FYI | Aug 08 2007
This week I had a meeting with two readers in the Sydney CBD. Let’s call them Richard and John.
Richard normally lives in North America from where he operates an investor research service. We had been corresponding via email over the past few months, plus a few quick phone calls. He discovered FNArena last year while researching the internet and instantly turned into a regular reader of our content.
John operates a business intelligence service from Australia and only heard about FNArena through Richard. Both discovered over the past year they had a lot in common and they decided to combine forces, and ideas, and set up their own asset manager. It is my understanding that FNArena will be one of their key information sources.
The three of us, on a chilly Sydney night, with some sizeable pints of German beer on the table quickly engaged in what is probably best described as a long conversation of like-minded spirits. This is not so strange considering that we each spend most of our weekdays in a similar manner: we read multiple specialized sources of information, we analyse, we think, and we write down our insights and sell it to our respective customers.
At times, when the conversation turned to recent market developments, or the US economy, there was more than just a hint of doom and gloom hanging over our table. Richard and John have put their investment strategy into academic analyses and blue prints and they were pretty straightforward in their assessment: no financial institutions.
One of the anecdotes that stood out, I thought, came from Richard. A good friend of his made a fortune out of buying and selling properties in California over the past few years. He pulled out of the market in time and is now sitting on a cash pile of some US$20 million. He is taking a wait and see approach while looking for the next investment opportunity. Stepping back into property is not considered an option.
Every week, Richard told both of us, he gives his bank manager a call just to see how things are developing and to find out what his credit line would be in case an opportunity comes along. About twelve months ago the bank was happy to provide him with a US$200 million credit, which translates into ten times his deposit at the bank.
Two months ago this had shrunk to about US$100 million. Last week his manager told him US$60 million would be the maximum (remember he has US$20 million in the bank). This is how lenders in the US are de-risking their operations.
Both John and Richard are not positive about the outlook for the US economy. They cannot believe there are still experts around who genuinely believe that what started off as a problem with sub-prime mortgages will remain largely contained to a section of the US housing financing market. John talked about how financial institutions in Hong Kong are feeling the impact.
Richard once again brought the direst anecdote to the table. He foresees a triple whammy coming down on US property owners through local councils. As these councils have been enjoying a feast in fees and taxes over the past years, mainly on the back of increasing property transactions, most of them will be facing budget deficits now that property prices are trending down. The most logical response would be to simply raise taxes to make up for the difference, he believes.
He would still maintain that most local councils will also be forced to lay off some staff.
In addition, many local government institutions, including schools and hospitals, have tried to spice up their coffers in the past years by putting part of their investment funds into higher yielding assets, such as the US share market, and those often named CDOs (and many other forms of what is in essence a repackaging of multiple home loans). The true effects of the current blow out in some of these financial products is still guesswork at this stage, but it could potentially make for a potent negative development.
There is not a single grain of doubt in both Richard and John’s mind that we have yet to see the true extent of the downturn in the US housing market. That’s why both shy away from anything financial, building or housing when it comes to finding investment opportunities. Even the service sector in the US in general is largely off the radar as far as both are concerned.
Without giving away too much about their plans and philosophies, Richard and John will be scouring sectors such as basic materials, food, energy, transport and infrastructure, including water and electricity, for the next big opportunities.
We also realized that when it comes to global growth the relative importance of the so-called BRIC countries (Brazil, Russia, India and China) will only further increase in the years ahead.
I thought I’d share these thoughts with you all this week.
Till next week!
Your I still think Belgian beer is so much better editor,
Rudi Filapek-Vandyck
(as always supported by a team of fabulous people including Greg, Terry, Chris, Pat, George, Grahame and Joyce)