Newsletter July 2005

 

I find it stimulating that on each occasion I come to put my thoughts on paper at the beginning of a new month, the financial mood affecting markets has totally changed. Today I think that the key factor is the likely movement of interest rates in the UK. By the time you read this they may be decided for the coming month. I have to guess using available info. Why do I think the Banks decision will be so important? Well, it comes down to exchange rates and house prices for me.

When the Fed raised US rates again recently, the Pound and the Euro went very soft and if Sterling and the Euro are not supported by rates being maintained at current levels, or higher, then they will go still softer. US rates are thought possibly to have peaked but if they should go even a little higher this puts even more pressure on our two local currencies. What does this mean for UK? Well, a falling currency sometimes helps our export effort but it also translates into problems eg. affording all this expensive oil, priced in dollars. The effect on our domestic economy could be dire including the increased inflation worries. Retailing is weak, the house transfer market is still weak and millions of Brits are jetting off to the sun with their foreign currency jangling in their pockets. I am not full of confidence and feel that rates may stay level tomorrow but could well be forced higher before the year end. The oil price trigger could save us if it falls back, but who would bet on that just now, when traders apparently have $80 in their sights.

At the weekend I unearthed an article which alleged that Steel makers around the World are scaling back production on weaker Chinese demand. A pointer to the effect that high oil prices are having on the global economy. See sector movement below.

In spite of some gloom around, stockmarkets have enjoyed a mid-summer rally. With the FTSE at 5184 yesterday, it is above the original forecast for the year end. However, betters are forecasting 5350 for the year end a considerable rise.  Yesterdays jump of 23.3 points was almost totally due to rises in BP and Shell which should tell you something. Perhaps a very unbalanced outlook.

 The FTSE has continued the recovery evident in May. In sectors, the winners since Jan 1^st have been Electricity (+23%), Oil & Gas (+21%) and Aerospace & Defence (+19%). Each grouping much higher than last month.  Worst fallers have been  Household Goods &Textiles (-18%), Steel & Other Metals (-16%) and Info Tech Hardware(-!5%) How are the mighty fallen as I commented last month? Resources and Mining are still riding high on the year and individual stocks are showing considerable strength. How much is due to reality or is it wishful thinking, and comments from commodity bulls?

 At the weekend there were 201 stocks touching new highs for the last twelve month period, while only 19 hit new lows. Pretty bullish. New highs were seen in RR, Victrex, TWOD, Arla, Stepstone, Kelda and Synergy (xd too).To name a handful in which I have an interest. Four of those shares also hit new highs last time I wrote and Stepstone was up 10% on the month

Phillip Coggan in the FT writes that the housemarket in the US is showing unmistakable signs of a bubble. He notes that investors are buying unbuilt properties, selling them on before they are completed but what is worse are employing ‘negative amortisation’ whereby the full interest rate is not paid but the shortfall added to the original loan!!! When the crash occurs some way down the line it will be ugly, he suggests. Current debt levels are still uncomfortably high in the US and UK. Meanwhile back at the ranch housebuilders here have risen strongly from their lows and Persimmon to mention one, is near its high.

Coming back nearer still to home, our portfolio is not looking bad. The move back into Synergy was late perhaps but why be churlish when the bid for Shiloh has seemingly been welcomed by the market. It certainly ought to be possible to make money in this rising market.

Commodities have been weak over this week at least. Metals mainly down. Only fuels up.

You may remember my mention of the Baltic Dry Index some while ago. This index is based on the basket of prices paid for chartering dry cargo vessels on the world’s most important trading routes.  Well in Dec 2004 it peaked at 6000 just now it is under 3000. Wow. The fall could be due to the China slowdown some have detected. However the truth may be somewhat different since there has been a supply response to high freight rates. First, the scrapping of old vessels has almost completely stopped. 100m tonnes of cargo has been carried in vessels over 30 years old compared with their normal lifespan of 25 years.. Second, lots of new tonnage has entered service. The dry fleet is thought to have increased 7% in 2005. Sufficient to carry 140m  tonnes more. The scale of the supply response outstrips even the more bullish estimates of this years supply growth in iron ore, coal and grain which could total 115m tonnes. The report suggests that we should not leap to blame a lack of demand when sufficiency of supply may be the answer. Either way you look at it the result could reinforce the fall in commodity prices that we could already be witnessing. I remind you about the report on Steelmakers mentioned above.                  

 

ML July 5^th  2005