Trip Report: Cairo, Egypt, October / November 2016

In my research and investing I stress three things: people, structure and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap.  This post is about a recent trip to Cairo, Egypt and touches on people, structure and value – as well as lots more - in that country. 

The purpose of the trip was to generate a short list of quality companies I’d like to own stock in if/when the currency is revalued.  Egyptian equities appeared on my value screens back in March, but corporate responsibilities kept me tied to home.  

I was also concerned that Egypt’s currency was going to be devalued.  There was a large and growing gap between the official and black market rate.  Russian stocks popped higher soon after their currency was floated in early December 2014, and I wanted to get my ducks in line in case the same thing happened in Egypt. 

Readers are advised to note that it was my first time in Egypt as well as my first time in the Middle East.  Most of what’s not referenced below comes from on-the-ground meetings rather than from verified sources.  The people I met were mostly financial and corporate professionals, who are generally more conservative, educated and less willing to rock the boat.

Meet the New Boss. Same as the Old Boss?

One of my first impressions of Cairo was the heavy security presence on the way from the airport to my hotel.  There were suited ‘undercover’ security men standing every 400 meters or so on the access road’s median strip and straight through the tony Heliopolis neighborhood.  Toward the end of my trip I was politely told not to take pictures at a major intersection near my hotel by a serious, well-dressed man with a walkie-talkie.

Despite having one the world’s oldest continuous parliaments, the country has been basically under military control since the 1950s.  Nasser, Sadat, Mubarak and now Sisi all come from the military.  And this doesn’t seem likely to change.  Nobody I talked to had anything positive to say about Morsi’s and the Muslim Brotherhood’s short stay, and there does not seem to be any other decent sized and well organized opposition.  I was told that most Egyptians feel that the military provides welcomed stability in volatile region.

While nobody I met had anything good to say about Morsi and the Muslim Brotherhood’s brief government, I’m sure this view is not shared by all.  Members of Hasm, reportedly a new group aligned with the Muslim Brotherhood, certainly don’t feel this way.  They recently took time and effort away from more productive activities to bomb and kill six police who were stationed on the road leading to the pyramids (see here).

Much of the outward appearance of stability could be due to suppression of the press and dissidents.  The government is not shy about keeping the press under control by jailing journalists, and some reports note that the present government is more repressive than previous ones (see here, here and here).

Foreign Exchange Nirvana

Virtually all discussions on the economy focused on the currency.  Egypt imports a lot and virtually all trade is done in USD (United States Dollars).  It’s one of the world’s largest wheat importers for instance.

Virtually every meeting with corporate executives began with a discussion of the currency - how they are sourcing dollars from the ‘parallel’ market, how much of the higher costs they can pass onto customers, and how and when the situation will end.  All were adamant that the situation was unsustainable and had to change.  None thought the change would come so quickly. 

It happened when I was there which, for an emerging markets geek like me, made it a super exciting week!!  So please forgive me if this section is a bit long-winded.

When I arrived on Sunday USD1 bought EGP8.88 at the official rate (EGP stands for Egyptian Pounds). However, the black market rate was EGP15, up from about EGP12 just a few months ago.  This means that people who exchanged their USD to EGP on the black market could buy twice as much as if they exchanged their currency at the official rate. 

It also means that companies that import raw materials, equipment and finished products needed twice as many EGP to buy the same thing when using the black market rate.  Few non-government companies could get enough USD at the official exchange rate so they relied on the parallel market.

By Tuesday – just two days after I arrived - the black market rate shot up 20% to EGP18, before falling by 33% to EGP12 the next day (Wednesday).  The dramatic one day fall foreshadowed the next day’s news that the currency was going to be set free (Thursday).  It fell to EGP15 by the time I left (Saturday).  It has declined further and, as this is being written, is trading a little over EGP18.

To put this in perspective, my daily breakfast at the Hilton cost EGP205.  At the old official rate of EGP8.88 to one USD, my breakfast cost USD23.08.  By the time I left it cost USD13.53, and at the current rate it cost USD11.39, or 50% less than it did at the old exchange rate.  Not as cheap as I’d like, but certainly not as expensive as before. 

Second cheapest Big N' Tasty meal in the world?
USD3.20, Cairo, 5 November 2016

After the change, prices in Egypt are not very expensive.  In fact, after Ukraine it has the least expensive Big Macs in the world.  At the hotel across the road from my hotel it cost EGP26, or about USD1.50 at current exchange rates.  (Link to The Economist's Big Mac index is here).

A quick stop at Carrefour confirmed this.  A 1kg bag of pasta cost EGP10 (US$0.66), pre-cooked large salami pizza EGP22 (USD1.46), and a French baguette, EGP5.75 (US$0.38).  This was a month ago and right after the devaluation, and with inflation expected at 25-40% next year, it’s unlikely they’ll stay so cheap. 

Stocks on Sale Too

Carrefour's Inexpensive Pasta
Cairo, 5 November 2016

Another way to look at this is that all the stocks were at a 50% sale for USD investors on Thursday as compared to Wednesday.  And who doesn’t like a sale? 

Investors certainly do and have bought heavily with the headline stock index increasing some 30% in the month since the currency was freed.

For foreign investors there is an additional problem of getting your money out and into the currency you want.  It’s easy to transfer USD into Egypt, but it may take a while to get it out as government approves all foreign currency outflows.  There have been signs of this improving, and with the currency now freely exchangeable, theoretically there should not be any problems.  However, governments everywhere are loath to give up power and fiddling with the currency exchange plumbing may be around for a while.  

Other potential inflationary reforms have also been implemented.  In August Egypt’s 150-year old parliament approved a 13% VAT tax, and more recently the government halted many subsidies on food and oil which had been in place for decades. 

In addition to freeing its currency, the central bank raised interest by 300 basis points (i.e. 3 percentage points), and Egypt now has some of the world’s highest interest rates at over 15%.  This was done in a bid to shore up the currency and in an effort to stem inflation.  

Long term these reforms should be good for the Egyptian economy, but there’s going to be a lot of short term pain.

Going Underground

One saving grace may be Egypt’s large underground economy.  It’s believed to be as large or larger than that tracked by official statistics.  Senior bankers note that only about 10% of Egyptians have bank accounts, which means that for the vast majority, Egypt remains a cash based economy.  Except for the minority very few Egyptians had access to the official exchange rate, so one could argue the dramatic fall in Egypt’s currency had already been absorbed by the majority of the population.  The new rate reflects what most Egyptians are already dealing with.

Meeting with consumer goods companies seemed to confirm this.  They have been steadily raising prices to cover USD purchases of raw materials like sugar and wheat.  Several noted that there was little decrease in demand despite higher prices.  Perhaps the economy is more resilient than the official figures suggest. Hope springs eternal.

Crowded House

One big problem could be crowding out by Egypt’s state and military owned companies.  Egypt's largest fertilizer producers, telecommunications company, and its tobacco monopoly are government owned.

I’ve not come across any credible figures but it’s speculated that the military and the companies they control account for 5-40% of the economy and that they crowd out private enterprise (see here). 

This is not unusual in developing countries.  China’s PLA and Indonesia’s ABRI were also heavily involved in business not that long ago.  Troops need to be paid and if the government doesn’t have the budget, smart generals do what smart people all over the world do – make do.

  

An example of this is the military backed cement plant that’s being built by a subsidiary of China government owned Sinoma (see here).  According to meetings with cement company executives, Egypt’s cement supply is already in surplus and a new plant that doubles capacity is not needed. Governments and state-owned-companies are typically bad at allocating capital and I doubt that two together will be any better.

In addition to curtailing the government and military’s business ambitions, Egypt can do a lot more to level the playing field for entrepreneurs and business people.  It’s ranked 122 out of 190 countries in the World Bank’s “2016 Doing Business Report”, which looks at the factors that impede or assist in business formation, construction permits, etc.  Big macro reforms like those written about above make the headlines, but making it easier to do business by cutting down on the time and costs of starting and running a business is just as much if not more important.

The Only Thing to Fear is Fear Itself

Egypt’s reputation is not very good these days.  Before my trip literally everybody said I should be very careful there.  Between the bombing of a Russian plane last October, continued problems in the Sinai, and fighting in nearby Syria, Iraq and Yemen one will naturally feel nervous.  The recent bombings near the pyramids and a Coptic church certainly won't help (see here).

Selfie With the Locals,
Giza Pyramids, 4 November 2016

Tourism is way down and I was told it’s not just the Russians and Europeans who are staying away. Regional visitors have curtailed trips for the same reasons.  According to the locals, Cairo was a fun destination where Arabs from stricter countries used to go to let their hair down.  Alcohol is available, there are no dress restrictions, and the Internet is free and open from what I can tell.

So my guard was up when walking around Cairo and visiting the pyramids. But I encountered no problems besides the usual pesky salesmen. The only people who approached me were overly friendly teenagers wanting to practice English and take selfies with a foreigner.  This reminded me of traveling in China some 30-years ago when foreigners were a rare sight and nervous kids yelled a friendly hello to the passing ‘laowai’.   

My fears seem to have been misplaced.  Egypt was recently taken off the US State Department’s travel warning list.  According to their ranking, traveling in Egypt is safer than anyplace in Europe, if recent reports are accurate (see here).

Investing

For US investors Egyptian stocks are not very expensive.  Measured in USD, its headline index, the EGX30, is bumping along close to the 10-year low levels it reached in 2009 and 2011.  However, when measured in EGP the index is at a 10-year high.

Egypt reminds me a lot of Indonesia, a country I’ve written about before (see here, here, here, and here).  Like Indonesia its demographics are very young with about 30% of its population below 14.  Both are the most populous countries in their respective regions.  Egypt is the largest in the Middle East and third-most populous in Africa.

Both are overwhelmingly Muslim – about 90% in Egypt.  Both are moderate Islamic countries.  An example of this is its current domination of women’s squash where all three top spots are held by Egyptians (see here). 

While parts of society seem modern, one is also reminded that Egypt has one of the world’s highest rates of FGM – female genital mutilation.  Despite laws against it, many websites report that it’s still widely practiced (see here).

While Egyptian stocks are now close to the cheapest they’ve ever been for USD investors, it does not feel like the fat pitch of Indonesia in Sep 1998. This is when the Indonesian index reached its lowest point ever in USD terms.  It fell a stunning 93% from July 1997 when the Thai Baht and Indonesian Rupiah collapsed.  The low point coincided with widespread riots in Jakarta and other cities, and the stepping-down of then long-term president and military strong man Suharto.  One should note here that there were 14 months between the initial currency fall and when the market and currency hit bottom.  It’s only been one month since Egypt changed its exchange rate, and instead of the market falling, it’s increased.  With more inflation to come to an already frustrated and increasingly poor population, political and societal uncertainty are still high and may not be fully reflected in the market.

A big difference is that Indonesia’s depreciation was unplanned.  All the business people I met in Cairo were anxiously waiting for the currency change so they could get back to business instead of spending time skirting the law in a search for USD.

The change can also help Egypt to become more competitive.  I was impressed with the managers I met at one of the world’s largest carpet manufacturers, and the lower and free currency means that they can compete very favorably with their biggest competitors in Turkey.

Wrapping Up

I was impressed by the people I met in Cairo as well as the numerous Egyptians I met during a short stay in Dubai.  The country has a lot of educated and switched-on people.  It should be to Egypt's benefit if their government and military is there to support rather than compete with them.

I don’t envy the changes, struggles and hardships that my Egyptian brothers and sisters will likely go through in the next few years.  Saying that short term pain leads to long term gain rings hollow when parents have to tell their children they can't afford meat, or to attend the university they expected to go to, or even delaying marriage because there’s not enough money.

But as we’ve seen before, economic reforms can and do work.  Indonesia’s per capita income fell from USD1,100 to US$560 between 1997 and 2000, and its poverty rate increased from 17% to 23% over roughly the same time according to the World Bank.  Now at USD3,440, Indonesia’s per capita income is more than 5 times higher and its poverty rate at 11% has never been lower (see here).

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Postscript
For a very good discussion of the recent currency change, other reforms, and Egypt's economic and political structure, readers are encouraged to watch/listen to the very good Al Jazeera episode, "Can Egypt's currency devaluation boost its economy" (see here).

Summer Reading Book Review: One Summer - America 1927

In my research and investing I stress three things: people, structure and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap. 

This post is mostly about people.   One Summer is full of great stories of a wide variety of people. The book was actually meant to be a guilty summer vacation read, but there is enough investment related material in it to warrant a post on the Minority Report blog.  Bill Bryson is one of my favourite authors and he does a great job with One Summer.  It is a very easy read with great insight into many characters that I’ve never heard of before.

For those who are not acquainted with him, Bill Bryson is an Iowa born and UK-based author who writes fact-filled, breezy and funny books.  I particularly like the way his books focus on lesser-known people and their backgrounds.  One of the key ingredients in my own investment research is people (link here) which is by far the most interesting element out of the three things I look at.

Bryson’s books are typically full of colorful and interesting souls many of whom have largely been forgotten, but nevertheless have many times helped shape the world we live in.  For more famous figures - particularly Charles Lindbergh in this book - he provides context, details and new findings that can be amazingly insightful, laugh-out-loud funny, and sometimes bewildering.

Cover - USA

As per its sub-title the book focuses on the summer of 1927, quite possibly the height of the roaring 20s in America.  The stockmarket was hitting new highs, jazz was a new and evil music, and Charles Lindbergh made the first non-stop airplane flight across the Atlantic.  It is Lindbergh's flight and his five-month tour around the US that begins, closes and provides the background for the book.

What I found most interesting is the author's observation that some time in the late 1920s Americans collectively realized that Europe was no longer the leader of most things.  "It is a little hard to imagine now, but Americans in the 1920s had grown up in a world in which most of the important things happened in Europe.   Now suddenly America was dominating in nearly every field - in popular culture, finance, and technology.  The centre of gravity of the planet was moving to the other side of the world and Charles Lindbergh's flight somehow became the culminating expression of that."

The vast majority of the book focuses on the more fun and interesting topics such as Babe Ruth, Lou Gehrig and why the 1927 Yankees were likely the world’s greatest ever baseball team; and Lindbergh’s incredible popularity and intense tour around the US after his groundbreaking flight.  

Although not mentioned in the book, 1927 was also a magnanimous year in investment history. In that year Benjamin Graham started teaching the now famous class called "Security Analysis", at Columbia University.  His class introduced a new method of analyzing securities that emphasized the difference between a company's true or intrinsic value and its stock price and how one can profit from this difference.  It would take another seven years till America's great depression, and his flirting with personal bankruptcy, that he and his colleague wrote "Security Analysis".  This book is as close to a financial bible, and is particularly liked by value investors.  His other classic, Intelligent Investor, was not published until 1949.

While more general in nature, One Summer has quite a few insights for investors.  I've copied several passages that I think investors and others in the financial community may find interesting. 

In re-reading many of the excerpts below, I kept thinking how similar America in the 1920s is to China today.  Stock markets are booming, funding costs are falling, more people were taking on credit, and corruption is not unknown.  Cohorts closer to other emerging markets can likely draw similar comparisons (Vietnam in the early 2000s, Indonesia, Thailand and Malaysia in the early 1990s, to name but a few).

Corruption is a good way to get rich. "...(then President) Coolidge kept a light hand on the tiller of state." "His treasury secretary, Andrew Mellon, spent much of his working life overseeing tax cuts that conveniently enhanced his own wealth.  According to historian Arthur M. Schlesinger, Jr., with a single piece of legislation Mellow gave himself a greater tax cut than that enjoyed by almost the entire population of Nebraska". "Mellon's personal net worth more than doubled to over $150m during his term of office, and the wealth of his family, which he oversaw, topped $2b.” 

"The total cost to the country of all the various acts of incompetence and malfeasance in the Harding administration has been put at $2b - a sum that goes way beyond the stupendous, particularly bearing in mind that Harding’s presidency lasted just twenty-nine months”. 

"Appointed to the role of head of the Veterans’ Bureau, (Charles) Forbes managed in two years to lose, steal, or misappropriate $200m.  …(he was) fined US$10,000 and given a two-year prison term”

Cheap finance and the carry trade did not work well in the end.  “Banks borrowed from the Federal Reserve at 4 or 5 per cent and lent it to brokers at 10 or 12 per cent.  They were, as one writer put it, ‘in the position of being handsomely paid simply for existing'.”

“As long as shares kept rising the system worked fine and for much of the 1920s that is exactly what shares did.  It was clear to anyone who cared to look, however that there was little correspondence between the prices of many shares and the values of the companies they supported.  While national output (as measured by GDP) rose by 60 per cent in the decade, stocks went up by 400 per cent.  Since most of these inflated prices had nothing to do with any underlying profits or productivity, all that kept them so giddily buoyant was the willingness of fresh buyers to bid prices up”.  

Prevalent share manipulation by the big boys.  "Many of the most respected business leaders in the country took part in syndicates in which share prices were shamelessly manipulated for the sake of a large, quick gain at the expense of innocent investors.  One such, reported by the financial writer John Brooks in his classic Once in Golconda, involved such luminaries as Walter J. Chrysler of the Chrysler Corporation; Percy Rockerfeller, nephew of John D. Rockerfeller; John Jakob Raskob, national chairman of the Democratic Party; and Lizette Sarnoff, wife of David Sarnoff, head of the Radio Corporation of America (RCA).  A broker working for them bought large blocks of RCA stock at selected intervals.  This had the effect of driving the price from 90 to 109.  The rise attracted other investors.  The broker than cashed the syndicate’s holding and the members shared a profit of nearly $5m for less than a month’s work.  With the syndicate’s money withdrawn, the shares sank back to 87, leaving other, uninformed investors nursing huge loses.  There was nothing to be proud of in any of this, but nothing illegal either.  Raskob made most of his fortune through such pools.  So, too, did Joseph Kennedy, father of President John F. Kennedy."

Rising stock markets make leaders popular.   “With markets constantly on the rise, he (President Coolidge) didn’t need to do anything except keep out of the way.  Under Coolidge's benign watch, Wall Street rose by more than two and a half times in value. The success of the economy not surprisingly did wonders for Coolidge's popularity."  

American consumers have almost always been important. "(In 1927) Americans were the most comfortable people in the world. American homes shone with sleek appliances and consumer durables…that would not become standard in other countries for at least a generation or more. Every year America added more new phones than Britain possessed in total. Kansas alone had more cars than France." 

Financial innovation (debt) made the American consumer. “Thanks to a brilliant new financial invention, Americans could suddenly have things that they had never expected to have - and they could have them right now.  It was called the installment plan, and it changed more than the way Americans shopped: it changed the way they thought.  Installment buying filled American homes with cars.  It made America the consumer paradise it has remained ever since. "

Great explanation of the gold standard.  "Under it, any paper money in circulation is supported by gold reserves.  When America was on the gold standard, a $10 bill could be exchanged for $10 of gold, and vice versa.  It was gold, in other words, that gave value to the otherwise worthless slips of paper known as money.  A gold standard had certain limitations - most obviously, the amount of gold that had been discovered - but it had many compensation attractions that endeared it to bankers.  It made inflation almost impossible since governments couldn’t just print money.  It kept the management of exchange rates out of the hands of politicians with their narrow, short-term interests.  It promoted price stability and, by and large, kept the heavy wheels of international trade turning.  Above all, a gold standard had a huge psychological importance.  It worked. It had worked for a long time.  It was what was known."

Federal reserve sows seeds of the great depression.  "The problem was (the gold standard) wasn’t working very well.  Half of all the gold in the world was in the United States, mostly behind a ninety-ton steel door in a five-story vault deep beneath the Federal Reserve Bank of New York in lower Manhattan.  This was not actually a terrifically good thing.  It might seem like a great idea to have all the gold, but in fact that would make it that other countries couldn’t buy any more of our products because they would not have gold of their own to pay for them.  In the interests of trade and a healthy global economy, gold should circulate.  Instead, it was accumulating - steadily, relentlessly, in a country that was already better off than all the countries of Europe put together." 

"...(the) Federal Reserve sets the stage for the 1929 market crash.  It was in America’s interest to keep international trade rolling along.  So (than NY Federal Reserve Head) Strong decreed that the Federal Reserve would cut its discount rate from 4 per cent to 3.5 per cent, to encourage holders of gold to move their savings to Europe where they would enjoy higher returns.  This in turn would bolster European reserves, help stabilize European currencies and boost trade overall.  Strong gambled that the American economy could absorb the stimulus of a small rate cut without going crazy.  It would prove to be a spectacular miscalculation.  …four of the reserve banks… refused to go along partly in petulance no doubt, but also in the legitimate belief that it was madness to encourage more borrowing with market values so high already”.  

“The cut in interest rates had an explosive effect - ‘the spark that lit the forest fire’, in the words of the writer and economist Liaquat Ahamed.  The result was the Great Market Bubble of 1928.  Over the next year, stocks would more than double from already irrational heights, and the volume of brokers’ loans to investors would rise by more than $1 billion to a tottering and unsound $4.5 billion - all fueled by the patently deluded belief that stocks could keep on rising forever. "

America was not so free in the past.  "America was in the grip of something known as the Great Red Scare.  In 1917 and 1918 Congress had enacted two startlingly restrictive laws, an Espionage Act and a Sedition Act.  Together these provided severe penalties for anyone found guilty of displaying almost any kind of disrespect to the American government, including its symbols - the flag, military uniforms, historic documents or anything close in which was deemed to repose the glory and dignity of the United States of America."

Like Madoff, Ponzi started out legit.  “…he concocted a scheme  - in itself perfectly legal - to make a profit by trading in international postal reply coupons.”   "The problem with Ponzi’s scheme was that individual coupons were worth only very small sums - 5 cents typically - so it would have been necessary to exchange monumental volumes to make a reasonable return.  Ponzi didn’t even try.  It was much simpler to pay off early investors with funds paid in by more recent ones." "Altogether, it is thought, Ponzi ended up some $10 million in the hole, equivalent to US$100 million today.  About 40,000 people invested with him. "

Fallacy of forecasts.  "When people imagined the future of long-distance transportation  it wasn’t always highways they thought of but airplanes and giant dirigibles cruising between city centers.” “…skyscrapers of the period began to sport pointed masts - so that airships could tie up to them”.  (MM's note - think of all the unused helipads in city centers). 

New music will bring down society - “Worst of all was jazz which was widely held to be a spring-board to drug-taking and promiscuity.  An editorial in the New York American called jazz ‘a pathological, nerve-irritating, sex-exciting music'”.  

Cover - UK/HK

High margin in illegal activities.  “Prohibition may be the greatest gift any government ever gave its citizens.  A barrel of beer costs $4 to make and sold for $55.” “By 1927, (Al) Capone’s organisation - which interestingly had no name - had estimated receipts of $105 million.  The scale of his operations unquestionably  makes him one of the most successful businessmen in American history.”


“Doctors could legally prescribe whisky for their patients and did so with such enthusiasm that by the late 1920s they were earning $40 million a year from the practice”. 

All that money led to a drawn out failure.  “Nearly everybody recognized that Prohibition was a colossal failure, and yet the nation persevered with it for thirteen more years”.  

“The national murder rate went up by about a third after Prohibition was introduced”.

American politicians break laws and oppose country. "During the war (WWI), Hoover illegally bought chemicals from Germany.  This was an exceedingly grave offence in wartime.  Remarkably he did so NOT because the chemicals were unavailable in Britain (where he lived at the time), but simply because the German ones were cheaper." 

America as an emerging market/economy.  "Nine tenths of all serious crime in America went unpunished... Only about one murder in a hundred resulted in an execution". 

Decrease in IPOs is a Good Signal

Closing out the year, IPOs are back in the news.  There were several large IPOs in HK and the US in the last quarter of 2013 and many had good first day price increases.  Some press articles are expecting IPO activity to increase in 2014 with many calling for it to be the best year for IPOs since 2007 (articles here and here).  

A large number of IPOs always seemed like the sign of a market top to me.  But this has been more of an assumption than something based on fact or past performance.

Thanks to accounting firm Ernst and Young and index provider MSCI I was able to assemble the chart below.  It shows IPO capital raised and overall global equity performance as tracked by the MSCI All Country World Index (ACWI) for the past 11+ years.  Not a large sample at all, but better than nothing.

Bear in mind that these are quick and dirty numbers and not a strict apples-to-apples comparison.  Ernst and Young's IPO figures include several markets that are not included in the AWCI index such as Argentina, Columbia, Syria and Ukraine.  

However all of the large markets are included in both - the US, UK, Japan, China, etc. The US accounts for close to 50% of the MSCI ACWI and it has been the largest issuer of IPO equities in two of the last three years. “It is better to be roughly right than precisely wrong”, John Maynard Keynes is believed to have said.

The quick and dirty comparison shows that in the past eleven years, the global index increased every year after IPO raised capital decreased.  In other words, a good time to invest would have been the year after the amount of money that went into IPOs decreased.  This is highlighted by the red arrows in the chart below.  

However the reverse does not seem to hold.  In the six years that more money went into IPOs, the global index increased in four of those years and decreased in two.  

Thus my initial assumption was wrong.  A large increase in money raised by IPOs does not necessarily mean a market top.  If anything, I suspect that the amount of media attention surrounding new companies coming to the market likely generates more interest in the stock market which helps keep or push up prices and valuations.  

One additional observation.   For the last 12 years, there has mostly been a direct correlation between the direction of IPO capital raised and the direction of the index.  The only years the two were not in sync - at least during this time period - was 2003 and 2012.  In both years IPO funding decreased while the global market index increased.

Green Shoots in Greece

Some green shoots in Greece were reported yesterday.  The most significant is that the Greek economy shrank by 3.8% in the second quarter of 2013 compared to the year before.  This is not good, but better than the 4.6% that was initially expected.

As pointed out in the article, one of the reasons for the less-than-expected decline was an increase in tourism.  Revenue from tourism increased by 39% in the first five months of 2013 compared to last year.  A big factor here may not even have been Greece itself, but the unrest in Egypt.  But I suspect it is as much a change in the perception of Greece.

Typically most forecasts overshoot on the way up as well as on the way down.  This is prevalent in both macroeconomic as well as earnings forecasts.  I don't see why Greece would not fit this general trend and I suspect we will likely have more upward economic revisions in the future.

For me another statistic I think is much more important : Greece's ranking in the World Bank's Doing Business 2013 report.  This reports ranks countries on the ease of setting-up and keeping a small and medium business running.  Greece moved up 11 places from a rank of 89 to 78 - the largest increase of any developed market.

As several of my readers know I'm a big fan of Greece.  Especially its equity market, which despite its good performance, is still one of the least expensive in the world on some long-term valuation measures.

Please note that I'm biased.  One of the best weeks of my life was spent learning about the country, its stock market, and its listed companies.  The people I met in Athens last year are smart, switched-on and, from my very limited number of contacts, genuinely feel things need to change.  My write-up is here.