8th May 2012

Justin's weekly commentary for the IFA community

In the midst of one of the more unusual droughts, it may seem odd to be giving a storm warning, but over the next few months our stock markets are far more likely to be driven by the vacuous actions of our somewhat unreliable politicians, than either any clear economic direction or corporate results. From our own "posh boys", to whomsoever the French choose shortly as their leader and of course the eventual outcome of the US elections, it seems that we are going to be significantly impacted by the politics of the time rather than the business results of the moment. Then to add to this, the turbulence of an over excited statistical industry churning out a daily diet of often rather deceptive short term data, add to that the spray of the credit ratings industry and you have the makings of a somewhat storm tossed time at some stage in the next few months.

Sadly the "when and the where" will be impossible to predict with any effective accuracy, but that is no excuse for any lack of preparation and readiness.

Last August, the equity markets had a spasm brought on by the "astonishing" news from a rating house that the USA might have a debt and deficit problem. This stunning revelation of what John Cleese would have referred to in Fawlty Towers as "the bleeding' obvious" saw some wholly irrational behaviour worthy of another UK comedy character - Corporal Jones in Dad's Army shouting "Don't panic Captain Mainwaring". So taking the lessons of Messrs Jones and Fawlty, we can at least be prepared to watch and wait!

So what to do? Well last summer saw a dramatic fall in the German stock market, the Dax dropped over 20%. Did this indicate that certain leading German companies like Seimens and Dailmer (and 28 other companies) were significantly weaker with lower profits, lower dividends and less cash? Of course not. They were in fact, in quite a "pukka" state, but just suffering from the after effects of the credit ratings agencies' comments and an astonishing lack of credible political policy and  leadership.

Thus, for very likely different reasons and no doubt at a different time, similar effects may well occur again this year. What may trigger such a burst of nerves we cannot tell, but in all likelihood it would be related to economic growth fears in the US and the Eurozone. The result will be that quality assets will have their prices depressed and fearful headlines may drive investors away. That then is the time when sound minds with a certain level of financial logic, knowledge and suitable courage, will be able to take action. This has been made easier with facilities such as tradeable Exchange Traded Funds, which can be accessed and invested in indices like the German Dax without any difficulty. So time to stash some trading cash in a rubber ring and be prepared for some stormy financial squalls. Dib Dib.

It shows that everything has a price at some stage and at some value. Last week I noted that both Deutsche Bank and Barclays Bank bought into a portfolio that seemed to consist of some of the old and somewhat infamous collateralised debt obligations (CDOs) backed by commercial mortgage property and other similar assets. These CDOs were packaged up into a portfolio named Maiden III which was the bundle of "stuff" that was bought at heavily discounted prices by the NY Federal Reserve as part of the rescue package and bailout of AIG. To give you some idea of the markdown, a previous package was estimated as being of fair value at $4.2bn compared to original face value of $7.5bn.

So even in banking - where there is muck, there is brass.

And  finally...I am sure we have all felt the anger and resentment at getting a parking ticket, but here is a tale of some affirmative action which is probably best not repeated here. When Derick A. Thoene, 28, went into City Hall in Iowa City, Iowa, he was apparently angry about getting a parking ticket. He stepped up to the receptionist and allegedly said, "I have your parking attendant in the trunk of my car,  do you want him dead or alive?"

She called for a police officer to speak to Thoene, who found him "elevated in emotion" over the citation.

So much so that he was arrested and charged with disorderly conduct for  his threats. (Iowa City Press-Citizen).

And a new bingo phrase as well - "elevated with emotion" - no doubt like Mike Tyson.

Have a good week.

Justin Urquhart Stewart
Director
Seven Investment Management Limited
www.7im.co.uk

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