Let’s get the cautious bit out of the way first. One swallow does not a summer make.

Excellent! Now we’re all nice and circumspect. I can reveal the big news.

HBOS has sold some mortgage-backed securities to someone. We don’t know who, because the details are all secret. But HBOS got £500 million for them — not too shabby!

This is a bit of a landmark. It’s the first successful sale of mortgage-backed securities since the credit crunch kicked off last year.

Even billionaire misery-merchant George Soros cracked his face.

“The acute phase [of the credit crunch] is behind us,” he said. But, like us, Soros was wearing his cautious helmet (in fact, his is permanently welded to his head).

He reckons the economic fall-out will get worse for Britain. So does Michael Spencer, head of ICAP, the interdealer broker that handled the sale.

So, donning our robes of wariness, exuding an air of “Let’s not get carried away”, and probably also holding a couple of horses, shall we dive in and ask that perennial question:

Is the credit crunch over?

“There’s definitely a market for mortgage-backed securities,” says Theo Casey, one of our research Mafia. “But here’s the rub: the market is highly vulnerable to swings in sentiment. Bearish sentiment doesn’t simply lower the price — it causes the market to disappear entirely”.

But commodities man Garry White reminds us of an age-old investment adage:

“The best time to buy something is often when everyone else says don’t”.

So it could be that, a year or so from now, those who were brave enough to buy these HBOS assets will be banking a tidy little profit.

Of course, these are mortgage-backed assets, so a lot depends on what happens in the UK housing market.

But that’s a whole other debate — and these Clothes of Careful are getting heavy…

Rock boss Sandler hanging onto our money

OK, OK, you’ve twisted my arm. A very quick cameo for the housing market.

As you’re probably aware, you and I, through our taxes, are underwriting Northern Rock’s mortgage book. To the tune of around £75 billion.

Not only that, but the Rock owes the Bank of England £24.1 billion. It is going to pay it back. Honest, guv. Only… well, there might be a bit of delay.

The original plan was to pay back the loan by 2010, and free the Treasury from its guarantees by 2011.

But yesterday, Rock supremo Ron Sandler told a Treasury Select Committee that they might have to wait a bit for the money.

The only asset the Rock really has is a big mortgage book. But the value of that collateral rises and falls with house prices. Right now, house prices are falling.

And there are other worries as rival lenders lure away the best customers.

As Sandler admitted: “There is a risk of adverse selection. Those customers who represent a better credit risk will get mortgages elsewhere. We do expect it will increase the riskiness of our book”.

So, as we suspected all along, you and I are in possession of a really bad business. A business which could struggle to pay us back.

Never mind the Helmet of Caution — it’s time to put on the Jumper of Indignation.

Darling to Businesses: “Don’t leave, I can change!”

Sometimes, you just wish you could take back something you’ve said.

I’m sure we’ve all been there — the argument with our partner which flared up over nothing, just a daft remark, something we didn’t really mean. And then we spend the rest of the evening (or the week… the month… the entire relationship) grovelling and apologising.

Alistair Darling knows how we feel. All he did was make a silly little slip — “Let’s maybe tax profits that British companies make abroad!” — and now he’s been forced to bow and scrape and beg for forgiveness.

So it was that yesterday Darling made some heavily pro-business statements in a speech to the Confederation of British Industry (CBI).

“Business is increasingly mobile,” he said. “Tax rates have to be globally competitive. Business is the linchpin of the British economy.”

He was probably wearing an ‘I ♥ Business’ t-shirt under his suit…

He’s right, of course. Tax rates should be competitive. Otherwise the businesses we rely on to generate the nation’s wealth will simply pack up and leave. Some already have.

The fear is that this debate could prove to be the catalyst for a business exodus. Just in case, businesses have already looked into the possibilities of moving elsewhere.

Businesses know that Ireland, for example, offers a corporate tax rate of just 12.5%. In Britain it’s 28%. Simple arithmetic says move to Ireland.

Now that some businesses have looked at the logistics of upping sticks, they may consider it’s worth taking the plunge — even if the Treasury’s proposals are dropped.

Time for another wardrobe visit — this time to fish out the Trousers of Concern.

Private-client brokers have been having a torrid time of late but ICAP is in a different space entirely. As the middle man in institutional investing — from bank to bank – ICAP has been benefitting greatly from the volatility in world markets.

The firm unveiled a 31% increase in full year figures. Profits for the year ended 31st March were £330.2m against £251.6m the year before, more than £10m ahead of analysts’ guesses. Revenues came in at £1.3 billion, 18% ahead of estimates.

As a handy result of ICAP’s diversification across financial markets their balance sheet serves as a rough proxy on where the action is. Unsurprisingly, foreign exchange and commodity trading led the volume figures… punts on the soaring price of oil and the dwindling US dollar will likely have topped the order books.

The group also tipped the market that a spate of debt-based buyout bids could be on the cards. “The current environment offers many attractive opportunities to acquire businesses. ICAP is well-placed to make further acquisitions and fund the development of the group using its existing financial capacity,” said Michael Spencer.

Spencer also took the opportunity to put to sleep the idea that ICAP would merge with a larger rival. “We are not involved in any discussions or negotiations on that front,” said the ICAP boss. This announcement will probably take a little bit of the air out of the share price, but makes good business sense… deals done in this economic environment are unlikely to bear the same premiums as those just one year ago.

ICAP’s castle protected by moat

ICAP balance sheet has a nice consistency to it. It has what Warren Buffett might describe as a wide economic moat surrounding it. Economic moats are the competitive advantage that one company has over another. The moat’s width represents the sustainability of the advantage and hence the sustainability of revenues.

Revenues at the broker have grown while earnings growth has been double-digit for three years on the spin and the group anticipates this trend to continue. We estimate that the underlying annual growth rate of industry revenues, in the medium term, will be more than 10 percent,” said Spencer.

The firm’s position, particularly in international debt markets, is comparable with that of a natural monopoly. And the thing about natural monopolies is that they are quite good at holding onto highly expensive share prices. When the London Stock Exchange was in its prime and a member of the natural monopoly club (circa 2006), very high valuations were attached to the group. Now this also as a result of the bidding frenzy surrounding the LSE, but looking at international rivals — CME and NYSE Euronext – the exchange biz had buyers pouring in.

Dealers like ICAP – a business not far removed from the exchanges – are performing strongly. Furthermore, the broker’s business model is a lot more flexible. Unlike the LSE, the long-term health of ICAP is not tied to a single asset class. Hence, the firm’s outperformance coinciding with rank underperformance in the equity markets is not a big surprise.

Stocks out of favour

As we discussed yesterday, the retail investor market is struggling to cope with the general apathy in equity markets. In fact, the only wing of the sector is spreadbetting, where market leader IG Group was reporting good trade amid the volatility. ICAP, not one to miss a trick, has a foothold in this prosperous market too — as they own UK spreadbetter City Index.

Volatility is no good for a long-term investor, and for the conviction to come back, so must the upward trend. But the recent rally in stocks is nothing to take heart from. We may be trading just 6% below recent peaks but the credit crunch is far from over and if you look closely enough you can see why.

Nobody is driving this bull-run.

Trading volumes are so low that brokers, like ICAP, are not just facilitating trading, they’re driving market direction. And they’re not moving them based on the direction of the wider market’s trades, but on their own estimations of sentiment… a recipe for status-quo.

That’s why this rally is a phony. As nice as 6,000 plus FTSE levels are, price is only one element of a powerful pair that drives the trading world. Volume completes the set and volume is nowhere near where it should be. Low levels – and yesterday the average hit it’s lowest point for 2008 – suggest that real the smart money is still on the sidelines.

This upswing has not yet been stress tested. When the big guns come back we will be able to see the true recovery of the UK stock markets. And with earnings season coming to a close, that time could be very soon. In the meantime, recession proof stocks like ICAP look like a good trading idea.

Theo Casey

Source: ICAP Cashes In On Market Misery

Michael Spencer is one of the smartest men in the City. The Times Rich List says he’s worth £1.15 billion. Spencer controls the world’s largest inter-dealer broker, Icap, here in London. He’s also the boss at spread betting firm City Index. Most financial firms are getting battered by the ongoing credit crisis and market volatility, Icap is actually profiting handsomely from all the increased trading.

You see, what they do is provide broking services to trading professionals in the wholesale financial markets. They offer everything from the global equity and credit markets and indices to more exotic things like OTC (over-the-counter) financial products and services in energy, foreign exchange and interest rates.

That obviously puts Spencer in a very sweet position. He’s got practically the entire range of investment options across the world at his fingertips – literally.

So the fact that he’s putting tens of millions of his family’s money into Africa and the Middle East right now is getting a lot of attention. In fact, it made the headline news in the Financial Tines today.

Spencer’s family investment vehicle, IPGL has teamed-up with a US financial consultant to provide $125 million of seed capital to a new African hedge fund. And this isn’t some pipe dream either – they plan to launch it this month.

He’s not alone either…

They aren’t alone either. Right now, there is a flood of money heading towards the region. Just look at what Tutu Agyare is up to. Most people outside the City would never even have heard of him, but he was on the board of directors of Swiss banking giant UBS. And he headed the banks’ equities division in the Euro time-zone Emerging Markets. He was the top man in Russia and Eastern Europe, Turkey, Israel, the Middle East and Africa. Agyare was one of the big movers and shakers in the Square Mile.

But he’s moving on to bigger and better things. Right now he’s in the final stages of fundraising for two new African hedge funds that should pull-in $200m-$300 million. You don’t quit as one of the top men at the world’s biggest fund manager unless you’re on to a good thing…

And other hedge funds focussed in the region are expanding too. The biggest of the Africa funds is still Blakeney Management here in London with about $1.5 billion under management. They pioneered international investment into many of the African and Middle Eastern markets and helped finance the lucrative resurgence of one of our portfolio’s best picks (an undervalued company that hold’s the key’s to $135 billion in oil – it can’t get out of Africa without their say so… but more on that soon)…

But Blakeney is a low profile company. Very niche. Even in the City, most people would never have heard of them. Spencer’s very public move into Africa is on a whole different order. It could mark a key turning point in the scale of funds moving into Africa for one main reason – Icap has actually got the ability to bring African shares onto the global markets.

In for the long haul

Spencer’s new fund won’t just be pouring money into African market-listed shares though. It expects to have about 35-40 per cent of its holdings in illiquid investments. Those would be things like private equity, corporate and government bonds and bank loans, including issues in local currencies. That’s a massive vote of confidence in Africa. That’s why we are so excited about this. This isn’t a fund that’s just trying to make a quick return on fast-moving African markets. It’s investing in Africa’s long-term growth story – which is precisely the strategy of our little known company that’s about to reap the benefits of America’s need for oil…

We got in ahead of the pack with our investment in this company. In fact at present the share price is less than 30p… by the end of the year I firmly believe this will have doubled.

This huge windfall will be just the start for this company… it’s got major positions in the sorts of industries that Africa needs if it is going to keep on growing: transport, infrastructure, clean water….

Regular Profit Hunter readers will already know how bullish we are on the Africa story. The continent has 15% of the world’s population, but only 2 per cent of the world’s GDP. So there is still huge scope for growth. And, we are already seeing that happen. The IMF is predicting growth of 6.5 this year – almost three times as fast as Britain. And we don’t see any end in sight.

We believe that the trickle of foreign investment that we has been flowing into Africa so far could be about to turn into a flood. This is an excellent time to get into Africa.

You can learn the details of the African opportunity by checking out our portfolio… and if you’ve enjoyed reading Profit Hunter’s views on today’s emerging markets… you can get them every day, along with tips, hints, stock picks and much, much more…

Shares in the company the subject of this promotion are penny shares. On 02/05/08 the share price was 27.25p and the bid/offer prices of these shares was 27p/27.25p.