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The Hunters' Tails
Between a muddle and a (oxy)moron ...
Markets are febrile, and will fall (again) if today’s US (un)employment numbers are bad. Well, it could be worse. One of us, or one of you, could be among the 32 people trying to read grim Gordon’s opus,The Change we Choose: Speeches 2007-2009. We’re delighted that Labour’s luminary will be addressing you at next year’s Evenings with Artemis. So rather than buy his book, you can hear his speeches then. (Only kidding).
Instead of Brown’s bathos, we’ve been reading Michael Lewis’ The Big Short. It’s strangely structured and repetitive, but a staggering excoriation of the sub-prime scandal and synthetic CDOs. Here are the itinerant immigrants earning $14,000 a year from picking strawberries, yet being lent by bandits 100% of the $742,000 it took to buy a house. Such financial illiteracy is an example of what economists term “rational ignorance” — inattention that is justified because the costs of paying attention outweigh the benefits.
Well, against the legacy of this vast and profligate debt, both private and public, markets were always going to struggle. We note that Irish hotels, for example, still have almost seven billion euros in bank borrowings, equivalent to about 111,000 euros per bedroom. It will take five years for existing excess supply (~2 million vacant homes) to clear in the US housing market. Six million new foreclosures should enter the market for resale over the next three years.
One result is another oxymoron — what Bank of America has called a “growth recession”: not outright recession, but not enough growth for unemployment to start coming down. And if one turns to the top sell-side analysts for guidance, one gets such insight as: “Stocks may rise 50% thru year end or fall 18%.” Or: “We continue to believe that equity returns over the next 6-18 months will either be very high or very low.” Promote those men. And our response?
Sticking to our knitting...
Equities have given poor returns over the last decade. Few ever see the catalysts for change, but stocks are due a good 10 years. All we know is that in this oxymoronic muddle and guddle we are able to buy good companies at compelling valuations. And we rather think that’s what you pay us to do, for the medium and longer term, ignoring those many diurnal infelicities that markets, and [wo]men, are heir to.
As low corporate bond yields make for attractive financing, we see mergers and acquisitions continuing (e.g. BHP Billiton for Potash Corp, Sanofi for US Genzyme). The recent strength of metal prices, historically a good ‘leading indicator’ of global demand, and the renewed outperformance of Chinese equities also give some degree of reassurance amid the doom. So, into [y]our Income Fund, for example, the Adrians twain have just added to Cobham, taking the holding back to 1.5%. The shares have been weak on concerns over defence cuts. But oor Adrians think the business is well positioned on the ‘right’ defence programmes — and looks ripe for nuptials in a consolidating sector. Cobham’s valuation is only 10x next year’s earnings, and it has a yield of 3.1% growing at 10% pa.
Secondly, the Adrians have bought a 1% position in Roche (Swiss pharma). It’s cheap (p/e of 10x) and yielding 5%. “The share has been a poor performer,” says a Gosden, “on difficulties with its drug Avastin. But Roche still has the best patent profile over the next five years of any major pharmaceutical company. Current worries are an excellent opportunity to buy.” This, incidentally, takes the fund’s pharmaceutical exposure to 15%.
As for bonds...
Opines our donnish James Foster: “With bonds offering a negative real yield, we are reaching ‘bubble’ territory. That makes no sense. People are hiding in bonds as a supposed ‘safe haven’ — ignoring valuations. Bubbles can last for some time, of course, but we know that when they burst it tends to be dramatic. The catalyst will probably be some acceptance that interest rates will have to rise. When that happens, expect the recent rally in bonds to unwind quite spectacularly.”
And the long and the short ...
UCITs III allows unit trusts to short. Our UK Growth Fund, managed by the irrepressible Timothy Steer, is now free to do so, and will. Unless you’ve been on Mount Athos, you may have heard Tim talk about his very successful short of Connaught in the UK hedge fund he manages. His main fund’s investment objective is unchanged, and it will remain a core UK equity growth product. But with up to 10% of the fund potentially short, expect some more sizzle from this particular sausage.
News of the Week
For society’s sake, sin ...
“Please smoke and drink more,” Russia’s finance minister Alexei Kudrin urged citizens this week, explaining that higher consumption would lift tax revenues for spending on social services. “If you smoke a pack of cigarettes, that means you are giving more to help solve social problems such as boosting demographics, developing other social services and upholding birth rates,” Kudrin said. “People should understand: those who drink, those who smoke are doing more to help the state.”
Alcohol and cigarette consumption are already extremely high in Russia, where 65% of men smoke and even the average Russian consumes 18 litres of alcohol, mainly vodka, a year. Alcohol kills around 500,000 Russians each year, especially men, whose life expectancy is lower than it is in Bangladesh or Honduras. As the Russian saying goes: “There’s no such thing as an ugly woman. But there is such a thing as too little vodka.”
Article last updated: Sep 3, 2010
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