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Funny old world. A fair amount of doom and gloom about in the financial world, but 2007 is setting a fair pace so far in the stockmarkets. Amidst debt worries, companies are continuing, on the whole, to present better figures than expected while the takeover pot continues to bubble. Corus has just been put out of it’s misery in a mega-takeover and who might be the next victim. Will it be Sainsbury’s with it’s healthy land values, perhaps? Somehow, it seems to suggest that being fairly fully invested can often pay good dividends in the shape of capital gain. It might interest members that Tata is the minnow taking over Corus which is eighth largest steelmaker in the World. The two predators in fact were not in the top 40 but both are very profitable, a virtue in the takeover battle. Tata is believed to have overpaid for Corus at nine times operating profits cf. the six times that Mittal paid for Arcelor in 2006. With these high prices being paid for assets one wonders how long this merger mania can continue without serious rifts widening in the financial system.
The FTSE 100 and DJ have both hit significant peaks, although the DJ is at a new all time high while the FTSE 100 has just equalled it’s recent high of the first week in January. The index strength reflects the many stocks like banks, food and drug retailers, to name but a few which are coming back to recent highs. Some sectors ( like housebuilding), though, demonstrate investor wariness of the interest rate situation which may not have completed it’s tightening cycle.
This week saw the Fed hold rates steady and with a benign statement showing some confidence for a soft landing the Dow took considerable heart., but I would not bet on inflation being beaten quite yet. Currencies showed some volatility with the yen dropping a long way against the dollar prompting the US treasury chairman to say he was watching that currency very, very closely. The carry trade using yen is thought vulnerable to a rise in Japanese interest rates. In China the Shanghai index suffered a sharp sell-off falling 7.3% when a government official warned of a bubble in stock prices.
The week saw some metals tumble seriously while the miners themselves were buoyed by stockmarket strength and expectations that their results will be robust in coming weeks. However with copper sliding 8% and zinc 15% in the week, largely attributed to a hedge fund in trouble but also to changes in the commodities stockpiles, I personally believe miners will eventually become casualties. Therefore I do not think our club should buy into them at this time.
The club had a small gathering at it’s January meeting with several members unable to attend. This was a pity as a suggestion to buy Bodycote was not supported sufficiently to enable a purchase. Over the following days the SP rose 20+%. Energy expended on risk/reward arguments proved futile and did not help us to make what would have been a very useful profit.
The IVA debt arranging companies were in the news again for all the wrong reasons. Accuma, Debtmatters and Debt Free Direct all took a hammering as many of their investors took fright. Worries about new regulations and big banks putting a spanner in the works seem to be causing the problems. However they look very cheap against future earnings just now. Our systematic portfolio had to be partially liquidated about 10 days ago when weakness in the small cap markets seemed to drag some of our holdings down to S/Ls causing them to be sold. However we have taken a valuable profit on three realisations at present and we look forward to re-investing the proceeds. It seems a pity that some of those shares are now recovering strongly but the S/L strategy for this portfolio has been well calculated. We did miss a more advantageous sell point for one of the shares as our method of watching shares is not as careful and meticulous as it should be.
The semi-systematic portfolio containing Northgate, Umeco and LogicaCMG are a story of two parts. Northgate is thought to be vulnerable to higher interest rates and is showing current weakness even after some good results. Logica seems to be rebounding from a recent low. The star, Umeco, is doing very well and hopefully will continue. Being in the aerospace/defence sector it could be a candidate for takeover. We live in hope – as usual and I shall keep my holding for a while yet.
I noticed that an old favourite of ours, Airpartner, leapt 80p on Friday. It now stands over £9 at a new all-time high. Hopefully we will decide to hold Hamworthy through thick and thin as I believe it has more sound credentials than Airpartner which unfortunately has been subject to cyclical trends and volatility in the past. That does not mean we should not move in and out of the share but some years ago we came out of Airpartner and it seems we would have been wiser to stay in, or at least re-purchase at a suitable opportunity.
ML - Acknowledgements to Daily Telegraph and FT.