So the Eurozone aint bust just yet!

Greece still moves in baby steps and manages to negotiate more and more favourable terms before each cash call, such is the fear of fresh contagion. Italy is thrown into renewed political uncertainty with a February election and given its position as the Worlds third largest issuer of debt, any doubt over Italys future can and will shock the markets like news of the bunga bungering fraudsters new 27 year old bride to be did. The Spanish continue to walk their slippery tight rope whereby they give the market just enough to think they will ask for a bailout to get their bonds back below 6% then not take one. Whilst their banks have been bailed out, I strongly suspect we will see a full blown sovereign bailout in 2013. Even the Germans are starting to feel the pinch as their PMI ticked below 50 at the start of the year and will finish 2012 a fraction under 47 you would not think it from looking at the DAX which is set to cap the year up 27%. Now that Europes banks have been recapitalised we need to see a gentle devaluation of the single currency to boost exporters whilst keeping inflation under control to placate the Germans. This should lead to the rebalancing of Europe and the elimination of this two tiered economy that has emerged. Thats the theory but execution is another thing and Mario Draghi should not be basking in all of his FT Man of the Year glory for too long as has got one heck of job to do next year! (He should also leave out the bumblebee analogies as they really do suck). Coming into the holidays, we toss and turn in the monotony of fiscal cliff negotiations as politicians struggle to agree on tax hikes and spending cuts until the very last minute. We should see a deal struck by 31st December but this doesnt hide the overall problem here that the US is trillions and trillions of dollars in debt. This should put the green back under pressure longer term but due to wider market concerns in the Eurozone we will see it supported by way of dollar repatriation. In China things appear to have perked up. Once more the Chinese have proved the importance of efficient monetary policy. Effective tightening in the good times has meant that several well timed cash injections this year has given China (and the Global economy) a much needed boost with PMI returning to above 50 for its first time in thirteen months. Inflation stands at a casual 1.9%, which if you believe them suggests there is room for further liquidity doses. I mentioned in last years Christmas report that despite all of the problems that are out there, the market will trade sideways but would continue to rise (5-10%) on further easing and other general illogical thinking. As it stands at time of writing the FTSE 100 is up just over 7% for the year many market participants will tell you however that this figure is in no way reflective of the real trading environment. I find it difficult to see many positive drivers for the wider market next year. Bernanke has already fired his RPG and Draghi has given his saviour of the Euro-verse speech. I suppose that the market will start to move on real events like it used to GDP, employment and earnings rather than the hope of more funny money being issued! I do fear that the successful execution of a Euro cure is starting to be priced in up here and poses greater risk to the downside if the wheels start to come off again. I strongly believe that the Chinese will continue to play their clever game of rate setting and should continue to provide the market with a boost when needed, particularly metals, however we must not get too reliant on them as we have with Bernanke as the effects become dilutive.

Overall next year I think things will remain sideways and overall the market will retreat 0-5%. I still think that many of these smaller names will be traded rather than invested in and profits should be taken when the opportunity presents itself or miss out. I think 2013 will see the resurgence of the smaller companies mining sector, particularly gold, iron ore and copper. On the topic of individual stocks this year finally saw the bid come for Cove Energy (COV.L) at 240p in an incredible climax to what has been a wonderful story for us since 2009. There continues to be a wealth of opportunity in the East African Oil & Gas space although expectations will be high for next years drilling campaigns in Kenya, Tanzania, Ethiopia and Mozambique. Another favourite *Rockhopper Exploration (RKH.L) finally got its deal done and was partnered rather than taken out. They farmed down 60% to Premier Oil (PMO.L) for $1bn USD perhaps giving away 10% more than investors expected but remember this is before the Americans moved in. The resultant news vacuum has hurt the stock since as the shareholder base rebalances itself. Mark my words on an eighteen month view there are very few picks that will be better than this at 155p. This oiler is fully funded through to production and retains 40% of Sea Lion this will be a great performer next year, and by the time the drill bit returns in 2014, this will have risen like a home sick angel. Staying in the oil space I expect there to be further consolidation in the North Sea with top picks being Ithaca Energy (IAE.L) and *Antrim Energy (AEY.L). *Lochard Energy (LHD.L) should also conclude their deal soon but do not hope for much more than 8p and do not be surprised if its paper still a decent premium from here from what should be little down side. Away from the North Sea I feel *Mediterranean Oil & Gas (MOG.L) offers deep value at present. Since the Italian drilling ban has been lifted MOG wait for their development plans for the 100% owned Ombrina Mare to be approved. This contains 40mmboe and could be worth 50-60p according to analysts. They farmed out their Maltese acreage to Genel (GENL.L) who are equally a fabulous buy here. They will be the largest oil producer in one of Earths last great hydrocarbon frontiers, Exxons arrival along with a host of other super-majors this year is no better endorsement. And so on to mining. Whilst I do not think gold will do anything special next year the smaller producers and explorers have still not caught up with the gold price since the disconnect began in Q2 2011. The ones I particularly like are Aureus Mining (AUE.L) led by Dave Reading, former GM of African Exploration for Randgold. They are currently finalising funding of their high grade New Liberty project in Liberia and offer plenty of exploration upside.* Nyota Minerals (NYO.L) has continued its rot this year as doubts persist over the Companys ability to obtain a mining licence, which should they receive then will see the stock back to 6-7p. They are first movers in Ethiopia so no fiscal benchmark has been set yet which is the one thing keeping the noose from my neck. Almost all of the smaller gold explorers have suffered a similar plight these past eighteen months and I think owning a basket of many of them will reward investors handsomely. I also like African explorer Goldstone Resources (GRL.L), Ariana Gold (AAU.L) and a little Canadian explorer called Mediterranean Resource (MNR.TO) both of which have their operations in Turkey. Jupiter Mines (JMS.AU) of Australia is one of my top picks for 2013. The Co. has $100m in cash, no debt and a market cap of $219m. As of October this year it started production at its Tshipi Mine that was seven years in the making hence now revenue generative. They have already turned down bids at multiples of the current SP for this mine and I predict that there will be other approaches this year as it languishes at 10c. *Red Rock Resources (RRR.L) has 60m shares worth of JMS which is half its market cap and a basket of other investments that are not reflected in its current 1.1p share price.

In copper I have recently done my homework on a Company called *Frontier Mining (FML.L) who are in production and should yield 7,000 tonnes of the red stuff next year. They have a resource of 2m tonnes giving an in situ value of $16bn on $8,000 copper. Even if they were to extract only the oxides from their ore this would equate 200,000 tonnes or $1.6bn worth of product. Management issues have kept this down here but FMLs largest shareholder has recently installed new blood meaning I think now could be time to own the stock. Two companies mentioned in last years report sum up this market perfectly. Agriterra (AGTA.L) and *Bowleven (BLVN.L) both doubled in 2012 only to now stand where they stood at the end of last year only in better positions operationally blink and youll miss them, I would be a buyer of both. So for now we can leave the guns at home and not be rushing for the hills just yet although I think it is a good idea to have the car fuelled and a little extra ammunition stocked as it will continue to be a bumpy ride. To quote one economist, if a dog you love has rabies, you put it down. In truth so much has been thrown at this drowning pup to keep it afloat that they cannot let it fail now. As ever I thank you for all your custom this year and wish you joyous Christmas and New Year.