Monday 8th February 2010

Britain's top fund managers - This item from the Telegraph.co.uk may be of interest to some readers and not just from the UK. Here is the opening:

Stock markets can be volatile beasts – you can be sitting on handsome gains one minute and hefty losses the next. With many investors nervy about a possible correction, the key is to find a fund manager who delivers the goods irrespective of whether share prices are rising or plummeting.

In total they have collated a list of 110 managers that they suggest investors should consider when buying a fund, but to make it easier for you we have cherry-picked the top manager in several main sectors over a five-year period.

Some of the names will be familiar to you, others less so, while we have also canvassed the opinions of advisers to see if they agreed with the Financial Express ratings.

My view - While a good investment manager can make a difference, the first paragraph above is misleading. Even the best long-only equity funds will suffer if share prices are plummeting.

The huge variance in performance over five years by the managers mentioned shows that choosing the right sector or region is considerably more important than the actual manager.

Orin S Kramer: Unfunded Benefits Dig States' $3 Trillion Hole - My thanks to a subscriber for this recent and topical item, published by Bloomberg. Here is the opening:

Everyone seems to know the current path of federal fiscal policy is a deathtrap over the long term. What's peculiar is the relative inattention to the balance sheets of state and local governments.

Hidden behind accounting fictions, the politically unspeakable reality is that public employee pension systems are under-funded by more than $2 trillion. Add more than $1 trillion in unfunded health-care benefits for retired public employees, and state governments face protracted structural deficits ranging from challenging to insurmountable.

Unfunded promises are the equivalent of government debt. The burden of promises made by state governments to their employees -- effectively an invisible wealth transfer from future taxpayers to current and prospective public-sector employees -- amounts to about one quarter of U.S. gross domestic product. The strength and durability of the current economic recovery are unknowable; that state and local governments, which employ one in nine workers, will be a drag on that recovery is certain.

Ultimately, mathematically unsustainable trends must reverse. As with New York City in the late 1970s, eventually the federal government may get involved in redefining the services state and local governments provide, the benefits paid to public employees and the burdens on taxpayers. States cannot kick the can down the road ad infinitum.

My view - The subscriber who forwarded this also said that it was "a timeless piece on the psychology behind the investment decisions at public employee pension funds." I agree.

I would also make another point. Unfunded public sector pension liabilities are a huge and growing problem for all heavily indebted countries, from Greece to many other European states, the UK and USA. These countries have three ways out of this crisis: 1) grow their way out of trouble; 2) slash benefits; 3) inflate.

Path 1) is preferable but difficult and takes a long time under the best conditions. 2) is probably sensible but also divisive. 3) is too often inevitable.

Amor Fati: Moving Toward Our Maximum Regret - My thanks to a subscriber for this interesting report by Marc Chandler of Brown Brothers Harriman. It is posted in the Subscriber's Area but here is a brief sample:

Life Blood

Nearly all policy makers share two key interests: lay the foundations for a sustainable economic recovery and unwind the emergency facilities and spending. There appeared to have been a consensus, giving more weight to the former than the latter this year. The bond vigilantes have instigated a disruption of that consensus much to the chagrin of the popular will. Indeed, those countries that capitulate the most to the vigilantes are likely to experience the most social push back. Stay tuned.

Ironically, the effect of the bond vigilantes and the social resistance may be similar insofar as the economic impact is negative. Ultimately what is at stake is how the costs (broadly understood) of the bailouts and stimulus are going to be distributed, not just in terms of classes, but also sectors, industries and countries.

This is taking place along another potent but yet somewhat less personal of a force. Like a victim in a trendy vampire show, the life blood of the two largest economic regions, the US and Europe, is being sucked out.

Money supply, measured by the ECB's M3 has collapsed. In January 2009 it was growing at a 6% year-over-year pace. By the end of the year it was contracting at a 0.2% pace. It was contracting in both November and December. The next report is due January 25th and even if one is not a monetarist, the situation is worrisome.

It has been lost in the light of the preliminary 5.7% Q1 US GDP, but in the Fed's statement there appeared what seems like the first official recognition of the ongoing contraction in bank credit. The FOMC implies that this is being offset by improved financial market conditions. We thought so too.

But the capital markets are fickle and given the surge in volatility and the general deterioration of market conditions (should it persist), the risk is that it no longer is sufficient to offset the contraction in bank credit. Even if this is just a normal market correction, it could stall the economies at a crucial time.

The real tragedy is not what is happening in Athens, as painful as the adjustment promises to be. Rather the real Greek tragedy is that we are running quickly, even if not irrevocably yet, into precisely that which we wanted to avoid the most.

My view - This is a worryingly pessimistic, hopefully too pessimistic conclusion, but let's have a look at various money supply figures.

This item continues in the Subscriber's Area.

Emails of the day (1&2) - On gold:

(These items appears in the Subscriber's Area.)



Additional commentary by Eoin Treacy

Estonia - The Return of a Baltic Tiger? - Thanks to a subscriber for this interesting article by Andreas Hoffmann in the ThinkMarkets blog. Here it is in full:

The new member states of the EU were hit hard by the current crisis. Especially the former Baltic tigers (Estonia, Latvia, Lithuania) have seen a tremendous decline in GDP. While our economies face difficulties to cope with a decline of about five percent of the GDP, they lost 10 to 15 percent. In my opinion, Estonia is the most interesting of the three as it chose a distinct way to deal with the crisis.

Like many economies, Estonia saw an artificial boom driven by cheap credit rates until the latest crisis. From 2003 to 2007 growth rates reached up to 12 percent. At the same time wages grew rapidly. Huge current account deficits reflected the increase in wages, influx of capital and the credit boom. However, unlike most other economies and even though it lost by two digits, Estonia managed to keep the budget relatively balanced in the current crisis. Estonia was even able to contribute to the IMF-program for its formerly "growth mate" Latvia. What is the reason behind it?

With a tradition of a fixed exchange rate to first Germany and now the euro area, Estonia has been waiting to enter the euro area as soon as possible. Even though the boom brought about real convergence as the GDP per capital caught-up with the former EU-15, nominal convergence was out of sight. The credit boom fuelled inflation, not only in real estate prices but also in consumer prices. Nominal and real convergence did not go hand in hand. This caused a problem in not fulfilling the Maastricht inflation criterion, necessary to introduce the euro.

Thus the Estonian government reacted in a way to the current crisis that should bring tears of joy into the eyes of any free market economist: First, they did everything to hinder a devaluation of the Estonian kroon, as a relatively stable exchange rate to the euro is a prerequisite for euro introduction. Secondly, they did not overspend. Instead they cut wages heavily with the fall in per capita GDP - even in the public sector. And third, unlike most economies, Estonia did not sacrifice economic freedom for crisis management. Instead, officials wait for the crisis to heal the market.

At the same time lower spending is assumed to bring inflation down. The crisis is seen as a chance to (readjust and) fulfill the Maastricht inflation criterion, which was impossible during the boom period.

Thus, as Estonia allowed for an adjustment process, malinvestment from the previous boom should be dismantled soon. This should bring about lucrative future investment possibilities in an economy with solid macroeconomic fundamentals, a high degree of economic freedom and prospects to enter the euro zone. At the moment interest rates are much higher there than in the euro area and a credible fixed exchange rate assures against depreciation. These facts should attract new investors. Therefore it is likely that we soon see the return of at least one Baltic tiger.


My view - The subscriber also attached this additional informative commentary on the Estonian economy by John Dizard for the Financial Times and a further comment:

"Friend of mine in Tallinn runs a Baltic fund. She tells me her friend who owns a fancy restaurant in the old town paid his waitress EUR 5.50 in early 2007. Now it's EUR1.50. That is just the kind of adjustment that Estonia will make, and Greece, Portugal etc will not. Also defaults have not been that high as bankruptcy is socially frowned-upon and people have very little to live on for some years after bankruptcy. Instead people have taken much higher paying jobs in Helsinki."

Estonia's fiscal adjustment is one of the more extreme undertaken by a European government since the credit crisis unfolded and it appears to be helping lay the foundation for an economic recovery. However, as with just about every other country that has an overhang of debt, convalescence is going to take time.

This section continues in the Subscriber's Area.

Email of the day (1) - on lumber:

"Kudos for a job well done with Friday's big picture long term outlook. You mentioned timber which had an emphatic breakout to the upside last week. However, stocks like West Fraser, Plum Creek, Rayonier, and Weyerhaeuser actually sold off and are lower for the week whereas the price of timber is up by approximately 15%. Is this a warning sign for timber stocks as in the gold market the mining stocks typically lead the bullion price or is this a buying opportunity. Can you please comment on this divergence?"

My comment - Thank you for your kind words. Lumber concluded a remarkable advance on Friday having been limit up at least once intraweek and is attracting increased investor attention both because of its absolute and relative performance compared to the wider commodity markets. It broke the 5-year progression of lower rally highs in November, consolidated below $250 for two months and broke emphatically upwards last week; reasserting the medium-term uptrend. It is somewhat overextended in the short-term but a downward dynamic would be required to check the advance beyond a brief pause, while a sustained move back below $235 would be needed to question the consistency of the medium-term advance.

This section continues in the Subscriber's Area.

World Equity Index Valuations Tables - The monthly list of 99 global indices ranked in descending order by dividend yield, then in ascending order by P/E, Price / Book and Price / Cash Flow is posted in the Subscriber's Area. .

This section continues in the Subscriber's Area.

Email of the day (2) - on whether it would be possible to add a column for Estimated P/Es to the World Equity Index Valuations Tables:

"Nine months from subscribing I am still an avid reader of your daily commentary.

"I am wondering about P/E ratios around the world. While your monthly list from Bloomberg is helpful, the data is historic. While I recognise that forecasts of P/E ratios are subjective, I and other readers might find it useful to know what the pundits are forecasting. A Google search led me to Consensus Economics who seem to produce surveys of forecasts. Does in Investors' Intelligence subscribe to their service, or some similar one, such that you could publish forecast P/Es from a fairly reliable source?"

My comment - Thank you for this reasonable request and we are delighted to hear you are enjoying the Service. However, the only data feed we receive is from Bloomberg and they do not publish Estimated P/E data for the indices in this report.

Email of the day (3) - on adding the gold/silver ratio to your Favourites:

How can I save a Gold/Silver ratio chart in the Favorites chart area?

My comment - Thank you for this question which I'm sure will be of interest to other subscribers. You will find the Gold/Silver ratio in the Relative Charts section of the Chart Library, about a third of the way down the left hand column. There should be a green '+' sign to the left of it. Simply click on this '+' and it will be added to your Favourites. For more on how to customize your Favourites such as how to add sections and filter the constituents have a look at the Help Pages.

Email of the day (4) - on finding funds in the Chart Library:

"Where can I look for Gold ETF and for Indian stock market ETF which is traded in USA and UK? Please help"

My comment - Thank you for this question. The Chart Library contains a number of funds devoted to both India and Gold. The easiest way to find either would be to use the Chart Library's search engine with either 'gold' and 'India' as the respective search parameters. For Gold, you will find all of the related funds in the Commodity Indices - Funds, ITs & ETFs section of the search results. All of the UK listed funds have (UK) following the title. For India you will find all the related funds in the Asia & Asia Pacific - Funds, ITs & ETFs section of the results and again all the UK listed funds will have (UK) following the title.

Email of the day (5) - on an addition to the Chart Library:

"Can you please include in the chart library: Franklin Templeton China A Distribution GBP"

My comment - Thank you for this suggestion which has been added to the Chart Library.

Email of the day (6) - on measuring a decline:

"One basic question - when analysts talk in terms of percentage decline, is it measured as:

"-decline from the highest high to the lowest low; or

"-decline from the highest closing high to the lowest closing low

"Thanks in advance for the clarification."

My comment - Thank you for this question which others may also be curious about. Terminology tends to differ between analysts. At Fullermoney, when we talk about a high or low we means from the highest value to the lowest value. If we mean highest closing value or lowest closing value we will generally state that.

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Thousands of people around the world receive Fullermoney's Free (Abbreviated) Comment of the Day, and their numbers steadily increase. Why do so many sign up? It is primarily due to word of mouth or word of press mention, from people who like Fullermoney's global perspective and our Empowerment Through Knowledge theme. Incidentally, on receiving our free daily email, you will not be contacted or solicited with advertisements and other marketing material. No one else will have access to your email address. We respect your privacy.

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