October Review 2008
With the ink on the September quarterly valuations hardly dry I thought it might be a good idea to try and summarise what has occurred in the last 6 weeks with an aim to review current strategies, etc.
As was clear to many commentators a global credit bubble had grown since the turn of the millennium ably assisted by the Federal Reserve’s emphasis on assisting borrowers rather than protecting the greenback (US$) which in fact is its remit. The gradual implosion of the asset bubble perpetrated by sub-prime and other derivative instruments forced firstly Bear Stearns and then Lehman Brothers out of business. A gradual pandemonium in financial stocks, mainly investment and international banks, subsequently forced some to merge (Merrill Lynch into Bank of America, Wachovia into Citigroup) as well as leaving governments no alternative other than to intervene on an “unprecedented” basis (Northern Rock, B&B, HBOS/Lloyds, RBS, etc just in UK). The utilisation of providing extra liquidity to all types of markets and instruments has arguably created a more stable financial environment with LIBOR (London Interbank Offered Rate) gap narrowing somewhat and many stocks stabilising in the process aided by a global rate cut (the Fed cut rates 0.5% to 1% recently). With the printing presses running flat out a deflationary market in property and commodities has occurred. Of course, the property price implosion and the banks demise has meant that the extraordinary commodities slide has been missed by many pundits although it is clear that price declines in commodities and commodity related stocks has been overstated as hedge funds have become forced (distressed) sellers in this arena. It is far easier to liquidate stocks in these conditions than property and clearly part of this easing of liquidity constraints has left investors nursing serious losses (as yet mainly uncrystallised) in their portfolios. There are many observers who have felt that the billions of $, £’s, Yen & Euros that have been raised would have been better deployed to stimulating core industries/sectors rather than bailing out the very banks who often or not catalysed this crisis of confidence. With balance sheets remaining questionable with off-balance sheet positions (debts?) remaining unquantifiable (the derivatives tail is now estimated at US$500 trillion) some market commentators have suggested that these banks didn’t need saving. Arguably new stock banks should have been created but instead governments have suggested that regulations were weak and have demanded more regulation thus making life more difficult for themselves, the banks and broking houses as well as investors going forward. I would argue that less regulation is needed allowing for new organisations to be formulated by entrepreneurs from any ongoing fallout but I fear that the opposite will happen (Sarkozy has called for more regulation along with other more socialist powermongers). In addition to personal crises several governments have had to go cap in hand to the IMF, notably Iceland, with Hungary, Austria and a host of others illuminating distress flares. The Barack Obama era has finally arrived but the euphoria may die down as the US deficit nears the magic US$1 trillion mark. Steve Forbes, CEO Forbes Inc, the int’l magazine emporium, has suggested that Obama may replace the Treasury Secretary Paulson with Paul Volcker the former Federal Reserve (before Greenspan) man who may be in a better position to stand up to Bernanke. Who knows what will happen or what the new administration will do to reverse the damage that Greenspan did to the US economy by maintaining low rates for too long but one thing is for sure, the bumpy ride is likely to continue as unemployment figures increase dramatically in the western world and a retail slump is forecast. Just how Wall Street reacts hereon is anyone’s guess but it is clear that until financial organisations are allowed to fail, thus cleansing the system, it is very difficult to see the wood for the trees.
I continue to suggest that all investors review their risk profiles and adopt more cash, precious metals, orientated strategies and only adopt domestic investments where there are clear value opportunities present. The intra-day volatility in all securities of all types is extremely unnerving but there are clearly value plays in these markets which are a stock-pickers paradise. Technically speaking all markets are off their lows but I am predicting more downside in the next three months (the ‘double bottom’) testing previous lows (FTSE may reach 3,300; S&P500 around 800). Gold, platinum, silver and most base metals stocks yielding in excess of 3% can be purchased as alternatives to risk deployment persist and as emerging economies grow at GDP growth rates of 4%+. In particular Templeton Emerging Markets, JP Morgan Russia, JP Morgan India, BlackRock Latin America present good long-term value on any further pullbacks. Looking at charts before making trades in these markets are really a necessity that many investors should not ignore.
Please contact me to discuss any aspect of your financial affairs at any time 24/7. A recent valuation is attached for your perusal. I am reminded of another market maxim from W.Dennis Heymanson’s excellent booklet;-
“Buy when the market is oversold, lighten when the market is overbought.”
