24th January 2011

Artemis - The Hunters' Tails

An alchemical appendix...

On this point at least, investors seem increasingly sanguine. So sovereign debt is ‘sortid’? Or does it [g]rumble on, like an appendix? For example, we note that the Portuguese debt office has just, and very quietly, become the first ever sovereign user of derivatives to (have to) agree to “two-way collateral postings.”

This means that the Instituto de Gest�£o da Tesouraria e do Crédito Público (IGCP) has begun posting assets to its counterparties when the value of a trade swings against it. So? Even the IGCP recognises the risk that it might (have to) default. Yes, the whole business is highly technical, if not arcane. But no. It was largely Chinese boom(/bust?) that set markets back earlier this week. Yet whether peripheral or core, the issues of sovereign debt are far from resolved. As the UK’s national debt heads for �£2 trillion, the ECB now owns almost 20% of the outstanding bonds of Greece, Ireland and Portugal. That’s not medicine. It’s alchemy.

BP is a useful analogy. It is to drill for oil and gas through nuclear waste in Oceanus Scythicus, better known now as the Kara Sea, thus going, literally at last, ‘beyond petroleum’. Bulls will have to drill through acute concerns about China blowing up (and if you want more on that, read on our website William Littlewood’s thoughts in his latest factsheet for Strategic Assets). Even when the bulls have done that, debt will still not be denied.

For the world has yet to find its new paradigm — if there is one. Economists, wrote John Maynard Keynes in 1931, should be more like dentists — “to get themselves thought of as humble, competent people.” As Thomas Kuhn averred in his book of 1962, The Structure of Scientific Revolutions, when one paradigm breaks down and another hasn’t yet taken its place, mayhem meanders. That may be so. Yet:

In the case of consensus...

The latest survey of fund managers worldwide shows that 55% of us are overweight in equities, the highest reading since July 2007. Private investors poured $5.7 billion into global equities last week, but only $2.0 billion into global bonds. The world’s market cap is now up almost $10 trillion since Bernanke’s Jackson Hole speech last August; oh, and the Bangladeshi stockmarket is up 400% since 2007. So time to sell equities?

As you know, apart from one W Littlewood, we don’t make those calls. We do observe, though, that of course this bullishness is selective. For example investors put $368 million into Japan last week, but redeemed even more ($385 million) from Europe. In [y]our resurgent European Growth, Philip Wolstencroft stands as steady as he did when all seemed lost. “As ever the fund has a strong bias to stocks on low valuations and positive upgrades.” If you haven’t for a while, do look at Philip’s numbers.

In UK Special Situations, Derek and Ruth find themselves spoilt for choice in ‘takeover time’. “Anything called Smiths is going up,” says Ruth. While watching very carefully its nephew, the two are holding on to Smiths Group — and their target price for it of 1550p/share. They expect more M&A, not least before Uncle Sam closes a loophole whereby US companies which don’t send profits home can keep — and spend — them free of tax. And if there’s a set-back, as per earlier this week? “We have,” says Derek, “a tight, short list of stocks we will add to on weakness.”

In UK Growth, young Tim continues with overseas earners. And yet? Enter Howden (ex MFI: maker of cheap kitchens.) Tim’s toes are at last in territorial waters. When will he put that wetsuit on? In Global Income, Jacob de Tusch-Lec is clear: “Equities still seem the best default investment on a relative and maybe even an absolute basis.” Yet Jacob continues to take profits in some of the cyclical names he deems the riskiest. He is buying more utilities, and even more telcos.

In Strategic Bond, the donnish James Foster is adamant on inflation. “You know central banks are panicking,” he says, “when India imports 1,000 tonnes of onions from Pakistan to curb onion prices. Hungary’s CPI has accelerated to 4.7%, Russia’s to 8.8%, and so on. In response to the UK’s inflation, a rate rise next month wouldn’t surprise me. One in the first half is a banker.” So James and Alex have taken further shorts on the UK government futures; and their duration is as low as it’s ever been. At this rate they and William Littlewood will be in Artemisian accord. In the meantime, James and Alex are glad of their holding in Taylor Wimpey bonds — and Aviva (‘not living’) is proving anti-eponymous indeed.

Speaker’s corner...

“All that can be required of a trustee to invest is that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”
— From the ruling in Harvard College v. Amory, Massachusetts, 1830.

News of the Week

Czech chic...

A scheme in the Czech Republic to replace traffic lights with cardboard cut-outs of female police officers has doubled the rate of accidents. Police in Prague believe that the figures in mini-skirts, high heels and stockings may be distracting drivers. “I admit I was looking at her,” said one driver involved in a crash. “I was thinking: What on earth is she doing dressed like that in weather like this?”

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