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Weekly Report 7 March 2008 - US incompetence masks shrewd buying, FKI worth a look, Newmont Mining a potential surprise sell

For a change we are not going to talk about the financials which have had their fair share of headlines in recent weeks. We will instead look at the action in the wider markets, and specifically the US, which still has the ability to give the world a cold when it sneezes, despite it seeming to have a permanent infection. Just about everything that epitomizes poor management could be fitted into the news this week, with ‘Helicopter’ Ben Bernanke again showing his colours by muttering on about how the weak dollar would help the US trade deficit. His view of the housing market and the outlook for smaller banks apparently gives him every justification for letting interest rates slip away to ridiculous levels, and you only have to look at what happened to Japan in the 1990s to see that if there is a credit crisis and money is not available, then it doesn’t matter what the interest rate is if borrowers can’t pay it back.

We then had the US grovelling to OPEC to please ask them to ship more oil to keep the price down, but the fact is that whilst their crude inventories are rising, the rest of the world is running short of supplies, so the US should be thankful they’ve got some oil of their own.  The next problem is the rise in food prices, and as the amount of land cultivable for wheat has fallen in a foolish rush to produce ethanol, the dollar weakness send the cost of imported foodstuffs up.  Mr. Bernanke has a problem with inflation, and if he can’t see the effect of the rising price of oil, food, raw materials for manufacture, healthcare, utility bills and of course gold, then it is time to give up.

Having said all that, you would expect us to be bearish on US equities, would you not?  Well the answer is not necessarily, because just like the UK, the US is not really a domestic stockmarket any more, and blue chips have fingers in pies all over, so it’s the big picture for world growth that matters, and that looks OK.  Second, there is that wall of money held by sovereign funds, and much as we agree with Warren Buffett that the US has only itself to blame for selling the family silver, at least there is someone around to buy it.  Third, we could have seen the worst of the kitchen sink sub-prime writeoffs, and without knowing what’s still out there, some of the predicted derivative losses are a zero sum game, so there must be winners around.  Finally, and intriguingly, smart money is still nibbling away at equities.  Everyday on the Dow Jones we have seen buying right at the end of the session, and that’s not Joe Public.

With all the bad news around, this might just be close to being the buying opportunity of the year in the US, and therefore the UK.....a brave call we know, but we’ll see.

FKI – why aren’t the shares higher?

Talking of bad management, the board of FKI must feel foolish opening the books to Melrose with a new bid worth 85p given what might have been on the table last year, but that’s water under the bridge.  Melrose argue the bid is actually 82p plus a 3p dividend, but either way it’s an improvement on the 70p offered a month or so ago.

Look at the weighted volume on the FKI chart and you will see significant and consistent buying of the stock in the last month, suggesting more interest out there.  There has been talk of Blackstone fishing around, and on a wider view it could be argued FKI should be worth a lot more, despite their current difficult trading outlook.  The shares are back to 73.5p as we write, and it must be worth a punt around here.

A speculative trade in the gold stocks

It is very rare for us to go against a bigger trend, but if you recall last year we pointed out some short term weakness in Newmont Mining which seemed unusual in the light of gold’s strength.  This week there was another blip in gold, which could be tracing out a big false break here, but that’s another story. 

Of more interest though is the fact that NEM may have turned down and completed a lower high, which is the first sign of a change in trend, and it remains sector laggard, especially against peer Barrick.  If gold does take a breather for a while, NEM shares be a better shorting option than trying to call the actual metal down, but as with any countertrend trade, be aware of the risk and adjust your position size accordingly.

CONTRACTS FOR DIFFERENCE (CFD) TRADES TO WATCH NEXT WEEK