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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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Focus is on stockpicking rather than sector allocation, finding companies that shows good cashflows. Earnings season is ahead, and we expect there to be profit warnings (PWs) ahead of these, so thread careful.

]]> http://blog.sumptuouscapital.com/2009/06/neutral-position/feed/ 1 http://blog.sumptuouscapital.com/2009/06/considering-a-short-bear-position-on-osebx/ http://blog.sumptuouscapital.com/2009/06/considering-a-short-bear-position-on-osebx/#comments Tue, 02 Jun 2009 17:36:42 +0000 Kristian Fiskerstrand http://blog.sumptuouscapital.com/?p=256 We started taking profit a tad early, but can’t really say that reducing risk and reallocating into defensive was a move I’m disappointing with. The PCCs have gotten some purchase pressure and gone up along with health care.

Technically, however, we’re now getting bearish and expect a correction of the market to be imminent.

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We observe a fibonacci retractment level around 315 that we see as the upper bound of the turning point. We crossed the 255 day moving average today and expect the correction to start in this area (301-315). Target for correction is adjusted upwards since may 10th due to market conditions with new target range 255-270 where we see a nice meeting point of fibonacci levels, 45 daily moving average as well as 200 daily moving average.

]]> http://blog.sumptuouscapital.com/2009/06/considering-a-short-bear-position-on-osebx/feed/ 0 http://blog.sumptuouscapital.com/2009/05/and-we-take-profit-on-obx-again/ http://blog.sumptuouscapital.com/2009/05/and-we-take-profit-on-obx-again/#comments Mon, 18 May 2009 13:09:15 +0000 Kristian Fiskerstrand http://blog.sumptuouscapital.com/?p=248 OSEBX is now at 277.34 with OBX at 249.54 (locking in 2.7 percent from the buyback 14th of may). The volume at the time of writing is 2,872 million NOK and the momentum upwards with that seems to have faded. We revert back to the initial strategy from the 10th of may. Positioning ourselves defensively in primary capital certificates and focusing on stockpicking. Things can obviously continue upwards, however, I’m comfortable taking the profit and reducing risks at this point and rather buy back later if I turn out wrong, giving up a slight profit.

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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.

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.