John Stepek highlights some of the best bits from all the free emails, newsletters, and blog – not to mention MoneyWeek magazine – from the past week.
● Last week China scared the markets. This week it was the turn of Barack Obama. The president is clearly bruised by the Democrats’ loss of Massachusetts (for British readers, that’s almost as unlikely as the Labour party losing Glasgow North-East). So he’s appealing to his core voters by turning on the banks.
Of course, his motivation isn’t pure. But with a man like Paul Volcker (the world’s most feared central banker, as we noted in Money Morning yesterday) behind him, Obama may just be on to something.
Tim Price for one told me yesterday: “I am 100% behind what I’ve seen of the Obama proposals.” The ‘Volcker rule’ plan will certainly make markets more volatile during its journey through Congress. But if we don’t reform the banks somehow, we risk a repeat of 2008.
● Indeed, if you need a lesson in how the banking sector can bring down an entire country, just take a look at Iceland, Tim says. “Back in 1999, Iceland was a simple place. Its three biggest banks had less than a billion dollars between them. And the island’s 300,000 inhabitants did well enough from smelting aluminium and trawling the coastline for trout.” Then came the credit boom, as foreigners poured hot money into Iceland’s high-yielding currency.
“The Icelandic banks went mad. By 2007, the three biggest banks owned approximately 50 times more foreign assets than they had five years previously. Then the economy went pop.” Now Iceland’s debt is equal to 850% of its GDP. “Its people are reduced to hoarding food and money.”
What does that mean for investors? Well, even if Britain doesn’t go the way of Iceland, it’s hardly a safe haven, Tim says in The Price Report. “As things stand, you would have to lend your money to the UK government for six years to get a current yield from gilts of more than 3%.” Given that the gilts market is already getting twitchy about the Bank of England pulling out of the market, they simply aren’t worth the risk. The good news is, there are plenty of other better-value assets out there – you just have to know where to look, says Tim.
● One such asset class is solid stocks, paying decent dividends. These are something we’ve been banging on about in Money Morning for a while. But even our enthusiasm for such stocks pales next to Stephen Bland’s. The whole strategy of Stephen’s Dividend Letter email is based around building a diverse portfolio of income-producing stocks. One of his earlier picks, publisher Pearson, pleased the market this week, “announcing a 10% leap in ‘headline’ earnings growth for their year to 31/12/09”. When Stephen first tipped the group last October, it was trading at around 552p a share. It’s up a lot since then, but what he really cares about is the dividend – and on a 4% yield, he reckons Pearson’s still a buy.
● While everyone else is spitting feathers about the Cadbury’s / Kraft deal (Why Britain needs to let Cadbury’s go), Paul Hill is rather excited. Not because he likes his chocolate to taste of sour milk – but because of what it means for the stocks in the Precision Guided Investments portfolio. He believes “this is the start of what will be a major upturn in mergers and acquisitions over the next two years. We’ve already seen Warren Buffett splash out $27bn on railroad operator Burlington Northern Santa Fe in November. And shortly after, Exxon Mobil snapped up XTO Energy for some $31bn.” Paul reckons that no fewer than six PGI stocks are set to be taken over in the next two years.
● The other big news in the UK this week was the spike in inflation, and the better-than-expected jobless data. David Stevenson reckons that inflation might force borrowing costs to rise sooner than people expect. But as Merryn Somerset Webb pointed out on our blog, the unemployment figures shouldn’t be taken as a good sign. For example, look a bit deeper, and you find that: “The number of full-time jobs fell by 113,000, while the number of part-time jobs rose by 99,000. There are now 7.71m people working part time. More than a million of those say they are only doing so because they can’t get full -time jobs. That’s the highest figure since 1992, and while we can’t class this one million as unemployed, they are certainly under-employed.”
● But what could be done to help? Merryn has another – slightly unorthodox – suggestion: “How about we increase the minimum wage by 30% or so, making one hour of basic work worth £7.50?”. As Merryn says: “it might sound mad at first, but it does make some sense.” Not only could it cut unemployment, but it could also cut the benefits bill and thus our massive government debt burden. How? Check out her views here and let us know what you think by commenting on the blog.