Review 1Q 2011 6th April 2011

6th April 2011


"I like too many things and get all confused and hung-up running from one falling star to another till I drop. This is the night, what it does to you. I had nothing to offer anybody except my own confusion." —Jack Kerouac

Whilst watching Bloomberg and CNBC these last few weeks I have been struck by how many market commentators are hanging onto every thread of statistics coming out of the Fed and elsewhere and predicting that a global market recovery is on the cards. In fact the repetitiveness of this recovery epidemic is extraordinary as all and sundry predict that the foundations are set for this global recovery. As you can gather I am in the ‘bear’ camp. I cannot see how any responsible government, central banker, regulator nor indeed commentator can call a recovery when employment statistics appear historically dire. Spain alone has 4.3m unemployed and fudged numbers everywhere show a bleak picture. Inflation is rising (4.4% in UK), rates are predicted to accelerate sharply upwards, bankers are still acting like hedge funds, taxes are going up, the oil price is rising sharply and agri prices are forcing food prices into the stratosphere. The UK supermarkets are finding it tough too and UK retailers are rocking too. Meanwhile bank bonuses exceed a fairytale £75bn, lending is still rolling along the bottom, debt levels everywhere are still at momentous proportions, bond markets look precarious, “dot.com-2” valuations appear to be from Mars, QE is still being rolled out along the printing presses, regulation is tightening and out of control and government enterprises designed to turn the ship around are simply not enough and too late. My year-end prediction that a “bumpy ride is forecast particularly in the Eurozone” has yet to dramatically materialise but the pressures on Portugal followed by Spain and Italy are now so great that something must give before long. An avoidance of all things “fixed interest” is precautionary and whatever you do, don’t be tempted into the property market just yet. US property prices are hardly turning the corner and FOR SALE boards seem to be blighting the landscapes everywhere like windfarms. Perhaps the most extraordinary thing about 2011 so far are the global events that have unfolded and the resilience of both equity and bond markets to these turbulences. Although Tunisia, Egypt, Bahrain, Yemen and currently Syria have proved to be surprising and momentous I doubt many feel much sympathy for the Gaddafi regime in Libya and the lack of support within the UN for Resolution 1973 by Russia and China speaks volumes for the global thirst for oil and ill feeling towards old colonial relationships. The earthquakes in Japan interspersed with the great tsunami and a nuclear accident just shows how delicate life is on planet Earth. The Japanese must undertake a rebuilding process for the second time since August 1945 and if past history is anything to go by then the likes of Sony, Toshiba, Toyota, Mitsubishi could be great investments hereon albeit it does look a little early against a poor economic backdrop there. To summarise I do think that in the western globally developed nations some thought must be given to providing the self-employed & SME’s with the right incentives to propogate the (possibility of a) recovery but it’s clear that exactly the opposite is happening. It seems that the super-rich are enjoying the fruits of their labours and expecting the rest of the working population to pay for their excesses. In this regard the students are right to protest although their anarchic tendencies seem to be targeted at the likes of Harvey Nicholls rather than the real culprits. I am drawn to the principles of Ludwig von Mizes Institute whereby supporters “argue that mathematical models and statistics are an unreliable means of analyzing and testing economic theory, and advocate deriving economic theory logically from basic principles of human action…Austrian School economists generally hold that the complexity of human behaviour makes mathematical modeling of an evolving market extremely difficult and advocate a laissez faire approach to the economy….they advocate the strict enforcement of voluntary contractual agreements between economic agents and hold that commercial transactions should be subject to the smallest possible imposition of coercive forces. In particular, they argue for an extremely limited role for government and the smallest possible amount of government intervention in the economy.” In a world dominated by the internet and personal devices I must confess I’m rapidly becoming a fan of the Austrian school as governments try to interfere in the modern world through excessive regulation and excessive public investing.

So far in the 1Q of 2011 the US debt mountain has continued to soar and more focus has centred on State debts rather than the mess that the Fed has made. In UK and Europe the battlelines are still drawn and frankly one sees little to commend as the Euro begins its long slow capitulation. Capital markets in the west are relying heavily on excess liquidity, relatively strong dividend covers and 2 year performances but the consumer is finding it extremely difficult at the moment. With p/e ratios in the mid-teens I have a horrible feeling that this is the false dawn similar to the false dawns that markets experienced in the 1930s. No-one can really predict whether QE is ending soon but it’s generally felt that when the taps get switched off then a correction will ensue and it’s my guess it’ll happen sooner rather than later and the fall could be sharper than many are ready for. The Fed, ECB & Bank of England MPC cannot ignore inflation and high commodity prices for ever and a sharp hike in rates could send shock waves through bond and equity markets. The only commendable investment themes that should withstand any onslaught are oil and precious metals stocks which have taken a beating this Q already, Royal Dutch Shell apart. BP has had another jolt recently in Russia as the share swap is received badly and uncertainty over Libya and the Mexican gulf prevail, Centamin has been effected by the rugged departure of Mubarak and the dislocation in Egypt & ME, Randgold has fallen from mid-£60s after a contested election in Cote d’Ivoire resulting in a mini Civil War which threatens to escalate and generally there has been a contagion threat right across the ME, Central Asia, all parts of Africa as well as a refocus on Chinese expansion and human rights abuses pertaining to poor working conditions for workers where China operates. The decline in share prices in these two sectors has been caused mainly by these fears alongside funding demands that are a continual side effect. I do believe that prices in many oil and precious metals companies listed in London will improve dramatically as the year progresses although mainstream FTSE100, 250 & 350 companies could well experience some upheavals hereon. This year was always going to be volatile but just how volatile no-one has experienced…..YET! The likelihood of oil breaking $150 and Gold breaking $1,600pto this year is still intact in my view.

In terms of stock selection I still continue to HOLD Royal Dutch Shell (buy under £20) & BP but prefer to wait until the Rosneft/TNK situation sorts itself out. Cairn (Deutsche have BUY 515p target, Merrill’s 520p) appears to be better value than Tullow where the Uganda tax agreement looks rather ominous. Amongst other oils Hardy Oil & Gas is undervalued, Dominion is static in 6-7p range, Soco Int’l is rumoured to be a takeover (Merrill’s have a BUY 489p target) whilst Heritage Oil reportedly rejected a 425p cash bid last month (Evo’s have a BUY 467p target) although the silence from Heritage is bewildering. Amongst gold miners African Barrick still appears preferential to both Randgold and Centamin on valuation grounds (Edison has issued a report) and SocGen has a BUY on ABG with a 780p target. Anglo Pacific (a mining royalty play) yielding 2.74% has joined the Full List this week whilst other miners such as Yamana, Kirkland Lake, Norseman, Chaarat, Mariana, Orosur, Patagonia, Shanta and Peninsular have had a quiet to negative quarter. In FTSE100 I am extremely cautious although I am looking at BAE Systems nearer 310p, Sainsbury nearer 320p and HSBC nearer 630p. Elsewhere I have a weak HOLD on Tullett Prebon (prefer to buy nearer 380p) and accumulate the biotech stock Vectura at 63p (brokers are bullish over £1). Current investment trusts that should be looked at on any pullbacks are JPMorgan Claverhouse (3.72%), Henderson Far East (4.27%), Schroder Oriental (3.58%), BlackRock Latin America (2.13%) JPMorgan Brazil, JPMorgan India & JPMorgan Russia with the following general UK trusts, Scottish American (3.76%), Securities Trust of Scotland (4.27%) and Merchants Trust (5.42%) for risk averse investors (all discounts permitting).

The headline quote from the great American beatnik author Jack Kerouac sums up the feelings of many as speculators chase “shooting stars” amidst a sky of “confusion”.

As the Royal Wedding approaches at least we can all look forward to a few street parties and reminders that there is one thing that the British do alarmingly well. The sight of guardsmen and the Household Cavalry in their regalia can demonstrate that ‘our chaps and lasses’ are indeed the best. Enjoy the festivities and ignore the austerity measures for a few days at least.


***STOP PRESS.....7th April 2011 --Since writing this review Socrates the outgoing Premier of Portugal has requested a US$100bn bailout from ECB and rates are expected to rise 0.25% later today. Bloomberg is already asking when Spain is going to do the same. Meanwhile all markets are taking this in their strides. Just how far can this discounting of events (bad news) keep bond & equity markets on an even keel? The lead will surely come from Euro/$ with a few eyes peeled too on Euro/£.