This chart is from the very recent Institute For Fiscal Studies briefing note that was anticipating a 45% rate (see page 14 for chart):
http://www.ifs.org.uk/bns/bn84.pdf

The most startling aspect when the IFS looked at the sums:

It would appear that the Treasury has not allowed the behavioral response to affect revenues other than income tax receipts.

This is quite extraordinary. A very cheap piece of electioneering by Labour will turn into a very expensive debt for taxpayers.

The beta of BAT over this time has been -0.2617 [1]. Undoubtedly a short-term phenom but rather startling nevertheless.

What can we take from this snippet of info? Perhaps more evidence of “sector rotation” and a rebuke to the idea that “money on the side” is re-entering the market.

Other big cap “defensives” are showing little correlation to the index. Imperial Tobacco is also showing a negative correlation but far slighter than BATS (a beta of -0.074) while Glaxo is showing a very slight positive correlation of +0.069.

mm

[1] For some reason Google’s dataset is missing 27th March for both the FTSE 100 and All-Share, I’ve simply taken that day out of the calculation for all the above.

I’d like to add a Battlestar-style “So say we all” and end the post. Unfortunately, politicians are doing their damnedest to recreate the illusion of limitless credit by borrowing even more.

You’re right to be put off [by Edinburgh Investment Trust].

First a point on how Trustnet measures discount/premium to NAV. Trustnet’s figures measure NAV with debt at par (nominal) value whereas others, including the AIC, measure debt at fair (market) value. For investment trusts with little or no debt this makes little difference. Edinburgh IT just so happens to be one of the most indebted investment trusts out there [1]!

The level of debt, via debenture stock, outstanding at Edinburgh leads to a large swing in discount/premium depending on how you value the debt. An idle look at the AIC’s website ([2]) currently shows a premium of nearly 10% while Trustnet shows a small discount. The AIC figure itself is misleading, imho, since it doesn’t take into account accumulated income. Edinburgh IT release NAVs daily based on par and fair value, cum and without income [3]. If this is all rather confusing the AIC have a good explanation of net asset values on their website [4].

Using March 11th as an example the Edinburgh share price finished the day at 297p, the following day Edinburgh released NAV figures that were between 270.71p and 318.39p, quite a difference! Personally I use the debt at fair value and cum income (for income ITs where this is going to skew the figure). For Edinburgh this was 282.06p on March 11th, still a premium of 5.3%.

So why the drastic reduction in discount for Edinburgh recently? Three factors stand out for me:

1. The appointment of Neil Woodford as fund manager.

2. The protection of income, in the short-term at least, that most Investment Trusts offer as they have a revenue reserve.

3. The structural advantage that a discount to NAV offers to the underlying yield – if you buy on a 10% discount you’re effectively buying a 10% higher underlying dividend (excluding charges).

2 & 3 can be applied to all Growth & Income investment trusts and most are now trading at a premium to NAV for these reasons. Personally I think its a little silly buying an Investment Trust on a 5% premium when, once the stockmarket recovers, you’re likely to see that premium become a 10% discount. For those reliant on a steady and increasing income such as retirees the peace of mind may be worthwhile but even then its difficult to justify.

I’d avoid Edinburgh right now. The downside risk is far higher than buying into Woodford’s Invesco Perpetual (High) Income funds which don’t have the leverage and aren’t in danger of reverting back to a high discount to NAV.

mm

[1] See pages 45-47 of the EDIN annual report available at:
http://investmenttrusts.invescoperpetual.co.uk/portal/site/iptrust/investmentrange/investmenttrusts/edinburgh/#

[2]AIC’s pricing for EDIN:
http://www.theaic.co.uk/Search-for-an-investment-company/Company-profiles/Conventional-companies/Performance/?company=59

[3]EDIN NAV news releases:
http://www.theaic.co.uk/en/Search-for-an-investment-company/Company-profiles/Announcements/?nav=1&company=59

[4] The AIC’s explanation of NAV:
http://www.theaic.co.uk/en/Guide-to-investment-companies/Glossary/?exact=1&filterBy=SearchTerm|Net+asset+value

So the mental abstraction of saying the S&P 500 is 94% in real companies and 6% in zombie banks and crushed autos which give ‘option value’ seems valid. There is some cherry picking going on here however. Defenders of Siegel have largely ignored the bullish outliers, i.e. the energy companies, who have not yet seen the drop in oil price vanquish their low historic P/Es.

To show how screwed up using a composite P/E is right now – here is a comparison between P/E and Robert Shiller’s P/E10:

http://dshort.com/charts/SP-Composite-PE.html?SP-Composite-and-PE-ratio-with-notes

The recent inversion between P/E and 10-year P/E is unprecedented!

Clayton’s 198,888 borrowers…have continued to pay normally throughout the housing crash, handing us no unexpected losses… Their median FICO score is 644, compared to a national median of 723, and about 35% are below 620, the segment usually designated “sub-prime.”

Yet at year end, our delinquency rate on loans we have originated was 3.6%, up only modestly from 2.9% in 2006 and 2.9% in 2004… Clayton’s foreclosures during 2008 were 3.0% of originated loans compared to 3.8% in 2006 and 5.3% in 2004.

Why are our borrowers – characteristically people with modest incomes and far-from-great credit scores – performing so well? The answer is elementary, going right back to Lending 101. Our borrowers simply looked at how full-bore mortgage payments would compare with their actual – not hoped-for – income and then decided whether they could live with that commitment. Simply put, they took out a mortgage with the intention of paying it off, whatever the course of home prices.

Just as important is what our borrowers did not do. They did not count on making their loan payments by means of refinancing. They did not sign up for “teaser” rates that upon reset were outsized relative to their income. And they did not assume that they could always sell their home at a profit if their mortgage payments became onerous. Jimmy Stewart would have loved these folks.

[1] For anyone with an interest in Buffett the purchase is a fascinating tale:
http://www.fastcompany.com/magazine/78/claytonhomes.html?page=0%2C0

[2] T’is brilliant as usual:
http://www.berkshirehathaway.com/2008ar/2008ar.pdf
Pages 10-12 for the Clayton Homes info and more mortgage insight.

Being one of the 364 economists who rallied against Thatcher and was proven wrong please forgive me for being nervous about your monetary policy decision making. You may need reminding about a very basic lesson. Please watch the following video replacing the “Fed” with “BoE”, Bush with Brown and Helicopter Ben for, erm, you.

Regards,

A not-so-loyal citizen of Great Britain.

“Widows and orphans” investment trusts* such as Temple Bar and City of London are now trading on premiums despite holding most of their assets in large FTSE-100 constituents. The little item called “revenue reserve” on the balance sheet has gained in value recently!

*You’re supposed to call them “investment companies” nowadays, pfft.

The online edition has a different headline.

Blood money: the MPs cashing in on Zimbabwe’s misery

The non-story amounts to a few front bench Tories owning shares in blue-chip British companies. It is unimaginable that Labour ministers don’t have similar interests in the likes of Shell, BP, Rio Tinto or Barclays. The vast majority of British citizens hold a stake in these firms either directly, through a FTSE tracker or via their pension scheme.

The so-called split between Cameron and the top Tories amounts to a quote by Cameron that companies shouldn’t be “propping up” Mugabe’s regime. Do The Independent consider Hugh Fearnley-Whittingstall to be propping up Tesco’s culling of cut-price clucks?!

Oddly enough the newspaper fails to mention its own connection with comrade Bob’s regime. Yup, Independent News & Media (INM) the parent company of “The Independent” and “The Independent on Sunday” does business in Zimbabwe.

INM run a company called Clear Channel Independent (CCI). Page 12 of INM’s Annual Report states:

CCI is the largest and fastest-growing outdoor advertising company in South Africa — which will host the 2010 FIFA World Cup — with significant operations also in Angola, Botswana, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe.

INM have owned 50% of CCI since 2001 and bought the remaining 50% earlier this year from the US based Clear Channel Outdoor (CCO). There is a notable absence from CCO’s 10-K annual report regarding its sale of CCI to INM.

On January 17, 2008, we entered into an agreement to sell our equity investment in Clear Channel Independent, an out-of-home advertising company headquartered in South Africa with operations in Angola, Botswana, Lesotho, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Uganda and Zambia

Only one country missing from this list: Zimbabwe. This 10-K file was filed with the SEC prior to the INM annual report. Either INM have recently started business in Zimbabwe or CCI were rather embarrassed about their company’s involvement in the country.

There are specific webpages set up for CCI’s Zimbabwean operation:
http://www.ccirsa.com/flash%20sites/zimbabwe.html

Contact details for doing business in Zimbabwe are available on the site.

CCI is profitable and effectively subsidising, the loss-making, Independent Newspaper, from page 18 of INM’s annual report:

Clear Channel Independent, had another strong year delivering a near 20% revenue growth in constant currency and strong double-digit profit growth.

It begs the question: have CCI’s billboards or other advertising apparatus been used to promote Robert Mugabe or Zanu-PF?

Kenneth Clarke and Baroness Jay are non-executive directors of Independent News & Media.