8th September 2009

The Hunters Tales

Number 55, 4 September 200
One guinea and a glass ...
It's been a month since this organ took its ease. Apart from constipation, what has happened? Well, a prodigious piranha was found in the Severn. With the release of one Abdelbaset Ali al-Megrahi to an exultant Libya, the wee parliament has made a mockery of the reservation of foreign affairs to Westminster - and yet goes on drawing its English dole. But grim Gordon has come well. He has actually done something, and really made a difference, by appointing sacked Strictly Come Dancing judge Arlene Philips to the salaried post of 'Dance Champion' at the Department of Health. This takes the number of our civil servants to a record 522,931 (vs. the 465,700 in 2004 when Chancellor Broon announced "job cuts and efficiency measures".) So that's all right, then.

The Edinburgh Festival has been again and gone. Our sales team's favourite - and did they ask you? - was the Fringe show Tokyo Discipline. In this, an angry and undressed young woman with short fingers and a flaccid bottom devours and spits out a whole, raw Savoy cabbage - in front of a hungry-looking guinea-pig trapped in a glass jar. Ah, the high ascent of low culture...

That of markets has been clearer. Since its 14-year low on 9 March, the MSCI World Index has recovered 48% to 31 August. “Oor ain” FTSE 100 went up by 7% in August alone - but is still down more than 13% from 15 September 2008, when Lehman collapsed and much else followed. The best performers so far in 2009 have been Peru (+98% ytd); Turkey (+73); Indonesia (+72); Russia (+68) and Argentina (+64). Following a 22% fall in August, China (up net by 'only' 54% ytd) has dropped back. Still heady stuff. So?

The angst of antithesis ...
On the one hand, stocks are due a pull-back and have been quiescent this week. More often than not, stockmarkets head down at this time of year. Since 1926, investors have lost nearly 1% on average in September. In any case for months, as the 'group-think' took hold that numbers less negative than feared were actually a Panglossian positive, the equity market has rallied on any good news. All adverse data from March to August saw investors buy on the consequent dips. But having gone from pricing in -2.5% growth in GDP at the lows to +4% now, it looks like investors are now more discerning in terms of interpreting the economic data.

For example, on plunging rentals for iron-ore carriers the Baltic Dry Index dropped 28% in August, its biggest monthly decline in 10 months. Iron ore to make steel is the biggest single dry-bulk commodity hauled at sea, and China is the biggest user of the stuff. Its inventories are near three-year highs. Or look at the US industrial vacancy rate. It jumped to 12.4% in Q2 from 11.5% in Q1 and 9.5% a year ago. The US office vacancy rate spiked to 16.5% from 15.5% in Q1 and 13.7% a year ago. American farms are also feeling fallow with prices sliding 3.8% month-on-month in August and 18.6% year-on-year. So deflationary pressures on crucial real estate are still very real. Admonition to markets includes premature tightening of fiscal and monetary policy, weakness in the global financial system, shortfalls in earnings and concern that prices may be too high relative to earnings and other criteria ...

On the other hand, "don't fight the Fed" as the old adage goes: astonishingly loose monetary policy, QE, kitchen sinks. So far this year, foreign central banks have bought $343.8bn in US Treasuries, and the Fed's bought a further $264.5bn. Collectively, they've 'monetised' a staggering 56% of the US federal deficit already this year - and it's only, ah, 4 September. These people mean business, and Europe's leaders seem no less determined to mortgage our futures as much as is necessary. If that means Scandinavian levels of tax and US levels of public services, stockmarkets don't care. So the antithesis is finely balanced. Could it be that, like the quadratic equation x² + 2x - 24 = 0, the market has an antithetical solution: x = -6 and x = 4?

And sticking to s[t]ocks ...
In any case, we go on stock-picking. In [y]our Income Fund, the Adrians twain have just taken some good profits in Savills and Segro (also property). They continue to find an attractive mix of p/e, cashflow and dividend yield in the drugs sector, and have bought a position in Merck. This is the fund's first ever US holding. If Brown's lily- liveredness on that Libyan has ended a 'special relationship', Frostie's clearly doing what he can to compensate.

For UK Special Situations Fund, Derek and Ruth have bought Aegis and Spirent. Aegis, says Ruth, "is a media buying and market research company which has taken prompt action to offset falling revenues. It is the largest independent company in its field and should be an early beneficiary of any improvement in advertising spend." As for Spirent, which does arcane things with telephone systems, Derek explains that "our recent meeting with management confirmed our belief that Spirent is a strong company, with high margin potential." That is not all. Scottish Stuart adds that "Spirent's also trading on half the valuation of its US peer group." We expect no less of a man whose ancestor formed the Grand Canyon by losing a dime down a gopher hole - and then digging until he got it back. Dum spiro spero will have to do.

http://www.artemisonline.co.uk/adviser

Source: Internal as at 4 September 2009.

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