| One fustian furphy ... |
| That law of unintended consequences ... It is as ineluctable as Benjamin Franklin’s death and taxes. Largely lawyers, the founding fathers of Liberty’s Land ensured many checks and balances in their constitution. They cannot have meant those to allow the present wotadammerung over raising the US’ debt beyond its present $14.3 trillion; its malign influence on stockmarkets worldwide; and distortions like gold through $1,600, or the Swiss franc topping the Matterhorn. |
| It’s all a fustian furphy. Not least so that senators can take their Augustan vacation, we expect a (late) deal, raising the ceiling and postponing what really matters: cutting the deficit. With a raised ceiling, there will be a ‘relief rally’ — before Americans face the muzak. |
| Over the last 12 months, federal expenditure has been $3,559 billion. Income from taxes has been $2,299 billion. So to have balanced the budget over the past 12 months, US spending would have needed a cut of 35%. We Brits, then, are far from alone in our empathetic hoc, our fondness for the teats of the state, for Flynnian net income — and gross habits. |
| Cyprus, meanwhile, has moved closer to becoming the fourth eurozone state in demand of dole. No longer are rating agencies the sleuths who cannot see: Moody’s have downgraded Cypriot bonds to just two notches above junk. With just 870,000 people and GDP of €17 billion, Cyprus is de minimis. But the psychological and political damage it could cause would be considerable — as Italian and Spanish bond yields continue to go, ah, up. With 10-year yields around 6%, Italian bonds attest investors’ concern that Italy may be forced to join that most ignominious group of Greece, Ireland and Portugal. |
| Incidentally, we note the delightful irony that some European cognoscenti are calling for the big three raters’ European licenses to be revoked; for the formation of smaller (more accommodating?) competitors; and for penalties on ratings that prove too pessimistic. As Fitch’s president told our very own House of Lords in May: “You inform the Greeks of a rating decision and you get phoned up by the French. That is quite disturbing.” Quite. |
In short, this mess has legs. A decade of necessary retrenchment and repayment; or at least as much as cosseted citizens will allow? Fortunately, with our minds on long-term profits, we concentrate, instead, on: | Certain stocks ... | | Tiger Brands in South Africa, Beckton Dickinson and Intel in the US, TDC in Denmark and Handelsbanken in Sweden. These, avers Jacob de Tusch-Lec of Global Income, are five sound stocks for a season even as sultry as this — and beyond. High free cashflows and sound balance sheets cannot be denied. For Strategic Assets, William Littlewood is sticking to his strategy of investing in low beta, stable companies which “should perform reasonably well under most conditions.” For Global Select, Simon Edelsten is standing by Standard Chartered. It has fallen in tandem with other banks over the last year, leaving it on a very affordable price-to-book ratio of 1.7 times (before goodwill). Unlike most banks, Standard’s markets are generating strong growth. Hong Kong and Singapore especially are doing brisk business in loans, while the bank’s deposits from Abu Dhabi continue to come. | | In bondland, James Foster still sees plenty of room for outperformance from financials as the industry addresses its frailties. “In particular,” James says, “the demand for extra capital is good news for our bank bonds: new equity capital on the balance sheet makes our bonds safer. The market’s positive response to the $8.5 billion write-off by Bank of America was very telling. It is a sign the equity market believes we are nearing an end to the banking sector’s problems and that investors are looking ‘across the valley’ to a time when profit growth in the banking sector re-emerges.” | | And by the way ... | | Jacob de Tusch-Lec will be doing a webcast on Global Income at 10:30am on Wednesday. Register here. | | Secondly, if you read The Sunday Telegraph you will find in this week’s a piece by young Tim Steer, he of UK Growth. For this first of an occasional series, Tim addresses IPOs or, as he prefers to think of them, Improbable Price Objectives. Tim has plans to put the Great back in Britain. And that, as we know, is what Telegraph readers like to hear. | While finally, furlough ... Resuming on 2 September, this august organ will now take its ease through August. If you too are having one, from all of us, happy holiday. |
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