Portfolio Construction - Part 6

We’ve been generally scathing about Wall Street’s ability to open its eyes and view what Basil Fawlty would have called “the bleedin’ obvious”. We’ve tended to excuse Morgan Stanley from our most trenchant criticisms. They seem to be more aware than most on the street that the equation isn’t as simple as weaker growth = interest rate cuts = economic stimulus = higher growth + lower inflation = smiles, bonuses, new Ferrari (Porsche are so passe) and champagne all round.
The company has recently expressed concern that markets seem to be relying on the Fed to cut rates, but that the markets may be getting ahead of themselves, especially with inflation appearing to be on the high side. The Fed has, for the most part, recently left interest rates unchanged, but made some significant changes to the tone of the accompanying statement explaining why they have acted in such a way. Specifically, the FOMC seem to be taking a more negative view of current economic conditions, changing language from “firmer economic growth” to indicators being “mixed”.
The change that the market is focused on and reacting to is the replacement of the phrase “additional firming” with the new phrase “future policy adjustments”. This is being interpreted as being a more neutral stance, the altered linguistic nuance being taken as a major “come on” by markets. Markets are now asking whether the Fed has issued a Bernanke “put”. This is the notion that the Fed will act to bail investors out by cutting interest rates when there is market turbulence and worries about the financial system. Precedent shows that the average time between any change in bias to the first easing has ranged between two and six weeks, but there are several reasons why a Bernanke “put” has probably not been issued:
* First, the Fed has almost always eased only when it is confident that inflationary pressures have diminished in the economy. Typically for this to occur there has to be softer growth and consequent weakness in the labour market. This has yet to occur in earnest.
* Second, the change in language probably is designed to give the Fed additional room for manoeuvre going forward, rather than being an intention to cut rates per se.
Markets are now caught between a rock and a hard place - whilst there are fears of slowing growth in the US, there have been various disappointing inflation releases from around the world:
* Headline inflation in both Canada and the UK was higher than expected during February. China’s annual inflation ticked up from 2.2% to 2.7% in February and there were upside surprises in the Euro zone and the US, but markets seem to be paying little attention to these moves up in prices. Having hit 4.90% in January, yields on US 10 year Treasury bonds have since retraced close to 4.60%.
* The implied inflation rate has remained remarkably contained whilst real yields have dropped on growth fears. But, given the run of higher than expected inflation numbers are markets missing the point by focusing solely on a growth slowdown? Worst of all, could we be entering a period of both weaker growth and rising inflation: a possible period of mild stagflation?
Anecdotal evidence tends to lead the official data and is now pointing to emerging inflation concerns especially in developing economies and in terms of upside risk to commodity prices. If that were the case, markets (both equities and bonds) could move from only being concerned about growth to also worrying about inflation. This would take away the ability to cut rates and leave the Fed (and other central banks) in a very tight bind.
We echo these concerns and also we would make the point that we’re not sure how effective the rate cuts would immediately be - there tends to be a lead time of around 18 months before monetary policy really bites - but the market wants it both ways; on the way up the economy could shrug of the rate hikes but on the way back as soon as cuts are made they will have an immediate stimulus effect. We’re not so sure about this. Even the eminence grise of the bond markets, Bill Gross of Pimco seems to think that an aggressive series of rate cuts could salvage the US property market. We are very unconvinced about this. Again, five asset classes, adaptive allocation, an open mind and an intelligent sensitivity to the lessons of economic history are the key factors in portfolio management right now. At times like this, thank your lucky stars for MitonOptimal!
Now we will try to focus on the liquidity issue and specifically, the liquidity surfeit that all markets have enjoyed over the last few years, why that will change and what the consequences of that are likely to be.
Let’s look at UK property which has been rampant during the easy monetary conditions - for the past five years interest rates have been exceptionally low and lending extremely easy to arrange. Individual buyers have been easily able to change properties, acquire investment properties and in some cases even acquire second/holiday homes. Developers have found it easy to launch new projects, virtually willy-nilly. Money supply (M4) has seen a consequential rapid growth to reach a 12-year high. It is likely, of course, that increases in the quantity of money are also likely to be contributing to asset price growth. As Milan Khatri, the chief economist at the Royal Institution of Chartered Surveyors, said last year: “Low interest rates have been the primary fuel for a surge in property demand, though by the end of 2006 these will rise.”
To be continued…

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]@mbmg-international.com.com

Snap Shots: by Harry Flashman

Videography - a ‘moving’ experience

I do not claim to be an expert in shooting video, but there are certain aspects that are true for all types of photography. However, I have written and directed a few TV commercials, so I do have some experience of the genre.

The main difference lies in that still photography freezes a moment in time, while video photography tells a moving picture story. Try not to shoot ‘stills’ with a video camera and your videos will start to look professional immediately.
Like all aspects of good camera-work, you have to think about the end product before you begin to shoot. For the still photographer it is a case of looking at the background and then working out the best combination of shutter speed and aperture. For the video photographer it is a case of working out the story line and then how to shoot the various elements in the story.
One of the ways you can pick the first time video user is the fact that the camera operator spends much time taking shots of still subjects. Having not made the mental adjustment from still photography, many minutes are taken up with a video of his wife standing by the front door of the hotel. That, Mr. cameraman, was a ‘still’ shot. With video, you film your wife checking out at the cashier’s desk, picking up her bags and walking towards the exit. Then you rush outside and the next footage is her coming out of the hotel and hailing a taxi. You have just shot a living ‘story’.
So where can you go to ‘learn’ this new art? Just as still photographers have photographs in books and magazines to study, the video photographer has a very ready source of informative examples to scrutinize. This is called TV! Sit down in front of the goggle box and see how the pros do it. Even the dreadful Thai soap operas have good cinematic technique, despite the glaringly obvious story line! So start to look critically at technique. Where was the camera, relative to the subject? Did they “zoom” in or was it one far shot and another close up to follow? How many times did the cameraman actually use the inbuilt zoom? You may be amazed to see how seldom!
Here are a few more “rules” which can help you produce better video. Firstly, no rule is absolute, but you should have a good reason to break it. Having said that, let’s look at a few basics.
You should also shoot people in full or three-quarter profile to let the viewers see both eyes. The one eyed effect does not look good. Again, look at TV. When two people are talking, the camera shoots over the shoulder of person one to shoot the second person face-on to the camera. When the first person replies, the shot is taken the other way, over the shoulder of the second person. You can also take shots of the person who is listening to the other speak. These are called ‘noddies’, because the person will be nodding while listening to the other speaker.
When shooting people, place the subject’s eyes one-third down from the top of the frame no matter the type of shot. It is that old rule of thirds again. Dead central is boring!
Another shot to avoid is one with large distances between people. Again, look at the soaps on TV. The people are really standing much closer than they would in real life (in each other’s personal space in fact), but if you have them a meter or so apart, you lose ‘contact’ in the video.
Focusing. This is a common problem with still cameras with Auto-Focus (AF), and 99 percent of video cameras are AF too. The magic eye in the camera focuses on a spot in the middle of the screen. When you are filming a couple, if the magic dot is not on one of the people, they will end up out of focus and the background perfectly sharp.
Application of these simple aspects of video photography will give you (and those who watch your videos) a much better end product, and a much more satisfying one for yourself to produce.

Modern Medicine: by Dr. Iain Corness, Consultant

Human Papillomavirus (HPV) vaccine

One of the major breakthroughs in immunology occurred recently, following two decades of work by Professor Ian Frazer, director of the Center for Immunology and Cancer Research of the University of Queensland in Brisbane, Australia. This was the development of the Human Papillomavirus (HPV) vaccine.
For many people, HPV was previously thought of as a ‘minor’ virus, which seemed to be endemic, in that everybody had it at one time or another, but the effects on human health were thought to be mild, if anything at all. This was not correct. HPV was found to the major underlying cause of female cervical cancer and genital warts which can affect either sex. And untreated cervical cancer is one of the major killers of women.
The importance of this viral cause was not lost on the world’s medical research community, who argued that if the cause was viral, it might be possible to develop a vaccine against it. That was Professor Ian Frazer’s stance, and life-long work, to produce such a vaccine.
That vaccine has been heralded as a huge step forward for young women, and vaccination programs have commenced all over the world, including Thailand.
There are four major types of HPV that we know cause 70 percent of the cervical cancers, and the new vaccine is 100 percent effective against infection with them, resulting in a 90 percent drop in the incidence of cervical cancer. This has the potential to save millions of lives through the decrease in cervical cancer in women.
It was also found that the vaccine protects completely against those strains of HPV that produce genital (and anal) warts.
The vaccine is being recommended for females between the age of 9 and 26, and it is expected that a large percentage of this group will not have been sexually active, and therefore not exposed to the various HPV strains. For them, the vaccine offers 100 percent protection against the main four HPV types.
For women who are sexually active, and may have been exposed to some strains of the HPV, the vaccine still offers immunity against the types of HPV not yet experienced, and will still be worthwhile for them.
The reason that the vaccine is made available to women up to 26 is merely that this was the maximum age up to which the vaccine was tested, and to get FDA approval for older women will require further testing on another age group.
HPV vaccine is given as a series of three injections into upper arm muscle. It should be given within a six month period - for example: first dose - chosen date; second dose - 1 to 2 months after the first dose; and third dose - 4 to 6 months after the first dose.
The vaccine is most effective when all three doses have been given. Missed doses should be given as soon as possible.
The vaccine provides protection for more than 90 percent of uninfected women who are vaccinated. The vaccine protects against the types of HPV which cause more than 70 percent of cervical cancer cases. This means that the vaccine will not prevent all types of HPV that cause cervical cancer.
Many women ask, will Pap smears still be necessary after vaccination? The answer is Yes. Regular Pap smears are important as the HPV vaccine does not protect against all types of HPV. All females whether vaccinated against HPV or not will need to have regular Pap smears from the age of 18 or within two years of first having sex, whichever is later. Regular Pap smears are still essential because the HPV vaccine does not prevent all cervical cancers. Pap smears detect abnormal changes to cells in the cervix so treatment can start before cancer develops.
However, despite some limitations, this vaccine will change the world profile on cervical cancer, and is a huge step forward in preventive health.
Some states in the USA are legislating mandatory immunization, and in the UK it is also licensed for boys between 9 and 15 years.

Learn to Live to Learn: with Andrew Watson

Talking Heads

Life’s a funny thing. About a year ago, I thought I’d run a series of interviews with regional Heads and call it ‘New Heads on the block’. It was an obviously tongue-in-cheek title referring to what appeared at the time to be a refreshing breeze that had brought a long overdue bunch of fresh faces to the region and the promise of some level of competence on one hand, and the rather disquieting fact that tenure of an International Head rarely lasts beyond three years, on the other. Well, I managed to get around the most established schools in the region and spoke at length with a number of inspiring characters, whilst some less secure in their positions chose to eschew the opportunity - entirely a matter for them!
Anyway, a year on and the educational landscape has changed immensely. It’s incredible how the imposition of a new Head can transform a school for better or worse. From a personal perspective I watched in utter wonder as with an almighty roar, Garden International School finally arrived in the first division of international schools as hosts of the Fobissea music festival last November. Since then, barely a week has gone by without some genuinely extraordinary performance at the school which has really become a centre for academic and especially performing excellence.
In all the schools I have worked in I have loved getting students to write their own plays and work towards performances that invariably include music, dance and acting. ‘Romeo and Juliet’ to the music of ‘Queen’ for instance (think about it). It’s so important to students and to school life - it’s a life giving force. There was no compromise on quality; it was all about challenging students - aiming for the stars - and they responded in kind.
But I was sorry to hear that having put on ten productions over the course of a year in one of the schools I worked in, the next year, when I had left, there were precisely, er, zero. Incredible but true. That’s one of the effects a new Head can have.
But I digress. The conversations I had with five Heads covered a few interdependent areas and shed light on some pertinent issues. You’ll notice that I have preserved the Heads’ anonymity. It’s important what they say, I think, rather than who’s saying it. With a whole bunch of new staff arriving for the new term, I thought I’d start with Recruitment & Retainment.
Recruitment & Retainment
Head 2 spoke of his guiding premise which is that he has a mature, well educated, well grounded faculty dedicated to lifelong learning and the pursuit of best practice, reflecting the values of the IBO mission statement.
Head 1 is certainly influenced by teachers’ espoused philosophy and speaks of the need to recruit “like-minded people”. In his opinion they have to be able to fit in with the general pedagogy of the school, because if they are outside of that, there is no point in them being there.
It is Head 4’s view that the majority of staff reflect the internationalism of the school. Part of the introduction to the school involves talking about the school’s culture. Head 4’s school recently appointed a secondary school Principal and for her, it was extremely important that the person they appointed was fully aware of what the IB had to offer, its mission statement, where there had been criticisms of IB and where they felt that criticism was appropriate and what could be done about it.
Head 2 was in favour of an international faculty and theoretically compared an American teacher with broad international school and IB experience, with a British teacher directly recruited from the national system. “Who,” he asked, “brings more diversity and a sense of ‘international’ to the school?” implying that it was the former. But the main criterion was, “What is best for the children?”
In response to being asked whether there might be a possible contradiction between recruiting staff from a national system for an international school such as he had described, driven more by international ideals than national, Head 1 replied that what he is looking for is a balance, because in his opinion, there are a great many “like-minded people” working in national systems who are looking for the opportunity to work in the international arena. They bring, he says, enthusiasm and idealism. Head 1 does not feel that there is a contradiction.
Head 2 pointed to a potential paradox between having a person that gets very good IB diploma results who might be “a terrible teacher,” suggesting that a student not enjoying learning or when leaning is by rote, would be indicators of low quality. He went further in suggesting that in these situations, even when they are achieving decent scores, students are “not being educated”.
Head 5 regards coming from the British State sector of education to the private international schools sector, as a “huge cultural jump”.
Head 2 spoke about the process of assimilation and learning that teachers have to go through, in order to deliver an international curriculum like the IB diploma.
Head 5 said that there are many cultural issues to which he has had to respond quickly. New staff, in his view, bring vitality. But moving into an environment where it appears to be quite normal to have a quarter or even a third of the staff changing because they are on one year or two year contracts represents and necessitates, in Head 5’s view, a huge cultural difference in the way he has to work with his staff and the way that he undertakes performance management. Head 5 said that what he looks for in a teacher is somebody who cares about every child and it is that which he regards as fundamental.
Andrew Watson is a Management Consultant for Garden International Schools in Thailand. [email protected]
All proceeds from this column are donated to the Esther Benjamins Trust. www.ebtrust .org.uk email: info@ebtrust. org.uk
Next week: More Talking Heads