Aristotle’s angst ...

Unless it’s for US Treasuries (10-year yield now at 1.7%), forget the ceiling. More than $3.4 trillion has been erased from equities this week, and more than $10 trillion since May. Where’s the floor?

Well, we can do alarmed. Consider that paradigm of the last crisis, Morgan Stanley. The newest savior (sic) of European stability, the European Systemic Risk Board, has said that Europe’s and especially France’s banks need more capital — and the Lear jets are off to the Gulf. But the truth is worse and wider. We note that, at $39 billion, Morgan Stanley’s exposure to French banks alone is 60% greater than its market cap — and more than half its book value. Of course what we don’t know is how much of that is hedged, leafed with fig or otherwise covered; but credit default swaps on all these guys are spreading fast. If this thing blows then boy, will it blow.

How right Aristotle was to observe that democracy is the least bad form of government. Our liege lords are out of ammo. Next they’ll ask the House of Keys what to do. Take Bernanke’s Maturity Extension Program, aka Operation Twist: “The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.” Wot? With ZIRP and QEs 1 and 2, financial conditions have been extraordinarily accommodative for the past three years; achieving?

The siege of Leningrad lasted 872 days. They had tin hats. But at least we have baked beans? Speaking of Russians:

Aye, right ...

If Scots is a language, it and Russian are the only ones in which a double positive can be a negative. And we think in Scots — aye, right — when we hear, again and again and again, the phrase “risk off”. This ghastly neologism means, of course, selling “risky” equities for “safe havens” — such as government bonds. In debt up to their oxters, and facing slowing growth and falling revenues, what on earth is “safe” about developed governments’ bonds (and their derisory yields)? Our view is incarnate in Strategic Asset’s strong — if, thus far, admittedly unprofitable — shorts of these sirens. We prefer, instead, certain stocks with strong franchises, balance sheets and, often, decent and sustainable dividends.

Of course already cheap stocks can get cheaper still. But the p/e on the MSCI World is down to 11x, the lowest since March 2009 and 46% less than its 16-year average. On your behalves, in these testing times [y]our managers are buying and/or holding stocks that will, we reckon, not just survive but thrive beyond these vicious vicissitudes. To wit, for Strategic Assets William Littlewood plights his troth through thin and thick to, for example, Tesco and Diageo. The former’s just announced price cuts; but William reckons it will avoid what in the Cold War we knew as MAD. The stock’s yielding 4.6%, and has delivered almost 11% compound growth in its dividend over the last 15 years. Diageo has a robust balance sheet, pre-eminent brands and has compounded its dividend by 7% over the last 15 years. “Even if the economy gets even worse,” says William, “we will see no reason to sell these stocks.”

For UK Smaller Companies, Mark Niznik is seeing M&A continue, even amid the gloom. MBT (domain management) is the sixth of his stocks to receive a bid this year. The free cashflow yields (of c.8.5%) that Mark looks for, and finds, do make bond yields pall. In like guise and in Global Income, Jacob de Tusch-Lec has just bought Virgin Media because “even, or perhaps especially, in a downturn people will still pay for broadband.” And Brazilian utilities, Jacob reckons, will outlast the bathos of bearded Ben.

Finally, we turn to our young éminences, Derek Stuart and Ruth Keattch of UK Special Situations. “Comparisons are being made with 2008/09. What is worse now? Little room for further stimulus. What is better now? Sound, well-managed companies which took radical action last time and have the balance sheets and cost structures to cope. At the other end, there will be opportunities to buy distressed companies. Last time a rag-bag of indifferent prospects somehow staggered on. This time the banks are taking a more realistic view of debt. These are the circumstances in which serious money can be made. So, while not at all complacent about the risks, this is a time of opportunity — even if it is unnerving for investors.”