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Artemis: The Hunters' Tails
Categories: Investments
The end of oats?
C’est charmant, ça. Certain French bonds are known as Obligations Assimilables du Trésor (OATs.) The eurobond’s rise will be their demise. Blog. App. SICAV. Tweet. Eurobond. Cacophony completes?
Anyway, the EU got another one away this week: €5bn over 10 years paying 90bps more than the analogous bund. This is to help keep Portugal in port as our liege lords repay debt with debt. And yet the issue was more than €2bn over-subscribed. Belle-laide, indeed. Or just plain bonkers.
A $2bn trading loss from a “junior” trader at UBS shows how much senior bankers have learned from, inter alios, Leeson (1995, $1.4bn), Hamanaka (1996, $2.4bn) or Kerviel (2008, $7.2bn.) Promote those in authority — as banking moves from tragedy to farce.
Merkel, Sarkozy and central banks have done what they can to shore things up — awhile. Most recently (the indebted leading the incredulous?), US Treasury Secretary Tim Geithner has floated the possibility of a TALF (Term Asset-Backed Securities Loan Facility) equivalent for Europe. “Just buying time,” says [y]our James Foster of Strategic Bond, “so they can try to organise an orderly default, rather than have a disorderly one organise them.” After all, these things take time. The euro began, in effect, as early as 1972 with the ‘currency snake’. That led, in 1979, to the European monetary system and thence to the ERM and ECU. Britain finally joined the ERM in 1990, but was forced out on Black Wednesday, September 1992 — and George Soros hasn’t been quite the same since.
In short, the politicians took a long time to make this mess; and they’ll take a long time to resolve it — if the markets don’t force the matter first. The future? One possibility is a new (euro-) union of Germany, the Netherlands, Austria, Finland, Denmark, Norway and Sweden? These seven countries each have a current account surplus; and together would create the world’s largest creditor bloc. A French-led second string would then have the flexibility to keep interest rates low, engage in quantitative easing, leave the Greeks to go on striking, the Italians to go on arguing, the Spaniards to go on bull-fighting and all that sort of thing: good old Europa’s bull.
While we ...
Though of course aware of these momentous matters, get on with our day-jobs: picking stocks (and bonds.) For Global Energy, John Dodd and Richard Hulf have taken advantage of the unusual spread between Brent and West Texas Intermediate oil prices by buying shares in HollyFrontier, a US refiner with attractive margins. And overall, says John: “We’re looking forward to a busy autumn with material newsflow expected from our Africa-weighted holdings. We remain defensive, with a bias to larger capitalised utilities and large oil companies that have become very cheap.”#
For Income, Adrian Frost is much taken with International Power: “As it can recycle its cashflows into power assets, (mainly gas fired/hydro and mainly in growth markets) at attractive risk-adjusted returns, IPR is a buy. It has said it will spend €2-3bn pa, including €500m on maintenance. Many countries in which it has work in progress have growing populations, growing electricity consumption per capita, capacity shortfalls and inadequate existing plant. IPR have operating competence and a record of building and delivering on plan. That will do for me.”
In Global Select, Simon Edelsten and Alex Illingworth buy quality — at an affordable price. One of their principal criteria is multiples of cashflow. The recent sell-offs have allowed them to buy e.g. LVMH (luxury goods) at 10x cashflow when it was 17 or 18x; China’s Guangdong Industrial (water supplies in the region bordering Hong Kong) on only 8x; and South African, Nigerian and Ghanaian mobile operator MTN. It’s pioneering money transmission via SMS messages in markets without developed banking. It’s also big in Iran, where among other things it supplies an LG handset whose compass keeps Mecca aligned. As allegory for investing, that will do.
But the most excitement this week comes from the normally emollient and donnish James Foster, he of Strategic Bond. As you may know, he likes financial bonds — even more than ever, as they are now “priced for levels of distress that are completely unjustified.” To wit, James holds Scottish Widows yielding 19%, Aviva yielding 17%, Old Mutual yielding 16% and Standard Life yielding 15%. Of course there is the possibility that some of these bonds may not be called. But on the balance of risk/reward? A thing to be cherished, like the thought of heaven.
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Article last updated: Sep 16, 2011
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