In the Kingdom of the Blind...

We always read Robert Skepper’s reports with a mixture of admiration of his knowledge of the stock markets and what makes them tick and also frustration at his inability to recognise that stocks are just one piece in the giant jigsaw puzzle that is investment.
These are the attributes that make a successful stock picker but these are not the qualifications needed for a successful multi-asset portfolio manager. It’s difficult to find a stock-picker who can be completely impartial about his chosen métier - there are not many that can progress to becoming the most successful long/short equity mangers, harnessing the positive power of stocks during the good times and exploiting the potential of short selling to protect/enhance the value of the holdings during bad times. Even good long only managers have a problem recognising that bear follows bull as surely as night follows day because that would require them to do what we suggested last week about CNBC - put up the ‘Gone fishing, back in 3 years time’ sign.
Robert Skepper’s latest report exemplifies this - with his typical Panglossian take on all things equity-related, he sees the recent corrections as being good for the markets - claiming that central bankers are likely to be heaving a sigh of relief that the bubble has burst before, in his opinion, it spiralled out of hand, which he admits would have undermined the real economy.
While recognising that a private equity bubble and property bubble have co-existed side by side he feels that these have been nipped in the bud, just in time. His view is that the steady tightening of credit, orchestrated by the central banks over the last two years, has had its desired effect and that writing down the USD20 billion or so of sub-prime toxic loans will simply mean that the banks involved might end up losing an amount similar to “all the juicy fees that they have earned from them in the last 12 months... but it is not worse than that, and whilst one weeps for the evaporated bonuses of these poor bankers, I think it has been stopped long before the whole system got polluted with bad debt. That is in fact very good news. The bubble has been burst before contagion has spread too widely in the economic system. The same can also be said for the property sector. The bubble is over in the U.S.A. - no more false boosting of consumer spending via re-mortgaging the rising house values (now falling). Spain was hit next, and the U.K. stock market has taking the view since last January that the game was soon to be up in the U.K. also ... So again a bubble has been burst but well before it had got dangerously out of hand - as it did in Tokyo in 1989 where the Emperor’s palace and gardens had a notional property value similar to the State of California - so the following decade in Japan of falling property prices fundamentally weakened the entire Japanese banking system with knock-on consequences for the whole economy.”
Unfortunately Robert, it is more widespread than that.
It’s not just sub-prime, it’s all forms of mortgage lending, Alt A and prime as well. Properties are falling in value, loans have been over extended and the majority have been overvalued. 104% LTVs (based on inflated values which are now falling by the month) to reasonable married clients on 5 X combined income aren’t really the bluest chip and there’s too many of those out there. Self-cert, Alt A, liars loans, call them what you will - these are really sub-prime by another name that only look good in comparison to the new sub-best of prime borrowers who wouldn’t have merited any category in more sensible times. Systemically mortgage risk has been totally mis-priced but that only becomes evident when it all goes wrong.
It’s not just private equity collateralisation loans - sub-blue chip corporate debt has been trading at unsustainably low spreads. Systemically corporate debt has been totally mis-priced but that also only becomes evident when it all goes wrong.
It’s not just in the US but also in emerging markets where debt has also been trading at unsustainably low spreads. Systemically emerging debt has been totally mis-priced and little discernment applied between different emerging market fundamentals and prospects but that too only becomes evident when it all goes wrong.
It’s not just debt - when the debt markets take such widespread pain then the real economy starts to suffer too; liquidity suddenly disappears and business dries up without the money to go round to support it. Suddenly there’s no sustainable demand for property and massive oversupply quickly builds up. Robert Skepper’s beloved equity markets react by going into free fall. In support of his views Robert cites an article by Anatole Kaletsky published in the Times recently.
Mr. Kaletsky’s basic premise doesn’t dispute our conclusion that the 02-07 bull market is over. How could he? He accepts that. However, even though the demise of every major bull market has been followed by a major period of economic and equity market consolidation, Mr. Kaletsky expects that the consequence of this correction will be ... er, another bull market.
Why does he think this? Kaletsky claims that bull markets, like royal dynasties, do not just die of old age nor do they expire for everyday reasons such as a change in risk appetites or a corporate bankruptcy or two. He lists the requirements for a real end to the bull markets as being:
1) The global economy must move into recession, decimating corporate profits; or
2) Interest rates on government bonds must rise sharply, to well above the long-term economic growth rates; or
3) Stock markets must get so overvalued that equity prices start to fall of their own accord, even without any pressure from high interest rates or weaker profits.
While I wouldn’t have set out the criteria like that I would make the following points:
1) The whole point about the sub-prime contagion is that as we explained in another recent article, the impact will be across most supply sources of liquidity and therefore into most aspects of the economy. Liquidity is disappearing rapidly. We may not be in recession yet but the markets have recognised that the reality is imminent.
2) The yield curve has been inverted for some time now - real money costs are distorted and this is another recessionary harbinger.
3) The biggest asset bubble in recorded history has taken place over the last few years - if assets such as stocks and property aren’t overvalued at current levels then they never have been.
Just as Robert Skepper tried to say that the only effects of the sub-prime fall-out would be felt by the banks involved in the deals, Anatole Kaletsky tries to argue that only LBO targets will suffer price falls. He therefore believes that even though liquidity will dry up, money from somewhere unexplained will rush to flow into equity markets. Quite why and how isn’t explained - just take a leap of faith and assume that the money will be there and that those holding it will be desperate for it to be poured into equity markets, other than by saying that these now offer “unprecedented value for long-term investors.” Ah, yes, the final refuge of the equity scoundrel - a bad time to invest will eventually become a good one so justify it as a long term investment. Unless there is a new investor class of high net worth lunatics (HNWLs), we can’t foresee any stampede to equity markets right now.
Kaletsky’s belief is ultimately founded on a personal creed that the US economy is about to enter an expansive phase - would this be the same lunatics that are buying stocks who will also be aggressively consuming or is there another category of indefatigably rich consumers whose existence is known only to Kaletsky?
He may be right - but the conditions for this to be so would be that:
1) Global liquidity would have to come from hitherto unknown sources
2) Abundant equity investment would have to come from Kaletsky’s HNWLs
3) Consumer spending would have to be driven by a group of persistently rich consumers know again only to Kaletsky
If you believe all of that, then steam into the equity markets and worship at the alter of Mr. Kaletsky. On the other hand ... maybe the equityphiles are just becoming more and more desperate?
Both Robert Skepper and Anatole Kaletsky are right to suppose that not all stocks will suffer equally and that there are still pockets of value out there but they’re getting fewer, further between and riskier. A long/short or equity hedge approach is rapidly becoming the only sensible way to expose oneself to the risk of stock markets right now. As long term readers will know we are a great fan of MitonOptimal. Though I may be biased about the investment philosophies of Scott Campbell at MO and with my supposed one-eyed take on things, the sooner people realise that a multi-asset classed approach is the best way to counter all the investment problems that we are about to be thrown our way then the better it will be for everyone.

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

Don’t believe anything you see

Take a look at this week’s photograph. A simple shot of an abseiler, but how was it taken? Did the photographer grab camera, ropes, cleats and all the rest of the paraphernalia to get it, risking life and limb? Simple answer - no!
The shot was one that was taken to illustrate an article on outdoors pursuits. I took it, and I can assure you I am not one for heights or hanging from ropes and clicking away with the free hand. The shot was taken in the horizontal plane, with an assistant to hold the rope taught, so turn the newspaper 90 degrees and that was the original shot. Simple, easy and illustrates the concept perfectly, even if it is a fraud.
Photography is one of the least truthful pastimes you can take up. For the pro photographer much time is used in working out how to achieve the end result as simply as possible.
Here are a few examples where the photographer has to stretch the truth somewhat. Ever tried photographing champagne? There’s never enough bubbles to keep art directors happy, so the photographer drops some sugar into the glass. Only a few grains are enough to give the almost still glass of champers that “just opened” fizz look to it. You also have to bring the light in from the back of the glass, as well as from the front. This takes two flash heads, or at least one head and a reflector.
While still on wines, if you try and shoot a bottle of red wine, it comes out thick dark maroon or even black. So what does the pro shooter do? Well he has a couple of courses of action. First is to dilute the red wine by about 50 percent and secondly place a silver foil reflector on the back of the bottle. So what happens to the half bottle of red that was removed to dilute the wine? The photographer has it with dinner.
And so to food photography. This is one area where there are more fraudulent practices than any other. Cold food can be made to look hot by sprinkling chips of dry ice to give “steam” coming off the dish. Not edible, but it looks OK. Cooking oil gets brushed on slices of the cold meat so that they look moist and succulent.
That is just for starters. Food needs good illumination. Brightness is necessary to stop the food looking grey and dull. If you want a “warm” look to the food, then you use internal reflector tungsten bulbs as well, but be warned, if you use the tungsten light as the sole source the food, it will turn out very orange. Lighting is just so important. If you do not have bright sparkly light then potatoes will look grey, and even the china plates look drab and dirty.
In places such as the USA, there are very firm rules about photographing food. You are not allowed to use substitute materials which “look” like food, but are actually not. This covers the old trick of using shaving cream as the “cream” on top of cappuccino coffee for example, or polystyrene foam as “ice cream”. Personally I think this is a load of ballyhoo, because the photograph is just to represent what the food will look like - you don’t eat the photograph!
Even in simple portraiture, the concept is to show the sitter in the best possible way. For example, if the person has “bat ears” the portrait should be taken with the head turned so that one ear disappears from view. Not “lying” but presenting mother nature in a different way. And always remember that when all else fails, it’s a quick trip to the retouchers.
Another piece of photo-fraud I have done was inserting an architect’s model of a hotel, as not yet built, into the aerial shot of a beach resort city. It took two 12 hour days in the studio to photograph the architect’s model and another day in the lab to combine the images.
Never believe everything you see! Especially if I shot it!

Modern Medicine: by Dr. Iain Corness, Consultant

How’s your insurance?

I was talking to a local Lion’s Club and mentioned the discounted check-up packages offered by the Bangkok Hospital Pattaya each year. Discounted or not, I advised them to seriously consider an annual check-up. In my humble (medical) opinion, the advantages of finding medical problems at an early stage far outweigh not knowing.
For example, correcting hypertension at an early stage makes medical sense. You must agree that correcting hypertension is better than brain surgery and intensive care after a stroke caused by high blood pressure, never mind pain and suffering and living the rest of your life as a tomato or an even less colorful vegetable!
Likewise, correction of high blood sugar today beats having your leg surgically removed because of diabetic problems in 20 years time!
However, Peter Smith from AA Insurance Brokers brought out an interesting situation, which could be vitally important for someone finding they have a chronic problem. If you have your check-up and find that you have high blood pressure, and then go and take out insurance, it is too late. You “know” about your blood pressure problem at the time of applying for the insurance, so it becomes a ‘pre-existing condition’ and your insurer is within its rights to refuse to pay for the further treatment of your blood pressure, or for any other conditions caused by high blood pressure. Including the stroke.
The simple answer is to make sure your insurance policies are in place before having the annual check-up. In fact, I strongly advise everyone to take out medical insurance. You do not know what is round the next corner. It could be a motorcycle coming the wrong way up a one way street. Even I have insurance, and I work in the hospital, so I don’t really need it - but I can also be run over in Bangkok, Chiang Mai or Nakhon Nowhere!
So back to check-ups. Many people work on the principle that they would rather not know about any underlying or sinister medical conditions they may have. After all, we are all going to die one day, aren’t we? I have always said that despite all the advances in medical science, the death rate will always be the same - one per person!
However, check-ups are inherently involved in that important feature called the Quality of Life. Longevity alone, with no quality, just isn’t worth it in my book.
The guiding principle behind check-ups is to find deviations from normal health patterns at an early stage. Early enough that the trend can be reversed before damage has occurred. Examples of this include blood pressure (BP) increase which is generally symptomless, and blood sugar. It requires sky-high sugar levels before the person begins to feel that something might be wrong. And by then the sugar levels have affected vision, the vascular system and many other systems, all of which can decrease your quality of life in the future.
Respiratory conditions also rate high on the list of medical events that can decrease your quality of life. Yet the majority of these can be found early, and treated successfully.
Cardiac conditions and abnormalities, be that in anatomy or function, can also very adversely affect your quality of life, but are very easily found during a routine check-up. Various blood tests and an EKG can show just how well the cardiac pump is functioning, and also how well it will continue to function in the future. The inability to walk more than 50 meters certainly takes the fun out of shopping, yet this can be predicted - if you have some serial records!
Another of the silent killers can be discovered in your lipid profile, with Cholesterol and its fractions HDL and LDL, being intimately connected with your cardiac status. Again a situation where detecting abnormalities now can mean that you can get through the deadly 50-60 year age bracket in the future with clear coronary arteries and a clean bill of health.
Renal (kidney) function and liver function can also be monitored through an annual check-up, as can prostate size (indicated by the PSA blood test) or breast tumors (by mammogram).
Take my tip, insure and get your check-up. That makes good sense.

Learn to Live to Learn: with Andrew Watson

It is in giving that we receive

In Charterhouse Street in London, but a blood spurt from Smithfields meat market, there was a pub called the Fox and Anchor, clad in tiles, from rooftop to doorstep. It was the kind of place that popular myth made of London; stained glass marked the entrances and exits to a series of exquisite booths, squeezed into a generous portion beyond an Edwardian long bar. Stale tobacco and real ale rose from the carpet and hung in the air, suffused with a tangible touch of bloody red meat.

Camilla Kinchin, fundraising coordinator of the Esther Benjamin’s Trust, accepts a check for 1300 US dollars from Andrew and Shamayim Watson, at EBT’s Cloth Court HQ in London. Shamayim is holding one of EBTs magnificent mosaics.

They used to serve something called a “mixed grill” in there, the only reasonable companion to which was a couple of pints of Guinness. Your plate arrived piled high with an unimaginable slab, cut and cooked to medium rare, accompanied by bacon, sausages, mushrooms, tomatoes, offal, chips, the essential bubble and squeak and a cursory gesture of irony, a sprig of parsley. It sat about twenty centimetres high on your plate. Only two people are known to have finished it.
When I was working for a large city law firm, we used to go there for lunch, amusing ourselves by ordering the mixed grill for the new blood and watching them suffer before inevitably failing the ultimate challenge of gluttony. Then, after a couple of hours, we’d stroll back through the market to the office overlooking St Paul’s cathedral. For some reason they gave me an office on the seventh floor, roughly the length of a cricket pitch, with a balcony overlooking the east side of the cathedral. Office cricket was a cracking game.
As I came up for air from the depths of St Paul’s underground station, I hadn’t expected to be disoriented; the very idea was disorientating. But the landscape had changed and I couldn’t understand why. For a few minutes I found myself bumping past people squashed into a narrow alley by building boards and scaffolding. Then I found myself on Cheapside and I suddenly realized that the nine hundred room building where I had once worked was no longer there. It had been replaced by space and a crane. It was a bizarre sensation.
I turned around and headed with renewed purpose in the direction of Little Britain and St Bart’s. In a moment I was almost where I wanted to be; but my quest for Cloth Court was arrested by the quite magnificent Priory Church of Saint Bartholomew the Great. I had an Australian friend once who doubtless would have observed, “Another bloody relic!” But what a sight! A church built when Henry I, son of William the Conqueror, was King of England. It survived the Great Fire of 1666 and the bombs dropped in Zeppelin raids in World War I and the Blitz in World War II. It also starred in Four Weddings and a Funeral, Shakespeare in Love and The End of the Affair, and in BBC 2’s Madame Bovary. I’d never taken the time to stop and look when I was living in London, but now I did and I promised myself that from now on, I’d take the time to “stop and smell the roses”.
Adjacent to the church, Cloth Court lay invitingly in autumnal shade. On the fifth floor (they call it the third but believe me it’s a long way up) of a winding staircase at number two, the Esther Benjamin’s Trust has its London headquarters. There, it was my happy duty to hand over a cheque for 1,300 US dollars, representing the cumulative generosity of children aged 3-18 who attended the hugely successful Garden International School of Football last year, one incredibly generous student in particular called “Smile” and the Pattaya Mail, spreading the culture of giving, far and wide.
It was my first visit to the London headquarters of the charity I had been introduced to by two of the most generous people I have ever had the privilege of meeting; the world’s best Maths teacher, Stella McCracken and her six foot six husband, David. When I spent time with them on our shared balcony, over looking the gulf of Siam, I felt humbled by their utter selflessness. In their sparkling blue and green eyes, I detected great, inspiring strength of character. Through their words, I understood that these were two very special people, unshakeably and ruthlessly honest. Perhaps most of all, by their actions, in an environment where avarice and deceit were rife, they demonstrated unequivocally, their determination to make a positive difference to the world, where they could. Through their smiles, I saw the truth of the maxim, “It is in giving that we receive”. It was the very least I could do to learn from them and I was and I remain, grateful for the opportunity.
Out of breath at the top of the stairs, I was greeted warmly by two more special people, Camilla and Chris, who run EBT’s London office. Around them lay the most wonderful mosaics, which I had previously seen only on the EBT website www.ebtrust.org.uk The mosaics are made by children the charity has rescued from slavery (who said it had been abolished?) and they receive very good wages for work that they love doing; and their self confidence grows accordingly.
One of Philip Holmes’ (the founder of EBT) dreams is to turn the production of mosaics into a non-for-profit business that can financially underpin EBT’s anti trafficking programme. Take a look at the mosaics, they really are brilliant pieces of work - and you can commission them - I’ve already put my order in for Christmas.
As I handed over the cheque, I felt like I was bringing a message; that there are people who do care and will do anything to bring social justice to wherever it is needed.
So thank you to all those students who came to play football every Saturday morning. Thank you to all you parents who got up early when you would rather have been asleep. Thank you to Peter Malhotra for his enduring support and last but not least, thank you to “Smile” - real name Napatra Tanganurakpongsa - who donated a great deal of money from her personal piggy bank. You are great people.
Next week: Global awareness

Doc English, the Language Doctor: How to encourage your child to talk about and discuss stories

Hello folks, welcome back. This week we include more tips and techniques for teaching your children English at home. Hope you enjoy them!
Last week we created an effective ‘learning environment’ at home and built a mini library. This week we investigate how to encourage your child to talk about and discuss stories before they read them.
Before you sit down to read with your child, get ready to do lots of talking yourself! You should be prepared to ask lots of questions before, during and after reading and you should encourage your child to ask questions themselves. You can write down some beforehand if that helps. Ask ‘key’ questions such as: “What is the book ‘Title’?”, “Who is the ‘Author’?”, or “Where is the story set?”.
Together, explore the book cover. If there is a picture, who or what is in the picture? Using from the book cover, encourage your child to ‘predict’ what the story might be about? Read the ‘blurb’ on the back of the book cover (this gives you a short summary of main events). The power of prediction is a useful tool in language learning (it’s not just a tool for Psychics!). Prediction allows you to anticipate the next word in a sentence, or even the next syllable. It helps you spell a word and also helps you understand what will happen in a story, be it real or fictional. You often use this skill when choosing books in a book shop for the first time, but your children need to be taught how to use it.
Practise these ‘predicting skills’ yourself! Pick up the Pattaya Mail next week and look at the headlines and pictures only. Are you able to predict what the story will be about? Afterwards, read the stories through and find out if your predictions were right! Hopefully you will be close to the truth and you will see that reading and listening / speaking without first using your ‘predicting skills’ will be less rewarding and the conversation or story harder to understand.
Teaching your child how to predict may sound difficult, but in reality it’s not. Simply discuss the front cover before you start reading with your child and you’ll find their understanding of the story will be a whole lot better than if you just start on page 1. When I was a kid my English teacher would throw a book at my head and say “Here’s a book. Read it!” Fortunately it did not do my head any serious harm and despite my teacher’s best efforts, I have learnt to recognise the importance of discussing a book before reading it. You can also encourage your child to use their ‘predicting’ skills as they read. Ask them “What will happen next?” at different stages in the story, or suggest an outcome and see if they agree. This will help them anticipate text and aid their interpretation of the text and the story.
OK, that’s all folks! Remember, you can write to the Pattaya Mail or email me at docenglishpattaya@gmail. com and I will try to answer your questions or suggestions, either by returning an email or via my column. As ever, your feedback is most welcome.
Can you predict what I’m going to write about next week? Yes! That’s right! We discuss questions you can ask during and after you have read with your child and I’ll also be including tips to encourage your child to understand, talk about and interpret what they have read. Happy reading!
Best regards,
Doc English