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Hubble Bubble - markets ()
5/2/2010
(119264)
Hubble Bubble…
Whoops! Here we are again, rolling and tumbling, with collapsing stock market indices, and great chunks being ripped out of leading share prices. Last week it was all worries about a double dip. This week, watch out for the PIGS.
The PIGS, of course, are Portugal, Italy, Greece and Spain with Ireland in the background – all economies in turmoil, all countries kicking against the boundaries of the common European currency.
Amusing to turn on American Tout TV and hear Greece being dismissed as a little country which produces olive oil and feta cheese, so insignificant that no-one in the mighty US of A should even bother about a spot of unrest there. Happily, one of the talking heads then reminded everyone that Thailand was nowhere much some years ago before a crisis there rattled the world as it spread across the Far East.
If a certain smugness abides in America at seeing upsets in Euroland stressing a few distant rivals, it still does the stock market no good at all, merely because it prompts a rush for safety in the dollar. A firmer dollar undermines commodity prices, which upsets a whole slew of leading share prices, which in turn unnerves all of the rest – especially at a point when the US employment figures don’t look so good and the great American economy might not be staging such a convincing recovery.
Once again, there is no point in rehearsing all of the minuses and pluses. They are too numerous to mention and striking a proper balance is well-nigh impossible. As always, the only way to approach any effort at assessing where the market might be going is to read and absorb as much as possible and then decide where it leaves your gut feel.
Inevitably there is a bias towards the views in the last piece you read. It is relatively easy to pick and choose indicators and to argue a case either way.
That said, it seems crystal clear that what we ain’t gonna get any time soon is a perfect answer, a market moving steadily one way or another. My bias remains towards the downside, and that, as I explained in my last general comment ‘The Big Chill’ on January 26, is why there have been relatively few stocks recommended here for some time. It pains me to advance ideas which lose money for subscribers (it might pain me, but sadly it does not always prevent me).
Hopefully those who have been playing the markets have heeded my repeated advice to run a tight trailing stop loss and to sell when prices start faltering. No matter how comforting it might appear to have a gain or two under your belt, it only matters when you get your money out, and when you count how much you have got out. There is no satisfaction in predicting that markets might be rocky for a week or two and sitting tight as those falling markets whisk away all of your profits.
The comments on our bulletin board have been fascinating and highly instructive. All subscribers should be sure to follow and think about them. In the end, you have to make up your own mind and invest your own cash accordingly.
Right now, it is overwhelmingly sensible to stay away, to keep your cash safe and sound in a bank or building society, even though it is earning an insulting and infuriatingly modest return. At least your cash pile is not diminishing as it well might be if too much of it is in the market.
In the past, some of my comments have proved over-cautious. On the way down, they were sensible. Then the caution lasted too long, and the opportunity to tell subscribers to get into sound, substantial companies on the cheap went begging. Some subscribers, led by the redoubtable kenmitch, were much smarter with their timing, and scored valuable gains. Many of those gains are still largely intact. Hopefully, no-one will let them slip away entirely.
Indeed, there is every reason to hope that will not happen. It is hard to imagine this market tumbling all of the way back down, though hard to guess when the current malaise will subside. As before, it is worth emphasising that the many economic elements are not yet pointing clearly up or down, but there are enough serious questions for the prudent investor to stay in cash.
Share prices are governed by sentiment. That sentiment is dictated only partly by economic reality. Turmoil in the eurozone will only get worse. If Greece is sorted out, sort of, there will be a need to tend to Spain (a much bigger economy), with Italy and Portugal requiring attention along the way. The UK could be but a blink or two behind them – for sure we are going to need a grim budget to jerk us back to reality after the election in May, no matter who wins.
Fixing – sort of – the walking wounded in Europe is not going to lead to immediate growth. We have seen enough of the Eurocracy to understand that these unelected barons in Brussels will twist, turn and cheat and do whatever it takes to keep their grand dream of greater Euro power intact.
So they will bail out the problem countries, but when the International Monetary Fund comes calling, we will see the same old, inevitable outcome – slash public spending, raise taxes, economise all round. In truth, we all know there is really no other solution. At some stage, we all have to pretend to live within our means.
This means a sharp reduction in spending all round. That cannot be good, medium term, for company profits. Company profits and the dividends to be paid from them ultimately drive stock market values. So it is hard to see share prices going up too far for quite a while.
Sure, sooner or later, the market will stage a sustained rally in anticipation of seeing the cutbacks work. But that is unlikely to emerge for a fair while yet.
This is part of the simple reality facing share prices. So far, the US, the UK and most of the Western nations have pumped extra money into the economy, printing it, to keep and get business moving. Maybe the markets reflected that in the last few months, rising to reflect that stimulus.
Next? There will be question marks over how well that stimulus has worked, unsettling share prices. Then will come a period when the stimulus is withdrawn, when economies settle into the serious business of genuinely rebuilding growth without artificial credit being made available to boost bank balance sheets (and bonuses). As credit growth slows (China is cutting back already, even the UK is pausing with quantitative easing) and real companies, real people, struggle to get loans, boosting profits will be tough for many companies.
Be careful. It is all very well to suggest buying substantial companies when they are cheap – much tougher to determine when they are cheap. It surprises me (and I have been wrong about it) to see some major company share prices pushing back towards levels they hit two or three years ago, ahead of the market and economic collapse. How can they be worth as much when they still have a grim year to report on, and a year or two at least of struggle to rebuild real earnings?
Never mind. All good fun, all part of the grand game. As before, there is a clutch of smaller companies we are following, split between special situations which might show spectacular recovery from the depths (the likes of ENRT, Eden Research, Vialogy, Northern Petroleum) and solid high yielders with a good chance of steady growth (like Charles Taylor, PSPI, and PHP). I have a holding in all of the afore-mentioned.
Don’t get over-committed to anything in these conditions, and keep clinging to your cash. Fingers crossed.
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