Excreta and extractors - the beginning

Sub prime and hedge fund chaos has now hit the "real world". And in the UK, too - not the US where the canker started. My betting is that this means the beginning of a market decline. We've already been through the 'nervous' stage earlier this year - and managed to avoid a permanent market decline; but this time I suspect it's for real.

* Mitchells & Butler has decided not to split off its properties. So the corporate strategy of a major pub company is now being affected by market movements... In fact they appear to have found it impossible to secure debt funding for the deal. Now M&B is not some fly by night asset stripper or dodgy start-up; it's pretty blue chip. That suggests a sudden and very marked increase in lenders' risk aversion.

* UK commercial property funds are hitting real trouble. It was obvious as much as six months ago that with commercial property yields lower than interest rates on the best savings accounts, something was going to have to give. The question was when, and how. Imposing penalties on withdrawal of funds is a drastic move. (Meanwhile the quoted property sector has fallen pretty consistently over the past six months, and yet still the majors are offering yields of only 2 or 3 percent. If there's no room for capital appreciation, then the yields ought to equate to cash yields - or even above, given the risk of falls in the price of the underlying assets; but that's still not happened. So I'm not getting suckered into any dead cat bounce.)

* One blessing is that the high rate of corporate activity has reflated the cash position of my portfolio and I imagine leaves many fund managers also relatively cashed up. But whether that cash is headed back into the market I don't know. Right now, I suspect not.

So what to do about it? Holding cash has become more attractive now that interest rates have risen. Oil stocks and to a lesser extent mining stocks still appear attractive particularly with oil prices at USD 78 or thereabouts. And tech and pharmaceuticals might be worth investigating; there are some low valuations and good growth stories, though there has also been an increasing number of profit warnings. As for property, I'm almost completely out of it - though Pactolus (Hungary) and Trinity Capital (India) might be interesting, and trade on good yields with in Trinity's case a massive discount to asset value - and certainly, I'm out of property and out of asset plays in the US and Europe.

The real conundrum is what on earth is going on in the UK residential market, with successive interest rate rises surely putting the squeeze on many mortgaged owners, and yet the Halifax reporting house price inflation rising. The sums don't work. And I would never have thought that it would be commercial property that would crack first....