29th October 2009

The Hunters' Tails

In the lee of lipograms
We all know Lipper. A lipogram, by contrast, is a written composition which eschews a particular letter of the alphabet. You would have thought that only French intellectuals are capable of such preposterous pretension; and indeed one Georges Perec published a novel, La Disparition, in 1969 which, except for the author’s name, dispenses entirely with the letter ‘e’. Yet in fact, we got there first. In 1939 England’s Ernest Wright begat a 50,000 word novel, Gadsby, that does not give suck to a single ‘e’: “Gadsby was walking back from a visit down in Branton Hills’ manufacturing district on a Saturday night. A busy day’s traffic had had its noisy run, and with not many folks in sight …”

Our point? That this great rally has been largely lipogramatic. On 3 March this year, that dies faustus when the market turned, the FTSE All-Share was at 1,782. As we write it is just shy of 2,700, up 50%. But excluding resources (miners and oils) and financials, the market is only up 32%. Without basic materials and financials, the All-Share would be at 2,350. Banks, for example, are almost 14% and financial services are over 6% of the All-Share. Both have done phenomenally well this year. Banks are up 46%, and financial services are up 75% year-to-date. So? For the relentless rise to go on, breadth is the thing we need.

And will the rally broaden? To show just how the market is now regarding that now forgotten four-letter word “risk”, the VIX index is back down near levels it saw last in October 2007, when the S&P 500 was just coming off its all-time high of 1,565 and the brightest and best were dreaming up new ways to develop ‘global liquidity’ – without an ‘i’.

Meanwhile, there are still sobering signs. For example, we note that rates for 30-year fixed US home loans went through 5% this week. That higher cost threatens stabilisation in the housing market. In the developed world at least, growth will be very anaemic.The UK economy will contract by 4.4% this year and then expand by 1.3% in 2010, according to forecasts released this week by the National Institute of Economic Research. And rather than the predicted 0.2% increase in the UK’s GDP in Q3, the numbers have just come out showing a 0.4% fall. Our economy has now shrunk over six quarters, the most since records began in 1955. Japan has just announced that, for the first time since 1946, it will have to issue more bonds than it raises in revenues. (And not for nought, it seems, is William Littlewood shorting JGBs in [y]our Strategic Assets Fund.)

But on balance, we reckon, the way is still up. Q[uod] E[rat] demonstrandum, and the mortgaging of our children’s and grandchildren’s futures will go on. Back at the ranch, this week several surveys have suggested that the UK consumer is starting to spend again – guardedly. Reckoning that QE, rock bottom interest rates, cash for clunkers and so on is the equivalent of a 12% pay rise, Lloyds has analysed millions of transactions in Q3. Their many customers are saving roughly half of that 12% - but spending the rest on more, smaller transactions. WH Smith, for example - we hold it widely - has just reported a rise in its average ‘basket’ to £5.00. Mony the mickle (small) maks a muckle (large) – as they say in Aberdeenshire.

And so to stocks …

If you like banks, our European GrowthFund and Global Growth Fund are both 8% overweight. And in financial bonds, Strategic Bond Fund is positively obese. Says donnish James Foster: “The trend of improved bank profitability and greater regulation implies that banks are likely to become more dull as time progresses. But then ennui is usually a sign of a good bond investment.” Very droll.

If you don’t like banks, in UK Special Situations Fund Derek and Ruth are dissident. Their position in HSBC reflects more a top-down view on the ‘Asian opportunity’ and the suspicion that having got into trouble early (with Household of the US), HSBC has avoided bigger disasters of more recent memory. Avers Ruth: “As exceptions we do hold Close Brothers and Provident Financial - and Tesco, the coming ‘people’s bank’. But we expect banking to change markedly in the coming years. So why buy a bank with legacy issues and unquantifiable political risk?”

Back to a broader (?) rally, Tim Steer (UK Growth Fund), Jacob de Tusch-Lec (Capital Fund) and the Adrians of Income Fund have bought Scottish & Southern. It has underperformed the rally by 30% year-to-date. It’s cheap and green and – sorry, poor old Scotland, and one can hear Salmond’s fulminations already – likely to be consumed in some rough wooing. Derek and Ruth have bought, for the first time, Balfour Beatty (now 1.5% of the fund.) After its imminent rights issue, the stock should re-enter the FTSE 100. So a technical rally at least towards the end of the year? Continuing to broaden their beta, oor Adrians are pleased with Pearson and Halfords. This week, as it trades on below replacement cost, also for its yield they welcome Drax. In Capital Fund, Jacob has taken Shell up to a 5% position. It has underperformed the market by 10% so far this year, and oil’s now up to $80/barrel – and rising? Nothing, ah, lipothymic, it seems.

News of the Week

Frank graves in ghoul …

“Kenneth Richardson lived in this parish for more than thirty years,” solicitor Jenny Brading told Banwell parish council in north Somerset this week, “and his last wish was to be buried here. However, he was born in Goole, in Yorkshire, and his place of birth remained important to him throughout his life. His will states that he wishes to be buried in Banwell cemetery. But it is also very insistent about the deceased’s epitaph. Mr Richardson expressly wanted these words engraved on his tombstone: ‘I would rather be in Goole.’ ”

On behalf of the council, the clerk (also called Kenneth Richardson) stated that “the council rejected this request because it was felt that the words ‘I would rather be in Goole’ would offend some people. However, after further discussion, it was agreed that the phrase would be less offensive if the word ‘frankly’ preceded it. The council therefore grants Mr Richardson his last request, provided that his tombstone reads: ‘Frankly, I would rather be in Goole.’ ”

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