22nd October 2010

The Hunters' Tails

Importunate interests ...
"The axe falls ..." Clippers click, more like; and think of fingers, not toes. But every dog has his day, and hyperbole's has come. Perspective's has gone. The "worst" spending cuts in a generation? What about the "best (relatively)"? Even the usually measured FT reckons that the UK is going "... into the unknown."

We're not so sure. Losing 500,000 public sector jobs over four years is a lot, of course. But not in the context of 28 million Britons in work. The private sector, if left alone as much as possible to do its job, will find work for many of those denied the succour of the state. In any case, and in keeping with its old ways, during its happy hegemony new Labour added 800,000 further servants of the state.

As for overall budgets, the state's spending will actually go on rising (by 5.5%) in the years to 2014. If you can bear to, look at page 17 of the Treasury's Spending Review. In this context, the humble 'if' is a very demanding particle. If the chancellor achieves all the savings he's announced, id est £81 billion over the next four years, then spending on public services in 2014-15 will still be higher in real terms than it was in 2006-07.

For example ACE, the Arts Council England, was established by one John Maynard Keynes, no less, in 1945. We note that it continues to advertise for a 'Governance Officer' (upper case, of course) in London and for a 'Relationship Manager, Digital and Creative Economy', in Yorkshire. In south Oxfordshire, the diamond synchrotron lives on, and Weymouth (Tory marginal) is to have its new transport system. It is the d-word, debt, and its ever-importunate interest (already a mere £120 million/day, or over £1 billion/week), that will take the real cut in overall spending to 6.5%.

Our incisive senior partner, Mark Tyndall, uses the analogy of an overspending family that simply finds new lines of credit (in Britain's case, QE). The family goes through the motions of modest restraint, and buys cheaper lavatory paper, perhaps. But the structural overspending goes on. Reaching a six-month high yesterday, the stockmarket continued to salivate about QE -- and prove that markets and economies are not the same.

And what did or does the Comprehensive Spending Review (CSR) mean for stocks? Ruth Keattch, co-manager of [y]our UK Special Situations: "The market was well warned. Markets move on surprises, and there were none. As a defence contractor, our holding in Babcock might have been vulnerable. But it has a pre-eminent position in certain parts of its market (e.g. maintaining submarines), and there is still upside for the stock from its takeover of VT. Opportunities? The wide sector known as 'industrials' contains stocks like MITIE (property services) with extensive exposure to the public sector. These were sold down before the CSR. There may be opportunities here."

Out east -- at home ...
Growth overseas continues to inform our holdings. In Tim Steer's UK Growth portfolio, 72% of earnings come from overseas. Petrofac, for example, looks perfect. So why not just buy emerging markets? Because after Russia, Greece, Spain and Italy, the UK is on a forward p/e of 9x and so is the fifth cheapest market in the world -- and it is yielding 4.3%. By contrast China, for example, is trading on a forward p/e of 11.2x, and is yielding 3.1%. Better to buy a UK-listed company with high emerging markets exposure, rather than a Chinese name on a much higher valuation, reckons the ever-effervescent Mr Steer.

The airline China Southern has just said it expects its profits to rise this year by 1,400% as more and more fly. The company pays no dividend. So for Global Income, Jacob de Tusch-Lec is playing this theme by holding Singapore Airlines.

AIA, the Asian subsidiary of AIG that the mighty Prudential failed to buy earlier this year, should achieve the second biggest listing in the world today when it floats in Hong Kong. The pricing values the company at $30.5 billion -- pretty close to what the Pru tried to pay and its shareholders thought too high. In Special Sits, Derek and Ruth, who held onto their Pru on the consequent way down, are enjoying its way up. To Aristotle, prudence was phrónesis. In French, that's savoir faire.

Speakers' corner ...
"I was just trying to make some money."
- Nelson Bunker Hunt, in 1980, on why he cornered the silver market.

"We will time limit contributory employment and support allowance for those in the work-related activity group to one year." (So) wot?
- George Osborne, 20 October 2010.

News of the Week
Playing the pipers ...
Because they can watch the tax collectors dance, hundreds of people now queue to pay their taxes in the Philippine city of Cebu, says city treasurer Ofelia Oliva. Local tax collections have risen by 43% to five million pesos ($115,700) a day since Monday, when the 320 tax collectors launched their dance routine with Shakira's 2010 World Cup theme, Waka Waka.

"We say to our citizens, paying your taxes is no longer a burden," Mrs Oliva explained. The twice-daily performances, one in mid-morning and another in the afternoon, now also include Earth Wind and Fire's Boogie Wonderland; and Mardi Gras-themed routines, complete with colourful tribal costumes. Mrs Oliva said she developed the shows following an order from city mayor Michael Rama. "The mayor said we should get the taxpayers to pay with a smile," she said. Just 5.5 million of the Philippines' 40 million workers pay income tax, according to the Internal Revenue Bureau. Mrs Oliva's dance can become only more decorous."

Investments