For previous Newsletters, please click here

Global Economies

There are still many worries pervading the economic world and although we have seen a bounce it ended in mid-Feb and the last two weeks have seen the return of the downtrend. Some market watchers predict the October low of 3665 will be breached and the next stops possible, are between 3400 and 3476. However it could rebound from that level which happens to be 50% down from major highs.. Further weakness later could bring 3160, 2900 and 2685 (a 35% chance according to Morgan Stanley in December last).. These are considered quite possible, partly because the All Share P/E stands at 11 times earnings and during the 1970 blitz that figure fell as low as 6.8 times. We are in territory that has been rarely charted so the perfect storm that surrounds us has not indicated a bottom so far. Interestingly, the S&P 500 index decoupled from the FTSE 100 in September 2008 and is now mimicking the FTSE but well below, compared with mid-summer. Neil Hume in the FT remarks that ‘things are not out of control but the economic and corporate data keep getting worse’.

Governments are busy passing the buck or trying to divert attention but there is little doubt that a lot of pain is in store for companies and individuals.

The Baltic Dry index has continued to rise through February easily topping 2000, making 1000 points in the month. However last week it dropped back slightly to 1986 and looks a bit more vulnerable at least temporarily. I suggested last month that it could be a first green shoot and that is not the only one (see Persimmon below).

The US economy has suffered terribly and company results are now being issued that make gruesome reading. GE (General Electric which includes GE Capital) has made it’s first dividend cut since 1938. It means it’s triple A rating is under threat and out in the open is the question of how bad things have become. Last week saw another Ponzi scheme exposed as Sir Allen Stanford became the most recent high profil casualty of the financial crisis with $9bn likely to be unaccounted for. Not to mention many hundreds of employees out of work and many savers will have lost life savings.

Japanese exports are down 45.7% on an annualised basis while industrial production fell 10%. Consequently capital has been fleeing the country and the yen has fallen showing its worst monthly performance in 13 years. Troubled times indeed. The recent reversal in the carry-trade had boosted the yen and now this unwinding has stopped leading to a monthly fall of 8.1% against the dollar. The most dramatic fall since 1995

Motor manufacturers have been some of the worst casualties of the economic downturn. With most famous names suffering to a greater or lesser degree as price cutting is required to generate sales. Saab is likely to be cut loose by general motors but will it survive. Question marks hang over all car plants as companies seek to save cash. Big US companies have gained some relief from government bailouts but help is only going to the biggest both in motors and banks. Understandably the banks are key to all trade so the UK’s biggest apart from HSBC and Barclays now have a majority shareholder in the shape of the government and in the US Citibank and Bank of America have a large government stake in them.

Around the world the only scheme which seems to have worked successfully for motor firms is the bonus offered in Germany to people who scrap a ten year old inefficient motor. Brilliant and well done them. It would be superb in UK and help carmakers no end I am sure. Course Gordon knows best or thinks he does.

UK Economy & Politics

Plenty of party wrangling going on as the opposition parties seek to pin the majority of the blame on the government. Strikes are pending and we have only just started the pain of serious unemployment. Each month signals another huge rise in numbers.

Currencies and rates

Rates are now at their lowest for years in all countries and there are only a few more steps to bring them all practically to zero. Soon the Eurozone is expected to drop theirs another half a percent. The pound sterling is holding well below its last few years position vis a vis the dollar and Euro. This trading advantage has had little effect yet but may help us in the later part of 2009. IT wiil make Brits less likely to holiday abroad and may persuade Europeans and Americans to come for a holiday. Let’s hope we have a good summer. We shall need it.

Commodities

Commodity prices remain weak. Gold rose above $1000 dollars again in Feb but has fallen back to $948 on 27 Feb.. It is thought likely that it will make new highs in 2009 because production has been low (South Africa [220 tonnes} down 14% year on year and just a shadow of the 1000 tonnes of 1970 ) while governments are reluctant sellers. Oil remains low with demand constrained but the threat of lower OPEC production is real. Meanwhile at the petrol stations prices remain high with the pound weakness supporting the wholesale price.

UK Stocks

Nick Louth’s prediction in the FT that the markets would fall back in Feb proved prescient but some sectors have bucked the trend. Including housebuilders which suggests buyers are attempting to get into the market. With prices being shaved by builders. Persimmon in fact rose 20% last week on the back of statements from Redrow, Barratt and particularly Berkeley who are intent on buying some land again now prices are so low.

New highs were 3 (yes three) while lows were 91 inc. Tate&Lyle and St Gobain. Not good signs. Sector changes were:- Industrial metals +115% since Jan 1st 2008, oil equipment and healthcare were also up 10-12% each. Forestry& paper was down 39% while banks and real Estate were off about 30% in the same period.

Worldwide interest is being shown in high rated corporate bonds as the yields are so attractive cf. gilts. Well, it’s difficult to get interest or dividend income by any other means.

Mobius investments

Mobius had a good meeting in Feb. We have stuck a toe in the water by buying BG Group our first investment for many months. Subsequently we had a beauty contest which resulted in Clarke T, a company in construction with Olympic contracts to keep them employed through to 2012. It was a close call as the semi sys value selections were returned and we will probably be trying again next month I hope.

Martin Longman - Acknowledgements to Daily Telegraph and FT.