Russia's Red Line?

It would be akin to poking a wounded bear in the eye with a stick; booting Russia out of SWIFT. The likely outcome might be unnerving for the markets, since it would almost certainly cut US and Russian diplomatic relations, which could be the pretext to war.

Commenting on the issue Andrey Kostin, chairman of the Russian state bank VTB, said, "If that happens it will be a huge worsening relations between East and West".

"Ambassadors in Moscow in Washington might as well go home the next day. We would be on the verge of war and it would be a very dangerous situation, going far beyond the banking sector", added Kostin, who is a close friend of President Vladimir Putin and a member of the board of Rosneft, Gazprom’s smaller but powerful rival. Mr. Kostin is part of Mr. Putin's “inner circle” and the second most prominent politician in Russia, according to a respected Russian newspaper Vedomosti.

So what is SWIFT?

It is the economy's windpipe, enabling it to trade internationally in hard currency. SWIFT payments are a type of international transfer sent via the SWIFT international payment network. It is the largest financial messaging system in the world. Russia’s banks rely heavily on the Belgium-based payments system for both domestic and international payments. Russia does have a local equivalent for payments but it still relies heavily on the SWIFT payment network for international payments.

Most international trades are facilitated with SWIFT in hard currency, US dollars. So if Russia were to be kicked out of SWIFT, facilitating payments for such things as machine parts or consumer toiletries will be difficult. Obtaining hard currency to buy imports will become challenging, oil rich Venezuela is currently experiencing this problem.

“If there is no Swift, there is no banking. . . relationship, it means that the countries are on the verge of war, or they are definitely in a cold war”, said Mr. Kostin.

The move to exclude Russia from the International SWIFT payment system had been discussed by western diplomats last summer as a punitive measure against Russia's alleged military involvement in supporting pro-Russian separatist in Ukraine. But at the time it was considered too punitive by some western diplomats, describing it as “the nuclear option”.

Nevertheless, the Ukrainian war, which started in April shows no signs of abating with each side pointing the blame at each other. Already 5,100 people have been killed in the conflict. Fighting this week was the most intensive since a cease-fire deal was signed in September. Russian Foreign Minister Sergey Lavrov told journalists that rocket shelling Saturday in the city of Mariupol, which left at least 30 people dead, was a tragedy that was being manipulated to "whip up anti-Russian hysteria" in the West. President Vladimir Putin's spokesman, Dmitry Peskov, told Russian news agencies that Ukraine was responsible for the "barbarous shelling" and said that the crisis could only be resolved if there was "firm political will on the part of Kiev".

Western diplomats are now mulling over whether to exclude Russia from the International SWIFT payment system yet again. Is “the nuclear option” real being considered by the West?

Russia believes that their annexation of Crimea, and its support of separatist fighters in East Ukraine are a pretext for tough economic sanctions. “If all this had never happened, any other excuse would have been created” as a result of the “policy of containment [of Russia] which was invented not yesterday, but has been held against our country for decades, if not centuries.” said Mr. Kostin.

Russia also suspects that the US and Saudi Arabia are behind the fall in the oil prices, which has depleted it of export earnings. Oil and gas were worth 68 percent of Russia's total export revenues in 2013.

So what is the end game, war with Russia?

Why not trade our way out of this mess? If a system needs to destroy every now and then to survive, is it worth saving? Admittedly, WWII did help get the US out of a Depression but at what cost? More than 20 million people dead, Europe was left smouldering with half its infrastructure in ruination and most of Germany's adult males were dead. Create, destroy, create, aaand destroy. what is the point?

The market's response to Russia being excluded from SWIFT would obviously be negative, particularly for European companies trading consumer goods and machine parts. Airline stocks might also be adversely affected with air-route diversions in retaliation. If we start seeing Russian and American diplomats being sent home, it would be a clear sign of a deteriorating and concerning situation. A worsening in East-West relations would have a negative impact on equity markets, and probably boost precious metals.

But assuming that East-West relations deteriorate to a point where diplomatic relations are cut, the crisis could have the potential of being very serious. Bear in mind that while the Russian economy has taken a beating through western imposed sanctions it still has teeth and claws… and an arsenal of nuclear weapons.

Fracking

In the world of investing, it seems that even the Church of England believes in a good rate of return. That became blatantly obvious when it was revealed in the UK press recently that the Church had ties with Wonga, the high interest online payday lender, which it later severed. Not being able to let a good investment go to waste, this hardnosed investor is now dabbling in the no less controversial Industry of British Fracking.

But put the controversy aside for a minute and let’s ponder over the likelihood of Fracking being Britain’s next big energy revolution. Many historians would argue that centuries ago, when the world moved from wood to coal as a form of energy, it was Britain’s largest coal reserves that powered the country to lead the way during the Industrial revolution. Moreover, look how the discovery of vast reserves of a more energy dense fossil fuel, oil, have transformed the Middle East. This is particularly apparent in the UAE where they’ve turned desert into ultra-modern cities of the 21 century in just four decades. It’s transformed the local populations from Bedouins (a more or less nomadic people) to now boasting one of the highest GDP per capita in the world.

Now the energy has another development in fossil fuel extraction: Fracking.

Fracking might be a solution to the demographic time bomb looming in developed economies, with ballooning dependant elderly populations and shrinking taxpaying workforce base. In the US state of Pennsylvania, who have taken on fracking in a big way, the senator running for re-election is proposing to tax fracking. The revenue would go solely towards the state’s public pension debt. For the outsider or the retail investor, like any grand investment opportunity in its infancy, getting in at the early stage (a more risky entry point) could pull off enormous profits if fracking becomes an accepted main energy source. Paradoxically, the current deteriorating geopolitical situation with Russia and Europe is probably going to give the British fracking industry a big boost. Russia, the largest supplier of gas in Europe is starting to look wobbly as a reliable supplier in light of the cooling relations over the Ukrainian crisis.

The world’s biggest shale basin is not in China or the USA but in Britain. That’s according to 2013’s survey by the British Geological Survey (BGS) report, which estimates there may be as much as 1,300 trillion cubic feet (tcf) of shale gas trapped in the Bowland shale basin alone. In fact, the BGS’s upper estimate is almost twice that figure, 2,281 tcf. To give us a prospective on this, Britain has almost double the amount of shale gas than in China, which has 1,275tc the USA 862 tcf, Brazil 226 tcf and France 180 tcf. So by a sizable figure Britain’s shale gas reserves lead the world, according to the British Geological Survey. “10% of Bowland Shale would equal 130 trillion cubic feet – or about 50 years of total UK consumption.”

Such vast reserves cannot be ignored from a national security standpoint for obtaining energy security independence, particularly at a time when energy supplies from Russia now look less reliable. Moreover, fracking cannot be overlooked from an economic standpoint either in a climate of rising budget deficits and falling exports. To put some flesh on the bonds, in economic terms, if just a fraction of those gas resources are realized at today’s prices, they would be worth more than one trillion pounds, or worth £16,000 to each person in Britain, according to the report. It is an undisputable fact that Norway’s oil revenue has propelled its people to enjoy the world’s highest living standards.

British fracking has won the backing of the country’s most powerful institutions, the Church and parliament. It’s a moon eclipse event when you get the country’s main political parties sharing the same view on an issue; they are all backing fracking. Indeed, the last Queen’s Speech back in June was used to path the way for changes to the laws of trespass that require land- and homeowners to give permission for shale gas and oil drilling under their land. This means that it would allow drilling to take place 300 meters vertically and extend up to 3km (1.86 miles) horizontally underground from a central well pad. As a sweetener local communities would also receive up to 20,000 pounds for each horizontal well drilled.

But here is the cold shower bit about fracking. Hydraulic fracking, the process of drilling and injecting fluid into the ground at a high pressure in order to fracture shale rocks to release natural gas, creates earth tremors and could even contaminate drinking water. During the process methane gas and toxic chemicals leach from the system and contaminate the water table. There have been 1,000 documented cases of water contamination next to areas of gas drilling. Ingesting the contaminate water can cause sensory, respiratory and neurological damage. Approximately, 40,000 gallons of chemicals are used per fracturing. The industry argues that when fracking is properly regulated the environmental effects are minimal. So investors need to weigh up the environmental issue and what impact this could have in the development of the industry. Moreover, increasing the gas supply means lower prices and profits. This could rattle big energy suppliers with money muscle power to lobby government to halt fracking.

Nevertheless, for those who think fracking is going to be a big part of Britain then there are several ways to invest in it. At the riskier end are the aim-listed shale-gas companies. Another option could be on junior markets. Egdon Resources is a UK oil and gas minnow, but its intentions for growth are clear. A safer play could be through Centrica, British gas owner, who has a Bowland license. Companies providing engineering expertise might also be a good play.

"The Brady Bunch Trade"

Remember that 70s show, The Brady Bunch (the US comedy revolving around a large blended family with six children)? The father, single, has three boys and meets his partner who is widowed with three girls. The couple move in together and in true American style its one big happy family, six kids, a dog and a big car.

You're probably wandering what the relevance is. After all, a traders' goal is to spot the trend, get ahead of the curve and make a profit. We want to go with the trend, either bullish or bearish and profit from it. Our success is based on being able to see reality before the other players around us. To trade profitably we need the true picture, not the illusion that the mass media spins for the ‘sheeple’, which serves to manufacture mass consent for their proprietors so that their political, economic interests can be propelled forward.

Even consuming the economic data fed to US by the Statistic Office can lead us astray, because sometimes there's a conflict of interest between the investor and the monetary authorities.

The investor/trader wants to see the situation as it is, warts and all. Without a true picture, trading decisions, in other words, risking capital with the aim of making profits, would be sloppy with losses likely to rack-up. But the monetary authorities have another goal; to maintain financial stability. They know that the whole fiat system is based on one thing, confidence!

So the pressure is on them to make the data look good, or not that bad, even if the reality is the reverse. Sometimes they are literally putting lipstick on a pig. Does anyone believe the official economic data coming out of say, Argentina? Frankly, you'd be wasting your time even analysing it because it is meaningless. A book entitled, “How to Lie with Statistics,” by former journalist Darrell Huff tells the story.

Assuming you don't own the corporate media, or you’re not a fly on the wall in those central bank meetings, then you have a handicap, but you can still make profits.

How?

By thinking outside the box, by looking at the world in a non-conventional way.

Take the Greek economy over the past year; mainstream painted a picture of a recovery, but in a healthy economy, do people chop-down trees and use the wood to keep themselves warm or for cooking?

When Tesco overstated its profits by 250 million pounds in its fraudulent accounting scandal, while the Board Directors were flying around in a private jets; why did the company not pay dividends to its shareholders?

When a company is liquid and bullish about the future it pays its shareholders' dividends.

Take the recent US economic data. If quarter of a million jobs have been created, then why has US labour participation rate dropped to 62.7 percent, the lowest in 38 years? Does that mean that people have stopped wanting to pay their utility bills, buy food or put shoes on their children's feet? It doesn't tally.

What about these pending US retail figures? Some pundits are optimistic about US retail consumption; their rationale being that lower oil price has resulted in more disposable income for consumers. The argument might hold water, but why have there been so many US retail closures lately? Macy's, the world’s largest store, is closing 14 departments laying off 2200 workers. Radio Shack, JC Penney, Sears and Kmart are all closing down stores. When the economy is doing well, retailers tend to expand capacity, they open more stores, hire more workers, but they are doing the reverse.

What we are witnessing is the march of the middle-class into poverty and the trend is picking up momentum. 

Now back to the Brady Bunch, in the 70s a working man, even blue collar, could afford to maintain a family, a wife and six children.

Today, 2015, a white collar worker doesn't have that same earning capacity. The family needs two people at work. Today, in the UK a white collar worker, say Solicitor can't afford to send his children to a private school.

The middle class is rapidly disappearing, and you can see it in the new retail landscape that is emerging. The cheap and cheerful retailers are doing fine. Their new customers are the millions of the disenfranchised masses, once belonging to the middle-class.

Likewise, the upmarket retailers are also doing well and the losers in this brave new world are the middle-class shops, which are falling like flies.

But with a widening wealth/income gap at levels not seen since the Victorian era, it is no surprise that consumption patterns are changing. In the US the top 10 percent control 86 percent of all the wealth. This phenomenon isn't unique to only the US. The widening wealth gap is occurring too in other advanced economies around the globe.

Wealth inequality is more visible in larger cities, with examples such as the ‘poor doors’ in places like London and New York, which segregate city dwellers from the poverty. Yes, can you believe it in 2015, poor people are segregated from the rich. We have wealth apartheid.

So what is the trading strategy for the new reality?

Be bullish, or trade long on the two extremes, companies that cater for the poor and the top one percent earners.

Sell out, or go short on those companies catering for the middle-class market, they are likely to continue struggling going forward.

But there is a caveat with this trading strategy. The monetary policy, quantitative easing, has aided and abetted asset price rises, which has contributed to a widening wealth gap in the economy. So more QE would mean more profits in this new reality, however, this trading strategy, "The Brady Bunch Trade", might not pay off if QE were to be abandoned by the central banks going forward.

US Employment Data, Savings and Rates Forecast

There is a mix bag of news out from the US regarding the latest employment data. The good news is that the unemployment rate fell to 5.6% from 5.8% with the economy generating 252,000 new jobs in December, The US Bureau of Labour Statistics.

Average hourly earnings was the disappointing piece of data, registering a fall of 0.2 percent in December. That is plunging wage growth back to 1.7%Year on Year from 1.9%.

Some pundits believe that the continuing fall in US unemployment will fuel consumption going forward, which might provide the US Treasury with a reason to raise interest rates in second or final half of the year.

But while the US economy appears to be absorbing labour, household savings remain low. That might dampen consumption and deter the Fed from raising rates.

The US household savings picture, frankly, isn't good. Apparently, near two thirds of Americans are unprepared for a financial shock, such as a loss of job due to an illness, or redundancy because of a downturn in the economy. In other words, in the most wealthy nation on earth, most Americans are living a hand to mouth existence. Only 38 percent of Americans have enough money on hand to cover “a $500 repair bill or a $1,000 emergency room visit”, according to a recent survey. So 62 percent of the people in the US don’t have an emergency fund. That’s a sobering thought in a country where health care costs can be crippling.

Despite the financial crisis of 2008 and the worst recession in living memory that followed, people are still living from one pay check to the next.

The majority of people are just one pay check from the street and are totally unprepared in the event of a major economic downturn.

What this could mean is that if costs fall, due to lower input costs such as low oil prices or wage rises (in actual fact real wages are falling according to the latest data), then households might defer consumption and instead use the surplus income to build up emergency saving reserves.

Bear in mind the last recession was a major wake-up call for millions of people. Suddenly, they lost their jobs in the sharp economic downturn. Then millions couldn't pay their daily household expenses because they had no emergency funds to fall back on.

Financial planners recommend households to build emergency fund reserves, a safety nest egg to cover at least six months of expenses to weather the rainy days.

Regretfully, a recent poll in the Wall Street Journal confirmed that only 38% of those polled said they could cover a $500 repair bill or a $1,000 emergency room visit with funds from their bank accounts, a new Bankrate report said. Most others would need to take on debt or cut back elsewhere.

“A solid majority of Americans say they have a household budget”, said Bankrate banking analyst Claes Bell. “But too few have the ability to cover expenses outside their budget without going into debt or turning to family and friends for help.”

The survey found that an unexpected bill would cause 26% to reduce spending elsewhere, while 16% would borrow from family or friends and 12% would put the expense on a credit card. The remainder didn’t know what they would do or would make other arrangements.

Another poll from the US Federal Reserve Survey also confirmed the same worrying findings. The Fed surveyed 4,000 adults last year and the survey confirmed the following;

“Savings have been depleted for many households after the recession”, it found. Among those who had savings prior to 2008, 57% said they’d used up some or all of their savings in the Great Recession and its aftermath. What’s more, only 39% of respondents reported having a “rainy day” fund adequate to cover three months of expenses and only 48% of respondents said that they would completely cover a hypothetical emergency expense costing $400 without selling something or borrowing money.

So it would appear that the Great Recession has taken its toll on household finances.

“They’re 40% poorer today than they were in 2007. The net worth of American families — that is, the difference between the values of their assets, including homes and investments, and liabilities — fell to $81,400 in 2013, down slightly from $82,300 in 2010, but a long way off the $135,700 in 2007”, according to a report released last month by the non profit think tank Pew Research Center in Washington, D.C.

The US jobs market may have improved and the Affordable Care Act has given an estimated 15 million American access to medical care. Nevertheless, many have come out of the Great Recession with a lot less wealth, depleted savings and no emergency cushion to fall back on.

In view of the above, I don't envisage a US rates rise for the foreseeable future. Real wages would need to improve and that’s not happening. Saving rates would also need to rise to a point where most households have built emergency savings provisions and that is a long way off. Unless that happens, consumption is unlikely to take off and a rise in US rates would seem unreal.

A low US rate environment is likely to support US equities and Treasuries going forward.

Santander Shopping Spree?

Written on the 9th January but I think still relevant:

Europe's largest bank, Banco Santander is making waves this morning with its recommendation to the Board of Directors for a 7.5 billion euros ($8.88 billion) capital raising program. The news is sending the stock price sharply lower, down 9.71 percent at 6.19p in morning trading, which means Santander shares have shed more than 10 percent of their value since the start of the year.

But buoyant profits have been posted at the banking giant. Record profits were generated in 2013 and in Q3 2014, Santander was well in the black, earning EUR 1.6bn in net profit.

So why a run on Santander's stock price?

Raising capital through an accelerated placement of shares at institutions will pull the stock price down.

It’s a supply and demand issue. When more stocks are created and traded on the market, it increases the supply of Santander shares in circulation, which reduces their value.

There are fundamental reasons why a stock price falls in value. For example, when the number of shares in circulation increases, it dilutes the net asset value per share (NAVPS), which is the intrinsic value of the share. It is calculated by dividing the total net asset value of the fund or company by the number of shares outstanding. So if the bank's total net asset value (this figure can be found on the balance sheet) remains the same and more shares are issued, the NAVPS falls.

NAVPS is the old school way of gauging whether the current market value of a share is fair value, oversold or overvalued. When NAVPS falls, more often than not the stock price also falls.

Another fundamental reason why a stock price falls when a company issues more shares is that it dilutes the Earnings Per Share (EPS).

EPS has been defined as the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. It is calculated by (Net Income less dividends on Preferred stock) divided by (average outstanding shares). With more shares in circulation, given no change in net income less dividends, the EPS figure falls. If the EPS falls below last year’s figure, it is often interpreted by investors as a negative signal.

Now let's put some flesh on the bones.

CEO Chairman, maybe I should say Chairwoman, Ana Botín, will go to the Board of Directors and ask them to accept the issue of 1,213,592,234 ordinary shares of Banco Santander, which will be placed with institutional investors at a price of 6.18 euros per share. If we do the simple maths, we can work out that the share placement will raise the banking group 7.5 billion euros.

But why does a profitable bank need to raise all that capital, particularly when profits are buoyant?

Moreover, the bank passed the last European Banking Authority (EBA) stress test in October. The idea was to simulate a worst case scenario for the European economy and test whether the banks would be robust enough to withstand the shock. European Banks were tested on their ability to withstand a 5 percent contraction in European Union (EU) Gross Domestic Product (GDP) by 2016 and a sharp rise in EU unemployment which shot up to around 13 percent, from its current level of 10.1 percent. And of course, a bond market crash was thrown into the “doom” equation.

Banco Santander wasn't on the list of the 25 European banks that were deemed to be under-capitalised to withstand a future financial shock.

Three months on and the Euro zone’s economy is looking in a slightly better shape, benefiting from lower input costs, particularly cheaper oil prices.

Nevertheless, Santander's chief, Ana Botín is apparently concerned that the bank's capital cushion is too thin. Ana Botín was appointed to the helm of the bank in September following the death of her father, Emilio Botin, who built the bank into a major international player. Since Ana Botín’s appointment to CEO, she has increased the number of independent directors on the board, shaken up the management team and shored up the lender’s capital base.

“Analysts estimated that the share sale would put Santander’s capital level—under international regulations known as “fully loaded” Basel III criteria—at around 10%, more in line with its European peers. A bank’s capital ratio is the amount of equity it holds in relation to risk-weighted assets on its balance sheet, and it provides a buffer against potential losses,” according to the Wall Street Journal.

“Santander plans to end 2015 with a capital ratio above 10% and maintain its cushion between that figure and 11% in the “medium to long term,” Chief Financial Officer José García Cantera told reporters Thursday.

There are two ways of reading into this.

The bearish view would be that if things are as rosy as they appear in the financial statements, then why is the bank undertaking a massive recapitalisation? Furthermore, why are dividends being cut? The bank is lowering annual dividend to 20 euro cents a share from its previous dividend of 60 cents a share. When there's a bumper harvest there should be a lot more to go around. Might there be an element of Tesco in all this?

Remember, the Tesco scandal, profits overstated by 250 million pounds, dividends cut, then the realisation that the Board was cooking the books, leaving investors with collapsing share price.

Another view is that Ms Botín is just about to embark on a shopping spree, but doesn't want to excite the market with acquisition speculations because it would jack prices upwards. So the strategy might be to let the market believe that the 7.5 billion euros is just a safety cushion, but in reality it is raised capital for acquisitions.

Last year Santander was busy doing deals. They got involved in a joint venture with a payroll-lending company in Brazil. Then there was the purchase of a consumer-finance business that operates in Norway, Sweden and Denmark. Chief Executive José Antonio Álvarez Álvarez said Santander will analyse deals that could bolster the bank’s units in countries where Santander’s presence is weaker.

So it might be about raising 7.5 billion euros to expand the banking empire. Is there a smell of takeover acquisitions in the air?

On The Cusp of a New Secular Bull Market?

It’s the first week of trading of 2015 and the stock-markets have been going down, then up, up and away. This makes me wonder whether we might just be on the cusp of a new secular bull market.

So why are the bulls charging?

For some pundits the motive is that Mario Draghi, Govonor of the European Central bank, is going to kick start a new massive one trillion euro round of quantitative easing (QE).

The Eurozone is officially in deflation and some pundits are jumping up and down saying, come on, do something. So what else can the ECB Governor do but pump the system with more liquidity?

But don't hold your breath waiting for QE because it might just not come as soon as you think.

Don't expect QE to prop up the market in 2015. Last year was a QE orgy, but it may not play out like that this time around.

When the bears came charging out at the bulls, the central banks would come to the bulls rescue with a QE fix. Maybe the central banks had to play it this way. After all, the economic fundamentals weren't strong enough to keep the bulls running. The financial market was like the central banks perpetual motion machine. When it looked like it was running out of momentum the central banks would pump it with QE.

Stocks were rising and it just didn't make sense. We had a situation of negative divergence, the economic fundamentals heading south and the stock markets going north.

But this year we may start seeing fundamentals, particularly in the eurozone starting to pick-up with some momentum.

Why the optimism?

The wild card, lower oil prices (an engineered crash in oil prices) are now showing some early signs of boosting consumption. German retail figures support this view with sales expanding by 1.0% on the month in November, according to the statistics office.

Furthermore, there’s historic evidence to support the view that cheap oil accommodates a boom for economies that are consumer, manufacturing based. Alternatively, during periods of high oil prices, such as the early seventies, these economies experienced sharp recessions. There is a correlation between oil price and the economic cycle. Low oil price, the economy booms, high oil price the economy goes into recession. This is the case with consumer, manufacturing based economies.

So the argument that the EU might experience an upturn in its economic cycle in this new environment of low oil prices is beginning to hold water.

What about the 0.2 percent deflation in the Eurozone? Surely that should be enough ammunition for the the ECB Governor, Draghi, to kick start his massive trillion euro QE program.

It is not as bad as it looks. Why? Employment is buoyant in Germany and starting to pick-up in some parts of the peripherals, such as Spain. Moreover, there are signs that consumption is starting to gain momentum in Europe's largest economy, Germany.

So the disappointing deflation figures are not down to deteriorating consumption during that period, but rather due to falling input costs, particularly oil and commodities.

In other words, don't read too much into a set of disappointing euro bloc Consumer Price Index (CPI) figures. As consumption picks up momentum moving forward, it should drive demand and push prices back into positive territory. It is just a question of time. 

So this year the euro stock market is likely to have better economic fundamentals to keep it propped up. It's unlikely to need the crutches of QE.

The next few weeks will be crucial, now the Greek election is done, how that plays out will probably determine whether the EU needs a shot of QE.

The last piece I wrote, “A Greek Play”, provided some insight into the saga.

Across the pond the Fed has given the bulls the green light. No rate hike until 2016? That is what Charles Evans, president of the Federal Reserve Bank of Chicago, said he wants.

So a new secular bull market?

Apply the duck test. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. Certainty, the fundamentals are starting to look brighter.

But there is no guarantee that improving fundamentals equate to higher stock markets going forward.

Sometimes the fundamentals can improve and the stock-markets go the other way. That would be positive divergence and a signal to buy. There's a lot of cash sitting on the side-lines, a little good news or a good reason for hope could get the party rocking.

Tesco - A Story Within A Story

Tesco stock has been lit up like a Christmas tree, up 9.8 percent at 199p on heavy volume trading (at the time of writing this piece).

After a dismal 2014 with the accounting scandal, where the company overstated it profits by £250m, and dismal trading figures, Tesco is now determined to show investors that it is starting 2015 on the right foot. There is certainly change in the air at. A change of the guard has taken place. Out with the old Tesco Chairman Richard Broadbent, tainted by the accounting scandal, or better said ‘fraud’, and in with Tesco's new great white hope, Matt Davies, Group Chief Executive of Halfords Group plc which will be effective 1st June.

The new CEO reckons he can turn around the UK giant retailer. Indeed the Tesco Board of Directors has big plans, but it is not going to be a walk in the park.

"We have some very difficult changes to make", said Chief Executive Dave Lewis. "Our recent performance gives us confidence that when we pull together and put the first we can deliver the right results."

So what is on the cards at Tesco?

The retailer will be launching an aggressive cost cutting program.

43 unprofitable stores will be closed, most of them will be the small metro stores with hundreds of job losses. Administrative staff will also be reduced with the consolidation of head office locations.

Some divisions of the business will be sold, for example the sale of its Blinkbox movie streaming service to TalkTalk PLC for an undisclosed fee.

The retailer also said it would launch a cost-savings program and reduce capital expenditure to GBP1 billion in the 2015/16 financial year.

Moreover, balance sheet building will also be part of the Board's strategy. There will be no dividend payments for shareholders this financial year and no pay rise for workers either.

Then there is the re-establishing of its identity as a value for money grocery store, being in the middle, between an upmarket food grocery and a discounter was like operating in no man's land. So Tesco will be embarking on aggressive discounts similar to its near rival Asda, which is pumping £300m into lower prices.

So the new CEO has a plan to turn the giant retailer around. Although, behind all this euphoria of change in the air at Tesco, the question is whether the new CEO can pull it off.

In a sense, Tesco's problem is a story within a much bigger story. What we have witnessed, following the 2008 financial crisis (the worst in living memory) is a radical change in wealth distribution, not just in the UK, but in all of the western developed world economies.

The monetary policy followed by the major central banks to tackle the 2008 financial crisis has saved the financial markets, but it has come at a huge cost. Quantitative easing (QE) doesn't actually do much for the real economy. It hasn't made credit more available for small businesses and it hasn't boosted real economic activity. If QE worked, Japan would not be in a depression right now. Admittedly, QE has been remarkably successful in fuelling asset bubbles and enriching a tiny elite group who are near the source of the money creation. This has created a Goldilocks economy, where the money just circulates around an elite circle, excluding those in the real economy.

That is why consumption in the real economy is down but demand for luxury goods is high.

In other words, this has created a two tier system of consumption. Businesses offering super luxury products have performed beyond their wildest dreams. The luxury car market has never had it so good. Rolls Royce has had a record year. Art Galleries selling multi-million dollar paintings also had a record breaking year in 2014. Diamonds being sold for record figures in the tens of millions. Meanwhile, businesses catering for the middle range customer have been struggling to keep afloat. However, on the lower end (which is now the new middle) sales have been going up. So the super luxury and cheap and cheerful are doing well but the middle range retailers are shivering.

That is why, in food grocery talk, upmarket Waitrose has done well and equally the discount supermarket Asda has had a good trading year.

However, make no mistake about it, the cheap oil is going to do what QE failed to do. Put money in the pockets of people living in the real economy, which is already boosting consumption.

“In Europe, total sales increased by 0.4% at constant rates for the 19 week period, excluding fuel. The like-for-like sales performance for the region, though still held back by our performance in Ireland, improved from (2.5)% in the second quarter to (1.2)% in the third quarter. Further improvement in all markets resulted in positive like-for-like sales growth of 1.0% for the Christmas period,” according to recent Tesco statement.

I wouldn't be surprised to hear more good news from Tesco soon as cheap oil starts feeding through to the economy, bearing in mind that more people just might take the car and drive to Tesco for a few items, rather than use the local convenience store, now that fuel is cheaper.

However, keep optimism in check. The caveat is that Tesco is not operating in a monopoly market so they can't extract monopoly profits. Attracting more customers by lowering prices is good for the consumer, but for the retailer it could trigger a price war and that will eat into their bottom-line.