Review 4Q 2009 6th January 2010

“There are bulls, bears, stags, lambs and giddy goats”
– a Market Maxim c/o W. Dennis Heymanson

After the FTSE All-World index had, by mid-November, surged more than +75% from the bottom and the FTSE Emerging Latin America index prospered +123% the global equity rally started to falter in December. With questionable signs of economic recovery in the US that could mean the end of almost zero interest rates and other attempts to stimulate the economy there are clear danger signs flagged in markets worldwide. The FTSE100 ended the year +22% at 5412 and +53% from its March low of 3512; the percentage gain of 2009 numerically matched its loss for the decade -22% having fallen from the all-time dot.com high of 6930 on 30th December 1999 (although if one includes dividend income then the FTSE100 returned a total of less than 7% over the decade). The following factors drove the market in 2009;

• Quantitative easing (QE) and concerted support for banks internationally (TARP) which boosted confidence.
• Dramatically reduced interest rates and increased money supply have enabled companies to borrow very cheaply; capital raisings strengthened balance sheets in the process.
• Drastic cost-cutting has helped stabilise company profits forcing analysts to upgrade previously downbeat projections.
• A change in sentiment from fear end 2008 of a global depression towards more measured concerns merely about the speed of recovery.

It’s clear that many global shares are beginning now to look expensive. If profit improvements and economic recovery don't materialize then the market may surrender some of the 2009 gains. The limited shock from the Dubai debt crisis in 4Q 09 served as a reminder of the fragility of the recovery but more worryingly the recently announced Chinese manufacturing numbers imply an acceleration of GDP growth to circa 10-11% from 7% approx. in 2009. If China is overheating then some knock on effect will be felt in emerging markets and through commodity markets at some juncture. I have been flagging this for some months and still see little real value at this time and continue to maintain high cash reserves. Last year the driving debate was whether the shape of the economy would be a ‘V’ (investors may be misguided for backing the quick fix prescribed by Bernanke), ‘W’ (double dip), ‘U’ or ‘L’. Although the jury is still out it’s clear that international money supplies are over-extended and interest rates may well reverse the trend earlier than most analysts predict. The double dip looks the most likely scenario to me and a sharp correction in China may be the catalyst for this.

Looking forward hereon I continue to focus on oils, precious metals and companies that have relative low gearing and intact business models regardless of the impending tax hikes and slowdown. Clearly the UK domestic scene is far too exposed to a severe downturn when one factors in the scale of the UK government’s problems. Thus I believe that 1Q 2010 is (yet again) one to remain cautious. My favourite stock picks are BP, Royal Dutch Shell ‘B’ (safe dividends), Yamana Gold, Newmont Mining and ASA (US listed closed-end fund focusing on precious metals). I am still avoiding banks/financials (although HSBC & Standard Chartered can be examined on any fallback) and recommend a selective few UK equities (Sainsbury, Greene King/Marstons, Imagination Technology, Dana Petroleum/Heritage Oil/Dominion Petroleum) although generally speaking I remain very cautious and suggest selling into strength where feasible and sensible. The big investment issue really surrounds bonds and when best to offload US$, £sterling and Euro instruments. Sometime in this quarter it will be sensible to diversify into alternative currencies (I have been recommending WisdomTree Emerging Markets Currencies Fund ETF listed on NYSE epic: CEW $22.21) or to hedge one’s portfolio through Proshares Ultra SHORT China (also listed on NYSE epic: FXP $8.02). Gold is likely to re-examine $1,200pto quite soon and possibly test the next resistance level of $1,332pto by the summer; my hunch is that further testing of $1,461pto resistance could be achieved by 3 Q with oil moving up simultaneously to $90pbo+.

Warren Buffett recorded his worst performance against the stock market in a decade last year after committing $44bn to a takeover of Burlington Northern Santa Fe railroad and lowering his expectations for investment returns. Berkshire Hathaway Inc. the company Buffett has led as chairman for more than four decades, rose +2.7% on the New York Stock Exchange in 2009, less than the +23% return in the Standard & Poor’s 500 Index. This year is likely to be the toughest for many years for tax payers and small businesses and I expect unexpected volatility at times. As the Sage of Omaha, Warren Buffett has found out himself it is extremely difficult to measure short-term performance versus long-term strategy. He believes in his acquisition of Burlington in the same way I believe in gold and oil related investments for the first half of this new decade.