14th October 2011

Artemis: Hunters' Tails

A mess addressed?

From the 21% agreed in July (“all instruments will be priced to produce a 21 percent net present value loss)”, a 50% ‘haircut’ on Greek gifts? Or possibly as much as 60%? Consensus seems to be building around that, and around the idea that the euro-mess will be addressed; and markets go on up in relief.

We’re pleased too, of course — but not convinced. You just keep on finding further confirmation of how ill-founded the world has become. This week, for example, we learned that there is, apparently, $53 trillion in global dollar-denominated debt out there — but a total money supply of only $2.7 trillion in circulation. Would you buy a $20 dollar bill for $392?

Meanwhile, the French and the Germans still need to agree on how to recapitalise the[ir] banks. The French would like it done by an expanded European Financial Stability Facility (EFSF), which would be leveraged to do the job. They don’t want national governments backing their own banks because that would almost certainly lower France’s AAA rating. The Germans don’t want to expand the EFSF because that might threaten their AAA rating. Oh, and either way the EFSF itself also needs a triple A. But leverage will turn it, in effect, into a collateralised debt obligation (CDO). Will the rating agencies make the same mistake they made with thousands of mortgage-backed CDOs?

Another week and another acronym is back: the credit default swap (CDS). Last week, Belgian bank Dexia went down. This week, Austria’s Erste Group warned that it expects a net loss of nearly €1 billion this year — instead of a decent profit. Erste wrote down its CDSs, mostly exposed to Hungary and Romania, to market value at an overall loss on those alone of €450 million.

And yet when the European Banking Authority (EBA) ran its tests on European banks in July, Dexia didn’t just pass. It emerged as one of the safest banks in Europe (12/91). Perhaps that’s why the EBA is ‘re-tooling’ its next stress tests. This time a big write-down of all peripheral eurozone sovereign debt will be included. At least 66 of Europe’s biggest banks will fail and will need to raise around €220 billion of additional capital, analysts averred yesterday. The new/next tests are going to be, ah, stressful.

In short, this is all going to be volatile at best. All await 23 October, when a comprehensive new Franco-German plan is expected. No Maginot Line here. Anything short of a panacaea will disappoint; and we know they don’t grow on trees. Then there’s the (ratifying?) G20 from 3 November in Cannes. Until and perhaps beyond then, up, down, flying around: those magnificent men in their flying machines.

While equities’ allure ...

... is, we think, all the more patent. Amid the mayhem, selected stocks large and small are both thriving and rich in further promise. So, on your behalves and beyond the demands of debt, we go on buying. Forming 1.3% of [y]our UK Special Situations, cash and carry group Booker, for example, has put out some sterling numbers this week. Under CEO Charles Wilson, it has transformed �£400 million of debt in 2005 into cash of �£60 million today. At home, abroad, the business goes from strength to strength. Phew.

Held in Strategic Assets (3.7% of the fund) and Income (2.8%) as well as UK Special Situations (4.4%), BP’s is the old, old story: under-loved, under-owned — and under-valued. The major western oils (ENI, Total, Statoil, Shell, Exxon, Chevron and Conoco) trade on an aggregate enterprise value/barrel of $6.90. The number for BP is $4.70. This is a 30-40% discount. Id est, BP would need to see around $70 billion restored to its market cap, also known as around 240p/share, if the company were to trade in line with its industry. We think that’s called an opportunity. But market-makers prefer to be maudlin about Macondo.

For UK Growth, young Tim (Steer) continues to prefer to pay up for (overseas) growth. So when he becomes enthused by a domestic stock, we all take notice. Enter Grainger plc, established in Newcastle in 1912 and now the UK’s “largest listed specialist residential landlord”. Home reversions are its thing, and suit Britain’s present demographics. Under Mrs T, the average first-time buyer was 26. Now he or she is 38 — and rising. A booming rental market is one result, and Grainger attests the saw of clouds and linings.

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