19th March 2012

Are fashion fads fading faster

Have you noticed how the speed of corporate ageing seems to have been rising exponentially - corporate histories seem to have an ageing process worthy of various characters out of a Rider Haggard ripping yarn. Only a few years ago, Yahoo which started in 1994 was seen as an exciting young dynamic brand for the new technology and new generation.  It even seemed to make a noise.  Now it seems to have aged before its years and seems almost tired and waiting to be absorbed by someone else.

After that Google, founded in 1998 by a young and seemingly revolutionary team, was the hungry interloper.  However this huge success has also matured into a global leviathan dominating markets and client usage, and far from being the users' pioneering friend, is now being cast as the spymaster of the globe.  It even now finds itself being categorised with the behemoths of the seemingly elderly Microsoft (1975) and positively geriatric IBM.  Google shows signs of share price maturity as well, having underperformed the NASDAQ index by a fifth this year.

The swathe of brash social media companies like Facebook and LinkedIn have, of course, now taken on the mantle of financial fashion, but they too will be disappointed when overtaken by the next-gen investment fad. Investors need to be aware that the span of corporate existence has risen to a frightening velocity.  As economic cycles have been shrinking, so too have corporate lifespans; it seems it is only our lifespans that are getting longer.

Also, along with this, it is interesting to see just quite how large some of the mega corporations have become.  Some around the globe are actually larger than not inconsequential countries.  For example, the current market darling, Apple as a nation would be ranked as 20th, sitting between Norway and Argentina.  The older leviathan Microsoft is not far behind in 32nd place and sits between Singapore and Malaysia.  GE and Nestle are in 46th/47th after Pakistan, although they do lack similar nuclear capacity (as far as we are aware).

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If there is a common theme running through the global economy, it is the profound reduction or even lack of fundamental demand.  The US has seen some growth, but with the huge sums being injected, anything less would be a disaster.  Europe seems to have little focus on expansion for the moment and in China the figures are lower and slower, although still positive.

Demand cannot be introduced by magic, but it can be encouraged.  It's back to confidence again.  One of the issues for the budget this week should be the direct encouragement of expenditure.  Not from cash strapped consumers, already struggling with thin budgets, but from inducements to invest.

Here we are in a ludicrous position where large companies are sitting on significant cash positions and interest rates are at record low levels and yet there is no investment.  Just what are shareholders looking for companies to do?  Do they want their company becoming a cash piggy bank or do they want something done with the money?

Now then, is the time to encourage investment when we know there exits both the demand (profitable) and the need. Whether this is housing, infrastructure or SME funding, the routes to market are there to be developed.  I often wonder when I am standing in awe of the Victorian engineers and entrepreneurs in metal palaces like Paddington Station dating back to 1854, just what would they have done in moments like this?

Probably take a huge risk on a dynamic capital project - a bit of financial shock and awe!  Not like Crossrail which although useful, is for most just drill and bore.

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Good news in the US - the jobs reports have been improving.  The proportion of working age American adults has risen in employment - but only by 0.1%!  This is now at a level of 58.6% - reminiscent of the figures in the early 1980s. Politicians be aware - it's not as strong a recovery as you may be thinking.

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And finally... a sure fire way of paying down the debt, but with one slight drawback.  Tucked in the hills of one of Spain's most picturesque regions, the Catalonian village of Rasquera has agreed to rent out land to grow marijuana, an enterprise the local authorities say will allow them to pay off their €1.3 million (£1 million) debt in two years.

Local authorities are keeping the location of the site top secret, while Spain's attorney general investigates the legality of the project.  The Catalan regional government has also asked the village for further information about the plan.

Spanish towns are swamped in debt after a decade-long construction boom that imploded in 2008.  Almost one in four Spanish workers is jobless and many cities are months behind in salaries for street cleaners and other municipal employees.

The mayor of Rasquera, with 900 inhabitants, said the project will not only benefit locals, but also eliminate organised crime and the tax evasion associated with the cannabis industry, thanks to government supervision.

"We want to put an end to mafias, we want to finish with the black market, we want to put an end to the underground economy," said Bernat Pellisa, Rasquera's mayor of nine years.

The Barcelona Personal Use Cannabis Association (ABCDA) will pay Rasquera €54,170 a month from July 2012 for a 15 hectare plot of land, and local authorities hope the farm will generate 40 jobs in the village.

The mayor said residents of Rasquera have welcomed the initiative, as long as it abides by the law, and that he is responding to the wishes of the people.

If the cannabis cultivation project goes through, the villagers of Rasquera will have an alternative to traditional jobs in olive groves, vineyards and citrus plantations, and the village debt could finally "go up in smoke."

The ultimate debt roll up scheme.

Have a good week.

Justin Urquhart Stewart
Director
Seven Investment Management Limited

Budget, Investments