Tiburon Partners LLP

Japan remains an investment conundrum. At the corporate level there is much to admire: healthy balance sheets improved by rising cashflow, ongoing commitment to restructuring especially in the more domestic sectors where historic overcapacity has affected returns and valuations that appear inexpensive. Ostensibly an attractive cocktail but why then are investors apparently so unenamored? Perhaps the reality is that the ongoing domestic institutional selling, leaving the foreigner as the only buyer, continues to expose the market to more cyclical factors, namely world growth rates and on this score there is cause for concern that corporate profit margins have peaked.

Our primary concern for several months has surrounded earnings forecasts, especially for next year when clearly the benefits of inventory restocking will be removed resulting in a lower base effect and therefore requiring strong sales to post a positive sales number. Analysts have remained very optimistic and have retained target prices that now look attractive given the recent market decline but this still appears overly ambitious as » Read more: Rupert Kimber – June 2010

June saw significant volatility during the month with slower growth anticipated for China acting as the main catalyst to drive resource equities much lower mid-month. The CBOE SPX Volatility Index or VIX ranged from 24% mid-month to 35% at the start of June and also by month end. Correlations between asset classes remain high by historic standards and implied volatilities continue to trade at a premium to actual.

One measure of economic activity, the Baltic Freight Index, is down 40% over the past month. Despite a huge injection of both fiscal and monetary stimulus, Europe looks moribund and US growth appears to be slowing. First quarter US GDP growth was revised down from 3.2% to 2.7%. In addition, two-year Treasury yields stand at a record low yield of 0.6%, which was not even seen during the depression and the 10-year yield has fallen below 3%. These low Treasury yields are clearly incompatible with most economists’ estimates of 3% annualised growth for the next few years. In Europe, the financial system remains under duress across Europe and according to the Bank of England’s June Financial Stability Report, banks in Europe and the US need to re-finance/roll-over $5 trillion in debt by » Read more: John Payne & Steven Miller – June 2010

Investors cannot stop worrying about debt. And this is the case no matter whether it is Southern European sovereign debt, Fannie and Freddie’s US mortgage obligations, or the upcoming aftermath of China’s lending binge last year. I can’t tell you for sure exactly how many, or which potential parts of this moving jigsaw puzzle are factored into expectations – and neither can anyone else. But there are a few interesting things to point out.

Remarkably, a Greek default and significant further weakness amounting to an effective “double dip” are now already factored into many managers’ “base case” scenarios. For instance, in recent surveys no less than 80% of fund managers expect a Greek default or restructuring some time in the next couple years, as well as bank recapitalizations in Spain, and serious problems in most of the rest of Europe. Investors have firmly embraced the notion that if we are having a recovery, it sure isn’t a normal one.

Asian markets have sold off (partially as “growth proxies”) and China continues to face » Read more: Jeff Coggshall – June 2010

The electorates of Europe are just starting to realise the reality of the coming austerity measures. Conjecture about cuts amounting to billions of $, £ or € and tax increases are now becoming a reality. Significant reductions in policing and schools are happening, pay cuts to fund (reduced) pensions and tax rises that make a difference to everybody are now coming home to roost. The private sector is also starting to realise how big a client government is – and how generous it has been in the past in its behaviour as a customer. It seems almost inconceivable to us that this does not precipitate the much-feared double dip recession.

So are European Governments tightening too early as the US has been saying? The answer is a resounding no. There is never a ‘good’ time to go cold turkey – in this case on debt – but the longer you leave it, the worse it is. The politician’s favourite fable of a vigorous recovery that leaves economies in a position in a year or two to take a major fiscal tightening on the chin and not go down is wishful thinking of the worst kind. It merely adds more debt in the interim and if there has been any kind of recovery in that period, dilutes the political will to make the difficult choices that have to be made. While the Germans are donning a hair shirt with possibly too much relish, » Read more: Mark Fleming – June 2010

For so many people, the world seems to be ending. Europe will collapse when Greece, Spain, Portugal or all three default and Germany will exit the Euro leading to tremendous global financial instability. Other dominoes will fall. Then, later on the US current account deficit will widen as a result, leading to a further, unsustainable global imbalances. As the Eurozone problems have no obvious solutions and markets are now forcing the issue, it is assumed that significant cyclical damage is yet to come.

At the same time, in China, the leadership appears to be mainly preoccupied with domestic issues, such as cracking down on perceived property market speculation. The measures have been forceful and frequent and there is no reason to think they will stop before » Read more: Jeff Coggshall – May 2010

Global equity markets recorded one of their worst months of performance since the 1970s. Alternative energy and natural resources were not immune. The MSCI Global Materials and Energy Index fell 12.1% while the S&P Global Clean Energy Index fell 18.4% while Tiburon Terra posted negative performance for May, down some 9.4%.

Although the portfolio had a low net long exposure in alternative energy coming into the month the weak economic outlook in the EU and concerns over sovereign debt in Greece, Spain, Portugal and Italy contributed to that sub-sector falling heavily. Elsewhere the portfolio’s holdings in Australian resource companies were hurt by the Australian Government’s decision to implement a Resource Super Tax on mining companies. The mining sector also suffered as a result of the Chinese government moving to slow the luxury residential property market in tier one cities. With transaction volumes taking a nose dive, we believe that Beijing has now achieved its objective of slowing the market in this sector and will probably relax its policies in the coming months. The portfolio had in place short exposure to international » Read more: John Payne & Steven Miller – May 2010

A cautious approach to the month proved correct but the rapid decline in equity markets resulted in there being almost no places to hide. Our more defensive positions and small/medium cap stocks were treated as harshly as the more overvalued cyclical ones. Equity markets continue to struggle with the issue of global growth where concerns about a deceleration in China now accompany the more obvious European issues and the potential for a spillover to the US. One or two slightly disappointing pieces of US economic data have frightened investors and in such an uncertain environment conditions in equity markets will remain highly volatile as authorities and central banks struggle to retain the correct fiscal and monetary policies. There is no doubt that the European governments and the ECB could have handled the situation significantly better and we sense that at least » Read more: Rupert Kimber – May 2010

This month the MAS in Singapore announced a re-centring of their FX basket and a bias towards a strong currency to counter inflationary pressure. Brazil has a CPI running over 5%, while India’s WPI is near 10%, as is Russia’s. Meat prices are rocketing due to diminished herds. The CEO of Australia’s largest utility expects electricity prices to triple over the next decade. Steel prices will rise sharply due to the 100% increase in coal and iron ore costs, with obvious implications for the prices of manufactured goods. Thermal coal, copper and nickel are soaring, as are Platinum Group Metals. Some independent analysts calculate US CPI at 4% already if the farcical Owner Equivalent Rent is excised from the calculation. So why are forecasters extrapolating low short rates for the foreseeable future? No one apart from Goldman Sachs can borrow at them anyway (ask the average small businessman or the Greek Government) and yield curves are rapidly starting to resemble the north face of the Eiger. Welcome to the new ‘normal’, where Central Banks remain the only believers in output gap analysis and where the Bond Market vigilantes are back to the accompaniment of Roger Daltrey screaming ‘Won’t get fooled again’. You can see inflation everywhere apart from in the official data. Stay long inflation hedges such as Gold, utilities with index-linked asset bases and businesses with monopoly-like » Read more: Mark Fleming – May 2010

Remember that Chinese asset bubble people were predicting for the last several months? Well, guess what? It never materialized. How could so many economists and investors have expected an asset bubble and while simultaneously expecting the highly risk-averse Chinese government to do nothing at all to stop it one from happening? Perhaps its stems from what seems to be a consistent underestimation of the ability and commitment of Chinese officials.

Now we face the opposite situation. More than a few people are beginning to fear a Chinese hard landing, or at least a very meaningful slowdown. They are betting on a hard landing in China confident that policymakers will mistakenly tighten too much. China it seems is either too hot or too cold but never just right.

Of course it is possible that Beijing hits the brakes too hard. After all, the Chinese policymaking apparatus is big and diverse and so there are many moving parts. There is a strong penchant for micro-management, or as they prefer to call it “fine tuning”.

And, as usual, there is a lot going on. Apart from the problems in the west, China is still in the midst of » Read more: Jeff Coggshall – April 2010