Fasten Your Money Belts

I see the ASX200 as a big jumbo jet, on a steady and long climb to a higher cruising altitude. Last year we climbed at a rate double the average of the past 10 years, and this year we expect to see the climb rate return to the average of 10%.

When you fly first-class, I'm told you feel far less turbulence. That's relevant to the equity market, because when turbulence sets in, the first-class stocks prove far less bumpy than those in "cattle class". Quality outperforms through thick and thin, and you must use periods of turbulence to upgrade your portfolio from "economy" to "first class".

My simple strategy remains, to accumulate quality on trading dips. It's a very basic strategy, but it's served very well over the past three years. I particularly like accumulating quality in periods of trading turbulence caused by "non-Australian" events. I also like accumulating quality ahead of dividends being declared and, as I have said before: I love getting paid for a risk I didn't take. The interim dividends that will be declared in February are for a period that ended 19 days ago, and I clearly can pocket some nice dividends for the period without ever have taken the risk of owning the given stock.

It still amazes me that the Australian equity market on a daily trading basis pays so much attention to global equity market developments.

For me, it really comes down to getting Australian developments right. This is counter-intuitive, but I think I've personally become a far better stock picker and commentator since I've paid less attention to global equity market developments, and redirected that attention to domestic developments. For me, life is about taking advantage of global over-reactions domestically. When all the global brokers sing "Alcoa result weak, sell Alumina", I'm trying to work out the right price to take advantage of that and buy Alumina (AWC).

That "global developments" part of the market is completely over-brokered, and it's not how you make the long-term money. The real money is made knowing as much as you can about domestic developments, be they macro, micro, or political, and taking advantage of global influences when they become extreme. I'd rather spend my time having lunch with the leaders of corporate Australia than worry about what the Dow is doing every night.

In the great film "Wall Street", Bud Fox spends days tailing corporate raider Sir Larry Wildman in an attempt to find out which company he is raiding next. Bud works out it is Teldar Paper, and instructs he client Gordon Gekko to start accumulating the shares. In recent times in Australia, the market has come to the conclusion that because IAG chief executive Michael Hawker was seen leaving the offices of QBE a few months ago, it means a merger is on between the two companies.

Separately, my brother has noticed that Graeme Hart's private jet has been parked at Sydney Airport for about a month now, and he took this photo of the plane early this morning.

Many of you will be thinking, 'He's having a holiday', but we don't believe he is here either for a holiday or to oversee the sale of Uncle Tobys. He's here to do a deal, and we suspect it's a very big deal with a Sydney-based company.

I'm putting two and two together and getting seven, but I've also been told by my friends in the legal world that many senior corporate mergers and acquisitions lawyers were called back into work over the Christmas break, which is highly unusual.

I suspect a very big deal is coming, and on the balance of educated risk you would have to think it's either in the food or packaging sector. As you know, we think the M&A cycle will take a big step up the market cap food chain this year, and I get the feeling that Hart is the man to start the ball rolling. He buys bombed-out branded-product companies, and he could be doing it at the low point of domestic economic growth.

The best guess is that he might want to take Lion Nathan (LNN) home. Lion Nathan looks the standout to us, and might be a very cheap stock, with or without corporate action. Much like Carter Holt, where he walked up and bought a 50% stake from US parent International Paper, you have a walk up start if the Japanese brewer Kirin having a 46% stake. Is this a core holding for Kirin? Who knows, but they do have a great portfolio of brands, it's had a tough 12 months yet Australia's number two brewer controls such iconic Australian brands as XXXX, Tooheys, Swan, and also Lion in New Zealand. There are also plenty of surplus wine assets. Hart could easily divest such premium wine assets as Petaluma, Knappstein, Tatachilla or Stonier. Even though wine is tough at the moment, there is always a buyer for premium brands.

Lion Nathan's market cap of $4 billion wouldn't be an issue for Hart. You could also easily see the logical next buyer, after Hart takes his turn on the assets, in a few years time being the private equity funds. It's a perfect business for them as well, with stable cash flows that brewers generate.

Watch this space, some big M&A is coming this year, and it's prudent to have some branded product laggards in your portfolio.