Research Watch

PORTFOLIO POINT: This is a sampling of the week's best research notes. In a world of too much information, we hope our selection helps you spot the market's key signals.

Markets are being ruled by fear of what may happen in Japan, but one contrarian says investors should be frightened of something else: the big bad bubble that is feeding on government-sponsored market madness. Others have decided that you should never let a good crisis go to waste and are making a motza out of the crisis in Japan, while in China bamboo capitalism is altering the fundamentals of the economy. Then we have yet more proof you don’t want to live in the US, while, much to our disbelief, deepest, darkest Africa is starting to look like an increasingly attractive investment destination. There’s a banker in the UK who is praying he doesn’t get sick right now and you have to wonder if the only bubbles are in the beer once an industry starts buying kegs for the office. Iceland is on the case of some playboy property princes, while the lack of offers for a bad Goldman Sachs unit may be due to its immoral and deceitful conduct. And on video, Christians come to save JP Morgan Chase.

'Suckered by the Fed’ '¦ “The good news: We’re still not in a bubble as big as the ones in 1999 or 2007. The bad news: We’re getting close. 'I am deeply, deeply worried,’ says James Montier, the highly regarded strategist at fund firm GMO and a rare contrarian. 'This is the first officially government-sponsored market mania for a very long time.’ Montier thinks investors are getting suckered by the Fed. They don’t understand how Ben Bernanke’s program of ultra-low interest rates and his latest $600 billion program of bond purchases is driving the market. 'QE II works by driving the future returns of all assets to zero '¦ It’s the only way you can force people to spend '¦ the Fed is forcing people to take on risks. And in this market I just don’t think you’re getting paid for it '¦ The latest forecasts from GMO make for sobering reading. From current stockmarket levels, GMO thinks you’re going to lose money, after inflation, on small-cap stocks and barely break even on large caps over the next seven years or so. The picture for bonds is similar '¦ His answer breaks the rules you hear from every broker everywhere. Hold cash, lots of it '¦ But this isn’t a question of 'timing’ the market. It’s a question of valuing the market. Stocks, after all, are just a claim on future cash flows. The more you pay, the worse the deal '¦ Montier’s 'Seven Rules’ are: 1. Always insist on a margin of safety. 2. This time is never different. 3. Be patient and wait for the fat pitch. 4. Be contrarian. 5. Risk the permanent loss of capital, never a number. 6. Be leery of leverage. 7. Never invest in something you don’t understand.” (MarketWatch, March 14)

They told you there was money to be made in Japan '¦ “The catastrophe in Japan has placed renewed focus on the country's already fragile economy – and brought unexpected profits to investors who have long bet that the nation eventually will be dragged down by its debt problems '¦ Hedge-fund managers, from Kyle Bass of Hayman Advisors LP in Dallas to smaller firms like Commonwealth Opportunity Capital, have made money since the earthquake on long-held bets on Japan's government and corporate bonds '¦ Betting against Japan has been a losing proposition for many investors for years. Despite all the debt problems, bond prices have continued to move higher partly because deflation, not inflation, has been the concern. Also, domestic investors own most of the government's debt and have been reluctant to sell. But now, facing at least a short-term hit to the economy from the earthquake and the likely need to issue more debt to pay for reconstruction efforts, Japan is seeing its problems magnified '¦ Bass and others are wagering against the yen and Japanese government bonds '¦” (Wall Street Journal, March 15)

Bamboo Capitalism rises to the fore '¦ “Few would deny that China has been the economic superstar of recent years '¦ Less obvious is quite what the secret of this success has been. It is often vaguely attributed to 'capitalism with Chinese characteristics’ '¦ But is it true?'¦ the state’s activity has been vast and important '¦ Yet China’s vigour owes much to what has been happening from the bottom up as well as from the top down '¦ China has a multitude of vigorous, (very) private entrepreneurs: a fast-growing thicket of bamboo capitalism. These entrepreneurs often operate outside not only the powerful state-controlled companies, but outside the country’s laws. As a result, their significance cannot be well tracked '¦ But they are an astonishing force. First, there is the scale of their activities. Three decades ago, pretty much all business in China was controlled by one level of the state or another. Now one estimate '¦ puts the share of GDP produced by enterprises that are not majority-owned by the state at 70% '¦ The heartland for entrepreneurial clusters is in regions '¦ that have been relatively ignored by Beijing’s bureaucrats, but such businesses have now spread far and wide across the country '¦ Second, there is their dynamism '¦ The people behind these businesses endlessly adjust what and how they produce in response to extraordinary (often local) competition and fluctuations in demand. Provincial politicians, whose career prospects are tied to growth, often let these outfits operate free not only of direct state management but also from many of the laws tied to land ownership, labour relations, taxation and licensing '¦ But this points to a third, more worrying, characteristic of such businesses: their vulnerability '¦” (Economist, March 10)

So much for the trickle-down effect '¦ “A huge share of the nation's economic growth over the past 30 years has gone to the top one-hundredth of one percent, who now make an average of $27 million per household. The average income for the bottom 90% of us? $31,244.”

(MotherJones, April Edition)

Africa’s 'elite’ can now afford soap and beer '¦ “Sub-Saharan Africa is now one of the fastest-growing areas on the planet and despite the turmoil in North Africa, has become one of the most incredible success stories of the global economy '¦ a burgeoning consumer class has surfaced and the once dark continent is now littered with diversified economies that can sustain sectors from technology to retail '¦ 'Investment’ is quickly replacing 'aid’ when it comes to discussing pumping money into the region '¦ The collective output of its 50-plus economies, meanwhile, reached $US1.6-trillion, far greater than, say, global industrial power Republic of Korea '¦ Underlying this economic breadth, says the report, is the African consumer '¦ Millions of Africans have moved from the 'destitute’ level of income below $US1000 a year to the 'basic needs’ level between $US1000 and $US5000 '¦ The middle class is exploding. They are buying soap, they’re buying beer '¦ Stronger and more diversified growth would not be possible '¦ if it were not for the major changes in political and economic stability over the past two decades '¦ countries have liberalised trade, reduced debt, lowered corporate taxes and developed better-functioning financial markets. Furthermore, they have increased investments in infrastructure such as roads, power plants, fibre-optic networks and human development, via better education for its growing population of young people '¦” (Financial Post, March 14)

Hope he doesn’t get sick '¦ “A bonus-happy banker taunts nurses and doctors marching below by waving a £10 note '¦ Mistaking medics chanting 'Save Our NHS’ and 'No More Cuts’ for an unemployed mob, he sneeringly mouths: 'Get a job.’ A laughing friend shares his sick joke. Last night the smirk was wiped off the banker’s face after the Sunday Mirror showed the picture to German giant Deutsche Bank in London. Bosses at the firm where investment bankers are on a basic of £350,000 – plus bonuses averaging £54,000 – immediately suspended him. Angry Dr Ron Singer, chairman of the Medical Practitioners’ Union '¦ said: 'It was shocking to see people acting in this way when we passed the bank. If it wasn’t for the greed of bankers the economy wouldn’t be in such a mess and there’s a good chance the NHS wouldn’t have to be making devastating cuts '¦ The bank’s chief executive, Josef Ackermann, who was paid £8 million in 2009, has been a staunch defender of bank salaries '¦ His firm fought a long battle with the Inland Revenue to try and avoid its staff having to pay tax on bonuses '¦” (Sunday Mirror, March 13)

The tech industry bubble is also in the fridge'¦ “At Yelp Inc’s San Francisco headquarters, a keg refrigerator provides a never-ending supply of beer to employees, letting them drink as much as they like. They just have to be comfortable with full disclosure: Workers badge in to an iPad application attached to the keg that records every ounce they drink. 'If you’re at the top of the leader board consistently, I don’t know if that’s a place that you’d want to be,’ said Eric Singley, director of Yelp consumer and mobile products '¦ the all-hours nature of startups means more employees blend their nightlife with work time. Drinking is an extension of that, said Joe Beninato, chief executive officer of Tello Inc, an app developer '¦ 'It’s not like it’s a wild fraternity party or something like that – we’re all adults.’ The long hours may be what sets technology workers apart from the boozing executives on Mad Men, a show set in the 1960s, said New York University’s Conley. 'The folks drank a lot more alcohol back then and had three-martini lunches, but they weren’t staying until midnight finishing projects,’ he said '¦” (Bloomberg, March 14)

It’s not all veni vidi vici for playboy property princes '¦ “As the sun set over the Cote d'Azur on Thursday, property player Vincent Tchenguiz's yacht, Veni Vidi Vici, began to fill for his lavish party at Mipim, the annual property expo in Cannes. But Vincent and his brother, Robert, were nowhere to be seen, still recovering from an astonishing 24 hours. The day before, when Vincent was due to fly by private jet to France, the pair were held in London police cells for nearly 12 hours by the Serious Fraud Office, which had sent 135 police officers and SFO investigators to the homes and offices of the brothers and their teams '¦ Nine men were arrested as part of a long-running investigation into the 2008 collapse of Kaupthing, one of Iceland's three biggest banks. Friends and acquaintances drinking Vincent's champagne and eating the steak and fois gras or the scallops with squid ink risotto at Thursday's party talked of their sympathy and concern for the brothers. 'They are probably just scapegoats. Maybe it's punishment for Robbie trying to sue Kaupthing for his losses,’ said one '¦ So how did two Iranian-born, Iraqi-Jews, educated in the US and living in London since their twenties, become heavily involved in an Icelandic banking crisis and what is at the heart of the 16-month investigation? Robert, 50, and Vincent, 54, borrowed billions from Kaupthing in the mid-2000s boom '¦ Robert Tchenguiz became the biggest Kaupthing borrower, racking up £2 billion in loans '¦ and '¦ owned a 1.5% stake in Kaupthing and held shares in Exista, Kaupthing's majority owner '¦” (The Independent, March 13)

Goldman Sachs might be breaking into your house right now '¦ “It's no wonder Goldman Sachs is having trouble trying to sell its mortgage servicing unit, Litton Loan. The allegations against the unit are absolutely horrific '¦ 'They break in my home, take my things then post notes sending me to another lender,’ one client said '¦ The client received a note on December 9, 2010, from Litton stating they needed more paperwork and no foreclosure sale would be conducted and they would not lose their home during the 30-day review period. When the client went to his house 10 days later he found Litton had changed the locks on the back door, posted signs on the sinks and toilets that said the property has been winterised, and phone numbers for other loan offices '¦ One of the loan offices on the post said they no longer worked with Litton and the company was illegally using their name. Another said he received a 'letter from Litton stating they had charged my account with $6535.27 for insurance which I already have’ '¦ (Business Insider, March 16)

Maybe they need to do this for the vampire squid too '¦ “Frustrated by the lack of action from JP Morgan Chase in offering assistance to families facing foreclosure, clergy members across New York City and Long Island gathered in front of the bank’s Park Avenue headquarters to close their accounts. They sprinkled holy water on 'this evil empire’ and called on 'almighty God to exorcise '¦ to chase the demons out of Chase’ '¦”

(DealBreaker, March 11)