RJH writes...

"They say I slept with seven Miss Worlds. It was only four."

George Best, RIP

Everyone can disappoint expectations, even the greatest of soccer geniuses (albeit not always in the sporting arena). Perhaps unsurprising then that even the unglamorous, non-footballing and unacclaimed-by-the-opposite-sex métiers of investor and trader must consider them to prosper.

Take, for example, the talk of year-end rallies, January Effect et al just now. Bullish expectations are high; and markets have moved much faster than this scribe would have believed in those low-October moments. But reflect awhile on another set of expectations.

Exhibit 1: S&P500 vs. US inflation expectations (nominal less inflation linked 5 yr Treasury rates)

The S&P500 data, lagged in the graph by 7 months, correlates with the inflation expectations by over 85%. And this leading indicator of inflation expectations is calling an imminent drop in US equities. Money illusion for the economists, and not a bullish picture.

Exhibit 2: US inflation expectations vs the euro

Inflation expectations drive the S&P500 not only via money illusion (it would seem); they also have the effect, in this declining case, of weakening the dollar's major rivals (this graph holds for sterling also). Why mention this? Because - and this is truly Yuletide fare - there is (for now, anyway) a strong negative link between the dollar and the S&P500 (yes, yes - counter-intuitive) which at its current level is suggesting that the next fall in the S&P500 will not be of the buy-the-dip variety.

Exhibit 3: S&P500 vs. the euro:$ rate, offset by 12 months

Why the dollar weakens whilst the S&P500 strengthens (and vice-versa) is a link the scribe is unprepared to attempt meaningful explanation of here although research may reveal the answer lies simply with the bond market (or complicatedly not).

However, so long as this predictive relationship holds (86% correlated since you ask), the euro is signaling that the S&P500 may be expected to commence a retreat in earnest below its 200-day moving average around end-May 2006. But the inception of the slide will have started well before then. About now/January, actually.

Nonetheless, the problem with this entire line of reasoning is that it is not backed by the economic data in the scribe's main model. Six months may, or not, change that.All in all, unseasonally low-key thoughts revealing this writer's mastery of timing and killjoyism; qualities explicative of the lack of Miss Worlds in his life (to date). Or at least that's preferable comfort to the "butt ugly" school of thought.

Merry Christmas and a Happy 2006.

Sources: Federal Reserve Banks of New York and St Louis; Yahoo Finance; European Central Bank

Credits: The idea for this post came from an article by Howard Simons .

NB: Don't know George Best, one of the top 5, perhaps top 3, footballers of all time? Video download here.

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MD writes...

Know yourself. Nothing in excess. A pledge and ruin is near.

The three maxims of the ancient Greek city of Delphi.


Not long ago your correspondent wrote of the limp business reporting standards in the UK national press with reference to one piece in particular from The Daily Telegraph. That article suggested that GKN would be better off in the hands of Delphi. This despite Delphi at that time being to all intents and purposes bust. Well, guess what? Delphi filed for Chapter 11 protection on 8 October 2005.

This has serious implications for banks, regulators and the major US and other motor manufacturers who are dependent upon them. And then there are the pensioners, shareholders and debt holders. Delphi has already asked GM for guaranteed business of circa $12bn per annum and received, so far, nothing.

Understandably, GM must be loath to make any other pledges to Delphi having at the time of the spin-off of the former GM division in 1999 granted its 4,000 employees the right to return to the fold should things go pear-shaped. Counting wages and benefits this amounted to perhaps as much as an $11bn cost pledge with no similar offset on sales.

Meanwhile, Delphi's workers are pondering strike action, a result that would likely shut down GM's US production and burn through GM's cash pile (the last 10Q showed the auto ops had $13.7bn) faster than the current management is doing: GM's auto ops have lost $(6.0)bn YTD 9.

A strike, therefore, is just about the last thing GM needs now; and for UAW readers that's a survival not a negotiating assessment. Separately, the company announced yesterday the closure / running down of 12 plants and the sacking of 30,000 workers. Time will tell if this is enough to save the family home from burning to the ground but there must be doubts.

What may be concluded? Well, Visteon - the number two major US components maker - is probably not far behind Delphi despite recently handing back tens of plants and thousands of workers to previous parent Ford (one of those pledges again). GM may well fold in 2006; Ford may survive. However, it's not beyond the realms of imagination that there will be no major US-owned multinational car manufacturers within 5 years.


[Editor: And nothing stands but for his scythe to mow.]

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MD writes...

Today the break-up and preparation for sale of a great company continues apace (no doubt inspired by advisors Goldman Sachs) as Cadbury Schweppes announced on 21 November the sale of its European beverages business to a consortium of Blackstone Group and Lion Capital for £1.27bn - barely 10 times operating profits.

This business is more profitable than the main bits of the company (and significantly more so in ROS terms than the dubious Adams gum purchase in December 2003). It is also cash generative, has a better ROA than the US business and appears under-managed: they have singularly failed to exploit the opportunities of the Orangina brand and the Schweppes franchise Cadbury all but gave away in the UK to Coke. In sum, it is a great opportunity for the buyers and another missed chance for shareholders.

Ought Cadbury shareholders to be looking askance at the company's independent Non-Executive Directors (NEDs) in this story? Cadbury have six of them:

1. Wolfgang Berndt
2. Rick Braddock
3. Roger Carr
4. David Thompson
5. Rosemary Thorne
6. Baroness Wilcox

NEDs are there in the main to protect shareholders interests. It would be interesting to hear their side of the argument in going along with this deal [Editor: this site is systematically scanned by the press offices of the larger companies mentioned so who knows]. That is, after all, what their fees are for. Cadbury NED fees range from £45k to £90k before any supplements, at least half of which end up in the form of Cadbury shares (details on page 9 at this link).

Nice, but does such a deal engender the same level of NED commitment to shareholders as having NEDs buy-in from the start with their own cash? To those who doubt it, it comes as little surprise that business deals such as this sail through with little, it seems, difficulty at firms with NED fee structures similar to that of the aforementioned. Is it any wonder that so many "independent" directors are held in low esteem?

Perhaps this is harsh on the Cadbury NEDs - note to the CBRY press office: right of reply guaranteed.

[Editor: The online spellchecker suggests "cadaver" as an alternative to "Cadbury". They aren't there yet, surely?]

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