Bull is not Bullish - Gloom to Continue

July is shaping up to be a tough month for public markets. If you had sold in May and come back in September, 2010, you would be fine but my account statements are not looking happy. Meanwhile, I got to spend some time with David Rubenstein of Carlyle and private equity is able to be the nose of the dog when it comes to investing. His company has been busy this July as it bought NBTY for $3.8bn, property in London in the billions and also in China too. The Financial Times reports:

Taking NBTY private is reminiscent of the buy-out bubble that burst in 2007, when big listed companies were regularly taken over by private equity.However, buy-out activity remains at a fraction of pre-credit crisis levels, even after a rally in recent months. The NBTY deal is different from most recent buy-outs, many of which have involved private equity selling companies to each other.

Carlyle is now doing mega deals in China and it is those size of deals that were done originally by the early private equity firms in America with which gave them their lead. It put cash in the bank for later and gave enormous market profile. All of a sudden, the deals will now flood to Carlyle before any other PE player as they have put serious cash into China.
For those of you still all in the public market, here is a quick recap that arrived in my email today from KJ Harrison and a great market analyst with the right name - Ms. Sarah Bull:

The catalyst for the current correction continues to be the fear of a relapse of the 2008 global economic recession. This is really being fuelled by the:

• US debt and deflationary issues, 
• European problems and 
• Prospect of much slower growth in China. 

Here's the detailed analysis:

• China’s growth rate has slowed – not good given its “engine” status for global growth.

• European sovereign and bank capital issues continue to remain unresolved issues.Uncertainty as to the Euro sustainability is a large issue for global markets.

• U.S. employment growth appears to have peaked – in fact last month the U.S. lost 125,000 jobs, and the average work week fell. Average hourly earnings fell, and widely defined measures of unemployment actually rose. In short, the anemic recovery in employment seems stalled, suggesting the private sector is incapable of taking the “hand off” from government stimulus.

• The G‐20 in Toronto came out strongly in favour of fiscal restraint – unfortunately major economies are not strong enough to withstand near term restraints, and as such investors are now very worried about policy error. If we are at the end of Keynesian policy initiatives, what happens if we double dip?

We believe that this pessimism will continue and that we will have higher than normal volatility in the markets over the next few months. Given this view, our disciplined approach is more important than ever and we are allocating our client’s capital to securities with good balance sheets and a significant margin of safety.

 by

Sarah Bull

Partner

KJ Harrison Partners Inc.