2007 Predictions - Part 2

The bulls love to compare what they are forecasting for this year with the mid-’90s pause in the economic expansion that launched the great bull market of the late 1990s. The similarities are there to be seen: growth was slowing and the Fed was lifting rates to forestall inflation. Shares endured a churning, range-bound period, and the Fed then reversed and eased credit as growth nosedived. The stock market marched higher with 1995 showing a gain of 30%. It would be great if history repeated itself. Cash-laden companies today are spending and global economies growing, offsetting the heavy hint of a recession in construction and a slowdown in manufacturing. To put it another way, things are looking good for a soft landing.
Yet it’s hard to argue the current period has seen the kind of financial pain that preceded the late-’90s gain. In 1994, the bond market crashed as the Fed’s tightening shocked the investment community. Although the indices were flat and did not fall 10% from peak to trough, more than 40% of New York Stock Exchange-listed stocks fell at least 30%. This is not the situation today. Also, bond yields plunged in 1995, something no one is expecting now.
Richard Bernstein, chief quantitative strategist at Merrill Lynch, states that Wall Street sentiment was so sour in 1995 that strategists on average were recommending equity weightings of less than 50% as the market took off. It was the unwinding of anxiety in and the ability of companies to generate earnings far exceeding expectations that provided the lift for the equity market that year. Admittedly, none of the strategists are suggesting as much upside today, but the bulls still argue that a pause in the market and a friendly Fed are the likely outcomes.
During 1994 and 1995 the Fed was not as friendly as it is now and the way it conducted its thinking meant that investors had no idea what was going on. These days it gives broad hints to the markets when it is thinking of changing policy. This probably has smoothed the market response, as the steady bond market suggests. Binky Chadha, chief strategist at Deutsche Bank, is looking for the same sort of “soft landing” that distinguished the 1990s, and places a 75% probability on such an outcome. He thinks the current quarter will see only 1% growth in the nation’s gross domestic product and prove the low point for growth in the cycle. He expects the Fed to cut short-term rates by a quarter of a percentage point early in 2007. Yet because alternative scenarios, e.g. a hard landing or re-accelerating growth with no Fed move, would be bad for equities, he recommends investors buy insurance against declining prices via options, which today are cheap.
The Institute for Supply Management manufacturing index last month fell below 50, inferring a contraction in activity. Citigroup’s Tobias Levkovich has shown that each time in recent history the ISM breached 50 on the downside, the Fed eased within six months.
Some people are suggesting that the Fed should drop rates to 4.00% this year. UBS thinks GDP growth of only 2%, and lower headline inflation, will clear the way for such a move and lead to a dramatic re-steepening of the yield curve. Others disagree. Tom McManus of Bank of America suspects the market is “overly confident” about the prospect of an imminent rate cut. “We don’t deny that the Fed might cut rates in ’07, but it won’t likely be as fast as the markets would like it,” he says.
At the moment, the bond market is betting heavily that the Fed is itching to lower rates, presumably to head off a housing-induced slowdown. If this is the case then it assumes that Bernanke’s recent emphasis on the continuing inflation threat is not serious. If the Fed defies expectations and either keeps rates unchanged or lifts them, “It will prove to be a significant and speedy downside catalyst for the market,” says one bond market specialist.
McVey at Morgan Stanley has a different reason for thinking the Fed will hold off trimming interest rates for as long as possible. “The last thing [Bernanke] wants to do is create more irrational exuberance in the private-equity market,” he says. “Liquidity is still plentiful.”
There are many different ways to get to these similar market calls. The disagreement about whether deeply cyclical or more defensive sectors will lead the market in 2007 makes this clear. Cyclical stocks have out run more defensive sectors in the recent rally. While the relatively small (and still unloved) telecommunications sector is poised to become the best-performing group of 2006, energy, consumer-discretionary and materials stocks are also among the leaders.
More than a few people believe that emerging-market demand for resources will win over diminished growth in the U.S. and keep commodities prices firm or rising. Even so, says Morgan Stanley’s McVey, “We get a lot of pushback [from clients] on our bullish energy call. We think oil will be flat to down over the year, but with a spike higher at some point. Energy gets multiple expansion. You’ve never seen a group have great earnings growth [energy’s had it for three straight years] and then just roll over.”
Merrill’s Bernstein sees things differently, however. “A lot of people relate this period to the mid-’80s and mid-’90s, when we got P/E [price/earnings] expansion” he says. “But people are not positioned that way. Energy and materials stocks get P/E expansion only when the ‘E’ goes away. In every period of P/E expansion in the last 20 years, stable growth stocks have led.”
McVey also thinks the broad market could trade at a higher multiple in a year because of the sources of growth. Last year, 79% of earnings growth came from relatively low-multiple sectors: energy, financials, telecom, utilities and industrials. This year, forecasts imply that 67% of growth will be generated by health care, technology and staples, groups that tend to trade at a premium to the market.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]

Snap Shots: by Harry Flashman

Make your camera pay for itself

PThe world needs words and pictures. Despite all the electronic advances, the world still needs and reads a hard copy. You have a camera. Can you write a few words? If so, you can make your camera pay for itself.
This is particularly so if you are using a good quality, high definition digital camera, and have a reasonable skill with emails. You see, no editor is going to scan your 3x5 print and laboriously retype you words into electronic copy which can be cut and pasted into the newspaper or magazine.

It was many years ago that I sold my first story and photos. It was to one of Rupert Murdoch’s ladies’ magazines and I almost vomited by the time I read my finished article. It was nauseating pap! They loved it! They paid what was “big money” for it, and I settled my stomach with the thought of what I was going to do with the cash.
There was a lesson to be learned, and when you learn it, your chances of being able to make a little extra money by using your camera and your ability to string a few sentences together will be very much greater. First off, you have to research the publication that you hope will accept your work. Look at the first few pages, as it will say whether contributions are welcomed or otherwise. Choose an “otherwise” to send yours to and you will get your first rejection slip! Different magazines also have a different “style”, and no matter how good your article and photographs, if not in the style of the publication - it won’t get published either!
So what do you have to look at? And how? Firstly go and purchase copies of the publication you are going to try for, and then read them from cover to cover, absorbing the style of the publication. Is it a “hip” magazine full of words like “extreme, Man, cool” or is it more refined? Do they like short sentences or long ones? How many words make up their average article? 500? 1,000? 3,000? Sending 3,000 words on pig breeding to a publication that does snappy little photo essays on fashion and film will obviously get a rejection slip. Sending 3,000 words on pig breeding to the Pig Breeders Monthly will also get a rejection if the longest piece they run is less than 1,000 words. You must tailor your proposed work to suit the magazine. Write nauseating pap for a nauseating pap magazine and you’re away!
So far you have outlaid money for several magazines and nothing has come back in yet, but do not despair, you will eventually get some rewards. The next item is: what is it you are going to write about, complete with illustrative photos? The simple answer here is to start by writing about subjects you actually know something about, rather than starting from scratch on some other topic.
Even then, you will have to do some research, either on foot, by phone or net based research. Write a great story on the 12 Commandments, when everyone knows there are only 10 is not going to get you published – unless you have found 2 more that Moses dropped on the way down from the mountain!
The next step is a crucial one as well. You must write your story or feature to the required length, and then illustrate that story with appropriate photographs. Do not start with photographs and try and write the story around them.
Let’s imagine you have written 500 words on whether elephants should be allowed on the beaches. What photos should you use? Any old elephant shot will not do. You should be trying to get one strolling along the foreshore. A photograph of the “No Elephants” sign would also be worthwhile. An amusing rear view of a pachyderm would also go well, with the caption, “Is this the end of the elephant tale” would also amuse the editor – all of which helps get your contribution accepted.
Once you have had a couple of acceptances, you use these to get you into more publications. You can legitimately ring and say, “My work has been accepted by Blank magazine, would you be interested in 500 words and photographs on the banning of elephants from the beach in Pattaya?”
And finally – lots of luck!

Modern Medicine: by Dr. Iain Corness, Consultant

Mata Hari, frogs, dogs, horses, toy trains and EKGs (ECGs)

Everyone is familiar these days with the electrocardiogram, known by the acronym ECG or EKG (US style, which comes from the German spelling). This is an invaluable medical test to show the electrical conductivity of the heart, which in turn can give the doctor an idea of the health of the heart muscle itself. Many think of this as one of the newer developments in medical science, but it is not, having a history dating back to the mid 1600s.
In 1664, Jan Swammerdam, a Dutchman, disproved Descartes’ previous mechanical theory of animal motion by removing the heart of a living frog and showing that it was still able to swim. On removing the brain all movement stopped. (This reminded me of the professor who proved that fleas heard through their legs. When he told intact fleas to jump they did - but after he removed the legs they no longer moved, proving they must have previously heard through their legs.)
Almost 200 years later, in 1856, researchers Kolliker and Muller accidentally discovered the electrical activity of the heart when a frog sciatic nerve and leg muscle preparation fell onto an isolated frog heart and both muscles contracted synchronously.
The investigation into the electrical stimulation of muscles continued, with the main stumbling block being the difficulty in measuring such small voltages. However, in 1887, Augustus Waller, working in St Mary’s Medical School, London, published the first human electrocardiogram, having recorded the electrical activity of the heart of a Thomas Goswell, a technician in the laboratory. This required not only wires, but the subject sitting with his hands in glass jars of salt solution. Waller’s electrocardiograph machine consisted of an electrometer fixed to a projector. The trace from the heartbeat was enlarged by projecting it on to a photographic plate which in turn was fixed to a toy train, to produce a graphical, moving record! Unfortunately Waller did not see the clinical application of his EKG.
Two years later, in 1889, Dutch physiologist Willem Einthoven saw Waller demonstrate his technique at the First International Congress of Physiologists in Bale. Waller often demonstrated by using his dog “Jimmy” patiently standing with his paws in glass jars of saline, and Einthoven began to develop the technique further.
What Einthoven did, who was working in Leiden, was to throw away the toy train and use a different and much more sensitive string galvanometer that he had invented himself in 1901. The different wave formations could be more easily identified, and it was Einthoven who assigned the letters P, Q, R, S and T to the various deflections, and described the electrocardiographic features of a number of cardiovascular disorders, such as atrial fibrillation.
In 1909, Thomas Lewis of University College Hospital, London bought an Einthoven string galvanometer and published a paper in the BMJ detailing his careful clinical and electrocardiographic observations of atrial fibrillation. Lewis identified a fibrillating horse using the string galvanometer’s electrocardiogram recording, and then followed the horse to the slaughterhouse where he could visually confirm the fibrillating atrium.
By 1924, the EKG, in a form close to that we know today was developed by Einthoven, who that year was awarded the Nobel Prize in Medicine for his discoveries.
Since then, the EKG has become even more sophisticated, and the equipment much smaller in size. However, it was not until 1963 that we began to carry out EKGs while making the heart work. This exercise ECG concept was promoted by Robert Bruce and colleagues to describe their multistage treadmill exercise test later known as the Bruce Protocol. “You would never buy a used car without taking it out for a drive and seeing how the engine performed while it was running, and the same is true for evaluating the function of the heart,” he is rumored to have said. And of course he was quite correct, and the Exercise Stress Test EKGs are important features in modern cardiac diagnosis.
So where does the famous spy Mata Hari come in? Well, somewhat tenuous I know, but Mata (1876-1917) lived in Leiden as a young girl when Einthoven (1860-1927) was doing his experiments there. Who knows, she might have electrically stimulated young Willem as well as her other later exploits which led her to the firing squad!