Bond Outlook [by bridport & cie, June 05th 2002]

Time for a rethink. Not of our view of how we see the American and world economies playing out, but of how wealth is created and sustained, and of how rewards for investment and management are earned. Denis Kozlowski has now joined the ranks of fallen icons, with the difference that he was not running Tyco on exaggerated hopes of new technology. Rather, part of his management style was that of the 1970s conglomerates; part of it the creation of wealth through acquisition, applying new-economy practices to old-economy sectors. So he was nevertheless a new-economy phenomenon, riding the acquisition wave and associated sky-high stock evaluations. For Tyco it is "game over", the stock price is now close to book!


We see the Tyco "game" as part of a much wider practice of artificial and temporary wealth creation. Artificiality begins with the US Administration, its own profligacy, its encouragement of private indebtedness, and its unwillingness to recognise and correct fundamental imbalances. It continues through the deceptive financial reporting of corporations and the "gung-ho" presentation of every investment "opportunity". It finds expression in bundling corporate debt and selling it to insurance companies, who multiply their exposure by selling credit risk cover. It encourages HP's shareholders to believe that the merger with Compaq and the accelerated job destruction will create value.


"What!" the reader might be saying, "Has bridport lost faith in the free-market economy?" No, actually, our faith is as strong as ever, as we believe that the market will, in the end, exert pressures to end artificiality and to correct the imbalances of which we have written so often since bubble days. If the icons of industry cheat on investors, they and their shares eventually fall. If the American economy depends on imports exceeding exports by $400 billion per year, the dollar has eventually to adjust (it has taken longer than even we thought!). If corporations have too much debt, even if the debt is repackaged and sold on, it will lose its popularity. In fact, as we attempt to see through the haze to seek the trends, we always take the view that the market will sort things out. When, in April 2002, the dollar fell from its pedestal, that sorting out began. The clean up has a long way to go, not least because of the mountain of corporate and household debt that has to be brought under control.


So the recovery in the United States is slow, as it is everywhere else because of the world's "addiction" to exports to America. The Fed will delay raising rates lest it kill the recovery, while in Europe the ECB will enjoy a stronger (all right, "not such a weak") euro, containing inflation. The UK, ever in the US's footsteps, will probably sail close to the wind but "get away with it" as the pound weakens against the euro, but not so much as to create inflation. (The 2.5% target is really so much smarter than the ECB's 2% ceiling - which it cannot reach anyway.) The so-called "commodity-currencies" are all doing well, and their receptive Central Banks are having to lift interest rates (Australia and Canada). That means, by the way, that several opportunities in fixed-income instruments are currently to be found outside core Europe and USA.


The slowness in raising interest rates in the major economies allows us to leave in place our recommendation to stay at five years average maturity across the board, but with bar-belling in dollars and euros, so that a portion of cash is available when longer-term rates eventually move up.


A few weeks back we mentioned the flipside of the "six-months rule". Stock markets are supposed to boom about six months before recovery begins. For a long time, it was a moving six months! The flipside is that stock markets do very badly six months after the recovery begins. Does this mean recovery began in November 2001? We shall find out.


Japan is going through another self-imposed tragedy. A few months of improved exports, a stronger yen and Nikkei, and the momentum fades for domestic change, like reflation and demand stimulation.


Where does our rethink lead us? To some fairly old-fashioned ideas about focused businesses, better transparency, sensible debt to equity ratios on balance sheets and stock evaluations based on anticipated cash flows, all coupled to Governments who take their responsibility for long-term sustainable development seriously. Would it not be nice if the Governments also allow markets to function freely enough to bring all their power to keep economies going? If that sounds like Thatcherism, apparently the new/old evil to the European left, long may she reign! And let's hope French do the sensible thing this Sunday!


Recommended average maturity for bonds in each currency
Bar-bell in dollars and euros, fairly long in Swiss Francs and Sterling.

As of 01.05.02
2007 bar-bell
2007 bar-bell

Dr. Roy Damary

Currencies (by GNI)


The still tense geo-political environment and further fears about dubious accounting practices in the USA do not bode well for the equity markets in general. The bottom of the euro has continued to move higher, but has met its first tough hurdle in the 0.9450 area. Investors are still favouring gold and all the commodity currencies, which are now testing levels unseen for a long time. It looks like that the trend for a higher euro is well established, but we would still advise caution and suggest some consolidation before the markets attack the crucial levels of 0.9450 for the euro, 1.55 in USD/CHF and 122.80 in the USD/JPY.


EUR/USD: The bottom of the euro has moved up to 0.9280 and is reaching the next target at 0.9450. A weekly close above this would open the door for the next leg up, direction 0.9600. We advise some caution and rather look for some consolidation. First supports will be at 0.9330, 0.9280, 0.9240 and 0.9140.


USD/CHF: The US unit still looks very heavy and upside attempts are running out of steam in the 1.5750 to 1.5800 area. Our first major target on the downside at 1.5550 has been reached, and only a weekly close below would target 1.5410 followed by 1.5350.


USD/JPY: The battle with the BoJ continues in a 122.80/123.30 and 124.50 range. A move above 125.50 is needed to achieve a clear correction, direction 127.00, as a move below 122.50 would be catastrophic and put the credibility of the BoJ into doubt (at least in the short term).


EUR/JPY: 114.50 remains the key support level, and still looks like holding for the time being. Any loss would immediately push it down, direction 113.--. The upside is 116.50, 117.00 followed by 117.80.


USD/CAD: All commodity currencies are continuing their rallies. The next targets are 1.5280, 1.5220 followed by 1.5100. There is major upside resistance around 1.5480.


AUD/USD: The Aussie remains firm, jumping from one target to the next, making up a lot of territory lost in the past. Next levels would 0.5730 and 0.5780. The downside should remain well supported at around 0.5650 and 0.5500.


GBP/CHF: The pressure on GBP continues and our target of 2.2850 has been reached. The next target is 2.2650 and breakout on the topside is at 2.3000



Current spot level
Current spot level
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