Review 3Q 2010 4th October 2010

Tim Geithner acknowledged at a conference in Washington last week that “we saved the financial system, but lost the country doing it”.

As the debate about the ‘double-dip’ rages on both sides of the Atlantic there are millions of Americans and possible Europeans who have little comfort in knowing that job prospects appear pretty bleak despite the billions thrown at the banking system alongside liquidity injections across many industries including Detroit. As Yves Smith of the populist blog “Naked Capitalism” has observed that by saving the banks all that has transpired is that bankers have reworked the balance sheets and rehedged the risk only to be rewarded by obscene bonuses based on spurious profits funded ultimately by taxpayers. Smith like many others feels that had a sharp correction or jolt ensued then the recovery prospects today would be more meaningful and possibly stronger. Although it’s clear that there are now some ‘green shoots’ the reality is that many small businesses (SME’s) are sludging around in the mud rather like the golf fans at the Ryder Cup this weekend. From a markets perspective are stocks cheap or expensive? Ditto bonds? I think the case for single digit p/e’s is getting stronger all the time and the irresistible rise in Gold suggests that many others too feel that historically stable currencies and markets could be in for a fright very soon. Further QE this quarter will not deflect from Gold’s rise either. The deflationary/inflationary debate is already twisting and turning but in this regard I think that certain areas such as global property prices are likely to continue to deflate whilst food prices (soft & agri-commodities) and precious and earth metals prices inflate. It really is a complicated world out there and the US China trade and currency saga appears to be nearing conclusion too.
Many emerging markets are still showing signs of genuine growth and the finals frontiers markets too (eg sub-saharan Africa) provide a relatively safe haven for growth orientated investors although regular liquidity issues are likely to be flagged from time to time. The recent beligerance of the Ugandans over Heritage’s supposed CGT liability does show, however, that risks are associated with emerging markets. Despite the ongoing saga at least Heritage had its $1.4billion payment honoured by Tullow and with the £1 Special Dividend having been received by Heritage shareholders the other annoyance is that the book costs for Heritage investors have not been adjusted downwards accordingly making the book/value ratio appear out of kilter. Elsewhere Dana has been acquired by KNOC (the Koreans) and BP continue to realign themselves to a more non-US focused exploration universe. In a world where the buzzword is ‘regulation’ who could have imagined after Dudley’s indignation with the russians a few years ago that TNK-BP would today be the staple business in BP’s universe?
In UK DaveCam speaks of growth opportunities and the ‘big society’ but in reality it appears to be an excuse for ‘big business’ to scalp the individual, the self-employed and the SME. The timely comments at the Conservative Party conference regarding deficits and tax solutions seems to be at loggerheads with freeing up the economy allowing for entrepreneurs and hard-working individuals to trade freely. Certainly experienced stockbrokers and IFA’s are not too amused by the super-regulators’s current offering called the Retail Distribution Review which is sending us all back to school. There was a time in UK when qualifications were voluntary. Not today it seems! It’s pretty galling that after the banks appalling behaviour before during and after the credit crunch that the very same banks should be the major beneficiaries of the RDR monstrosity. True independence is finally getting smoked out after hanging on grimly since ‘Big Bang’ and this does not bode well for market stability, liquidity and small and microcap investment as every stockbroker and investor is coralled into a ‘wealth management’ and collectives category. Is it any wonder that this avalanche of intent is rolling down at breakneck speed as not a single board member of FSA appears to have any experience of bespoke financial investing and advice? Nor much else for that matter.
The one stable story yet again has been ‘Gold’ against the ongoing threat to the Euro, £ and US$ and the yellow metal is testing resistance at below $1332 (now circa 1320) so I’m still actively bullish on gold shares and think that an overweight strategy in precious metals and oils should be maintained. I continue to hold BP post-gulf spill and cum the reintroduction of its dividend policy 1Q 2010 and Royal Dutch Shell ‘B’ (6% yield), and Canadian miner Yamana Gold, FTSE100 gold miners Randgold and African Barrick, Petropavlovsk, Centamin, Norseman, Newmont Mining and ASA (US listed closed-end fund focusing on precious metals) buying them on the dips. UK equities such as British Land, GlaxoSmithKline, Sainsbury, Burberry (a 1350p takeover target has been mooted), Foreign & Colonial Asset and Tullett Prebon can still be bought whilst Soco (on Vietnam oil news), Salamander Energy, Heritage Oil (likely to remain steady for a while pending news on its kurdish fields) and Hardy Oil and Gas (takeover candidate?) appear attractive for appreciation in the oil sector. Oakley Capital (OCL: 70% assets in cash, c.16% discount NAV) and Ashmore Global Opportunities Trust (AGOL) are interesting plays in the trusts sector although I am still very cautious on the equity market generally as I see valuations and expectations being too high. For those requiring income there is a case for ½ units in Henderson Far East (HFEL: 3.8% yield), Schroders Oriental Income (SOI: 3.7% yield) and the new JP Morgan Global Emerging Markets Income Trust (JEMI: prospective 3-4%). It remains to be seen if Mr Geithner’s comments above do indeed leave the US financial system stronger but the future for many other americans looks very uncertain. It may not be just the US golfers who have to return home with their tails between their legs. Time is running out for Geithner as Obama’s presidency fizzles out ahead of mid-term elections. The ConDem coalition around Downing Street needs a similar tonic too although unlike the Republicans and The Tea Party organization I can’t see Red Ed making any real headway as his schoolboy brother is confined to the back benches. What the anglos need is action and leadership but on this front the current crop of politico-marketing men lack real zip and imagination.