This week speculative investors have moved money from Desire Petroleum (DES) to fellow North Falklands basin driller Rockhopper Exploration (RKH) following news from Desire's Liz well that it was non-commercial and was being plugged. After a sharp rise in RKH from the lows 40's to close to 60p on Tuesday, today it is down around 4% on the evitable profit taking.
After making some large profits on RKH and Falkland Oil and Gas (FOGL) this week I no longer hold any of the Falkland's Islands drillers. Why have taken my money off the table? 1) The results from Rockhopper Sea Lion drill site will not be available for around a month 2) The spudding of Rockhopper well is unlikely to drive a significant new inflow of investment into the stock given news flow will take some time and speculators have been badly burnt on Desire (Desire has now fallen from a peak of around 130p to today's 45p). 3) most of the rotation within the sector from DES to RKH has probably taken place on Monday/Tuesday this week. For now Contrarian Investor UK stays on the sidelines but will keep an eye on things for any potentially fruitful entry points
Thursday, April 8, 2010
Do rising bond yields mean U.S. inflation is coming?
Earlier in the week 10-year U.S. treasury bond yields moved close to 4% and are approaching their 2008 highs. Part of the reason for the move was the government bond auction yesterday and often yields increase prior to these auctions in order for buyers of the new debt to get more favourable entry points. After listening to Frank Curzio's Podcast (the S&A Investor radio podcast) he talked about his fears for impending inflation in 2011 because of the movement of the 10 year treasury bond, but is he right to be fearful? The 10 year generally sets consumer loans such as mortgages so would hurt the consumer recovery.
Government bond yields can go up because:
1. Investors believe that the creditworthiness of the debt issuer is going down e.g. as i the case of the Greek government
2. Fear of inflation in the future
3. Higher interest rate expectations in the future driven by an expanding economy
Historically, the 20-year treasury bond yield has averaged approximately two percentage points above that of three-month treasury bills. Generally when the gap between short and long term treasuries increases it is a sign that the bond market expects the economy to improve in the future because the Federal Reserve will increase interest rates. Currently the yield on the 2 year is at 1.04% and the 10 year is at 3.86%, nearly 3% higher.
If fears of inflation were driving this increase in bond yields you would expect that inflation indexed treasuries which pay more interest the higher the rate of inflation would be rising at a much fast rate than standard treasuries. But this has not been the case.
Government bond yields can go up because:
1. Investors believe that the creditworthiness of the debt issuer is going down e.g. as i the case of the Greek government
2. Fear of inflation in the future
3. Higher interest rate expectations in the future driven by an expanding economy
Historically, the 20-year treasury bond yield has averaged approximately two percentage points above that of three-month treasury bills. Generally when the gap between short and long term treasuries increases it is a sign that the bond market expects the economy to improve in the future because the Federal Reserve will increase interest rates. Currently the yield on the 2 year is at 1.04% and the 10 year is at 3.86%, nearly 3% higher.
If fears of inflation were driving this increase in bond yields you would expect that inflation indexed treasuries which pay more interest the higher the rate of inflation would be rising at a much fast rate than standard treasuries. But this has not been the case.
So in summary I do not agree with Frank Curzio's hypothesis that we are on the verge of a period of rising inflation despite all the paper being printed by the central banks for the bail-outs. I do see inflation coming into the equation but not for a while yet. Perhaps we should worrying in late 2011?
Market on its way down this morning
The Dow Jones Industrials finished down 72 points at 10,898 last night despite a positive U.S. Treasury's 10-year note auction and Federal Reserve Chairman Ben Bernanke's optimistic outlook for the American economy saying "if economic conditions improve, as I expect, we should see increased optimism among consumers and greater willingness on the part of banks to lend, which in turn should aid the recovery". The FTSE 100 is currently down around 40 points with resource stocks on their way down. The markets are awaiting feedback from the Bank of England and European Central Bank meetings.
Reckitt's Becht earns close to £100 million in 2009
Reckitt Benckiser (RB) Chief Executive, Bart Becht, earned £93m in 2009 making him one of the best paid business leaders in the world. Having grown earnings per share from 92p to 195p over the last few years it could be said that Becht deserves this payout which is largely a share based compensation package. However, is any CE really worth close to £100 million a year despite being credited with making Reckitt the P&G of Europe? At least Becht will donate three million Reckitt shares, worth £110 million, to his charitable trust.
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