17th June 2011

Artemis: The Hunters' Tails

The cost of catharsis ...

So that's it, then. Lugubrious Alan Greenspan, maker of the mother of all that bubbles in mortgages, said this morning that "the chances of Greece not defaulting are very small." The man has never used a positive when a negative would do. More importantly, the market in credit default swaps is now pricing in a 75% chance of a Greek default -- up from 45% as 2011 began.

Anyway, Greece per se is de minimis. Greece, Portugal and Ireland together account for 7% of Europe's GDP. But add Spain, and you get to 26%. Contagion is the crux. Were it not for the (hubris of the) euro, Greece would have defaulted, European banks would have absorbed, somehow, their $50 billion of Greek government debt and Greeks would no doubt be re-considering their colonels.
But these days our politicians are endlessly emollient with our grandchildren's taxes. Catharsis, here known as default, would at least clear those Augean stables. Instead, at its summit next week we reckon the EU will almost certainly agree to further Greek gifts of €50bn and announce some semi-plausible fudge. Says James Foster of Strategic Bond: "I would guess there will simultaneously be announcements about improved terms for Ireland and perhaps Portugal, so that it reduces the fear of contagion. Greece should be forced to pull out of the euro -- but again, only politics can effect that. There needs to be some sanction, otherwise the markets will take it as a defaulters' paradise.

“Merkel and Sarkozy are far from stupid. To see the 'European dream' unravel because of one very small nation on the periphery seems inconceivable to me. I would expect some sort of muddle through, perhaps not as clear as the markets would like, but sufficient for now. That said, history is littered with examples of the authorities not learning. We are approaching one of those crucial week-ends, and we will see if they have learnt."

Unless the Greek government falls before then; unless? It was, after all, in innocence that Oedipus married his mother. And the rest was the stuff of Sophocles.

While Elizabeth R ...

As if this wasn't all bad enough, the end of the US Fed's QE2 is nigh. We note that by the end of June, the Fed will have bought some 80% of the US Treasury's issuance ($773bn of $946bn) from November 2010. So when the biggest buyer says 'adieu', prices will fall and yields will rise? Not with 'zero interest rate policy'. Small wonder that US corporations are sitting on some $2 trillion in cash; and US banks have $1.5 trillion on deposit with the Fed. All watch and wait; for that which none can see.

And so -- to 'profits'?

Deep breaths and stout hearts (and hard hats?) are the order of the day. On price and prospects, equities look (relatively) even more attractive -- and we go on buying on your behalves.
This week, quietly and softly, we have launched our thirteenth unit trust in as many years, the Artemis Global Select Fund. As long-term investors, managers Simon Edelsten and Alex Illingworth are finding themselves with much they want to buy. Such themes as the 'grey dollar' will outlast current woes. For Strategic Assets, William's long-held defensive stance is proving its worth, and for Income [y]our Adrians are standing steady with, e.g., BT. "A strong hold at least. The low yield relative to other telcos will limit short-term performance. But as confidence in cashflow and growth increases, the free cashflow yield will rise." That's an Artemisian sort of stock. That will do.

Speaker's corner ...

“First we fear for Oedipus -- and then we fear for ourselves."
— Aristotle (384 -- 322 BC), Rhetoric, 1382b 26; 1386a 27.
“Tragedy is an imitation not only of action, but also of objects of fear and pity. These arise most of all when events happen contrary to expectation and in consequence of one another; for in this way they will have more that is remarkable in them than if they happened by chance. Even among things that happen by chance, the greatest sense of the remarkable comes from those that seem to have happened by design."
— Aristotle, Poetics, 9.

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