2nd September 2011

Artemis: The Hunters' Tails

Either -- or?

A fortuitous furlough ... As we resume, happily markets have recovered at least some of August's frightening falls, when 'high frequency trading' met low volumes. Though retreating as we write ahead of US non-farm payroll numbers due at 13:30 over here, from its low on 10 August the FTSE 100 is still up. Reasoned recovery, or 'suckers' rally'?

Neither nor, we reckon. The politicians' response to the demands of debt remains opaque at best. Chancellor Merkel is waiting for the decision by her country's Supreme Court on 7 September as to whether or not German support for the EU's dole is unconstitutional. Until then at least, Merkel will continue her pretty good impersonation of Hamlet.

Meanwhile, under Greek 'austerity' still only 5,000 Greeks (out of 12 million) are declaring taxable income above £90,000 pa. Despair not: [Great] Britain is showing the world its way? Cuts to the MoD -- now to be 12,000 soldiers down by 2015, rather than the original 7,000 -- see service men and women outnumbered even more by public servants amid pot plants in offices. By contrast, secure custodians of recidivism, aka prison officers, have complained this week to the Health and Safety Executive that their health is being affected by their passive smoking of cannabis. Prisons are being told to carry out 'risk assessments'; and the hard-pressed taxpayer may be about to spend much on new ventilation. This is even as the UK's Public Sector Net Debt continues to grow by £2,876 each and every second; as four million households in Britain in which no-one has a job live on; and as 370,000 households (up 18,000 year-on-year) in which no-one has ever had a job are still bound to the taxpayers' teat.

Well, at least the Swiss are getting on with real life. Their latest political movement, the Anti PowerPoint Party (APPP) wants to free the world from the ubiquitous inanity and over-simplicity and sheer quantity of bullet points. If there was one for it all in our view, it would be that, inherently, democracies just are fiscally irresponsible. All we need next is water wars.
The bears like Roubini are saying this is the 'endgame'. But what if this game has no end? Muddling along in the West and Japan with sub-par growth, better elsewhere, may just be the 'new normal' and preferable to recession/depression. As Hegel argued in 1812, a thing is always more than just itself. No disrespect to his countryman, our very own Jacob de Tusch-Lec. But Kierkegaard's Enten-Eller (Either-Or) was never going to do.

And so we are ...
Buying. As stock-pickers, we think we know a hawk from a handsaw. For UK Special Situations, for example, Derek and Ruth say: "This environment is one of significant buying opportunities. Our main purchases have been additions to existing high conviction holdings such as BG Group, Man Group, Melrose, Micro Focus, Reed Elsevier and Tate & Lyle, often at levels close to our original entry points. We've funded these purchases through the sale of Experian and Centrica and reductions elsewhere."
For Global Growth, at the margin Peter Saacke has been buying stocks that (a) are beaten up; (b) have very good SmartGARP® characteristics; and (c) have reported Q2 results confirming the investment case. Examples include Betsson, the Swedish online gaming operator, Millicom, an emerging markets mobile phone company; and US Bancorp.

By relative contrast, James Foster of Strategic Bond is watching and waiting: "The high yield market is now discounting that 45% of companies will go bust (with 40% recovery rates) over the next five years. In banks it is discounting that six big European banks will default (with 25% recovery) out of the 25 in the index over the next five years. These numbers are highlighting the distress in the market: defaults on this scale are unprecedented in our lifetimes. Value is clearly being demonstrated. But in a market racked with uncertainty, investors are waiting for policymakers to provide some semblance of order.

“On the other hand, the background of low interest rates for a sustained period is a very important driver. The panic in the banking sector will subside and the fantastic yields now available will fall as confidence returns. The banks have a much greater level of capital now than even two years ago. We are confident that the markets will turn positive again soon."

Speaker's corner ...

“Come esistono oratori balbuzienti, umoristi tristi, parrucchieri calvi, potrebbero esistere benissimo anche politici onesti. Just as there are stuttering orators, sad comics and bald hairdressers, so too there could be honest politicians."
- Dario Fo (1926 - ), winner of the 1997 Nobel Prize in Literature.

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