To Odey, Or Not To Odey

Category: CM Commentary & Opinion, Tim Quast
Source: Tim Quest, Managing Director, ModernNetworks IR LLC

We woke Monday to three inches of wet snow in Denver, after basking in 80s last week.  Nature, like markets, may deviate mightily from the mean in short bursts.

Speaking of deviation, UK hedge fund manager Crispin Odey (see link below) has gotten thick British ink for declaring current opportunities in equities to be “astounding.”  Odey banked returns last year for his billion-dollar Odey European Fund shorting UK financials like Northern Rock, where his wife, who is also sister to Barclays CEO John Varley, was an independent director.  Whatever the cost to family relations, it profited Odey investors.

We write on this today to cast the glare on our own seeming devotion to a coming slide in equities as we attempt to help you IR professionals stay cool. We’ve reported here since early April on how data indicate that cappuccino markets – a lot of foam hiding a dab of brew – prevail. Mr. Odey, who is far cleverer than we are, wrote in January 2009 on equity markets: “I am happy to buy when faced with irrational fear, but the fear that I see around me today appears reasonably rational.”

Chuckles aside, Odey has now reversed course, saying the week before last that the next bull market may have begun.  He’s been buying the banks he shorted last year and now believes the bargains there will "encompass other industries where capacity has been sufficiently reduced as to allow pricing power to come through."

We’re not market commentators. We just observe behavior.  There are curiosities, like BofA’s trading desk going dead silent since March. Why is Merrill, the loser in the deal (so to speak), winning all the trading business, and who’s behind it?  There are things like Deutsche Bank’s Q1 2009 profits on trading and swaps for risk-management with big institutional traders.  Gains like that come from speculation, not investing. And there are European structured products players, huge earlier this month but slipping away again since about April 22.  These observations don’t jive with rational investment habits.

Bottom line – and we can be wrong – Crispin Odey’s stance reminds us of what currency policy theorists call “wishful expectations,” describing policy intended to bring about a desired outcome that is not supported by underlying data.  Investors identify opportunities for capital appreciation in two broad ways: through growth, wherein value is created by productivity; and through bargains, where overlooked value returns in time.  With unprecedented government interference in capital markets, the capacity of businesses to produce by innovating has been curtailed. And massive flooding of global currency markets by central banks the planet round has depressed the capacity of value to return to things in time. 

Contrarians like Mr. Odey defy crowd direction to find uncommon opportunity and we hope he’s right.  If resisting the natural direction of things is contrarian, and you offered the example of, say, riding a motorcycle around a corner at high speed, we would agree.  Fighting inertia’s pull to travel straight would be a triumph.  But were your premise for bucking nature instead, for instance, deciding to forego nightly sleep, well…that’s a bit foolish.

Meantime, here’s a rule of thumb: as long as Asian markets go up one day, and European markets go down the next, and US markets go both up and down throughout any given day, it’s not rational investment at work. 

Have a good week,

Tim Quast

Managing Director

ModernNetworks IR LLC

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