Monday 24 September 2018

Lies, damned lies and statistics from Wall St all the way to Brexit

Volatility in the markets has been attributed to the fact that Wall Street is dominated by algorithms and automated trading, not humans. Photo: Bloomberg
Volatility in the markets has been attributed to the fact that Wall Street is dominated by algorithms and automated trading, not humans. Photo: Bloomberg
Richard Curran

Richard Curran

One newspaper described the stock markets as "melting" during the week. Time magazine referred to the "Dow's biggest plunge ever". Yet it wasn't a market meltdown as US and international stocks recovered most of their losses in subsequent sessions.

The Dow shed around 4pc and European markets followed up the next day with losses in the 3pc region. So how come such market volatility gets reported as a meltdown?

It all has to do with how the media uses the numbers it is getting from someone else. For example, the Dow Jones was in some of the highest territory it has ever been. Therefore a serious, but not catastrophic, share price fall will see it shed more in value that ever before. But when that is expressed in percentage terms, it is isn't that bad at all.

The stock market fall of last week is being attributed to fears about higher-than-expected inflation coming down the track in the US in particular. Fine, but a risk of that kind has been on the horizon for some time.

The reason stocks were so volatile is that only about 10pc of Wall Street market trades are genuine discretionary - traders picking stocks to buy and sell. The market is dominated by algorithms and high-frequency trading, which is automated.

Whenever questions are being asked in the market, the reactions become exaggerated and volatile. That is not to say that everything is fine with the US stock market right now and it somehow represents a buying opportunity.

The S&P hit a record high at the end of last month, but has now fallen back by close to 6pc from those highs. When investors are sitting on such massive gains, they get jumpy. Algorithms seem to get even jumpier.

I go along with the US fund manager who said this bull market is basically in the process of forming a top. Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, told CNBC's Squawk Box last Wednesday: "This is the first crack of it. Bull-market tops tend to be a process, not an event." He sees that happening this year.

But surely one of the first rules of interpreting facts, statistics and figures is to have some context. The very same thing is happening with Brexit numbers right now. Last week, some British government estimates of the cost of Brexit to the economy were leaked. They suggested that Northern Ireland would be one of the worst-hit UK regions, where it could see its economic growth over the next 15 years stunted by 12pc in the event that no new trade deal is reached.

Even in a benign scenario, growth could be held back by 2.5pc.

Media reports suggested that Northern Ireland would take a "12pc hit". Sky News described it as a "GDP slump" of up to 12pc.

But what does this really mean?

Northern Ireland's GDP is roughly around €40bn. The British government estimates do not say its GDP would shrink, they just talk about lower growth. This is meaningless, unless you know what assumptions are being made about economic growth without Brexit.

Let's say it was expected to average 1.5pc over the next 15 years. That would see GDP in 15 years' time running at around €50bn.

So are they saying it would be 12pc lower growth and therefore GDP would be around €45bn instead of €50bn? That is a serious number - but without the assumptions underpinning it, it is impossible to interpret in a meaningful way.

The idea that the Northern economy will be negatively affected stands up to scrutiny.

But figures are being thrown around without real context. Perhaps in a world where computers make so many decisions about what shares to buy, we have forgotten how to ask some basic questions about the numbers being presented to us.

Tullow Oil's long road back

Tullow Oil chairman Aidan Heavey must have felt that he had come through the worst as the Irish-based but Africa-focused oil company reported its first profit in three years. Tullow reported an operating profit of $22m (€18m) for the year ended December 2017, compared with a loss of $755m (€615m) in 2016, and ahead of analyst forecasts, on revenues of $1.7bn.

It was quite an achievement given the major surgery Tullow had to undergo when oil prices collapsed in 2014.

Last week, chief executive Paul McDade even talked about returning to paying a dividend after this year.

The company's commitment on capital expenditure was based on an oil price of $50 per barrel, but with oil trading at around $65 per barrel, free cash flow should become available.

But Tullow's share price bobbled around in the last week and was trading around £1.81 on Thursday, having been over £2.00 the previous Friday.

In the background are concerns about the recent oil price rally and whether it can last.

Last Thursday, figures from the US showed record crude output. The shale industry was devastated and unprofitable when oil prices tumbled in 2014. Since then it has got its act together and has found ways of making money at much lower oil prices.

Every time oil stages a serious price rally, the US boys pump out more.

Oil prices fell back to their lowest level so far in 2018.

Tullow has some very strong prospects, especially in South Lokichar, Kenya. Possible and proven reserves for this prospect were reduced but not as much as some had expected. Tullow said the figure is 560m barrels and the company has a 50pc interest.

Tullow plans to get back to its winning ways when it comes to exploration.

It has come a long way in just three years but one wonders whether the oil business hasn't changed irrevocably in the meantime.

We've gone from ECB whipping boys to recovery poster boys

Relations between Ireland and the ECB may be thawing. They reached a low point when the former head of the ECB, Jean-Claude Trichet, declined to appear before the Oireachtas Banking Inquiry.

He did later answer questions from members at a different forum in Dublin, but cited rules saying he was accountable to the European Parliament and not national parliaments.

Current ECB president Mario Draghi told Fine Gael MEP Brian Hayes last week that he is willing to appear before the Oireachtas Finance Committee to discuss the policies of the institution.

Draghi has already appeared before the parliaments of France, Spain, Italy, Germany, Finland and the Netherlands.

This coincides with Ireland's strong bid to have Central Bank governor Philip Lane appointed vice-president of the ECB. He would be the first Irish person to do so.

It appears in Frankfurt we have gone from being basket case number one to austerity/recovery poster boys.

If only there wasn't that €60bn bank bailout bill hanging around.

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