In an interview yesterday I was asked what people should be investing in at the moment. This is a difficult question as investors are supposed to take reasoned decisions over events, as they see them, combined with the future prospects for the actions that they take.
I had to say in all honesty that how can anyone possibly make a long term investment choice on any stock in the current environment? For very long term players with huge income streams I suppose as long as you keep buying all the way down the curve you should pick the bottom at some point!! But for ‘Joe Public’ trying to pick a few winners in the murk, what is the point?
The best place for your money, as I have commented since last year, is in cash. I have been getting around 5.7pc for my funds for most of this year. A far, far, greater return than virtually all funds except for short play vehicles. My few excursions into equities have cost me dear and sad to say it is difficult to see much change now.
Analysts keep telling us what good value stocks are at the moment with p/e returns at below their median levels. But bear markets normally run until stocks become absurdly cheap not just ‘good value’ and this bear phase is still quite cuddly when compared to some that I have known during my 25 years in the city.
The current environment is one of quick entry decisions and even quicker exits. Only those with vast resources can sit tight when the stakes are so high. Poulson’s aggressive ploy may work but then again it may not. If it does work we can either look forward to several years of very low growth and falling margins (possibly deflation) or, if liquidity does return to the banking sector quickly, the possibility that a $700bln injection (from the US alone) sparks a huge money supply spike and thus a big inflationary bubble. Neither of these is exactly good for equities. If the whole project fails then, unfortunately, more banks will go under and at some point the governments of the western world would be forced into wholesale nationalisation (Scandinavian Style) to protect the assets of the rest of the economy.
Of course these scenarios are worst case, but investors can probably afford to sit out events over the next six months as the chances of missing a huge equity market rally are probably remote.
Markets this morning are a little fractured after the big dump off last night in the US. The FTSE is called some 45 points lower at just below 5200 with the Dax trading at a similar reduction at 6065. The huge rally in the FTSE ran out of steam at pretty much the precise same point as the lows of the fall earlier in the year (5414) in March and the worry for technical traders is that this might now be seen as a restrictive top for moves higher in the future. The region from 5400 to 5550 has proved pretty difficult to either bust down or up through over the past four years and it is difficult to see why this should alter now. Likewise the low during the evening session on Thursday in the FTSE recording a print just above 4800 is also mirror by resistance and support back in late 2004 / early 05.
Best guess at the moment is that we might oscillate in this range for the time being.
On the currency markets the dollar continues to wane on the back of the huge US bailout but it must be said that Europe and the UK will probably also have to have their own emergency financing efforts and, for the UK, this will be on top of the £90bln deficit already mooted. The dollar will probably find a few friends once more in coming sessions and it would be wise to limit risk in light of the extreme moves over the last few trading sessions.
All the headlines last night were around the huge spike in October Oil as shorts discovered that longs had no interest in selling as they had presumably bought on the basis that they need the cover for ongoing business purposes rather on the basis of making a quick buck. This might make the next expiry (November) an interesting time. The move was helped by the biggest one day drop in the greenback for some seven years and so is unlikely to be maintained in the short term. A slowing global economy will require less fuel, not more, in the medium term and so price pressure should (!??) continue to ease.
Gold, as is its wont, made hay in the chaos peaking at $900 once again. Volatility in the Yellow metal has reached extreme levels and you can sell 1 year, at the money, puts and calls for about 25pc or $250. This type of price actions rarely lasts long but it would be a brave man who bet on Gold remaining between $650 or $1150 between now and next September.
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