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Today, August 1st, I write under the shadow of tumbling markets. Yesterday saw a bounce, dead cat I think, but late in trading, mainly after closing, the Dow fell nearly 146 points. The consequence this morning, after Japan fell 2% was a domino reaction throughout Europe. One should not be surprised at the correction continuing because all the signs of weakness have been present for several months even while the markets were climbing and creating new highs. The trigger this time was apparently another US mortgage lender announcing it was in financial trouble.
During the last month the MPC duly raised interest rates another notch. It is still thought an equal possibility that it will have to do it again before the year end. Largely due to high rates here and stable rates in the US the dollar reached new 26 year lows against sterling and a lifetime low against the euro. This will come as bad news for UK and European trade so looking ahead one can see a lot more turbulence.
Although the Baltic dry index set new records every day last week indicating strong demand from bulk traders (iron ore and coal principally) for freight ships worldwide, commodities enjoyed a volatile period. Some metals indeed fell off recent highs and nickel remained subdued. Lead alone fell 14.6% from a high set only in the previous week. Gold also fell back which is surprising with the current weakness affecting stock markets. Crude oil has been bobbing around $76 and remarkably West Texas Intermediate went above Brent for September delivery for the first time since Feb 2007. The impetus for this is thought to be the US market where refineries are coming back on stream after lengthy problems. At least the US consumer can be happier if gasoline falls to more affordable levels as supply constraints disappear.
Mobius has had a reality check with some of our shares having to be sold under club rules. A pity, since some have gone and then regained their poise almost immediately. In the wholesale carnage of last week which may well continue, there is the possibility of more sales to come. Even if companies have good growth prospects now they are not proof against re-rating.
Dim Data hit the skids after climbing 12 % one day and falling soon after. Ashtead, which was bought at a temporary high, has been weak for a while and dollar problems have not helped. Needless to say I will not sell any of my large holding in that stock, the prospects 12 months hence look far too enticing.
There has been a great deal of profit taking in shares like Tanfield and the weakness caused might well bring us grief. The club should be careful not to succumb to a rout which could cause capital losses and unnecessary trading charges. Our policy of operating a trailing S/L has unintended consequences when the market has a substantial correction and some of our shares go at a loss.
It was indeed a pity to sell Persimmon recently, one of the biggest and strongest housebuilders and landowners in the UK. It had fallen 30% since January and reached a 20 month low last Thursday. Bought at a high point in hindsight, the whole sector has hit weakness as interest rates have been forced up. In the last few days housebuilding has bounced and possibly a low can be identified near £11. This might turn out to be a good time to invest and possibly get back the value of our original investment., so I think the club should look seriously at a new purchase. Last weeks trauma in the market showed up in the statistics with new lows recorded as 148 and new highs only 20. Banks, housebuilders, general financial and investment companies were the sectors suffering particularly. Last month I recorded highs and lows about equal. With hindsight this might well have shown that the market was finally topping out.
Fortunately our current portfolios are spread well across the sectors and some more recently purchased are holding up well and hopefully will not end up breaching their S/L. We have reduced the number of stocks more by accident than design but doubtless we shall soon be filling some portfolio vacancies. Without the figures to hand I believe our monthly account will show a fall in the UV as most of our shares have been hit to a greater or lesser extent. The market itself is back to where it was in January 2007 but who knows whether it will yet go a lot lower.
We have no meeting scheduled for August so we shall have less activity until September comes round. We shall likely be cash rich and I feel sure there will be plenty of opportunities out there, but we need not rush. We should perhaps wait until well after St Leger day.
Martin Longman - Acknowledgements to Daily Telegraph and FT.