2007 Predictions - Part 3

After a short break, the 2007 predictions now resume:
Even strategists who are confident the Fed will soon cut rates differ when picking sectors. Ryan from UBS feels that economically cyclical industries will be more vulnerable in a slowdown. He prefers traditional havens such as healthcare, consumer staples and even financials. Levkovich counsels a mix of themes, warning that big industrial stocks are not properly priced when the manufacturing sector eases production levels. He also finds commodities unattractive as domestic production and housing slow, and questions why “investors continue to believe in the mysterious power of commodities.” Yet he spies opportunity in semiconductors and media while shunning utilities and household-products names.
Francois Trahan at Bear Stearns has a somewhat nuanced outlook on these matters. He sees the market under pressure in the early part of 2007, until the Fed satisfies investors’ wish for a rate cut and leading economic indicators to foretell a re-acceleration. At that point, he advises grabbing hold of tech and consumer-discretionary shares, typical early-cycle, bull-market leaders. Moving beyond sector calls, McVey notes that historical correlations among sectors in various macroeconomic environments “have broken down.” Consequently, he’s hunting for companies with rising returns on equity, partly driven by greater balance-sheet leverage. With profit margins peaking, here’s where out performers will separate from the pack.
Most analysts believe that large stocks ought to reclaim the lead over small ones. Although there were hints that the market’s largest issues were resurgent this past summer, the small-cap Russell 2000 again is besting the big-cap indices. Large-cap valuations, on average, are lower than those of small stocks, but not to the degree that large-cap values exceeded small-caps at the peak of their out performance cycle in 2000. If the universally expected slowdown materializes, history suggests sturdier, more multi-national, less-leveraged companies would lead. It’s also true that very large stocks are “under-owned” by active fund managers such as hedge funds. The weakening dollar also tends to work in favour of the larger companies.
The logic of a role reversal is sound, but, then again, it has been so in each of the past three years. The ascendance of big-caps might have to wait for a decline in financial-market liquidity and a pullback in the debt markets that so many small firms rely on.
McVey reports that, in the past, the time to “pile into the mega-cap trade” was after the S&P 500 already had outperformed the Russell 2000 by 20% in a given period. When the bulls discuss market psychology, they believe that investors are unduly skeptical of stocks. Citigroup’s Levkovich likes to point to his firm’s sometimes maligned Panic/Euphoria index which has been in “panic” territory most of the year to support such a point - despite the recent upswings.
It can also be shown that American investors do not like American stocks. Strategas Research Partners state retail investors “are still net sellers of domestic equity mutual funds. We view this as a major positive for the sustainability of the rally.” And at midyear, it’s now clear, investors were too negative on U.S. stocks, and hedge funds too short, opening the way for a rally. But small investors have also been investing in international funds, especially emerging markets. It’s possible this implies the U.S. stock market is, as McVey titled his 2007 outlook report, “The Best House in a Bad Neighborhood,” meaning the most attractive choice in a world of unattractive risk/return trades.
Perhaps a better clue to current psychology lies in the global appetite for leverage, the collapse of risk premiums on lower-quality assets, the tight correlations among global asset markets and the near-universal grasp for yield. In short, these are “stability” trades. Market volatility has been running near historic lows, emboldening large investors to assume that stability and calm will persist. This, ironically, encourages more risk-taking. Goldman Sachs and Deutsche Bank are among those who expect volatility will pick up in the coming year. If this happens, it could compromise some of these strategies, leaving unwitting victims in its wake.
“There’s a lot of money chasing too few ideas and using leverage to juice returns,” says Merrill’s Bernstein. He points to the scant premium afforded triple-A corporate bonds over lesser-quality bonds and the fact that triple-A debt is near an all-time low as a proportion of total global debt. Says McVey: “If the market sells off, it’s not because valuation is excessive. I worry about a shock, given how tight market correlations are.” This was also true in 1997, before the Russian/Asian financial crises.
McManus agrees that “valuation is OK, but not great,” based on P/E multiples of future earnings. The market isn’t “cheap enough to withstand anything but a minor disappointment,” he adds.
Here, then, is the force majeure clause of the upbeat consensus view - a list of culprits that could shock a placid market. They include a back-up in yields overseas, which would draw capital out of the U.S.; a run on the dollar; downside acceleration in housing that creates major credit problems; a surge in oil prices driven by escalating geopolitical tensions; Russia’s conversion of petrodollars into euros; the failure of a huge leveraged buyout, and ... well, you get the point.
So where does that leave investors? The financial system is overdue for an “accident” of some sort, given that some dislocation has accompanied each of the past three Fed-tightening cycles. The ingredients of excess, e.g. hedge funds going public, mammoth buyouts on the rise, etc., are all there but have, as yet, to make any impact.
Also, equities are entering the fifth year of a bull market, one of the longest ever, and the second longest free of at least a 10% drop. However, this can be countered with the fact that in the three prior bull markets since 1962 that lasted through a fifth year, the fifth year was a good one, with average gains of 22%. That, among other things, could mean Wall Street’s forecasters get it right again this year.
However, even though the Dow has broken new ground this year, it is only really true if investors ignore inflation. The DJIA needs to rise almost 20% to about 13900, to offset even the weak inflation of the past six years. A buy-and-hold investor in the 30 Dow stocks can’t be very happy, unless he considers his other options. Index-fund investors have put more than a trillion dollars in mutual funds linked to the Standard & Poor’s 500-stock index. S&P index investors need another 12% rise to get back to the old top of 1527, set in October 2000. To offset inflation, S&P 500 investors would like to see the index surpass 1807 or, to put it another way, a 32% gain from where we are at the moment.
To be continued…

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

Silly items that make photography easier

Have you ever stopped to wonder just what pro shooters have in their very large camera bags? Well, for starters there will be a choice of lenses, two or three camera bodies, and a whole host of non-photographic ‘stuff’, but ‘stuff’ that makes photography much easier.

Best taken with remote release.

One of the people who has plenty of ‘stuff’ is my photographic friend Ernie Kuehnelt, one of the most enthusiastic local amateurs who has a rare talent as a pet photographer. Now, for my money, Ernie is either exceptionally brave or exceptionally foolish. On the few occasions that I have tried to photograph pet animals it has been hours of frustration and very little fun. As they say, dogs have owners but cats have servants! Try telling puss to “sit!” Put another way, dogs are difficult but cats are catastrophically impossible! However, the one item that all dog photographers should have is a box of matches. One little rattle and Rover pricks his ears up and looks intelligent. Or as intelligent as Rovers can look. This even works for children (but take my tip and never be conned into photographing pets or children)!
So after the box of matches, what else should you have? For my money it is a torch. Any photographer who takes his camera out at night will need one. Even if just to see what way up the batteries go in the flash, which always runs out of volts just when you don’t need it. Setting shutter speeds in the dark can also be difficult. Or even seeing what aperture you are selecting on the lens barrel.
Another small, but definitely handy item is a remote release for the shutter. Any time you are trying to do a time exposure, it become very difficult holding the button down and not making the camera tremble - especially with long exposures. Cheap, does not take up much space, and very useful.
While talking about time exposures, another useful “camera bag” item is a miniature tripod. I have one that was made by Polaroid a few years ago which folds up small and even fits into the side pocket on the bag. With something like this you can mount the tripod on the roof of the car and take five minute moonlight shots if you need it. Often called table-top tripods. There are some I have seen with “springy” legs but they are not much good. Get one with solid legs.
Now the next one is not so easy to get here, but you can always get someone to bring you one in from overseas. With the bright sunlight here, the magic brain inside your camera that sets the exposure settings can get confused. The answer for consistently correct exposures is an 18 percent grey card. This you place beside the subject and take a meter reading from it. You then set the camera to that f stop and shutter speed and you have the correct exposure for the main shot. If you are serious about getting the correct exposure, and particularly if you shoot slides, one of these is invaluable. You can just fold it up and slip it in the camera bag very easily. However, another trick is to select an 18 percent grey camera bag, and you just take your reading directly from there.
The next item is again not a true photographic item, but is invaluable. It is a waterproof marker pen. How many times have you written details, names, etc., on the back of a print, to find that it has rubbed off on the face of the next print and so forth? Totally annoying and often requires another set of prints to be made.
The last item that is worth considering, if you are a serious photographer, is a battery charger. You will go through heaps of batteries is you are shooting regularly. This gets expensive. Buy two sets of the rechargeable batteries and a charger and your photography expenses will be a lot less. This is particularly so with the new digitals. They eat batteries, so keep a freshly charged spare in the camera bag at all times.

Modern Medicine: by Dr. Iain Corness, Consultant

Athlete’s foot? I haven’t run for years!

A friend of mine confided the other day that he has been having a never-ending battle with Athlete’s Foot. This is one of the most common conditions in the world, and you certainly do not have to be an athlete to get it (my friend most certainly isn’t) – but it helps!
Why? Because athletes, like so many sporting groups tend to stand around shower/changing areas in their bare feet, spreading the little organism that causes the condition. (Perhaps I can use this as the excuse as to why I didn’t complete my gymnasium program with David Garred at the Dusit Sports Club, but I know David’s place was spotlessly clean!)
So let’s talk about the condition. The correct name is Tinea, and we have several types depending upon the area of the body that is affected. If it is in your scalp we call it Tinea capitis, on the body - Tinea corporis, on the hands - Tinea manum, on the feet - Tinea pedis and in the groin we call it Tinea cruris, otherwise known as Dhobie itch or Crutch Rot! What a wonderful grab bag of conditions to say the least.
The organisms which cause all these are called Dermatophytes, and they have the ability to live in skin and so can invade hair and even nails. Imagine the dermatophytes are like cabbages planted in the garden and growing in the soil, with roots growing downwards. The most common has the exciting name of Trichophyton rubrum, a noble name for an organism that can live in the soggy bits between your toes, I’m sure you’ll agree.
The symptoms generally consist of a spreading “rash” with reddened edges that becomes itchy and eventually quite painful as the infection goes into the deeper layers of the skin. This is the result of the organism putting out roots which extend deeper.
Unfortunately, there are a number of other conditions that can manifest themselves in a similar fashion, including Psoriasis, eczema and some forms of dermatitis. This is the most usual reason for “Athletes Foot” preparations that are not working - it wasn’t “Athlete’s Foot” to begin with!
There are various methods of clinching the diagnosis, including examination with a special Wood’s Light, which allows you to look at the affected region with UV light. The most accurate way, however, is to take scrapings and examine under the microscope for the tell tale “roots”.
So what can you do if it really is our friend Trichophyton that is cropping up between your toes and other unmentionable places? The first thing to do is not to use high powered steroid creams, but use a topical anti-dermatophyte preparation like Canesten cream. You can alternate with a weak steroid, but remember that the steroid does not “cure” the problem - it only masks it. And if it does not settle quickly with the cream, go and see your doctor.
With some very stubborn cases it may be necessary to use medication by mouth to attack the organism through the blood stream, but these can have some fairly unpleasant and nasty side effects, especially on your liver. If your liver is already having problems straining the blood out of the beer stream then you need to use extreme caution.
To prevent re-occurrence it is necessary to be very careful where you put your toes, never share towels and jump over communal bath mats - but even then you may find it comes back. Remnants of the organism start putting out their roots and the cycle is on again. And stop scratching!
Some dermatologists also believe that you should put your socks on before you put on your jocks. This way Dermatophyton spores can’t fall off your feet and get carried up to the groin to continue their interesting work in that warm, moist area, which is just great for growing fungus. If nothing else, it’s an interesting theory.