LETTER FROM LINLITHGOW - MAY 2012

I thought it would be a good idea to give an antidote to the menu of bad news pumped out at this time of year. For example, you'll be fed up seeing "SELL IN MAY AND GO AWAY".

So, let's look at significant news being ignored completely by the media. Over the last 39 years I've been doing this job it's not what's commonly believed that dictates investment success over the following 5 - 10 years, but what's going on underneath the headlines that matters.

So what are the most common things we hear about? Well, let's start with Europe. Greece has apparently been disappearing for the last year or more, and like dominoes it will bring down the rest, and is a disaster for the World. That's what we're told. This type of commentary ignores any policy reaction and insults leadership of European nations, Central bankers, the IMF etc. But it's an easy story.

Let's look at some good news. Sweden, I don't think, has hit any headlines. But that's where the Conservative Government responded to the 2008 problems so differently from any other European Government. They decided to go for permanent tax cuts and they paid for them by cutting Government and welfare spending. They were accused of lunacy - their response was "Lunacy is repeating the economic and high taxation of the 1970s, and expecting a different result."

Now you may not have noticed but Sweden was the fastest growing economy in Europe last year and the Conservative Government in 2010 was re-elected for the first time in history. Are you listening David Cameron?

Now over to the US - the largest economy in the World. In my own blog site (Points of Few) which can be accessed on alansteel.posterous.com, I posted "US corporate earnings exceeded expectations in the first quarter by the highest margin since statistics began in 1986". The response of analysts was they must have set the bar too low.

The pessimists say that the numbers are made up. So how do they explain this? "Thanks to April's stronger than expected gains in US Federal Tax Revenues, combined with weaker than expected growth in Government spending, the 12 months' US Federal deficit has shrunk in less than 2 years by 22%." US Government spending is shrinking allowing the Private Sector to grow. And that's why Tax Revenues are rising in the US, although tax rates aren't.

So is there any other good news from the US? US exports to the rest of the world are up 57% over the last three years. You tell me how that's happening when Europe is supposed to be shrinking.

US property prices are increasing in most areas of America over the last year by 25%. And Ned Davis Research estimates, in the last 12 months alone, one million new households have been formed in the country, and mortgage rates are at their lowest level for thirty years.

And there's an Energy revolution going on bringing down unemployment, and creating higher tax revenues for the Government. Oil prices are falling bringing down gasoline costs and that's good news for the US stockmarket over the next 6 - 12 months.

The US intends to be self sufficient in natural gas and oil within the next five years. Natural gas prices in the US are a quarter of those in China, and now the lowest in the World. Already US businesses have saved an estimated $83 billion in the last three years in reduced energy costs.

What else is happening that's significant? Long term Sovereign Bond yields such as US Treasuries or UK Gilts are at the end of a thirty year bull market. What that means in old money is there's hardly any room to fall further. Ask any expert in this area and they'll tell you, looking out ten years, they would expect yields to be at least back to 5%. That's double where they are now. So those thinking of piling into these bonds now could suffer horrendous losses shortly. Meanwhile high quality equities are cheap and good value. The cheapest places to be, where all the bargains are, are in equities.

Finally to the UK. You may have noticed in the last few weeks stockmarkets have been falling a bit and sadly have been volatile. That's to be expected with so much bad news with the French Elections, Greece and the onset of May. But what can we learn from the Olympics?

An analysis of the last six Summer Olympic Games going back to South Korea in 1988 suggest what's par for the course - stockmarkets are weak in the three months before the Games, and tend to be strong in the six months following. So the UK stockmarket, never mind anywhere else, could well be a Gold Medal Winner from the Summer onwards.

Speak to you in June.

Alan Steel
Chairman
telephone 01506 842365
www.alansteel.com

 

This letter is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.