Laying fear of public humiliation aside in honour of the New Year here are some of the assumptions this scribe is investing under for the first 2 quarters of the year. Subject, of course, to revision as new data appears:

  1. US house price falls coupled with credit evaporation will knock on through to consumption, 70% of the US economy;

  2. weak dollar driven exports will not fully offset reduced consumer demand. And the buck will near certainly strengthen against sterling;

  3. the crumbling bits of bank balance sheets, visible in large inter-bank spreads, will (continue to) be bolstered by managers faster than expected due to the realisation that central banks cannot bail them out quickly enough; and with the opportunistic help of what McKinsey in October labelled the four new financial power brokers;

  4. US inflation will surprise on the upside toward end Q1 causing the Fed to think twice about easing rates just as it would like to be more accommodating. They ease anyway;

  5. but do not prevent a US recession (which, pending data, may have already begun in December);

  6. or the decline of US and UK equity markets by between (2)% and (8)% of their worth in the first half.

And, if one must hold stocks in this environment, here - with the proviso that stock selection is second to portfolio management* - are a few potential extra sticks to beat the scribe with in 6 months time:

  • BHP Billiton plc, 1542p (commodity exposure with upside if Rio bid goes south; but China related risks)

  • Astrazeneca plc, 2144p (defensive with dollar exposure but not much to get excited about)

  • Hikma plc , 483p (pharma qualities plus more than useful growth prospects in petro-dollar land)

  • Empresaria plc, 110p (staffers, 80% temps, and a play mainly on recent changes to German labour legislation)

  • ICO, Incorporated, $13.10 (boring but steady US exporter of resins)

  • Team, Incorporated, $34.94 (the incontestable champ of its fragmented N American oil & chemical services market)

  • Ascribe plc, 33.5p (small cap hospital software specialist with niche markets, a decent reputation and gear that actually works)

  • Invu plc, 30.5p (seriously chosen but fun-money scale micro cap; Sage plc deal a potential catalyst)

*Repeat a few times before considering these as ideas; and see usual disclaimer in the right margin.

NB: Scribe owns Billiton, Hikma, Empresaria, Ascribe and Invu equity

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2 comments

  1. Jim Donovan // 1/03/2008 11:24:00 AM

    That's a bold call on BHPB. Exchange rates, commodity prices and general economic conditions all in one. Please explain. PS I own them too.

  2. RJH Adams // 1/03/2008 12:11:00 PM

    Jim,

    Happy New Year, how is life post-Fronde?

    I consider Billiton to be a fortunate sub-contractor to massive Chinese central planning in, above all, its steel industry. The sheer scale of what is going from white goods to cars to shipbuilding provides serious political protection - China employs something over 2 million (probably an understated number) in steel and there is little chance that will change in the next 2 quarters whatever the free market thinks should be happening. No people in the streets pre-Olympics.

    That's the short answer; and I doubt copper price drops (for example) will dent the thesis much.

    The complication is Rio where the horizon considerations are different - are they buying too high at the wrong time? BLT looks cheap where it sits - obviously because the bid is priced in. Say Kloppers ups the bid, then there is downside.

    But say he does not - Rio, after all, stands to have its market cap crucified if it plays too hard to get and the bid is abandoned - a relief rally is likely.

    Or suppose the rumoured China consortia, petrified of a BLT/Rio combo and the consequent direction of iron iore prices, come up with something and stop the transaction. The bid pricing will be backed out of BLT's shares.

    Of course, I fully accept something else could go wrong and BLT drops like a stone. But I don't see it happening in the next 6 months.

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