14th October 2009

The Hunters' Tails

Our sympathies go to the citizens of Leeds, where that euphemism “industrial action” - let’s start getting used to it - means that garbage is growing. As it is, we note this week, in Cairo. The UN’s Food and Agriculture Organisation has declared that there is no demonstrable link between pigs, famously omnivorous, and the transmission of swine flu. Yet a dissident view has prompted Egypt’s government to slaughter the country’s 300,000 pigs, a process that has just been completed. Police have clubbed the pigs to death and bulldozed the cadavers into pits.

Stay with us, not least because this is germane to the direction of economies and stockmarkets. One result of Egypt’s actions is an end to the livelihood of about 70,000 Cairene families known as zabaleen, freelance garbage collectors, recyclers and keepers of urban pigs. (Zabaleen are Coptic Christians, 10% of Egypt’s overwhelmingly Muslim population.) Secondly, the garbage that either their pigs ate or they cleaned up is now mounting on Cairo’s streets. So HMG is about to twin Leeds with Cairo.

And the analogy? That the actions of governments usually invoke the ineluctable Laws of Unintended Consequences — and thus often end in garbage. Yesterday the BoE regretted rien of its �£175bn ‘quantitative easing (QE)’. James Foster of [y]our Strategic Bond Fund observed this morning that QE alone is worth a 5% cut in interest rates. Add the actual 5% cut (to the present and maintained 0.5% base rate) and a further 5% for the fall in sterling, and you have effective UK interest rates of minus 15%. Meanwhile, yesterday the US Congress announced a trebling of the US budget deficit to $1.4trn in the year to 30 September. Thats 9.9% of GDP. Ours is 14% of GDP (vs Maastricht’s 3% ceiling.) This astonishing debt is immune to the brave wonder boy Osborne’s proposed �£7bn of cuts, and the next government will have Labour’s damnosa hereditas — as Boris says they say in Eastenders’ Walford. So just how real is ‘economic recovery’?

Amid frissons of fears and Spears ...

Hence our caution re the rally. Is its main driver, paradoxically, fear? Institutional equity investors are afraid of missing out on the rally. Bond investors fear deflation, and feel that equities are ripe and ready to fall. The goldfingers fear that the fiscal and monetary stimulus will lead to inflation - when, that is, they’re not afraid that the US dollar is on the verge of collapse. Never before has fear felt so reassuring. Pick an asset class, and it’s going up. Hmm, our Frostie fears. All this said, after seven months this rally has been declared dead more times than the career of Britney Spears. We wouldn’t like to bet against the market- or Britney, for that matter. In any case we are revelling in opportunities. Such as:

For UK Special Sits Fund, this week Derek and Ruth have bought a new holding in Ricardo, the engineering consultancy. Derek’s owned the stock before, but sold it two years ago on concerns about the automotive market and its gaskets. Since then Ricardo has broadened its base beyond automotive. Says Derek: “The trend to reduce carbon emissions, not just in the car market but in every motorised sector, will ensure demand for Ricardo - and, I hope, its shares.”

In UK Smaller Companies Fund, John and Mark have just cut back on holdings where they feel prices have become a little precious. They’ve used these sales to top up Babcock and MITIE — likely beneficiaries of greater private sector outsourcing as the next government looks to reduce, so let us all pray, its deficit. In UK Growth Fund, with new holdings in Babcock, VT Group and Serco, Tim Steer’s been doing the same thing. Even Income Fund’s Frostie has frisky days. “The rally has given us the opportunity to purchase better quality, growing companies with decent yields, companies that only occasionally grace the portfolio of an income fund. We’ve added Cineworld, WH Smith, G4S and Halfords.” European Growth Fund’s Philip is (mildly, of course) polemical too: “The fund’s prospective p/e is 10.2x compared to the markets 13x.” Global Growth Fund’s Peter is emerging (now 17% of the fund, and rising), while Capital Fund’s bull-bear Jacob is delphic: “Fortunately, the UK equity market has relatively little exposure to the UK economy.” So there.

Speakers’ corner ...

“Over the 10 years that I have had the privilege of addressing you as chancellor, I have been able year by year to record how the City of London has risen by your efforts, ingenuity and creativity to become a new world leader in an era that history will record as the beginning of a new golden age ... Britain needs more of the vigour, ingenuity and aspiration that you already demonstrate that is the hallmark of your success.”

— a besuited Gordon Brown, addressing bankers in the Mansion House, 20 June 2007.

News of the Week

At the sound of snails ...

The wholesale price of milk is at 20-year lows, and agricultural profits are arresting. But in the EU’s poorest country, Bulgaria, at least snail farmers are fattening. Harvest is now in full flow, and demand for escargots — ohlyuvi in Bulgarian — is outstripping supply. About 900 tonnes of snails — six times more than in 2008 — will be exported from Bulgaria this year, mostly to France, where the harvesting of wild snails has now been banned by the EU. To add to the 50 already in operation, some 300 new farms are set to open next year, according to Bulgaria’s National Snail Breeding Cluster, which encourages exports.

“Orders are likely to reach one billion baby snails this year,” said Simona Mollova, consultant at the cluster, citing additional demand from Japan for fattened escargots and from Dubai for the new, orange, carrot-fed snail. “The market is huge,” said Krasimir Kostov, 45, whose farm in northern Bulgaria specialises in supplying snails of the popular genus Helix aspersa. “We could not fullfil all our orders because our incubator is too small.” He pulled a face when asked if he actually likes snails. “But at least they are very quiet. Indeed, you cannot tell there is a farm here. Snails do not moo.”