I'm not sure why I didn't post this at the time but the following letter was sent to my clients on 16th August 2007;-To ALL Hoblyn Clients
Our ref;- RPH/CT/marketwarning
16th August 2007
Dear Client(s)
Since writing to all my clients on 14th May predicting an unprecedented credit crunch a severe and unprecedented problem has indeed arisen in the US banking system. Although there are many interpretations and reasonings as events unfold it would appear that the inability of low quality (“sub-prime”) borrowers to repay mortgage arrears has led to falling property prices in the Mid-West and Florida starting a spiralling effect into the rest of US market. Doubts remain about the state of the largest mortgager, Countrywide as well as various mainstream Investment Banks, including Bear Stearns, Lehman and Goldman Sachs after hedge funds have been caught out holding illiquid positions. As margin calls persist these same banks are being forced to liquidate elsewhere. For years this type of “down wave” or “domino effect” has been predicted and although it’s impossible to gauge how the fallout will pan out it’s important to realise that the property bubble in UK is still intact. It has been apparent to me for most of the past decade that excessive valuations have been abundant in western retail property markets and I have had grave doubts about the so-called housing shortages as millions of homes remain empty as a result of excessive speculation. A comparison with the early ‘70’s secondary banking crisis and the bear market then could be made today although I fear that the current crisis, one mainly of shaken confidence so far, could lead to a fully blown bear market as the reality of unfathomed losses materialises and a US$500 trillion derivatives market attempts to unwind. It is ironical then that the hedge market could be the creation of the biggest market correction ever. The recommendations made after Enron and LTCM have been mainly ignored. Creative accounting and lack of transparency could well make many of the analysts redundant as cataclysmic financial events unfold.
In essence the bear market is long overdue. A technical double top or head and shoulders may well have formed between the top in December 1999 and June 2007. If this is the case the prognosis for equities is not good. Asset deflation could well accelerate as Central Banks dither on the best way to safeguard investors interests. I fear that any lowering of interest rates hereon could just add fuel to the fire.
As I said in May, “I continue to recommend only UK equities with a reliance on international scenarios, exposure to oil majors (BP & Royal Dutch Shell ‘B’), exposure to London based precious metals stocks (Randgold, Hochschild) and a moderate exposure to general miners, higher cash levels and a review of all property related investments”.
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