E-mail this article Printer-Friendly

Absolutely, positively the last market forecast for 2008

For this forecast, only the pundits with the best track record need apply. We also go exploring for stock picks with this Canadian advisory.

Actually, this isn’t just one forecast, it’s sort of like the all-star game of forecasts. Here’s how it works. One analysts picks three experts he thinks are the best forecasters based on their past record. Then he goes and gets their predictions for 2008.

If you agree with the rules, we’ll proceed. The one doing the picking is Mr. Larry MacDonald for Investor’s Digest of Canada. You’ll find out who the three “all-star” forecasters are in a minute. But here’s a hint: none of them is all that pessimistic about the year ahead.

Along with the forecasts, we’ll try and fathom the state of mining stocks through the eyes of a fund manager, and look at one more rather exotic stock pick from the pages of Investor’s Digest.

But first, some all-star predicting.

A few at the top

“The forecasting profession seems to be like any other,” says Mr. MacDonald. “Most of what you get is average, with a few at the top demonstrably talented and capable.”

It’s just like the investing profession, he adds. Mr. Warren Buffett and a few others are able to refute the Efficient Market Theorem that no one can outperform the market over time. But multitudes can’t.

Ditto in forecasting. “Most of what seems to be heard is noise,” says Mr. MacDonald. Some forecasters are quite accurate one year, then off the mark the next. “But a few do seem to regularly defy the apparent randomness of events with prescient forecasts year after year.”

The three he likes are: i) Mr. Peter Gibson at Desjardins Securities, ii) Mr. Lakshman Acuthan at the Economic Cycle Research Institute, and iii) Mr. Martin Barnes at the Bank Credit Analyst.

“Unfortunately,” he adds, “subscriptions to their services are not cheap. But if you can’t afford their prices, you can still follow them in the media when they do interviews (often archived on the Internet).”

Or, this time at least, you can come here.

Close to the mark for two years

Mr. Gibson has been ranked number one in his category for years in surveys conducted by Brendan Wood International and Greenwich and Associates, two prestigious research and consulting groups. He has also done well by Mr. MacDonald. “In my column last year summarizing forecasts for 2007, his calls turned out to be close to the mark (e.g., projection of a financial crisis in the second half).” He had similarly good results for 2006.

So is 2008 going to be a disaster, or what?

Mr. Gibson does not think so. He expects the TSX Composite to move higher toward the end of 2008, by 10 per cent or more. But he’s not expecting the current financial crisis to end overnight. The current economic and equity cycle will be extended by “a drop in U.S. bond yields and aggressive cutting of Federal Reserve interest rates, both of which should be sparked by the deepening financial crisis.”

Following historical patterns, the turning point in the crisis should be marked by the failure of a U.S. financial institution. It could be a subprime mortgage lender or regional bank.

Tellingly, Mr. Gibson recently shifted some cash and defensive positions in his Focus 10 list of stocks into more aggressive picks. One notable selection is Research in Motion (TSX-RIM), which he likes because “technology stocks are likely to be the main initial beneficiaries from Federal Reserve rate cuts.”

Another is TD Bank (TSX-TD), which is free of subprime loans and asset-backed commercial paper. In fact, Canada’s banks are bursting with value right now, in Mr. Gibson’s opinion. “TSX banks represent incredible, rarely seen value to investors — [they are] yielding more than U.S. 10-year bonds… this has only occurred twice in the last 50 years.”

Not signaling a recession

The Economic Cycle Research Institute (ECRI) was founded the originator of leading economic indicators, Mr. Geoffrey Moore. Mt. Achuthan is its managing director. Fortune magazine says of him: “No one speaks with more authority about the economy’s turning points.”

You’ll be glad to hear, then, that Mr. Achuthan’s indicators are not signaling a recession in the United States. They do show a “broad-based slowdown,” however.

The recent uptick in the U.S. Consumer Price Index can be discounted because the Federal Reserve Board “has its hands tied on cutting interest rates.”

ECRI’s forward indicators show that consumer prices are softening, so the analyst believes “the Fed has more leeway to cut rates than most think.”

Not quite a jump-for-joy forecast, but hardly a prescription for disaster, either.

Still bullish after all these years

Mr. Barnes and his fellow editors at the Bank Credit Analyst advisory called the start of the current bull market in late 2002, when just about every one was bearish, points out Mr. MacDonald. “They have remained bullish through all the corrections to date.”

And they’re still bullish after five years. The current correction does not deter them from their path.

Says Mr. MacDonald: “Their reasons include: i) stock valuations are still reasonable, ii) non-OECD economies are expanding at a good clip, and iii) the Fed should be cutting rates substantially, which will deliver a stimulus that should ignite another upleg in the bull market.”

This next stage in the bull market should reach the higher valuations that are typical of the final phase of the bull markets. Then we can worry.

“Of course,” concludes Mr. MacDonald, “even these able seers will not be right every time, just like Warren Buffett is not right every time he picks a stock.” He isn’t?!! But on the whole, his experience is that their anticipation of the future is above the crowd’s.

One encouraging sign is that none of these forecasts lurch into utopian optimism or profound gloom. When it comes to credibility, moderation beats excess in our books.
With these predictions behind us, let’s cherrypick some stocks from Investor’s Digest of Canada before we get on with the rest of 2008.

Supply and demand still works

There’s a lot not to like about the early months of 2008, admits Mr. Michael Smedley, who has managed the closed-end Canadian General Investments Fund for two decades.

If we’re not headed into a bear market, we at least have a correction coming, says this fund manager. But Canada is still in a strong position, he asserts, with our superior dollar, full employment, safe excavation of resources and a healthy balance sheet. The biggest enemy will be the ravages of inflation. Look at rising costs in the mining and construction industries, he adds.

Nevertheless, Mr. Smedley believes that short supply and high demand are still at work in base metals, and that a handful of stocks will prosper. One is FNX Mining (TSX-FNX), which is exploiting old nickel and copper mines on the Sudbury Rim, originally obtained by agreement with Inco and Falconbridge — and supplying 20 per cent of capacity feed for the Inco mill, now the property of CVRD of Brazil.

HudBay Minerals (TSX-HBM), a leader in zinc, benefits from a legacy of great plant and survey work by its former owners, Anglo-American, says Mr. Smedley. “This company is also top of the class in net free cash flow and could be picked up in the correction, provided that you take your chance with the price of zinc.”

Two lesser-known but well established copper companies that this analyst likes are Taseko Mines Ltd. (TSX-TKO) and Imperial Metals Corp. (TSX-III). Imperial, notably, may be on to a remarkable find at its Red Chris location in British Columbia.

A younger, more speculative copper miner, Sherwood Copper Corp. (TSX/V-SWC) just started production in November in the Yukon. Mr. Smedley likes its prudent, cost-efficient approach to mining what appear to be “Chilean-type” grades of copper.

Fearless gamblers and clean banks

Finally, this fund manager has “a personal dream stock,” which he admits is “purely for the fearless gambler.” Campbell Resources Inc. (TSX-CCH) once traded above $30 and had assets in Latin America.

Now it sits atop the Campbell Chibougamou camp in northern Quebec, and nothing else. The property has gold and gold-copper deposits, and the company is currently producing from one high-grade deposit. “It is looking for ore below existing workings, and I have no idea of the probability of success,” admits Mr. Smedley. Here’s what you’re gambling on: 428 million shares to choose from at a market cap of just $51 million. Its normal trading range is between 12 and 20 cents. It closed yesterday at $0.135.

Finally, we have a bank. Oh, no, not more subprime slime, you might be saying. No, this bank is recommended precisely because it is free of such debt-backed troubles. It is also a long way away, in a much warmer place. Mr. Sunil Vidyarthi, a regular contributor to Investor’s Digest of Canada, likes the National Bank of Greece (NYSE-NBG).

The bank “has ambitions to become the leading financial institution of the region, including many of the smaller European countries.” It has branches in Bulgaria, Romania, Serbia and Turkey. This is an area that is looking forward to annual GDP growth of five per cent in the next few years. The bank has also grown by mergers and acquisitions, the latest a major Turkish takeover. For the first nine months of the past fiscal year, profits rose an impressive 66 per cent.

Greece happens to have one of the hottest stock markets in the world (even hotter than Shanghai). Much of this is fuelled by the famous Greek shipping industry (remember Aristotle Onassis?). Both the stock market and the shipping trade can be pretty volatile, says Mr. Vidyarthi, but an investment in the National Bank of Greece seems like a pretty secure way to invest in all this prosperity.

Oh, and did we mention that it doesn’t have any subprime debt?

Subprime debt and its attendant evils will still be with us for a while. All the forecasts say so. But if the all-star forecasters we have consulted are right, the mess will be cleared away sooner rather than later. Seems like reasonably good news to us.

Just think. In a couple of weeks two groundhogs will pop up, and we’ll have a whole new set of predictions to contend with.