● For once, the biggest shock of the week came, not from the eurozone, but from somewhere far more mundane: Tesco.
The UK’s supermarket behemoth, bane of the market town middle classes, issued a profit warning that dragged the stock down by 16% on Thursday. It didn’t even muster a dead cat bounce on Friday, which shows you just how badly shareholders must have felt about it.
I explained some of the reasons for the plunge in Friday’s Money Morning: Tesco: is this a huge buying opportunity? Would I buy it now? Well, as I said on Friday, I doubt anyone would seriously regret buying it in the long run if they jump in now. But I can see the long run lasting for quite a while. Markets will be sceptical now until it becomes clear that things are turning around. That might take a while to happen, especially in this economy.
We’ve had quite a few views on Tesco in the MoneyWeek office in the past. My colleague David Stevenson has always preferred Sainsbury’s, but he felt that Tesco was decent enough value too.
However, since Sir Terry Leahy quit as chief executive, deputy editor Tim Bennett has been less enamoured with the stock. Indeed, he suggested it as a good potential shorting opportunity in a recent post on spread betting, back in December: Three reasons to short Tesco. Citing red flags, such as the high turnover in senior management, Tim warned: “Look out for a share price drop. The full horror of what looks like being a dire Christmas shopping season might just be the trigger”.
Sadly, I can’t say I was short of Tesco myself, but hopefully some of you might have been.
● Of course, the eurozone continued to rumble away in the background. Greece is back in focus once again. You might have thought that they’d have dealt with Greece by now. After all, it is the original source of the problem. But no, Europe’s finest are still arguing over just how much of a haircut private sector bond holders should take on Greece’s sovereign debt.
You might be tempted to say – well, so what? Greece is a tiny part of the European economy, which in many other ways, is actually quite healthy. As many of you pointed out in the comments under Thursday’s Money Morning, if you could take Europe as one region, then it’d be in better economic shape than the US or the UK.
Trouble is, you can’t take it as one region. And the euro means that one country’s problems become the problems of everyone else in the zone. As Tim Price, in The Price Report newsletter, points out, “there is no such thing as an orderly government default”.
“I do not believe that such an event is remotely priced in [to markets], even though the likelihood is growing for as long as Europe’s politicians fail to address the debt crisis”. You can find out how Tim suggests you protect your portfolio in The Price Report.
● Of course, the trouble with betting against Europe is that everyone is looking for a way to do it. And that means that the euro has been a much unloved currency. Our spread betting expert, John C Burford, reckons that could spell opportunity for canny traders. He’s been looking at how the euro could surprise all the bears – in the short term at least. You can find out more about the surprising patterns he’s found in the long-term euro / dollar chart here: Is the euro set for a big comeback?
● How did we get into this mess in the first place? A lot of it boils down to central banking. Our publisher, Bill Bonner, gives a round-up – and perhaps a reappraisal – of the actions of the father of all bubbles, former US Federal Reserve chief Alan Greenspan, in his Daily Reckoning newsletter last week: Greenspan’s secret plan.
You’re probably all familiar with the idea. Central banks, prone to political influence and popularity contests, allow money to become too easy during credit booms, fuelling the bubbles. When the bubbles pop, they make things even worse by fighting to prevent creative destruction.
● But what if, my colleague Sean Keyes asks, we could replace them all with robots? It’s a serious theory. Market monetarism (MMT for short) suggests that there’s an easy way out of the financial crisis. It’s all to do with managing people’s expectations, ignoring inflation when necessary, and automating the central banking process. Sean outlines what it’s all about: Should we replace Mervyn King with a robot?
We’re not saying we agree with all of it – and those more clued up on the ideas behind MMT may wish to chuck their tuppence worth into the comments section – but we’d be interested to hear what you think. Read the piece and Should we replace Mervyn King with a robot?.
● Merryn’s been blogging on a few different topics this week: performance fees, corruption, and high financial industry charges.
But the topic that remains closest to your hearts is house prices. And we had a different take on them this week. Merryn is against wealth taxes for various reasons. But there’s one group she thinks probably should pay a wealth tax: non-resident property owners: Will the wealth tax never die?
“Look around central London at night. See any lights on in the houses of Mayfair or Chelsea? No? That’s because no one lives there. All too many of the very high priced houses in the centre of our capital city belong to foreigners who spend all their time somewhere else.
“That comes with a cost for us: it pushes up house prices throughout the city and it makes London a much less liveable place all round (you can’t form a community in London with neighbours who live in Athens and Dubai).
“But it comes at very little cost to the non-resident investors. They rarely pay stamp duty, and they pay no other taxes during their holding period other than council tax. That makes them, as an irritable friend trying to buy a house in London puts it, “effectively very cheap safety deposit boxes in a safe well regulated economy for those who make their money in less well regulated economies and who aren’t in the UK often enough to make a material contribution to the domestic economy”.”
So why not charge them? You could think of it as a management fee charged by the UK taxpayer on the foreign investor.
● This one attracted plenty of comments. An interesting view came from ‘mombers’, related to the idea of a land tax (always an intriguing one – there’s a big debate on it here from a piece we wrote last summer: should we have a land value tax?).
Says mombers: “Houses near me literally double in value if they overlook the park. Who provides that park and prevents my family building a house there? The government. The council is providing the landowner with all of this extra value. This extra value is purely unearned and the house a block away should not be paying the same council tax. After all, the council allows a house to block its view!
“Economically speaking, taxes on earned wealth and income are a bad idea as they discourage earning and creating wealth. Land value is unearned and immobile, so taxing it heavily will not affect people’s decisions to work or invest and there is therefore no dead-weight loss.
“We tax booze and fags so that people smoke and drink less. The tax code is then surely designed to make people work less.”
SL isn’t keen on a land tax, but reckons Merryn’s right to suggest imposing one on foreign owners: “If the world’s super rich want to treat central London as their own private Disneyland, which they currently do, then they can put their hands in their pocket and pay for the benefit of pricing real Londoners out.”
● If you’re a property owner and you’re having trouble selling up, Tim has some advice for you in his latest video on ‘market makers’. I’ll warn you now though – you probably won’t like what he has to say. On the other hand, if you’ve ever wondered about what goes on behind the scenes when you try to buy or sell a stock, you should take a look at Tim’s video, right here.
● It’s clear that 2012 is not going to be an easy year for investors. But there’s plenty of value to be had out there if you know where to look. That may sound odd, but judging by the reactions to my colleague Bengt Saelensminde’s piece on shorting stocks, I know that a lot of you feel quite strongly that investment should be a constructive process.
Enjoy the rest of your weekend.
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Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
• David Stevenson
• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .