NB: JC, did I write this?! Post surpassed by events - if we knew then what we know now...

RJH writes...

"You know, I could lay a big line on you and we could do a lot of role-playing, but the simple truth is, is that I find you very interesting and I'd really like to make love to you."

From the film Tootsie

When Dustin Hoffman utters this to Jessica Lange, quoting her own feelings on chat-up lines back to her, all he gets for his hard-won knowledge is a drink in the face.

It's a bit like what has happened to the analysts who follow the mid-cap firm iSoft Group plc; and they have struck back.

iSoft's premium rating was destroyed in one fell swoop this morning on the back of a warning that a major customer, the UK's National Health Service (NHS), was deferring revenues expected by the firm. Previously adorned by many analysts with "outperform" and "buy" ratings, iSoft shares lost over 40% of their value within minutes of the open. Yes, that's 40%. The analyst reaction to the iSoft announcement, savage as it was, was clearly an accessory to this grievous bodily harm.

Analysts believe that management knew about, or should have known about, such a bad miss (about 20% of expected turnover) much earlier than today. And, last week, when there was an indication that a problem was coming - another software vendor involved in the same NHS tender warned for the same reason - iSoft still remained silent.

Analysts wrath thus stems from management's non-communication but also, one would hope, from their own timidity in not breaking ranks earlier with their suspicions. This was an example where (with one exception) they missed a trick in not warning their clients ahead of the iSoft announcement.

So iSoft has had to take a hammering; but to unconcerned witnesses the damage is clearly not to be found in iSoft's operations - they are, as before, in a growing market and sublimely cash generative. The shares are now on a sub-10 PE multiple (based on underlying earnings) and there is £72m of cash on the balance sheet. Strategic plans may have been slowed but the show is clearly on the road.

Rather the damage is to management's credibility. But as a bunch of guys who were spun out of KPMG they will doubtless manage to draw on their consultant's training to slickly present themselves back into favour quicker than you can say "client expenses" or "lap dancing club".

Read the accounts yourself; consider also the iSoft attractions as a take-over target (there have been stories); and see if the opening quote really has no resonance. Didn't Dustin and Jessica get back together in the end?

Disclosure: the writer owns post-warning iSoft shares.

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RJH writes...this follows-on from an original CC post here on the group's problems

There was some press comment yesterday to the effect that Sanctuary's two main lenders / bond holders would continue to support them pending a rescue rights issue of £130m. So is the group, at 1.93 pence a share, worth another look?

In August the group was described here as "a bet too far" at 9.5 pence. Now 80% cheaper the price reflects above all the firm's bankrupt (in all but name) state. Their main lenders are simply providing the life-support.

The amount of the latest life-support is £15m for working capital purposes pending the rights issue. The lenders, HBOS and the hedge fund Highbridge, must surely have delivered this at a significant cost to Sanctuary.

But just what cost? Presumably, HBOS have first call on all worthwhile assets (notably the back catalogue) in the event of failure and leverage over various operational aspects and appointments so long as the firm is a going concern. For their part, Highbridge got themselves an option exercisable in 2008 to buy 8.9 million shares at a 75% discount to market if Sanctuary's shares quadruple from the rights price.

Readers may wonder who pays for this. The short answer is existing shareholders who are taking it pretty ferociously from behind: Highbridge and HBOS have covered their risks (insofar as they can) for being such nice guys with the readies; but the dilution (assuming Sanctuary survive) will kill off earnings per share for shareholders for a time to come.

Then there is the core question of will £130m in rights (if taken up) save Sanctuary. The last - dodgy - debt figure from the 2004 accounts was £94m (with £72m of that long term). Since admitting those accounts were not completely fair and true that figure has been revised south.

It would be surprising if HBOS or Highbridge have not negotiated immediate partial loan repayment (ie capital) from amounts raised via the rights issue. How much cash that will leave the firm is an open question. Further, in terms of operations, the jury is out on whether recent changes in the Sanctuary team will improve the group's money management going forward.

Buying Sanctuary is purely speculative. Short-term, buyers may win if the group becomes a bit of a good story. Longer term, the data says they've got it all to do at the cash generation level. Full year results to end December may surprise on the upside - HBOS and Highbridge must have had a sniff of these prior to lending. But shareholders aren't lenders and they/buyers will have to pray it comes right.

If you are going to do it, wait post-rights and don't use the pension fund.

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RJH writes...

Conclusion:
The 2006 global economic consensus forecast is a robust one. With generous liquidity and cheap money this is not a great shock - but both can bring problems. The key to a big year is whether markets perceive the US Federal Reserve as successful in managing inflationary pressures - notably central government spending on disaster relief, Iraq and Afghanistan.

The scribe's working assumption, subject to new information, is that that the next 12 months will fail to provide a clear-cut answer. Inflationary doubts will meanwhile increase and, in response, the broad US indexes will take high single digit losses into 2007. The main UK indices will score low single digit increases.

Discussion - a few components of the Working Assumption:

Iran
The potential for significant disruption is real. Determined, it seems, to go down as the man responsible for putting the 'mental' into 'fundamentalist', President Ahmadinejad's uncompromising nationalism and populism risks transforming domestic and international uneasiness into something more dangerous. There is little sign to date of any pragmatism from the President; and he does not seem the type of man who shirks confrontation: just how far along is the nuclear programme?

Crude
If the consensus for global growth is correct, it seems unlikely that energy will cheapen. Moreover, aggravation in Iran (perhaps in the form of military strikes against the nuclear programme; or, insofar as the cartel makes a difference, Iran-inspired OPEC price supports; or civil unrest) implies support for already expensive oil. Persistently high energy costs will appear more and more in finished goods prices and will take an ever-heavier toll on aggregate consumption.

US dollar
It may not have fallen in 2005 but from mid-2006 this is likely to change. Last year the Fed was in rate hike mode and this, coupled with looser foreign central bank policy, had a huge impact on the currency (and embarrassed dollar bears like the scribe). However, the most recent Fed minutes appear to show that this stance is changing - in contrast, for example, to the position of the European Central Bank that appears to be tightening. A weaker dollar might (ah, might) be enough to make the heroic US consumer start saving and diminish aggregate demand. Conversely, it will boost US exporters, but how much of an offset will that prove?

Corporate balance sheets
Strong in both the US and Europe and probably will drive solid M&A activity, share buybacks and investment expenditures in 2006. But is this as good as it gets for the current cycle; and are Delphi, GM and the automotive rest harbingers of a generalised deterioration in debt ratings?

US Presidential Cycle
Year 2, the one in which tough economic decisions are made in the hope the electorate forget about it come election time.

Decision:
Oil and other resources will win if global growth is robust (but one probably has to believe the BDI will rebound). Oil will be the outstanding gainer if there are Middle-Eastern eruptions. Moreover, if the dollar is to decline, a US-quoted Canadian energy trust (for example) will make not only the crude gains but will also pay a handsome loonie-denominated dividend. Increased capex/investment expenditures stand to benefit any number of companies but there are a handful of especially attractive candidates compatible with the scribe's investment method that serve the utilities, oil & chemical and business process (software) sectors.

Disclosure: the writer has holdings in Canadian energy trusts, oil and resources

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