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Markets seem to have gone off the boil after some interesting bouts of volatile activity in 2007. We are now close to the end of the financial year and the ISA money will be drying up. Several problems which have threatened over the last year or so are now hanging over the US particularly but also other countries exposed to credit or trading difficulties.
The carry trade took a knock in the last month but has steadied itself with consequent easing of yen volatility. In the States the sub-prime lending problems threaten to blow up into a more substantial trial for banks exposed to house mortgages. It seems that many borrowers are finding the new rates too much for them to continue payments so that when the books of loans by sub-prime specialists have been bought by the big banks, the latter are finding their bargain purchases not much of a bargain at all. Many sub-prime lenders have already gone out of business and distressed property prices are affecting many but not all regions in the US. These problems have put the Fed in a difficult bind. They need to raise rates to ward off inflation but are afraid that this will exacerbate commercial and financial difficulties already apparent and could lead to recession with world-wide implications.
The US housing market is in dire straits. There is unsold supply that would normally take more than 8 months to sell. To compound that problem, housing starts are still outpacing new sales. The S&P housing index has slid 25% since January and that puts it back to where it had fallen last summer. The welter of bad news on housing, bad debt and a negative savings ratio in the US could easily tip us into the mire. Last month I recorded that markets were in sell-off mode and we are not clear of that scenario yet, although falls then were relatively muted. David Schwartz the stock market historian wrote in the FT (Sat 31 March) with warnings of possible problems still ahead. He points out that the All-share index fell in both January and February this year but only by 0.3% and 0.4% respectively. This may sound trivial but this drop in two successive months is rare and has only occurred nine times in the last 70 years. In eight of those years bear market conditions led to falls of more than 20%.
We are still considered to be in a bull market having risen consistently for 49 months but maybe this is the end of the line and people should be prepared for future hiatus especially anyone who has taken loans to buy other assets such as property or shares. A related worry in the geo-political sphere is the spat with Iran over UK sailors being captured allegedly in Iranian waters. The rising oil price confirms that this is a real threat to stability.
To return closer to home it is expected that UK rates will rise at least once more and this will happen this month or next. Already the house market is tightening and it is thought that prices are at their highest for 15 years relative to incomes. 2008 is thought to be the year when the house market gets a dose of reality. As in all forecasting. We shall see. At least if you have cash on deposit you can revel in some nice juicy interest going forward. Commodities have exhibited some more strength which has kept mining shares quite buoyant. Merrill Lynch World Mining Trust for one, has broken through £5.
The Mobius portfolio has ballooned in size considerably in the last couple of months since our own mini sell-off in January when one or two of our systematic share selections breached S/L’s. We currently hold 13 shares (inc. some warrants) and may soon hold another if the buying process goes through. We have therefore soaked up a considerable portion of our free cash. It might be a good idea to hold the remaining cash and look for bargains in the next few months. Several selections are still showing losses of varying proportions but none have been held more than a year except the warrants. It is apparent that discounting the trading cost, most shares would be about even. Apart from the dogs at the moment which are Ashtead, LogicaCMG and Plethora. The good boys are Hamworthy, Nord-Anglia and Umeco.
On Saturday 31 March the FT recorded 78 new highs, Among them, Tanfield Group, Just Car Clinics (a Tony tip) and UK coal (551p). Also recorded were 48 new lows including Erinaceous Group and sundry Aim companies.
If Erinaceous does have a rights issue to pay down debt it looks to be a share to invest in for the future. All the best but watch out for a 20% slide this year.
ML - Acknowledgements to Daily Telegraph and FT.