Mr. Angry has been spending the winter months reading ‘The Fear Index: the day has come to make a killing’ by Robert Harris (Hutchinson 2011).

The brilliantly told story concerns Dr. Alex Hoffmann, a visionary computer scientist, whose software turns trading patterns into gold. His artificial intelligence tracts human emotions thus predicting movements in financial markets.  His Geneva based hedge fund is hugely successful but is trying to raise new funds. However Dr. Hoffmann is under threat from a virus that he cannot track down. His world begins to collapse until an extraordinary conclusion reveals all.

Mr. Angry found that the detailed prose tested his reading skills but the thought of learning how to make money encouraged him to keep trying.

“I should have been a hedge fund manager” he told Mrs. Angry.

“I thought you wanted to be prime minister” she replied.

“I don’t think Barking Comprehensive compares to Eton Mrs. Angry.”

“And there was the brief period you spent in a Borstal institution.”

“I was stitched up Mrs. Angry.”

“So this Fear Index book. Did you learn anything from it” asked Mrs. Angry.

“Dunno really. I can’t understand it. Coming to the pub?”

In this week’s bulletin:

• Global equities resumed their upward path last week as investors put to one side the worries over Greece and took heart from further signs of a brightening outlook for the US economy.
• The relative strength of recent market performance masked another week of twists and turns in the ongoing Greek saga, which saw the prospect of a ‘disorderly’ default by Athens increasing in the minds of many.
• The price of Brent crude, the benchmark for oil prices in Europe, has been steadily rising over the past few weeks as investors grow increasingly worried about Iran’s nuclear ambitions, with the US, UK and Europe all imposing sanctions to restrict Iran’s ability to sell oil.
• The official measure of inflation, the Consumer Prices Index (CPI) fell sharply last month to a 14-month low of 3.6% from 4.2% in December, according to the Office for National Statistics.

The full Bulletin is attached in pdf format and the Word version appears below.

Blink and you miss it

·         The S&P 500 Index stands at its highest point since April 2011

·         Downgrades fail to make significant impact

Global equities resumed their upward path last week as investors put to one side the worries over Greece and took heart from further signs of a brightening outlook for the US economy. Fourth-quarter eurozone data was not necessarily encouraging, but a string of US data on employment and manufacturing fuelled the equity rally further. The US market was unsurprisingly the most buoyant as the S&P 500 Index closed in on a post-financial crisis high, having risen more than 8% since the start of the year. The Dow Jones Industrial Average hit a four-year high on Friday, while the technology-heavy NASDAQ stands at its highest level for a decade. In the UK, the FTSE 100 closed the week above 5,900, joining in with the widespread optimism.

In currency markets, the euro and the pound showed little response to credit-rating cuts by Moody’s to several eurozone countries; or to the threat of a downgrade to several other sovereigns, including the UK, and to many leading financial institutions. Both currencies showed little reaction to the pessimism of the ratings agencies, showing more evidence of the increased risk appetite of investors relative to the gloomy sentiment of 2011.

Some commentators are arguing the rally has been solely as a result of the European Central Bank’s (ECB) €500 billion long-term refinancing operation (LTRO) on 22 December. By demonstrating for the first time that the ECB would commit to a form of quantitative easing, they argue that it has reduced the risk of the ‘armageddon’ scenario many feared from August onwards. With more LTRO activity likely, the risk of contagion across the financial system seems to have been reduced, at least for now. Elsewhere in the world, the Bank of Japan jumped on the liquidity bandwagon as it announced its own asset-purchasing programme, which is weakening the Japanese yen and resulting in the export-heavy Nikkei 225 hitting a six-month high.

Dan O’Keefe of Artisan Partners is one such expert who believes that the European Central Bank has been the key to the turnaround, reporting, “The ECB is now effectively engaged in its own version of quantitative easing, buying large chunks of troubled sovereign bonds. This is reducing funding pressure on the most troubled European sovereigns, which is having knock-on benefits for bank funding. As a result, stocks in Europe and around the world have rallied. The more leveraged businesses such as banks have led the recovery.

“The market has swung from pessimism in 2011 to optimism so far in 2012.

The turn came suddenly and quickly, showing once again how futile it is to try to time the market based on prevailing sentiment. We remain focused on executing our strategy with consistency, even as the market gyrates around us.”

Greek talks stall

·         Eurozone debate continues, but markets move forward

·         Strong words from France amid German reluctance

The relative strength of recent market performance masked another week of twists and turns in the ongoing Greek saga, which saw the prospect of a ‘disorderly’ default by Athens increasing in the minds of many. While the general view is that the second bailout and the terms of private sector involvement would most likely be agreed today, enabling Greece to receive the next round of funding by the 20 March deadline, last week drew people’s attention to further hurdles that could arise.

Angela Merkel of Germany, Italy’s Mario Monti and Lucas Papademos of Greece held a conference call ahead of the weekend discussing a range of contentious issues. Should private investors take a bigger hit? Should the rest of the eurozone have tighter controls over Greece’s fiscal policies? How tight should Greece’s austerity measures be? There are still many uncertainties over details but the progress made over the last 4 months has led traders to believe that, somehow, there will be a solution. Francois Fillon, France’s prime minister, berated those with doubts over rescuing the Greeks.

“We must do absolutely everything we can to avoid a default in Greece. Now that we have a commitment from the Greek government, the Europeans must now honour their own commitments. Such talk is totally irresponsible.”

European leaders have repeatedly warned that there was no guarantee they would reach an agreement, and reports that the German government was split over whether to allow Greece to default would have deeply disturbed markets only a matter of months ago. The markets’ sanguine response reflects belief that eurozone finance ministers will choose to rescue Greece rather than rock the fragile global economy further. With the aforementioned American markets soaring, the German and French equity markets also continue to be strong along with Spain and Italy. Nevertheless we still question how, even with a second bailout package agreed, Greece will be able to withstand a prolonged period of austerity (remembering it is already four years into a recession). Without the economic growth Greece and the wider eurozone desperately needs, it is difficult to envisage how the country will return to a path of recovery. The threat of default remains high, with the bigger question occupying commentators and politicians being whether Greece could still remain part of the euro.

Over the past few weeks, the cost of borrowing in the eurozone has also dropped sharply, with AAA-rated euro-denominated corporate bonds falling from an average 3.8% at the beginning of the year to 3.4% now. Sovereign bonds have seen similar drops, with Italian bonds seeing the biggest fall from 6.9% to 5.6%. Some of these changes are hugely significant, and seem to have happened in the blink of an eye.

Iranian oil embargo

·         Iran reacts to the EU oil embargo by restricting supply to the EU

·         Prices spike but this is likely to be a short-term issue

Back in January, the long-running stand-off between Iran and the West over Tehran’s nuclear programme shifted into a more unpredictable phase after Europe decided to impose an oil embargo on the Islamic republic. The EU decided no further oil contracts could be struck between the member states and Iran, with existing oil delivery deals only being allowed to run until July. Several countries shared reservations about the move, with Greece the trickiest problem since it imports Iranian oil on very favourable conditions. Reaction from Iran finally came last week, as official sources said on Wednesday that the Iranian government had cut off oil exports to six of the European Union countries in response to the sanctions. The pro-government channel Press TV interrupted its usual broadcast to report that the measure affects the Netherlands, Spain, Italy, France, Greece and Portugal, amongst which are nations that most depend on Iranian energy. Of the 2.2 million barrels of oil Iran exports a day; around 18% is bound for European markets, according to the U.S. Energy Information Administration. Iran has also threatened to close the Strait of Hormuz waterway if the oil embargo goes ahead, a move that would choke off global oil supplies and send international tensions soaring.

This announcement was followed on Sunday by news that Tehran would stop supplying oil to the UK and France. A spokesman for the oil ministry, Ali Reza Nikzad Rahbar, was reported as saying on the ministry’s website that Iran would “sell our oil to new customers”.

The price of Brent crude, the benchmark for oil prices in Europe, has been steadily rising over the past few weeks as investors grow increasingly worried about Iran’s nuclear ambitions, with the US, UK and Europe all imposing sanctions to restrict Iran’s ability to sell oil. Prices for Brent crude oil rose to their highest level since April 2011 on fears that Iran might halt shipments of oil to Europe, spiking to $119.53 per barrel immediately following the reports. However, economists generally do not believe this to be a long-term problem. Julian Jessop, Chief Global Economist at Capital Economics, believes this increase in prices will be short-lived for three main reasons.

“This development is not a complete surprise, because with the EU embargo announced last month but in force from July, the countries involved have already had some time to find alternative sources, with Saudi Arabia and Libya keen to meet any shortfall.”

“Secondly, the six countries targeted by Iran are likely to require less oil this year anyway because of weakness in their economies. The impact of the Iranian ban may simply be to ensure that the burden of weaker EU demand is felt by Iran rather than by other oil exporters. Thirdly, Iran will still need some customers for oil and US pressure to boycott Iran is having little effect in the larger markets in Asia. China and India, in particular, are taking advantage of their much stronger bargaining positions to insist on lower prices for imports of Iranian oil, which will help offset any upward pressure on global oil prices from EU countries seeking alternative supplies.”

Inflation falls further

The official measure of inflation, the Consumer Prices Index (CPI) fell sharply last month to a 14-month low of 3.6% from 4.2% in December, according to the Office for National Statistics. The Retail Prices Index, which includes mortgage payments, also fell from 4.8% to 3.9%. The main reason for the severity of the drop-off is that the VAT rise from January 2011 is no longer skewing the data, while stable petrol prices and a fall in energy bills have also helped pull inflation down. The Bank of England expects inflation to keep falling throughout the year, but other commentators disagree, arguing that while the falling utility prices are welcome, they can’t be relied upon to stay that way.

Whatever lies ahead, it’s clear that, as with anything investment-related, it is hugely difficult to predict the short-term and any asset class that traditionally protects against inflation remains helpful. Diversification of risk is still key.

The week ahead

·         Greek discussions continue, with compromises to be made

·         US housing data should dictate the market sentiment

The Greece situation is the key issue that will determine the tone for the week ahead. If all goes to plan in the early meetings, then Greece could provide a formal bond offer to creditors by Wednesday, with the exchanges completed by the bond maturities on 20 March. This requires European leaders to agree the latest austerity proposals from Greece, private creditors to accept the offer without legal consequences, and the International Monetary Fund to agree a proposal that is highly likely not to reduce the debt ratio to 120% of GDP by 2020. At least it is a step in the right direction.

In the US, the country from which the rest of the world takes its lead, the economic releases focus on housing, with existing home sales expected to show a fourth successive monthly rise and new home sales expected to show an upward move for the first time in over a year. In the UK, the second estimate of the Quarter 4 GDP data is released on Friday, but it is unlikely to be revised significantly either way. Meanwhile, the minutes from the most recent meeting of the Monetary Policy Committee will be important to gauge the appetite for further quantitative easing beyond the £325 billion already pumped into the UK economy.

Geoffrey Dicks, Sunday Times

Last week…

…at 5905 the FTSE100 improved 0.9% while the FTSE250 increased 1.3% and the Aim All Share at 810 was up 1.9%. The US S&P 500 closed at its highest level for 10 months as the US Unemployment  rate of  8.3% is the lowest level for 4 years  and Manufacturing  Output improved by 0.7%. Eurozone GDP, however contracted by -0.3% which was bit better than many expected.  UK business confidence is improving according to a PMI Index albeit from a low rate but GDP growth forecast for 2012 remain a sluggish 0.3%-0.9% range.

This week…

…Public Sector Finances are reported on Tuesday. These are running at a £1 trillion deficit, which is 64% of GDP and potentially ‘clipping’ our AAA rating. January’s figures are likely to show that the   deficit is reducing quicker than forecast which is a timely political boost ahead of the March 21st  Budget. BOE Minutes on Wednesday may signal the end of the need for QE. The Greek debt saga reaches another deadline this week but is likely to continue for the rest of our lives.  Markets seem set for further improvement.

COMPANY REPORTS

Electric Word (ELE) - £5.23m at 2.12p

Refocus online for recovery

Electric Word went through a period of restructuring and refocusing in the year to November 2011 but it still managed to make an underlying profit. Overall revenues moved ahead from £14.6m to £15.1m, while the adjusted profit dipped from £1.94m to £1.39m. The reported loss was £4.68m but that is mainly due to asset impairment and restructuring costs. The business has been restructured into three divisions: education, health and sport and gaming. All of the business is being refocused with online increasingly replacing print product.

It was the education division that had the main problems last year as schools were uncertain about their budgets and cut back spending. Education made an operating profit of £81,000 on revenues of £5.91m. Conferences performed poorly and the conference portfolio is being reduced. Some publications have been discontinued and a training operation started. The move to online will help margins to recover and should help to improve yields from schools. The gaming division continues to go from strength to strength with the full benefits of the acquisition of the rest of the affiliate business showing through. The profit contribution was £1.34m, with more than one-quarter relating to the additional affiliate profit, on £4.72m of revenues. The US provides long-term potential for the gaming division. It appears that online gaming will be allowed in the US and casino operators are already seeking out information about the sector. A US publication is on the cards. The health division is the newest and last year was a period of integration for the recent acquisitions. Even so it made a profit contribution of £774,000 on revenues of £4.5m. Sales and marketing are being improved and niche health communities are being built up. Assuming profits of £1.43m then the shares are trading on 7x prospective 2011-12 earnings

Finance

Net debt was £820,000 at the end of November 2011.

MBC Finance (MCRB) - £11.52m at 69p

Strategic Dilemma

It is not clear why this online provider of short- and medium-term loans to customers in Finland, Estonia, Latvia and Lithuania, is listed. The historic rating that puts them on an historic P/E of 4.6x shows that few investors are accessing the risk of this tightly held stock with 17% free float. Profits of Euro 3.7m were reported for the December 2011 year end. The attractive business model is highly automated and centralised as clients use the internet to apply for loans. Credit is assessed centrally using credit score cards with internal and external data input. The average loan is small and short for around six months.  A majority of business is repeat lending to existing customers. The customer is typically a mid-to low-income earner with an instant cash need, ie the non-bank consumer credit market for which there is strong demand.  Forecast for 2012 are for Euro 5.2 giving a P/E of 3.9x but there is no yield being offered.  The strategic dilemma remains;  why be on Aim unless it helps funds to be raised to increase the loan book.

Finances

Gearing is 110% with net borrowings of £11m

Amino Technologies (AMO) - £29.8m at 51.25p

Reset for growth

IPTV software and settop box developer is growing on the back of the widening use of the technology and its performance last year was better than expected. Revenues grew 18% to £51.8m in the year to November 2011, while the business increased its underlying profit. The reported loss fell from £882,000 to £619,000 but stripping out the goodwill impairment and the previous year’s onerous contract provision the profit improved from £794,000 to £1.66m. Much of the growth in full year revenues came in the first half but the profitability was better in the second half because revenues were much higher than the first half. The US and Italy were important markets last year.

Older products are being phased out and the product range simplified. The order book covers 102,000 units. Obtaining components can be difficult and Amino has managed to ride out supply problems in the Far East. Hard disc drives supply has been a problem but further supplies have been obtained at a higher than normal price. Forecast for the November 2012 year end are for PBT of £2.7m giving an EPS of 5p for a prospective P/E of just over 10x.

Finance

Cash generation was particularly strong last year as working capital was reduced. A maiden dividend of 2p a share was announced, which shows that the company expects to maintain and build upon its profitability. 

The mayor of London supported by his deputy Kit Malthouse have decided to spend £400,000 on the trial of a US style project to stop those with alcohol related issues from drinking it, with the threat of going to prison ‘instantly’ if they do drink alcohol.

http://www.bbc.co.uk/news/uk-england-london-16970501

So to remove alcohol from the picture, as suggested by Mr Malthouse, 300 people will be taking part in the trial of the scheme at a cost of about £13,333 per person. I would suggest that is a significant investment for a ‘solution’ that is only likely to work when the tag is fitted and being monitored.

But what will happen when the tag is removed?

They are likely to return to the old pattern of drinking alcohol and possibly committing further acts of violence, because fitting a tag changes nothing, it only monitors the level of alcohol in the person’s body, nothing more.

This is an attempt to try to change the behaviour of violent individuals by threatening them with prison if they do not stop using what is assumed to be causing that violent behaviour and in this case it is being assumed that alcohol is the cause.

But the rage and violence are likely to be symptoms of something far more serious such as undiagnosed mental difficulties, post traumatic stress disorder or unresolved issues, possibly involving violence against them in the past. People don’t usually just become suddenly violent when drinking alcohol there will be underlying reasons for it and finding them may not be easy.

Putting more people in prison will not resolve their problems with alcohol. If they do not understand why they are doing what they are doing they will have no idea how to change, and will most probably continue drinking and commit further acts of violence.

£400K would provide a lot of help and education to a great deal more than 300 people, and would probably also help to prevent a number of newly created victims as a result. But it probably wouldn’t be so popular with some of the voting public, who just can’t resist the headlines promoting some ‘threat, punish and control measures’, attempting to change people’s behaviour by force and fear of consequence.

But why stop with monitoring alcohol? Why not get the whole population to wear tags to monitor the presence of illegal drugs in the bloodstream? Arrests could be instant and fines taking from our debit cards automatically.

But that’s just being ridiculous isn’t it?

Let’s hope so.

Whisper it but it has been a relatively benign economic slump to date. Obviously not for those who have lost their businesses and jobs or have seen inflation and low savings rates ravage their income and living standards. But anybody who can recall the previous slumps of the 70s, 80s and 90s will probably agree that we have been let off relatively lightly so far.

Two weeks ago this blog set out the argument that the proposed restructuring of the NHS could so absorb Government expenditure that any future support for Britain’s enterprising businesses could be affected.

The final stages of the Health and Social Care Bill are proving so controversial that the future is even more uncertain. The statistics are deeply worrying:

• 151 Primary Care Units are to be replaced by 279 clinical commissioning groups reporting as hubs to four Strategic Health Authorities. This represents a massive overhead increase
• These changes are expected to cost perhaps £3bn. The new national commissioning board has two executives on £170,000+ and seven board members
• McKinsey and KPMG are already on multi-million pound contracts to support the commissioning process
• The NHS is supposedly saving £20bn as part of the austerity measures. Staff numbers are being cut, waiting times are collapsing and targets are being abolished. In a late change Downing Street altered this objective to “saving up to £20bn…”
• The Care Quality Commission, whose budget has been cut by 30%, has 900 inspectors to check 8,000 GP practices, 400 NHS Trusts, 9,000 dental practices and 18,000 care homes.

It is already known that some GPs are setting up clinics and referring their own patients to them.

It is probable that the Bill will pass through Parliament such is the fragile nature of the Coalition Government. It could be at least two years before the real truth emerges as doctors prepare to gorge themselves on the £80bn Andrew Lansley is giving them.

Whilst this is going on Britain’s equity markets are failing to provide the support to SMEs that is desperately needed. PLUS Markets is up for sale and the share price (£0.98p) suggests the market has written them off. AIM remains dogged by regulatory costs and is not supporting smaller companies. The Treasury has yet to launch its SEED EIS scheme (announced by the Chancellor in his Autumn Statement) and is basing most of its fire power on trying to create specialist funds.

If this carries on we’ll all need a doctor. Unfortunately the NHS service will mean longer and longer waiting lists and to get immediate treatment may mean resorting to private health care.

That is exactly what will be the outcome of Andrew Lansley’s reforms. Disgraceful.

Mr. Angry has announced that he’s parted company with his sponsor.

“Drury” he yelled in the pub “is history.”

Mr. Angry was negotiating a seven day loan against his next social services cheque.

“Where was he when he should have been worrying about the NHS Bill, the Greek default and the Falklands?”

“Where was he?” asked Mrs. Angry as she enjoyed her large brandy.

“Primrose Hill Mrs. Angry.”

“Doing what Mr. Angry?”

“Making a video to promote his new novel ‘Megan’s Game.”

“What’s that to do with enterprises businesses Mr. Angry?”

“It’s got a lot of sex in it.”

“I’ve always liked that Mr. Drury” smiled Mrs. Angry.

This week’s Bulletin:

• US and European equity markets retreated from recent six-month highs as concerns over Greece re-asserted themselves. Greece’s lenders are demanding more cuts to this year’s budget plus a written pledge that politicians will adhere to the cuts irrespective of the outcome to the upcoming elections.
• Despite violent protests by Greek workers, the additional cuts were approved by the country’s Parliament yesterday and today, equity markets have responded positively to the news.
• Last week the BoE announced the resumption of its quantitative easing programme, saying it planned to purchase another £50bn of government bonds as part of measures to avoid the UK economy slowing further.
• QE has come under criticism from a number economists who doubt its effectiveness and we discuss the merits or otherwise of the Bank’s latest plan to print more money.
• Return of the Bull – this year, many of the world’s stock markets have already erased losses seen last year as investor sentiment improves causing equity and corporate bond prices to rise. We look at the reasons behind the change in sentiment.
• The likelihood of higher-rate pension tax relief being scrapped appears to have increased following comments made over the weekend by Liberal Democrat Chief Secretary to the Treasury, Danny Alexander. Mr Alexander claims that the cost of the relief is unaffordable and his comments come as coalition ministers plan to meet this week to discuss tax plans ahead of the March 21 Budget.

Market Eye

·         Greece approves further austerity measures

·         Western markets retreat from six-month highs

American and European stocks took a breather last week and fell back slightly from their recent six-month highs as investors temporarily moved to the sidelines, citing renewed concerns over Greece as the reason. Inevitably, the latest twist in Greece’s long-running bailout saga made markets twitchy; although the view amongst analysts was that any default would come as no surprise to the markets and that any potential fallout was being priced into share prices. With the 20 March deadline looming fast – Greece has to find around €14 billion to repay a maturing bond – lenders upped the ante last week, telling Greece that it had to come up with €325 million of additional cuts to this year’s budget. The EU and IMF also demanded that the country’s political leaders pledge in writing that they will uphold the reform programme, even after elections due in the spring. In response to threats of more job losses and pay cuts, Greek workers took to the streets and six members of the Greek Cabinet resigned in protest.

However, with the stakes so high it was no surprise that Greece was once more warned by its prime minister that failure to agree to the demands would lead to a disorderly default, with all the associated ramifications. However, yesterday Greek MPs approved the controversial package of austerity measures demanded by the eurozone and IMF in return for the €130 billion ($170 billion: £110 billion) bailout. Tens of thousands protested in Athens, where there were widespread clashes and buildings were set on fire. Prime Minister Lucas Papademos urged calm; insisting that the austerity package would “set the foundations for the reform and recovery of the economy”. Whilst the outcome was probably never in doubt, confirmation of the vote has given global stock markets a boost this morning as investors reacted favourably to the news and removal of this latest uncertainty.

Away from Greece, economic news was much in line with expectations, with some signs that the UK economy was seeing some pick up in activity following positive manufacturing output and retail sales numbers. This didn’t, however, preclude the Bank of England (BoE) from announcing its long-expected decision to embark on a further round of quantitative easing, which we discuss below. By the end of the week, Western markets fell back a little; whilst in Asia, a more bullish mood prevailed, enabling Tokyo, Hong Kong and Mumbai to advance by almost 1%. In the commodity markets, gold continued its retreat whilst oil prices touched almost $120 per barrel.

Bank presses the button

·         MPC announces further £50 billion QE

·         Debate continues over its effectiveness

As expected, the Monetary Policy Committee (MPC) voted last week for £50 billion more quantitative easing (QE). Since it started QE, the BoE has injected £275 billion into the economy – an amount equivalent to nearly 20% of Britain’s GDP – but it seems a majority on the committee believe that this is not enough. Just to recap, the reasons for QE are straightforward enough: the BoE buys gilts; this increased demand pushes down yields, as prices rise; and the cash should then find its way into the British economy via increased bank lending and increased consumer spending. The net result should be to boost economic growth. According to some, the benefits of QE have not been as transparent and evident as they should be; so last week the critics were lining up to say the Bank’s response is too little, too much or beside the point. Against this backdrop, it’s worth looking at the evidence to date before damning the BoE outright.

Firstly, interest rates are undeniably lower as a result of QE – the government’s cost of borrowing over ten years has fallen from a little over 3% to around 2%, saving around £23 billion according to latest figures from the BoE. Aside from the fact that the BoE has made a paper profit of £40 billion from the exercise, has the economy grown? Well it did initially but growth slowed markedly last year and it actually contracted in the last quarter of 2011. But it’s also true to say that lending by banks has hit government targets, according to the British Bankers Association – some £215 billion was lent to businesses last year, against a £190 billion target – although loans to smaller businesses fell short. One other area of concern was the impact on inflation – whilst much higher than its 2% target, inflation has started to fall backwards, with expectations of it being 3.4% once last year’s VAT rise drops out.

So, back to the critics’ views. It is difficult (though not impossible) to argue that the policy is both impotent and inflationary – after all, if it’s courting inflation, then it must be doing something. Former MPC member, Andrew Sentance, has stuck with his longstanding view that the policy would do much for inflation, but not much for anything else. Matthew Hancock, a former economist at the BoE and former chief of staff to the chancellor, is more circumspect, hinting in his emphasis on the need for ‘credit easing’ to get money flowing to ordinary businesses, in addition to anything decided by the MPC. Lastly, what about the argument that the BoE ought to be doing more? Last week some were expecting an injection of £75 billion, rather than £50 billion. The reason for a smaller amount is probably because the latest news from the real economy has been surprisingly good. As mentioned, the UK’s manufacturing output in December was 1% higher than in November and our trade deficit in that one month was the smallest since 2003. However, given that the eurozone supposedly slipped back into recession at the end of the year, it’s good and surprising news that our exports to that region have been steady – in fact, up 1% in December.

So, will this £50 billion make a difference? The BoE must think it will. Its latest estimates show that the first £200 billion raised the real level of national output by up to 1.5% and inflation by about 1.25%. As ever, the markets will have to be patient and wait for the evidence but, in the meantime, it looks like ultra-low interest rates are here to stay for some considerable time. Whilst bad news for savers, it is good news for those with mortgages and crucially, companies looking to borrow money to grow their businesses, which is just what the UK economy needs.

The bulls return

·         Increased risk appetite sees strong start to 2012

·         Investors see grounds for optimism in three key areas

Just in case you hadn’t noticed, global markets have been enjoying rather a good time so far this year. After a pretty difficult 2011, investors have taken a brighter view on the outlook for stocks and shares, enabling global indices to register some significant gains year to date – erasing, for the most part, losses seen last year. For example, whilst the index of the UK’s top one hundred shares fell 2.2% last year, as at the beginning of last week the FTSE 100 had advanced 5.8% so far this year. In the US, the S&P 500 is up 5% this year and significantly, re-entered a bull market by having risen 20% since the lows of last October. The world index has recouped all of its losses from last year whilst corporate bonds have also advanced. It’s worth noting that last year’s best UK asset class performer, gilts, have slipped this year due to an increased risk appetite on the part of investors. Of course, one has to be very careful when looking at such short-term numbers but it is still worth thinking about what may have fundamentally changed in recent weeks to account for such a change in sentiment.

There are three key areas where investor perception has changed latterly. Firstly, a reduced threat of a eurozone banking collapse and credit crunch. Secondly, US economic data has proved to be much more robust than expected. Lastly, it is unlikely that China will experience a ‘hard’ economic landing at its policymakers endeavour to slow its economy in a manageable way. Taking Europe first, it was only back in December that there was a sense of impending doom in the eurozone as a result of turmoil in Greece. Fortunately, after much pleading, the European Central Bank (ECB) rode to the rescue by providing huge loans to the region’s banks. The ECB lent almost €500 billion to around 500 banks for three years at just 1% and there is promise of more to come. As a result, the cost of overnight borrowing has dropped and yields on the government debt of the region’s most troubled economies have fallen too. There was an extra bonus last week when the European Banking Authority said that banks’ plans to raise capital by July were on track.

In the US there is a growing ‘feel good’ factor too. Unemployment is falling faster than hoped for as businesses recruit more employees – new orders poured into American manufacturers last month, driving the sector’s growth rate to its highest for seven months, continuing a 30-month expansion. As a result, order backlogs are now at a nine-month high, meaning manufacturers will have to expand capacity. With news that some of America’s largest companies – including Caterpillar and Carlisle – are repatriating jobs to the US, President Obama’s re-election prospects are improving daily; unemployment has fallen from 10% to 8.3%. Even the moribund housing market is showing some signs of life – spending on construction rose in December for the fifth consecutive month, to the highest level in almost two years, which has been boosted by the building of single-family homes. Exports have boomed too – in December they grew 14.5% to $2.1 trillion. Against this positive backdrop, investors have decided to invest more in equities – from a valuation perspective the S&P’s price-to-earnings ratio of 13.9 has been below its long-term average of 16.4 for the past eighteen months.

And lastly to China. The world’s second largest economy has enjoyed growth of around 10% per annum for many years but signs of higher inflation – especially food basics and housing – led the authorities to raise interest rates. Recent signs of a slowdown in these key areas has led to policymakers taking their foot ‘off the pedal’, allowing growth to resume once more as inflationary fears ebb. The economy is still expected to grow this year at around 8.5% and, taking a global view, the IMF is expecting the world economy to expand by a respectable 3–4% this year.

So, as these key uncertainties diminish, investors have decided that for now, the outlook appears far more positive than could have been hoped for just a few months ago and as a consequence markets have started to price-in this better environment. Of course, there is the usual caveat for every investor and that is too ensure your portfolio remains aligned to your overall attitude to risk and is sufficiently diversified by asset class, geography and also at a fund manager level too.

Tax alert

The possibility of changes to tax-relief on pension contributions appears to have come back on the agenda as a result of comments made by Chief Secretary to the Treasury, Danny Alexander. In an interview at the weekend Mr Alexander re-iterated the Liberal Democrats’ commitment to scrap or further restrict higher-rate pension tax relief;

“If you look at the amount of money we spend on pensions tax relief, which is very significant, the majority of that money goes to paying relief at the higher rate.  [For those with] very large incomes who are paying very large pension contributions… the country cannot afford to give you all the tax relief.”

A proposal to scrap higher-rate pension relief was included in the Lib Dem manifesto but was not included in the coalition agreement. Mr Alexander said that scrapping pension relief altogether would save £7 billion whilst axing it for those earning over £100,000 would save £3.6 billion. The coalition meets this week to discuss tax plans ahead of the March 21 Budget.

The debate in parliament this week about alcohol put the focus on the usual areas of concern but I feel that those doing the debating will be under the illusion that the vast majority population will drink for the same reasons that they do, but they do not. Many of the population use alcohol to medicate their lives for reasons that they themselves do not understand, and nor do their MP’s.

The MP’s are all employed; many of those that they represent are not. The MP’s are all doing their job of choice; many of those that they represent are not, they are doing what they can get. The MP’s are well paid, enjoy good benefits and get better than average holidays. Many of those that they represent will be getting the minimum wage, no benefits and average holiday entitlements.

I would suggest that the working life on an MP cannot be considered as comparable to the vast majority of the working population of the UK.

Perhaps this is part of the reason that MP’s continually promote the message that the vast majority of the UK population are responsible drinkers and that they all drink in moderation, in the same way that our MP’s obviously do.

At the centre of most private parties you will find alcohol. Rarely in my experience does the host consider who is attending and work out how many units of alcohol that will be per person and then proceed to buy roughly that amount, and no more. At most of the private parties that I have attended my experience is that the majority have exceeded the unit guidelines, but that is viewed as perfectly ok providing that they don’t make a spectacle of themselves.

What I believe that our MP’s may be saying is that responsible drinking means that you can drink as much as you want providing that you do not end up requiring hospital treatment, vomit in public, assault someone, damaging property or appearing drunk in public.

Perhaps if our MP’s promoted the fact that drinking alcohol, no matter what the quantity, is actually recreational drug taking, and that it is always risky, we would get a clearer picture of what is really going on, and may respond differently to what they are trying to say to us about alcohol.

But the truth is not always a vote winner, and the phrase ‘drug addicted society’ is one our MP’s will use with extreme caution, and rightly so.

But what if it were true?

… is also central to attaining the Federal Reserve’s other mandate objectives of maximum sustainable employment and moderate long-term interest rates.

Ben Bernanke

Last week …

… the FTSE 100 at 5852 was -0.8% marginally lower while the FTSE 250 slipped -0.6%. The Aim All Share at 795 improved 1.7%. Inflationary pressure at 4.1% is declining but higher crude oil prices are a concern. The prospects of Greek debt default on Friday, which was resolved over the weekend stressed the markets upward trend while a further £50 billion of QE may help to ease the pain.

This week …

… there will be further evidence of declining inflation when the Consumer Price Index is reported on Tuesday and the BOE Inflation Report on Wednesday. Also on Wednesday, the UK Unemployment rate will be reported, which at 8.4% is increasing at an uncomfortable rate.   There are US and Eurozone reports on prices trends and growth and it maybe that the robustness of the US will not negate the weakness of the Eurozone. The Greek relief relay may last the week as  markets not seem dear compared to holding cash.

Company Reports

Allocate Software (ALL) - £51m at 80p

Set for Stronger Growth

Interims sales were flat at £16m but the positive underlying performance is partly disguised. There was a a strong performance in licensing last-year  from the multimillion pound HealthRoster deal with the state government of New South Wales. The second half seems set to show stronger growth as an Australian defence deal   comes through. Allocate Software is a leading provider of workforce and compliance optimisation solutions. Its primary focus is on healthcare but also  in defence and maritime. It now supplies 45% of all NHS trusts, all of the Australian army and is a market leader in the Australian healthcare market. Recurring revenues accounted for 47% of sales and were up 42% although large licensing deals still heavily affect earnings.  Allocate retains considerable scope for expansion both domestically and internationally. For the May year-end to 2012 the PBT forecast is for £5.7m giving and EPS of 6.5p so a prospective P/E of 12.2x dropping to 10.8x.

Financials

There is no debt and the £8m drop in net cash is due to various payments relating to  two deals but strong cash generation is expected to  return in the second half. A dividend payment would certainly  help the rating.

Transense Technologies (TRT) - £8.5m at 4.75p

Bridging the Earnings Gap

An order from Brazil for the iProbe,is a user-friendly wireless solution for cost effective monitoring of tyre pressure and tread depth.   Bridgestone began work on integrating the iProbe into its systems in April 2011 and this work is now complete and, following a successful field trial and positive feedback from Bridgestone’s customers, it is anticipated that further orders will follow. Surface Acoustic Wave (SAW) technology group Transense has been around for two decades and it still has some way to go before it starts generating any significant revenues from the automotive sector. However, there are newer markets that could generate revenues in the near-term. Transense has already started shipping the intelliSAW wireless sensor system for temperature monitoring of electrical switchgear. This can help to prevent equipment being damaged and fatalities. There is no power required for the wireless device so no batteries are used. This can be retrofitted or put in the equipment when it is manufactured. Measuring tyre pressure on giant construction vehicles used in mining is an area that could yield orders in the next year or so. The technology is being tested and it is marketed on the basis that it improves health and safety. The data is live and enables the vehicles to be tracked. Another potential market is for the gear boxes of wind turbines. The technology can be used to help to control the speed of the turbine. Transense is still working with General Motors on the SAW torque sensor technology.

Finance

Transense raised £1.33m in December at 3p a share from a combination of a placing and the exercise of warrants.

Brady (BRY) - £44.8m at 81.5p

Acquisitive Growth reduces risk

Trading and risk management systems supplier Brady has boosted its exposure to the electricity and carbon trading markets through additional acquisitions. These acquisitions supplement the recent acquisitions by Brady as a way of broadening its offer to clients. Brady is paying £17.1m for Navita Systems, a Norwegian software company that fits well with Brady’s late 2010 acquisition Viz. This puts Brady in a strong position in the $2bn Energy Trading and Risk Management (ETRM) market, which is growing by 11% a year according to Commoditypoint.  Navita generated flat revenues of £11.5m in 2011 because it lost three clients to Brady and EBITDA dropped from £1.8m to £1.1m. Navita is moving from a software licence sales to a recurring revenue model. More than 50% of Brady’s revenues will be recurring. There will be cost savings from integrating Navita into Brady Energy. Brady has also bought Switzerland-based syseca, which will broaden the group’s product range and take it into physical electricity trading and connectivity to European Transmission System Operators.  Navita  and Syseca  will not be included for a full year to Dec 2011  but  forecasts are set to rise in Brady’s revenues from £19m in 2011 to £27.8m in 2012, while profits are expected to improve from £3.5m to £4.9m although the EPS  may decline marginally this year to December 2012  from 5.4p to 5.3p for a prospective P/E of 15.1x with a 1.8% yield.

Finance

The Navita acquisition is being financed by a £16.7m net placing at 77p a share. Brady already had cash in the bank but it wants to retain a strong balance sheet in order to reassure its customers that it has  a strong balance sheet.