London notes - Macro update.

On route to Heathrow after two busy days in London.

Conclusions:

1. EU/ECB will violate every single principle/issue to secure
'orderly' markets for PIIGS.

Central banks not under mark-to-market scrutiny and they want to buy time.

2. Risk taking is very tough - market moves in big range and
resolution seen only coming via ECB action and/or by monitoring the
political situation in Germany.

3. 'Growth Recession' being accepted when brought to the table - no
one has been watching the weak weekly data which tells me market will
adjust their growth projection down and soon, we will see market
starting to discount easing in the US(also stronger us dollar has made
room for this move)

4. Overall frustration with hedge funds and managed money: why pay 2
and 20 pc for getting plus/minus zero on portfolio of active managers?

The excess return from 'alpha' no longer viable/possible as market
trades all risk as correlated - the symtomes of having policy rates at
zero - remember at zero pct all valutions are infinite! - incl
starting a hot dog stand next to ten others!!!!!

The allocation of capital is simply based on the ready access to
it(read: banks) and not on its utility.

This game could continue 'forever' while ECB and the EU tries to safe
the European banking system from disintegrating under the burden of
ill-timed excessive investments in Southern European bonds and banks
or we could see escalation of trouble bringing about the
'quick-and-good-recession' as opposed to the drawn out 5-7 year (the
lost decade?) Slow grinding....

The money, among the people I speak to, is on 'the slow boat to
recession' which implies more of the same: promises, lack of
transperency, crowding out of private capital and ultimately low
growth as tax and lack of investment outweights the productivity gains we
may see.

5. Themes?

Very few - there is some appetite for what I call 'small cap'
investments - I.e: unleveraged investment in companies with 'going
concern' but locked out of financing/refinancing due to the banks.

A friend of mine coined it perfectly: 'small cap is private equity
with transperency'! - voila!

Here is a market where you have enterprises needing capital meeting
investors who are too long cash.

A second theme was a general acceptance that owning a basket of high
dividend paying stocks would outperform short-term government bonds
and broad-based index composites.

The international names have plenty access to capital - they are
looking to do M and A (consolidate)

The preference would be Asia names as the growth cycle(even is
slow-down) mode would outperform rest of G20.

A third and more surprising theme was a tendency to overweight Japan.

This a theme which has been on the back of my mind as a thing to look
into for a while. Friend of mine in Singapore has been beating the
Japan drum for a while.

STRATEGY:

Unchanged but we need S&P to start rolling over and preferably today!
Risk is now firmly for 1175 test, but we will give it one or two more
days into this Friday.

Nice week-end

Winston