RPG Wealth Management and Financial Planning

Monday 30th August 2010

Time to end this misleading Mis-Labelling

There is nothing more infuriating than thinking you are buying one thing – and then getting another. Still, when that happens with a mail order shirt then it is very simple, you just post it back and get your money back. If you buy something which is clearly labelled as one thing but turns out not to ‘do what it says on the tin’ then you chuck it back at them. However, just in case none of that works we also have the power of the law to back us up in the form of a whole range of Trades Descriptions Acts.

This is all marvellous for the consumer and of course should apply to all the consumer items we have to deal with – until, that is, we get to the financial services industry and especially when buying various types of investment funds.

For many years various trade bodies have tried to operate classifications of different types of funds or portfolios. The Investment Managers’ Association (IMA) has structured a range of classifications of funds to try and describe their contents. The key for such classifications is to go back to their reason for existence – and this is clearly to provide greater definition and direction to investment advisers and their clients. Following this logic, then whatever the titles that are being applied, then the constituents must properly reflect them. This is relatively straightforward in, say, any geographical divisions, although even this can be blurred when looking into the underlying investments. These may be being quoted in one market but may in fact be a company from a completely different area – just look at the makeup of the FTSE 100, where over 65% of the profits of its constituents are from overseas and an increasing number of the individual companies are not British at all.

The problem comes to the fore though when dealing with more subjective divisions where interpretation can sometimes be at best vague and at worst positively misleading.

For example, if you look at the ‘Balanced Managed’ classification you will find that rather than having a broadly based range of different asset classes, the portfolio can consist of up to 70% in equities, with the rest made up of a bit of fixed interest bonds, property and cash. This is not just unbalanced; it is potentially a highly volatile and thus much riskier investment structure than the average balanced investor would probably expect to have.
Even the ‘Cautious Managed’ sector can often have 50-60% in equities and this is hardly a level of potential volatility that most would call cautious. These are misleading titles.

This has come about because in the past, portfolios were predominantly made up of equities and thus these allocations were effectively the ‘norm’. However, since those days innovation and development in investment management have taken us a long way from the somewhat simplistic attitude of just balancing a combination of equities, fixed interest, property and cash. There is also a similar level of measurement by APCIMS which manages the classifications for stock broking portfolios and again a balanced profile is quite likely to have in excess of 70% in equities.

The increased use of the disciplines of institutional management have led to a broadening of investment classes and greater appreciation of both risk and volatility management. This has meant that through the greater understanding of correlations between different asset classes, portfolios and their managers can have a far greater understanding and appreciation of the risk and variation in the behaviour of their portfolios and thus the greater understanding for the opportunity to achieve their desired outcome. Therefore now we can have Cautious portfolios that really do take a cautious approach with, say, just 25% in equities and the rest broadly spread across the other asset classes globally.

These old classifications must and indeed will change, but along with them so must the attitudes of the authorities such as the Ombudsman, so that the understanding of far better risk management and control are reflected in investor’s portfolios.

***
And finally..............For those who prefer to take the longer view of historical events, the 24th of August was the 1600th anniversary of the sack of Rome by Alaric I, the leader of the Visigoths. The Roman capital had been in fact already been moved to the Italian city of Ravenna by the young Emperor Honorius, after the Visigoths entered Italy. However, this was the first time in 797 years that Rome had fallen to an enemy. The previous sacking of Rome was by the Gauls under their leader Brennus in 387 BC. St Jerome, a citizen in Rome at the time, wrote that "The city which had conquered the whole world, was itself conquered..."

A timely reminder to all superpowers that their time will finally come to an end.

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited





Monday 23rd August 2010

Fighting off the British Malaise

After several weeks’ sojourn in South Asia I came back refreshed and reassured that actually the global economy is in quite rude health. It is only when one lands back in the UK that the pall of determined pessimism starts to flow back across you. I had forgotten our astonishing ability to not only assume the worst outcome as the most likely but also our trenchant views towards normally rejecting any form of positive prognostication. Now admittedly our American cousins can often be accused of the complete inverse, generally seeming to be more bullish in their attitude to the future over just about everything. As we all know, realism is somewhere in the middle, but at least the Americans seem to have a more sunny if sometimes unrealistic disposition in contrast to our own Lutheran air of undefined guilt and an inevitability that the worst may occur….

So before the British cloud of depression envelopes me perhaps we can point out some of the more salient positive features. Corporate results, for example, have generally been looking rather positive with many companies on both sides of the Atlantic having managed their way through the recession very effectively with lower debt, higher cash positions and profit figures fulfilling expectations. The British side of us will immediately point out that this has been due to tough cost cutting and low levels of reinvestment and capital expenditure which, although probably true, still means that companies are not teetering on the edge but are in fact managing themselves quite well, albeit through difficult times.

One sign of confidence has been the growing interest in mergers and acquisitions of which BHP and Potash has been the most recent high profile action. This wave has been predicated on two key issues – confidence and finance. The availability of corporate debt seems not to be a problem for quality firms with investors rushing to grab good quality paper even at record low yields. The confidence comes from companies who have moved from just survival mode, back into more of a growth viewpoint.

Corporate advisers are probably salivating at the potential deals to be done (and of course the fees to be earned) and all such speculation will of course be positive for equity markets as money chases the phantoms of the next possible target deal. The reality of much of this though is that although it may be good for the markets, these deals often actually achieve little for the economy or even, as we know from the figures, do much for the companies themselves as so few seem to create greater shareholder wealth in the medium term.

Another positive bit of news to receive as we came off the plane was that UK tax receipts were up and thus UK government borrowing levels were lower than expected. Add to this the somewhat startling rise in consumer spending and Mr Cameron will come back from the West Country quite heartened that the recovery is still there and has not faded away in the summer holidays. “Aye though” says my Scottish conscience “but these are just one month’s figures” – true, but just shut up. The truth is that everything will be on hold until we have the results of the Comprehensive Spending Review in October, but if this is a trend of ‘not as bad as we thought’ then the cuts may not need to be quite as Draconian as currently predicted.

Of course the other side of this has been the continuing strength in the inflationary numbers which although slightly lower, are still over 3% on CPI. This is the other secret weapon of any government – devaluing the real debt through inflation whilst capping as far as possible any increase on expenditure.
***
We can read whatever we like into the forest fires in Russia and the appalling floods in the Indus valley, but it seems that the increasingly erratic and lethal behaviour of the weather is almost becoming the standard. The immediate effect on markets was seen in the wheat price which spiked and created a surge of interest and speculation as investment vultures sought to benefit from the price movement on the back of the disasters. Sadly much of this gives investing in commodities a bad name but that is an unfair tag on those who see such investments as a strategic part of the broader investment asset allocation requirements.

I think that a broad basket of commodities has a very useful role to play in a well diversified portfolio. We believe that they reduce volatility, particularly at times of high inflation. There are however some well known investors who dispute whether commodities are investments at all as they are “economically inert and do not develop value... Those who buy and sell commodities are not investing; they are speculating that they know more or better than the markets know.” (Charles D Ellis - Winning the Loser's Game). Certainly there have been speculators, but market supply and demand will win out over time. Those attempting to corner the markets normally find themselves cornered - Bunker Hunts in Silver come to mind.

You may remember from your economics classes that high prices tend to lead to increased supply as producers increase production to increase their profits. We have had high prices in agricultural products for some time now and acreage and supply does seem to be increasing in most areas of the world. Farmers' incomes are increasing and they are investing in more plant, machinery and fertiliser to meet strong demand.

This could lead to lower prices in the future if supply outstrips demand. At present wheat prices are high again because of the current situation. These events will impact this year's harvest, but there is nothing to say that this situation will recur next year. There could be a good crop in Australia as well as the USA which could offset this and there could well be a good crop and falling prices next year. Also current supplies and inventories in the US seem to be significantly higher than before.

***
And finally............courtesy of my good friend John Whiting some English language problems identified at an international airport recently. Some confusion arose as a result of enquiries from a group of backpackers. Whilst standing in the queue one of the tourists came up and enquired with the single word “Chicken?” This was then repeated by the others almost as a form of mantra addressed to any who were in earshot to respond. The constant request for chicken would have seemingly been a delight to the local KFC franchise holder but unfortunately they would have been disappointed – it turned out that these backpackers were those global tourists from New Zealand and the request for a chicken was in fact merely the request for ‘Check-in’.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 16th August 2010

How low can it go?

“How low can it go?” – Whilst this phrase was once synonymous with the ever plummeting waistband of Britney Spears’ jeans, and the depths to which Kerry Katona’s drug-fuelled life could sink, it is a phrase now more commonly heard in the challenging world of bond investing.

As a seasoned bond holder, you will know that returns from bonds come from two sources - the income paid out in the form of coupons and capital gains made from price appreciation of the bonds. This price appreciation is made as yields falls. Currently the game looks potentially treacherous for bond investors. For one, yields on Treasuries and Gilts are ultra low already; between 1-2% for shorter-term bonds and 3-4% for medium term bonds. The prospect of any further price appreciation at times like this feels like pie in the sky. For another, interest rates having been cut to record lows to stave off recession have nowhere to go from here but upwards.

These are very real concerns and account for some of the reasons why this asset class remains about as popular as Tony Hayward at a 4th of July barbeque in Louisiana. Your inner investment voice of reason is no doubt pestering you to think about hunkering down in cash, after all you won’t be facing the principal losses that might confront you in bonds.
The Barclays Capital US Aggregate bond index, a broad index tracking US bonds, yielded 15% in 1981 and began each of the following decades with yields less than the last. This period has generally been marked by declining interest rates. The yield of the aforementioned index now sits at a paltry 3.2%. If interest rates and yields pick up from here, bonds will have to contend with capital losses instead of capital gains.

While it is undoubtedly hard to get excited about an asset class that has a dark cloud of likely loss looming over it, it may be worth considering that although investors expect interest rates to rise, the central banks may not hike interest rates very quickly in a straight line, if at all.

As we move through into the second half of the year, a clearer picture of global economic health is starting to emerge. The recovery in the US, which was running in fits and starts, now appears to be faltering. In the UK, deficit cutting is likely to mean lots of job losses in the public sector. Consumer confidence is crashing and house prices are falling again too. In its quarterly Inflation Report, the Bank of England (BoE) revised down the growth forecast and reported inflation will likely stay above target well into the next year.

The BoE and the Federal Reserve in the US have consented to keep interest rates low to protect growth and the prospect of an eventual hike is getting pushed further and further into the future. And so bonds appear to be dodging that particular interest rate risk bullet for now.

There is something else that can drive bond yields lower. Scary as ‘Quantitative Easing – Round II’ sounds, it is not outside the realms of possibility. The Monetary Policy Committee (MPC) may have no choice but to step in and support a weaker than expected recovery with an additional round of QE. If you remember, this was primarily done through the purchasing of Gilts and any further buying may work to support prices and deliver that much desired capital appreciation. The MPC’s equivalent in the US has announced just this week that it would be considering “reinvesting the proceeds of maturing mortgage backed securities in Treasury securities”. Isn’t this just quantitative easing by another name?

Scarier still is the prospect of deflation. Yes, that’s hard to believe when BoE has missed its inflation target for 42 out of the past 51 months. The Central Bank is in dire need of overhauling its forecasting models and is quite rightly taking much derision from market spectators. But there are many who point to spare capacity in the system and believe that inflation will fall to subdued levels as temporary effects such as VAT hikes and oil prices disappear.

The threat of deflation now poses a more serious immediate threat to the US economy than inflation. This dreaded D-word is akin to the He-who-must-not-be-named villain of the Harry Potter books. Under this scenario, prices of goods are expected to fall in the future and consumers, investors, and businesses postpone their spending which is lethal to economic growth. One need only look over to Japan and its ‘lost decade’ to see what happens when deflation becomes embedded in the economy.

Whilst the Gods of monetary policy, AKA Ben Bernanke and his fellow Federal Reserve governors work to put in place stimulus packages to prevent a Japanese-style outcome, the mere possibility of deflation should have bond investors rubbing their hands with glee. If inflation is kryptonite for bonds, then deflation is whatever the opposite of kryptonite is. Bonds become attractive because they offer guaranteed coupons and a predictable selling price while equities and real estate will suffer from falling prices and returns.

Of course, under any deflationary scenario, the phrase ‘cash is king’ becomes the mantra. Holding cash will allow you to have options in an environment where asset prices are dropping and a bargain or two may be had.

So back to the question of ‘How low can it go?’ – well, the answer to that depends on the outcome of another question; ‘Will we get deflation?’. Should it materialise and hang around like a bad smell, there is nothing to stop yields tumbling lower and lower.

***
And finally... Numerous inexplicable things have happened in the City over the last few years and many of us would rather pretend that a lot of them were the stuff of science fiction rather than fact. However, all the strange but earthly machinations of dealers, traders, financiers, brokers, underwriters, managers, advisors and bankers were put firmly into perspective this week with the news that the remains of a UFO had been discovered resting on the bed of the Thames just east of London Bridge. Quite apart from the question as to how anyone knows that the object, although undoubtedly unidentified, ever actually flew there are one or two more plausible explanations as to what it might be. Some theorists have suggested that it could be a wooden buttress from the old London Bridge, or that it might be the remains of a Second World War rocket. We think that our version is much more likely – it is the last resting place of a lorry load of collateralised debt obligations that their creator would rather stayed undisturbed for several generations.

The truth is out there!

Aparna Ram
Investment Research Analyst
Seven Investment Management Limited





Monday 9th August 2010

Going long is the new black

Oscar Wilde once said “Fashion is a form of ugliness so intolerable that we have to alter it every six months”. In fact, it was just recently reported to me by an enthusiastic friend that ‘greige’ is the new black. Greige, in case you are as puzzled as I was, is apparently a blend of grey and beige. It’s a relief one doesn’t have to stick to this bizarre colour for more than a few months. This fickleness, if you take a look, is everywhere. Enjoying your latest Apple gadget? There’ll be a newer, faster and more exciting version for you to play with in a few months. Taking out a mobile phone contract? Don’t worry, you can upgrade or change provider in 12 to 18 months. If we’re having such trouble committing to a phone service provider, then is it any wonder we are equally - if not more - fickle with our investments?

We may all believe the mantra about investing for the long term but our capricious investing pattern shows anything but adherence to this. The reality is that few people act with the long term in mind and stick with their investments over time. Instead, investors frequently turn over their portfolio, buying high and selling low. Why? Because people are addicted to the short term, especially that of short term performance.

It’s why city analysts focus on corporate quarterly earnings results. It’s why most manager bonuses are based on one year performance or less. It’s why money often chases whatever is hot, whether it be emerging markets, tech stocks, gold or China. But a positive return in one month can be followed by a negative return the next. Investors who regularly make short term decisions based on short term returns will generally sabotage their long term investment results, because short term returns are unreliable (and often contrary) indicators of subsequent performance.

Short term performance chasers tend to be emotional and impulsive. When the investment benefits are not seen straightaway, investors get frustrated and switch to a different manager or strategy. It’s not dissimilar to switching lanes when driving. You may think the lane to your right is moving faster, so you switch and cruise faster for a while only to soon come to a stop while the lane you switched out of is now moving faster. The problem is that short term performance chasing leads to underperformance not outperformance, in part because the turbulence caused by the changes has dealing costs attached!

This trend of switching out just at the wrong time explains why, according to Dalbar over the 20 years to 2009, the average private equity investor achieved a return of only 3.2%, barely beating inflation, whereas the equity market rose by an average of 8.8%. Investors should realise that short term performance is probably due to luck rather than the skill or lack thereof of the fund manager. It takes a certain talent and conviction to pick out undervalued or potentially exceptional stocks, and these picks may not come to bear fruit for months or even a couple of years.

It pays to be patient, and those individuals who are not vulnerable to short term performance obsession are more likely to be rewarded. Markets tend to reward those who accept the greater uncertainty that comes with investing over a long term horizon. Case in point - Warren Buffett; he keeps his investment philosophy as simple as possible, moving only when markets are so far in his favour that he can hardly lose. Crucially, he’s also incredibly patient and has built up his wealth over many years.

The longer the investment is held, the less likely the fund’s performance is based on luck and the more likely it is to achieve its investment objective and decent returns. This also means less worrying about 3 month, 6 month or even 12 month performance. That is not to say funds should not be held accountable for their performance. But when evaluating a manager, a greater weight should be placed on his long term accomplishments and a smaller weight should be attached to short term returns. In the realms of institutional management, five year rolling average returns are king.

In a volatile investment market such as the one we’ve experienced over the past two years, it can be hard staying committed, and not let fear and greed guide us into making a bad situation worse. But this is the time for a different and more disciplined approach.
First keep in mind your investment objectives. What are you trying to get out of your investment? What is your goal? Write down your planned holding period. If you need the money in three years, it makes sense not to invest in an equity fund. Conversely, if the money is needed in fifteen years time, underperformance in an equity fund for two or three years should not rattle you.

If you tend to sell at the wrong time because everyone else in the market is selling too, try to make a conscious decision to have a contrarian view. Investors tend to follow the herd because it gives them a sense of safety in numbers. It may also make sense to stay clear of high risk stocks or funds that lead you to panic and become a forced seller.

Lastly, evaluate managers on not just their recent performance. Rather than reading too much into last year’s performance, try and find funds that have low turnover and long manager tenure, investments that have trustworthiness, conviction, communication, transparency, governance structures and process. Buying funds that have invested in good personnel, research and risk safeguards are what will help you get value for money over the long term.

***
And finally...... Our Compliance Manager had a life changing experience this week when he and his family survived an air crash. With the passage of time the story will doubtless become a tale of derring-do and bravery in the face of extreme danger although in reality, and rather more prosaically, the actual incident involved a plane at Edinburgh airport which somehow managed to reverse into the perimeter fence, badly damaging the tail fin. It was a somewhat ironic outcome to a journey undertaken with vouchers issued as compensation for the airline’s earlier failings.

When interviewed about the incident, David said “My whole life flashed before me - although only at about five miles an hour.” He added “Being a Compliance Manager that was quite fast enough for me, thank you very much”.

David is very much looking forward to receiving yet more compensatory vouchers so that he can continue to demonstrate just how exciting life in Compliance really is.

Have a good weekend.
Aparna Ram
Investment Research Analyst
Seven Investment Management Limited





Monday 2nd August 2010

Great Expectations… (of the unexpected)

When you live a single life in this constantly busy metropolis of London, you’re reliant on certain things that are imperative to maintain the on-the-go lifestyle. Good friends who possess great energy, an ‘in’ with the party hosts at the best clubs, flat shoes to run around in (heels are to be kept in a hold-all so one can slip into them moments before making an entrance)...and last but by no means least, a functioning freezer. Yes, you did read that right. Being able to go from pack to plate in under five minutes is essential when you’re regularly racing the clock.

So when your trusty freezer that has been working splendidly for the last four years suddenly malfunctions, it’s a shock. Its occurrence is out of the blue and if not entirely devastating, it’s certainly pretty darn inconvenient. In the investment world, we call this type of incident a ‘tail event’. It falls under the realm of possibility but difficult to predict and not a frequent occurrence.

When the equivalent of a freezer breakdown happens in the markets, shares take on the consistency of melted Ben & Jerry’s ice cream, corporate bonds are like defrosted poultry, laden with multiplying bacteria and a source of food poisoning. The portfolio that you have carefully put together loses its structure altering into a soggy, congealed mess. Fortunately there is the equivalent of home contents insurance in the investment world.

The fear of a breakdown, it appears is very much instilled in investors’ psyches after the collapse of Lehman Brothers back in September 2008. Economists and Wall Street, despite their complex multifactor models failed to predict both the event and the extent of the fallout. This was the black swan that Nassim Nicholas Taleb had warned of; the widely held belief that only white swans existed until black ones were discovered in Australia. Many failed to realise that just because they hadn’t seen a black swan, it did not necessarily mean they didn’t exist. Now in the face of the Greek sovereign debt crisis and the possibility of the collapse of the Euro, demand for insurance products to protect investors against any cataclysms is surging.

Besides the sovereign debt crisis in Europe, many believe ‘tail risks’ may come from a mis-step in monetary and fiscal policy leading to hyperinflation from bailing out the global financial system. There are many clever clogs out there who have constructed insurance hedges that allow trading on these very fears. Many of the hedges are designed to increase in value as other portfolio assets (everything from stocks to the Canadian dollar) plummet.

One of these instruments has been getting a lot of attention lately and goes by the name of VIX futures. This is a future on the VIX or Volatility index created by the Chicago Board Options Exchange (CBOE). The VIX has become the default ‘fear index’ since volatility often signifies financial turmoil and can be helpful in evaluating potential market turning points. During the financial crisis of 2008, there was a spike in volatility sending the VIX index level up to 80. During the latter part of 2009, stock markets moved higher and a low volatility level in the region of the teens was reached.

The attractive thing about the VIX is that it has a strong negative correlation to many equities. That is you’re likely to make up part of the losses in one asset class with gains in another. The correlation between US large cap stocks and volatility is -0.65. A simple way to think about this would be imagine stocks went down 100 points, volatility partially offsets this loss by increasing 65 points. Deutshce Bank has created proprietary products with catchy names like ELVIS [replace mental image of the white-suited fat guy singing in Vegas with Equity Long Volatility Investment Strategy] that gain in value with investor expectation of stock market volatility increases. Having the benefit of foresight would be beneficial here as one cannot be entirely sure these products will work in a crisis when correlations all tend towards 1. In this instance, when stocks lose 100 points, so will volatility.

VIX options and futures, as well as credit default derivatives (iTraxx and CDX) and out-of-the-money index puts (on the FTSE, S&P500 etc) are just a few of the ways to hedge at the broader portfolio level in a similar vein as buying home contents insurance covers everything from jewellery to your Jimmy Choos to your Fridge-freezer. But all this comes at a cost. And this cost is rising. According to data compiled by Bloomberg, investors buying options that paid off should the S&P500 plunge were paying 75% more than those speculating on the S&P500 rising.

While these strategies undoubtedly have a place in the investment world, investors should be wary of overpaying for these insurance products. Buying expensive insurance is just like buying any other overpriced asset and a desire to be always hedged using these strategies can prove to be too expensive and not worth the trouble.

There are ways to hedge tail risk using dynamic asset allocation methods. The most obvious and common sense approach is to hold a larger cash balance. There are other traditional asset classes like short term Treasuries and Gilts that can serve as a hedge. A flight to safety during an equity or credit market crisis makes these attractive securities to hold if they are attractively priced. Right now yields are almost inconceivably low and prices too high to consider.

7IM’s investment management team mitigate unforeseen portfolio risk by tailoring cash to their perceived risk levels rather than that dictated to them by market consensus. Continuously monitoring economic developments, working through several different economic scenarios ranging in intensity, and not managing to a fixed model also allows the team to implement sudden and necessary changes in portfolios. Furthermore a layer of risk management is done via currency hedges as movements in currencies increasingly reflect risks in the macroeconomic environment. This of course, is all in addition to benefits of diversification our clients already receive by investing in a range of asset classes from equities and bonds to commodities and timber.

Yes, it is very hard to predict when that freezer will let you down or where the next Lehman is going to come from. But the important thing to remember is that while tail risks may vary in their origin, they can have considerable impact on your portfolios and some level of portfolio contents insurance will prove useful.

***
And finally….... A black bear has gone to extreme lengths to secure its meal. Attracted by the smell of a peanut butter sandwich, it managed to open the door of a car, climb in and promptly got stuck. The car rolled down a slope into the trees after the creature managed to knock the gear stick into neutral. Expect profit warnings from peanut butter manufacturers who now are prepared for bearish conditions to persist well into the second half of the year!

Have a good weekend.
Aparna Ram
Investment Research Analyst
Seven Investment Management Limited



Monday 26th July 2010

So who is Frank Dodd?

Forget Frank Dodd, it is in fact Dodd Frank that we should remember. Chris Dodd is the chairman of the US Senate banking committee, and Barney Frank (who should be a cartoon character, surely) is chairman of the House (of Representatives) financial services committee. These are, if not the authors, then certainly the names responsible for the new US financial regulation bill. So why should we care? Well to start with what happens over there will at least ripple over to our financial world and of course our own financial services regulatory structure is about to undergo a major overhaul and reform.

The very mention of regulation normally induces an automated yawn for many, but in fact it is probably the most vital issue for all of us as participants or customers to ensure that we have a trustworthy, reliable and sound investment and banking industry. It affects us all. It will be especially interesting to see if our initiatives take a similar route and remember that regulation is not a form filling bureaucratic exercise, but would focus more on supervision which works as part of the industry itself to help it develop and provide suitable facilities in a controlled and risk measured manner.

The US plans can be best described in five key areas:-

 Consumer Protection. A new Consumer Financial Protection Bureau will be established within the Federal Reserve. It would aim to tackle miss-selling of credit cards, loans and mortgages, the last part of which lay at the core of the original housing loans problems.

 Derivatives. In order to improve transparency and risk control they will ensure that settlement for such contacts are cleared through central clearing houses. At least then in theory you could have a better oversight over the amount of risk being taken on by counterparties. Additionally the banks would have to divest themselves of their derivatives trading businesses.

 Resolution authority. Effectively this will allow the authorities to step in to seize and control any organisation and even wind it up if it is facing impending failure. This then manages the Lehman-type events and would more effectively manage any such impact to avoid an industry wide catastrophe.

 Systemic risk regulation. Here a Financial Stability Oversight Council of regulators would be established and be chaired by the Treasury Secretary. This would have the task of identifying systemic risks to the industry and particular participants and even require ‘living wills’ from those that might be considered at most risk to ensure that they could be managed down if necessary.

 The Volker Rule. Yes the Prince of Darkness (no, not Peter Mandelson) Paul Volker, the ex-head of the Fed before Alan Greenspan, seems to have had his way and had agreed that deposit taking banks shall no longer be involved their own proprietary trading (prop desks) and be limited to only small holdings of hedge funds.

These are very significant changes and will have some quite dramatic impacts on certain banks that have for many years built up their prop desks as very useful back door profit centres away from their normal public role of normal lending facilities. These should now be regarded as separate businesses – and after all, get banks back to what they are supposed to be doing – providing financial services to their clients, not to themselves.

And finally........ Boulder, Colorado, USA. Tragic news from the States as we hear that the days when a citizen could address their local Council wearing only underwear may be over. The Boulder City council will vote on new decorum rules in September, seven months after a resident stepped up to a microphone in his boxers.

The rules were already under review (in fact very close scrutiny) but that incident led to a proposed ban on undressing during meetings.

It's not the first time the university town has wrestled with how much clothing is enough. In April, the city barred teens and adults from showing their genitals in public. That could put the wraps on two annual traditions that involve running or cycling naked. But the council declined to outlaw topless females, despite complaints about a woman who gardens in a thong and gloves. Yet more of our freedoms being taken away – especially with the secateurs(!)

I am off to Sri Lanka for a few weeks having not been there for thirty years when the fighting first started on that unfortunate island. In the meantime my most talented colleague Aparna Ram has kindly agreed to take my place. Have a lovely Summer.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited





Monday 19th July 2010

Cocking a CNOOC?

At the time of writing this, the BP gusher appears to have been capped. If true and sustained, then in Churchillian terms this is “Not the end. It is not even the beginning of the end. But it is perhaps, the end of the beginning”, because this is just the stopping of the core damage and nowhere near the stopping of the financial damage. It seems almost inevitable that the BP we know today won’t be the same BP this time next year. From where we are and what we know today, BP is unlikely to go bust, unless this ‘spill’ becomes an unstoppable flow. However, it would seem to be far more likely that they will wish to demerge certain key assets before populist politicians seeking retribution decide to take precipitative action.

It is quite possible that BP thus seeks to find the best value way of finding new partners for its US operations or even selling it off altogether. At the moment names like ExxonMobil and Apache have been in the frame, however a more controversial but probably more valuable move would be to bring in the acquisitive Chinese oil giant CNOOC. Now would this cause a ripple of nerves amongst the political pigeons in the US if domestic oil fields could be transferred to another foreigner? As a ‘strategic asset’ would the US authorities block it as they previously did with the proposed CNOOC takeover of UnoCal the Californian based oil company? Yes, probably.

However, of course there would be a difference here as of course BP is a British registered company and thus what interference would be allowed? Nevertheless, given the previous somewhat predatory moves by US authorities into the corporate world, then this has to be quite a serious risk. In the core of the capitalist empire, direct state interference seems to be coming more acceptable.

***
So what can we see for the rest of the year – well for the global economy it can be best summed up as a ‘growth deceleration’ – still growing generally but at a lower level. From a level of 4.8% in the first half, this will likely pull back to a still respectable 3.8% in the second half. So yes a dip and a double dip, but not a recession. However, for many of the Western nations, it still looks like showing signs of being more of a slow grinding recovery but with the air and atmosphere of a depression.

The economic figures that are coming out of the US elsewhere and most recently in China last week seem to be pointing to a slow down but as yet to nothing worse. There have been some doom mongers that are predicting a dramatic crash in the People's Republic, but that is to not understand the nature of such a vast nation and the innate momentum of developing nations. Anything below 7% will feel like a recession in any case and a slowdown from their current racing pace to something slower is necessary to avoid bubbles bursting and is to be expected.

Goldman Sachs have been researching this area and comparing it with other historical ‘slowdowns that are not recessions’. They have come to the conclusion that in most cases, not unsurprisingly, markets discount such fragile recoveries and slowdowns, and that in looking through the period of economic slowdown, enable equity prices to rise.

However, they cite three areas that could be the ‘this time it’s different’ excuses. Firstly the exceptional financial and housing crises that have so eroded both economic and market confidence. Secondly the effect of governments’ policies in terms of monetary policy - in that if they are all contracting too quickly, this will suck out financial strength and demand. And thirdly the degree to which the Chinese economy is actually slowing down.

As the months go by, whilst these issues may not be actually resolved they are being actioned and managed, and thus it would be their conjecture that markets have been ‘tracking at the lower end of historical outcomes’. This then would be supportive for markets for the second half and provide greater confidence for a marginally overweight position in global equities.

***
How good to see the return of that delightful old City term of ‘cold shouldering’. This rarely used phrase has all the resonance of school and ‘being sent to Coventry’. However of course, it is there to act as a ‘Mark of Cain’ on unscrupulous City practitioners and basically says that you are not to be trusted.

The Takeover Panel first used this term in the 1970’s as a method of informal punishment for an individual for not obeying the City’s codes of gentlemanly conduct. Since then it has become a formal sanction but one which can prove very effective in a business community – it hurts far more than a fine – it’s your reputation and your pride that are damaged. The fine may just hurt you; the sanction makes you an outcast and will quite rightly kill your City career.

However, with the anticipated changes to other regulatory bodies coming through, it is possible that other more effective forms of discipline might be introduced such as the ‘knee in the groin’ for insider trading and a good old fashioned ‘head butt’ for mis-selling. White collar crimes getting some black eyed discipline at last?

***
And finally................ Workmen painting white lines on a road left a gap for a dead badger because they said it was not their responsibility to move it.

The animal had been killed about a week before on the A338 near Downton, on the Hampshire-Wiltshire border.

Hampshire County Council said the workers did what they thought “was best" because it is the district council's job to remove carcasses.

The badger has now been removed and the painting will be completed on Friday.

Perhaps I could achieve the same with the yellow lines outside my house. Any other road kill available?

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited





Monday 12th July 2010

Double Dipping?

I always thought that a double dip was some terrible faux pas at a cocktail party with limp celery and the warm houmus. Now I know better – it is of course a non specific economic term that appears to have now become common parlance. It certainly has little precision, as some imply that it could mean a dip back into recession and others that it is a mere slowdown. Either way though it seems to be talked about in the terms that imply that only dark days and doom lie ahead.

So are we likely to have a dose of double dipping? The answer is quite likely yes as many of the forward indicators seem to be rolling over from their previous upward trajectory, but whether that implies another collapse down into recession is unknown - but from the current situation this may well be avoidable. Subject though to the ruthlessness of the government’s heralded cuts, we are in fact more likely to see something altogether far duller in the form of a slow and grindingly unappealing and somewhat insipid recovery.

Personally what I have read so far into the political and economic prognostications is that we are seeing a lot of bravado and pontificating in order to create the atmosphere of economic danger. This is quite intentional by the government as they come out with their incantations of stern determination and intention – they must look in control of the situation in order to reaffirm international confidence. This has already had an effect with Sterling rising quite surprisingly and the threat of a debt downgrade seemingly to have receded.

One area that has surprised many has been the swap around in the attitude to the UK Gilt market from one of almost unanimous condemnation only a few weeks ago, to now being regarded as an international safe haven - at least for the time being!

So what can we all learn from this? Well certainly that the ‘given’ knowledge is not always correct and that there is always a need for suitable contrarian views to be at least considered. Such events have an amazing ability to ensure that egg is firmly placed on faces – something I know to my own cost. However, I am pleased to say that I am in good company for such mistaken views. Who am I to question the prognostications of the highly regarded investment ‘guru’ Jim Rogers when he said not too long ago “Sell any Sterling you might have; it's finished.” Or the world’s largest fixed interest manager (Pimco) whose founder Bill Gross said that UK Gilts were "resting on a bed of nitroglycerine". A slavish adherence to both such comments from such influential people would have resulted in some disastrous investment results.

Yet another reason for having a broad asset allocation policy so that diversification avoids the worst of such failures.
***
The equity markets have been extremely skittish of late and have made it challenging for investors to look through the fog banks of economic fear, and see through to the value of the underlying companies. From fears of impending Chinese bubbles bursting, through to weakened US growth and Euro concern, these have all been enough to frighten investors away. However, for those actually willing to look at the strength of many companies, especially the larger multinational ones, buyers have been coming back in. In fact a quick review of the larger UK and European companies reveals a rising trend in the amount of cash being held by these companies. Many have already bolstered themselves with debt issuance last year and are keen to remain out of the hands of unreliable banks who may have little consideration for maintaining credit lines in times of any further systemic banking failure. Economies and companies are obviously related but they do not usually move in tandem. The result has been that for every fall we have been seeing a switchback of prices flicking back after a few days – not very comforting but a sign of markets being unable to have the confidence of which way the economies are moving.
***
The Coalition Government has already been making noises about potential sell offs to try and raise more money for debt control. Sadly of course we managed to sell off the family silver some years ago and we appear to be down to the butter knives and teaspoons. The value of NATS (the Air traffic controllers), the Dartford Crossing and the High Speed 1 Line are all of some value but not on the scale of a national utility. Of course there is always the more sensitive Royal Mail, and even the Tote - which has been talked about as being ready for sale for as long as I can remember. However there is of course one other major piece of silver that we seemed to have missed behind the sofa.

This, of course, is Network Rail. You will remember that the last government renationalised – sorry took into administration the old Railtrack, which was originally floated back in 1996 in the dying days of the last Tory administration. Back then it was floated with just £2bn in equity and took on frankly a creaking and rusting infrastructure which quite literally fell apart a few years later with some horrific crashes and fatalities.
The failures of British Rail and Railtrack were though, mostly as a result of the indifference to the railways from nearly all the post war governments for any proper investment in infrastructure and capability.

Back in 1999 the annual public funding into Railtrack was just £900m. Compare that with the £5-6bn that Network Rail has been using up – not unsurprisingly then we now have one of the most up-to-date railway structures in terms of maintenance compared to most of Europe.

So what could be the effect of selling this off? Well the debt (over £22bn) could be transferred off the governments book which would be quite helpful and then potentially a sell off could raise possibly a figure in the range of some £14bn.

I wonder if there is anything else behind the sofa?
***
And finally.....the wisdom of youth. My colleague Alex Scott had a conversation recently with his daughter Millie (aged 4).....
Millie: why were you on the phone so late?
Daddy: because Daddy’s markets are being strange and we’re not sure what to do
Millie: why are the markets being strange?
Daddy: because some people are worried about the banks
Millie: why are they worried about the banks? I’m not worried about the banks...
Daddy: I’m not that worried, but some people think the banks might run out of money
Millie: that’s silly; they haven’t run out of money. If they have I think they’ll find some more. [Quite sensible until here, and I think we’d agree with her analysis, even if she doesn’t know about the ECB].
However, Millie continues: they could go scuba-diving in a wishing well....
Of course - now I am surprised that with all the world’s great financial minds, not one has thought of that bailout measure.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited



Monday 5th July 2010

A careful balancing act

I am very grateful to an old friend, Jonathan Davis, for an excellent column in last week’s FTfm in which he addressed the issue of portfolio rebalancing. This might sound a somewhat tiresome and technical subject but it is actually one of the fundamental elements of effective and disciplined portfolio management. In his article (which might well be better reading than mine) he quotes the well regarded US fund management group Vanguard who have various research papers on this subject.

The key point about portfolio rebalancing is to ensure that the spread and percentage of asset classes in a portfolio are kept within a given proportion – and why is that important? The answer comes down to the level of risk that investors are willing to accept. In Vanguard’s research paper they cite data from 1926 to the present covering the US equity and bond markets. What their figures illustrate is that if you had a portfolio with a split of 60/40 with just equities and bonds, then if there was no rebalancing discipline during that time there would have been an equity creep (that is also an unofficial term for certain stockbrokers I know) such that you would have ended up with 97% in equities. This ‘equity creep’ occurs as equities should rise in value over time. As a result this would now have become a very high risk portfolio – for a client who probably would have signed up for something a lot less risky.

Thus by having a discipline of controlling the pressure of rising equities, the risk levels can be maintained and controlled. This then gives rise to the subsequent questions of how often to rebalance and at what trigger of percentage variation would be appropriate.
What this in effect means is that irrespective of external pressures, investment managers will be forced to sell out of certain asset classes and buy others despite their own personal views or prejudices. This could be both good and bad news, so for example when equity markets get into a slump and your percentage drops, then portfolio rebalancing would force you to buy ‘cheaper’ shares – buying when others are scared! Equally of course if you are too rigid in rebalancing you could be forced to sell the asset class you like and be forced to buy the asset class you hate!

So what to do? Well some do nothing at all – in which case you are left with that tiresome equity creep again. Or alternatively...

Some rebalance to exact percentages at given times of the year. So if you are up at the Summer solstice you will not be alone as there are both druids and asset managers casting runes and buying and selling because it is a given date in the year. Strange but true, as some investment houses and programmes operate quarterly or half yearly rebalancing investment regimes.

The effective answer is as ever somewhere in between. A most effective structure would be to ensure that there is still a rebalancing process but to allow the percentage of various asset classes to move within a given range and only then will you need to act if they breach the extreme bands on either side. This gets away from the dogma of rebalancing with druids according to a given date (and the extra costs as well), whilst still ensuring that the equity creeps are effectively contained.

Does it work? Well the answer has to be yes – and that is what we at 7IM have done so far with some success. Investment rebalancing is a necessary discipline if carried out in pragmatic manner – but it is certainly not a blind dogma.

***
A date to pencil in – Wednesday 20th October at 12.30pm. This is when we will finally get to see the results of the Government’s Comprehensive Spending Review. This is going to be crucial in order to see how the Treasury team of Boy George and the red headed ‘Beaker’ are going to shape the country’s finances over the next four years. Obviously it seems that their plan to date is to get all the bad news out as quickly as possible, and then to threaten fire and brimstone in the hope that by the time the election comes around (assuming the coalition holds) there will have been either enough growth and/or enough inflation to have reduced the structural deficit to such a level that they can show that they don’t need to do all the cuts after all. Bravo and then all you have to do is get re-elected!

Good plan so long as there is some growth somewhere for someone to buy our exports and that we are not beset by an extended bout of deflation. Inflation we British know all about and how to (painfully) address it – but deflation – that’s more of a problem. It’s taken the Japanese twenty years not to fix it.

***
And finally........... News from Illinois. Police said a 30-year-old woman apparently fell out of a third-story window, landed on her parked car, and then walked into a neighbour’s house, where she fell asleep on a couch for two hours. A spokesman said the woman bounced off the hood of her car, walked through a neighbour’s open garage door and went into the house.

The neighbour found her asleep two hours later and called 911. The woman, whom police have not identified, was taken by ambulance to hospital where she was not suffering from any life-threatening injuries.

Now just try explaining that on your car insurance claim.

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited
***
P.S. A word on the football – the England rugby team won the World Cup under the guidance of the talented Clive Woodward having undergone a root and branch development plan looking right through the entire process from mental attitude to individual personal as well as team behaviour. Additionally the British Olympic cycle team which swept the board at the Beijing Olympics won as a result of a similar in-depth planning and restructuring plan covering even more detail from equipment and clothes design, to mental strength and team appreciation. Something to learn here?



Monday 28th June 2010

Butcher or Surgeon – and how much collateral damage?

It’s obviously still too early to say whether Osborne’s budget has been a success or not, and sadly of course we will never know until its effects are well under way. As certain highly respected commentators have mentioned, cutting too deep into the economic body could injure some vital organs and cause further unintended damage, but too little and firm confidence in the control of the economy will ebb away. However, whatever your view, politically he really had no choice but to get as much of the dire news out of the way as swiftly as possible, even if the effects are for most still illusory. Be assured that 25% cuts in departmental budgets will be very significant and quite considerable job losses are inevitable, not just within the state sector itself but also in those closely related private sector areas as well. This will stretch from the local newspaper and sweetie shop through to the ubiquitous consultants that seem to pepper our civil service. This will be our economic collateral damage.

Of course there are a range of ring-fenced areas which are apparently sacrosanct, but I don’t think they should be too complacent – fences have knot holes. Whether Education or NHS, both will find that they come under greater pressure - especially from the vague and ill defined term ‘front line services’.

Of course much has been left to other committees and quangos to report back. These are a very helpful device to delay any announcement and to blame someone else – especially if they are led by a well known member of the Opposition who may have held some middling ministerial rank – a good wheeze that one.

But just in case we should forget – the debt continues to rise and the most recent calculation is that it is growing at a rate of £5,000 per second. This is from the ‘national debt clock’ on the website www.debtbombshell.com, which rather graphically shows the current total debt (as of the time of writing Friday 25th June) is an eye watering £914,352,000,000.00. They also say the interest paid for 2010 will be in the region of £42.9 billion - which translates as a mere £117,534,246.58 per day in interest. I will cover the 58p.

Yes we must learn to live within our means. Will it succeed? The answer is probably yes, albeit with some considerable collateral damage. However, there is also that wonderful British mitigating item which the boy Chancellor and his red headed partner the Beaker look-alike, will be secretly banking on – a bit of old fashioned British inflation. It knocked billions off for John Major, and was probably the most significant contributor to that regime’s recovery from their 8% deficit. Obviously we have a far larger amount to address but nonetheless it could have similar effects this time, even at levels of inflation at 3.5%.
***
Meanwhile the G20 group of nations is meeting in Toronto as I write. I hope by the time you read this that this essential meeting has come to a constructive conclusion. However, what I suspect will come out will be the differences between the Obama administration continuing to argue for further economic stimulation to ensure that the recovery does not fizzle out, as opposed to the likes of the Germans and British focusing on deficit cutting and debt reduction.

If there is one key focus to look for, it is any mention of the G20’s commitment not to raise trade barriers through to 2013 – we don’t want to see any repeat of the old US Smoot Hawley Act in 1930 which condemned the world to falling trade as a result of trade barriers.

***
And finally............ Sacramento, California. The California Legislature is considering a bill that would allow the state to begin researching the use of electronic license plates for vehicles. The move is intended as a money maker for a state facing a $19 billion deficit.
The device would mimic a standard license plate when the vehicle is in motion but would switch to digital ads or other messages when it is stopped for more than four seconds, whether in traffic or at a red light. The license plate number would remain visible at all times in some section of the screen.

In emergencies, the plates could be used to broadcast Amber Alerts or traffic information.
It is envisioned the license plates could not only be just another advertising venue, but also as a way to display personalised messages - broadcasting the driver's allegiance to a sports team, for example. Or presumably just for sending offensive messages to the car behind?

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited






Monday 21st June 2010

Corporate and Political Hypocrisy

What started as a corporate mess has quickly become a political quagmire for BP. The result has been not just a financial disaster but a reputational one as well. It is too early to be able to write the history of this disaster with the suitable amount of perspective, after all there is still going to be much to unfold over the coming months.

However, what we can see have been actions and reactions of a major corporate struggling to manage such a series of events in the glare of twenty four hour global media all hungry for comments, errors and slip ups. Mr Hayward has been criticised for some ill advised comments but frankly anything can be taken out of context and twisted to imply whatever the media outlet wants it to be. This I know from my own experience.

The problem for BP has not necessarily been the amount of their action or inaction, but their inability to finally ‘cap’ the problem in every sense. Thus as the tragedy continues the issue metamorphoses from a corporate and environmental issue into a political one. BP has clearly stated and repeated its determination to stand by its promises of repair and rectification and that there will be no going back on this. The comments therefore that not enough has been done seems astonishing when you see what actually is being done and with no obvious alternatives being suggested. It is not as if there is anyone else that has either the technical ability or experience in the US government to add to the engineering oil expertise already being applied. You can’t send in the marines here to solve the problem – butch bravado and bravura does nothing to stop a burst pipe a mile under the sea.

Sad to say BP has now been thrown into the torrid vortex of American politics which is building up into a concentration of ferocity which will culminate in the October elections. BP has become the President’s goat to beat for blame.

Tony Hayward then has been right to stand there and take the flack - much of which has become very personally directed - and has been acting responsibly and committed, quite correctly, BP to act properly to eventually resolve the issue.

Compare this then with the corporate hypocrisy of Bhopal and the Union Carbide disaster which in turn became an environmental atrocity against the local population. Only last week were there two local managers sent to prison – after 25 years! At that time estimates of between 2,259 and 15,000 were killed by the leak of the deadly methyl isocyanate gas and a possible 8,000 further lives in the years thereafter. The ground still apparently is poisoned and people are still suffering from the effects of that pollution. Where is the corporate responsibility here? Where was the CEO, where was the clean up, and where was corporate responsibility? Or was it because it was ‘over there’ in India so it didn’t matter – after the camera crews had left. Before the US becomes too obviously critical of foreign firms not acting responsibly, perhaps it would be better to look closer to home to reveal some unpleasant truths. Apparently an Indian arrest warrant for the CEO Mr Warren Anderson is still pending as the US authorities seem ‘reluctant’ to proceed. This was ‘resolved’ by a payment of $470m for the disaster to the land, the people and the environment – is that corporate responsibility?

BP may be no saint and has had a poor track record after the Texan refinery fatalities and explosion in 2005, as well as the Alaskan oil pipeline leaks, but here is an example of where good and responsible management should be demonstrated and applauded. Although crude oil is an awful substance to deal with, it is at least a naturally occurring substance and not a man made toxin like the methyl isocyanate gas.

***
Time to use an old film title...’Return of the Zombies’. To this you can now add two words – companies and countries. The concept of a zombie operation is that it is so indebted that its sole purpose and capability is now only to pay off its debt. The unfortunate Greeks find themselves in this position in that all the nation is currently able to do is just service their existing debts and, without growth, will increasingly find it impossible to start reducing it. Hence the need for radical economic surgery and inevitably, in my view, debt restructuring – no one will dare use the term default but would far rather come up with some softer descriptions – either way there will very likely have to be write downs by their creditors and especially the banks.

However, closer to home the situation may well be more pressing. Companies which geared up, either by their own design or more likely by ‘imaginative’ finance deals, find themselves laden with a level of debt which seems immovable. Some of these have come by the design of certain Private Equity houses, and others by irresponsible high street banks pretending to be private equity houses – stand up HBOS. There are those Private Equity firms on the side of light who finance the restructuring and rebirth of many companies: there is however also the dark side of the ‘barbarians at the gates’ for whom corporate rape and pillage is a way of life.

Currently for companies like Crest Nicholson their restructuring has left them unable to make effective and timely decisions as 90% of the shares are now controlled by the lenders. “Although we can grow in current facilities, it takes a long time to get decisions approved” said Stephen Stone, CEO of Crest Nicholson. In such a position a company’s ability to save itself is very restricted and with the cost of refinancing rising (along with the required arrangement or amendment fees) the result is bound to be an increase in the number of insolvencies. This too will put further pressure on the lenders and especially for those banks trying to rebuild their balance sheets.

***
And finally.......the naming of England has always been a slight concern to me. The Scots obviously come from Scotland, the Irish from Ireland and the Germans from Germany, so where did the Engs come from? They sound like something from Tolkein. Now if it is a derivation of the Angles then maybe we should be Angland or more appropriately Angerland – now that fits, especially after an unpleasant Budget.

And now for some silly stories about the World cup that have come to my attention......
A South African jewellery company was in talks with a Spanish and a British club to sell what the firm claims is the world's most expensive football, a 2.2 kg diamond-encrusted football.

"I am negotiating with the owners of two European clubs. They want to take it back to Europe," Yair Shimansky, chief executive of Shimansky Jewellers, told Reuters by phone.
He did not want to divulge the names of the competing clubs ahead of concluding the deal sometime next week but confirmed they came from Spain and Britain.

The ball was unveiled on Thursday in Cape Town, ahead of the World Cup opening game between South Africa and Mexico in Johannesburg on Friday. Shimansky said the jewels -- 6,620 white and 2,640 black round brilliant cut diamonds -- were all sourced in South Africa, a major diamond producing country.

The ball, containing 3,500 carats and estimated to cost 20 million Rand (£1.8 million), was the exact size and dimension of the Adidas ball players from 32 competing teams in the finals would play with.

"We did it with the World Cup in mind. It was a two-and-a-half year project," Shimansky said.

I thought they spent all their money on players?

And another......’Elephant blocks U.S. squad on trunk road.’

The United States training session ahead of Saturday's World Cup Group ‘C’ opener with England was briefly delayed after an elephant blocked the route of the team bus.

A U.S. team spokesman said the squad had to wait around five minutes while the elephant ate food from a tree on the road leading from the team's hotel.

It was the second time on Friday that the U.S. team bus was blocked by an elephant on the road, the spokesman said.

One of our better tactics perhaps?

And one more…..The African vuvuzela trumpets, hugely popular with World Cup fans in South Africa, are no longer welcome during Dutch training sessions as their continuous din drowns out Netherlands’ coach Bert van Marwijk.

The Netherlands had an open training session on Wednesday, obligatory under FIFA rules, which was attended by 3,000 mainly Dutch and South African fans, many sounding their vuvuzela plastic horns.

"It was annoying and I could not make myself audible," van Marwijk told a news conference on Friday. "That way training has no use if I can't address my players."
The vuvuzelas have become a heavily discussed issue since they featured for the first time for a worldwide audience during last year's Confederations Cup.

"I heard them for the first time during the Confederations Cup though I have to say I got used to the sound of it after a while," van Marwijk added.

"At this moment we don't know if there will be any more open training sessions but if we train with a crowd then (it will be) without the horns."

Spoilsports.
Have a good week
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited






Monday 14th June 2010

Football – It’s all about sport – No it’s the economy stupid

Love it or hate it, everyone will get some benefit from the World Cup. The South Africans hopefully will enjoy their role as host and despite the huge cost of the infrastructure, they will at least be able to showcase that beautiful country to the rest of the world.

However, what happens elsewhere? The media back in Britain divides themselves into those writing paragraphs of assured glory that England is already the rightful holder of the cup, and that everyone else has just been borrowing it, as opposed to the others who write in the absolute confidence that England will be knocked out soon after the first kick is taken. So time to hum that 1956 popular (and quite infuriating) football associated tune written by the song writing team Jay Livingston and Ray Evans “Que sera sera!” Time for me to leave the room screaming.

Of course the usual clichés will be coming out about the amount of tasteless lager and cardboard pizzas being purchased south of Hadrian’s Wall, but in the retail area the economic impact is really quite significant.

A report from the Centre for Retail Research which looks at the spending for the 19th FIFA World Cup reveals that the tournament could provide a much needed cash injection of potentially £987 million for the UK retail industry, but only if England can survive the second round of the competition. In addition to this we could also possibly see a further £110 million spent in all the pubs, bars and cafés that are covering the event. All of this could prove very helpful for the new government in the run up to the emergency Budget.

However, let me take this good news even further on the assumption that the talented Wembley Wanderers ‘go all the way’ (wrong phrase I think), then consumer spending could rise by as much as £2.01 billion. This would apparently boost total retail sales by 4% for June and July from £50.14bn to £52.15bn. Someone has even been able to establish, although I have no idea how, that every goal could be worth a £126.3m for UK retailers.

So what are we buying?

 Obviously the largest area of retail spending for consumers will be food and drink with £250m being spent on drink (including non alcoholic ones – that’ll be just the one Coke then) and £209m on food by the end of round two – and this gorging could rise £874m if England does get to the final.

 Television and audio sales are the next area of spending with many apparently using this as an excuse to upgrade to HD or 3D sets. Sales are predicted to account for 25% (£250m) of World Cup spending by the end of round two and also rising to a possible 30% (£620m) if they reach the final.

 Other areas will of course include those ever popular and attractive ranges of memorabilia and souvenirs (£50m) such as those delightfully crafted plastic hats, also the sportswear and official kit (£200m), presumably in XXXXL sizes for the more relaxed and expansive armchair sportsman. We should also add in the extra barbecue and garden furniture that will be purchased (£28m) just in case we didn’t already have enough. Oh yes and these figures rise to £95m, £360m and £62m across those sectors respectively again if England reaches the final.

 Online spending is likely to increase with estimated sales of £116m (again rising at the final to £205m) and this will likely be the highest level of online participation for a major international sporting event. Not surprising really as the dedicated fan does not actually want to get up during the entire event (except to answer the door for the pizza delivery).

 Pubs, clubs and cafés would benefit and a place in the final would generate £305m. Apparently 20% of World Cup viewers will watch at a pub.

 Betting companies are expecting an increase of revenues of £1.2bn.

As for the business impact? Well, the usual assumption is negative as it is assumed that everyone bunks off to watch the matches, and in fact a ‘YouGov’ survey found that of those full time workers aged 18-45, some 38% are planning to be out of the office for their matches. Sensible employers will look at this from the right end of the telescope and allow and even encourage supporters to watch. There is in fact a very sensible business reason from this in that we know from previous experience that if the national team wins, the error rate has dropped by some 10% and in an earlier business we could calculate that this made a difference of up to £15,000 per day!

Some companies have even mentioned the event in their business statements as having a material impact. These include 8 bookmakers, 7 media companies (including ITV and WPP), some retailers like JJB Sports and DSG (PC World & Currys) and a couple of pub groups. So the World Cup is not just a game – it’s an industry which has a material effect on the economy, and further than this the ability of the team to win will impact directly on economic spending, our behaviour and our efficiency. Sport is not just an amusing pastime, it is a vital part of economic value and morale – and boy do we need it now!

Other side effects?

Increase in A&E attendance as a result of over excitement with the television controls, barbecue food poisoning from under-cooked chicken, along with sundry cooking tong burns and attempts at accidental lager drowning.

Also for some this could be an excellent few weeks for the quiet viewing of favourite films at the cinema to catch up on some blockbusters without having to sit next to the popcorn chewing chimp I normally end up next to.

Certain restaurants may well be offering encouragement for non fans, and booking at certain eateries may well become easier. So whether you like the game or not you cannot ignore it – and in fact we should all encourage it.

So on the assumption that it is all plain sailing from here on, we can look forward to a very useful fillip to the economy (although truth be told most of the expenditure is probably just being pulled forward from later in the year and we may well see a significant pull back after the event) just at the time that we are having a thoroughly miserable budget.

Add to this Mr Murray’s impending victory at Wimbledon and the nation will be united under a haze of champagne topped lager and fresh strawberry pizzas. This of course will be followed the next week by our celebration of the first international pig flying championship.

If for any reason things don’t go according to plan then we must prepare for the worst and manage the fact that there are going to be unsold rotting pizza mountains to recycle back into cardboard and lager lakes forming in central England.

I also wonder how many of the North Koreans will actually go home? Depending on how far they go in the competition, they may not wish to. Mind you if it is just the mother-in-law that is being held as some surety for their return then the beaches of Natal may just have a greater appeal than another few years north of the 38th Parallel.

***
This week - some more key data to pore over:

 On Tuesday 15th we get the UK Consumer Price Index and the Retail Price Index to see if the inflation trends are rising.

 On Wednesday 16th UK jobless (which fell last month by 27k) and the claimant (4.7% last month) counts.

 However, also on Wednesday but more importantly, the US Housing start figures will show if the confidence is continuing in this so sensitive area.

 We finish the week with the US Inflation Data.
***
Have a good week and good luck to whomsoever you support.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited







Monday 7th June 2010

The Tax Man Cometh

Margaret Mitchell in ‘Gone with the Wind’ wrote “Death, taxes and childbirth! There’s never any convenient time for any of them”. Convenient or not, June 22nd 2010 is probably an important date that you will want to schedule into your diary. This is the date when the new coalition government will tell us of its plans to haul a nation, which is currently riddled with debt, into prosperity through taxes and spending cuts. It has already signalled clear intentions to raise capital gains tax for non-business assets to be more in line with income tax. So far, details have been scant on the type of ‘non-business assets’ that will fall in the net, and of the ‘generous exemptions’ promised to entrepreneurs.

The result of all this? Stockbrokers up and down the land are now more popular as confused investors make a beeline for them. The fear is that these new changes adversely affect small investors and savers who have saved prudently for their retirement and now find that the goal posts have moved.

There has already been some movement towards capital gains tax products over the last couple of months as many high earners sought to lock a CGT rate of 18%. It is precisely this behaviour that the government is hoping to discourage with the new (expected) tax rate of 40% or even 50%. However, according to the HM Revenue & Customs, 53% of all people who paid CGT in 2008 did on gains of less than £25,000. Hardly stratospheric if the whole point is to reprimand those who are out to make a quick buck by making speculative investments!

The primary message from 7IM’s own investment advisors is to make one of two choices - pay tax now at a rate of 18% or pay tax later at a rate of 40% (or possibly higher). On a £100,000 gain, paying CGT now would mean parting with £18,000. Paying tax later would on the other hand, mean paying HM Revenue £40,000. If the decision to take the CGT hit were to be delayed only to be stung with a 40% tax rate later, the portfolio of investments would need to rise significantly in value in order to get you back to the same net proceeds from sales. In that vein, many of 7IM’s clients are choosing to pay now rather later. However, this does not mean just cashing in assets. It allows the proceeds to be reinvested immediately into a more diversified, risk-managed strategy aligned with financial planning aims and objectives. Of course there is one ‘damned if you do and damned if you don’t’ scenario which would materialise if the new CGT rate were to be applied retrospectively from April 2010!

The second message is one of tax planning as in doing more of it through use of tax efficient wrappers such as offshore bonds, ISAs and SIPPs. Unitised portfolios such as the multi-manager OEICs run by 7IM can also be used to avoid paying elevated rates of CGT on individual stocks and shares. Money can be switched between underlying funds and managers without being subject to a tax charge. This of course not only allows for effective tactical asset allocation (the ability to respond quickly to market movements and take advantage of investment opportunities) but also makes it easier to manage CGT allowances for clients on an ongoing basis. Non-unitised investments have the added burden of being overwhelmed by CGT rules. A reluctance to pay tax at the new rate may mean holding on to rising shares (and gains); the cost would be throwing asset allocation between equity and bonds off kilter and putting oneself in a higher unsuitable risk profile. In summary, good financial planning is essential as we transition through the tax changes, and efficient personal strategic investment decisions will help you go a long way in mitigating that tax tail which threatens to wag the investment dog.

Small investors aside, the new Chancellor’s budget will also have implications for another key group – the entrepreneur. A Stateside study released this week by the Kauffman Index of Entrepreneurial Activity reported that in the US, 2009 had the highest level of entrepreneurial activity in 14 years, even exceeding the number of start-ups during the technology boom of 1999-2000. Challenging economic times can motivate those who find themselves made redundant to start up new enterprises, and increasing entrepreneurship can be the key to an economic recovery. Although similar data is not available for the UK, a Deloitte report last year found UK entrepreneurs having a very tough time. Many companies in the study reported that sales growth will take a backseat to survival, a third said banks had reduced their lending facilities and nearly a third informed of their plans to sell within the next three to five years.

The ‘generous exemptions’ promised to entrepreneurs say Deloitte needs to “stretch to include employees. At present, many employees do not qualify for the current entrepreneurs’ relief – yet their involvement with growing companies is vital. Employee tax breaks help to make a big contribution towards getting good people to take reasonable risks with growing businesses”. Quite right too!

Venture capital firms are also vital in assisting companies which are young or helping a great idea come to fruition. Many executives and employees of these firms invariably end up backing these projects with some of their own money. Entrepreneurship involves taking risk and the new coalition must take care to remember that while it is taking important steps to tackle the deficit, it must not stem growth in this sector – a sector that will play a robust part in any recovery to be had. It aims to boost a part of this sector by providing a 20% tax relief on investments (max £500,000) in Enterprise Investment Schemes (EISs) while also allowing rolling over CGT for three years. It’s important to remember here that this only delays the paying of CGT and does not help avoid it.

If the CGT were to increase to 40%, UK enterprises would find themselves with one of the highest rates in the world. Only Denmark would rank higher at 62.9%. But will this move work to bring in higher tax receipts that the government so desperately need? According to one study by the Adam Smith Institute, analysis of US CGT data shows the CGT increase has had the opposite to the desired effect – i.e. rises in capital gains tax has led to falling capital gains tax revenues. While it reports that fewer significant shifts in UK CGT rates make it difficult to draw clear conclusions here, it does note that the reduction of CGT on business assets to a rate of 10% held for two years did have a positive revenue effect.

The Institute also disputes the theory that lower CGT rates will result in people shifting income to capital gains, pointing to countries who have a CGT rate of zero but still manage to raise significant revenue from income taxes.

Whatever happens come June 22nd, the markets will still have plenty to worry about in the weeks ahead. Sovereign debt crisis, employment data, Central Bank meetings and political uncertainty will be the bigger picture and making a capital gain in this environment may itself be a big thing, let alone paying tax on it!

***
And finally…..... my colleague Amy Halford has pointed me towards this bizarre story as further evidence of the worldwide recession taking its toll. A man dubbed ‘the grim eater’ has been warned off by undertakers in New Zealand for gate crashing up to four funerals a week, even taking home leftovers in Tupperware containers. Perhaps the food was to die for!

Have a good week.

Aparna Ram
Senior Research Analyst
Seven Investment Management Limited





Monday 31st May 2010

Fighting Fear

Whether fact, rumour, hearsay or tittle tattle, whether from an ill-informed or respected source, when fear grips a situation sometimes even the strength and sheer logic of facts will get washed away in the flood of a frenzy.

Certainly there were times last week when the equity markets around the globe were being smacked around with all the erratic behaviour of a pinball machine. Of course we shouldn’t really be surprised as we are constantly bombarded with news, views and numbers from all directions which as a result, but for the double glazing, would have had many heading for the windowsills.

The equity market correction over the past few weeks has been both vicious and painful. I think it is fair to say that it has primarily been the concerns over European sovereign debt have driven this volatility and at the moment it is far from clear that this nervousness is over: however, the huge Eurozone financial dyke and support package announced a week ago is a major step in the right direction, in terms of buying time for governments to address their deficits (which many are now doing, more aggressively). For once it is showing tangible evidence that the authorities appreciate the seriousness of the situation. There is of course more work to do on that front in Europe and especially with the redesigning of the control and disciplines around the Euro.

Elsewhere – the UK’s £6bn planned budget savings are just a drop in the ocean, but the long journey back towards fiscal responsibility has at least begun and now we have to wait for the Budget later in the month to see if a credible plan can be laid out. This will particularly have to address the issue of social welfare expenditure and benefits.

The sabre-rattling across the Korean border has come at a bad time too. That situation needs monitoring but a major escalation currently looks unlikely but with Mr Kim logic and common sense are in short supply and in an unstable situation with the potential for domestic collapse, frankly anything could occur.

Thus markets are likely to remain volatile, and there is a risk of another leg lower at some stage, but at current levels equities offer value on some measures. Time to look through the fear to some financial facts. Dividend yields on major indices in Europe are higher than government bond yields: this was the norm until the 1950s but has only been seen twice since until the current episode – in March 2003 and March 2009: both occasions marked major turning points. Corporate earnings are making good progress, and equities offer reasonable value on a PE basis, with major European markets trading around 9-10x earnings (the FTSE at 5000 trades on 10.2x 2010 estimated consensus earnings, 8.4x 2011 estimated). The global recovery is still progressing – with flickers of concern, for sure, such as house prices in the US, but on balance still pointing towards growth in the world economy for now – though doubts remain about 2011.

The picture is still mixed and the risk of another episode in the Eurozone government borrowing saga should prevent us getting too carried away. However, at current levels the value on offer in equities is enough for us to justify an initial increase in risk in the 7IM portfolios and we have bought a small initial position in LSE-listed FTSE call warrants (currently 5% out of the money, with around 6 month expiry).

Facing fear with a contrarian view is always controversial but for a small proportion of the portfolio is interesting potential for our money.

***
Interest rates and Inflation. The fear of inflation for the UK led the OECD to warn The Bank of England that interest rates may have to rise to 3.5% by the end of next year, and that this rise in rates should start no later than the last quarter of this year. This of course is in stark contrast to the comments made by The Bank that inflation will start to fall in the middle of the year and then drop well below target and even remain there for several years to come. So who is right?

Any significant rise in rates could certainly weigh heavily on the fragile UK recovery and the authorities would probably prefer to keep them as low as possible for as long as possible even at the risk of further inflation. Remember politicians quite like a bit of inflation because of its mercurial ability to dissolve debt over years (whilst also devaluing the economy), but of course with an ‘independent’ Monetary Policy Committee such decisions are not directly under their control – but do not underestimate their power of influence.

So who do we believe? The OECD has by no means an impeccable track record of forecasting (nor has anyone else for that matter) but certainly the concern that the UK is building up inflationary pressures for 2011 and beyond has been a growing consensus in the City.

***
Next week will see the release of rather comically named ‘non-farm payrolls’ in United States. These will tell us how many new jobs were created in the US economy in May with the consensus of analysts hoping to see a robust increase of 500,000 and a drop in the unemployment rate to 9.8%. There is relatively little economic news out of the UK, although we will get some statistics on the housing market, which unfortunately seems to have been slowing down a little of late – good news for first time buyers perhaps, but not for those looking for signs of a strengthening economy. Finally, there is a meeting of G20 finance ministers and central bankers in South Korea next week. Let’s hope Mervyn King and George Osborne don’t have to put on their tin hats!

***
And finally............another glorious headline to be savoured.... ‘Man sucked into sausage seasoning machine.’

Danvers, Massachusetts. Police said a cleaner was taken to a hospital after being sucked into a machine at a sausage-making company. The accident happened as the man was cleaning the vacuum-type machine that is used to season the meat at DiLigui Sausage Co. Police said the man's head and shoulders became stuck in the machine after it somehow activated while being cleaned.

So probably we were right to have been suspicious over the contents of certain sausages and with a name like DiLigui there are immediate connections with The Sopranos.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited






Monday 24th May 2010

Learning to Sell Austerity

We all know the bad news is coming. The budget of 22nd of June is unlikely to be pleasant either reading or listening for any of us. However the new government has for the moment the brief period before the halo of honeymoon popularity fades all too quickly. Already, apart from the backfiring joke from the previous 1st Secretary of the Treasury that there was no cash left, the blame is inevitably being cast at the previous lot. Well that is to be expected and is understandable, but merely blaming someone else is not going to solve the problem.

Now is the time for some forceful leadership to inspire the nation. The coalition government will soon learn that public memories are short and that the deficit is now their problem, their responsibility and they will be loaded with the blame.

Time for some effective imagination and even marketing of what has to be the worst product you can think of – paying back the debt. There is an interesting model that we can see in Canada where in a previous financial disaster they chose mostly to cut costs rather than raise taxes, but these very unpopular measures were on the whole accepted by the people as being a necessary evil that they should all bear for that time.

So, some marketing ideas for the Era of Austerity?

 We don’t have to have a War Bond, but an ‘Austerity Bond’ to pull in public savings for the national debt. A bit cheesy maybe and also its size would be a mere nibble out of the truckle of debt, but that is not the real point. The effect of marketing to all to help save the country passes a strong message out of the importance and urgency of the problem and the need for the country to pull together. Such a bond could have some additional features of a tax bonus in five and ten years especially if transferred into a pension or long term savings vehicle.

 A Refundable Time Tax - A payment according to wealth and/or income for a limited period of years of, say, a 3 or 5 year period, with an automatic enshrined end date and even a potential claw back. Although a tax, it would thus have a clause for a gradual repayment maybe by way of increased allowances in the years after the ‘age of austerity’. Again this could be enhanced if put into a pension or tax wrapper.

 Communication - Clear measurement of the target amount – in numbers and graphics – to clearly get the message across and thereafter a clear message on the progress to date. Yes again a bit corny and potentially seen as no more than the ubiquitous ‘church thermometer’, but a clear way of not only showing the problem but more importantly showing the country the progress being made.

The message of pulling together and motivation to all participate is not an easy one – but for a new government relying on goodwill and others’ blame will soon land them in trouble.

***
Last week the world seemed to get a bit more scary. From Mrs Merkel’s internationally castigated moves against ‘naked short selling’ which worried the markets (without necessarily taking into account her domestic issues and audience), to worries over the LIBOR spreads as well as headlines of the imminent demise of the Euro, all these acted to scare investors away. Certainly there have been some nasty jolts as recent peaks have been knocked off certain equity markets, but have the Euro fears really been enough to stop the economic global recovery or even become reason of further global economic contagion? The answer is - unlikely. For example, 70% of the Eurozone economy is made up of just 3 countries – France, Germany and Italy, and unless we are anticipating their economies being derailed then much of the Euro fear may well have been overdone.

Is there a need for reform? Of course - and this may well be the trigger for such moves. Could some weaker countries adjust to an internal ‘Euro-Lite’ with a domestic ‘Lewes Pound’ until they are more stable? Possibly. But none of these issues mean the end of the currency.

The panic over the Euro’s value and the shouting headlines seem at odds with reality as we are merely seeing a return to a level of some four years ago before the period of significant US$ weakness, and frankly a weaker Euro will be a welcome boon to the German exporters.

So as ever following the line that you sell when others are complacent and buy when others are fearful, I would urge you to look at the strengths and opportunities in certain Eurozone nations. Take for example all those apparently dull old German industrial infrastructure giants – Siemens, BASF etc. These often ignored beasts are the strength of the German economy in exporting high calibre and value goods to the rest of the world and especially in the field of power generation and infrastructure building.

For investors wishing to invest in Germany’s leading companies there is the iShares DAX ETF, which covers the largest 30 listed companies in Germany or the db x-trackers DJ STOXX 600 Industrial Goods ETF which invests in the leading European industrial companies throughout Europe, including many of the exporters mentioned above as well as leading exporters like ABB, the Swiss/Swedish heavy engineer and Zodiac of France, the aerospace company. As always, it’s the broad and global diversification in a portfolio that is so important and that is what we focus on here at 7IM. It just shows that even in nervous markets you can identify value, especially when others are looking the opposite direction.

***
This week watch out for the UK GDP figures on Tuesday which will give the new administration some idea as to how our economy is growing or slipping back. On the same day the US consumer confidence data will be available and hopefully negate some of last week’s more negative views. Another figure some may not be familiar with is the US Case/Shiller housing data. The housing figures gave us the first sign of the problems that occurred – these figures may show us whether the underlying issue of US housing valuations are slowly improving.

Also look out on Thursday for the US GDP numbers and the well respected University of Michigan confidence figures on Friday.

***
And finally..... Are you fed up with vending machines which just give you the usual dull choice of warm drinks and stale chocolate bars? Well here is a new alternative that could really brighten up your time hanging around in railway stations.

An Abu Dhabi hotel is offering guests the chance to change their cash into gold using a vending machine that dispenses 24-carat bars and custom-engraved coins.

"The function of the machine is quite easy," German entrepreneur Thomas Geissler said of his "Gold to Go" machine, which currently takes cash only. "You put cash in -- or later on credit cards -- and you take your gold out."

Ex Oriente Lux / AP

Installed recently, the ATM-style machine is open for business at the Emirates Palace Hotel. Every 10 minutes, the machine updates its prices to reflect the changing value of gold - currently more than $1,230 per ounce, and dispenses small gold bars weighing up to 10 grams each.

A marvellous idea but one that might have certain security drawbacks in the shadier areas of Waterloo station. Still the idea of getting a small gold bar out in the evening to stroke or comfort you all the way home could really cheer you up on a miserable November evening.

Have good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited






Monday 17th May 2010

Power and Responsibility

It’s all very well being able to wield power, but it is the responsibility that goes with it that is more important. As we have seen with the banking crisis, the irresponsibility of key officers and directors who seemed to be almost omnipotent was astonishing. No one seemed minded to criticise the sartorial elegance of these faux financial emperors. Was there any thought of responsibility or was it purely focused on the need for the return for the bottom line of the Profit & Loss account – well, as we all now know – the answer was yes.

There are of course many highly regarded courses, and probably qualifications, on ethics and behaviour, but all of these count for nought unless the culture of the company concerned and its employees actually live and breathe such standards. This is not “woolly and cuddly” thinking, but rather a very practical business discipline which will positively differentiate those who are willing to compromise their standards from those who are determined to “do the right thing”.

However there are other areas, and not just banks, where such responsibility lies. Take the Ratings Agencies. These beasts vary in size from big brand international concerns like Standard & Poor’s, Moody’s and Fitch, through to quite local and focussed evaluators of funds, services and capabilities.

The concept of such evaluators is not only extremely useful, but also in many cases vital in order to provide an independent and objective view and opinion on the state of any particular market or participant. However the fulcrum issue here is the quality and independence of such ratings.

As we now know, the credit agencies were more than happy to bestow AAA ratings on billions of dollars of less than perfect assets, many of which in fact turned out to be thoroughly toxic waste. The evidence? Of the AAA rated sub-prime mortgage backed securities in 2006, 93% has now been downgraded to junk status. Just what kind of reliability is that?

Many of these agencies really started life quite respectably as market researchers providing assessments of products for people looking to invest or use those facilities: somehow some of these have now morphed into something very different. It seems that some were in fact being hired by those people actually selling the debt packages and to provide a third party seal of approval.

Here then is an obvious conflict of interest and open to abuse. What was becoming apparent was that various firms were selecting their preferred rating agency according to the likelihood of which one was going to give them the most favourable verdict. This system is thus inherently open to corruption and abuse, and this has been corroborated by a US Senate subcommittee which has been turning over some stones to reveal some very unpleasant truths.

These agencies of course have a broader influence and one which the UK is facing right now. There has been much talk of the UK’s Gilt debt potentially losing its AAA status. This though is not just a matter of national prestige and pride – it can have a very real impact. Most of the time, I find that the output of such agencies normally provide us something as helpful as yesterday’s weather forecast – really useful. In fact of course you can just bypass the agency and see how say UK debt is being judged by the price in the market. If the cost is rising then the risks are rising in which case the rating has already been lost. Who needs an agency for that?

No - what though is more vital for the UK is that if the AAA rating is lost, then there are many bond funds around the globe that are only allowed under their mandates to hold AAA debt. Thus any downgrade makes UK debt a forced sale, which in a bad market can make things considerably worse.
The impact of this will be higher interest rates, which will have a direct impact on companies by reducing investment, a direct impact on the household sector by pushing up mortgage rate and a direct impact on the government by pushing up the interest bill. By the way, the annual interest bill is climbing as the government’s debt rises. The interest bill is forecast to be £42 billion for 2010/11, up by £11 billion (assuming Gilt rates stay flat). £11 billion is more than we spend on probation services, courts and prisons put together or is equivalent to an extra 2% on VAT.

So what should be done? Control of who pays the agencies – i.e. not the product seller? Centralising all ratings through a regulatory body? Either way this must be addressed. The system was corrupt and they were part of that corruption.

In the meantime our new Chancellor of the Exchequer has a clear target – don’t lose the AAA credit rating.

***

So much for a smooth Summer; volatility is back and across many asset areas around the globe. The “sand devils” I have previously referred to are still twisting and are sapping away the confidence of the recovery from last year’s nadir. A bit more cash might well become a more comforting asset over the next few months.

Even the enthusiastic commodities markets have been seeing a fall back, with iron ore prices down some 8% from a two year high in April. This is thought to be on concerns about falling demand from China as that nation continues to try to cool the pace of growth of their economy. Whether this is the start of a trend or just a blip remains to be seen, but either way it is certainly a sign of lost confidence that has rippled around the globe.

***

This week watch out for the inflation data for the UK and the Euro zone on Tuesday to see if we are seeing any further upward pressure. The following day the new government will be interested to see the CBI Industrial Trends Survey to see if the recovery is gaining any traction. However it will be Friday that some key data will be out on the Public Sector Net Borrowing figures - the term eye-watering may well come to mind.

***

And finally..............I love persistence, and this year’s award must go to a South Korean woman who earned a driver's license after 960 attempts.

Yonhap News Agency reported on Thursday that 69-year-old Cha Sa-soon finally passed the driving part of the test last month. South Korea requires a written test first, and Cha took it nearly every day since April 2005 before passing last year. If she had left it much longer she would have failed the eyesight test.

And one more... Why we need cigarette butts! Hong Kong (Reuters) – Chemical extracts from cigarette butts can be used to protect steel pipes from rusting, a study in China has found. In a paper published by Industrial & Engineering Chemistry Research, scientists in China said they identified nine chemicals after immersing cigarette butts in water.

They applied the extracts to N80, a type of steel used in oil pipes, and found that they protected the steel from rusting.

The chemicals, including nicotine, appear to be responsible for this anti-corrosion effect, they added. Corrosion of steel pipes used by the oil industry costs oil producers millions of dollars annually to repair or replace. According to the paper, 4.5 trillion cigarette butts find their way into the environment each year. Apart from being an eyesore, they contain toxins that can kill fish.
China, which has 300 million smokers, is the world's largest smoking nation and it consumes a third of the world's cigarettes. Nearly 60 percent of men in China smoke, puffing an average of 15 cigarettes per day.
So they may clog your arteries but at least they won’t rust. I feel healthier already.
Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited






Monday 10th May 2010

Beware the Sand Devils

I am sure you have seen in those natural history programmes those mini sand twisters that dance around with seemingly little impact - that is until they hit you. Well last week we saw what happened when several of such sand devils combined to cause a global fear of a devastating financial tornado. Each on their own could have had an effect but their combination suddenly brought markets up short as they saw the potential for something worse.

It was not just a sand devil of the fear of sovereign debt and default from Greece and the others on the fault line, but also the actions by the Chinese to try and rein in parts of their galloping economy. Add to that the other sand devils of the new Australian tax on the miners, the worries about BP and its Gulf disaster and we had all the making for a global market shudder. Suddenly our parochial election didn’t seem so important and even the Icelandic volcano couldn’t get its picture in the paper.

The sovereign debt question has still yet to be properly addressed. The key issues come down to the very structure and operation of the Euro. As the USA perfectly demonstrates, you can have at least fifty different economies but all operating under a generally common financial set of disciplines. Some of those states can and do, like California, get into financial problems, but as they are part of a cohesive common political structure, it works!
In contrast the Eurozone does not have much commonality and certainly very little discipline. It is thus going to be fundamentally flawed until such fissures and cracks in the system are addressed. This though is not to say that the Euro has been a failure. Certainly not. After all it managed to dispose of the world’s most useless currency, the Belgian Franc. In fact as a mark of its success it is held as a reserve currency to a much greater extent by overseas governments (roughly 14% I understand) then say Sterling which now languishes at some 4%. However the talk of some two years ago that the Euro could potentially replace the US Dollar as a global reserve currency now seems laughable.
The answer must not be another Euro fudge, but rather some currency surgery either to establish formal financial disciplines across its members or restrict membership to an inner core of willing participants, leaving the rest still members of the Euro zone, but with a form of ‘Euro-lite’ of a domestic currency pegged at a lower level until such time as they can mature into full membership by way of qualification rather than whimsical Euro–dogma.

***
As I write the politicos are no doubt arguing over what sort of party construct can we have for our new coalition world. Whilst they all work out ways to see how they can grab power, might I suggest that the wisest move might well be to let the others ‘win’ for the moment.

Could this not be an example of a Pyrrhic victory for the winner, in that whoever wins this election and is forced to take the most unpleasant and unpalatable of actions, might well find themselves at the wrong end of the popularity polls in a few months if a further election is forced upon a weak and unstable government. Mr Cameron might yet thank the day he did not get a fulsome majority first time around, and rather wait for the unpopularity to fall upon whoever does take power and starts to enact the most unpleasant of financial medicines.
***
This coming week have a look out for the Bank of England’s Quarterly Inflation report, which is going to give us some interesting insights into their thinking on the inflation outlook. It seems that we are potentially storing up some inflationary pressures but may be not until sometime in 2011. The following day we will get the UK trade figures as well, which with a bit of luck might just continue to show the improving effects of a weaker currency on our exports especially from the SME sector.

***
And finally.................if you are bored this weekend – why not go to a fair? Well if you are happily married then don’t read on. However, if the joy of wedded bliss has faded into something more acrimonious, may I suggest a visit to Milan this weekend?

Seemingly Italy is holding its first divorce fair, offering services such as life coaching and beauty advice to a booming number of separating couples in the Catholic country.

The organisers said the fair (www.puntoeacapo.it), which will be held in Milan, aims to help divorcing people start a new, happier life.

"Smiling is key to this fair, which also offers serious, practical advice for often dramatic situations," Franco Zanetti, who created the event, told Reuters.

The services include divorce planning, anti-stalking help, and “new look” tips, the organisers said.

Echoing similar initiatives in the United States and elsewhere in Europe, visitors will also be able to subscribe to divorce gift lists at department stores in Milan.

A growing number of Italian couples file for divorce every year, according to Italy's statistics agency ISTAT.
More than 130,000 couples split or got divorced in Italy in 2007, up more than 3 percent from the previous year, ISTAT said.

On the other side, the number of marriages nearly halved since 1972 to around 246,000 in 2008.
Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 3rd May 2010

And Now to Work

So as from this Friday the limp bunting can be torn down and the faded posters finally ripped up. Now is the time to end the pontificating and politicking - now to start the ‘doing.’ The question is, though - what exactly? After all the debates and interviews, as far as I am concerned none of the parties have laid out a credible or realistic set of policies for the restructuring of the economy – including either managing the debt or rebuilding for growth. At the risk of missing out on another invitation to a round of limp canapés and warm white wine, I can’t see a statesman or stateswoman amongst any of them. However, the electorate will have voted and we will have to deal with what we have been given, but please spare me the toe curling quotes and platitudes on the steps of No 10. We are in the poo – so get on with it.

There was a delightful BBC reporter who added to the oft quoted phrase “the elephant in the room” that had been ignored in the campaign, by saying that it had in fact become so relaxed that it had now made itself quite comfortable being ignored and was now sitting happily on the sofa having a cup of tea and tucking into the digestive biscuits. Well now is the time to disturb the somnolent beast called ‘Deficit’ and devise a plan to try and get it out of the room - and eventually out of the house.

They won’t be able to just shoot the beast as it will make far too much mess, and for heaven’s sake don’t frighten it, or it will trample everything it its sight. No, we need a careful plan to cajole it out of the room and down the corridor. However, we are probably going to have to knock down some walls and lose some of our treasured possessions in doing so. Only then will we be clear of this unfortunate animal - but it is going to take some time for it to be achieved and to see it finally trumpeting off down the street onto the economic savannah.
Actually I am not sure I can stretch that analogy much further, but I hope you get my gist.

***
I must apologise if I find myself repeating comments on certain subjects, but the frustration at the continuous incompetence of some of the authorities never ceases to amaze me. I am a proud Scot, Brit and European but have issues with all three. The latter element is behaving in the most astonishing way. I have written for months about the forthcoming currency storm around the Euro and to the astonishment of many, the authorities still don’t seem to realise quite how stupid they are looking in the face of markets questioning the effectiveness of their actions and decisions.

Last week we found out that ‘swift action’ in Brussels about the currency meant in fact two weeks. We saw the amazement of some that sovereign debt questions would spread to other weaker nations, and we saw the usual trite excuse that this was all the fault of currency speculators. Wake up Eurozone! Your currency has been generally a success and is held as a greater reserve currency amongst governments than Sterling, but you should recognise that there is a design fault which could have all the impact of a Toyota safety feature.

A decade ago I wrote questioning just what would happen if you asked the Germans if they wouldn’t mind paying out for the profligacy of less responsible nations. The answer was clearly no then and it is the same today.

It is time for the Euro equivalent of the Diet of Worms, which in 1521 looked to address the religious fissure that was created by the tracts of Martin Luther. The Euro has some great strengths and has provided some significant benefits, but unless these fundamental flaws are addressed then it surely will continue to be pushed towards financial failure and go against one of the key reasons that the EU was formed in the first place, which was primarily to create greater political and financial harmony and strength between the historically bickering European fiefdoms.
***
As well as an election this week, there are some key sets of data which may well give that last nudge for the electorate in one direction or another. On Tuesday we have the Nationwide Consumer Confidence Index which will reflect the temperature of the population and I think for many the feeling of some economic recovery is already being tempered by a nervous view that we are inevitably in for some bad news to come regarding domestic spending and taxation. Also we have on the same day the Purchasing Managers Index for Manufacturing, and the previous day the same measure for Construction. These are generally forward looking indicators and again will provide a theme for where the economy is going over the next few months.

Internationally though, it will be Friday that will have the data of the week with US Unemployment being announced (currently at 9.7%) and the important Non Farm Payroll numbers, which will show just how much re-hiring is really going on. If the recovery is to continue then Jo Shmo in the States is going to have to get a job.

***
And finally.............Loo paper has not figured especially often in my thoughts when it comes to business or even security, on the basis that its function and use is fairly obvious. Thus the headline from Lincoln Journal Star in Nebraska did attract my attention.

‘Police say man wrapped in toilet paper robs store.’

It was thus inevitable that I had to read on....”LINCOLN, Neb. A man who concealed his face by wrapping his head with toilet paper robbed a Lincoln convenience store. Police said the man was armed with a knife when he robbed the store around 10:30 on Saturday night. He escaped on foot with an undisclosed amount of money from the safe. Capt. David Beggs said that no one was injured.”

Now from this I presume one can deduce that this must have been soft roll rather traditional shiny single sheets and presumably only single ply given the time of night of the robbery. I also assume that this plan could have gone seriously awry with any light shower or even a slight breeze. I will now hold it in far higher regard than before.

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited






Monday 26th April 2010

‘New Banks for Old’

Despite my moans, even I have to admit that our state owned banks have been making some significant progress in their repair work. As I have mentioned (and praised) before, the dynamic action around Northern Rock has been both timely and effective with the result that most of the government’s loan has already been repaid, the bank itself split between good and manure bank, recapitalised and is now strong enough to have the government protective guarantee removed. Good work in short order.

The work at Lloyds and RBS however has not been as timely. To be fair the tasks are of a totally different scale and proportion. These two leviathans are still in intensive care and although I would have preferred to see more dramatic surgery at an earlier date, diligent treatment is being undertaken. You can only have sympathy for the team at Lloyds which was the bank with the most respected credit control structure in the UK. For them to have been effectively dumped on by their inept senior management must have been appalling, especially as they have then had to trawl through all the bad and doubtful lendings of HBOS.

For Daniels and Blank to have taken Brown’s tainted ‘shilling’ to take over HBOS was a commercial crime of astonishing proportions. Not only was it ridiculous to think that they could ride rough shod over the mortgage monopoly rules, but also to recklessly ruin the UK’s strongest domestic bank – and of course just at the moment when we needed at least one properly functioning bank as we struggled out of recession.

RBS too have been taking action to repair their damaged structure and have made some significant progress already. Profits, at least on an operational basis, from these restructured banks are quite likely to be eye wateringly positive, mainly though as a result of increased margins – something which will no doubt rile many smaller companies who have seen the cost of their facilities go up significantly.

Over the next few months we will also be hearing news about the various branch sell offs and disposals and no doubt the names of Metro bank, Virgin and Tesco will all be mentioned. As part of this, it is interesting to see the investor confidence in British banking as currently being displayed by the likes of US tycoon Wilbur Ross who has committed £100m to the new Virgin Money banking plans. It is quite likely that Virgin will be making a bid for the 318 ‘ex Williams & Glyns’ RBS branches to be their core, but it will be interesting to see who else is going to be making an offer. It will prove just how much confidence there really is in domestic utility and commercial banking in the UK.

***
The two track global economies appear to be coming into even greater contrast as the data of the two spheres show them to be moving at very different trajectories. The Western nations and Japan are growing but often at a grinding pace, with fears of deficits, deflation, and low demand. Interest rates show little sign of moving up for fear of forcing economies back into a double dip recession.

Meanwhile the Eastern developing nations see all the opposite signs, with bubbling economies, inflationary concerns and an increasing pattern of rising interest rates. India, Australia, Indonesia, Singapore and China are amongst those that have already raised interest rates as they act to try and rein in their speed of growth, bank lending and fend off asset prices bubbles and inflationary pressures. As we know, interest rates are not a precise surgeon’s scalpel but a rather blunt mallet of an instrument and as a result some moves will be effective, others less so. The effects of such moves often take months to circulate through the system and economists in both the East and West will be waiting and monitoring these effects closely.

On a related subject, it has been interesting to see the increasing number of other nations who are now pressing for a Chinese change in its currency policy. I think a change will be likely and not only as a result of the more recent quiet diplomacy of Tim Geitner, the US Treasury Secretary, but also as a result of pressure from other developing nations. Both Brazil and India are feeling the effect with the head of the Brazilian central bank, Henrique Meirelles, saying that it was “absolutely critical for the equilibrium of the world economy”. Even Singapore has been highlighting the benefits to China itself of such a change – now I suspect it is now going to be down to the inner wrangling of the Chinese communist oligarchy.

***
Some likelihood of encouraging news this week on the US economic front, I hope. Tuesday will show us some US consumer confidence data which, along with the University of Michigan Confidence Index of Friday, will give us a clearer indication of the strength of the recovery. Friday will also give us the US Q1 GDP figures which are likely to show still positive growth but the rate of increase will be a key measure to watch – and that will be crucial for the market sentiment. Keep in mind investors who will also be then quite focused on the direction future interest rates take – the decision on that will have already been made two days before by the Federal Open Market Committee.

***
And finally.............at a time when we are all wondering whether we can really trust our politicians, there comes a story of longer term political malfeasance and downright unreliability.

It has been reported that New York City's oldest library says one of its ledgers shows that the first U.S. President, George Washington has racked up 220 years' worth of late fees on two books he borrowed, but never returned. One of the books was the ‘Law of Nations’ which deals with international relations. The other was a volume of debates from Britain's House of Commons. Both books were due on Nov. 2, 1789.

New York Society Library head librarian Mark Bartlett says the institution isn't seeking payment of the fines, but would love to get the books back. The ledger also lists books being taken out by founding fathers Alexander Hamilton, Aaron Burr and John Jay but we are not told if they too are on the list of miscreants.

Typical politicians – you can’t even trust them with a book.

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 19th April 2010

Too Many Manifestos: Too Little Leadership

I normally try to restrict my comments to investment related issues, but I feel a rant coming on about the insipid publications that were presumably supposed to inspire us to vote for any of the major participants. Although the parties may have their own colours, frankly their programmes and policies seem to be coated in a bland magnolia. It appears that their spin doctors have, at least for the moment, ordered them all to be as non-controversial as possible and not to step too far out of line.

So let me give them some issues to consider. This election provides these politicians with a remarkable opportunity to show some real leadership, initiative and courage, and to come out with some ‘radical common sense’ (sorry, one of our own 7IM tenets) ideas to lead us out of this financial morass.

There are too many areas to cover but let me mention just a couple. Our leaders will (or should) want people to save more and take more responsibility for their own family affairs, especially with regards to retirement and old age. So why not radically reform the savings systems? Why not rationalise the Child Trust Fund, ISAs and Pensions all into a single saving scheme which is simple, transparent and flexible in terms of its use from providing security for a mortgage, through to education, health care and retirement for the family – most of which currently fall back to the government. Add to that a form of real compulsory saving as we have seen in Australia (as opposed to the UK’s own Ponzi scheme - also known as National Insurance) and a more certain stream of longer term savings can be created.

This in fact could save on the duplication of various operational charges, be simpler to understand and vitally transfer costs, power and influence away from the government back to those who should be more responsible for looking after ourselves – us!

Also why not face reality – we are all living longer and usually healthier lives, so realistically why on earth do we retire at 65 when on average we are going to have quite often at least another 25 years to live? So raise the retirement age as a standard default (allowing for certain health exceptions) to a more logical age of 70. At the same time the civil servant final salary schemes will have to face the reality that they are now unaffordable and will need be adjusted to contributory structures.

One other area to mention must be that of Smaller to Medium Size Enterprises (SMEs). After the government (who now employs directly and indirectly 39% of the entire workforce!) it is this sector that is the largest employer in the UK. In my travels around the country I have found that it is this group that frankly has the ability and talent to be the reviving force within the UK economy. However, seedlings don’t grow without nurturing, so whether it is access to easier and cheaper banking facilities, simpler investment processes as well as the scything of the heap of bureaucratic administration that has been put onto them, there is a great deal that can be done. Why not simplify and regenerate the now somewhat tired VCT and EIS structures and rationalise all those little meddling initiatives that endless Chancellors have started over the years - mostly in the name of trying to get a good headline the day after the Budget. They all come out with entrepreneurial platitudes – now is the time to prove their focus and commitment to the best area of opportunity we have for economic regeneration.

So politicians - stop pleading about our abject economic failures, and start leading us out of it.

***
What happens if a country does default on its debts? Does it really matter? After all, the country will still be there tomorrow and it is not as though another country will come in and claim it for themselves as collateral for a bad debt – although certain European nations do have a track record for unwanted expansionary policies. No, the main pain comes from their ability to be trusted in the future and if so, at what cost.

It has usually been the case that riskier countries have to borrow in stronger foreign currencies as local monetary value is not trusted. Often this leads to further pain as the local currency can significantly devalue in times of nerves, as perfectly demonstrated by Iceland whose currency collapsed by 50% and Government debt leaped to 80% from something close to nil.

Taking this further, Greece is finding itself in an equally invidious position. Greece already has a sky high debt to GDP ratio of just over 100%, thus if its yields on its debt are running at 5-6% , then the country is paying 5-6% of its GDP in just paying the interest! It is thus going to be almost impossible to start paying down this debt and in fact it may have to keep piling up unless the economy can find some way of growing at a greater rate. So as it cannot devalue, all it can do is look to carry out some very significant cuts in public spending as well as raising taxes. Sound familiar?

So please beware countries can go bust, can default and can lose you a lot of money. We are back in a world where some companies can be safer than certain countries. If there is a direction for investors at the moment, it is that some sovereign debt may well be riskier than the more highly rated corporate debt. So who do you trust with your money – a successful corporate leader or a politician? Be careful when choosing.

***
Whilst the current popular tone of economic commentaries seems to be almost unanimously positive, perhaps I can be Grinch and point out that under certain measures the US is still in recession. Although usually recession is accepted as being two quarters of ‘negative growth’ (i.e. shrinking!), the National Bureau of Economic Research has a broader definition which includes a variety of measures which have a longer lag time and thus extends the recession further. However, although we are seeing growth, such measures still indicate the sensitivity of the recovery and especially around jobs. I think there is a very good chance that we are going to see some astonishingly good corporate results, but often on the basis of ‘efficiency and productivity programmes’, which translates as cost and especially job cutting. Hence the comments being made about a ‘jobless recovery’ and confidence in a real recovery will not really take root until we start to see some tangible change in permanent employment trends.

The equity markets are still being run by the excited ‘bulls’, but please be aware that the easy money has already been made. The risks get higher from here.

***
And finally.....another superb headline that caught my eye – “Corpse was still alive at airport, wife says.”

A German woman was arrested recently on suspicion of trying to smuggle a corpse onto a plane, saying her husband was still alive when they reached the airport. The husband, a retired pilot, was pushed in a wheelchair through the airport wearing sunglasses before check-in; staff became suspicious and he was prevented from boarding the plane.

Gitta Jarant and her daughter were arrested at Liverpool's John Lennon airport on Saturday, suspected of failing to give notice of her husband Willi's death. She told the paper the 91-year-old former pilot had died at the airport just before the flight.

"I'm not a smuggler," Jarant, 66, told the newspaper Bild. "My Willi only died at the airport. He suddenly looked so lifeless, like a wax figure. His fingernails turned blue all of a sudden. At home he was still warm - I swear!"

I am sure I have sat next to people like that on planes – mind you, that was normally after the in-flight meal.

***
If I may pay my respects to our forbears on this day (Friday 16th) who fought and died at the Battle of Culloden in 1746 – thankfully the last battle fought on British soil.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

P.S. When an Icelandic bank blows up you lose your cash but when Iceland blows up we just get their ash. Maybe I won’t give up the day job.....





Monday 12th April 2010

The Best Things In Life Are Three?

Justin mentioned the Three Chancellors last week. This reminded me that many good things come in threes. For instance there are the Three Wise Men, the Three Tenors, the Three Musketeers, the Three Degrees and of course the Three Wise Monkeys. The Three Wise Monkeys could see no evil, speak no evil and hear no evil, which takes me back to some of the traits demonstrated by our Three Chancellors in their TV debate a few weeks ago.

As Justin mentioned last week, we, as a nation, are in the ‘poo’ financially, but this seemed to have passed the Three Chancellors by, as they promised to be able to reverse increases in National Insurance, increase benefits for pensioners and pay for all this, and repay the accumulated deficit, by cutting wasteful spending. I am sorry, but I do not think there is that much wasteful spending to go around.

Ahead of the election spending promises like this are not a great surprise, but it is certainly not honest, and is the sort of behaviour that that makes the electorate cynical about self serving politicians. If we get the politicians we deserve, we must have been very naughty in the past.

The deficit this year is projected to increase by around £167Bn, but it is due to decline over the next few years as increases in National Insurance kick in and as the economy recovers. The government projects that the annual difference between tax raised and government spending will be a £74Bn deficit by the fiscal year 2014/15.

Now there are some economists who are slightly incredulous about this decline in the deficit as it assumes that the economy will grow by 16% over the next 5 years and it also assumes that tax revenues, including the coming increase in National Insurance, will increase by 34%. Well maybe the Treasury forecasters will be correct, but I suspect that all they will do is to make Mystic Meg look good.

However, let’s take a leap of faith and assume the Treasury economists are correct and we have a £74Bn deficit in 2014/15. I think we all know that it is a lot of zeros and commas, but I also think that we are so used to the television news talking in billions and trillions that we can lose sight of just how big a number £74Bn is.

Well in short, and going back to the theme of the threes, it is the amount we spend on Defence, Justice and the Home Office every year. Together these 3 departments’ spending adds up to around the £74Bn deficit we are projected to have in 2015.

If world peace suddenly broke out and we laid-off all our defence forces and ceased all our spending on buying tanks, ships, jets and limousines for army generals we would save around £50bn a year. If we could all settle our disputes without going to court and if all our criminals stayed on the straight and narrow and we closed down our justice system - our prisons, courts and probation services - we could save a further £10Bn a year. Finally, as we are such a Utopian society, if we laid-off everyone in the police, the UK Border Agency, counter-terrorism, the Passport Office, and related services we could save another £10Bn.
These three government departments will not disappear of course but it does illustrate just how large the cuts will have to be. The new government will clearly not be able to cut the deficit by cutting wasteful spending alone as was suggested during the Three Chancellors debate.

What will probably happen is that there will be large cuts in spending and large tax rises as well. As education and healthcare spending is going to be largely protected, the spending cuts will fall very heavily on the remaining big spending departments like Defence and Local Government.

It is perhaps interesting to consider what taxes might rise over the next few years. This is not pretty reading and I advise readers of a squeamish disposition to go on holiday to a suitable tax haven.

If the new government could double the rate of VAT it would raise about £70Bn a year, which might be enough to deal with the deficit, assuming no marginal diminishing returns and that the imposition of a 35% VAT rate does not plunge us into a second Dark Age.

More sensibly, raising the standard rate of VAT to 20% would raise around £11Bn a year, which could well make it a part of a combination of steps to address the deficit.

Slapping VAT on food would raise another £10Bn a year, but would be political suicide for whoever imposed the tax. I am not a headline writer, but I can imagine the headlines along the lines of ‘Chancellor puts tax on children’s food’. It seems to me that this is unlikely to happen. Our food is already expensive enough paying for French farmers.

Income tax may have to be raised. A penny on the basic rate of income tax would raise £4Bn a year, a very considerable sum, but pretty shabby in addressing the deficit, unless tax goes up a lot. Yet another penny on the higher rate of income tax would raise only £1Bn, but they may have to be hit again to mollify the vast majority of basic rate tax payers if the basic rate goes up.

The other often discussed tax increase is a change in Capital Gains Tax (CGT). A change is as possible here as so much else, but the sums that might be raised are very small relative to the size of the problem. A 1% change in the rate of CGT would raise only about £110 million a year. CGT would have to go up a lot to have any sort of impact.

Churchill was candid when he offered three things – ‘blood, sweat and tears’, but I am afraid the Three Chancellors are not statesmen of the same calibre and they, understandably perhaps, pulled their punches in their debate a few weeks ago. After the election it will be a different story.

***
And finally….Even a ‘living goddess’ is sometimes faced with tough decisions.

Chanira Bajracharya, 15, has been the Kumari or ‘living goddess’ of Patan, an ancient town south of Kathmandu, for nine years, blessing devotees at the temple and riding in decorated chariots 18 times a year during Hindu and Buddhist festivals.

Now, with her time as living goddess drawing to a close -- the young virgin deities retire on reaching puberty -- Bajracharya is contemplating a career in banking if she makes grades good enough to study commerce or accounting. Let’s face it, she can probably do just as good a job as some of those who were at the head of major banks in the credit crunch.

Have a good week.

Peter Sleep
Senior Investment Manager
Seven Investment Management Limited





Monday 5th April 2010

The Phoney War

We could call this the ‘phoney war’. Although there has already been much anguish and pain from the high streets of Britain, and indeed a significant number of failures have already occurred, it is interesting to note the quite positive figures from some of the leading retailers. Certainly given the prevailing media sentiment, the anecdotal evidence does seem to be really quite contradictory.

In competitive terms, those that are still standing are of course facing less opposition as the weaker retailers have already been whittled away. Those with ‘weaker retail propositions’ (consultant ‘bingo’ speak for rubbish businesses), often with highly geared and borrowed balance sheets, have found the pressure just too much and imploded.

It has been interesting to see that there are still the numbers of shoppers out there, and they are seemingly keen to carry on buying. For the start of a decade of austerity it seems to be quite unfashionably perky. The numbers of people do probably hide the actual amount of shopping and certainly the ratio of bags per person in somewhere like Westfield in Shepherds Bush seems to be somewhat less than usual, however our national weekend pastime of shopping - or even window shopping - does not seem to have gone away as yet.

However, we may be deluding ourselves into thinking that economically we are past the worst. After all, the recession is over – Alistair said so. Nevertheless, after the election we all know some unpleasant decisions are going to have to be made – as the ‘Three Chancellors’ all said on the Channel 4 show last week. We all know about the potential threats of higher taxes and expenditure cuts, but there are two issues especially that the retailers should worry about.

1: Employment, or more particularly government employment. We all know that the government is the largest employer and certainly some of the ludicrous jobs created over the years are finally going to be rumbled. Less employment means less income and thus less spending (and of course already less borrowing).

2: Mortgage payments. Many mortgage borrowers have had a lifetime windfall of quite spectacular proportions as interest rates have crashed. The best I have seen so far has been a ½% below base rate tracker mortgage! However, there are many fixed term mortgages and these will be maturing; when they come to renegotiate new terms they will find that although the base rate hasn’t risen, the mortgage rate certainly has. Banks, under government direction, have been increasing their margins. For those who have squandered their windfall and not taken the opportunity to pay down the capital sum or save the difference, then they will be hit by the harsh reality of some sharply higher costs.
So retailers beware, there may well be another notch on the belt to tighten yet.

***
As for the ‘Three Chancellors’, although the concept was interesting the execution was somewhat dull. We never really had a debate or even a proper political dialogue but I suppose that was never going to happen. Uncle Vince was of course the winner, being far more relaxed, with the other two not really inspiring much confidence.

Inevitably most subjects were mentioned in passing rather than fully explored, but there seemed very little understanding of some of the economic fundamentals such as the hobbled banking system and the lack of investment. Still less mention of the depth and breadth of complication that we have had as illustrated by the doubling in the number of pages in Tolley’s Tax Guide since 1997. If ever there should be a mantra for the politicians this time around it should be ‘Less & Simpler’ – spending, government, politicians, red tape and taxes. Although taxes will no doubt go up we could certainly make them simpler and clearer. How about simpler saving rather than the plethora of rules around Child Trust Funds, ISAs and Pensions?

The key issue that was missing was that although they all agreed we are in the poo, and we have awful decisions to make, there was no direction or inspiration for the future. There was some nod towards smaller businesses, but no clear direction and lead to inspire us that in five and ten year’s time it will be better. In the darkest of economic hours I expect to find the leaders who can inspire and imbue us with confidence to counter and comfort us through the cuts and costs we are all going to have to bear.

If ever there was a time that we need a statesman or woman it’s now! Any volunteers?
***
Meanwhile our close neighbours in Ireland are taking decisive action to deal with their banks and budget deficits.

Since the crisis began two years ago there have been tough pay cuts, painful tax rises and significant public spending cuts – real financial surgery carried out on a damaged nation. The reaction from the population has been a muted acceptance of the inevitable with only a smattering of demonstrations and go slows – and barely a formal strike to be seen. The Irish government took early and aggressive action to deal with their bank’s disastrous problems during the credit crunch, but the banking system still has a black hole roughly equivalent to 20% of the country’s GDP. However action here has been taken as well with bad debts being purchased at a discount by the government into its own NAMA (National Asset Management Agency) bank for bad debts (surely NAMA is almost an anagram for ‘manure bank’), and thus releasing the banks from the sinking weight of bad loans and enabling them to start channelling money back into the economy again.

Mr Brown and the ‘3 Chancellors’ take notice. Here is a story of political leadership in terrible times taking a frightened population with them and taking decisive action which is already showing signs of putting this economy back onto the road to recovery.

A show of respect then please, for the nation of Ireland, its leaders and its population. The transfer of bad assets to their bad bank NAMA has started and although it will take a long time, those assets will probably come good over the period of a decade. Meanwhile of course, this action will serve to ensure that the remaining banks can be properly capitalised and start properly functioning again. This is a very good start but does not in itself resolve all the issues for the Irish banks.

We have yet to take such action with either RBS or Lloyds – two years down the road and we are still dithering.

***
And finally .........in another case of ‘How dim can your bank robber really be?’ - two accused bank robbers might have just been trying to save time when they called ahead and demanded that the bank have the cash ready when they got there. This of course, in business terms, is in fact a very time efficient method of conducting a robbery and far better than making an outrageous fusses in the banking hall.

However, such initiative of placing an order for cash didn’t get them far. Seemingly
Albert Bailey, 27, and a 16-year-old, both from Bridgeport, called the People's United Bank about 10 minutes before they came to rob it, the Connecticut Post reports.

Sgt. James Perez, a Fairfield police spokesman, told the Post. "They literally called the bank and said to have the bag of money ready on the floor because they're coming to rob the place.” Then, true to their word, they showed up – just as police were coming to greet them.

“I would classify these individuals as, 'Not-too-bright.' They should have spent time in school instead of trying to rob a bank," Perez said.

However, I do like the concept and it certainly was original in its thinking - albeit somewhat flawed; of course what they should have done was asked for delivery rather than takeaway.

Have a good week and I hope you had a good break whether celebrating Easter, Passover or even a fresh Spring daffodil.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited







Monday 29th March 2010

Fool’s Gold

Depending on your age, the mention of the word inflation will have a different meaning for you. For anyone in their 30’s, inflation has been more or less irrelevant. It has been quite low and frankly not much to get too excited about, but then again you will not have known anything different and perhaps wonder why some of the older ‘fogies’ seem to get quite concerned about it.

For any of us in our 50’s, we can recall the double digit inflation of the 1970’s with probably a somewhat mixed view. We will remember that the British economy was in a disastrous state, often with the tag of the ‘sick man of Europe’ being applied. From the three day week in the miners’ strike, to several Winters of Discontent and a peak of union militancy – the place was a mess. However more positively, for those of us who were reckless students with irresponsible and profligate borrowings, actually it was a marvellous boon as, without any effort on our part, these debts seemed to dissolve in value even if the interest rates were somewhat punitive.

For those who were in paid employment, you looked forward to a somewhat variable payslip that seemed to change by the month, with inflation adjustments clipping in on a regular basis. You seemed to have extra Pounds even though costs were also rising but, so long as you could keep up, then all seemed to be fine.

However for those in their 70’s, inflation will be remembered with a real and tangible fear. This generation were often the ones who had either finished or were close to ending their working lives and thus the prospect of living on a fixed income and with fixed capital in the teeth of an inflation storm was very worrying. For those fortunate enough to have inflation linked pensions, then they were weather proofed by their financial tarpaulin, but for those less fortunate then they were faced with the prospect of serious financial erosion.

So what is the real, corrosive effect of inflation?

Inflation even at low levels is an insidious acid eating away at the value of your money. For example, even at an apparently somewhat benign 2%, long term savings can be significantly reduced. From 2010 to say 2050 £1,000 would be reduced to £445.70 if no investment had taken place. Try the same calculation at 4% and your money would have been reduced to a mere £195.37 – and most would regard 4% as hardly a high level of inflation. Oh yes and just to frighten us all about the real damage of inflation – try 8%. At this level your £1,000 disintegrates to a pile of dust, valued at just £35.61.

The reason I wanted to bring this to the fore is that after that somewhat tedious political Budget, and as we enter the last run up to the General Election, we will hear much comment from the politicos about managing inflation. Here now we must beware those with forked tongues, as it will be an easy temptation for politicians to engineer some more inflation to try and magically get rid of our national debt. Inflation erodes value, erodes the economy and our wealth. It may be tempting to inflate our debt away but at what price? Beware Fool’s Gold.

***
Banks - I think most would agree that we need more banking competition and slowly, through certain new initiatives like Metro bank, Tesco and no doubt Virgin, more will finally be happening. Even the initiatives announced by the Chancellor will encourage further entrepreneurial activity – but at what pace?

If banking supplies the life blood to our economy, then we need some more transfusions. The bleating that lending has increased is only partially true; in fact it seems to me that it has been the offers of lending that have actually increased and not necessarily the lending itself. Speak to many smaller companies and they tell the tales that it has been the increase in lending margins that has been the real killer. It may be an offer of lending but not one that people want to accept at that cost.

We need more banking now and there is one area where we could see smart action taken quite quickly. Gary Hoffman’s very effective surgery at Northern Rock has now provided an excellent base structure to provide some real competition in quite short order. With the bank now separated from the bad ‘stuff’, recapitalised and restructured, here is a far more logical structure to try and add certain RBS and Lloyd’s branches to. Quite quickly you could create quite a significant competition for the other banks, both on cost and service, and hopefully also have the effect of spurring the two government dependent banks into action to carry out their own surgery rather than their painfully slow sticking plaster and paracetamol cures.

***
And a tale from the train – the ‘Transpennine Express’ from Manchester to Preston – from the trolley lady, “You look like a banker so you can’t have any fruit cake. In fact you are all bl***y fruit cakes.” “No,” says the conductress, “he’s the bloke in red braces off the telly – he can have a free slice”. Now I know the price of some media coverage – a slice of fruit cake!

***
And finally a story which can only damage your local Neighbourhood Watch scheme.......
Boulder (Colorado, USA) Housing Partners plans to amend its rules so that tenants cover up when they're outside. Several passers-by told Boulder police earlier this week that 52-year-old Catharine Pierce was topless while tending to her yard. Last year, she was threatened with eviction for gardening wearing only ‘pasties’ (somewhat naively I thought these were enticing foodstuffs from Cornwall) and a thong. Eeww!

Police responding to Wednesday's reports decided Pierce wasn't breaking any laws. Mr Robert Pierce said he'll fight changes that would keep his wife from gardening outside topless, which is legal under state and city law.
Boulder Housing Partners Executive Director Betsey Martens didn't return a phone call on Friday seeking details on how covered residents would have to be. She told the Daily Camera newspaper that people have complained for years about the couple often going outside wearing only thong underwear.

Robert Pierce said the new rules wouldn't discourage the couple. "We'll stay the way we have to stay," he said.

The City Council is scheduled in April to consider expanding the city's anti-nudity ordinance, but a draft proposal to make it an offence for women to go topless in public was removed.
Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 22nd March 2010

Ignore the sweaty rabbit

Please don’t hold your breath – it’s going to be a tedious budget. Next week The Chancellor is going to stand up and effectively launch his part of the election campaign. The content will no doubt include some symbolic gestures (one or two unrepeatable ones come to mind) and inevitably some political pontificating along the lines of “you are safe in our hands”. There is however, unlikely to be anything new or of any note, although a small sweaty rabbit might be pulled out from an old frayed top hat just to keep us interested. Frankly anything meaningful or any initiative is going to be saved for the Party Manifesto and will come under the aegis of the First Lord of the Treasury and not his downtrodden Chancellor, whose career prospects post election would seem to be somewhat truncated whatever the outcome.

Any sweaty rabbits are likely to be concerning those areas that the Tories have begun to focus on and these would probably include direct support and encouragement for ‘businesses of the future’ and smaller to medium sized enterprises. Actually this is a very important area and one that deserves far more focus than a mere rabbit-related mention. This after all is quite likely to be the growth area for our injured economy and, if we are to move away from our dependence on governmental financial heroin handouts, then this is going to be our route.

A measure of our addiction to government spending was perfectly illustrated in last week’s ‘good’ unemployment numbers. The headlines all seemed to focus on an apparent fall in unemployment. However, upon closer inspection, all is not what it seems. Yes, the headline figure showed a drop in the claimant count of 32,300, and yes there was a drop in jobless numbers to 2.45m, but in fact there was a significant drop in the number of people actually employed overall. This dropped by 54,000 to a total of 28.9m which is apparently the lowest figure in four years. Not an encouraging sign.

However, there is a more concerning figure that I have highlighted before – we have apparently around 8.16m who are ‘economically inactive’ - those that don’t work and don’t claim benefits. Of this number, some 5.8m say they don’t want to find work but some 2.3m say that they do. So if you then add in those who are officially unemployed, 2.45m, then we have a total of the potential working population of around 10.55m not working. At a rough calculation that is about 17% of the population and roughly 30% of the potentially working population. What was the old slogan Saatchi & Saatchi - “Labour isn’t working”?

***
I must congratulate the newly branded East Coast Line on the improved service on their trains. Since coming under new ownership I have asked quite a number of the staff there how things have changed and the answer comes back that, at last, they seem to have been left to run the trains themselves – and ‘better than the last lot who couldn’t even run a proper bus company!’ It just goes to show that if you let those who know about trains, run the trains, then maybe we are better off.

Also I found it quite encouraging that Deutsche Bahn (DB,) the German state railway, is taking an even greater interest in our trains. Given their famous ability to run on time, then certainly this is something we can all benefit from. DB already run the well regarded Chiltern Railways, as well as the EWS freight service and has been behind the entrepreneurial Shropshire & Wrexham service, and is now looking at the Arriva train and transport company. Arriva are best known for their Cross Country service and have recently been courted by the French national railway SNCF, but this seems to have run into trouble and thus probably triggered the interest from the Germans. Nothing like a bit of Rhine rivalry over our railways.

***
As I am writing this, the Greek game of poker continues to be played out. For a country with few cards in their hand, the Greeks seem to be playing a blinder against the leading Euro zone members, but as yet of course have not resolved any of their outstanding problems. Seemingly every day I hear someone saying that the worst is over and the storm has passed, but I fail to see one iota of resolution to the problem.

We must now recognise this as a much broader sovereign debt and sovereign risk issue in which the Greek situation is just one unpleasant and seeping sore. Over the next few months the funding for other nations will come to the fore and no doubt further suppurating buboes will come out.

Whether the Greeks can continue to play the IMF threat against Angela Merkel with any credibility remains to be seen, but they need to be very careful as the demands of the IMF are likely to be far more stringent than those that could be imposed by the Euro zone members. Additionally, any referral to the IMF can only just show to the rest of the world that yet again those bickering Europeans can’t sort out their own problems. That doesn’t do much for the credibility of the Euro, and this only a year after many were calling for the Euro to be seen as a potential alternative reserve currency to the US $. Perhaps we should give it a rebranding and call it the Neuro – as it will just represent in effect just the northern Euro members?

***
And finally .... One for the file of ‘How dim can your criminal really be?’.........Last week police were looking for a gunman in Seattle - one initially believed to have shot a man after an attempted robbery.

A few minutes before 1 pm on the 8th March, a 911 caller said a man with a gunshot wound was sitting in a black Honda Accord in the car park of Seward Park. Officers found the man bleeding from his lower left leg. He told officers a story about a robbery attempt, but then police found a .38-calibre Smith and Wesson revolver in the bushes about 30 yards north of the car, containing one fired and four unfired cartridge casings.

The police grilled the man about story inconsistencies and, according to police documents, he admitted he accidentally shot himself and tossed the gun in the bushes.

When questioned about the incident, (the man) stated that “he had set a booby trap as an anti-theft device by placing his loaded .38 calibre Smith and Wesson revolver with the hammer in the cocked position under his steering wheel,” Gang Unit Detective, Rob Thomas, wrote in a police document. “When he returned to his vehicle after jogging in the park he attempted to disarm his booby trap, accidentally set off the gun and shot himself in the leg."

The 24-year-old man, who had his first of five felony convictions in February 2005, is prohibited from possessing guns. Two of his felony convictions were firearms violations.

It’s just a question of practice.

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 15th March 2010

Watch out for the inebriated barmaid

The term ‘crawling peg’ does bring to mind a somewhat inebriated barmaid character out of Eastenders. Forgive me, but I am not a regular viewer. This term over the past week has been cast around by those Beijing watchers trying to read the runes of the inscrutable Chinese leaders at the National People’s Congress.

As I have mentioned before, both the Americans and Chinese have whinged at one another about each other’s currency policies. In my view both parties have some foundation for a just cause, but seemingly lack any form of appreciation or pragmatism of each other’s position.

The Chinese moan about the devaluing $ (until its recent recovery) and especially because much of their reserves are in US$ Treasury Bills. The Americans moan that the Renminbi has not been revalued and as such is ludicrously undervalued and thus had led to the dumping of Chinese goods on overseas markets and the distortion of global free and fair trade.

Sadly this is not helped by the populist rhetoric cast from the battlements of both parties – “we will not yield to any form of pressure forcing us to appreciate” said the Chinese leader Wen Jiabao in December 2009 – and Tim Geithner the US Treasury Secretary (he is the one who looks like a Lord of the Rings extra) said in January last year “President Obama believes that China is manipulating its currency”. This is hardly creative diplomacy and the US must understand that if the Chinese are to move, it will not be as a result of bombastic oratory from the foreigners.

Perhaps it would be more constructive if the Americans were to highlight the benefits of revaluing for the Chinese themselves in order to win more support and friends for this policy. The populist US politicians, and especially those in the House of Representatives, whose short term tenure of two years inevitably lead them towards near term popular policies, would be sensible to focus more on this and less on jingoistic, job-protecting flag-waving.

After all, a re-valued currency could help ease some of the pressure off an economy that has been building up quite a head of steam. In fact I think such a move will come and we may see the Chinese currency being subject to a gradual appreciation, not just against the $ but rather against a basket of currencies - and it will be done on the basis of political pragmatism, not being seen to be giving in to ‘gweilo’ barbarian pressure. Those ‘tea party’ US politicians should also remember that between 2005/8 the currency actually did revalue against the $ by some 21%.

However, there is still a fundamental point – the Chinese national income per capita is $3,000 per annum. Thus its leaders will have to consider restructuring the economy away from just exports to the West, to some domestic opening up and improvement as well. The dragon cannot forever just sit on its trading reserves ‘geld’ which now stands at $2.4trn and rising.

As an aside, I noted with some concern a few weeks ago that the Chinese had in fact started selling some of their US treasury holdings. This was a worrying sign, so it was with some relief that I see the authorities have gone out of their way to reassure the markets that they will continue to be purchasers, but at what level is a state secret, as is the composition of their reserves as a whole.

***
So it has been a year since the market turned and the day that Satan entered the S&P 500 when it bottomed at 666. As you will also have heard it has been a decade since the ‘dot.com’ bubble burst, and for Tom Sheridan and I, the time when we decided that a change was required and we should go back to the common sense of disciplined investment management and not stockbroker gambling on the ‘stock du jour’.

So what happens next? After a very significant year long rally and with volatility (US VIX Index) at a near record low (a key gauge of risk aversion), implying a level of over confidence or even complacency, I can hear a level of creaking amongst these somewhat stretched valuations. We have come too far potentially too fast. Prepare for a correction.
***
So now we can all look forward to an exciting Budget on the 24th of this month. Leaving aside the political blather, the main requirement is to send a message out to the markets that the Government and Treasury really do have a credible plan for paying down our debt. Presumably we will not know the real plans from any party until after the election.
However, I would appreciate at least some greater clarity of direction. The problem has been quite clear – we have been living beyond our means and in the good times we didn’t manage our spending either at government or personal level. If excessive spending is the problem, then lower spending is your solution.

The arguments over higher taxes and spending cuts will rage, however what must be admitted is that most taxation is a negative and not an encouragement to grow and develop. Although VAT is a discretionary tax it still is a dampener on an economy. History shows us that with tighter housekeeping in economies like Canada and Sweden, vigorous tightening was followed by some quite significant growth. Examples of the opposite, where there were increased taxes and reduced tax incentives, occurred in both the US in 1937 and Japan in 1997 and in both cases the result was to see their economies fall back into a pit of recession.

It may be a painful process but at least there will be incentives; the bludgeoning of taxation does little to encourage anyone.

***
And finally...............You've heard of the dangers of texting while driving and talking on the phone while behind the wheel of a car? Well yet again our American cousins have taken this to a totally new level.

Seemingly a two-car crash on a Florida highway was caused by a 37-year-old woman who was shaving her bikini area while in the driver's seat, according to the Florida Highway Patrol. Her ex-husband was steering from the passenger seat.

Megan Mariah Barnes and her ex-husband Charles Judy were driving southbound on Tuesday morning when they slammed into the back of a pick-up truck.

Ms Barnes said she was meeting her boyfriend in Key West and wanted to be ‘ready for the visit.’ Barnes and Judy allegedly drove on for another half-mile before switching seats. When they were pulled over, Judy claimed to have been driving. The trooper noticed burns on Judy's chest from the passenger-side airbag, which disproved their story. The airbag in the steering wheel apparently did not deploy.

Three passengers – a man and two women – were treated for minor injuries – but presumably quite painful ones.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited



Monday 8th March 2010

A Charging Elephant

If anyone can say they have had a good recession it has to be India. In fact they didn’t seem to have had a recession at all. In 2008/9 her gross domestic product grew by 6.7%, with an increase forecasted for this year to 7.2%. However, of course with this there have been constraints, with both the government fiscal deficit rising and the rate of inflation creeping up. Although these have been a concern they seem not to be at worrying levels for the moment.

India, to state the stunningly obvious, is no China. Yes certainly in terms of square kilometres, population and many other dimensional statistics both are huge, but thereafter they are best identified by their differences rather than similarities. In our somewhat patronising Western view we tend to lump groups of nations together and most fashionably and recently have done so with two others - Brazil and Russia - to form the investment acronym and fad of the BRIC countries.

Brazil and Russia are primarily commodity based economies, although the former does have a burgeoning middle class. The latter, although having a developing middle class, has a population which is in fact shrinking quite drastically. Not only does it seem that the Russians have given up breeding but, unlike us, they seem to attract few immigrants apart from those brought in by the security services. Both nations react to global demand for raw materials and certainly when China breathes in, Brazil breathes out (exports) iron ore.
Both China and India have growing and developing populations and with them will inevitably come the increased demand for consumer goods and other popular disposables. Such demand will develop according to the growing wealth of those nations, but will also be helped by the development of their consumer credit and banking facilities.

A key difference between the two is of course their political systems – one the largest democracy in the world, and the other the largest communist oligarchy in the world. Certainly the central control mentality of the communist system probably lends itself to a more efficient method of developing such a huge nation, but the functional democracy of India is to be considerably admired given the ranging differences of the nation and some of its more unruly parts.

China has funded itself through trade surpluses whereas India has been running a deficit for many years, albeit at a very affordable level. Part of this has been down to its remarkable savings rate - which is something of a distant memory for us back in the UK. Such savings have helped fund the development with a rate reaching an astonishing 36% of GDP until somewhat falling back more recently. With a middle class of some 450m, this is a huge lake of wealth which, if properly harnessed, will help fund significant development into the future.

So for the Indians it has been ‘Crisis, what crisis?’ In addition, whereas the Chinese saw a dramatic rise in unemployment, although the figures are unreliable, such an impact in India seems to have been more muted.

It seems quite likely that growth levels in India could be sustained at a figure close to 10% and at that rate, the nation’s economy will overtake the UK economy within a decade and potentially Japan’s within two.

However, there are some worrying areas of concern that must be addressed. One that rarely seems to be highlighted has been the influence and spread of the Naxalite (Maoist) guerrillas who are apparently active in a third of India’s 626 districts. This low profile insurgency claimed some 998 lives last year but has barely been recognised outside the country. Unless this sort of running wound is addressed then this could affect potential development, especially given the social pressures that are inevitable with such a fast changing economy and society.

If effectively addressed however, then confidence in the government can be further enhanced: if, though, this is just left to fester, then external investors will be attracted to other more stable areas of Asia – such as its neighbouring fellow leviathan.

***
Well with all the prevailing news of economic gloom that we are being fed in the UK, one could be forgiven for finding that most of the population is thoroughly depressed. It was thus rather surprising to see last week’s consumer confidence figures being at the highest level since the beginning of 2008. This is despite the gloomy prognostications of all the politicians and certain journalists who love to focus on the darkest of threats even on the brightest of days.

However, there is another area where I think we short change ourselves and that is that we tend to regard our investments purely in nominal terms and not taking account of other issues. These could include inflation, but also, and more importantly for those of us in ‘Blighty’, the impact of our yo-yoing currency that can have a very considerable impact.

For those investors who are US$ based, they will still be suffering especially where they have overseas investments. As the US$ has recovered, so the value of those investments has diminished and of course this includes any of their dividends being repatriated. In US$ terms in fact, world equities are still 25% below their 2007 high.

For the Japanese the situation is even worse. Unlike the majority of American investors who still seem somewhat bemused by the term ‘overseas’, the Japanese have had to invest overseas ever since their markets crashed back from their zenith at fractionally under 40,000 in the Nikkei 225 in 1990, to a nadir of around 7,000. For effectively twenty years their markets have gone nowhere. Their answer was of course to invest overseas but with a stronger Yen they have now found themselves in a position of being still 44% below the peaks of the Summer of 2007.

In the UK we have always expected to have invested either directly or indirectly around the globe – obviously an old empire thing. Even in the FTSE100 we not only have a growing number of overseas companies but also large multinationals with the result that some 65% of profits from this membership are coming from overseas. So we have in fact been sheltered from the worst of the market storm and, if you add in the recovery in valuations since last March, the result has been that we have recovered all the losses since 2007. In fact the FTSE All-World equity index, on a total return basis including the reinvestment of dividends, is quite astonishingly at an all time high!

The pride before the fall when the Pound reached $2.10 was illusory and had, for those who were watching, obviously gone far too far. The fall back since then has in fact been a great boon for us as a relief pressure valve which of course those heavily indebted Eurozone members did not have. If we hadn’t had that chance to devalue, our investment and economic position could well have been very considerably worse.
***
And finally from the quirky state of California..............

A couple who tried to save water and money by removing their lawn are being taken to court by the city of Orange. Quan and Angelina Ha, who now have a scheduled court date, decided to replace the grass on their front lawn with wood chips in 2008. The Ha’s said they'd just had a baby and began to think about her future and the effect of what is happening to their environment.

Thus they made a decision to replace their water thirsty grass with the far more environmentally friendly chippings. At a time when Southern California cities fine people for overwatering their thirsty lawns, the Ha’s said they've saved hundreds of thousands of gallons of water and drastically lowered their water bill.

But the city cited them for violating a law that requires ‘live landscaping’ to cover 40 percent of the yard. The couple planted drought-tolerant plants last year but the city said it wasn't enough.

The city said it wants them to come up with a compliance plan. Ah yes, this is the land of the free!

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 1st March 2010

The Great Sag

As the figures come through and the runes are cast by the legions of experts and economists, there seems to be a discernable trend developing. The politicians of all colours are telling us, and will continue to do so until we finally have an election, that they have the perfect plan to lead us from the ‘slough of despond’ to the sunny uplands of economic success and safety. Here we will find lush fresh green verdant fields of economic success; sadly however I think we can increasingly see that such optimism may well be illusory if not intentionally misplaced.

In all likelihood it looks as though we are going to be seeing an extended period of time with the image of a flat peat bog rather than sunny upland. Damp, soggy and difficult to get through it may be, but probably no more than we deserve after the recklessness of the past few decades.

So maybe this era may be known as the ‘Big Sag’ where, following the globe’s largest economic stimulus in history, we could find ourselves sagging back into a duller period of lacklustre growth, weak supply of cash and capital, and a sour deflationary air.

Despite some stupid politicians still shouting to the contrary, we are not going back to the way things were before the financial crash. This, in spite of sounding so gloomy, does not mean that we have to go through a 1930’s style Depression, but rather an extended period of lower, slower, growth. This of course will not be uniform as the national economies will be affected in different ways.

For the West and Japan or the post development nations, there is a need for the private sector to be reignited into action and investment, and especially as governments find themselves unable to sustain their expenditure and will be mired in debt for years to come. This revitalisation of the private sector will rely upon two factors in particular; firstly a willingness (with positive tax breaks) to invest in the first place and secondly a banking system capable of supplying the blood flow that is so vital. These are two areas where our government, both pre and post election could take some very decisive actions, but sadly to date show little sign of understanding, appreciation or intention.

Last week’s US consumer confidence figures were truly awful, and in a nation which is so consumer dependent, not a good sign for any sustained recovery – back to the Great Sag. It shows still how little confidence there is and this is likely to continue as we can see with the sustained weakness in the US banking system, with 702 banks now considered ‘troubled’ and more likely to follow. There has been some improvement in earnings from the banks though, as we can see from the FDIC figures which showed that banks earned $12.8bn last year and that was a significant improvement over the $4.5bn earnings in 2009. To put that in perspective, earnings were over $100bn in 2007.

The area of pain seems still be back where we originally started, which was the US housing market where, seemingly, still further write downs are going to be coming through. It was a member of the 7IM Asset Allocation Committee who quite correctly warned of the dangers of US housing as being the source of the pain to come and its potential ramifications – and that was back in 2006. However, for a bit of comfort here - in 1987 at the height of the Savings and Loans crisis there were some 2165 troubled banks. Well it’s some consolation.

***
I hope that over the past few months you have been taking heed and reaping some benefit of the rising US $, especially against our own somewhat beleaguered currency. However, there is also a considerable risk as the $ rises, and that will be particularly to all of those who borrowed cheap Dollars at low rates and bought just about anything else. This is more commonly known as the ‘carry trade’. Two years ago we saw the effect of this on the Yen where cheap Yen were borrowed to buy Icelandic Kroner which would have been fine so long as the Icelandic economy was ok – oops!

From March to December last year the $ fell by some 17% on a trade weighted basis: since December it has risen by 8%. During this time we have seen the Chinese tightening bank reserves, which has impacted on commodities and certain emerging market indices and thus seeing money go back into the financing currency – the $. Add to this the trauma of the Euro and the Club Med nations (also known as Club Lead) and this has pushed further nervous money back into the Greenback. Then just to put the cherry on the top the Federal Reserve raised its discount rate. All good reasons to encourage people back into the currency.

The net result is a stronger Dollar, not because of any domestic good news but rather from overseas worries. Who says the Dollar is no longer the world’s reserve currency? The other side of this issue is of course the Chinese Renminbi which is pegged to the $. As it strengthens – so does the value and strength of the Chinese economy – an interesting issue for the US whose populist politicians have found a perfect scapegoat to take the blame for just about all their failings.
***
Worried about the downgrade of Sterling? Well a good friend did say you can ignore the ratings agencies as they very rarely anticipate any changes by initiating any downgrades; it is the market that makes the changes and the agencies make their moves with the benefit of hindsight. So has Sterling been downgraded? My cynical chum has merely pointed towards the spreads and says that in effect it has already happened and we are just waiting for the agencies to pluck up the courage to admit it. True or not, being downgraded has become more of a political totem than anything for the moment.
***
And finally.........Unusual news from Breckenridge in Colorado I believe — Authorities have concluded that no crime occurred when a Texas Christian University student's buttocks were branded with a hot hanger during a fraternity trip last month.

“All the evidence suggests that Amon Carter IV was a willing participant and the branding was not part of any fraternity initiation, as he is already a full member,” according to a Breckenridge Police Department. If this was just a pastime, you wonder what he had to do for the full initiation.

Investigators met on Thursday morning with District Attorney Mark Hurlbert, where it was concluded that there was no probable cause for a crime having occurred. Well you can at least appreciate the level of education as Carter received both second and third degree burns for the Greek symbols for his fraternity and a sorority that were burned into his bottom. Apparently plastic surgery will be necessary to repair the damage. I wonder if they can really understand the Greek letters?

Next time have a stick-on tattoo.

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

P.S. An anniversary of the week. The 5th March 1770 - 29th Regiment of Foot fired on a mob in Boston (Massachusetts) killing five and wounding six civilians. The rest, as they say, is history.






Monday 22nd February 2010

Reversing the decline for Mutuals?

A great history but in a tough environment. The world of mutuals has not been an easy one. Many have glorious chronicles of the past dating back into the developing financial world in the Victorian era. The concept has been robust and certainly the view of shared ownership has been attractive to businesses in various areas of commerce. From the Co-Operative movement which covers virtually everything from supermarkets to funeral directors, financial businesses and even one of the UK’s largest department store chains, John Lewis, the mechanism has appeared to be a successful business structure.

However, this equitable model has found itself open to attack both directly and through market competition from its more aggressive capitalist cousin, the joint stock public company.

We will all recall the fashion fad of ‘demutualisation’ whereby apparently “inefficient” old building societies could be transformed into modern dynamic financial companies. Not only would they wake up a sleepy hollow but provide far more aggressive competition to the existing banks. Additionally the old members (many of whom never even realised they were part owners) would receive a windfall payment by way of cash or shares, and so would the staff, and so everyone would be happy. Oh and if that wasn’t enough with some bright financial engineering, they would also be able to ‘make their balance sheets much more efficient’, which was a polite way of saying borrowing a lot more. And so a raft of flotations came through, with Northern Rock, Halifax, Bradford & Bingley and even Abbey National many years ago.

However, you can see the pattern here. None of those names exist any longer in their original form. Many others were scooped up by banks, like Cheltenham & Gloucester and Bristol & West, leaving a rump of building societies gamely fighting for a shrinking cause.
The demutualisations actually started off rather well. They brought in new products and aggressively took on the banks. Northern Rock, for example, was known for being a low cost mortgage operator and took positive pride in being the bank that liked to say “No”. No, that was, to other products and services – just mortgages and deposits (not insurance and all the other banc assurance twaddle) and a bank that seemed quite fussy who they offered facilities to.

Sadly though all that changed, as we know – and the rest is painful and recent history as corporate greed overcame corporate common sense and worrying about risk was just for wimps.

The result was that many seemed to have abandoned the old disciplines of balance sheet management, funding themselves increasingly from the wholesale money markets and far less so from their original depositors. Add to that the lending practises to the unsuitable and unreliable, and the opportunity for disaster was clear – and well signposted some months before Northern Rock actually collapsed.

Since then the rump of building societies have been struggling. Dominated by the Nationwide, the band has now reduced to some 52 firms with some very well run and managed, such as the Coventry, but others suffering from lack of scale and a market squeeze.

The banking crisis is pressing in on them from various fronts. In terms of deposits they are suffering as they are unable to offer the attractive rates of before - and especially against government owned and guaranteed institutions. This means they have less deposit money to lend out. Meanwhile, the institutional money markets are still constricted with nowhere near as much available as before -thus other funding is necessary.

Some Societies have issued Permanent Interest Bearing Shares (PIBs) in the past, but these do not form part of any Tier 1 capital. Others have created more inventive structures including the Yorkshire and Chelsea who with their recent merger issued Contingent Convertibles (or CoCos) which convert into Profit Participating Deferred Shares (PPDS) in due course. However, these are less popular as it means that in the future part of the societies’ profits will be streamed away to pay for them.

The latest idea (with of course the necessary acronym) are MODS or Mutual Ordinary Deferred Shares. These will have a capped coupon but will be loss bearing if the society goes bust and thus for regulatory purposes can be regarded as capital. If these are finally approved it would mean that at last this excellent financial sector can have more life breathed into it but without endangering their mutual status. This in turn will provide more competition for the banks, more liquidity and volume in the market – but it will take time.
Perhaps someone could now come up with a Rocker to go with the Mods?

***
Following on from my concern over the Chinese losing their interest in funding the US deficit by their falling value of purchases of Treasuries, I noted last week in the China Daily that far from buying, the Chinese have announced that they are selling $34bn of US bonds. This will mean that Japan will overtake China and become the US’s largest foreign bond holder.

Seemingly Japan boosted its holdings in December by £11.5bn to $768.8bn, leaving China with a mere $755.4bn. I also note that apparently the UK increased its holdings to $303bn from $227bn – and there was I thinking we didn’t have anything left!

China, it would appear, has taken advantage of the rising Dollar, but the key question for the US administration is whether this is the start of a new policy to put pressure on the White House or just a decision to take advantage of a change in the currency value. The larger question remains though - who is going to continue to buy their huge debt?

***
And finally ..............’Men run risk with anatomy-boosting pants.’

LONDON (Reuters) - Hundreds of British men are risking a Valentine's Day anti-climax for their partners by stocking up on anatomy-boosting underpants ahead of the most romantic weekend of the year.

British department store group Debenhams said it had seen a 76 percent surge in online sales of the £18 pounds-a-pair underwear in the past week.

The pants work by using a lift and hold feature at the front, like a male version of the cleavage-boosting Wonderbra. "The briefs mean that no man ever needs to feel inadequate again on the most passionate day of the social calendar," said Rob Faucherand, head of men's accessories buying at Debenhams. "However we can't be held responsible for what happens once the pants come off," he added.

That’s why I prefer to wear a kilt.

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited



Monday 8th February 2010

A Global Fault Line

I think we learned our lesson with the Titanic. It is always worth having enough lifeboats - or in this case even one. Seemingly the Euro was designed without one. So when an iceberg is hit, the horns go off and the result is that all the officers of the leading nations rush around wondering what to do. Seemingly there was no ‘plan B’. Because there has been no bailout plan, it has been inevitable that there has been a fear of systemic risk as the contagion spreads to other nations. The latest acronym after the PIGS has been the STUPID nations - to list those with potential the most serious sovereign risks. The STUPID list thus includes Spain, Turkey, UK, Portugal, Ireland and Dubai.

In fact we may get some more cogent guidance as to where we need to see restorative action by governments, from the IMF’s own list of nations that need to make significant fiscal adjustments. At the top of the list are the UK and Japan where some 13% tightening of GDP would be required for the public sector to balance its books, then Greece, Spain and Ireland at 9% and then close behind is the USA at 8.8%.

Looking at the US predictions for managing this, the figures don’t look encouraging. Although savings in US households have started again, it is unlikely to be enough to absorb the amount of debt issuance currently being planned. The old reliable buyer of days gone by was of course China; however, their purchases are seemingly declining at a rapid rate. In 2006 they bought some 47% of all new issuance. In 2008 this fell to 20% and last year apparently it had reduced to a mere 5%. So who’s going to buy the rest?

So from Greece, it looks as though we can see a funding fault line from the Eastern Mediterranean to Spain, from there to the UK and then running across the Atlantic to the USA. This ruction is not over yet.
***
I am sure I can hear a fizzing noise somewhere. It’s a sound that always makes me slightly nervous as it reminds me of a fuse burning. The sound seems to be coming from the Far East where we are seeing some sharply rising producer prices, house prices and money supply figures. This is all data coming out of China and seems to me to be creating a sensitive economic blister which at least is going to be painful and at worst, could burst causing some most unpleasant side effects and collateral economic damage.

One other China issue that has come to the fore has been the rising attitude of domestic protectionism and anti-foreigner bias. This of course has not been a new phenomenon but has been less prevalent over the past few years. However, the economic slowdown of last year created significant pressures with growing unemployment, and seems to have fostered an attitude of greater preference towards domestic Chinese businesses and against foreign participants. Some have even described it as a ‘witch hunt against guilao’ (or gweilo – ‘foreign devils’) resulting in blocked access to markets, theft of intellectual property and rigged tendering processes.

Such domestic trade protectionism hasn’t really been focussed on before but could now add to the concerns of rising protectionism I have mentioned in previous weeks.

***
Interest rates have started to rise. Whilst the Western nations may well be seeing floored and flattened rates for some time to come, other more vibrant parts of the world have already been forced to take action on their rates against the threat of inflation. Australian rates have already gone up as the ‘lucky country’ has had a rather good recession thanks to its preponderance of commodities and enthusiastic Chinese demand for them (and come to that Australia itself if it ever came up for sale).

However, other countries have also started to raise rates. Vietnam has raised rates although Indonesia is, at least for the moment, are on hold at 6.5% despite inflation rising to 3.72% in January. This country now finds itself in a very different position from nearly two decades ago when the Asian crisis trashed so much regional value. Now with the Rupiah being a much stronger currency and with growing reserves, the nation has changed in both its attitude and pride. Last year it became a member of the G20 leading nations, this country (which by the way is as wide as the USA albeit mostly sea and islands) is beginning to show signs of greater stabilisation after the chaotic post dictatorship days and even starting to address some of its old problems of endemic corruption.

This focus on growth rather than inflation has further strengthened the currency however even here you can feel the concerns over the impact of the weakening value of the Chinese Renminbi. It’s not just the Americans that are complaining.

***
Also a cribbed quote from my good friend Anthony Peters, which is a priceless piece of Prime Ministerial rhetoric:
“What you as the City of London have done for financial services, we as a government intend to do for the economy as a whole”- Gordon Brown speech to bankers, Mansion House June 2002.
Yes, you certainly have Gordon.

***
And finally.....................just how much do you need a drink?

I don’t know if you know the story about Antarctic explorer Sir Ernest Shackleton's "whisky on ice", but it got even better when recent explorers found more of the century-old whisky than they were looking for.

Explorers struggled to find a way to get to the whisky without upsetting Shackleton’s historic hut which still survives above the ice. They said however that the experience was less than enjoyable.

"We were lying on our stomachs on the permafrost completely under the hut removing the ice enclosing the boxes; to say it was a pleasant job would be untrue," said Al Fastier, of the New Zealand Antarctic Heritage Trust. (I just love the idea of raiding whisky as being part of a heritage trust…..)

For three days, they chipped their way through the ice toward the crates. Their efforts were more than rewarded. "We got the two boxes out and were very excited and pleased with ourselves and then we looked through the layer of ice behind the second box and could see through the opaque ice the words 'whisky' again," says Fastier.

Fastier said they found not only the extra crate of whisky, but also two crates of brandy.
The liquor cache is believed to be what's left of 25 cases donated to Shackleton on his first expedition to the icy, unforgiving continent.

The biggest proponents of the expedition were from faraway Scotland. The makers of the original whisky said they want a sample so they can attempt to recreate the old recipe and no doubt with the world’s worst storage instructions – leave for 100 years!

Fat chance.

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 1st February 2010

There Is Value In The Gloom

After an appalling week of commentary on the UK, it is quite understandable for many to think that the country has something of a nasty whiff about it. With our government debt referred to as ‘floating on nitro-glycerine’, our economic growth racing along at an anaemic 0.1% and our politicians floundering amongst their pre election propaganda – none of this can inspire much confidence for investors wondering where to put their hard earned money. Just to rub salt into the wound the FTSE 100 has dropped some 7% since 11th January. However, it is at such moments when the herd has decided that they must all move in one direction, that I would urge you to turn around and look back the other way.

Wiser heads though would seemingly encourage you otherwise. I am as ever indebted to my very experienced colleague John Hatherly who brought to my attention the January Merrill Lynch Global Fund Manager survey. This highlighted that the UK is now the most hated equity market amongst managers, with a net 15.7% of them wishing to underweight it; a figure even greater than Japan! Of course, at the other end of the scale is the Emerging Market sector, which is the most popular but is also now the most expensive and more than the major developed markets (2010 PE 17.3 vs. 13.7 PE for MSCI World). Of course, Emerging Markets were the most successful last year – nothing like betting on last year’s winner!

Yes we all know the UK economy is in a poor shape and we know our finances are shattered, but what has that got to do with the stock market? Economies and markets have of course a relation to each other, but they are certainly not conjoined twins. In fact the FTSE 100 is increasingly diverging from our troubled domestic economy, with some 65.7% of FTSE 100 profits coming from outside the UK. In effect this Index is a cheaper play on the global economy.

UK profits from overseas earnings will thus stand to rise if Sterling falls especially against the Dollar and there is a pretty good chance of that occurring. Add to this the number of UK companies that set their dividends in $ terms (including BP, HSBC, Astra Zeneca and Standard Chartered) and certainly the returns look to be more promising. However, as in anything economic, there are two sides to every story and of course stronger Sterling versus the Euro will put UK companies at a competitive disadvantage in a market where something like 60% of our exports go! As ever, you win some you lose some! Perhaps I can add in one other area for consideration after the Cadbury Kraft deal and that is the attraction for overseas buyers for buying UK companies now available at a Sterling discount?

All of this adds up to quite an attractive list for supporting the UK market however, there are headwinds and negatives as well.

Firstly the exposure of the FTSE 100 to oil and mining companies’ means there is a real risk from a pull back in those sectors. Additionally many institutions seem to have been running down their proportion of UK equity weightings for more than a decade and this may yet continue further.

***
There was a mention last week of the continuing shortfalls in many of the mortgage endowment funds for many such savers looking to pay off their housing debt. As ever we end up hearing the excuses from the providers that the markets let them down. What is clear to those that want to look is that their asset allocation policies (assuming they had any) weren’t just wrong but seemingly inept. Too much equity in the boom times and then selling it off in the bad times, further compounding the problem by failing to buy back in with the recovery! And we pay people to do this?

***
So Mr Bernanke has been reapproved in his role as Chairman for the second four year term with an extremely hollow vote of approval by the Senate with a majority of 70:30. With such enthusiastic support I am sure he is delighted to have the old Prince of Darkness, Paul Volker casting a looming shadow across his career. Quote of the week goes to Tom Sheridan when answering my daft question that I thought Paul Volker had died, “he did”, Tom answered “it’s just that he has been resurrected by Obama”.

Now we wait for his plans to be fleshed out, but the intent is clear and with mid-term elections due in the autumn and Main Street howling at Wall Street, the banks would be better to start their reforming ideas sooner rather than later. The key point that we can distil will be the ‘Volker rule’ that deposit taking banks would not be able to engage in proprietary trading, or to own hedge funds or private equity funds. Obviously this will not be the final answer to address the question of systemic risk, but rather the concerns and actions that will have to go further with regard to capital requirements and above all effective and intelligent regulation and regulators.

***
Obama’s State of the Union speech was as to be expected, an oratorical triumph which has been so much his hallmark. The question for his administration is being able to live up to the dramatic and theatrical rhetoric. One area though that should strike a note for some UK politicians were his comments on Capital Gains Tax abolition but more importantly the focus on smaller company incentives and encouragement to entrepreneurs. This too is a key area for the future of the UK economy and despite our debt burdened finances this is an economic sector we must seek to encourage. We know that if there are incentives the British will be entrepreneurial. A misquote from the film Field of Dreams, “if you build it, they will come”.

***
And finally........jailbreak usually involves someone trying to bust out of jail, but police arrested a man trying to break into the Jackson County Jail in Medford recently. Medford police Lt. Bob Hansen said, “At 4:10 a.m., sheriff's deputies at the jail spotted a man scrambling over a tall fence that surrounds a secure lot where arresting officers unload potential prisoners and escort them inside. Jail officials met the man on the ground and contacted Medford police.

The man, James Merrill DeVore, 28, told police that he was distraught over the death of his mother two years ago and admitted that he had been drinking alcohol and smoking marijuana. He told officers that he needed help, so he went to the jail to ask for assistance. When he didn't get an answer at the front entrance, he decided to go around to the back and try to break in.  Medford police charged him with disorderly conduct and trespassing.

But even after the two criminal charges had been brought, he still didn't land in jail.
Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited



Monday 25th January 2010

All Things Must Change

Can the City of London kindly stop moping around like a depressed basset hound. Just a year after we managed to avoid financial Armageddon, the banking system is of course still not fit for purpose, but none-the-less changes and developments are afoot – which is good news. However:

Bad news - it would be foolhardy to suggest that the banking issues and problems have been resolved – far from it. From last year worrying about having banks that were ‘too big to fail’, we now have a smaller number of larger banks (in terms of market share) which are still ‘too big to fail’. We still have not addressed the regulation and risk controls of the unstable mixture of investment and utility banking, and for many they are still undercapitalised with large write downs ahead of them, and unable to lend sufficiently at the right margin into a credit-strapped economy.

Good news – changes are afoot.

 RBS has already started the process of divesting 318 branches to someone else (offers needed please). LloydsTSB has to do the same for some 600 of their branches and of course Northern Rock has been restructured as a functioning mortgage bank again and is ready for a friendly purchaser.

 There are also new participants waiting in the wings whose plans are as a result of these changes. Tesco and some other supermarkets all have banking aspirations of various levels and given that they already have one or two branches, such an initiative with a high level of internet access would not necessarily be a very complicated structure. Also we cannot ignore the aspirations of Sir Richard Branson’s Virgin group who have made it very clear that they are interested in entering the arena in some form or another.

 Then we can have the brand new banking ideas that are forming. Blackstone, the private equity firm has applied to the FSA for a banking licence to potentially establish a banking operation under the possible name of Home and Savings Bank. Add to this the concept of Metro Bank and most recently Walton & Co which is being created by Panmure Gordon and at last we are seeing some much welcomed sparks of entrepreneurialism and initiative coming into this depressed market.

 Overseas entrants are also waiting in the wings but it would be helpful if the City of London started to get back onto a positive footing again and realise its great strengths and not just sigh from its failings. Success attracts success and London still has a lot to be proud of. Thus the opportunity of attracting more banking investment from both China and India is perfectly sensible and both already have a reasonable presence, with even the Chinese entering the UK mortgage market. Even in Brazil, the São Paulo based Itau Unibanco, which is the largest non-government lender in Brazil has not denied an interest and they could well be one of the contenders for the hived off branches of RBS and LloydsTSB.

 So if the City wants to gain some respect it should start addressing the negatives and encouraging the positives and get back to what it does best – making money.

***
Another area that needs to change or at least evolve was highlighted last week in a fascinating article in the New Statesman by David Blanchflower, the economist and ex-member of the Bank of England’s Monetary Policy Committee (MPC). In this he suitably castigated George Osborne for his stated policies and seemingly ignored his advice. In his words, “he seems hell bent on creating the Osborne Dip”. He quotes Dominique Strauss-Kahn, the head of the IMF to support his argument against the immediate post-election tough-cutting proposals of Osborne “in most countries, growth is still supported by government policies. For as long as you do not have private demand strong enough to offset the need of public policy, you shouldn’t exit”.

He also went on to criticise the MPC itself in its narrowness of brief and remit in looking so fixatedly at inflation and not only that but at only the narrow measure of inflation, CPI which excludes house prices. His point being that if they had taken account of house prices as part of the inflation measurement then rates would have been higher at an earlier stage, and thus could have helped prevent or at least reduce the credit bubble that followed. In his view they missed the clues for the recession and acted too late on rates on the way up and too late on rates on the way down.

In this view it is thus ‘not fit for purpose’. His points are certainly correct, but rather than disbanding it altogether, it certainly needs reform. Heaven forefend that we return to control of rates solely back to the murky world of the politicians.
***
Darwinian evolution is taking place at some speed in the world of private equity as well. Last year the measure of the lack of vibrancy in this sector was shown by the number of deals – just 117 which is their lowest in 25 years and at value levels going back to 1995.
The prevalent system of private equity was to use borrowing (or leverage) to re-engineer and restructure businesses or their sub units by way of buy out or something similar. Now however with the shortage of borrowing and the days of mega-buy outs gone, the private equity beasts are evolving fast.

The new world is closer to that of a financial version of Burke & Hare, with corporate cadavers being taken and their bodies being used for ‘other purposes’. More companies are being brought out of receivership than at any time since 1993. With the new fad for corporate MFI or ‘pre-pack’ bankruptcy, this has meant that private equity firms need a new style of staff. Rather than the financial warlocks that could create complicated accounting structures, they seem to now require good old-fashioned business operators to rebuild defunct businesses and bring them back to life. This sounds like a wholly encouraging development; given the number of failures coming through, often with good companies being squeezed by cash flow constrictions (back to the banking system again) the opportunities of rescuing good value from untimely failure seem most positive.

***
And finally......the headline of the week must be.......
Floor caves under Weight Watchers weigh-in
No-one injured – but dieters might have extra motivation to shed pounds
As a Weight Watchers group gathered for a routine weigh-in, the dieters got an idea of how far they still had to go: The floor underneath them collapsed, a Swedish newspaper reports.

"We suddenly heard a huge thud; we almost thought it was an earthquake and everything flew up in the air," one of about 20 group members said to the Smalandsposten newspaper. "The floor collapsed in one corner of the room and along the walls."

After the initial collapse on Wednesday evening, the floor started to cave in other parts of the room, and the stench of sewage crept into the clinic, which is in Vaxjo, a city in south central Sweden. No one was injured, and the cause of the collapse is still under investigation.

The group is looking, not unsurprisingly for an alternate location for future meetings. I think it is frankly one of the best incentives to lose weight – I hope they find a building with the right load (or is it lardy) factor to support them.

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 18th January 2010

The Temperature of Chinese Porridge

I don’t know what the Chinese translation of Goldilocks is but certainly she appears to be much sought after by them. The search for an economy which is neither too hot nor too cold has always been the most Herculean of tasks for any financial authority. The recent Chinese stimulus packages and loose credit facilities have certainly been having their effect to invigorate their economy, and such actions have often caused many of the ripples of reaction around the globe. For example the amount of investment in infrastructure projects has provided a much needed fillip for such overseas suppliers such as Siemens in Germany and Caterpillar in the US.

Now however, there have been some serious concerns raised internally (as opposed to those previously expressed externally) about the possibilities of the Chinese economy potentially overheating. The concerns particularly surround the recent credit binge as illustrated by the growth in lending more than doubling from Rmb 4,200bn ($615bn) in 2008 to Rmb 9,000bn ($1,318 bn) in 2009. The direct result has been for the People’s Bank of China to raise the reserve requirements that local banks must keep aside by 0.5% to 15% of their deposits, and also to raise rates on one year notes.

This can really be seen as a warning to banks to rein in their lending which in a command and control economy should be lot easier than in respect of our reckless bankers of the last decade. The question now though is whether this action is enough to be a gentle application of the brake, or if rather something more direct may be necessary – once we can assess what effect this might have, then we might have a better idea whether we are dealing with a controlled and co-ordinated slow down or something more unpleasant such as an asset bubble bursting. As any child can confirm, letting air out of a balloon gently is extremely difficult.

This of course is not just an issue for the Chinese but for the rest of the world as well. Any sharp change will have a consequent reaction and of course that will most certainly include us - and particularly the FTSE 100 Index which is so heavily weighted towards the mining companies that are so strongly correlated to Chinese economic demand.

As President Nixon’s Treasury Secretary, John Connelly, so famously declared about their management of the US Dollar: "It’s our currency, and your problem." Perhaps soon we might hear a Chinese official say “It’s our economy, and your problem”. You have been warned.

***
From shivering to damp trench foot in the space of just three days - I am sure we have all suffered from the astonishing unpredictability of the UK’s weather. This is a perfect example of where investors can see a clear line of logic between an event and its effect. With the chilling cold so the demand from our power utilities shot up not just here in the UK but across the Northern Hemisphere. Economic dislocations from the freeze have rippled across the economy providing some potentially interesting investment alternatives – just follow the snow line.

In days gone by it would have been necessary to try and stock pick risky individual power companies to try and see if you could benefit from the meteorological misfortune. Now though there are easier vehicles to use such as the iShares DJ STOXX 600 Utilities (SX6PEX GY) which is the most obvious as it gives exposure to a broad array of European utilities, including power generation. This is another example where Exchange Traded Funds can provide cost effective access to the breadth of a sector that would otherwise have easily been hidden.

***
And finally…….…..A South Carolina man has been sentenced to 10 years in prison for stealing an $80 slab of meat. The Times and Democrat of Orangeburg reported on Thursday that 51-year-old Mark Zachary of Orangeburg received the maximum sentence after jurors found him guilty on Wednesday of shoplifting. Prosecutors said the sentence was justified because the 26 August theft from Reid's grocery store in Orangeburg was his ninth offence.

Authorities said when a store manager approached Zachary about the missing New York strip of beef and the somewhat bulbous bulk under his shirt, he fled right into the arms of an off-duty police officer.

Assistant Solicitor Glenn Justis asked jurors "Where's the beef?" in his opening argument.
Zachary testified he was just ‘massaging’ the meat, not stealing it.

Have a good weekend.
Justin Urquhart Stewart
Director
Seven Investment Management Limited

P.S. Oh and one mutter from the gutter – second hand quote....”Mr Mandelson why didn’t the coup against the Prime Minister succeed last week?” The answer came back “because I wasn’t running it”. Well it sounds credible!




Monday 11th January 2010

The UK ‘A game of two halves’

Before the snow set in, there was a brief moment of economic enthusiasm (but certainly nothing that could be considered anything near euphoria). This was a result of the retailers rushing out their sales estimates for the run up to Christmas. Spending was apparently better and therefore everyone was encouraged, and then with some industrial production figures in the UK showing some improvement, suddenly there was a brief flush of optimism.

However, within twenty four hours the snows set in again and the blanket of financial worries returned to cover the economy with a pall of gloom. In just a single day sentiment turned, with forward retail sentiment turning down and the consumer confidence figures coming out showing greater weakness and nervousness on the part of spenders. These concerns primarily related to the increasing cost of taxation both directly by way of National Insurance and Income Tax, and indirectly with the rise in VAT back to 17.5%. Not surprising really - especially given the dour commentaries from all the politicians who seem to have started practising their party lines for their forthcoming hustings.

For the UK, I wonder if our markets may be the inverse of what happened last year. Just twelve months ago we were just recovering from the fright of near Armageddon and the first few months were nervous and torrid; yet following an evaluation of all the government economic stimulation around the world and the S&P 500 reaching a satanic nadir of 666, everything turned around. From there we had a wonderful market and economic recovery (albeit the UK has yet to prove that it has turned positive). This year I wonder if we will see a potential reverse when optimism is shaken by some aftershocks and our investment markets lurch ‘down again in 10’. This year we will hope and plan for the best but be prepared for the worst.

The recovery from last Spring should come as little surprise given the amount of cash pumped in to stimulate the economy. Investors have been seeking anything that may give some improvement from the meagre deposit rates – a dash from cash to just about anything, even including some trash. Nevertheless we need to beware, as such an environment can and will change swiftly. Remember stock markets do not carry on going up in a straight line. However, at some stage the injection of government stimulants will stop and the question will be what happens to both the economy and the markets when we come off the steroids?

Such action is likely to occur possibly in the second half and not far off the General Election. The result and the subsequent Budget from whoever wins will, in my view, inevitably see government expenditure cuts, and that means job losses, and taxes rising either stealthily or more directly by VAT at 20% for example. Any base rate rise could act as a brake on the UK’s delicate recovery.

Thus our focus for returns and growth may well be outside the UK. Our domestic economic growth, whether dipping back down or not, is likely to be both anaemic and insipid however, more encouragingly elsewhere around the world growth will still be there and this will provide support for those overseas areas of our stock markets and especially in the FTSE 100 which is so dominated by miners and oil companies. These will benefit from not just overseas growth but also the weakness of Sterling especially against some of the stronger developing nation currencies.

So first half domestically better; second half domestically weaker but overseas demand stronger. Thus we may have a ‘game of two halves guv’nor’ which if we are not careful could have us ending up feeling ‘as sick as a parrot’.

***
With Pimco’s comments last week about the increasing risk to the UK retaining its debt credit rating, I took a look at the Pre-Budget Report projections for the amount we as a nation will be paying in interest. For 2009, the figure quoted was £31bn but rising to some £44bn this year. These may be large numbers but of course somewhat meaningless to most, possibly until you bring it down to the daily cost of servicing our national debt which would be approximately £120 million each day.

Perhaps if such figures were more effectively broadcast to the nation, many would realise that we cannot afford to continue to live beyond our means. Thus unless we have what is recognised as a credible repayment plan (the key word here is credible, not bland intentions and targets) then we will lose our debt credit rating and the cost of our debt will only rise further.

Whilst some have rather patronisingly commented on the dire straits of Ireland, Iceland and Greece, perhaps we should look to our own shortcomings first before criticising others too vehemently. I have mentioned before the brave actions of the Irish government to address their huge difficulties, and perhaps our vote-desperate politicians should remember this as they try to entice us with many of their unreliable promises. Streuth - we have probably got another five months of them flapping around until we can finally get an election result.

***

Just one other thing to note from last week; the Bank of International Settlements (BIS) which is sort of ‘the central bankers’ central banker’ has put a shot across the bow of the banks about a resurgence of ‘excessive risk taking’ that sparked the financial conflagration. You may recall that it was the BIS that twice warned about risk and exposure by the banks before the crisis exploded – and no-one took any notice – not bankers, not regulators and not politicians. So yes they were warned and they have been warned again. The banking crisis cannot be considered as being resolved until action is taken to control them either as being too big to fail, too big to effectively regulate or too big to manage risk – and that is apart from still not having enough capital support.

Watch out with all the government issuance going on as those finance ministers wondering what to do with it will suddenly realise that they can ensure that their banks can be required to hold greater proportions of the government paper – a good wheeze for building false demand for dodgy paper.

***
And finally........ Food rage returns - Police were called to a McDonald’s restaurant in Toledo, Ohio where a woman apparently punched through a McDonald's drive-through window because there weren’t any Chicken McNuggets left. I had never realised that such delectation could instil such a reaction. Police say that the 24-year-old was treated for injuries, and then jailed. Mind you if she had thrown the McNuggets one wonders what damage they could have done instead?

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited





Monday 21st December 2009

Say Goodbye to the Naughty Noughties - Welcome to the Lean (and probably Mean) Teens

I suppose the end of a decade was never going to have the impact of the end of a millennium, but its passing is barely being whimpered let alone celebrated. Perhaps we will look back at this first decade of the new century as being the ‘Noughties’ marked by the financial, consumer and property excesses that eventually exploded with such catastrophic consequences.

Compared to the roaring 20s, our ‘noughties’ don’t seem to be as exciting, but that will be for history to judge in years to come. Certainly we had huge excesses leading to extreme levels of over-confidence and complacency stating that it was all going to be ‘different this time’. You may recall being told that the packaging of debt, including sub-prime debt, was in fact going to reduce risk by spreading it. Well to an extent it did - it spread the risk like noxious manure, and sprayed the damage far and wide. But did anyone want to know about the risk or warn about it? No – as Chuck Prince, the then CEO of Citigroup, said in 2007, “but as long as the music is playing, you've got to get up and dance. We're still dancing.” Well he was – and now the bank’s value has been decimated.

I am grateful for the combined experience and intelligence of our asset allocation committee for countering such complacency and highlighting the growing risks of the recession, sub-prime debt and of course warning of the farce that was the Icelandic banking structure.

So, what next? Well, as ever, some are always able to find predictions of Armageddon over the next few years and especially around the Mayan calendar predictions of 2012 which run out in that year. This, I can only assume, is the ancient version of your Duracell battery running out in your alarm clock. It is fairly pointless planning for such catastrophe, as being the last one standing in your ‘sou’wester’ clutching an ISA application form and your ‘go-go hamster’ will be of little benefit as you float aimlessly amongst the cosmic debris that was our planet.

So rather than worrying about a polar shift courtesy of the Mayan priests, perhaps we will be seeing a financial polar shift in business and political influence from West to East. This could be either a great positive move for global economic advancement, or alternatively the trigger for increased trading protectionism by the economic blocs of the USA and the EU against the aspirations of the Chinese nation.

The key issue here will be the attitude of our politicians as to whether they are going to be barn storming populists defending ‘pork barrel’ local economic issues, or pragmatic statesmen willing to work against the populist views for the greater good of the larger economic environment. Surely pragmatism should win out, but if you look back at the background to the dreadful protectionist Smoot Hawley Act of 1929 in the US, you can see that many politicians realised the danger of such a policy but mid-term elections for democratically elected populists proved an easier route for cowardly demagogues. Could it happen again? Sadly some of the current comments from US congressional backwoodsmen do not read well, and quite a number are pointing in an accusing manner at the trading rival and old ‘enemy’ of China – and dare I say some would no doubt refer to them as ‘Red China’. Of these two nations, I realise that one is more right wing and that the other is more left wing – the trouble is I have no real idea which is which.

***
Another theme for the Lean Teens will be that of taxation. Just in case none of us had noticed taxes will be going up – and by quite a lot for quite a while. As a result, every penny of benefit that we can legitimately squeeze from our allowances and tax free facilities will be proportionately far more valuable than ever before. From income tax allowances and ISAs through to grandma’s heating allowance, all of the family’s entitlements can be brought to bear to fairly minimise your tax payments. This of course is one of the effects that few politicians seem to appreciate – the more you tax, the more effort will go into minimise exposure and payments: whereas the lighter the taxation often the less effort is made and as a result often the tax take can increase.

However, I would like to think that this period of austerity will drive us through towards some better personal financial disciplines. A combination of well founded cynicism in the financial services industry with a fear of not having enough in the future will, I believe, help us have a more considered and responsible approach. I would urge everyone to think across their family and not just as an individual. As a family we should all usually have greater assets and a stronger and larger financial balance sheet – as individuals we are lonelier souls, and financially more vulnerable and easily picked off by product salesmen.

Thus this decade I believe, will be the era of the Financial Planner. These professionals are still rare beasts who provide a service rather than a product sale, and are therefore rewarded as professionals and not salesmen. Within the decade I believe having your financial planner will be as common as having your own private financial GP, and frankly the sooner the better for all of us.

***
And finally.........December 14 — Why Santa’s a bloke. A 44-year-old Florida woman was arrested by Boynton Beach police yesterday and charged with resisting arrest without violence. According to the police report, Officer Alex Lindsey was interviewing a woman last evening while investigating a disturbance when she began yelling at another woman "so loud that it caused the female I was interviewing to start screaming." After refusing the officer's request to stop and leave the area, the lady was arrested using a ‘bent arm takedown’. She was then cuffed and taken to the police station for processing but was released without having to pose for a mug shot. Her name? Ms Merry Christmas!

May I also wish you a Merry Christmas, or a Happy Hanukkah or just a jolly good holiday.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited





Monday 14th December 2009

Barking at the Bankers

You may recall the Dangerous Dogs Act of 1991 which was the legislation rushed in as a response to some dreadful incidents of serious injury or death resulting from attacks by aggressive and uncontrolled dogs, particularly on children. These attacks received typically hysterical tabloid headlines, causing widespread public concern over the keeping of dangerous dogs and the result was some ill thought through knee jerk legislation.

Under the 1991 Act (and as amended in 1997) it was illegal to own any ‘specially controlled dogs’ without specific exemption from a court. The dogs would have to be muzzled and kept on a leash in public, they must be registered and insured, neutered, tattooed and receive microchip implants. The Act also banned the breeding, sale and exchange of these dogs, even if they are on the Index of Exempted Dogs.

Four types in particular were identified by the Act:

• Pit Bull Terrier (a description which has led to some confusion, as the ‘Pit Bull’ is not a breed in and of itself but encompasses a range of breeds)
• Japanese Tosa
• Dogo Argentino
• Fila Brasileiro

In comparison the Chancellor’s Pre-Budget speech pronouncements on city bonuses seemed to be about as equally thought through. I noticed that he only mentioned discretionary bonuses as opposed to contractual ones which of course would be a lot harder to hit but are often the most penal type and most reflect the weak and insipid management of various investment houses when negotiating pay contracts.

Like this canine act, his pronouncements have already been mainly ignored as Treasury officials rush out explanations as to what is included or not, what actually is a banker (as opposed to an asset management firm, say, owned by a bank?) and how the tax bill can be avoided, rather than just evaded.

Perhaps they could also identify and categorise these types of dangerous bankers properly as per the Dogs Act:

• The Pit Bull Banker (unpleasant aggressive New York banker usually identified by beautifully capped and whitened teeth covering the original fangs)

• The Euro Slick (too smartly dressed smug continental banker who rages at the Anglo Saxon financial system whilst still receiving a generous package)

• Japanese Banking Tosa (this may be just a mispronunciation but after nearly twenty years of domestic enfeeblement it has been effectively neutered in many markets)

• The Perfidious Albion (this over-bred and arrogant breed that has little realisation of where it has defecated and the unpleasantness it has caused).

Sadly, like the Dogs Act, such action and no doubt others to follow will have little effect on the industry’s cultural attitude - which is endemic in certain areas, of greed and lack of responsibility. We should all recall that in dealing with others’ assets we have a higher duty of care and remember that it is a privilege to be asked to do so and that we do not have any given right to be in such a position. However, perhaps we could adopt certain elements of the Dog Act for the bankers such that they need to be registered and insured, neutered, tattooed and receive microchip implants. Now that’s what I call proactive regulation.

With Sarkozy and Brown enjoying the bank basking headlines there will no doubt be calls for other taxation ideas like the transactional ‘Tobin’ tax, but much of this has now turned into a form of banking stocks – and I don’t mean shares, but old fashioned stocks in which you pillory your bankers with ageing fruit and vegetables. I would suggest it is time that they start to concentrate on the causes of the problem and not the symptoms.

***
Whilst the papers have finally realized that the Pre-Budget was a hollow tin when it came to debt management proposals, it just underlines that it is confidence that truly underpins markets and economies. Thus if politicians try to be too clever in times of worry then they will be rumbled. The ineffectual nature of Darling’s comments about his debt plan only added to the lack of confidence. As I mentioned recently this is dangerous behaviour when sovereign debt valuations are under such scrutiny.

Perhaps I can offer an alternative view for the Government. Rather than just looking so bewildered over its debt, perhaps it should actually take a look at its overall balance sheet and assets as well as liabilities. The UK government now owns large elements of the UK economy. As well as being the country’s largest employer, it is also the country’s largest banker.

Add to this the range of its indirect assets by way of guarantee, the railway network, significant parts of the infrastructure, and of course by way of its bank ownership it has investments in pub chains, housing developments, nursing homes and even some yachts. In fact the UK government is now the country’s largest private equity company. Maybe such a review could provide us with a better valuation of the government, the nation and its debt?

Perhaps then let us learn from our history to see if we can reinvigorate our economic vitality?

After the First Opium war with China in which British troops occupied Hong Kong 1841, the island was ceded to Britain but it was not until 1898 after another drug war that Britain obtained a 99 year lease on the New Territories. From these small acquisitions even the Chinese will admit that such a creation was an incredibly valuable and dynamic centre of trade and wealth creation.

Perhaps now is the time for a reversal of such a policy. Why don’t we make an equivalent centre in the mouth of our equivalent of the Pearl River? There, sitting in the Thames, is the often ignored Isle of Sheppey. Well you don’t have to sell it but lease it out as a tax free development centre to attract inward investment and entrepreneurial skills. So rather than a science park off a university campus why not a national development centre? Hong Kong might like a new base and Singapore certainly needs more space.

***
And finally............where in the world would you choose a town that could possibly be the obvious ‘twin town’ with Walt Disney World? The excitement, the thrill, the charm and the sheer magic of the place for young children, this has to be a very special place. There can only be one name that immediately comes to mind. Swindon.

Well there is hope for Hammersmith yet.

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited



Monday 7th December 2009

No Sovereign Immunity

The term ‘Sovereign Lending’ implies the delightful possibility that we could lend out the Windsors for weddings, bah mitzvahs and sundry supermarket openings, which to a great extent I suppose is what they actually do, except on a somewhat grander scale. However, back in the late 1970s and early 1980s this lending to states turned into a euphemism for trying to get ‘the stuff back’ from bust and over-borrowed nations. This national sovereign lending had become a banking fashion fad with new departments being created and the concept of lending to nations was altogether seen to be far more appealing than just lending to the same old corporate again. So why was this suddenly so popular amongst international bankers? Because countries don’t go bankrupt do they! Or do they?

Then there came a realisation that countries can and in fact do go bust. In those days we had the caricature sharp suited American banker going south of the Rio Grande to lend out suitcases of greenbacks at cheap rates to virtually anyone who would take them – so long, that is, as they had some form of a letter of comfort from the local state or government. Thus Latin America was swept up in a frenzy of bank lending with cheap money for projects many of which were seen as being hair brained even in those days.

I recall a steel plant being funded and to be built from scratch in the middle of the Brazilian forests, which to this day I don’t think has produced an ounce of metal, and also the British financing of warships to be stationed in the strategically vital port of the city of Manaus which has to be at least several thousands of miles from the nearest international border. Also at that time we had the new BAe146 being sold as a great short take-off jet, which apparently would be perfect for third world dusty African air strips – except no-one on the continent had the facilities to service four high tech jet engines in the middle of nowhere. I think one was eventually sold to Mali for important national security reasons (presumably for the president to get out of the country quickly).

So money was shipped out and the risks were for someone else to manage. The lending was big, and the fees eye wateringly generous as reflected in the acrylic ‘tombstones’ that listed all the participating banks that joined in the syndication. Where you stood on the list was according to your seniority in the debt, your fee and your banking ego. And for those who said “no” – well, they just weren’t proper players. Big was butch and size was everything. The quality of lending seemed to be a wholly secondary issue.

Of course it all ended in tears, firstly with Mexico’s default but the contagion swiftly spread around the globe and especially throughout Latin America. The low cost rates had doubled and tripled and what was previously just affordable on a good day became totally uneconomic and destructive not only to those states but of course also to the banks in due course as well. Some may recall the failure of Crocker Bank in California which was brought down by its overseas adventures, and of course this in turn triggered the mortal injury for Midland Bank which was eventually to be rescued by HSBC.

Many countries with corrupt leaders and officials were blamed but certainly this was the first time I had come across such degenerate banking behaviour as debt was shovelled out in return for fat fees, and then, to rub salt into the wounds, after the default, usurious penalties were charged just to pile on the pain.

It was not of course just the bankers, certainly the lawyers who drafted the huge tomes of legal documentation had equally astonishing fees and in one case I can recall actually just duplicated documentation within the same tome – presumably to get extra fees for production and output. Nothing seems to change.

However, now we are dealing with a different sort of sovereign debt crisis. Dubai has been a bubble waiting to burst for some time, and has been covered in detail elsewhere, but countries such as Greece and Ireland are closer to home, albeit within the Eurozone. Here the pressures are marked by the widening in the debt spreads and the increasing aggravation of the Germans towards these junior Euro nations who lack the financial discipline to control their borrowing effectively.

This though is not just a financial problem but a political one. The issue will be which governments will have the strength and courage to face their electorate with what must be penalising measures to try and restructure the country’s finances? Well to be fair Dublin has started to act and face up to their responsibilities, but I fear others will be less determined as their politicians waver and weaken. The reaction from those citizens will not be pleasant and I fear a whiff of tear gas will be in the air before twelve months is out.

Although not in the Euro, the one name that also stands out as being a case needing urgent attention is that of the UK. Morgan Stanley’s note last week highlighted some of the threats here if political uncertainty increased and especially if we ended up with an unclear election result. Their worry was that, in extremis, we could see a fiscal crisis with capital flight and Sterling suffering severe weakness along with a sell-off of gilts. The issue must be that whoever is in charge after the election must be able to lay out a credible plan for the nation’s debt management – if not then we will almost certainly lose our valuable AAA credit rate status.

***
One of the immediate effects of investors trying to find anything better than ‘sod all’ on cash accounts has been the ‘dash for trash’ that I have mentioned before. One the consequences for that is the inevitable pulling forward of flotations and IPOs as corporate advisers take advantage of a window of opportunity to raise money for businesses and get their prospective new issues away. These may well include such names as New Look, Gartmore and Pets at Home.

These floats may well in fact have a very important structural effect on our economy as many of these companies will be coming from the private equity stables. Private Equity has suffered greatly for the past two years as they have been unable to move their portfolios of investments. This will allow the freeing up of more capital to be deployed into the next generation of ventures and aid the depleted banking system in the provision of support. After such a period of corporate constipation, some economic syrup of figs could provide some much needed relief. Eew, sorry.

***
And finally……Wisconsin, USA. Planning and timing is everything in a good crime. Maybe the bank robber needed the money to buy a watch. It would seem he needed one after arriving six minutes after the Guardian Credit Union in Waukesha closed. Police said a man wearing a ski mask entered the first set of doors at 5:36 p.m. on Wednesday with a gun, apparently not realising the bank was closed.

Police Sgt. Jerry Habanek told the press that police are reviewing security tapes and investigating. He said the robber could have planned poorly or possibly had another reason, like getting tied up in traffic.

The message is clear. If you want to really rob a bank – join one.
Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited





Monday 30th November 2009

Sheikhs Rattled and Markets Roll

So finally reality has come to the sparkling mirage of Dubai, and the result of the effective default became a seismic ripple around the globe. This of course was not helped by certain markets either being closed, as in the Gulf and New York, or just not working – London! However, as the news is digested and the potential collateral damage considered, we have to measure the likely outcomes.

Certainly the debt from Dubai is spread like a broad web across the world from the UK’s Southampton Containers to the Emirates airline, as well as, of course, the huge property developments within the Emirate itself. However, the key point will be the effect on other emerging markets and especially those more closely related to Dubai.

The wisest move would be for the other Emirates (and especially Abu Dhabi) to step in swiftly and stabilise the situation if only to ensure that there is no further contagion for the near region. Any delay or vacillation could easily have a much broader impact and potentially lead to a wider emerging market correction.

However, what is clear is that Dubai is not a Hong Kong or Singapore. Its roots as a financial trading centre are still relatively shallow and certainly it does not have the benefit of being an entrepôt for an industrial hinterland – just dust and dunes. The big bet for the Emirate was to create a vibrant centre before the last of the oil ran out - it was a brave call – and one that may not be yet lost, but that will be dependent to a great extent upon the goodwill and largesse of others.

For the banks affected the damage has already been reflected in the share prices and, although the short term issue will be addressed, this news may just be the precursor of other sovereign defaults elsewhere in the world.

Related to this and closer to home in Europe the worst of the Eurozone “PIGS” has been behaving badly. Greece is financially strapped and has shown little or no interest in properly addressing its dire situation and has even been referred to as the “Iceland of the Aegean”. This reflects poorly on the confidence in the structures of the Euro and will no doubt have created much anger back in Germany, where the need for financial discipline is more fully appreciated and understood!

***
Happy Thanksgiving – Phew the world made it!
Compared to this time last year when financial Armageddon was quite a considerable possibility we have been pulled back quite remarkably. That’s not to say that all is well – far from it - but at least we are not teetering on the brink of that banking crisis, although my previous paragraph may yet reverse the situation for some.

So we should all celebrate Thanksgiving as it could have been a lot worse. After last Friday in the US (Black Friday, when US retailers hope to go into the black for the first time in the year with holiday shopping) the figures will be pored over the see if Joe Schmoe can still spend anything and if so what was sold at what margin.

The first indicators in the UK are that savvy retailers have already taken action to reduce stock, and some are even concerned about stock shortages. Sales figures seem to be holding up but we should note that some sales have already started. The divide will of course be clear between those with jobs and tracker mortgages who are still in a better position, and the rest – who are most definitely not.

***
Sadly we are already being softened up for the charade that is likely to be the climate conference in Copenhagen this week. At least on this occasion we have the US and the Chinese being seen to make an effort to participate with various offers of collaboration, however I suspect we are all going to become bemused and confused with varying comparisons of proposed cuts and actions.

However as with many of the national promises and “binding” commitments to third world debt and donations, much is promised and often little delivered. I will be delighted to be proved wrong.

***
And finally........what can you do if you find that your economic growth figures aren’t quite what you were hoping for? Well we all know politicians have their own way of dealing with this, but I can but only admire the imagination of the South African government.

Their Statistics Agency released previously “non-observed” activities in its gross domestic product calculation for the first time – in line with international standards.

The new category includes many other activities like prostitution, abalone poaching and of course the growing and trading of drugs. As marijuana is seen as a cash crop in many rural areas then they could be missing out on some key economic growth data if this were not included.

On this basis perhaps we should re-evaluate the growth figures for the UK? Mr Darling could for example have some better economic news for us if he were to include the market turnover in say, Shepherd’s Market, and include some of the sales of the herbal remedies seemingly so easily traded in parts of West London. Perhaps then our own growth figures would not only look better, but enable our politicians to chill as well.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 23rd November 2009

The Reincarnation of Old Economies

In the dull grey light of an Autumnal dawn it can be quite difficult to envisage the dynamic regeneration of those older industrial centres whose ageing factory sites seem inevitably destined to be repackaged into ‘heritage centres’. History of course, is something to be proud of and something which can be turned into an active and contributory part of the economy, but historical sites and collective memory cannot on their own build the vibrant economies of the future.

Wrexham has been such a town. Rich with a history from the crucible of the industrial revolution, this border town on the Welsh Marches has been put through the wringer of economic change over the past few decades. Throughout that period its core industries of coal mining, steel production and brick making have all died out and left the town as the classic post-industrial failing economy. However, judge the strength of character of a town not by its difficulties but by its reaction – and Wrexham to its credit didn’t just wallow in its depression but took action to change itself.

Thus it came about that I was privileged last week to be asked to help open the Wrexham Business Week, which reflected their determination not to only change but also to promote their efforts as well – and also to show just how far they have come. Of course, they have had the ubiquitous retail developments and shopping centres but, although these are useful developments, they are primarily service areas and will be inevitably be affected by our next somewhat leaner economic decade of lower consumer spending as the nation learns again to save, pay down debt and finally remember that houses are for living in and are not gambling chips.

Wrexham has taken some brave initiatives and it is the strength of these actions that show the real mettle of the community and its leaders. Now with better transport and a growing technology park, new business and economic development is back on the agenda. Wrexham is a great example of what can be done and has realised that the real growth opportunities for the UK economy will come from smaller to medium sized companies and not the lumbering corporations of yesteryear.

To add to their prospects they even have their own railway company, the Wrexham and Shropshire, which now provides a direct route back into London (Marylebone) for the town and for the first time in many a year. This is a bold and exciting initiative and I was impressed by the imagination of the company’s management into developing a new rail brand and service in the teeth of a nasty recession. They seem to be focussing on all the things I love to hear as a committed (in various senses) train traveller – service - improving times and punctuality, improving service with trained staff and good food and drink – even in due course being able to book your meals in advance and online.

Bravo for such initiative both for the town of Wrexham and its railway.

***
A financial area that may well show some concerns next year could be the Building Society movement. I have always had a lot of respect for the structure of these organisations, where their mutuality has provided the opportunity of some tangible connection between customer, and thus part-owner, and the actual operator of the society. This linkage can create great brand and business loyalty and, when working well, should also be a great marketing tool to attract and refer new business to them. Sadly however, I do come across some of them that have lost this connection and are corporate in all but name and structure. This is where the main banks have failed to really engage with their clients, and it should be an advantage for these mutuals.

The main problem for many societies at present though is a business one. At their best they are straightforward businesses primarily providing savings products and mortgages. The trouble is that both of these areas are under severe pressure at present. Savings rates for most are pathetically low throughout the market and the societies are finding it difficult to offer more competitive rates and attract more savers. On the other side, mortgage volumes, although off their low, are still well below last year’s levels, and thus both their businesses are being squeezed.

The result of this is that we are likely to see more mergers in this sector as a defensive move to reduce costs and benefit from any economies of scale. Some that find this difficult may be tempted to offer astonishingly attractive rates by way of desperation – if that occurs I would urge all to remember Icesave and the like – if it is too good to be true then it probably is.

***
Two warning lights just flashed on this week:

1. I am indebted to an old friend and ex-colleague Anthony Peters, who has proven to be a wise sage over the years, for pointing out one key indicator - 3 Month Sterling Libor has risen from 0.479% on October 10th to 0.60% now - that is a 28% increase. This is a clear indication of rising risk levels.

2. US mortgage delinquency rates and the percentage of loans starting foreclosure have leapt up and are now standing at record highs. With unemployment rising, and likely to continue to do so into next year, these levels may well continue to deteriorate before finally improving over the next few months.

Such risk measurements are sensible and logical forward indicators and should be taken account of – especially by those too enthusiastic bulls.

***

And finally........ Russian police have arrested three homeless people suspected of eating a 25-year-old man they had presumably killed and then decided to sell the less tasty other bits of the corpse to a local kebab house.

"After carrying out the crime, the corpse was divided up: part was eaten and part was also sold to a kiosk selling kebabs and pies," the Prosecutor-General's main investigative unit for the Perm region said in a statement.

Suspicions were raised when dismembered parts of a human body were found near a bus stop in the outskirts of the Russian city of Perm, 1,150 km (720 miles) east of Moscow. I note that no suspicions came from any complaints from customers as to the flavour of their take away meals. Frankly, given the odours I come across in certain kebab and pie vendors around Shepherds Bush, it is merely confirmation of earlier nervous suspicions.

Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited







Monday 16th November 2009

Sometimes exposure and transparency go too far?

The truth is that if all the customers put their bankers up against a wall (no, not to shoot them necessarily – no matter how tempting that may be on occasion) the bank concerned would almost always be unable to pay back everyone’s money at once. After all, a joint stock bank is not a Piggy Bank but operates on the basis that not all funds are needed at once and consequently money can be applied to other uses. A bank will always work on the basis that only a relatively small proportion of their cash will need to be made available at any one time. Thus the basis of banking isn’t in fact the holding of money – it is the holding of trust – the customers’ trust.

Therefore if at any one time you had to publish to customers just what proportion of their money is not actually available, I think many would be rather concerned, especially given the events of the past couple of years surrounding the reliability of the banking industry. Banks will always have a range of different lending facilities and services in which customers’ cash is being applied and thus it is down to the good judgement of that bank to evaluate the risk and return of those facilities to ensure that client confidence is being retained.

From this simple premise perhaps then we should question some of the broader statements of exposure of banks’ valuations. We, of course, would all agree that we want effective probity and honesty, but does that have to include a constant measurement of value of assets even at times of severe illiquidity when proper market values will have been made impossible to establish?

This brings me then to the repetitive mantra from many about the banks. This has been the need for absolute clarity and transparency. This has resulted in calls for ‘mark to market’ accounting requirements – which in easy terms just means trying to attribute a real value for an asset at any given time. Obviously such an open and honest approach is laudable in its aims, but unfortunately does not really address the issues of the real world.
In reality banks’ assets, i.e. loans and investment facilities, can be extremely difficult to clearly value as they are not usually day to day tradable items which have clear pricing structures. If then you force someone to mark a price at any one time to such items, the answer can quite often be at least misleading and at worst create catastrophic financial panic. An example of this can be seen with the recent figures coming out on the banks.

The major banks that have been forced to open up their assets to evaluation have seen their corporate value collapse however, the likes of Barclays - by avoiding the involvement of the State as a shareholder, has been able to steer around such exposure and thus although considerably weaker than before, has avoided the worst of the storm to date. One wonders exactly what position they would have been in had they been forced to openly attempt to ‘mark to market’ all their facilities as RBS and Lloyds have been obliged to do? What price confidence.

***
One sign of the growing Chinese consumer base has been the decision of Tesco to carry out a £100m joint venture expansion. The UK’s largest supermarket is planning to build three large shopping centre developments to add to their existing chain of hypermarkets. Although playing catch up with the other international supermarket giants of Carrefour, Metro and Wal-Mart, there is still a huge amount of business to aim at.

By way of perspective, China’s total retail market grew by 281% between 1999 and 2008 to Rmb 8,500bn (£750bn) - a compound growth rate of 16% (data from Access Asia) and no doubt a lot more to go yet.

***
As I write, President Obama is well on his way for his first Asian Presidential tour, and no doubt one subject coming up will be the relative values of both the Renminbi and the Dollar. The Chinese have made no secret over their fear of continuing US$ devaluation and the impact it would have on their US reserves and investments however, I suspect the President will also be hearing of the regional concerns over the need for the Chinese to let their currency appreciate beyond its current $ peg.

The APEC (Asian Pacific Economic Co-operation Forum) meeting in Singapore has called for a more ‘market oriented’ approach to both exchange rates and interest rates – which is conference-speak for revaluing the Renminbi! Given the move towards greater regionalisation rather than globalisation in South East Asia (with less Dollar and US dominance and dependence – what a change from the last decade before the Asian crisis) this may be better received by the Chinese authorities, and especially since most recently some of the seemingly relentless downward pressure on the US currency has eased off. Such an easing would be welcome however, I hope this should also be accompanied by further agreement between the US and Chinese leaders to stop the dripping of protectionist sand into the engine of Sino-American trade. This must stop – that is the path to recession and depression.

***
And finally........ London commuters listening out for the latest news about train services got a broadcast with a difference when the noise of a couple apparently having sex was blasted out over a station's loudspeaker system.

Instead of the usual messages about delays, passengers at West Ham station in east London heard a couple's love-making antics being relayed over platform loudspeakers during the evening rush hour on Thursday.

"The noises heard by passengers were not from within our station. We believe they were a result of some sort of interference with our public address system," a Transport for London spokesman said on Friday. "It certainly wasn't coming from our staff."

"It was definitely a couple doing it there and then," passenger Laura O'Connor told the London Evening Standard newspaper. "He was grunting loudly and she sounded like she was having a great time. The driver must have heard it, too, as the doors stayed open longer than usual."

Gosh – tube travel will never be the same. They really should mind the gap.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited






Monday 9th November 2009

Is This The Next Area of Concern?

So where is the next problem going to come from? Even though we haven’t anywhere nearly sorted out the mess from the last crisis, people are still desperately looking for the next one. Sadly the gift of foresight has not been given to me but at least some common sense might provide some help.

The murky worlds of ‘High Frequency Trading’ (HFT) and ‘Dark Pools’ are beginning to attract some attention and certainly some light into this gloom could be revealing. Essentially, as the name implies, HFT is automated computer trading at high speed and high volumes. These are systems which are often run and owned by investment banks and trade according to their proprietary programmes and seek out any pricing differences or anomalies they can find, and consequently trade on them. The idea being that even with fractional differences, a huge volume of trades can be potentially very profitable.

The term ‘Dark Pools’ refers to trading that takes place away from the major exchanges and are traded at prices which are not disclosed until after the transactions have been completed. These are normally for institutions wishing to trade quite substantial blocks of shares without drawing attention to themselves. These structures are called ‘crossing networks’ and are run by independent operators, exchanges and investment banks. To a great extent these came about because of the monopolistic behaviour of certain stock markets and their uncompetitive charges.

Now all of this innovation should be welcomed, after all faster trading at lower costs should be good for clients and users, and also improving proper price formation and, of course, ironing out price aberrations as they occur. Surely this is a great use and application of technology?

However, I would consider that there are some considerable issues that should be addressed here. First of all, can we really regard HFT as investing? Isn’t it rather an automated computerised gambling and trading programme, feeding off other market trades? It is certainly light years away from the concept of what a stock exchange is for, whose primary role is to raise money for business in the most cost effective and efficient manner. The secondary role for stock markets was thus the trading in the stock listed upon those exchanges – HFT has taken this to a whole new level. So in reality, this has no connection with share ownership or investment in companies which goes against the main premise of a joint stock limited company. Research and evaluation of companies is thus irrelevant, corporate ethics and social responsibility of no interest and the actual business of the company of no consequence whatever. This is not investment – this is programmed gambling.

Also, to those who serve their clients in the markets, these trading programmes will be automatically reacting to individual and even small private client trades and effectively getting better prices than the stockbroker can and, one can argue, distorting the market. After all what then is ‘best price?’ In fact you could find the situation whereby the investment house you may be trading with could be making a ‘turn’ out of giving wider prices just to enable them to make more - especially if they are able to see trades entered before they are actually executed – and yes, that is possible.

Does this then make it a fair and open market? Is there thus a case for banning such behaviour as it is anti-competitive and monopolistic towards other providers and traders, and distorts the market?

These are valid concerns, but of course it is always easy to apply the dogma of the ‘Spinning Jenny’ and ban such innovation. However, I don’t think there is any reason for such Luddite behaviour – standing in the highway of progress normally results in messy road kill.

I don’t have an easy answer or solution, but I can see a problem not just in distortion, but rather in trading that is hidden. This is a charter for potentially illegal, corrupt or more probably potentially destabilising markets and just where another financial explosion could occur, if there was lack of capital support, security and effective regulation.

The answer I suspect will lie with the need for greater transparency and intelligent automated and live trading regulation to sit alongside these functions. Additionally those that operate in such worlds, should have to bear the necessary capital requirements to cover the risks themselves and not to fall back on governments and tax payers.

***
After the GM/Magna fiasco, I suspect the Russian investor in the rejected consortium must be indeed annoyed at not being able to acquire such assets at a knock down price. For others though, this period of weaker industrial valuations has provided both a boon and boom for emerging market investors with reserves to spend.

China especially has taken the opportunity to buy into such technology at prices akin to a fire sale. The preferred bidder for Ford’s Volvo car brand, Geely, is offering to pay about a third of what Ford paid a decade ago. Also the Beijing Automotive Industry Corp is taking a stake in Koenigsegg, the Swedish supercar company that has bought Saab, and another Chinese car maker, Sichuan Tengzhong has bought that most American icon - GM’s Hummer brand.

The good news is that this shows that the Chinese are reinvesting their reserves of capital and not sitting on it like the greedy dragon often portrayed. The bad news for western nations is that their hard won and expensive investment in technology is being sold off cheaply – but if you want the capital investment you are going to have to give up something and something valuable.

***
And finally.........odd news from Rio de Janeiro. A Brazilian bricklayer was reportedly killed in a car crash. As is customary in Brazil, the funeral was held the following day, which happened to be the holiday of Finados, when Brazilians visit cemeteries to honour the dead.

What the family members didn't know was that the bricklayer had in fact spent the night at a truck stop talking with friends over drinks of sugarcane liquor known as ‘Cachaca’. He did not get word about his own funeral until it was already happening on Monday morning.
A police spokesman in the town of Santo Antonio da Platina said “the driver Goncalves rushed to the funeral to let family members know he was not dead. The corpse was badly disfigured, but dressed in similar clothing. People are afraid to look for very long when they identify bodies, and I think that is what happened in this case."

His niece Sampaio said that some family members were not sure if the body was Goncalves. "My two uncles and I had doubts about the identification," she told the newspapers "but an aunt and four of his friends identified the body, so what were we to do? We went ahead with the funeral."

The police spokesman confirmed there were doubts: "His mom looked at the body in the casket and thought something was strange. She looked and looked and couldn't believe it was her son," Sampaio said. Before long, the walking dead appeared at the funeral. It was a relief.
“The body was correctly identified later on Monday”, the police spokesman said, “and has already been buried in another state.”

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 2nd November 2009

So what bank would you like?

Just what type of banking system do we want? It’s not often we get the chance to choose, but the actions and opinions of the EU authorities on our banks may well have thrown this whole question open.

So do we want big banks? Big does not necessarily mean strong as it used to before the banking earthquake. Do we want small banks? Small may not have the necessary cost efficiencies to survive, and also small may not be strong enough.

No, what we need are properly functional and functioning banks. We need banks which can be both scalable and provide deeper facilities, but also enough of them to provide a competitive and more efficient market.

The agreement to separate out Northern Rock’s good quality bank from its ‘manure bank’ is to be welcomed as only then will the management be properly freed to start growing the business more effectively when released from the shackles of the inherited horrors. However, just relieving the beleaguered Rock from its position is only part of the solution and, if not followed up, could be part of the problem. What we can’t then have is a clean Rock offering market winning facilities when the competition is also hobbled. Action needs thus to be taken, and in short order, on the other banks and most especially Lloyds and RBS.

Just think what we could create. Edinburgh could get the once venerable Bank of Scotland back, Yorkshire could retrieve its once leading mortgage provider and regional icon, the Halifax, and even the TSB in Scotland could see the light of day again. The reality though is likely to be less bold with, I suspect, a sell-off of a few brands like Insight and branches of Cheltenham and Gloucester – not very imaginative and not enough.

How about RBS? Maybe the primary brand for England will be Nat West and the Royal name kept for North of the border and also for the still significant international investment banking business. How about bringing back Williams and Glynns, which I recall had an excellent reputation as a retail and commercial bank for maybe a premier brand? And of course, there is also the Coutts brand which, despite the devaluing of the exclusivity of the brand by its unimaginative corporate owner over the past few years, could still be saved and revived. Perhaps the staff and management should start a campaign to ‘Free Coutts?’ There will also be the niche Edinburgh based bank of Adam & Co which could be separated, but for my own personal and totally selfish (and probably no more than emotional) wish, I would like to bring back the Drummonds bank brand, if only to remind me of the days of the branch just by Admiralty Arch.

In fact we could have an array of great brands if we wanted, all of which could provide healthy competition if properly capitalised and managed. Of course there is the problem – who would want to buy them and who can give them enough capital and marketing drive to revive these great brands? Well of course we do know of at least two companies lurking in the foyer. Just maybe the likes of Virgin and Tesco might want to pick up such names and add them to the top end of their prospective financial ranges?

On the other hand there are other entrants as well which could also have an impact. The Chinese have already entered the UK mortgage market and a further extension of this is quite probable and, given the lack of capacity in that market, any such addition must be a benefit not just to mortgage applicants but to homeowners if transaction volumes start to increase again. Additionally there are some smaller very exciting technological innovations beginning to make their presence felt such as Zopa, which cuts out the middleman and matches lenders directly with borrowers. The line to draw from this is that commercial banking is changing – and after what has happened over the past year, then it has to be only for the better.

However, just being a retail bank today is no guarantee that you will make a decent profit. Only last week we saw the rather small fish of Standard Life Bank being snatched up by the Barclays eagle. Starting from scratch, the bank has been going for some eleven years and has cost the company apparently some £85m. Sadly the removal of another banking participant will further reduce competition and especially one which had started with a reputation for market leading initiatives and had forced some of the larger banking mastodons to react.

***
When you look at the state of our Parliamentary system it does not seem especially impressive. The ‘mother of all Parliaments’ appears to now be ‘muddle of all Parliaments’. With the House of Commons smeared in expenses slime and the standing of certain members of the House of Lords being somewhat questionable, you can share some small element of the anger of one Guido Fawkes 404 years ago. So if you are celebrating the uncovering of the Gunpowder Plot this weekend, I think rather than throwing an effigy of the unfortunate Mr Fawkes on the bonfire, you might try and find something with a passing similarity to one of our more tiresome politicians. I am open to suggestions.

***
Well the US is out of recession, so at least that is positive. However, after $1.3 trillion of economic stimulation, the ‘cash for clunkers’ scheme and the tax credits for homebuyers, then it should have some effect – but is it sustainable? There will probably be some growth but at the speed of a sloth.

***
And finally…..well it was bound to happen – a drug-sniffing dog was recovering in a veterinary hospital – with this human partner at his side – after accidentally ingesting methamphetamine.

Senior Deputy Dean Worthy said that Balu, a 4-year-old German Shepherd, had been commanded to search for a bag of drugs near where a suspect had dropped something else. “He did his job”, Worthy says. Balu alerted his handler to a bag of meth. However, Balu must also have inhaled or licked up some remnants from the bag. Hours later, he had a bad reaction.

Worthy took his K-9 partner to a veterinary hospital where he now appears to be on the road to recovery. Worthy said that he also has a bed near Balu’s, because the dog gets separation anxiety if he tries to leave and tries to tear out his IV lines. “We do develop a real close bond with these dogs” Worthy said.

The time to really worry is when they start to roll their own.

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 26th October 2009

An interesting beat-combo

So how was your ‘beat’? This has become the favourite word for US commentators for the past few days when discussing the recent string of quarterly corporate earnings coming out of the States. This most recent verbal confusion now uses the term as a noun usually with an attached descriptor of quality or size. Thus we can now apparently have a ‘good beat’, ‘big beat’ or even a ‘no beat’ and ‘under beat’, all to describe the quality or otherwise of the expectations of these important earnings figures.
At mid point it seems that it is open for all to see what they want to see (or are hoping to). The Bulls are seeing good recovery figures laying the foundations for a more solid outlook for 2010; the Bears are inevitably more cautious and point to weaker top line sales numbers rather than larger bottom results. Overall though it would appear that over 70% of those reporting seem to have come out with quite good ‘beats’.

However, there are themes definitely appearing from which we can make some deductions. Domestic consumer demand in the US generally still seems relatively flat, with earnings from the likes of Coca-Cola looking far more promising overseas with double digit growth in both China and India. The bright sparks from Apple also provided an air of optimism but much of this is still around product specific issues and fashions especially around the iPhone, which has managed to make the Blackberry look ‘positively passé darling’ in less than a year.

Others like Caterpillar are seeing signs of ‘improving economic conditions throughout most of the globe’, which again seems to be a description of improvement outside the US and not necessarily inside. However, despite the optimists looking for growth, the theme of cost cutting is still prevalent - as perfectly described by the FT last week ‘US companies have cut costs faster than revenues have fallen’, which sums up what seems to have been going on.

***
It has of course been the banking figures that have grabbed the headlines with their astonishing profit recovery figures just a year on from near Armageddon. Again these figures need separation, as those with retail and commercial banking businesses have still been languishing in ‘the slough of despond’ with more write-downs and losses to come, but on the other hand those investment bankers are showing eye watering figures that seem almost to ignore the events of the past twelve months.

These figures and the related populist row over bonuses have created a not unexpected furore. Following on from the huge government bailouts, both direct and indirect, these organisations have benefited not from just these palliatives, but also from having even fewer competitors. After a year in which it was said we didn’t want to have banks that were too big to fail, we now have fewer investment banks doing an even greater percentage of the business – that is to say making it even riskier! Brilliant.

I personally am with the Governor of the Bank of England and look forward to seeing certain banking functions and businesses being separated. In my view the only thing that an investment and commercial bank have in common is the same title – bank, thereafter there is little in common. There is though, in my view, one compelling issue for such separation of business. It’s not just risk, attitude and business, all of which are sound reasons, but really that linked and intertwined banking systems mean that depositors’ savings might be used and potentially at risk by the investment banking side, especially in times of squeeze and pressure. This is wrong. An economic utility is a different beast from a financial trading and investment business. One is essential for the effective running of a capitalist system, the other is a separate risk taking business.

The fact that the Prime Minister and the Chancellor regard these ideas as simplistic and out of date is more of a reflection of their knowledge and understanding. Comments that a US style Glass Steagall Act (brought in the in the 1930’s to provide such separation) are not appropriate in the 21st Century seems in itself simplistic. Mervyn King though is not alone in his views, with President Obama’s economic adviser Paul Volker, the highly respected predecessor of Alan Greenspan at the Fed, who also wishes to see such banks keeping out of riskier activities. We must remember that the level of risk and concern only started to rise when it was repealed and the two cultures were allowed to mix– blending nitro and glycerine may seem simplistic – it is – but it’s dangerous.

What I do find simplistic is that we must now establish new international bodies to manage banks and provide advance warnings of upcoming risks and concerns. Do they not realise that we already have them – and they warned us all in advance – and what happened? Nothing. None of the politicians or their advisers took any notice. The Bank of International Settlements, the ‘bankers’ banker’, warned, to my memory, at least twice of such concerns, but who was willing to possibly infer that the emperor might be somewhat sartorially challenged? No, we were still too focused on prolonging our booming economy on our bubble of debt.

However, separating the two styles of banking itself wouldn’t have prevented all the events of the past two years, but it would have meant that we should have had far clearer and focused regulatory understanding on the different areas. This could have meant that the risks being run by the bad business models of Northern Rock and Bradford and Bingley could have been addressed, the over indebtedness of the population being properly understood by the politicians, and even the reckless commercial (almost private equity) lending by the Bank of Scotland being addressed.

There is of course no single answer or solution, but there is a need for a greater appreciation of understanding and managing risk in different areas - making things too complex to manage means that they are inevitably too complex to understand.
***
And finally..............a measure of the state and quality of British ‘edjakashun’ – graffiti in a Gatwick airport loo I noted last week – ‘West Ham is a poof’ – I suppose there might just be a Mr Ham sadly given a first name of West? Even so, his sexual orientation is of no interest to me.

Also I overheard in the same airport, “I only usually have one because I can’t count past two” – I wonder in fact if that was the author of Mr Ham’s statement?

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited





Monday 19th October 2009

Autumn Sales start early

The Autumn sales seem to have come around very quickly this year. First of all we read of the private equity firm, Blackstone’s sales plans for part of its portfolio of businesses. Blackstone is the world’s largest buyout firm, and has now just recently changed its tune about the state of the financial markets, after being a voice of doom for so long. Its founder Steve Schwarzman, now with a more positive air, is feeling that the worst is over for private equity, and that this might be the time to start off loading (sorry obtaining better value for) some of their investment portfolio.

Successful private equity companies thrive on turning over their investment portfolio of businesses, if only to ensure that they are bringing real cash and are not just sitting on an illusory and often unproveable paper value. The past couple of years has led to a clogging up of the private equity channel as willing buyers and investors dried up, thus leaving the private equity firms with sedentary assets with no capital inflow for further investment.

Now however, Blackstones feel that there is enough investment appetite to list and float up to eight of their businesses and potentially sell at least another five. If successfully carried out, this is a major turnaround for hard pressed private equity firms and a sign of confidence in investment markets and which may mark an easing of the market gripes as they awake from their torpor.

Meanwhile at the poorer end of the high street, our own Government has floated the idea of some sales of national assets in order to raise a little bit more cash. Earlier last week you may have read a list of state assets which might be up for consideration of sale. With the campaigning for the UK election next year having already unofficially started, any such announcements were bound to be greeted with a level of cynicism.

However, when you look at the list and the potential sums being talked about, the list and its potential value does look rather pathetic. Hardly the family silver, which of course is now mostly owned by the French and Germans (in terms of utilities), but rather the silver plated cutlery that was forgotten and finally found in an old canteen in the loft.

So what could be included? The Tamar Bridge linking Devon and Cornwall, the throbbing travellers’ communications hub of Newquay Airport, or even the stationary (in every sense) Dartford Crossing – not exactly a mouth watering selection of unique British assets that the world would be clamouring for, but rather the “garage sale” of what might be left over by a desperate government in disastrous financial straits trying to raise some cash – any cash. Better to sell Tower Bridge and chuck in Lundy as well.

With an estimated sale value of £16bn this hardly goes far in addressing the UK debt mountain of £800bn. So why sell future income generating assets at knock down fire sale prices – have we not learnt anything? Can someone please remind our leaders of their pathetic management of the sale of our gold reserves back in the late 90’s – then at around $275 per troy ounce and now over $1,000. Anyone booked the IMF any hotel rooms yet?

The UK needs a clear plan to manage our way out of this mess and we are not getting it, and every day that this goes on will put further pressure on our currency and our ability to raise funding cost effectively.

You have shown that you can’t manage your own expenses, and you can’t manage our national expenses – so just go, will you?
***
Another red flag warning went up on China last week when figures on the aggressive Chinese stimulus plan showed some worrying signs. Although the world must appreciate this huge package in terms of its expenditure and stirring up of global economic activity, there are downsides and risks as well.

One area to watch has been the massive increase in bank lending which will have helped to propel the growth figures due later this week and are likely to show a growth level of 9% in GDP. The increase in lending and money supply is giving a legitimate concern about overheating and price bubble concerns, but it may be looking a little further out there may be a more important issue to watch.

Although the trade surplus figures have reduced quite significantly, much of this seems to have been caused by commodity stockpiling (with copper imports up 87% compared to last September) this may well bounce over the forthcoming months as the strategic stockpiling comes to an end. This will be exacerbated by the effective currency peg of the Renminbi to the US$ which due to the latter’s depreciation, has effectively devalued it by some 10% against many other currencies.

The effect of this could be then to hear those old accusations of cheap product dumping again as more products are produced and being sold and apparently cheaper prices. The protectionist cries will be heard again and louder.
***
And finally..............having trouble with your marriage and worried about the cost of a divorce? Maybe there is an answer from a Malaysian state government, which says it is planning to offer free honeymoons to save the marriages of couples who are on the brink of breakup.

Ashaari Idris, a government official in northern Terengganu state, says troubled couples will be allowed to spend two nights at the state's scenic islands or beach resorts to help them rekindle their romance under a "Second Honeymoon program”.

He said on Monday that couples who enrol in the program must however also undergo counselling.

Mind you for a holiday on a Malaysian island it’s probably worth having a decent argument.

Have a good week and Happy Diwali.

 Justin A. Urquhart Stewart
Director
Seven Investment Management Limited



Monday 12th October 2009

Potential Euro-fracture?

Euro fractures - whilst much blame for the financial crisis has been thrown in the direction of the mud splattered ‘Anglo-Saxon’ financial regime, that is certainly not to say that all is fine and dandy in the ‘non Anglo-Saxon’ Euro world. Previously we could identify the difference in policy interpretation and financial discipline between the ‘euro-core’ nations of Germany, France and the Netherlands as opposed to the PIGS (Portugal, Italy, Ireland, Greece and Spain). However, now there has been a worrying shift in attitude by certain members. After elections in Greece, the new left wing government seems bent on increasing debt levels rather than reining in costs, and now the French have announced that they will be no longer aiming to reduce their budget deficit to the required 3% of GDP level by 2012. This of course was one of the main planks of the Maastricht Treaty.

In effect this means that we are going to be seeing an adjustment in the two groupings within the Eurozone with Germany, the Netherlands, Finland and Austria on one side and then the rest making up the other group. The key message from this is that financial discipline across the single currency is breaking down. Whilst this may not mean the imminent demise of the currency (although many Tories would be yelping at the thought), it certainly may call into question its longer term stability. Such questions will call into question the various interest rate levels as well as sovereign fund rates and even the potential for default. The main protagonists here are Ms Merkel and Mr Sarkozy – it may well be their behaviour and attitude that will influence the next moves.
***
And speaking of Anglo-Saxons, the battle booty found in Staffordshire recently brings us back to the question of gold again. With 11lbs of the metal along with 5.5lbs of silver being uncovered, it was certainly not an inconsiderable haul. As a side point you can imagine the conversation after the battle sometime in the 7th century. “So Baldric, where did you put that bag of loot I told you to look after?” Which may well have been followed by “what bag sire?” These of course may well have been his last words.

My colleague Peter Sleep, pointed me in the direction of a book called ‘The Golden Constant’ by Roy W Jastram published in 1977. In this he highlights the consistency of the metal in that even if melted down, it will never change either its weight or chemistry. Furthermore, he also highlights the consistency of its price over time as well as ‘its purchasing power in the middle of the twentieth century was very nearly the same as in the midst of the seventeenth century’.

So what’s the value of the Staffordshire haul? Well 11lbs works out as 160.416 troy ounces, and thus the bullion value (not archaeological value) at today’s prices would be approximately $159,020. Now if we applied Jastrams equation for providing the historical value, we can arrive at a figure of $569 if tracked back to 1343 when his index started. Then if we surmise, we could use the same formula to take us back to the mid 7th century, we can calculate a value at that time of just $2.0347!

Now bear with me for another leap of faith and fiction, supposing that Baldric hadn’t lost them but rather had been able to meet one of my forebears at an earlier version of 7IM, presumably VII IM, his advice might have been to go and buy some 2% Government Consols for a long term hold. With the much ignored power of compounding, that would have provided our modern day treasure hunter with a bullion value of $762 trillion (that’s 12x global GDP (IMF)), or even at 3% $568 quadrillion – not bad for a couple of bucks. If only Chancellor Darling had met Baldric on a blood soaked Staffordshire battlefield, then maybe all our national financial problems would be solved – well maybe not.

***
Latvian fears are rising again as their economy is sliding towards potential currency devaluation and possible bankruptcy, and with it fears that their neighbours may get dragged down with them. This Baltic crisis maybe a financial sideshow compared to the larger economies but their impact could be just as devastating if it cripples the Nordic banking system.

Proposed Latvian legislation is currently being considered which would allow banks only to claim the value of mortgage properties rather than the mortgage value itself. This could prove very damaging as many properties have already dropped by 70%. Add to this that some 80% of mortgages are denominated in Euros and thus any devaluation will only further exacerbate an already dangerous situation.

So the government faces the ‘judgement of Solomon’. Keep the Lat pegged to the Euro and suffer an extended period of rising unemployment, falling wages, deflation and no doubt civil unrest, or devalue now and face the increased economic pain but potentially for a shorter period as economic competitiveness aids recovery. A news story to watch.

***
At least one bank is significantly benefiting from its more pragmatic and conservative position and policy. HSBC has of course been affected by the financial fiasco, but it has managed itself very effectively through the minefield and after a successful refinancing, now finds itself in a superb position to acquire discounted assets in strategically, for them, perfect locations.

As their name implies, their oriental pedigree is clear and thus a chance to buy up assets at, if not at distressed prices, then certainly at little premium - an opportunity which cannot be overlooked. The assets of both the distressed banks ING and RBS, in the region, would be excellent additions and although others will be in the hunt, like OCBC in Singapore and Standard & Chartered, the opportunities are remarkable for them. It’s good to be in the right place at the right time – with the right balance sheet.

***
And finally....good news for New Zealand patriots – your country just got a bit bigger: bad news for New Zealand patriots - you just got closer to Australia. Following an earthquake New Zealand has grown westwards by some 30 centimetres. That should improve the fishing and oil drilling rights then.

And another and finally…..the latest suggestion for controlling the southern march of the Sahara Desert has taken a leaf out of Emperor Hadrian’s book and proposes to build a 6,000 kilometre wall from Mauritania to Djibouti made from existing sand dunes and then covering them with the bacterium Bacillus Pasteurii which is commonly found in wetlands. This apparently will have a geological effect not dissimilar to that of ‘Imodium’ and will set the dunes like concrete within hours. Sounds like a good idea but I am sure they will never get planning permission.
Have good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited






Monday 5th October 2009

Getting the Bonfire Lit

I think I can hear the sound of something disappearing down the plug hole. It may just be the money supply. After a flush of excessive emergency stimulation packages, the world looks to see what effect have they had. To change my metaphors, if I may, gallons of lighter fuel has been poured onto the very damp bonfire and the “burning” question has been – has it been enough not just to catch alight and burn the fuel, but to create enough heat to set the heart of the bonfire glowing again for the longer term. For those who specialise in autumn bonfires, chucking paraffin over it is usually rather ineffective. Good slow burning bonfires are created from a concentrated heat which is nurtured over time to burn more slowly and consistently. The question for the global economy will be – have we started the slow burning bonfire, or just seen a flash of fuel burn over the surface and just leaving a thin blue plume of smoke from a still damp pile of rotting leaves?

Looking at the data following the fuel laden stimulus packages to date, these figures do not seem to inspire much confidence. For example, after all the stimulus packages China exports are down 23%, Japan’s down 36% along with their industrial production down 23%, and Germany’s down 17%, France down 13% and the US down 11%. I wonder what would have happened without any stimulants at all?
Thus if the money supply is disappearing, are we not in danger of losing the lifeblood of the credit and capitalist system? If so then where does that leave us? Well probably further deflation. If I may quote Axel Weber the Bundesbank chief “we are threatened by stress from our domestic credit industry through the rise in the insolvency of firms and households” and for Germany I think we could also read a similar picture in the US and UK.

***
Last week there was much excitement over the record set for the FTSE 100 with its best quarterly rise in history! By the way, history started in 1984 for the FTSE before which we had the much simpler FT30. A rise of almost 21% over that period has been remarkable and we have to go back to 1987 to find the next best quarter when between January and March of that year the where Index rose by 19% - at the risk of being a “Jeremiah” this was followed by the sharp “crash” or correction of October 1987. We must all remember that markets do not go up just in a straight line.

However, one of the factors and features of this recovery has not just been the supreme stimulus packages from the authorities, but also the better than expected corporate results which surprised the markets and further encouraged the bullish enthusiasm. More recently the rebirth of some M&A activity has heartened investors but a Goldman Sachs economist suggested that nervousness about the forthcoming earnings season might be adding to market wariness when saying “third quarter consensus earnings per share estimates in the US have been drifting down for the past two months” and more precisely “while 49% of S&P companies reported positive earnings surprises in the second quarter, only 25% beat on the revenue side” – which in English means that the rest was achieved by cost cutting which although helpful for a time, is not a recipe for a sustained future of growth.

***
More focus back on the insurance sector is likely to continue. After the Resolution/Friends Provident deal, the market is looking at other likely candidates. Legal & General have been regularly put in the frame, with Standard Life also being mentioned in despatches. The key will be to find the acquisitors and here we should be watching the National Australia Bank (owners of Clydesdale and Yorkshire Banks) along with their fellow antipodeans AMP and QBE. One name that keeps on being mentioned and keeps on denying any interest is the Italian leviathan Generali who have currently only a tiny UK presence. All of this gutter mutter will keep the sector bubbling and no doubt none of this will have gone unnoticed by the silent watchers from those other Insurance giants lurking on the sidelines.

***
And finally..........another incongruous legal decision from the US legal system. A Mr Terrence Dickson, of Bristol, Pennsylvania, was leaving a house he had just broken into and burgled, by way of the garage. Unfortunately for Mr Dickson, the automatic garage door opener malfunctioned and he could not get the garage door to open.

Worse, he couldn't re-enter the house because the door connecting the garage to the house locked itself when Dickson pulled it shut. As a result he was forced to sit for eight days and to survive on a case of Pepsi and a large bag of dry dog food. As a consequence he sued the home owner's insurance company claiming undue mental anguish.

Amazingly, the jury said the insurance company must pay Dickson $500,000 for his “anguish”. Memo to self – don’t leave anything in the garage that’s consumable except some WD40, Warfarin and Antifreeze. That should sort out his anguish.
Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 28th September 2009

Money for Nothing!

How about earning something for nothing? Well if you are a British bank then it seems that you can! Following on from the frustration that many have expressed at the lack and depth of bank lending, my colleague Peter Sleep has uncovered an excellent graph which perfectly illustrates where a good proportion of bank cash is currently being hoarded!
You will see from the chart that there is roughly a balance of some £40bn usually kept by the banks in The Bank of England held as a form of special reserve account. On this they receive an uninspiring but quite reliable rate of interest of 0.5%. However, since the banking crunch the amount stashed back with the “Old Lady” has now rocketed up to something in excess of £150bn. As the one year Government Gilt is only yielding 0.35%, it is thus more cost effective to just leave it with The Bank of England with no risk and without the fear of having some awful borrower not returning it. So it is hardly surprising that many banks aren’t lending so much when you really can get something for nothing. However, this may well, and probably should, change as The Bank could make their own deposit rates negative for the banks – thus they will have to pay for the privilege of keeping their money there.

Even if this does happen I wonder how much will really change?

Rather oddly the largest car manufacturer by volume of cars produced, listed on the London market is Manganese Bronze, the maker of the classic London cab. This national icon must be as synonymous with the UK as those deeply unpleasant tourist models of the Houses of Parliament. Although known throughout the world, it has never really been able to properly be exported with any success. I am told a failed foray into the US disappeared down one of New York’s famous potholes.

At a cost of somewhere between £30-40,000 these are not cheap run-abouts and in the recession not unsurprisingly demand has dramatically fallen over the past year by some 40%. However, there is now another attempt to try and make the most of this brand with greater overseas sales. A failed Chinese linkage back in 2002 achieved nothing but now a new Chinese shareholder, Geely, has entered. With a joint venture, Shanghai LTI, production has finally begun in China with the aim of selling around 1,000 vehicles domestically in the next year – and thereafter to start more aggressive exports. They will be sold at a much cheaper production cost (£11,000 I am told although sale price would presumably be higher) to potentially all other areas –with the exception the UK. So if you feel like a full and frank view of the state of the global economy with your driver, can I suggest this as an opening statement – you may however not reach your intended destination although he will no doubt tell you where to go.

The key question is whether cabbies around the globe want a higher value premium taxi in preference to the dull reliability of the ubiquitous Nissans and Toyotas that populate most Asian ranks? If it can achieve the ruggedness and reliability of a Land Rover, but with the lower cost base of Chinese manufacture, then just maybe this British badge can get a well deserved polishing.
***
And finally... a story which I am told is true and certainly deserves to be has come to my attention. Mrs Merv Grazinski, a good citizen of Oklahoma City, Oklahoma, purchased new 32 foot Winnebago motor home. On her first trip home from a football game, she drove on to the freeway; she set the cruise control at 70 mph and calmly left the driver's seat to go to the back of the Winnebago to make herself a sandwich.
Not unsurprisingly, the motor home left the freeway of its own volition, crashed and overturned. Somewhat more surprisingly, Mrs Grazinski sued Winnebago for not putting in the owner's manual that she couldn't actually leave the driver's seat while the cruise control was set. The Oklahoma jury awarded her $1,750,000 PLUS a new motor home. Winnebago actually changed their manuals as a result of this suit, just in case Mrs Grazinski has any relatives who might also buy a motor home.

Have a good week.
Justin




Monday 21st September 2009

Attack of the Rubber Chickens

If there was one thing we could point to in the Great Depression that almost ensured the economic recession collapsed further into an extended and deepening depression, it was the imposition of a wave of protectionist tariff barriers that effectively killed off global trade for the next few years.
This catastrophe was essentially caused by the passing of the ‘Luddite’ and disastrous ‘Smoot-Hawley Tariff Act’ signed into law on June 17, 1930. This raised U.S. tariffs on over 20,000 imported goods to record levels. The not unsurprising retaliatory tariffs by the U.S. trading partners reduced American exports and imports by more than half, and thus became one of the primary reasons for the severity of the Great Depression. In fact in the 4 years to January 1933 world trade fell by 66%.

Until now when it came to free trade, I had been quite encouraged by the more responsible attitude of the politicians and leaders around the globe. Obviously the Doha round of WTO (World Trade Organisation) talks have been dragging on for years without any clear progress or agreement. However, given the global recession it could have been much easier for posturing populist politicians to have retreated behind the argument of imposing trade barriers to wave their national flag in front of gullible voters – but so far there have been few signs of such rhetoric. There has inevitably been a certain amount of whingeing and some tariff barriers have in fact been raised. The EU, often guilty in this area, has imposed extra tariffs on Vietnamese footwear, and also raised subsidies on various dairy products, but on the whole has generally resisted calls for further protection.

Even in the US, despite calls for protection during the election, the Obama administration has rejected such actions – that is until now. Only last week we found that the US authorities had imposed a 35% tariff on Chinese made tyres, and not unsurprisingly the Chinese reaction has been swift and the authorities are threatening to retaliate with a slapping of extra duties on US chickens and certain car parts. So are we about to see the start of the Rubber Chicken Trade War? (I must express my ignorance and slight surprise that US chickens were a significant US export to China – something you would normally associate with an emerging economy – or may be a submerging economy?)

Thus the G20 meeting in Pittsburgh this week must be especially aware of these moves and I hope it will be highlighted to them as a dangerous path to follow. The main point of that meeting is that you have those with surpluses sitting down with the deficit holders, and what they must be reminded of is that they need each other – not as chums but as tangible trading partners to start to get the recycling of cash and trade as well as to start to increase the sluggish velocity of the global economy again. We must have a strong commitment from them to avoid protectionism.

***

Phew what a blinder. Barclays are at it again. Last week’s announcement of the restructuring of their riskier assets and subprime debt into a new company, Podium, took many by surprise. In days gone by this would have been called a Special Investment Vehicle or SIV, but that term has now been demonised for their part in the financial chicanery of the past few years.

To the outside world this does look like cosmetic rearranging of their balance sheet – and to an extent it is. What Barclays are doing is moving some ‘niffy’ stuff from their own loan book to that of the new company along with a huge loan to keep it afloat. It doesn’t mean that the debts have gone away but now they are no longer in the ‘front window’ of their balance sheet /loan book and replaced by a nice clean looking facility to the new company. So the smelly stuff is still around but now well off shore and with a huge financial seal stamped on it – thus no longer in Barclays name, and replaced by a simple facility to a new holding company. Does any of this sound vaguely familiar?

***
Gold fever is back. You only have to look at those dreadful adverts to realise that people are about to be scammed in some way. I am fascinated by the references to ‘unwanted gold’ and ‘broken jewellery’ that apparently we can just send off in the post and they will send us back the money straight away.

Hmmm, well to start with what exactly is ‘unwanted gold’? Of course you want it unless someone is willing buy it because it can be valuable. Also broken jewellery – how many people have broken earrings and necklaces? Surely don’t people ever repair them? Or is your first thought to stuff them in an envelope and post them off to heavens knows where. Yes and this brings me on to the final point on this madness – the postal system.

On what basis would you post jewellery and lumps of gold through the post especially in the UK? Given that deliveries by the Royal Mail in the UK are somewhat peripatetic and unreliable to say the least, it would seem to be counter-intuitive to despatch your worldly goods into a system where it has an almost certain chance of being delayed and a lesser chance of even being left in a gutter. Are we really that stupid?

Gold has been reaching near record levels and inevitably the cry goes up from those promoting it that we should all be piling in. Yes it is a perfectly valid asset class and has been a good solid asset hedge in nervous times however, before we all turn into gold bugs recent movements can be down as much to a fall in the US $ as to any rising demand. Many nations including Italy, Mexico and Singapore as well as the IMF are all looking to sell significant amounts of reserves in 2010. This may counter some increase in Chinese Gold reserves, and is by no means going to be a one way street.
***
And finally.....who says high flying salaries in financial services are a thing of the past? I note that the Chief Executive of Blackstone Group, Stephen Schwarzman, was paid a shade over $702million last year. The recession can be tough for some!
***
And one more…. with the German election due, I note that apparently on the 20th anniversary of its collapse on November 9, 1989, one in seven Germans want the Berlin Wall back because they feel they were better off when the country was divided.
The survey found that many westerners are bitter about higher taxes to pay for rebuilding the formerly communist east, where some 1.2 trillion Euros ($1,762 billion) worth of state funds has been transferred in the last 20 years.

Eastern Germans are unhappy about income levels that are on average only 80 percent of western levels and that due to higher unemployment depopulation is decimating parts of the east, where the population has declined by about 2 million since 1990.

So that was a great success then. They can blame David Hasselhoff.
Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited


Monday 14th September 2009

An Air of Palpable Excitement

I can’t remember seeing such group ecstasy for a long time. Suddenly it’s all over! The announcement of the return of M&A bids was greeted with the joy and relief of a chocoholic licking their first Mars Bar of the day. This was perfectly illustrated by Kraft’s cheeky bid for Cadbury which was almost greeted with euphoria and, although Cadbury’s themselves stuck two chocolate fingers up at the Kraft bid, this is going to be a story that may well be with us for some weeks to come with others like Hershey and Nestlé no doubt increasing their interest. For parts of the City the fact that corporate deal making was back on the agenda and seen once again as an acceptable form of capitalism, will have been greeted with huge relief as just another indicator that the investment markets are slowly but surely easing from their year of cramp.

However, before the school children get too over-excited, this is no return to the heady days of two years ago, but rather opportunist action by those able to use cash and paper to try and do a deal. It does mean though that “risk”, albeit in restricted amounts, is back.
But if that wasn’t enough the breaching of 5000 points on the FTSE100 has seen a rash of re-rating of expectations from quite a few retail houses seemingly oblivious of either how far we have come or the risks of weaker growth expectations in the next year. Now markets are always said to be able to climb a “wall of worry”, and they often do as they try to look ahead and discount future value. However, there seems this time almost a denial that certain key elements are still badly damaged and will provide only limited support to any recovery – this is of course namely the banking and finance system. Still, let us enjoy our Indian Summer of calm, cooling weather and use it to finish off the last of the Summer rosé wine – we must appreciate the gains but not let the feelings of mellow fruitfulness be replaced by sleepy complacency.

***
In fact I think there was actually some far more encouraging news which seemed to get very little overall coverage. This was the investment by China and one of the Abu Dhabi sovereign wealth funds in some strategic investment overseas. If there was one thing that the G20 should be looking for, it would be the recycling of reserves by those countries who have built up secure cash piles. The global economy needs those with the cash to get spending - even more especially as they can no longer rely on those deficit laden nations to spend their way out of the impasse.

With China it is worth stepping back to see the bigger picture and see if we can try and “join the dots” to try and find a pattern. Not only have we been seeing the Chinese investment funds being exported, but also the continuing pressure to make the role of the Renminbi more acceptable as a trading currency – or more to the point to try and move away from their reliance on the weakening US $.

In the past twelve months China has signed deals with Malaysia, South Korea, Belarus, Brazil, Indonesia and Argentina, all in order to start allowing it to receive Renminbi instead of the greenback for its exports. Since 2007 quite a number of Renminbi bonds have already been issued by some of the main Chinese banks in Hong Kong, now even HSBC has joined in with its own issue earlier this year. Now China is taking a further step towards the internationalisation of the currency by the issuance of sovereign bonds now available to offshore investors. At the end of this month they plan to sell Rmb 6bn ($870m £544m) with the stated aim of “improving the international status” of the currency.
So now try and join the dots and we can see a clearer picture of growing Chinese financial influence. Their currency is going to have greater traction and at some stage soon the authorities must start to introduce a plan towards proper convertibility and tradability. Not necessarily as easy as it sounds.

Part of this Chinese concern is coming from their continuing worry over the value of the Dollar and the Chinese reserves of over $2trn, 70% of which are thought to be in Dollars. The Chinese have thus been promoting an idea for a new currency order – maybe a new Bretton Woods agreement? - which could look to see an extension of the use of the IMF’s shadow currency the SDR (Special Drawing Rights) which is made up of a basket of currencies. Actually it currently consists of 4 with different weighted percentages – US$ 44%, the Euro 34%, Yen 11% and £ 11%. As these nations together only account for 28% of global exports, perhaps a broader participation might be more appropriate and provide potentially greater stability?

One of China’s views has been to expand the SDR basket to some 10 currencies, which potentially could leave the Euro and the Renminbi with 20% each, the US$ down to 16%, the Yen 9%, with £ and the Russian Rouble with 9% each. So one day your cash ISA might just have Renminbi in it!

***
And finally.............a sad story of inequity. RBS are saving £100million by cutting the pensions of 60,000 of its employees; I am sure you will recall the somewhat generous £17million awarded to their previous leader having trashed the business. A fair share of the pain?
Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited










Monday 7th September 2009

Banking – One Year After Lehmans

The whole banking problem has not been resolved. Between now and the end of the year there are going to be yet more failures, which may come through either as higher profile headlines via failure or nationalisation, or more likely with polite and quieter mergers behind the scenes.

In the US the FDIC (Federal Deposit Insurance Corporation) has said that the number of US banks now at risk has risen to a 15 year high, whilst the fund protecting customer deposits is also at its lowest point since 1983. In fact the number of banks seen as being at risk has now risen from 305 to 416 just in the past quarter – mind you to put this to some perspective there are around 7600 banks across the whole of the USA.

However this is not just a US issue but also back in Europe as well. Certainly in the UK it can still be argued that both RBS and Lloyds are technically insolvent if they were pushed to admit to all their losses and write downs. The fret over Lloyds over the past week about the cost of entering the Governments loan protection scheme has brought such issues to light. The questions for them now will be how to finance either their participation or avoidance of the scheme – so do they raise new money by way of rights or bond issues, or do they sell off quality assets in a dreadful market? This could include great names like Scottish Widows and Clerical Medical. Inaction is not likely to be an acceptable alternative.

However before everyone starts writing off the banks again, just remember that we are coming up to the first anniversary of the Lehman’s collapse on the 15th September after which we entered that maelstrom of the banking crisis which threatened the stability of the capitalist system itself. A year later the system may still be damaged but it is better than it was and it is slowly being repaired –although in my view not fast enough in the UK.

What though is frustrating is that the political leaders do not seem capable of focussing on anything other than the populist, although no doubt controversial, subject of bonuses. Here we are just at the most critical moment for companies trying to pull out of recession and yet we still have a dysfunctional banking system with restricted capacity and rising charges.

***

Later this week we will have the announcement from the Bank of England about base rates and in all likelihood they will remain the same at 0.5%. Of course we have all seen that interest rates have been rising for some months with anyone borrowing money suffering significantly higher rates than before – and often with eye watering arrangement fees.

However there is an area where the interest rate might be cut, and possibly turn negative, is in the excess reserve accounts that the banks have with the “Old Lady”. Now these rates aren’t generous but it has been apparent that the banks have been so risk averse that they have been preferring to keep money secure with the Bank of England, rather than to risk further lending out in the commercial world. It is amazing to think that reserves deposited by the banks at the Bank of England has grown from £28b a year ago to £161bn today (with so much money in its coffers perhaps the Old Lady can now afford to tidy up her rather tatty looking building on Threadneedle Street).

In order to force them to do something else with their money, could the Bank of England actually make these rates negative – so that if banks really want to keep their money in the Bank – they will have to pay interest for the privilege! The central Bank of Sweden, the Riksbank, has already started charging negative rates on the krona and the mere threat of the Bank of England doing the same has pushed down yields on one year gilts to a mere 0.45%. Hopefully this will feed through to the high street in the not too distant future!

***

It is that time of the economic cycle when spontaneous combustion seems to break out in what would have seemed to be previously inert warehouses. Normally during recessions there would have been a range of conflagrations in and around Glasgow by now, except for the fact that they have already been engulfed and destroyed in previous recessions. Thus it comes as no surprise to hear that the insurance industry have been growing suspicious at the recent spike of fire claims and the potential for some relating to arson events. Well if you can’t rent out property anymore you are going to suffer a cost as you will have now to pay commercial rates on empty buildings. So then you either you bulldoze it (and yes that has already started) or torch it!

***

And finally a sign of the recessionary times............B&Q have announced that they are to start selling flat pack pigsties for a mere £300. This follows on after a record rate of sales of chicken coops which trebled last year, and a growing waiting list for allotments for would but vegetable growers. So we can look forward to news next year of escaped pigs and chickens turning feral, and roaming parts of West London as many realise it is more complicated than they thought and probably cheaper and easier just to buy bacon and chicken rather than grow them.


Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 31st August 2009

The Sorcerer’s Apprentice

The end of the holidays and the beginning of September is really the start of a new investing year. The past few weeks have seen an enthusiastic equity rally, but is really based upon some pretty thin trading volumes. This period is often seen as being run by the Sorcerer’s Apprentice, in that the larger and senior traders are away and the juniors are covering – and the question is now what the Sorcerer will do upon his return? This does not necessarily mean that the increasingly more positive news and the market reaction to it has been misplaced, but it does mean that valuations may prove somewhat delicate in the face of much larger trading numbers.

The next fortnight should see a reasonable growth in trading numbers until after the St Leger has been run at Doncaster on Saturday 12th September (as in “sell in May, and go away, and don’t come back until St Leger Day”). In fact, had you sold out in May, and gone away, you would have missed out on a rise in the FTSE 100 of some 673 points from 4243 (1st May) to 4916 (25th Aug) which has been a rise of 15.8%. For the S&P 500 Index in the USA this was even higher, as it produced a growth of 17.2% during that time.

Mutter from the gutter has been telling me that many investment houses were quite significantly caught out by the sudden rally and are still sitting on significant cash amounts. They will no doubt be looking for a chance to get back in but are inevitably quite nervous at plunging back in at these levels. Watch out then, because if we do run into an Autumnal market squall, which is quite likely, then there will be quite a number of people looking to try and get their client monies back in the market. I am not too sure many investment managers will wish to face their clients at the end of the year saying that they entirely missed out on one of the largest equity rallies we have seen in a generation!

If ever there was a reason to underline the need for ongoing asset allocation, then this must be it. By ensuring that you had some reasonable equity exposure has meant that you did not miss out on the rise in prices. However, by then adding a process of tactical asset allocation, this would have allowed a further increase in equity investments both directly and through the use of derivatives to both control the downside risk and increase the upside leverage. Now that is a disciplined investment process and structure.

One issue that is going to have an increasing impact over the next few years is that of the savings glut. The Eastern nations have for years sat on cash rather than spending it, but now both the US and UK consumers have reversed their reckless spending sprees and have started to save again.

However, with savings interest rates at record lows there will be more money than ever trying desperately to find a better return. As confidence returns, time passes and complacency replaces fear, so the risk appetite of investors will increase. This will be better news for investment markets, but the key issue will be to what extent will the fear of loss be overcome by the greed for higher returns? Investment memories can be remarkably short.

The effect of this awash of savings will be to depress interest rates which will be bad news for ordinary cash savers. For borrowers though, rates (or more usually spreads) have already risen as banks seek to boost margins and profits. One area that will continue to suffer will be the Building Societies who are finding it very difficult to offer decent rates to attract new savers, and thus have little capacity for lending, especially with the wholesale markets still being constricted. Watch out then for further mergers here - sadly with no sign of windfalls, but rather with rescue nets as they huddle together to survive.
***

And finally...... In a cross between The Full Monty meets The Calendar Girls - workers at the Chaffoteaux et Maury crisis-hit boiler factory in Brittany have decided to strip off for a nude calendar in a bid to save 204 jobs slated for redundancy.

They say they will use the proceeds to fund a trip to Italy where they plan to stage a protest at their parent company, Ariston Thermo Group (ATG) – hopefully by that time fully clothed.

"Our aim is to show there are workers here who will do anything to save their jobs, even take their clothes off," said Brigitte Coadic, representative of the CGT union at the site and the woman behind the calendar, which is due out in the Autumn.

But Coadic insists that the Chaffoteaux action, in which 13 male workers pose nude covered only with masks or helmets, is completely peaceful. Well after “Boss-napping”, sit-ins, port blockages and lamb burning, this is probably a bit more appealing. I thought stripping down boilers was just something normally done by British Gas.

***

And another and finally..........more excellent value from local councils....Dundee Council is spending £144,000 on putting an overweight family of 8 on a diet. I quite understand and support food for those who cannot afford it, but paying people not to?


Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited





Monday 24th August 2009

From Recession to Recovery (that’s the hard part!) - Bonus Twaddle and “Doh!” x 3

Good news – the world is coming out of recession. Bad news – it’s going into a period of very likely tepid, anaemic or insipid recovery. No doubt the Thesaurus is going to be well thumbed by the time we get through the next quarter to describe the quality and standard of the recovery, but the message is likely to be a familiar theme.

However, suffice to say that for the moment flicking flaming matches onto a damp BBQ won’t immediately light the charcoals sufficiently to warm the economy’s chipolatas.

I came back from my holidays to find that nothing has really changed - our glorious leaders are still getting into a state of hysteria twittering about bonuses. Creating a lather of confusion, they seem to be making it up as they go along – should we be capping certain bonuses, banning guaranteed bonuses and even having a bonus or higher pay commission – what else do we need? All the leading parties seem to be trying to out-do each other in anti bonus talk – obviously their much leaned upon focus groups have been frothing at the mouth and thus the party leaders feel they have to respond in threatening rhetoric to such populist demand. I wonder if Robespierre ever got a bonus?

It is as though that we seem to have had a logic breakdown. So if I may, perhaps I could go through a list of questions to ensure that I am not really “three stops short of Dagenham”.

Question 1: Is it still alright to make money? Presumably, yes.
Question 2: Is it still alright to be rewarded for making money? Again presumably, yes.
Question 3: Is it still alright to reward people an extra amount for exceptional results? Yet again presumably, yes.

So what are they all barking about?

I completely understand, and in fact am adamant, that financial businesses and especially banks must not be allowed again to get themselves into that same position where they can either endanger the economy and/or expect that they can fall back on the largesse of the tax payer.

Most of this, though, is managed by the requirement for a significantly greater provision of capital by those banks wishing to enter areas of increased risk. Additionally more effective monitoring and supervision must be in place to identify this in advance. Frankly whether a bonus is paid or not, (and even guaranteed or not) is beside the point and if stupid companies are being stupid enough to pay too much for bonuses and their “talent”, then that is their own fault. If on the other hand they judge that they need to pay high rewards for fantastic returns so long as they can manage the people effectively – then why not?

What the politicians should really consider is the ability for companies to be making money and profits and thus being able to pay the tax due thereon. For example, if companies are making more money, then they will be paying more into the Exchequer (just look at the recent destruction of government revenue as a result of the banks not making money) and if the individuals are getting bonuses then they too will be paying more in tax as a result – not as a penalty but as part of just the normal income tax structure. What the government should be ensuring is that corporate taxes are in fact paid where they are due, and that the bonuses for individuals are fairly taxed and not squirreled away to an offshore island before any deductions. Don’t they want more tax revenue? “Doh!”

Sadly we seem to be entering a period of popular attitude where profit is increasingly regarded as unsavoury, success seen with suspicion and those with exceptional success as the spawn of Satan. In fact let’s turn this around. We should rather be welcoming corporate profits and welcoming exceptional results whereby people do earn bonuses based on success. Where the balance goes wrong is when stupid managers give short term rewards for longer term risks, but that again is down to the governance of the company itself, its shareholders and its supervision.

***

For a second “Doh”, the Homer Simpson award for not realising the consequences of their actions and statements must go to George Osborne. His comments about disposing of the FSA, not unsurprisingly, have put off many would be aspirants to join the regulator – just at the moment when they are trying to attract more talent, not less! As I have mentioned before, the nomenclature of the bodies is virtually irrelevant – it is getting the right quality and calibre of people that is so crucial and short term political name calling as ever, never achieves anything.

It smacks of the “not invented here” syndrome that Labour were equally guilty of when they ditched the PEPs for their “all new” ISAs. All that did was incur extra cost and confuse savers and investors, just for the sake of something new from “us” and not “them”.

***

And finally....another “Doh” award for making money from almost nothing must go to Pizza Express – if only because they use dough.

Once upon a time you could buy a pizza with things on it – but now you can have a better and trendier pizza called a “Leggera” - or light alternative presumably. This is a pizza with the middle taken out – so less dough and less topping, and then the hole is refilled with a dollop of nice cheap salad. Why is this a stroke of genius? Because now they can offer you less pizza for a higher price and then take the middle bit of the pizza dough and make some dough balls which you can buy as a side dish for £2.35, and then finally use the toppings for someone else’s pizza.

A triumph of marketing – you get a trendy product which costs more and you get less. Brilliant. Suggestion - Why not make your own?

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

P.S. my apologies for those I may have confused a few weeks back about the story of the Bristol car park attendant. It has been one of those lovely urban myths which one day may even come true. A story, yes, but still worth re-telling.




Monday 17th August 2009
Date Dilemmas

You’re on a first date that starts off in a swanky West End bar. The conversation is a tad on the dry side. You are glad that you made the effort to go but now are in a quandary. Do you a) cut the evening short and leave before you are dragged onto more awkward silences over dinner or b) keep the hope and say to yourself that the only way is up?

Now imagine that two participants on this date were the Old Lady of Threadneedle Street (a.k.a. the Bank of England) and Quantitative Easing. Last Thursday it seemed the BoE faced just such a dilemma. When many observers were speculating that it was about to time its exit from this awkward situation, it shockingly did the opposite and chose option b). The Bank decided to carry on with QE and expand the programme by a further £50 billion.

It has already thrown £125 billion of liquidity at the market through the QE programme but is unfortunately left with no clear indication of whether its unprecedented measures have made a large enough dent. Even the all seeing all knowing, seemingly omnipotent IMF is none the wiser reporting that “It remains too early to tell whether this will be enough to ultimately generate the desired increase in aggregate demand.”

The BoE’s intention of suppressing Gilt yields through its asset purchase programme hasn’t been entirely successful. Benchmark 10 year Gilt yields have actually risen since March. In defence the bank’s Inflation Report released this week suggested “[yields] were probably lower than they would have been in the absence of the asset purchase programme”. The IMF too corroborated this.

It also reported that money growth remained weak, growth in the stock of loans to households remained subdued and the stock of outstanding loans to businesses fell. The bank took the decision to raise the money supply hoping that it would be spent on new investment projects, thus creating economic growth. But the Inflation Report estimated that business investment fell by nearly 8% and dwelling investment by 12% during Q1 2009. Wait, so where is all this money going if it’s not to households and small businesses which might actually be able to spend it?

Here’s a clue; take a look at equity prices. That now infamous phase ‘green shoots of recovery’ and the emerging strength of China and India through this crisis has certainly helped in raising the risk appetite of investors. So when the BoE turned to institutions and big banks for purchases of Gilts, you could have quite literally heard their cash machines go Ker-Ching!

The extra supply of money has been used by institutions to repay bank debt, restructure balance sheets and has found its way into risky vehicles such as equity and property which offer higher returns than Gilts. The shine of Gilts is fading fast. The government has to borrow billions (by issuing Gilts) in order to fund its appalling lack of fiscal prudence - and then there is the matter of just how long will the BoE remain chief buyers.

Cash is reallocated to risky assets and money is shifting between one financial instrument and another but what does that have to do with growth? No doubt rising equity and house prices will be pointed to as signs of an economic recovery but again, what does that have to do with growth? The BoE’s hope of avoiding deflation and creating economic growth through new investments and jobs has yet to materialise.
And that brings us to the Bank’s ‘exit strategy’ - the new buzz-phrase that Barron’s (part of The Wall Street Journal digital network) note as “one of the things that strike us, after observing the sorry episodes necessitating an exit strategy, is that the vast majority of them, whether in war, diplomacy, politics, romantic involvements or finance, could have been avoided by an entry strategy”. Well said!

In wanting to avoid a double-dip recession such as that characterised by America in the 1930’s, the BoE may well be cautious of suspending the unprecedented policy of QE too early. The monetary policymakers note that inflation is likely to be volatile and below target in the medium term, but also report that there are upside risks as well as downside risks. Spare capacity and unemployment is likely to depress wage and price increases whereas the upward pressure could come from Sterling’s depreciation as well as rising global energy and commodity prices if world growth is stronger than expected.

With the only evidence of success of QE being in the form of ‘lower bond yields than would have otherwise been’ and no historical precedent for the policy, the pumping in of billions of Pounds cannot go on without an end. It would appear that the Bank of England’s awkward date with QE should be approaching an end and it would do well to plan a smooth, dignified exit.

***
And finally……….for those of us forced to ‘staycation’ in the UK this Summer, this story is bound get your back up. British embassies around the world are reporting a curious rise in cases of moronic travellers. A few examples - a holidaymaker in Italy called the embassy to ask where to purchase a particular pair of shoes, another called to ask “I’m making jam – what ratio of fruit to sugar shall I use?”

Perhaps the Foreign Office would do well to dispense this travel advice – “Pack brain, then passport, then leave the country.”
Have a good weekend.
Aparna Ram
Junior Investment Manager
Seven Investment Management Limited





Monday 10th August 2009

A New Dawn
I hope Justin has picked up some good Summer reading for his holiday, for if he had turned to the financial press as normal he would have found the usual swinging pendulum of news. All that oscillating between ‘a recovering economy’ backed by improving data to ‘oh dear it’s worse than we thought’ substantiated by an extension of the Bank of England’s quantitative easing, can make for dizzying reading. Forced to turn to the blogosphere (yes, that’s a word!), and the opinion pages for inspiration, I was interested to stumble upon Michael Malone’s editorial in the Wall Street Journal.

Looking well past the current economic misery, Malone talks of an American future driven by an ever innovative and individualistic Generation Y. The generation who have changed the way we learn, communicate and consume will not only lead to new products and inventions but to “new ways of living and new types of organisations”.

At the apex of this new future is an increase in entrepreneurship, driven largely by the younger generation’s rejection of traditional notions of job security, and redefining ‘career success’. Being on the cusp of Gen X and Gen Y, my peers and I can certainly relate to this new outlook. Of course Malone has some especially notable stats to back this up;
“The most compelling statistic of all? Half of all new college graduates now believe that self-employment is more secure than a full-time job. Today, 80% of the colleges and universities in the U.S. now offer courses on entrepreneurship; 60% of Gen Y business owners consider themselves to be serial entrepreneurs, according to Inc. magazine. Tellingly, 18 to 24-year-olds are starting companies at a faster rate than 35 to 44-year-olds. And 70% of today's high-schoolers intend to start their own companies, according to a Gallup poll.”

America’s future, it would seem, is in the very capable hands of Gen Y. Being from the Asian Subcontinent, I couldn’t help but turn to India, whose future may also similarly rest on the fruits of entrepreneurship to drive bottom-up change. This is a country that now celebrates its ‘demographic dividend’ and has one of the youngest populations in the world with a median age of 23. This and the degree of entrepreneurship activity is the single most important armour that India has in its race to catch up with China. Sadly, my statistic gathering isn’t quite as skilled as Malone’s and dates back to 2003; according to the Global Entrepreneurship Monitor report, 12.5% of the total Indian working population was involved in opportunity based ventures versus 5.5% for that of China.

Travel to India and you will be more than likely to come across a young entrepreneur and many who understand what is involved in launching a business venture. Personally I know cousins who have either started businesses or are being groomed (via international business schools) to do so and peers who have started their second or third venture.
It helps that India has notable icons in the Ambani brothers or Lakhsmi Mittal. Thankfully Britain is certainly not short of high profile entrepreneurs either. The likes of Richard Branson and Alan Sugar head up the old school while younger men like Simon Nixon (Co-founder of Moneysupermaket Group) may provide inspiration for Gen Y here in the UK.

The business schools too have caught up. Where once classes on entrepreneurship may have been on the periphery of an MBA programme, today they seem to take more centre stage. I recently attended an open evening at one of London’s business schools and was inspired to find that a notable share of attendees reported that starting a business venture was their reason for considering an MBA. For its part, the school offers heavily subscribed courses on entrepreneurship and access to several entrepreneurs through chairs, boards and alumni.

The main speaker for the evening was a senior student and budding entrepreneur who had, with three of his fellow pupils, started a social enterprise company and was in the midst of approaching venture capitals for funding. Impressive!
Generation Y are embracing entrepreneurship and also the idea of doing something socially meaningful. And while progress through the current murky recession may be slow at times, now may be the best time to encourage young talent, embrace innovation, gather your hope and make way for a new and brighter future.
***
And finally………. News emerged that a Kenyan man has offered 40 goats and 20 cows for Chelsea Clinton’s hand in marriage. By African standards, that is supposedly a very handsome and generous offer. Hillary Clinton has promised to “convey this very kind offer” to her daughter. I can see the frenzy ahead. Surely it’s only a matter of time before another eligible man matches the offer and throws in five camels and an emu!

Have a good weekend.

Aparna Ram
Junior Investment Manager
Seven Investment Management Limited






Monday 3rd August 2009

Debt on the back of a fag packet

£950 billion is quite an eye watering sum of money – and of course it also happens to be the latest figure of our UK government debt for this year. This is the equivalent of 56% of total UK GDP and the highest since our records began back in 1974. It is forecast to climb to £1.1 trillion in the next financial year. A number that has so many zeros and commas that I am worried that people will start talking about the British Lira rather than good old Sterling.

Like any debt, of course, we will be expected to tell our lenders how we are going to pay it back. Unfortunately as yet no-one seems to have come up with any sort of reassuring plan which will grant succour to those who may be more nervous UK government investors. Every day that goes by when we cannot effectively describe how we are going to dig ourselves out of this hole, will further create concern and put pressure in the confidence of our government, our economy and of course our already weakened currency.

Perhaps I could put some of these debt issues into some perspective. We all know what it is like paying off credit cards and how much interest we pay, but when it comes to government and national debt it seems somehow separated away from reality and thus we have no real understanding of just how much this is costing us.

From the government’s own website (www.hm-treasury.gov.uk) we can find out just how much interest we are having to pay, and it reveals that for this year we are probably going to be paying some £31 billion in interest – which by the way is the equivalent of £84 million each day – and if you thought that wasn’t enough, it will be rising further to £43 billion next year which works out as £117 million each day - including weekends! Perhaps people may like to revisit Mrs Thatcher’s disciplines of trying to drive down debt so that not so much public money is wasted just on funding costs.

To complete my depressive nerdy behaviour we can also divide the debt around the entire population of around 60 million, and thus end up with an individual debt for us all of £13,316 each. Cheques by return please.

However, of course for those of us with smaller budgets there is a not dissimilar problem developing. Although as yet not on the scale of the US, the UK has developed an unpleasant “habit” of credit card debt. As both unemployment and personal insolvencies rise, so inevitably will the levels of defaults and losses. In fact the latest figures from a ratings agency show that the “charge-off” rates have risen from 6.4% last year to 9.37% - that’s not far off the US figure which is over 10%. This in turn will create further problems for certain banks like Lloyds who will have to bear the write-off themselves and have been unable to include the numbers in their toxic loan insurance they agreed with the government. This will have a long tail with it – longer than the tail of rising unemployment I suspect.
***
The most recent news from the UK railways just underlines the general view that our system is a mess. Now I am no fan of the old British Rail. All those who go soppy eyed at the very mention of our nation’s nationalised railway system really should recall just how atrocious it was - filthy trains, usually late and food that should have appeared in an Attenborough wildlife film.
With privatisation there have been some very significant improvements in service, reliability, comfort and even food. Of course it still has the ability to wrong and when it does it tends to do so in the most spectacular way. However generally the inter-city lines are much better with Virgin and even the east coast line run by no-one in particular at the moment, are great rides with generally very good service.
However, the structure of the new railway system is a mess. Designed in a rush by a dying Conservative government, they managed to create an operational camel. Firstly there was Railtrack which controlled the lines and operating systems, and in effect becoming the longest and thinnest property company in the world. It was always going to struggle to make up for the years of under-investment by all the governments of all political colours, but nonetheless managed to magnificently fulfil most people’s low level of expectation.

Then there were the railway franchisees (the TOCs ,Train Operating Companies), who were in effect a muddled group of travel companies including bus companies and an airline with little experience of railways, and finally the 3 Rolling Stock Leasing Companies (ROSCOs), Angel Trains, Porterbrook Leasing, and Eversholt Trains (later HSBC Rail), which were allocated all of British Rail's passenger coaches, locomotives, and multiple units.

The reason to have three of these was decided by the civil servants on the basis that two wouldn’t be enough competition but three would do. What twaddle, and instead of creating a market for the provision of railway kit which could bring prices down, they all specialized in their own areas and effectively created their own monopolies. That’s why you still see ancient “bus like carriages” commuter trains still teetering around stations that haven’t been replaced and cost a fortune in rental from their ROSCO.
Time, then, for a significant rethink. This time it should include all the benefits of the private market as we have seen from the more successful operators - but probably with much longer leases to make them viable, along with their watchdog. Then also time to reform the equipment providers and to break up their cosy cartel and have a blast of real competition and pricing value.
***
And finally....................I am deeply indebted to my friend Jonathan Rounce for providing me with my last ‘and finally’ before I totter off for two weeks to Tuscany.
Outside Bristol Zoo is the car park, with spaces for 150 cars and 8 coaches. It has been manned 6 days a week for 23 years by the same charming and very polite car park attendant with the ticket machine. The charges are £1 per car and £5 per coach. On Monday 1 June, he did not turn up for work. Bristol Zoo management phoned Bristol City Council to ask them to send a replacement parking attendant. The Council said "That car park is your responsibility."
The Zoo said "The attendant was employed by the City Council... wasn't he?"
The Council said "What attendant?"

Gone missing from his home is a man who has been taking the car park fees amounting to about £400 per day for the last 23 years...! Circa £2.8 million……….cash. Now that is what I call an impressive scam – imagination, style and playing the long game.

Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 27th July 2009

In Goldman’s Eyes.....

What a difference a week can make. Last quarter the glass was cracked; last week it was half empty and yet seven days later it appears half full! Certain analysts have been getting quite excited with one of Goldman’s analysts (presumably still celebrating his bonus) stating that the S&P500 would enjoy its “best second half rally since 1982”. As a result they have boosted their forecast for the Index and are predicting a rise from its 30th June close of 919.32 by 15% to 1,060 by 31st December. This level of excitement even led to the Daily Telegraph highlighting that the FTSE had had its best run in 4 years! Yes absolutely stupendous taking us back to exactly where we were last month at around 4480, and the previous month and February and December. I think we could call that range trading! (N.B. Just for reference the FTSE achieved the most recent intra-day high of 6574 on 9th July 2007.)

This is a very bullish stance from Goldman’s as we head into the Summer trading lulls followed by the months of usual Autumnal market storms. The question is – has the market discounted all the bad corporate news and is now starting to look through the difficulties to a more encouraging period of modest growth after the end of the technical recession?

Certainly a lot of bad news has been absorbed, but I wonder whether some are just being too optimistic about the strength of any recovery. The US, with its greater strength and depth, is no doubt going to be in a better position than the UK domestic economy, but there is still little room for confidence of any sustained recovery after such a huge destruction of housing, investment and banking value – as well as confidence. But that has never stopped the Yanks before.

One pattern that is emerging from the rush of recent corporate results has been the picture of not especially bad, and even quite encouraging, bottom line figures but with poorer top line sales and income figures. What this seems to show is companies stripping back the bark by cutting costs which will of course have a positive impact initially, but is not a recipe for any form of sustained positive growth in company profits – strip off too much bark and you end up killing the tree.

However, there have been some positive areas such as infrastructure expenditure which has been a clear beneficiary as we saw with both GE and Caterpillar, and some great tech products like iPhones which will sell even in bad times.
***
I mentioned last week the growth of the Bank of China into the UK domestic mortgage market, but there are other movements by the Chinese which I see also as being potentially more interesting strategic developments and investments. As you will recall China is sitting on reserves of an equivalent of over $2.132 billion. Over the past few months there has been a growing criticism from some quarters that such reserves in China and other nations with similar albeit smaller reserves, need to be playing their part in the global recovery by recycling these funds and not just hoarding them.

In fact the Chinese authorities through the People’s Bank of China have been quietly building up strategic holdings in various assets. Most recently they have acquired 1.1% of Diageo, who sees that nation as one of its key export markets for the future. This holding will sit alongside 0.5% of Tesco and other publicly quoted investments - including BP which is held by other Chinese bodies.

Obviously such buying will provide a support and prop for certain stock prices and the market will be keen to encourage such an eager purchaser – especially at a time when normal investors have been scared away.

However, the Chinese authorities are not immune from all the investment concerns. The auction of government bonds has become a source of nervousness for both the Americans and the British as both fear that there may be further worries from investors who may become less enthusiastic to buy their paper. Now the same malaise is affecting the Chinese.

Earlier this month the Chinese failed to attract enough interest from bidders for the second time in a week as investors raised concerns that record bank lending might spark inflation in the world’s third largest economy. The concern was really related to Premier Wen Jiabao’s huge stimulus package and what impact it could have in creating price bubbles in stock and housing markets, which could in turn force the central bank to tighten monetary policy.

The stimulus package has had a rippling effect around the region and even affected shipping rates, however there is still a question over how sustainable any of the effects of the package might actually be.
***
And finally............never knowingly willing to avoid a controversial elephant trap, Boris Johnson, who writes one single column each week for The Daily Telegraph described recently the pay for his endeavours as “chicken feed”. He is paid £250,000 by The Telegraph – some chicken – and presumably a quite over-fed one at that rate!
...........and another item that would no doubt also be described as “chicken feed” by some is the cost of the development of “Civil Pages” which apparently has been described as the “Facebook for Civil Servants”. This will provide a social networking site solely for those unfortunate and lonely civil servants. Cost to date £1 million. Streuth – they are not supposed to be socialising but working! Or is that too old fashioned a concept?
Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited






Monday 20th July 2009

In a Time Warp?
So when did either Goldman Sachs or JP Morgan ever care about public relations? I suppose if you are back behind your iron gates of Mordor it would never even cross your mind. Their results last week were positively eye watering, but not wholly surprising. Whether wanted or not, these organisations were the lucky recipients of US “state aid” which enabled them to be in the right place at the right time, and with the right money, to pick up others assets at fire sale prices. Then if that wasn’t enough, they were then able trade with fantastic margins at a time when others could not. So no surprise with their figures, except at the sheer gall of announcing such huge bonuses at a time when unemployment figures are breaking records of personal grief as the recession slashes thousands more jobs, each creating a maelstrom of depression amongst those affected.
It is not that I am against great pay and great bonuses for astonishingly successful work, but would no-one think of putting such announcements into context, not just for those losing their jobs, but for the oppressed taxpayers in both the US and UK who are footing a much longer term bill for this financial and economic fiasco caused by financial irresponsibility at a senior level. From the attitude of tax payers today, including those in the City, if the banks are stupid and irresponsible enough to get themselves in further troubles again, then their organisations will die and their investors will lose their money – and the taxpayer will not come to the rescue.

Perhaps this then leads me onto to the recommendations from Sir David Walker for “better bank boards”. The immediate reaction of ruffled feathers probably means that he has got quite close to some sensitive targets. I particularly liked his views on bank non-executive directors in that they should be increasing the amount of time they commit to their role from an average of 20-25 days per year to 30-36 days. I think a quick glance at the report and accounts of some of failed financial institutions suggest that some directors are more focused on remuneration than taking time to understanding the underlying business. Take the unfortunate case of Louise Patten a non executive director at the failed bank Bradford & Bingley. She was paid £58,000 for attending 13 meetings. She was also non executive chair at property company Brixton plc (recently rescued by Segro plc), for which she was paid £143,000 and non executive director at retailer Marks and Spencer, for which she was paid £73,000 to attend 16 meetings. She is also a special advisor at Bain & Co. Remuneration seems to be a bit of specialty for Ms Patten as she was chairman of the Remuneration Committees at the failed Bradford & Bingley and at Marks & Spencer, which recently received strong shareholder criticism for the high compensation package given to Stuart Rose for rather more moderate performance. If perhaps directors like Louise specialized in one field like banking, property or retail, rather than remuneration, the directors might have had sufficient knowledge to have prevented the failure of some of our banks we are now all paying for.
***
Another story that immediately acquired the “didn’t they learn anything” tag was Nationwide’s announcement of a 125% loan to asset value mortgage. Now of course this is only available to a very narrow range of clients in negative equity and, for a number of people, potentially quite helpful, but the message to the rest of the world is that the financial services industry is “at it again”. If the finance world thinks it lives in a bubble then someone is only going to pop it.
***
At the time of writing the news of the fatal explosions in Jakarta has just come through. The main suspect will be the Jemaah Islamiah, the al-Qaeda related terrorist organisation. Sadly this will yet again dent the recovering tourist industry for this nation which still bears the scars of the memory of brutal Bali bombings. Indonesia is not a radical Islamic nation but almost inevitably has an angry minority however, as the nation with the world’s largest Islamic population, its actions in handling the bombings will be watched carefully. This, though, will not stop the development of this emerging nation whose economic strength, primarily based on commodities, especially palm oil, will still continue to develop over the next few years. Unlike its other ASEAN neighbours, it is its sheer size that will ultimately ensure its greater influence in the region.
***
Good news for the capacity strapped mortgage market – there is a new entrant! Yes even as questions remain over the ability for mortgage providers to increase availability a surprising source has arrived on our shores. After the rushed departure of the foreign banks over the past two years in comes the Bank of China.
Four distributors are now officially offering products from the Bank of China which is currently the third largest bank in the world by market capitalization and has had a presence in the UK since 1929. Perhaps this is a sign of the future as oriental investment capacity is spread into Western markets. You never know but we may yet end up with the “Leeds & Shanghai Building Society”.
***
And finally.........on a train north previously known as “National Express”. Question to one of the stewards “So, who do you work for now?”, answer “British Rail, I think, now”. “Does that make any difference?” I enquired further, “No, not at all, except I don’t have to try to be pleasant to anyone like you any more SIR.” “Thank you comrade”, I replied. Actually both the bacon sandwich and the service were very good. Given the number of franchisees and makeovers we have seen over the years, I can only presume these trains must be more paint than metal by now.

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited






Monday 13th July 2009


Back on the Savannah
The process of life and death on the Savannah is the normal role of nature in the wild: corporate economic birth and death in the business world is almost identical – unless or until politicians interfere with it.
In the USA such behaviour has normally been seen as quite normal, although there have been some notable exceptions. As the heart of the capitalist empire, the ruthless culling of the weaker and injured corporate beasts is to be expected in America, but it never ceases to amaze me the number of “protected” industries that have been effectively subsidised by political vote seeking and “pork barrel” protectionism. This extends to everything from ship building to mining, and from defence to the most obvious one – the car industry.

It was therefore with some relief that, after seemingly a certain initial reluctance, the Obama administration did act to see the proper and necessary surgery on two of the most obviously injured behemoth beasts. The actions on both Chrysler and General Motors should be welcomed, and frankly could only have been achieved in that window of “goodwill” of the new President’s honeymoon period. However, this will only be the start.
Now we are seeing the true ruthlessness of the US capitalist system as bankruptcies reach near record levels. A lot of this can be measured through the number of defaulted junk bonds. They of course also go by the more comforting name of high yield bonds, which always sounds more reassuring - that is until you realise why they are providing such a high yield – higher risk. Figures show the default rate for 2007 was a mere 1%, compared to the recent running rate of approximately 9.2%, based on estimates from the rating agency Moody’s that this could rise to around 13.8% by the last quarter of this year.

By way of comparison this is in fact slightly higher than the 1991 peak level of 12.8%, but still below the record level achieved during the Depression in 1933 of 16.3%.
Such destruction is of course both sad, when seeing some famous names go down (such as Crabtree and Evelyn who recently filed for Chapter 11 bankruptcy protection) and obviously personally painful for those directly affected, but it is both normal in the economic cycle and in fact healthy. The reason being that the clearing away of the weaker businesses clears the path for the next investment cycle for the new businesses coming up to replace the fallen beasts.

In fact it is far more difficult for an economy when such actions are prevented and this sadly is now what we are seeing in the UK. There has been much talk of “zombie” banks and businesses, and I apologise - I have mentioned before the hobbled nature of the UK banks, through under capitalisation, but this has manifested itself not just through higher margins and constricted lending, but also due to their inability to write off obviously failing and doomed businesses. These structures are also in a zombie world of being the living dead – still alive but financially dead. Banks effectively can’t afford to write down such failures with so little capital, so better therefore to keep them going? Well actually not. This of course also prevents the next stage of the cycle to occur, namely to see the next cycle of investment come out of the carcass of the old beast.

The frustration I am hearing from would-be business entrepreneurs and investors waiting for this next stage to occur are now quite commonplace, and although the government may think that what they are doing is “protecting British industry”, actually in many cases they are just stretching out the painful economic weakness for longer. Unemployment is likely to be rise to more than 3 million, and in effect be over 10% of the workforce, and add to that the 2.7 million signed off as sick (and that’s without porcine sneezing) and another couple of million in various types of training, and we could have close to 20% of the potential working population not working. That’s a big cost to carry. A lot of Britain won’t be working.

Trying to delay the law of economical jungle does little to improve the situation, but extends the period of pain unnecessarily. By letting the injured beast die, we will speed up the recovery, but we will also cause further pressure of the banks for more write downs. The banking problem has not been resolved and has not gone away. Government, especially the Treasury, must face the reality that a period of further banking pain is to come and that further surgery will be needed.

Last week we saw more “encouraging economic numbers” of confidence, but still many were negative, or rather just less negative. These are not green shoots, but rather signs of mould. If I may quote from an excellent article from last week’s FT by Wolfgang Munchau, “Only a fool would take comfort from the strength of economic indicators. During a financial crisis, these indicators could be a metric of its respondents’ degree of delusion.”
So the message is to ignore the headlines and look at the real economy.
***
And finally........ is anyone else dealing with increasingly daft grandparents? This struck a chord with me.
Zurich authorities say police and firefighters were called to the house of an elderly woman early Thursday after she reported her television set was burning. When they arrived, they discovered no signs of fire or smoke.
They found instead that the TV was tuned into a German station that in the early morning hours aired the constant image of a fireplace.
"The fire was extinguished with the press of a button," police said in a statement.
Yes but in my case we could not find the remote control anyway!
Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited








Monday 6th July 2009
A Deluded Britain

Can we stop trying to fool ourselves please. We in the UK, are not going to go back to our complacent world of heady consumerism and conspicuous consumption any time soon. Almost every week there are more reports of ‘green shoots’ as well as confidence indicators starting to perk up again. These are of course positive and encouraging signs and I certainly don’t wish to be the Jeremiah casting a dark pall over the news – after all we have had enough doom and gloom in the media over the past eighteen months to all become serial window sill jumpers.

However, the concept that we will have simple ‘V’shape economic recovery, a quick bounce back and all live happily ever after, is frankly a story from ‘LaLa land’. The combination of our personal debt levels, job insecurity with rising unemployment, housing nerves and sub prime political leadership (that is across the political spectrum with a few notable exceptions) all compound to ensure that our UK based economic environment is going to be very constrained.

As you will no doubt recall, more than 60% of our economy is based on household consumption – and if we are not consuming as much then our economy will not be growing as much. Thus we should more realistic. Our economy isn’t doomed but it is going to be depressed for some years. The length and depth of this will be dependent not so much upon the global developments, although they will be important, but rather on the strength, effectiveness and moral courage and leadership of our politicians. Who will be brave enough to stand up and say not that it’s just going to be tough, but to tell us how tough and what we all have to do as citizens to pull together to fix it. It is not just their responsibility as politicians, but also ours as well in being prepared to back them and make the sacrifices. Not pleasant and probably not fair for many either.

So are we all back to teetering on the window sill? Absolutely not. The fact that the UK has got itself into a funk does not mean that we should “Let us sit upon the ground and tell sad stories of the death of kings” ...as quoted by the unfortunate Richard II.

Firstly there is growth elsewhere around the world and that growth will affect us indirectly. Although the emerging markets are held up as the saviours of the global economy, we need to be suitably circumspect over the risks. Secondly, we should also take heart from research highlighting the longer term strength of investment in the seemingly mature and ‘dull’ markets of Europe and areas closer to home.

The old fashioned power of compounding of dividends over time in fact shows a greater and steadier return for investors than just looking for quick gains from stock price appreciation. Barclays’ excellent Equity Gilt Study shows us that if we invested £100 in 1945, it would have been compounded to £92,460 with the dividends having been reinvested: however this would have been a mere £5,721 without any reinvesting.

***

If there was a single area I would ask the politicians of all parties to look at now it should be to try to act to address the driving force of our economy and the largest employer. I talk of course about the smaller to medium sized companies, or SMEs as they are often referred to.

This group are the nation’s commercial risk takers, not in the sense of City traders who are just punting other people’s money, but the risk takers who put up their own capital, career and commitment for their business. This is the group that we need to cherish as they are the ones with the initiative and drive to see these economic downturns as opportunities and not just failures.

If there was any area that should be having any of the tax incentives it must be this group. These entrepreneurs are the basis for the future successes in the recovery and the companies that will be able to develop the British economy especially at the high technology and innovation end of the spectrum. Less taxes (even just by the number of them if not the value), simpler reporting and incentives for successful development are all relatively cost effective routes.

What we also need to do is to make it far clearer for school leavers and graduates that such entrepreneurialism is recognised and rewarded, and to borrow the President’s well used phrase “Yes we can”. Yes but let’s help them, and at least we can make it easier for them to start and grow.

***

And finally.......... Authorities said a man has been charged with domestic battery after he drenched his wife with a garden hose and elbowed her for smoking in the house. Police said the couple began arguing when the wife began smoking a cigarette in their home.
When the victim picked up the phone and began calling a friend, authorities said the husband believed she was trying to call police and elbowed her in the mouth during a struggle to grab the phone.

The woman was soaked with water when deputies arrived. The husband told deputies he had been watering the grass and did not intend to spray her.

Gardening can be just so dangerous.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 29th June 2009
A Dangerous Policy

Yes we all know that interest rates have never been this low in the UK since men wore tights and long floppy wigs (actually I may have forgotten the 1970’s), but the truth is that interest rates as far as the real world is concerned, have already started to rise quite significantly. Unfortunately cash savers need not pay attention here as, so far, there has been no sign of any respite for the truly abysmal rates of interest income on cash deposits.

It can however be seen quite clearly in the rates now being levied on many prospective borrowers. It has been a common theme for many businesses to comment and complain about not just the reduction or withdrawal of facilities but far more about the increase in the lending margins and the rates themselves. This has now spread much further as we see retail lending rates increasing quite significantly. Whole ranges of fixed rate mortgages have been withdrawn - and the interest rate numbers replacing them seem to be generally quite a bit higher.

With this widening of bank margins, this is obviously enabling the banks to become really very profitable in the short term, at least on an operational basis (we will still have to wait and see what write downs and provisions they are still going to have to make under the recession). From this one can surmise that this is probably direct government policy and intention, after all they have stated that they want to see a strong and steady banking system being re-established as quickly as possible. Such a need is laudable, but at a price.

The capitalist system needs an efficient banking system and the British economy needs a strong and robust one and so rebuilding their strength through profitability is perfectly sound, but it can become a dangerous policy if left too long. If we allow the banks to be introverted enough to focus primarily on margins and profitability, we will be running the risk of stifling other potential lending. The economy now needs more liquidity of banking to help the blood flowing again through the economic body and to get the velocity of the blood to be pumped at a greater pace. More money at greater speed through the economy will be a key element to helping to break the logjam of the recession and especially to help ease the transactions of houses and thus assist in their more effective price formation and, eventually, solidity.

The alternative to this is to see continued constrained investment and cashflow, both of which will harm the repair and recovery of the economy. It’s more banking, not just profitable banking.
 

***

The internecine bickering over the structure and future of Formula 1 seems to an outsider to be a perfect example of rich men playing games with boys’ toys. Whether it is Mr Moseley’s inability to whip either the teams, or even himself for that matter, into shape, or the diminutive divorcee to keep control of the events, is, in my mind less important than the businesses behind the sport itself. We often say how poor we are at recognising, supporting and celebrating our successes but here, surely, is one. I don’t mean F1 itself but the cutting edge of engineering behind it. We often laud and praise the Germans quite rightly for their engineering prowess, a country where engineers are respected as industry leaders and fulcrum points of their economy; how that compares with the UK, where engineers are merely associated with an oily rag and a spanner.

If you look at most of the leading teams in this global car chase, most of the expertise and capability are right here in the UK and mostly in and around the Thames Valley and Silverstone. At present all we seem to do is praise the drivers, especially if they are from Blighty, and admire the cars, but really we should be recognising the fantastic feat of British engineering that produces such global winners month after month. This at a time when LDV vans is seemingly doomed! If ever there was a case for national support for this high tech industry and all its spin off and associated work, it is now. Just a pity we couldn’t do that when we had a world leading motorcycle industry. Anyway motorcycle races are more interesting – at least they make the effort to overtake each other quite often, but sadly none of the bikes are British.
 

***

And finally......... A Coventry bishop has given his backing to a charity's scheme to raise funds for better sanitation in Burundi, Africa - loo twinning. The Right Reverend Christopher Cocksworth paid £60 to twin his smallest room with one in Rutana Province.
Leamington Spa-based charity Cord has introduced the scheme, with the money going to families returning to Burundi. A spokesman said the money was needed to improve hygiene.

The idea is people can twin their home or office loo with one in Rutana Province, and can track it down to its exact location via Google Earth. Bishop Colin said the scheme was a "brilliant idea".

"It's a way in which we can have some fun while making a difference to a lot of people's lives," he said. I suppose they have nothing two loos.....(sorry!)

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 22nd June 2009
Rough seas ahead?

Justin is away this week - not unwell, he has gone yachting - so he has asked me to step in to cover his weekly column. Justin is not being held hostage by Somali pirates off the Horn of Africa, but on a corporate event somewhere in the English Channel, no doubt singing for his supper and entertaining a captive audience with his red braces and large stock of anecdotes.

Good for Justin I say - he should enjoy it while he can, as the going is unlikely to be plain sailing for UK plc for the next few years. We are seeing some encouraging signs of a recovery right now, but they are tentative and it remains to be seen just how many of these so-called green shoots will survive the impending storm of tax increases and government spending cuts we will soon be suffering. Add to this the increased regulation we have all been told to expect and the outlook for the green shoots starts to look a little bleak.

Mohamed El-Erian, chief executive of Pimco, the large US investment house, has coined the phrase the New Normal for the situation we face. The recovery and future growth is going to be burdened by higher tax, lower social spending, the dead hand of government and a dysfunctional financial system. As a result we should expect lower long term growth, higher volatility in the investment markets and higher inflation risks over the medium to long term.

Right now we are living on borrowed time. The government is forecast to run a deficit of over £100 billion this financial year, escalating to £178 billion next year. Now that is a lot of zeros and commas when you write the numbers out in full, so to give you an idea of the magnitude of the deficit, it is nearly as big as the amount the government is forecast to raise from income tax and corporation tax next year. In other words, the government would have to nearly double income tax and corporation tax to cover this deficit, all other things remaining equal.

I say we are living on borrowed time at present as no political party is going raise taxes, or hold out the prospect of spending cuts, a few months before a general election - not even our present government. But make no mistake - a combination of higher taxes and real spending cuts are just around the corner, coupled with greater red tape, regardless of which party forms the next government.

How do your investment portfolios cope with this world of the New Normal, a world with high tax, high regulation, low growth, high volatility and high inflation? There are three answers in my opinion and they are diversification, diversification and diversification. No single course of investments will perfectly protect you against all risks, which is why many investors may prefer to hand over responsibility to professional money managers, who will have their work cut out in the New Normal world.

To cope with the risk of increased inflation and volatility you may want to hold a broad array of internationally diversified investments so that problems in one country do not overwhelm your portfolio. You might want to include some inflation hedges as index linked bonds and perhaps a smattering of real assets (as opposed to paper assets) such as commodities and maybe property, but only when the time is right. To cope with the greater uncertainty in the world financial markets you may also be drawn to high grade government bonds or even bonds issued by high grade corporations although, as Justin would point out, inflation is ‘kryptonite’ to bonds, so these investments will need to be watched carefully.

Equities could well have lower returns and greater volatility going forward, but by most metrics they look relatively cheap. Not as cheap as they were in previous market bottoms, in 1932 or 1974, but they do look good value for longer term investors. Again we would recommend a broad international spread and perhaps a bias to the fast growing Asian markets.

Six months ago we were bracing ourselves for a financial hurricane that had the potential to sink us all. We are now in the hurricane but we have managed to stay afloat, albeit with some frantic bailing by the government. Going forward the outlook will be unsettling for many investors, but those that are well diversified and have patience could be well rewarded.

***

And finally, as we near the end of the exam season the Times On-Line has some great exam blunders that I hope my own son and heir managed to avoid. In my experience, the answer to the religious studies question does not seem wide of the mark.
Classical Studies
Question: Name one of the early Romans' greatest achievements.
Answer: Learning to speak Latin
Biology
Question: What is a fibula?
Answer: A little lie
Geography
Question: What are the Pyramids?
Answer: The Pyramids are a large mountain range which splits France and Spain
Religious Studies
Question: Christians only have one spouse, what is this called?
Answer: Monotony

Have a good week.

Peter Sleep
Senior Investment Manager
Seven Investment Management Limited


Monday 15th June 2009
Market Muggers and Bullies

Bullying is to be abhorred on every occasion. So whether it is in the playground or in the world of business, the same attitudes must apply. Smaller companies are forever at the mercy of their stronger and larger counterparts – but such is the world of capitalism. To try and mitigate against this, the rules on monopolies and unfair contracts are there to try and provide at least some element of balance to help the smaller participants and allow for healthier competition. However, my concern is rather with the area of market manipulation - where share prices of companies can be adversely affected, not necessarily by larger brothers, but by teams of feral share muggers who seek to beat up share prices for their own benefit, irrespective of the damage they cause.

We all know that once outside the FTSE350, we are in a dry and arid world of limited trading and rarefied price liquidity. In this world the actions and influence of a few mutters from the gutter can have a disproportionate effect on prices and valuations. With smaller companies this is not just a technical issue but one which can materially affect the survival of businesses - especially if their share prices are being forced down. The style of “let me on the board or I will dump your stock” is, in my view, little more than blackmail and whether legitimate or technically allowable, it goes against the ethic and intent of an investing market – namely to primarily provide finance to an investment market and secondarily to provide a healthy open trading ability behind it.

For some companies, short selling can have a disproportionate impact and here the strange practices seem to apply whereby certain people announce their intentions to sell in advance through public publications and chat rooms, to thus in effect adversely influence the market and make their intentions a self fulfilling prophesy - and profit. Is this investment or market abuse?

This is especially difficult for often smaller companies to fight against and particularly dangerous for them if the modest share price is adversely hit. This can potentially impact upon bank covenants and value obligations, which could even endanger the company itself.

In the institutional world of investment management, short selling is an important tool to manage client money and to aid proper and open price formation. However, for smaller companies it can prove very destructive and unfair to the company concerned.

I take this further in my annoyance at hearing certain “internationally regarded market experts” talking a particular investment angle – such as talking down Sterling for example – without disclosing that they have a significant bet on it occurring. Is that a market view or abusing the media for your own profit?
 

***

The next time you hear a commentator say that they have just been through a bank’s Report and Accounts, either be very impressed at their wonderful diligence, or be very sceptical that they have not actually gone beyond an overall summary. My colleague Peter Sleep brought to my attention that the 2007 HSBC annual report weighed 1.47kg – that’s about the size of a medium sized chicken. Well at least you can eat a chicken - although I suppose you can cook the books. However, don’t worry about 2008 as this year’s only runs to a mere 472 pages – pages that most don’t read, most can’t understand and can be barely delivered by post.

Banks have become so large and so complicated that you need a range of experts to fully understand them. Now with the “integrated” banking leviathans, their businesses are so diverse that appreciating and understanding their true risks must be almost impossible. Thus, despite the good intentions of the regulators aiming to prevent any further recurrence of a banking crisis, it is going to be very difficult to have a clear method of evaluating the potential holes in these groups, and especially as to whether they actually have sufficient capital and funds to sustain their position.
 

***

There are times when history doesn’t have that glow of warm wistful memories. Last week, sitting in sullen silence during a London tube strike, hearing about the Labour party ructions over a sub-prime minister and reading about further weakening of our economy on the back of poor retail sales, all felt like being back in one of those currently popular retro time television programmes about the 1970’s. David Bowie’s lyric of “Ashes to ashes, dust to dust” might be the signature of the last few months of this Prime Minister’s tenure. All I need now is to put on one of my old stripey tank-tops and I will be back there again.
 

***

And finally...... What's not to like about a tree? Apparently plenty, if you live in one New York City neighbourhood.

The New York Daily News says some residents in the Bronx are fuming over the city's plans to plant trees on their block. They say the roots will eventually crack the sidewalks - and they'll be stuck with the repair bills. Opponents also fear that fully grown trees will damage their homes, clog sewer drains and entangle power lines in the borough's Mott Haven neighbourhood.

Who wants to go green anyway when you can have some fresh paving slabs and concrete!

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited





Monday 1st June 2009
Feral and Ferrous

That’s just what the world needs right now – a feral state with a tin pot dictator who has an inferiority complex (and probably a personal security one as well) - chucking missiles around and setting off nuclear bombs. Kim Jong-il, who looks like a character out of “South Park”, and behaves like one as well, may be doing this for domestic reasons as well as trying to draw attention to himself on the world stage, but either way it is not helpful. The lyrics from “Evita” come to mind for this political throwback when General Peron utters the words of every nervous tyrant... 
  
     “Dice are rolling, knives are out,

     Would be presidents are all about”
 

Economically this demented idiot and his regime has little impact directly, but geopolitically such actions shake the nerves of an already delicate global economy where the words of “trust and confidence” are so important - but sadly so lacking.
Under this US President we would hope the reactions will be more measured and intelligent than the last cowboy, but this time it is really for the Chinese to step up to their international responsibilities and to impose some discipline on this regional delinquent.
This issue apart, the focus on the People’s Republic of China must increase over the next few years. As I have mentioned before, our medium term growth view must have a more oriental hue over the next few years. That is where the potential for more significant and sustained growth will come from – probably not so much from a thriving demand from the West that we saw in the last decade, but rather from the ability for Eastern nations to start to release their own domestic consumer demand that we know is pent up in certain areas. We only have to look at the explosion of retail expenditure in more liberated nations to see the potential for this. What effect, then, will a burgeoning Chinese middle class have?
This may be one of the first signs of a new economic generation moving away from the dominance of globalisation, perhaps to an increase of regionalisation?

 

***

Last week’s move by Rio Tinto to cut the price of iron ore I think was an important move. Firstly it reflected a dose of realism that global demand has been disintegrating, but also to bring down basic asset prices to encourage regeneration at a later date. This was an inevitable event that had to occur as a precursor to any recovery at some stage. This, I suspect, will be followed by more to come over the next few months across other metals. I am sure that China will be banging the table not just for similar cuts but significantly greater ones as well.

The mining companies and commodities themselves are fascinating assets. Unlike many other asset classes, they can constrict supply and even bury the stuff for a while. After all it will still be there in a few years and it won’t have “gone off”. Compare that with commercial property where, once built, your asset may well become one of declining interest rather than rising value.

Whilst the global economy is in a funk, demand for commodities is going nowhere; but as prices fall and supply reduced, so the opportunity for future value is being laid down. This natural chain effect stretches from the mines of Brazil and Australia, through the shipping companies, who are currently laying up their unwanted hulks, through to the cobweb covered factories of Southern China. After seeing the collapse of metal prices since 2007, a time for such investment then may not be too far off.
 

***

And finally.................oh the indignity. Rushing for a meeting in Bolton last week, my train was overtaken by a ‘Tesco’ train – they are becoming ubiquitous, moving vast quantities of products and produce around the country. Beaten by a shopping trolley on rails.……
If what the Chinese need is some serious consumer attention – what they really, really need is a few Victoria Beckhams. Apparently her “Hermes Birkin” handbag collection is now estimated to be worth an astonishing £1.5 million. That’s not a collection, that’s a fetish.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

Monday 25th May 2009
Fancy a new Currency?

Strange as it may seem, new currencies are not necessarily an infrequent event. Some are created out of necessity, others from financial innovations. However, whether new or old, none have been found to be impervious to the myriad financial disasters and panics, although there are two I can think of that have had a greater permanence than most. The most obvious survivor has been gold, whose ability never to tarnish seems to have retained an enduring hold over the grasping greed of the typical human over the centuries. The other, salt, has fallen out of trading favour more recently but is still equally important in other ways. The Romans, when running out of clipped, debased and devalued denarii and sesterces would pay their good legionnaires in salt (from which we get the term salary). This of course is now less popular as a tradable commodity but still in regular demand – however, even salt has been debased with some awful low sodium salt which apparently is better for you. I bet that wouldn’t have cut the mustard with many Roman soldiers.

Our most well known recent currency has been the Euro, which has been a remarkable invention. Although not the first attempt at a pan-European currency, as others have been tried before and failed, it has actually found a place as being the most successful pan-European currency since the Roman Empire collapsed. What I found most remarkable was the ability with which certain countries were willing so easily to give up the pride and prestige of their own currency for the greater common good.

The proud trading histories of the French Franc and the Dutch Guilder would be two; the Deutschmark however was a relatively new invention after the war and the demise of Mr Hitler’s Reich marks. This new currency, though, was imbued with the strength of the German economy and the discipline of its central bank, the Bundesbank. The Germans were being asked to trade in the controlled strength and reliability of their own currency for a bet on a European financial camel – quite a gamble for them given the recent memories of the economic chaos of the depression during the Weimar Republic – and quite a gamble for the Germans to potentially find their currency being impacted by the less disciplined behaviour of their fellow members of the new currency.

Other European currencies, though, will not be missed – after all, what was the point of the Belgian Franc and what was the purpose of Italian Lira coinage, apart from clogging parking meters?

In fact since its adoption in 1995 and with banknotes appearing in 2002, the Euro has grown in reputation as a globally respected currency and now can be seen as a greater reserve currency than Sterling.

However, pressure is mounting on the currency as the Germans fume at the draining effects of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) impacting on both the strength and the credibility of the currency.

Other reasons for changing currencies include financial catastrophe. This is often on the basis that if those countries can launch a new brand then they can leave the old problems behind. There have been examples of which, with the right discipline, this has worked. Brazil and Argentina both changed their currencies after their sovereign debt crises. Brazil swapped the Cruzeiro for the Real while Argentina traded the Peso for the Austral. As yet no one has come up with a better name for the somewhat unfortunately named El Salvadorean Colon.

With the global recession and the accompanying banking disaster, the US $ has come under greater pressure and its role as the master of the global currencies is now being questioned. After all, with the Chinese having some $2 trillion of reserves much of which will be in that currency, it is quite understandable that they would wish to spread their risks elsewhere and diversify away. Most recently China has carried out a currency swap with Argentina but, more importantly, the Chinese have agreed with the Brazilians that they will use each other’s currencies for trade with each other rather than the US$. Now whilst this is by no means terminal for the Dollar, it may lead to other large international traders trying to find other ways of avoiding US exposure – this can only add to that currency’s concerns.

All this adds strength to the arguments put forward by Mr Zhou Xiaochuan, governor of the Chinese Central bank, that we should all be considering a new international currency, possibly in the form of the IMF SDRs (Special Drawing Rights) which are made up of a basket of currencies, to move away from the global Dollar reliance.

All interesting ideas, but as yet I don’t think the “greenback” will be losing its appeal for the time being. I suspect it will at least remain the currency of choice for the Columbian cocaine cartels.
 

***

Are all banks running up huge losses and write offs? Well certainly not when you look at The Bank of England. It apparently has earned its biggest profits in its 315 year history of some £995 million. This is apparently five times larger than its figure from the previous year and relates almost entirely from its huge purchases of securities which benefitted as interest rates fell. Well maybe they will extend into credit cards next year?
 

***

And finally.....news from the open minded and internationally aware schools in West Haven, Utah. The principal of a Utah middle school has been asked to apologise for forcing a kilt-wearing student to change his clothes.

A school district spokesman had been asked to extend an apology to 14-year-old student Gavin McFarland. Gavin says he wore the kilt twice in the past two weeks to Rocky Mountain Junior High as a prop for an art project.

The spokesman told the boy that the outfit could be misconstrued as cross-dressing, and added that the district now recognises the kilt as an expression of the boy's Scottish heritage and that the kilt was not inappropriate.

A newspaper report went on to say that apparently Kilts are traditional Scottish apparel generally worn by men for formal or special occasions.

There goes my cross-dressing holiday in Utah then.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 18h May 2009
Finding the Phoenix from the ashes

It is far more fashionable to focus on the failures and of course not very British to actually celebrate any success. This is in fact made worse when, in times of economic difficulty, it almost appears impolite to admit to that your business or enterprise might actually be doing quite well. No, we are all supposed to wear sack cloth and ashes and mutter in a Scottish accent under our breath like Private Fraser from Dad’s Army - “we’re doomed”.

However, amongst the pain of the economic failures, there will be some astonishing opportunities, but it will take careful consideration and some clear courage and conviction to take advantage of them. Most recently of course we have seen some market lows of significant proportions. For example only last March the SP500 index in the US managed to reach the somewhat concerning number of 666. For those who may be devoted followers of Lucifer, this may have been the best buying signal since the Spanish Inquisition; for others it may merely have convinced them that the investment industry is in fact just the work of the Devil and that we are all simply the creatures of Beelzebub. Meanwhile, whilst I sit cleaning my cloven hooves with my trident, perhaps I can identify some other opportunities.

First of all, the main markets. There is every reason to think that we may again see a significant fall in some of the key indices back to some of the previous levels. After all the optimistic tenor of the markets recently, many seem to be once again happily anticipating that we are going to be returning to ex-US President Warren Harding’s “normalcy” sometime soon. Well in my view we are not and we won’t! We are in for a long hard slog but with some enthusiastic rallies. Even the Bank of England said in their quarterly report that our recovery is likely to be “slow and protracted”.

Far from being negative, this could allow both short and longer term investors to use the troughs to buy some value, and even for regular investors it will allow them to take advantage of regularly drip feeding in their money in order to carry out “pound cost averaging”.

However, there are other areas to look at. Property, for example, has become a dirty word as valuations have dropped. For many investors this has been a painful experience - either through being caught at the wrong end of the residential boom, or being suckered into certain inappropriate buy-to-let schemes. Additionally many have seen their quite expensive commercial property funds either fall back or be closed for redemptions – either way they are probably also nursing some unpleasant falls in value.

Nevertheless this is not the end for this asset class. What we are likely to see now is the next stage of development as the values have fallen back. The next wave of interest will come from those watching investors looking like vultures flying over the market looking for failing carrion. Firstly there will be failures and the vultures will fall upon them and pick at the assets, and secondly the effect of this will also draw the attention from other, less aggressive, investors into those listed property companies which will be seen as hugely undervalued and unloved.

The fund management industry is also likely to be going through a significant change. The past two decades have allowed investment firms to grow and prosper – as measured by marbled hallways and comfortable corporate surroundings. As we enter a period of likely leaner growth, then returns for investments may well be thinner than previous decades. The result will be that average active managers will come under pressure, not just on performance, but also on cost. Both the growing usage and number of providers of the cost effective and flexible Exchange Traded Funds will also have an effect as they snap, terrier-like, at the heels of the waddling portly fund managers. The good news will be that those that are left will be the better ones.
The real phoenix that excites me, though, is the downturn effect on entrepreneurs. Now is the time that this key breed will likely come to the fore, often as they are unceremoniously chucked out of corporate leviathans. These are the nascent businesses of the future that need the fostering and help from the government and the banks. Although the banks have come under a lot of often well justified criticism, there are some signs of success. In RBS/Nat West in their North of England region (and a sliver of North Wales), they have been able to foster 9238 new starts this year - these are treasured babies and will need careful nurturing. They didn’t all need financing from the bank but is a great measure of entrepreneurial activity. The UK is a nation of small businesses which are our area of greatest employment (after the State) and our most promising area of future growth. A hopeful sign, albeit as yet on just a small scale.


Maybe the politicians might take notice for one moment if they could take their corrupted minds off their self-centred feather nesting expenses. Perhaps they could at last put their blinkered egos to one side and add some real and much needed value to the nation. If not, as Cromwell quite rightly said –"YOU HAVE BEEN SAT TOO LONG HERE FOR ANY GOOD YOU HAVE BEEN DOING. DEPART, I SAY, AND LET US HAVE DONE WITH YOU. IN THE NAME OF GOD, GO!” That was in July 1653 – 356 years later, seemingly nothing has changed. Where is our Cromwell today? Well maybe we don’t want a dictator – but at least a Statesman!

Perhaps I can add another rather appropriate quote from Cromwell which is just as apposite today: “Weeds and nettles, briars and thorns, have thriven under your shadow, dis-settlement and division, discontentment and dissatisfaction, together with real dangers to the whole.” Cromwell’s speech dissolving the 1st Protectoral Parliament.)

***

And finally...... Buying a waffle can be dangerous in America.

Police Officer Lieutenant Tommy Burgess says the fight started in a South Carolina Waffle House when customer Crystal Samuel complained about the quality of service in the crowded restaurant. "I thought I was gonna get me an All-Star, grits, sausage, toast, eggs and a waffle." Samuel said service was slow and when the food finally arrived she began arguing with the waitress. Samuel admits throwing a waffle at the waitress. "I did actually throw some food but it didn't hit her," said Samuel. "That's when she jumped across the counter and we got into it," says Samuel. The waitress then went to her van to get a gun. Samuel was hit in the arm when the waitress fired, as those trying to break up the fight pointed the gun to the ground and a bullet ricocheted.

As the Americans keep telling us – it’s all about service.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited





Monday 11th May 2009
And then at last the parachute opened!

In sterile City offices, country downgrades are achieved by tapping into a keyboard; in the real world they can result in the chucking of a brick. It is very easy to blandly talk about downgrading in the ratings of national economies without appreciating the implications for, not just those nations, but their populations as well. Downgrading is in fact far from just being a technicality but something which can directly impact on the cost of funding for that nation. Such extra costs will mean fewer funds available for investment and expenditure, thus often resulting in cut backs and a reduction in facilities - and consequently employment. Tensions rise as economies weaken.

Over the past few months quite a number of countries have lost their treasured “Triple A” rating status including Spain, Ireland, Greece and Portugal, and this has directly impacted in their cost of funding. For others the issue will be worse - certain nations like Argentina, Pakistan, the Seychelles and Sri Lanka’s ratings have fallen to junk status. Not so much affecting the cost of funding but actually any funding at any price! This, then, is when domestic pressures boil over and even the international funders like the IMF get the blame (as often deflected criticism is provided by weak and unpopular local politicians), and the first bricks and petrol bombs get thrown. I fear a whiff of tear gas before the Summer is out.
 

***

Last week I got the distinct impression that I could at last feel the comforting tug of a parachute opening. After several months of seeming to be freefalling, the global economy started to show some more distinct if not necessarily more reliable, signs of slowing its rate of its previously precipitous descent. The wholly unreliable, and in fact often misleading, monthly housing data is starting to give contradictory signs – which in real speak means that none of them know really what is happening. Some up, some down – well it’s better than all going down. These erroneous monthly figures always claim to be based on actual transactions – the question is then, who did the other one?

With barely any transactions being carried out except by forced sellers, and few buyers with constricted mortgage facilities available, there are barely enough deals being done to really have any proper price formation and thus provide reliable data. The likelihood therefore is that house prices will continue to fall, but at a gentler rate than before. This still looks like a ten year peak to peak cycle to me – so there is still a long way to go yet.

Another parachute indicator was the CIPS/Markit purchasing managers’ survey which came out last week. Although the headlines from certain newspapers waxed enthusiastically as the figures rose from some dismal depths, it is however worth pointing out that the figure was still negative (i.e. below the 50 mark) which still indicates a contracting measure of confidence. Some mentioned that this was a real “green shoot” but I am not sure how something that is still shrinking, albeit more slowly, can really be classed as a shoot of any particular colour? No, more like a weed that is still wilting but just not quite as much as before.

However, let me be more positive – there have been two areas where we have seen some encouraging signs - stock replacement and consumer expenditure. Both of these are quite logical as stock levels will necessitate a certain level of re-ordering but probably only at a low level. As for consumer spending, again it is quite usual to see a small bounce from a lower level and especially with a little Spring sunshine. Add to this last week’s German capital goods orders rising by quite a reasonable level, small output rises in both India and China, and there is certainly a growing list of positive indicators.

So a new bull market or a bull rally in a bear market? Time to look at some fundamentals. The global economy has been damaged, the banking system is still in a very poor state and unemployment will continue to rise for some time to come - even after the technical recession has ended. To me this adds up to a reason for a decent rally, but then an inevitable pull back as reasonable profits are taken and the bullish enthusiasts gasp for air. A key measure may well be during these rallies to see if the level of new market lows keep rising – this will be a trend that will be a sign of growing confidence. For the time being, enjoy the Spring bluebells - before they wilt.
 

***

And finally......if ever you thought you might be feeling a little lonely, then spare a thought for Afghanistan’s only known pig. Although previously able to happily graze and gambol with goats and deer, Khanzir the lonesome pig has, because of swine flu fears, now been quarantined. The result is that the chances of finding a companion for the swooning swine are now dwindling.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Monday 4th May 2009
To Trade or Not to Trade?

As the recession takes hold, I am unashamed to say that I am going to ‘staycation’ in England this Summer and have already spent an increasing number of nights within the four walls of the shoebox that is my flat. On many evenings, I have sat in front of the idiot box; one show (besides Justin’s numerous television appearances of course!) has particularly caught my attention. I have enjoyed watching Conor Woodman’s fortunes and misfortunes (of which there have been many) in ‘Around the World in 80 Trades’ on Channel 4. For those of you who have not had the pleasure, the show follows an ex-City trader who threw it all in to travel and trade his way, solo, across the planet, buying local products in one country and selling them at a profit in another. He fails miserably when trying to buy Camels in the Sudan. His best trade appeared to be buying inflatable surfing boards in China and selling them in Mexico but I wondered whether he’d heard of taking coals to Newcastle when he intended to sell chilli sauce in India. Bizarrely, it proved successful!

Watching Conor, I was struck with two particular thoughts. First – why didn’t I think of doing this?! And second - this show is astonishingly timely, highlighting the importance of open borders and trade at a time when the World Trade Organisation (WTO) is forecasting world trade to shrink by 9% during 2009. It would be the biggest drop in trade since World War II, with the developed nations set to experience up to 10% falls. Although the deepening recession has led to a dampening of demand, and reduced availability of trade finance, and thus less movement of goods across countries, the downturn in global growth has also been accompanied with an alarming increase of protectionist rhetoric.

In contrast, it is precisely during these times of economic doom and gloom that trade should provide a valuable tool for recovery. As Conor so wisely puts it – ‘money and the pursuit of money makes the world go round.’ (Really? Stop the press, this man is a genius!). In economic theory, persons or a country can make gains in income (i.e. money) by specialising in the good which can be produced at the lowest marginal cost and trading that good for another.

The Western world has largely achieved its ‘developed’ status through the production efficiencies gained during the industrial revolution. By being powerhouses of manufacturing and exporting, the UK and US were able to gain astounding riches. The reflex action during a time of crisis such as this can be to protect those industries by introducing tariffs and employing subsidies. But history tells us that although this may offer immediate relief, like a drug, a prolonged pain becomes inevitable. In 1929, customs duties invoked by the US government of more than 60% on imported products led to a fall in imports - by $3.1billion over a 3 year period. Crucially, the playground tactics of the world’s economies (an eye for eye and all that) led to a 69% decrease in US exports and at the depths of the Great Depression one American in every four was unemployed.

Unfortunately, we currently find history repeating itself and the world in much the same predicament – half blind! America, for all its prize winning economists, has passed a stimulus bill through Congress with a ‘Buy American’ clause, which limits the purchase of foreign raw materials for the building of infrastructure. The Europeans and Chinese have been arguing about bras and other items of clothing for years but these relations are being strained even more right now. The World Bank reports that the developed G20 countries are relying on industry subsidies (such as those lavished on the auto sector) and the developing countries are using a mix of measures including a hike in tariffs. New anti-dumping cases have also risen by 15% this year. Come now, surely there is enough sand in our global sand box. Can’t we all play nicely?

American and European companies should be angling for a piece of the pie that is the monstrous Chinese fiscal stimulus package. No-one can dispute the manufacturer of the world that China has become, but there are comparative advantages that are to be had by other countries too. Conor, in his travels finds that the Chinese are partial to a nice bottle of wine. Let’s ship them over a few thousand bottles and drink to a better future.

***

And finally…..tourists who were enjoying a day of sightseeing at Windsor Castle were treated to an eyeful of something else too. A couple selected a spot near the castle’s Garter Tower and stripped off to engage in activity of the sexual kind. Perhaps it was by royal appointment only!
Have a good week.

Aparna Ram
Research Analyst




Justin's Latest Weekly Commentary - Monday 27h April 2009
The New Austerity - Welcome to the Fourth World

So much has already been written about the detail of the UK Budget that I am not going to repeat the excellent work of others. I am sure you have had far too much to read already. However perhaps there were some key measurements which I felt were especially graphic in describing the parlous situation of the British economy. It was Gillian Tett in last week’s FT that highlighted that the risk measurement of UK government gilts was now worse than Cadbury PLC. To explain, the cost of insuring a 5 year Gilt against default was “95 points” (0.95%) – which in English means that it costs £95,000 to insure £10 million worth of Gilts. By comparison Cadbury’s debt would only cost £50,000 to insure – which is a bit odd as they only produce chocolate money – still, maybe its worth more than I thought?

Additionally since last year, the 2009/10 UK budget deficit has managed to nearly double its size from a mere 6.3% of GDP to some 12.4% - that is the highest level of all our peer nations but, more worryingly, three times the percentage deficits of Argentina and Indonesia! What then is the message from this? Possibly a new category of nation has been formed? Maybe the UK is the first member of the new group of “4th World” nations – that is to say those nations with post development mature submerging economies.

As such our biggest issue will be one of confidence, especially when you ask who is going to finance our debt and at what price. This situation may become even worse if the UK is downgraded and loses its “Triple A” rating which would yet further put up the costs of our funding. To get ourselves out of this we need statesmen and not just the usual selection of parochial politicians playing petty party politics – also known as P6.

If the financing numbers weren’t warning enough, then it was the Chancellor’s growth figures that seemed most astonishing. In any normal recession (if there is such a thing) a slowdown can often be seen to be followed by a balancing recovery; however in the current climate of capital destruction and flailing banks, the fuel for any recovery, let alone a dramatic one, is going to be in very short supply. Effectively we have had twenty years of growth concertinaed into a single decade further exacerbated by a credit boom – ten years of fat which will now be followed by ten years of lean and mean. At least a slowdown or recession is usually quite predictable and expected – and remember our “Dear Leader” told us that he would make and set aside provisions for such times, however, we now know that no such provisions were made and that the granaries were not stocked during the years of surplus. We may have found our Potiphar, but where was our Joseph?

So what should be done now?

The answer lies in some very serious financial control for a limited number of years – almost a national social contract of austerity - if we are to try and stabilise this leaky craft. Yes harsh cuts which will be both painful and unpopular, but maybe we should rather look at a VAT rise for several years with higher rates on certain products. At least this is discretionary for us all. With this, should we consider full bank nationalisation to enforce policy faster and then the withdrawal of Stamp Duty on property for the same period of time? At least that would encourage further expenditure and speed up property price formations and certainty. The alternative is to leave the equivalent of another world war debt to our children.

We are, in any case, all going to have to consider our finances on a broader scale across the generations and not just as individuals with our own pots of coinage (including chocolate ones) but as families, sharing our costs and responsibilities in order to look after our larger family group. Thank heaven for professional financial planners.

***

And finally....I know this is a regular occurrence but I regard it as an excellent barometer of the inefficiency of public expenditure and the abuse of the English language – I am referring of course to some of the ludicrous job titles and nomenclature that seem to have grown up, particularly around our public services.

Newcastle Council, for example, has appointed a “breast feeding support co-ordinator” – to do what I am not sure – and in fact I don’t really want to know. Additionally Falkirk Council has appointed a “toothbrush assistant” along with a “cheer leading development officer” which must be essential to the efficient running of that authority. Windsor and Maidenhead however have thought that their local tax payers’ hard earned money should be directed towards employing a “roller disco coach” – how retro!

Who said there was a recession and a job crisis – such creativity must point towards the development of a dynamic UK economy at the cutting edge of the global innovation. Britain shall be known as a world leader in breast feeding co-ordination.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

Justin's Latest Weekly Commentary - Monday 13th April 2009

Somewhere over the Rainbow

With the bunting fading on the floor and the cheering crowds now just echoes in the halls, the Obama “Rainbow Tour” of Europe has finally ended. A G20 meeting, a NATO council and a grand tour of Eastern Europe bore all the hallmarks of a royal progress. As he was paraded from nation to nation the reputation and style of both him and his wife outshone those of his various hosts. The adulation reflected the general desire by many to desperately find an international statesman, a leader or even a saviour to rescue them from these troubled times and especially from the range of deeply unimpressive petty princeling politicians which only Europe seems capable of producing.

However, I hope he enjoyed and appreciated the adulation, as his return on Air Force One will be to a sharply different politic climate where the fickle populous of voters have already been marking down his domestic approval rating really quite sharply. Honeymoon periods always seem too short but especially so in the fetid world of bickering politicians where even the most inconsequential can get air time on the 24 hour news channels.
 

***

There was a lesson last week to be learnt from the Irish Government’s emergency budget – a lesson which I hope was not lost on our own Chancellor as he builds up for our Budget on 22nd April. Ireland is in a painful spot with an economic boom turning to bust, falling property prices and all compounded by a banking crisis. Any of that sound familiar?

However, their situation is made worse by the constrictions of Euro membership and the requirement to keep their budget deficit under some control. As I have mentioned before, the less responsible Eurozone members, known by their acronym as the PIGS, have blown their limits and have found their cost of borrowing getting considerably more expensive. Unlike others Ireland has been brave enough to try and address this painful situation – at the cost of further domestic economic pressure and criticism.

Ireland also does not have the benefit or luxury that we have, where of course the UK can just allow the currency to devalue – a 30% drop in Sterling can ease our trading situation significantly – if you are locked into a German dominated currency discipline, your options are somewhat narrowed.

The Budget has initiated the start of an Irish toxic bank, but as yet no final move to take over the banks completely in a Swedish style move. That may yet have to occur. Also taxes have risen and already the spectre of young talent being driven overseas by high tax is also being discussed – an unpleasant event reminiscent of other difficult times for the country.

The main criticism though seems to have been levied at the lack of action by the government on central expenditure. This is something which we particularly in Britain should take account of. The largest employer in the UK is the government and even more so after taking majority shareholdings in certain banks. Since Labour came to power the state sector has bloated to an enormous level and issues of current and future costs must now be addressed – especially with regard to that bottomless pit of pensions for government employees.

I wonder if he will have the courage to move? Over to you Alistair.
 

***

And finally....

Staff at a British aquarium have captured a massive sea worm that had been terrorizing other aquatic life. For months, the 4-foot-long creature - apparently called "Barry" - had been devastating a coral reef at Newquay's Blue Reef Aquarium. I thought that was our window cleaner.

I hope you have had a Happy Easter. I am off to plan the Egg Hunt for the Easter Bunny, although sadly last year a number were unfortunately eaten by the badgers before we got to them.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

Justin's Latest Weekly Commentary - Monday 6th April 2009

Some Proper(ty) Perspective

To some it is just a place to live, to others a useful investment for the future, but for the British our house has not been our castle (that was just a Norman fetish), but rather our national fixation. Over the years we have all had to suffer those dinner party bores trumpeting their astuteness at being able to buy at the right time in the right place and how much they have made as a result. This of course became even more tedious in the nineties as their lectures lengthened to include their overseas property speculations in places like Dubai and latterly their range of buy to let investments which they have just bought off plan. Property bores, though, do move in regular waves as the price of real estate oscillates from ludicrous value to unutterable stupidity, and with it they accumulate little or no collective memory of the last downswing or property price crash.
Not a week goes by when we don’t have to suffer the deliberately worrying hyperbole of various mortgage providers telling us that all our houses have dropped in value again last month. This data is both stupid and erroneous. A single month of data is not really valid in any case, but when based on the actual transactions they become even more ludicrous – because there are barely any to speak of! Those few sellers that are around are either probably “forced sellers” through unfortunate circumstances (foreclosures etc.), or they have died; and as for buyers – there can’t be many anyway as they can’t get a mortgage! No wonder most of the country is so depressed.
So perhaps we should put this into perspective. According to the Nationwide, UK house prices have dropped by 17.6% over the past twelve months. This has been hailed as a disaster, with cries of the return of negative equity and rising rates of foreclosure. No doubt this is true, but in fact rising from a very low level and normally affecting those who were either amongst the last into the housing boom, or with a horrendously over-extended mortgage. However, to counter balance some of this negativity the Nationwide’s (equally invalid) monthly figure last week showed a slight increase in house prices!
In fact for most of us our house is our home and we don’t trade it very often. I understand that we used to move every seven years, but this has grown out to a far more extended period of eleven to fifteen years. This is longer than the usual decade-long housing cycle. So what has happened over that decade to prices? Well figures show that from 1997-2008 our house prices had risen by some 150%, thus meaning that most house buyers would still be considerably in the black even taking account of any recent fall. It is fair to assume then that, apart from a few exceptions, it would only be those who bought just at the peak that will be suffering and they may well have to wait for the full cycle to come around again to get their value back – but for the rest of us the question is more psychological than anything else, and thus only adds reinforcement to the irresponsible and ill-informed doom-laden economic messages from certain elements of the media.

***

Well the City “riots” were somewhat overstated. With much appreciation to the police actions, I actually felt that there seemed to be more spectators and cameramen than real demonstrators in some areas. You could also argue quite soundly that the demonstrators were the best advert and promotion that the meeting of the G20 could ever had. Without them I think the world may have just yawned.

Apart from some litter, tiresome graffiti and a few broken windows, I couldn’t see much effect. I suspect most inner city Saturday nights are probably more violent and unpleasant. Oh and as for the simpering City folk dressing down to avoid attention – spare me. Those that did often were worse dressed than the protestors. At least Swampy had pride in his protest.
The outcome of the G20 of course is primarily political rhetoric and grandstanding for domestic audiences, but behind it the intentions are right and it is important that both those with the financial reserves and those with deficits speak to each other as they both will depend upon each other. Now we need to get back to the tasks of trying to ensure that we end up with more credit back in the system and less crunch – and get the money system working properly again.
Perhaps we should be starting a straw in the wind indicator – if only to stop people referring to green shoots. The number of these straws blowing past is in fact increasing. In the US we have had increased mortgage applications, approvals and fulfilments, an increase in new housing build sales and even a modest increase in the forward looking Institutes of Supply Management’s (ISM) Index. The figure still indicates a contracting demand but at a slightly better level than before from 35.8 to 36.3; this is the fourteenth month of this figure being below 50, which still indicates contraction.

***

Who on earth thought that we should hold a conference for the 20 most influential leaders of the world in a shed in East London? The French would have wowed them all with the palaces at Versailles or Fontainebleau; we could have at a minimum managed Leeds Castle – at least it’s got a moat.

***

And finally....

Life may be tough for its full-time residents, but for Miss Universe a day out at the US prison camp at Guantanamo Bay was simply "a loooot of fun!"
Venezuelan beauty queen Dayana Mendoza visited the centre and wrote about it on the Miss Universe blog on 27 March. Her remarks that she "didn't want to leave" the "calm and beautiful" place attracted some scathing reactions. Did she perhaps confuse ankle jewellery with shackles?

Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

P.S. If you are celebrating Passover this week may I wish a relaxing holiday with the family, and for those waiting for Easter you must remember to buy lots of Eggs and support those Cocoa producers.

Justin's Latest Weekly Commentary - Monday 30th March 2009

“I predict a riot” (Thank you Kaiser Chiefs)

No doubt there has been some concentrated brick polishing over the past few days. The more intelligent will be preparing their debating brickbats to argue the merits or otherwise of the G20 meeting. Those who may be somewhat more intellectually challenged will no doubt be reverting to the physical brick over the metaphorical. I am sure that the protestors will vary from the well meaning demonstrators through to the usual suspects of radical anarchists. Actually though, for once I think that a large proportion of the population would like to have their own brick, albeit a rubber one, to lob at a bank – or come to that any representation of capitalism. Such anger is quite understandable – such behaviour is totally unacceptable.

There is no denying that the world is angry and this frustration is certainly not just restricted to extremists but rather to the “reasonable man” on the “Clapham Omnibus” who feels both let down and misled by a failed system that has destroyed savings, investments and jobs. From Clapham to Canton the language may be different but the feelings will be the same. Perhaps I should camouflage my red braces this week?

What the leaders of the G20 must ensure is that they do not waste the event. Those who use it as a moment of parochial populism will have failed their citizens. Those on the other hand who take this moment to stand up and take the global view of a responsible statesman should earn our respect. This is the moment when the world needs some leadership to build on the actions already taken by certain nations.

The one figure which I would like them to consider is that of global trade – or more to the point the lack of it. Just over a year ago global trade was growing at 6% per annum which was certainly very respectable. However, within the space of a few months the World Trade Organisation has estimated that it will decline by 9%, which is an astonishing turnaround and in fact the worst since the end of World War 2. We seem to have gone from globalisation to “de-globalisation” in a matter of months as demand has just fallen away.

The key therefore will be to rebuild confidence in such a way that demand can be nurtured again. This is no quick fix - especially with a barely functioning finance sector. Perhaps then we will see a greater focus on domestic and regional trade where local competition is seen as being more acceptable within the group – as opposed to those damn foreigners from the other end of the globe. This is easily achieved within areas such as the EU, and the USA and even with a less bound group as ASEAN. So, from globalisation to potential regionalisation? This of course could only be made worse by allowing further protectionist measures, but this is the cowardly politicians’ route out. In this case it would be true that “Patriotism is the last refuge of a scoundrel”. The US went through this in the 1930’s where, in the face of all logic, their populist politicians wrapped themselves in the stars and stripes and passed the Smoot-Hawley Bill which effectively condemned the world to a decade of depression.
 

***

God Save Ireland – Well he might just be required to because the once vaunted Celtic Tiger has just turned feral. After years of exciting growth, the Republic has found itself in a vicious place at the wrong time in the cycle. To quote Brian Lenihan the Finance Minister “The economy has fallen off a cliff”. A ballooning budget deficit which could rise to 11% of gross domestic product has shattered their requirement to keep it within the Eurozone’s tight corset of a mere 3%. Tax receipts are falling and inward investment is vanishing - the picture is poor. The risks were of course made all the higher by the government’s somewhat foolhardy (or just reckless) decision to guarantee all their banking system last year (although few asked the question as to what the guarantee was actually backed up by?) which may still come back to haunt the government as some of those banks are foreign. Guaranteeing somebody else’s banks is just what they don’t need to be doing right now.

Of course Ireland is not alone in this position. Being in the Euro means that they do not have the luxury (that we have in the UK) of being able to devalue their currency by 30% as we have done. Rather, they are left with a painful choice of how much deflation they are willing to apply to their economy and are able to suffer. The Irish government has bravely decided to confront this head on and act to cut their deficit: compare that with Greece’s position where the problem is not only barely recognised, let alone being dealt with. The Greek government debt as a percentage of GDP is over 100%; Ireland’s is just 30%.

So the Irish are doing the right thing whilst others are frankly just being irresponsible. Even “Perfidious Albion” isn’t helping them either as the fall in Sterling has led to a cross-border shopping spree into Ulster and a consequent loss of VAT income. Time to find some luck of the Irish.
 

***

And finally....

It may be home to the Manure Bank but there is something rotten in the state of Vermont. Seven year old Joshua Boothe has won the 34th national “Odor-Eaters Rotten Sneaker Contest” for owning America’s most malodorous trainers. I really don’t want to know about the judging but given the amount of bacteria and potentially useful penicillin concentrated in the contestants’ shoes, I am surprised it wasn’t sponsored by Glaxo.

The offending shoes will now be on display for posterity, hopefully in a sealed cabinet, in the Odor-Eater Hall of Fumes in Vermont - now known as the Rotten Sneaker Capital of the World.

Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited






Justin's Latest Weekly Commentary - Monday 23rd March 2009

“Daddy, the country just went bust.”

In these nervous times government bonds are often held out as the last bastion of security and safety. Even if all the companies go bust, at least we can still rely on the central government to bail us out. Well actually, maybe not!
History shows that such events were not uncommon and both France and Spain seemed to make it quite a habit in the 17th and 18th centuries as they financed reckless foreign adventures and imperial pomposity.

However, we don’t have to go too far back to recall various corrupt South American regimes racking up huge debts which were totally unsustainable. The fad for “sovereign lending” in the late seventies and early eighties was a banking fashion of huge proportions. Much of the blame for this was laid at the feet of greedy and corrupt Latin American dictators, and with some justification, however others were also culpable. The plane loads of American and British bankers flying south to proffer cheap Dollars for ludicrous “strategic” developments (a steel mill in the middle of nowhere and warships for the middle of the Amazon are just two that come to mind) all helped to fuel the anticipated debacle. As the Dollar strengthened and their local currencies dissolved, so the repayments became impossible and the inevitable happened – the counties one by one, defaulted. The disaster was masked by a whole new industry subset of sovereign debt renegotiation, refinancing, recovery – and eventually write downs and finally write offs. They employed a lot of people (especially some extremely questionable American lawyers), wasted a huge amount of money and achieved very little. The pain and cost was borne by the banks with some being mortally wounded. Even our gloriously dull but previously well managed Midland Bank was mortally affected as it had dived into the dangerous world of international banking by buying Crocker Bank in California, only to find that it was holed below the waterline by that bank’s buccaneer Latin American lendings. The wounded beast was some time later finally put out of its misery by HSBC.

Now we are back in familiar territory. 2009 will mark the next round of national defaults. The usual names of Ecuador and Argentina are bound to be mentioned but now also others closer to home may come as more of a surprise.

Ukraine has been regarded with concern for some time, and not because of its uncertain relationship with a nearby Bear, but also because of it precarious financial situation. This year it will have to roll over both private and public sector debts of over $40bn, but with only some $28.8bn of foreign exchange reserves. Further west, Hungary has some $35bn to address with only $31bn reserves and so a similar pattern is playing out across the region with Turkey in an equally parlous position. Of course there are similar figures coming out elsewhere in the emerging market world with a far larger debt level in Asia – but the difference is that they have much stronger national balance sheets – and reserves.

Over the past few months the concerns of the PIGS (the unfortunate acronym for Portugal, Ireland, Italy, Greece and Spain) have been rising with fears of default and even expulsion (or polite withdrawal) from the Euro being openly discussed. Such financial weakness must infuriate the Germans who have always prided themselves on having a strong and virtuous currency, and now finding themselves shackled to a bunch of misfits will only increase their desire to return to the good old days of a currency named after the Fatherland. The chances of either this happening or one of the weaker ones leaving is still as yet unlikely, but German patience is not limitless.

And finally.....what is wrong with the words underlined in this sentence? “Welcome to all our agencies who act as ambassadors for our clients. I hope you all have the capacity to challenge the guidelines with initiative and help us to publish a proactive and robust vision.”

Answer? All the underlined words are now banned by the Local Government Association and should not be used by local councils as they are too confusing for members of the public to understand. Streuth.

Have a good weekend,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited





Justin's Latest Weekly Commentary - Monday 16th March 2009

Monte Carlo, Moseley and Markets

The good news is that the world has lots of rallies – the bad news is that most of them usually end in disappointment. I lost interest in the old Monte Carlo rally shortly after Paddy Hopkirk in his Minis stopped winning it. Oswald Moseley’s rallies luckily never gained much traction and, sadly, most stock market rallies seem to get slapped down after a wave of euphoria.

It has been a dreadful start to the year for the FTSE 100 with a drop of over 18% until last week’s rally. There was a tangible sense of desperation in the relief that at last there had been some positive signs. Some commentators seemed to get quite excited at the 10% or even 20% rises in certain bank shares both here and in the US – however, after a few seconds of reflection, some at least realised that this took those companies from being penny shares to just being companies worth a few more pennies.

I would be delighted to announce that this was in fact the end of the bear market, but the reality is more likely to be that it is going to be the start of a pattern which, although hopefully ending up higher than where we started, will mean we are going to see some volatile times. Whilst these may be encouraging and certainly better than the current torpor, they are more likely to end in depressing pull backs. For some previous examples we only have to look back to the recent history of the Japanese indices and I have added a slide below showing the S&P index in the 1930’s as well.

The good news for that index was that there was more positive than negative. Most investors though would have been feeling somewhat sea-sick whilst having to suffer that volatility. The bad news was that it was followed by the start of the Second World War. Now whilst I am neither advocating nor predicting a global conflagration quite yet, it can certainly be argued that it was the determined expenditure of the war economies that helped to pull the US economy out of the depression.

We should get used to these gyrations, as we are now likely to be in for an extended period of sharp rallies and fall backs – but within the context of a bear market. All the more reason therefore to ensure that you are well diversified into other asset classes that won’t suffer the nausea of the switchback ride of the equity markets.

***

So Quantitative Easing has begun formally. More money is going into the system, but as yet this will achieve nothing unless it starts to ease the log jam of bank lending. It is to be hoped that it will succeed but I will be unconvinced until we begin to see companies starting to see letters of credit being issued again and new facilities being offered in any scale.

Perhaps it would be timely for the government to meet Bo Lundgren, the head of Sweden’s debt office who played a key role in resolving that country’s banking crisis. He has been invited to the US to explain how the Swedes got out of their banking crisis in the early 1990’s. The respected economist who has been illuminating many of the rocks and reefs in this crisis, Nouriel Roubini, recently commented “We are all Swedes now” on the basis that national funds are being deployed to prop up the banks. The key issue is not just the monetary support of the banks, which to a great extent has already been done, and it is not even whether the money is being applied – it is how it is being used. The key issue then is making sure that the funds are being applied to the right areas and not just being left to keep the propped up banks secure.

What I find fascinating is the clarity of thought from the Swedes as opposed to our somewhat more muddied or even muddled approach of moving in piecemeal. From the slightly patronising view of the Swedes a year ago I think there is now a real appreciation that they, albeit on a smaller scale, got things sorted and recovered in good order and good time.

***

And finally.......

What price for a job these days? Graham Edwards, a graphic artist who has been unemployed for five months, has said that he will give £1,000 to charity in return for a job offer, and then another £1,000 when he has been able to complete his probationary period. Now that’s what I call commitment to really go out and get a job.

Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited







Justin's Latest Weekly Commentary - Monday 9th March 2009

No Knee-Jerk Regulation

Such is the power of a baying mob. Populist fervour, albeit fanned by a media furore, called for the head of Fred Goodwin. This, as much as anything, was a reflection of the general frustration and anger of the population at their having to both pay for others’ mistakes and then to see their leaders getting away with it and, just to rub salt into the wound as well, even being rewarded for it. With this crowd there was going to be no call for “Barabbas” to let him go, but rather a mass demand for some kind of retribution. Whilst emotionally satisfying in the short term, such stories do little to actually solve the current issues, although I do admit that they are useful, and I would even say essential, to have such a totem to blame and to heap our indignation upon. The reality is that despite such media lynching, nothing of note is going to come out of it which will affect the economic malaise.

If we want to focus on something which is more creative, then it should be to ensure that this doesn’t and can’t happen again. The immediate call is for more regulation. This is typical in such populist events. For example, it took such an emotional campaign to produce legislation as ludicrous as the Dangerous Dogs Act. Perhaps we should have a Dangerous Bankers Act as well, and thus have them put in muzzles when they are out in public? They could certainly do with at least a leash.

The simplistic answer to many issues is the call for more laws and more regulation. But perhaps we are focusing on the wrong issue. It seems very easy to answer a problem with a set of tick boxes as to whether you are within the law or not. Just ask any unfortunate policeman filling out hours of paperwork about reported crimes and misdemeanours. Yes, he finds out which bye-law and sanction has been broken, and yes he can propose to prosecute, but this does little to prevent the crime actually taking place. Our legal system is not just based upon precise statute law, but in fact on a blend of the precedent of case law and our historic basis of fundamental common law as well. This provides flexibility, interpretation and above all the ability to adapt and change according to circumstances.

Perhaps therefore we should consider such elements when we are looking at our financial regulation. The baying mob, once bored with Fred’s head, will move on to other areas and one of those will be the “demand” for more effective regulation of bankers (you can hear ill-informed politicians already repeating this mantra) - more box ticking, more discipline and more bureaucrats.

None of us would disagree with the need for change and that better controls are required, but before we draft the next rule, let me propose an alternative view.

Prior to 1997 we had a different approach to banking regulation – in fact it wasn’t regulation it was supervision. You may accuse me of being a pedant but the definitions are quite clear...

Regulation - “a law, rule or other order prescribed by authority “

Supervision - “the act or function of supervising; superintendence”

But this is not just to play with words. The Bank of England did more than just regulate. It educated suggested, proposed, mentored and assisted in the development of banking structures; but it also acted to restrain and deter actions which could have been too risky or destabilising. This is supervision – a positive and constructive role - not just control by regulation. That’s not to say it was perfect, as the BCCI case illustrated - and that turned out to be an international banking and regulatory shambles. But on the whole, banking problems, including failing banks, were handled discretely and effectively with no bank runs or operational panics having to come out into the popular domain. A key element of this will be who these supervisors should be - practical experience and understanding of the industry is required – not just financial traffic wardens!

What has been apparent is that the “clip board” approach to regulation of banks has not worked and that maybe a return to the supervisory attitude would have provided a far more constructive and effective result. Our law is based upon the dictum of the “reasonable man” not the officialdom of the bureaucrat.

The recent comments from Lord Turner (Chairman of the FSA) said recently at the Treasury Select Committee “we can see a strong argument for us getting more involved in product regulation.” Sounds quite threatening but his calls for a new “macro prudential” role for a broader oversight may have a more supervisory tone to it. The Bank of England’s supervisory role ended in 1997 with the creation of the FSA, but there is no reason why such an effective and proven attitude cannot be reinstated. Sadly populist politicians will be happier fawning to the baying crowds.

***

And finally....

Yet again we should appreciate the initiatives and dynamism of the Americans in the face of adversity. It appears that following the President’s initiative to keep the people appraised of what’s going on, various “stimulus sites” have been set up and have attracted a myriad of different ideas and proposals from across the nation. So far these have varied from the usual – “send us the money”, through to sponsoring the redevelopment of bathrooms and even offering a six pack of beer to every adult! Well I suppose at least that way you forget the slump for an hour or two?

Looking for business ideas in Britain has been fascinating as companies have looked to see how they can adapt to survive. One excellent example is Cooplands the bakers in Doncaster. They have found an ingenious way to beat the recession and add a further leg to their business. On the basis that many offices and businesses are now out of town at business parks, there is little chance of many being able to nip down to the local bap and sandwich shop in the town centres. So the answer is a mobile shop – selling fresh baps. So what do you call it? The Bapvan, where the Bapman comes to your offices in the specially converted beast of a machine, with the accompanying music over the van’s loudspeaker of the “Batman” theme. See picture below.


Result? A storming success. Well done. I wonder if they sell Penguins?

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

Justin's Latest Weekly Commentary - Monday 2nd March 2009

Pride before a fall

Pride before a fall – when will we ever learn? Whether it has been puffed up complacent investment bankers who assumed they could stroll across the Sea of Galilee, property developers feeding both the greedy and the gullible, Icelandic politicians who claimed to have found a new economic paradigm, or even a desert mirage of palaces built on sand, eventually the cold light of dawn reveals a dreary pall of chilled reality. All we have to do is to make sure we don’t fall for the next one – and please be assured, there will be more and they will be even more attractive and enticingly plausible.

Thus the news last week that even Dubai has now had to be bailed out by a cash injection from the United Arab Emirates authorities of some $10 billion, has brought a sense of reality to the biggest bet in the Gulf. The support from its oil rich fellow UAE member Abu Dhabi, is obviously welcome but I suspect the rivalry between the two emirates must have led to some wry smiles behind closed doors. Transforming this state from a declining oil producer into a spanking new property, business and tourism based economy was always going to be a tall order, and in the face of a global recession with mounting debts to pay, it was just becoming a problem waiting to explode.

Some have compared the suffering Emirate with Iceland but the differences are far more than just meteorological. Yes the spread on the credit default swaps for Dubai rocketed to levels close to those of Iceland, and yes it has over-borrowed, but it has wealthy allies and friends and assets which do not melt as fast as its glaciers in Summer.

However, no-one should gloat over any such suffering for an area known for its conspicuous consumption. Such expenditure has been very beneficial to suppliers and exporters to the country, and of course any additional support for the Emirate will only reduce the amount of reserves that could be recycled elsewhere in the globe at a later date.

***

Well you can’t deny that it’s a big one. President Obama’s package is eye watering but probably it has to be to have the necessary effect. The fiscal deficit for this year will be in the region of $1,750billion, which is 12.3% of GDP and the widest gap between income and expenditure since World War 2.

The aim is to create a stimulus package with all the strength of a defibrillator on the economic heart to try and get the blood flow of economic expenditure going again. The assumptions here are optimistic, with an anticipated return to quite dynamic nominal growth of 5% in 2011 and 6% after that. This is quite heady stuff, but it is this strength that will probably be necessary. However, many will be concerned that if you take the Japanese experience as a precedent, stimulus packages have an effect whilst they last, but tend to falter once the supply of financial incentives and “heroin” is withdrawn. We shall see.

***

And finally....

It would appear that the credit crunch has taken its first direct sport victim for 2009. The Swindon Duathlon was due to be held at the quite sizeable and nearby Wroughton airfield. However, it was with much regret that the event has had to be cancelled – why? Honda has had to store 6,000 unsold cars on the airfield, thus blocking the contestants’ course. Still, they could have made for some valuable prizes. I just hope they weren’t the sponsor – oops!

P.S. A short note brought to my attention by my colleague David Ogden who is in charge of our Compliance. Who is the odd one out in this list?

• Lord Stevenson (ex Chairman of HBOS)
• Andy Hornby (ex CEO of HBOS)
• Fred Goodwin (ex CEO of RBS)
• John McFall (MP and Chairman of the Treasury Select Committee)
• Alistair Darling (Chancellor of the Exchequer)
• Sir Terry Wogan (BBC Radio 2 Presenter)

Answer:- Sir Terry Wogan. He is the only one with a banking qualification.

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited




Justin's Latest Weekly Commentary - Monday 23 February

How to run a Bank?

With all the creaking of a medieval ox cart, our banking system continues to slowly bump and grind its way along the road to recession. Dragged along by a bunch of tired old dray horses seemingly fit for nothing other than to the knacker’s yard, they hardly seem to have the necessary energy to revive our economy. Although spruced up with dynamic branding to look like thoroughbreds (one advertising itself as a lean high speed train, another sponsoring a Formula 1 team, and one of course is supposed to be a shining black horse in any case), these tired beasts seem unable, or maybe are unwilling to react to any of the exhortations of the driver. So our banks lumber on. Figures show how little of the intended sums of financing seem to be filtering through to the economy, and thus every day that goes by they cause further pain and frustration in the financial structure of the country. Last week the FT reported just a trickle coming from the banks faucet operating under the government’s loan guarantee scheme – out of a total £1bn facility, just £12m would seem has actually been lent out so far.

It seems that everyone is waiting for someone else to take the initiative, or maybe just hoping that things will come right again. A forlorn hope I suspect. Compare then this with the action being taken by the team led by Gary Hoffman at Northern Rock. Last week was the first anniversary of its nationalisation and thankfully away from the glare of public reporting. They have been able to make some significant strides. From of a debt from the government of some £26bn (you may recall that this is the equivalent of our defence budget) they have succeeded in repaying some 60% back to the Treasury. Although causing some concern over some of their actions over foreclosures, this is certainly a considerable achievement.

In fact the issue now is whether the Rock will be allowed to be recapitalised in order to start lending again as a fit and proper mortgage provider. This is quite a turnaround in just twelve months and I think shows what can be done when left to quietly restructure and rebuild. A lesson here for the other banks which my colleague Peter last week quite correctly referred to as the “zombie” banks.

Perhaps we can learn from the Lloyds of London Insurance debacle of the last decade. After the huge losses that were incurred, the future of that venerable London institution was seriously in doubt and frankly its reputation was in shreds. Yet, in just a few years, Lloyds is now seen as being very successful again both domestically and internationally, and its catastrophe has been consigned to history. How? Well, one key area was their focussing on good assets and then consigning the bad assets to Equitas as their equivalent of a manure bank. Equitas has been seen as a success with some of the poor structures there being turned around quite successfully over time, whilst the “good” areas were restructured and have gone on to be an effective and vibrant part of the City of London again. The key here is to focus on the good assets- not the bad assets, and get the good bank working again.

Government, Regulators and Bankers – look and learn.

***

There is one area of the City of London that has rather quietly got busy again. The Corporate Finance departments seem to have been flooded suddenly with instructions to start raising new money. Yes this Spring’s fashion will be the “Crisis Rights Issue”. Companies are beginning to queue up to put in their bids to refinance their balance sheets, some to pay down debt, others just to stock up on spare cash just in case.

However in markets where economic confidence is flat, such offers are going to have to be made extremely attractive to bring back risk money into the investment markets. This means that offers to potential investors are going to be at some astonishing discounts and could provide some tempting opportunities. The question will be though – will we believe what is being offered as being better longer term value? After all cheap shares may not be good shares unless we can see some tangible growth further down the line. However I think we should regard this as a positive sign as we move to the next stage of the recession and we can measure just how much money on the sidelines can be drawn in. Private Equity friends of mine are still somewhat sanguine. Yes there is value – but not quite enough yet.

***

Good news for one area of the UK economy. Here is one sector that is benefitting from a lower valued sterling, and seeing increased demand. As our GDP fell by 1.8% last year total income from this “hidden” sector increased by 36%. The often ignored world of farming is a significant contributor to our economy and is far more resilient in a slow down and more sustainable than our discretionary spending in the retail areas.

Although the record food commodity prices of last year have eased off somewhat, (however they are showing signs of picking up again) they, according to figures from the FT, seem to have provided a healthy fillip for the sector and with fuel and fertiliser costs coming down this year, then margins should also improve. Additionally, the lower value of sterling has not only made our farm goods far more competitive with exports of over £13bn last year , but also the much maligned agricultural subsidies that are received are priced in Euros have become even better value! Although farming is still only about 4-5% of our economy, it contributes some £80bn to the economy and employs 3.6m people. Not to be sniffed at and certainly not to be ignored in these constrained times.

***

And finally....

You cannot accuse the Americans of not trying every avenue to get the economy going again. News comes that not only are they not content with just printing money in the form of notes and easy credit to banks; apparently they are updating the coinage too. The designs for the 1c coin have been updated, and $50m of new pennies are being minted. Unfortunately, as they are made of copper-plated zinc they each cost 1.4c to make. Doh! Next idea please....

Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited







Justin's Latest Weekly Commentary - Monday 16 February

The Queen, Darwin, Banks and the Fear of God

When George Gilbert Williams, the president of Chemical Bank, a large US bank, was asked how he came by his success in the bank crisis of 1857 he said it was the “Fear of God”. It seems the “Fear of God” has deserted many of our banks, or perhaps I should say, the fear of bankruptcy, in these more secular times. Why should our banks fear any God when we the taxpayers are willing to step up and bail them out every few years, because they are “too big to fail”.

In the 19th Century bank failures were almost a part of everyday life and yet the Victorian era was one of enormous growth. Those banks that lent imprudently, or were slow to learn, or those who did not have the “Fear of God” went under. There was a kind of Darwinian “survival of the fittest” that ensured that the smartest banks adapted, survived and prospered and the slow and the stupid did not. Walter Bagehot, the great Victorian essayist, wrote that the Bank of England should lend unstintingly to solvent banks, against good collateral and at a high rate of interest. Today, we have the Bank of England lending unstintingly to our insolvent banks against poor collateral and at a very low rate of interest. Where have things gone wrong?

We are now all majority shareholders in RBS plc, with the government owning 58% of this institution and nursing large losses on its holding. Looking at RBS’s most recently published balance sheet there is little evidence of any fear whatsoever and it is this that led to its bail out. RBS’s balance sheet totals an amazing £1.8 trillion. Now, that is an awful lot of zeros and commas when written down, so for many of us it is difficult to appreciate just how big and bloated RBS has become. The UK’s GDP is around £1.3 trillion, so RBS’s balance sheet is roughly 1.3 times GDP. Supporting this mountainous balance sheet is “only” £53 billion of shareholders’ capital, or in other words, RBS management have levered their shareholders capital 34 times, making it very vulnerable to a vengeful God or the vagaries of Mr Market, as we have seen. The other UK banks are not much better.

The big banks have very little capital and despite government pressure and despite assertions to the contrary, little wish to expand their balance sheets further to irrigate the parched mortgage market or to lend to business. The government is trying to keep to keep these zombie banks on life support at the taxpayers’ expense and endure a bank led repression that is likely to last many years. The current process of letting the big banks merge has been likened to letting two drunks prop each other up. If the old banks were “too large to fail” what use are even larger banks. What is likely to emerge at the end of this process is a calcified oligopoly of a few large institutions that serve the public poorly. With no lessons to learn they will almost inevitably have to be bailed out again in 5, 10 or 20 years, rather like a clown stepping repeatedly on a garden rake, and we again will foot the bill.

Would it not be better to take these insolvent institutions into full public ownership, to protect the depositors, cleanse the bad debts, eliminate the bureaucratic structure and over-paid, fat and complacent bankers. At the end of the process the banks could be broken-up and a series of small, more vibrant institutions that would have to compete for our custom and not regard their customers as unwelcome distractions. They would be unencumbered by bad loans and able to lend freely again, hopefully to solvent borrowers against good collateral in the best Bagehot traditions.

If the banks came into public ownership Gordon Brown may have trouble explaining to HRH The Queen why the royal estate just got bigger by £3 - £4 trillion, but it should be easier following on from Northern Rock and the Bradford & Bingley, which were also taken under the public wing.

The French economist Jacques Rueff wrote that the “ever present threat of bankruptcy subjected all persons, even the most unwilling, to the harsh law of prices, and made short shrift of those who, through inability or dissipation, had not managed their own interests... to higher interests of the community” . With the banks’ bonus culture there was a mentality of “heads I win, tails you lose” that encouraged reckless risk taking that has led to the present sorry state of affairs. Whilst bankruptcy may be a step too far, wiping out the shareholders and holding the incompetent bankers accountable may go some way to re-instilling the Fear of God into the UK’s banks.

***




And finally...

What is the last thing you would normally expect to find at a zebra crossing – a zebra! Well, apparently not if you live in the city of Augsburg in Germany. Police were forced to spend hours chasing four zebras across the streets after they escaped from a visiting circus. After two hours of pursuit, the last of the errant animals was shot with a tranquiliser dart so it could be transported back to the circus. Police stress that no zebra was harmed in the making of this news story.



Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited