22nd November 2010

Artemis - The Hunters' Tails

The heirs of hazard ...

And so the seismic shifts go on. In an event of great importance, China has just overtaken the US as the home of the world's fastest supercomputer. For the technoc[r]ats among us, Tianjin's Tianhe-1A machine has a speed of 2.507 peta-flops (floating point operations per second), which means it can perform 2,507 trillion calculations every second. That makes it 1.4 times faster than the Cray X15 Jaguar, sulking in Oak Ridge, Tennessee with its mere 1.75 peta-flops. But the west ain't wasted yet. We note that the Chinese machine uses thousands of chips made by? Intel and Nvidia, of and in Liberty's Land. Who knows how such interdependencies will end? Exa- and zetta-flops, portend.

On the other hand what China will not do, one hopes, is follow the example of London's policemen. For they must now fill in a 'risk assessment form' before undertaking any kind of operational activity. The 238 possible hazards our police are heir to fall into 13 categories and include "noise, spillages, sunburn and uncomfortable seating."

As even Ireland's peat seemed to sink, investors know how the police must feel about such hazards. This is what happens when lenders don't show loans at fair value on their balance sheets. Stocks are recovering from a rout that started at the beginning of last week and took more than $2 trillion off global equities. There will be a lot of Sturm und Drang, no doubt, but the Irish bailed will be. Taxpayers' unwitting munificence knows no more boundaries. Like many things, bankruptcy isn't what it used to be. It may be in debt up to its shamrocks; but US-listed shares in Bank of Ireland still climbed 33% yesterday. Strong earnings and good results should see equities, we reckon, resume their rise. Or?

Will debt's demands ...

Prevail? The euro-zone is one thing, the US quite another. On both sides of the Atlantic, housing is of course a primary monetary mechanism, as the economists like to say. Well, foreclosures on prime fixed-rate mortgages in the US have just jumped to a record. We observe with particular interest the Obama administration's primary anti-foreclosure plan, the Home Affordable Modification Program, or HAMP. Even under its watch, 108,946 mortgages had to be 'hamped' last quarter. Now there's a eulogism.

More and more, it is one that rests in the already indebted maw of the state. In the US, government-controlled lenders now guarantee 95% of all new mortgages; and the Federal Housing Administration insured 40%, or $319 billion, of all new mortgages in fiscal 2010.

If that isn't a canyon grand enough for recovery to get lost in, try municipal bonds. This is a $2,800 billion market, of which $1,000 billion is owned by individual Americans. The federal subsidies for such things may end -- or will, if the Republicans have their way. And in any event, a growing number of learned men and women expect the default rate on munis, as they're known, to rise. The road to recovery in the west is looking long and dusty. Whereas:

Out east ...

Our Peter Saacke, he of Global Growth, is just back from China and strange encounters with, for example, "a combination of TMT craze and (over-)enthusiasm for China." Take VANCL, an online clothing retailer, founded in 2007 by a Chinese ex-Amazonian with $100 million of private equity. The company already turns over $3 billion a year and has a 28% market share of online garments, with online retail sales growing at 60-70% pa. Yes, you guessed. It is soon to float on Nasdaq. Don't even think about the p/e.

Across those other straits, year-on-year Taiwan's economy grew by 9.8% in the third quarter, apparently. "With growth rates like these, I don't see why we should avoid cyclical Asian exposure," says Jacob de Tusch-Lec. Inflation will result and could break the market. But in the meantime, for Global Income Jacob continues to put some of your money into Asian real estate.

While back at the bothy ...

Jacob has also taken a position in Ireland's CRH (cement and roads). So, for UK Special Situations, have Derek and Ruth. "It's looking like Ashtead three years ago," says Ruth. "And investors did well there." Listed in Dublin, the stock has been sold off over-hard, in our Artemisian view. In fact it has far more exposure to emerging markets than it has to emerald's isle. Will a dual listing follow?

Other Irish activity for Derek and Ruth concerns food producer, Greencore. This holding proposes to merge with Northern Foods in a deal of which Derek and Ruth approve. The firms' combined profits are £100 million, and yet cost savings of £40 million look realistic. The deal has been well thought through; and is refreshingly free of blarney.

News of the Week

One type of 'two-for-one' ...

An electrical goods shop in Israel has sought extra sales -- by giving anyone buying a fridge a free sheep as well. The promotion was aimed at Israeli-Arab customers ahead of Eid al-Adha, this week's Islamic festival of sacrifice. The store in Tiberias gave a live ewe to anyone spending more than 1,000 shekels -- about £200, or the price of a fridge. The sheep were penned outside the shop, and anyone eligible could help themselves. That proved vexatious, as sheep were stuffed into car boots and trailers alongside electrical goods.

Their new owners were likely to slaughter them as part of the festival, which Muslims around the world celebrate by killing animals such as sheep to mark the prophet Abraham's willingness to sacrifice his son for God. The offer drew controversy and a visit from government animal welfare inspectors. Vets from the Tiberias municipality descended on the store and stopped the promotion. The surviving sheep were taken to a sanctuary. The store's owner, Arshad Arak, was sanguine: "In šā Allāh," he said.

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