Rational Advisor

A manager that I respect a great deal is Gerald Cooper Key from Mawer - they are international growth managers. They have also won the award for International Manager of the year for three years.

Here’s the notes on my conference call today with him

- Accomodative money supply is still there, however although the central banks have been accomodative, its the regular banks that are not, and this is causing the liquidity crisis.
- We are negative on Japan. What we have now is both Japan and Us being disappointing. The #1, and the #2 economy of the world.
- Corporate cash flows are high - but these corporations are not putting their cash flows into the economy, just making their balance sheets stronger.
- Cash for Hedge Funds have tightened, and we’ve seen this by hedge and Private Equity Funds having to reverse their trades and try to get out of deals. This has caused a great deal of volatility.
- Infrastructure spending (by governments) is still strong. So, corporations are not providing liquidity but governments are. We need to see both sides provide liquidity to get back to normal.
- There are risks in the collapse of the carry-trade (borrowing from Japan and investing in emerging markets and commodities). This has led to the increase in Risk premiums in the debt markets.
- There is risk in the US$ weakness - we are pretty close to collapse scenario, although we wouldn’t call it that for now.. will it continue down at this pace, we don’t know. But the reasons for it to come down have not been solved 1) twin deficits, 2) growth declining. So, we think it will weaken further.
- The US subprime is nasty and still a red flag. There is more to come out of this yet.
- With regards to the middle east, it looks like there could be about 3 civil wars in that region.
- Rememrgence of inflation is less now.
- Why have we increased our thoughts about US subtrend in growth: houseing slowdown, leading to slow consumer confidence, which means savings rates will go up, becasue consumers are worried and don’t want to spend.
- Chances of a US slowdown in increasing and this time Japan will not bail them out - all countries are not immune to the US slowdown, there will be aftershocks right across the world.
- Our cash position has increased to around 7% this is a recent high, we reduced our positions to some international banks over concerns of sub-prime. We have actually got a soft-moratoriam on banks - becasue we do not know what will happen with them. But we expect the numbers to be reported to be poor. we are erring on the side of caution.
we favour infrastructure and environmental stocks.
- We are conservative going into this volatility, and look for strong balance sheets, strong cash flow - this will be important for corporations as liquidity from other sources dries up, and we love dividends.
- We are too early to be positive - chances of economy and rate of growth of corporate profits will slow - then we could see a reasonable chance of a correction.
We are looking at chances to add to the portfolio.

Just came out of my quarterly conference call with David Dreman and his team.These are one of my favorite managers, only because they have a great discipline and a rational approach

Here are my notes from the call

- Markets have broad concerns around confidence. Market participants do not have confidence that anyone has a good handle on this subprime thing.
- We expect a slowdown. But not a recession. The chances of a recession are increased as the housing problem in the US increases. Short term funding stress is NOT over.
- Concern is on how the US consumer reacts to this slowdown. Job reports are making us worried about the consumer. Consumer is leveraged going into this still relatively high rate environment.
- 3rd Quarter reporting period will increase volatility, a lot of companies will be showing the impact on 3Q numbers. Remember they want to keep the best reporting for their 4Q period. So will get a lot of dirty laundry in 3Q numbers
- A lot of European holders on US debt – as the US$ drops they are concerned about the quality of their paper.
- In our view, there is another correction coming, the rosy picture is just too rosy for a slowing economy. – we do not know if it will be a 2 foot wave or a 10 foot wave but we do think it is coming. The greatest concerns will be in Financials (because of sub-rime) and Health Care (because of elections). Also October is a heavier re-pricing month – what this means is that the largest amount of variable rate mortgages were sold in Oct 2005. These are now coming due in the states, so can expect some fireworks around that. Even though most of them were not to sub-prime candidates, will still see some bleeding into that area. Ultimately a slowdown will affect earnings.
- Most companies in the US have taken advantage of the lower interest rates, and made their balance sheets stronger.
- As a value manager we are excited because we can see some good opportunities coming in the financial sector (this is the sector most impacted by sub-prime). Currently our weighting in financials is lower than the benchmark. As interst rates are lowered the spread of banks profits increases (Spreads refers to the difference between what the banks pay to depositors and what they receive from lenders, as interest rates fall, they pay less to depositors, and they keep higher the amount to lenders)
- We did not add to any stocks in this recent quarter. We think our patience will pay off . This was just too volatile a sector.
- We do not have anything directly related to sub-prime, interestingly one of our positions Band of America is doing a David Dreman on Countryside Financial, in that they are adding/give it capital at the time when they have the most bad news. We will indirectly benefit from this as BofA has made a good decision.
- Energy was an area of strength for us. These stocks that we hold are low in P/E and have a good dividend yield >2%
- We will be keeping our eyes open for good industrials.
- We continue to stay away from Consumer Discretionary positions – mainly because these would have the largest impact from a consumer led slowdown.
- Our only technology position was Verizon, and Tyco electronics
- In the S&P 500 you got a quicker recovery, because it is higher in weighting in industrials and technology, a lot of these firms get their revenue from outside of the US so were deemed more attractive. The issue we have is that we do not believe in a lot of their offshore earnings, particularly those related to the emerging markets. We are not finding a lot of value in techs.
- We are not commodity players; we do not have exposure to gold. There are not any gold companies that offer dividends and are value plays. We feel that the portfolio is very well placed.
- We will continue to be patient, 4Quarter will require it – there is no material change to the portfolio.
- With interest rates falling and a slowdown, we expect the US$ to go lower, by how much we do not know, eventually it will become an election issue. On the other side, as the US$ goes lower the exports of US goods increases, and to purchase these goods they have to be bought with US$’s. So, there is a level of equilibrium.
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