk of inflation for the time being, at least myself have already allocated my personal portfolio out of equities into short-term money-market instruments.

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Intel Corp. said Tuesday that its second-quarter sales fell compared to the same quarter a year ago, but that business is picking up fast.

Even as revenue declined from last year, sales figures were better than what analysts had expected. Profits for the quarter were stung by a one-time fine from the European Commission.

At the time of writing INTC is up 8% in after-hours trading, a good sign for tomorrow.

Read news article

Whitney predicted Goldman Sachs would post second-quarter results Tuesday above Street estimates – she expects earnings of $4.65 a share, compared with the average analyst estimate of $3.48, according to a survey of analysts by Thomson Reuters. She set her 12-month price target on Goldman shares at $186.

Shares of Goldman Sachs rose 2.7% in recent trading to $145.75.

We maintain a bullish view

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We expect institutional investors to start joining from the sidelines and form an upward pressure. The main concern is the low liquidity/volume in the market, which can postpone the recovery. However, these levels are good entry points for long term positions.

* OBX (25 most liquid stocks) ended at 234.79

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Technically, on the other hand, there isn’t much resistance untill the 315-level (both 255 day moving average and next fibonacci level)

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In favor of a continuous growth is that the move has been on high volume and international investors seems to be weigthing up again.

Personally, however, I’m confortable with the gains for now and think it is time to reduce positions on the market and position myself defensively, such as primary capital certificates / grunnfondsbevis. Target for correction is the 45 day moving average, around 230-240 when it should be time to increase weights again.

Obviously I could be wrong, I guess time will show.

PCCs are very similar to shares. The main differences between PCCs and shares are that PCCs give ownership rights to specific parts of a bank´s capital, and that the governing bodies of a savings bank will have a broader representation than a commercial bank. As a result of the fact that the PCC owner´s only own parts of the bank, the dividends are limited.

There are 121 savings banks in Norway. 25 of these have issued PCC. In 2002 The Savings Bank´s Act was amended. The savings banks got the possibility to convert to shareholding companies, and the largest saving bank, Union Bank of Norway, converted. The bank has later on merged with the largest commercial bank in Norway, DnB, into DnB NOR Bank ASA. The bank might still be named a savings bank.

PCCs are of great importance for the Norwegians savings banks. 8 of the 10 largest savings banks have issued PCC, and the he owners´ share of the bank´s capital varies from about 10 to 55 percent.

The interesting thing about PCCs in a few of the mid-sized norwegian banks is

• High dividend yield (comparable to dividend shares)
• Low volatility

At the same time the disadvantage from an investor’s perspective is

• Low volatility
• Low liquidity

As should be easily noticable, low volatility is listed as both a pro and con . While the Oslo Stock Exchange Benchmark Index (OSEBX) is up 30% the past month (and rougly 45% since the bottoming) a few of the more interesting PCCs (such as MORG – Sparebanken Møre) has moved 1.9% the past month. As such, a high weight on PCCs vs the overall market means giving up gains. At the same time, in downturns they stay stable while giving a good dividend.

As such having a weight on PCCs serves as a defensive position, and at the current levels seems interesting to position for a pullback.

The most interesting PCCs in my opinion at the moment?

• MORG – Sparebanken Møre

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Dividend history:

• SVEG – Sparebanken Vest

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Dividend history:

• MING – Sparebanken MidtNorge

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Dividend history:

The summary of the situation is that Aker Solutions acquired ownership in a series of companies from the holding company Aker. Internal transactions are always vulnerable to speculations about proper pricing, and stresses the importance of proper Corporate Governance. For one thing the competencies and the independence of the different corporate boards of directors can result in the difference between a favorable and an unfavorable situation.  My hypothesis is that the board of directors in Aker Solutions is too closely related to the Aker system. Simultanuously you have a complicating factor in that the Norwegian government is involved. The Norwegian Prime Minister was present at the Aker Day 2nd of April when the transactions were announced, and naturally got questioned about his thoughts on the matter. More about that later.

Aker

Aker ASA is an industrial ownership company consisting of the companies (ownership in percentages after adjusting for the transactions in question)

• Aker Floating Production (72.3%)
• Aker Drilling (100%)
• Aker Solutions (41.0%)
• Aker BioMarine (82.9%)
• Aker Seafoods (64.95%)
• Aker Exploration (76.1%)
• Aker Philadelphia Shipyard (50.3%)
• Aker Clean Carbon (50%)

The aker companies has a total of 26,500 employees spread across five continents and total operating revenues totaling NOK 65 billion for 2008.

Aker Solutions

Aker Solutions delivers engineering, construction, manufacturing, technology products, maintenance and other specialised services, often as total solutions for complete projects. Aker Kværner is the result of a merger between the Kværner Group and the Aker Maritime Group in 2002, and it got listed on the Oslo Stock Exchange in 2004. In April 2008, Aker Kværner changed the name to Aker Solutions.

Governmental involvement / Aker Holding

Aker Solutions’ largest shareholder is Aker Holding AS, with a 40.27 percent stake in the company. Aker Holding AS is owned by Aker ASA
(60 percent), the Norwegian Government (30 percent), SAAB AB (7.5 percent) and Investor AB (2.5 percent). The government got involved on June 22nd 2007, when Aker transferred its entire ownership of Aker Solution (40.27 %) to Aker Holding, and sold 40% of the latter for NOK 6.4 bn. This happened after international investors showed interest in the company, by reasons of wanting the company to remain in Norway. As this is not a post about protectionism I’ll leave it at that for now. There are also questions about a put option that was given to the swedish investors, but again, I’ll leave that for now.

The transactions

Aker Solutions is acquiring five companies at a total consideration of NOKbn 2 including shareholder loans (ownership in brackets):

• Aker Oilfield Services (100%)
• ODIM (33%)
• Aker DOF Supply (50%)
• Misund Bruk (100%)
• Aker Clean Carbon (50%)

It is worth noticing that a few of these companies undoubtedly prompts sound long-term gains for Aker Solution. The issue is the pricing involved. At the same time it seems weird to increase the capital expenditure requirements for the next couple of years by roughly NOK 2.5 bn and the debt ratio (NOK 2 bn in debt accounts for roughly 25% increase) in the mids of the financial environment we’re in.

One company that seems additive for Aker Solution is the acquisition of Aker Oilfield Services, but while the valuation of comparables are down 50-90% over the past 18 months, the transaction involved a premium to prices at that point, which seems unreasonable at best. Similarly the ODIM stake seems just, except for being sold for a 16% premium over closing prices on the Oslo Stock Exchange previous day. The transfer of Aker DOF Supply (pretty much 6 AHTS (Anker Handling Tug Supply) ships) is more questionable.

The acquisition of Aker Clean Carbon is also interesting, as Aker Solution sold this to Aker in the first place and now pays a premium in order for it to be re-acquired. But the most questionable in the whole situation is the process.

The Aker value statement says “Aker ASA’s overriding concern is to create value via its ownership of well-run businesses that provide products and services in an environmentally sound, ethical, and socially responsible manner.”, an interesting notion considering the situation in the first place.

Aker Solutions had a general assembly 1st of April 2009. Nothing about these transactions, however, were mentioned untill the Aker Day the 2nd of April. For transactions resulting in 25% increase in debt and capex increases it would’ve been nice for this to be mentioned in the documents for the general assembly, not to mention for it to be disclosed at this, not the following day.

As for Aker Holding, the equity agreement between the partners states that such a transaction in Aker Solution ASA is clearly a matter for the board of Aker Holding and the general assembly. However, the transactions were performed through a fully-owned subsidary of Aker Solution ASA named Aker Solution AS (note the difference in organization form, so it is actually two different companies).

Inquery into the transactions

The government has started an inquery into the transactions. The financial valuation will be performed by Pareto Securities, while the legalities will be considered by the lawfirms Simonsen and Selmer. The question is, what can happen even if they should conclude things to be non-favorable for Aker Solutions? Ultimately the responsibility is with the board of directors in the company.  The government’s representative in the Aker Holding board is now responsible for the investigation, after apparently reacting due to the stock market reaction to the news.

As one can see in the drop the past couple of days, it is down (rougly 13% the days directly after the announcement), on a montly basis it is down about 11% vs OBX (25 most traded shares on OSE, of which AKSO consists) which the past month is up 4.36%. The increased debt ratio and capex has also resulted in rating agencies taking matters into their own hands and prompting a negative watch on the rating (BBB- initially)

No matter what happens, it shows the importance of corporate governance when dealing with internal transactions, it will be interesting to see what the inquery concludes.

But first of all, the prerequisite disclaimer: I would never recommend using TA as the only foundation for decisionmaking. But it still is a nice addition to the rest of the tools in the portfolio , and I do believe it can provide information , in particular in terms of being a proxy for market psychology.

I made a reference to expecting it to be the smart move for the younger part of the population (with excess cash) to invest in the equity markets in my former blog post. Lets look at some charts for this.

The past couple of days has been very interesting with a breakout of a negative trend tunnel in RSI 14 and RSI 21, as well as closing over the 45 day moving average yesterday (45dMA: 222.39 vs Close: 223.58). The next solid resistance isn’t seen untill the fibonnaci retractment point around 265-270, granted we have some resistance also around 235.

The 200 day moving average is 303.55 and we have 255 day MA at 337.27. A move back to 305 from 223.58 signifies a 36.4 percent increase from today. At the same time there seems to be increasing reasons to believe there is a limited downside. I believe we saw the bottom for this round with the lowest close 188.23 on 21st of November 2008 and an intra low the day before of 180.4. The close of 188.23 is as such 15.8 percent down from today’s levels (or inverse, we’ve increased 18.8 percent since that close).

That said, I do believe we’ll see continuing horizontal movement for a while more. But in order to reduce the risk of a bad entry point I prefer spreading my purchases over a longer time horizon, and I do believe

1. The OSE is attractively priced from a longer term horizon
2. Investors should have an overweight on OBX (25 most traded shares)
3. A smaller part of the portfolio should be placed in some high risk shares that have taken excessive hits during the financial crisis
4. Primary Capital Certificates are a nice defensive contribution to the portfolio with a high dividend yield (e.g. MORG with 11.5 percent div yield (20 NOK over 173 NOK close, note personal bias towards this bank))

That said, in many ways I hope that we don’t see a too steep growth over the next couple of months, as that will signify a high probability of the upturn being a bear-market rally.. What I would like to see is a reduced volatility with high volumes (we’ve seen a volume increase over the past few weeks) established in the 215-225 range. The important thing is getting a higher ratio of investors to traders in the market (long-term capital). And there is indeed quite a lot of money sitting on the sidelines waiting to get in.

And with that rant I want to wish people a nice weekend and good investing!

The financial markets are more interesting to follow than ever before in my history of dealing with them, with an extraordinary volatility and moving at a speed that is worthy of the internet age. We’ve witnessed a black swan event that has gotten most quants to question the assumption of normal distribution of return (about time), which will re-write financial theory as most know it.

I wrote in my post The fall and decline of USA and the USD, Feb, 2008 that

And being competitive internationally is something the US of A has neglected for quite some time. If we e.g. look at the the automaker industry and agriculture; the political reign has been dominated by protectionism and neglected modernization, supported by, to mention one factor, strong lobbying from worker’s unions.

If we look at today’s situation; where USA has a net negative savings rate (being indebted on average), China has a savings rate above 50%. Politicians are already trying to bring the savings rate down and support consumption rather than savings, in order to offset negative consumption growth from the US. And we are indeed seeing a slightly higher effort in savings, if only it had happened 15 years ago.

My short term targets for the USD were obviously wrong, as I didn’t take into account the importance of USD as a safe heaven. But it does give a sense of Schadenfreude , or sense of pleasure on others behalf, to see that at least some of what I pointed out as an issue with USA actually turned out to have this effect. And longer term I’m still bearish the dollar using much of the same arguments to back it up.

The situation highlights the importance of information gathering from multiple sources and across fields of expertise. Today’s markets are as much driven by psychology (fear) than it is by objective fundamental analysis of the firms.

For many it is also a question of philosophy (tried reading Being and Nothingness by Sartre, about existentialism? ). In times like these, fortunes are lost and fortunes are gained. I intend to use this time to do the latter, build a foundation for the rest of my life.

The troubled population is people about to go into, or that already is on their pension with a degree of 401k-like investment or other form of contribution based pension plan or a high degree of the pension savings in financial assets. Or even pension holders with a high degree of cash/liquidity at hand that due to the time horizon consideration will (and should) remain in such moneymarket instruments. But why is the latter group affected? Even if we exclude the alternative cost that the younger part can gain in such a situation, we see a situation with low interest rates in the moneymarket. Combined with an expectancy of a high inflation to come, a situation where debt is profitable. But this group has spent their life paying down the debt, and often find themselves with a religious wish to avoid having it in the first place.

For the younger part of the population the situation is more promising. I have no issue recommending a young individual with money to set aside for saving (p.s. I wouldn’t recommend this for saving for a house in 5 years) to start a savings plan to buy into a mutual fund ( preferably index funds, there are plenty of nice Exchange Traded Funds for this), especially in the Norwegian markets. The important thing is that there should be a balance in the weights of the different asset classes, but this is a good time to increase the weight on equities and bonds (retail clients can get exposure to this through money-market funds).

As Warren Buffet has stated (paraphrased); When others are frightened, you should be greedy.

Amongst others the norwegian branch of the Icelandic bank Glitnir offers 6.5 pct nominal interest, and 7 pct nominal interest if willing to bind the capital untill 03.06.2009. This is money covered by the norwegian bank savings fund, so considered close to risk free up till the limit of rougly 400,000 USD per person per bank, that is, if spreading across two banks the limit is 800,000 et cetera. So considereing risk free rate at around 7 pct, and a risk premium of 8-10 percent, one has to expect at least 16-20 pct gains on alternative placements to want to enter.

If we look a bit at the development of the Oslo Stock Exchange (click image for larger size):

OSEBX.I closed at 435.73 today, after what can only be characterized as a couple of hopeless months, bringing us back to march 2007, if looking for another day with close at this level. As such this is well below the 200 day moving average of 461.71, but with a potential support level if trying to make a trend out of the turns in late january and early march of this year
The interesting thing is that norwegian companies still shows some promising earnings potential, so these levels, in theory, should offer some nice P/E ratios for people looking to invest. The obvious question is the investment horizon; One should not invest anything in equities if not willing to stay in the market for at least 5 years, and it is the volatility in the market that over time should pay off.

US shares closing higher with financial and healthcare stocks climbing the most should help tomorrow at least. Falling oil price taking away some pressure from the US market and worse than expected US pending home sales could not stop today’s recovery. SP500 closing the day 1.7 % higher. DJIA up 1.35% with Bank of America the best performing blue chip up 9.30%. Nasdaq100 up 2.40 %.

In the after-market Alcoa (AA) just posted better-than expected 2Q EPS of 66C vs analyst estimates at 65C and at the time of writing the futures are pushing upwards, which should at least make tomorrow an interesting day.