Markets seem very much in two minds as to the next direction. The FTSE and Dow are swinging wildly during each session first pressuring the upside and then the down only to revert to the up again.
This type of trading activity is generally an indication that we are about to break out from the current range but nobody is too sure which way! On the face of it valuations appear generous (good p/e levels and solid yields versus Treasury and cash rates) but on the other hand the continuing (and seemingly accelerating) rate of decline of the Global economy leaves many investors wary of taking the plunge. Added to this yields on corporate bonds are now so generous (and afford greater protection than straight equities) that they are affecting the possible attraction for stock.
The call this morning is for the FTSE to open at around the 4030 level off 15 from the official settlement at 16.30 yesterday but 50 points down from the futures close at 9pm last night. The index has made a series of attempts to trade down here over the past few days but there is definite support between 4000 and 4030 and we will probably need something new to actually break lower. One of the major problems for any rally is that the banks seem to be on a one way trip to oblivion. Without a banking system able (or willing) to lend at some point in the future the chances for solid growth once the recession has run its course are getting slimmer and slimmer. Nationalisation of the banking system sounds attractive at the moment but state control is never efficient and without incentive to perform (sorry, but this means bonuses and dividends) banks may retreat into safety first which could stunt growth for years to come.
The financial sector is not exactly the flavour of the month with tales of cut backs in lending readiness to go to court etc but the Repossessions rate out yesterday seems to tell a slightly different story. 13,161 homes were repossessed in the third quarter of 2008 (this is just to the end of September) yet 340,000 mortgages were in arrears at the end of the same period. This indicates that less than 4pc of mortgage arrears cases are ending with the repo man. People tend to forget that when they buy a house they can only do so because the bank has lent them money to do so. If they fail to uphold their side of the bargain (i.e. make their mortgage payments) then, like any business which has not been paid for its services, the lender is quite within its rights to seek redress. In this case the return of the asset (i.e. the house).
The arrears number is very worrying as the big increases in unemployment have really only just started to come through since the end of September and most of these (pushed out in the first wave) will probably get the best redundancy packages. This would seem to indicate that the arrears figure for the end of the fourth quarter will be much worse.
Markets
Trying to find some sense in any market activity is getting a tad difficult with almost random direction being the apparent order of the day. The most successful traders at the moment seem to be those who are fastest on their feet. The idea that you should invest for the ‘long term’ seems almost laughable especially when you analyse the performance of equities since the current administration came to power. The major UK indices have not moved for 11 years (and this is with the continual removal of the weak to be replaced with the strong/new). If you were lucky your portfolio might be worth the same as ten years ago but with transaction costs etc this would be unlikely. So how long is a long term investment?
Daily activity on the markets from our clients continues apace with solid trading levels every day. The varied market swings seem almost designed for contrarian day trading as every big move seems to have a significant reversal almost immediately.
Sterling though continues to weaken overall. Cable seems to have found some support in the mid to low 1.37’s but against the basket of majors the pounds value continues to sink. In July ’07 the GBP/JPY cross was 251.00 as I write we are trading at 122.00 (an all time low …ever). This is a drop of over 50pc meaning that an imported Japanese manufactured product should be double the price of 18 months ago. Slowing demand on our high street is disguising the inflationary impact of the pounds weakness but this will be yet another worry for the future.
Unfortunately every factor seems to be working against the UK at the moment and the house of cards built by Messrs Brown and Blair is in danger of collapsing irreparably. The hope that a weak currency will somehow help to pull us out of the ess aitch one tee seems very old fashioned. We have to have a serious manufacturing base for this to actually be the case but with such a small percentage of our economy based on an exporting industrial foundation in the first place and what we have still having to survive the global downturn such hoped for bonuses seem a long way away right now.
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