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The correction came. But has it gone? The sectors which led the previous charge have subsided somewhat but are showing signs of revival. Meanwhile the usual defensive sectors found whatever support was going. Some investment houses believe that other sectors will show the greatest upward movement after the correction is over, but we shall see.
Global worries seem pre-occupied with Fed rate decisions. If inflation persists, then we will still get measured increases in US rates but they may be less frequent going forward. The probability of an August rise is no more than 50/50 at present but that could change depending on July economic data. A period of indecision might be the focus for the medium term until inflation is judged to have been purged from the US economy. There is a definite possibility that the high price of oil ($73) and bubbling commodities will depress global activity, acting like a world tax. Which would of course be bad news all round. Let’s hope it does not come to that. A few weeks ago, as oil prices weakened, it felt as if a weight was about to be lifted but the start of the US holiday driving season and the impending hurricane period amongst other factors are stoking prices again. Production from the Gulf of Mexico is still 15 % below pre-Katrina levels. The oil futures market suggests a price of $70 until August 2010, not a happy thought for drivers or indeed producers.
The influence of US rates on world currencies should not be underestimated. Already the dollar is showing weakness with the hints from Bernanke (Fed Chairman) that this increasing rate squeeze is finally close to topping out and rates may indeed start to drop next year. The dollar is down 7.7% against the Euro in the year to date while further tightening is likely in the Eurozone. With these expectations there was a big recovery last week in weaker currencies such as the Turkish Lira after their central bank raised rates to 22 %!
After some weakness, over the last 4 weeks, in commodity prices, they strengthened again. Copper and gold moved up strongly although not near their highs. Gold will definitely be flavour of the month if, as is thought, some 10% of petrodollars moves into the metal. Chartists might be of the opinion that one bottom has been identified. However a second might well form in the next month or so. Current strength has boosted miners up again but they still give the appearance of forming a pronounced bubble relative to the All-Share index. This may or may not be sustainable in the long run. Oil stocks look at least as well supported by the record oil prices and typical US summer demand.
The club is as you know well balanced with cash. There is in my opinion no need to rush into new investments. However as good opportunities arise they should be examined closely and purchased if they fit club criteria. Several of our shares have been quite strong of late on the back of good results. Particularly, Debtmatters and Hamworthy. Retail, having risen strongly today may again be close to takeover which will benefit us considerably. At this early stage we have had mixed results on our mechanical portfolio, with BETonsports rising well while Delta is perhaps struggling under the weight of massive prior third party sale. News about Langbar legal moves is not encouraging and seems likely to lead to return of less cash to shareholders, but one can live in hope. In the light of the market being down about 5% our UV is reasonable. A move into the market at lower levels will, on balance, probably net us better returns in future with consequential benefits to our UV.
Investments sold due to S/L breaches i.e. BHP and Merrill gave us good profits totalling more than £1300. A few more gains like that would improve the clubs standing very much and give much needed confidence. Future declines in SP’s of these shares may present opportunities to get back in again. Let us hope so.
On a personal level I used some liquid assets to purchase shares such as Avocet (gold mining), 3i and Ashtead. All were weaker, (particularly Ashtead), over the last month and two are recovering well with the market. Avocet was a tip from Fat Prophets. It initially fell during the week of the ‘tip’ but is nicely ahead, as the gold price firms, since it is solely concerned with gold. 3i was battered in June but at 844p I could resist no longer. Now I notice they are buying a Chinese restaurant chain. Interesting departure! Ashtead looked in dire condition before it’s final results were published but it seems the fright was much to do with it’s founder retiring from the business. Hopefully it will make a full recovery in time, especially as it’s growth over the Atlantic has been very strong in the last financial year with forecast of more to come. I am showing a large paper loss over the last two months and with hindsight I could have traded successfully to take advantage of the large price movement but I was a bit slow. The purchase of new shares will be beneficial in time. All being well. Hope you are all keeping well and your spirits have not been dampened by the market turmoil. I doubt we are out of the wood yet but things look easier at this time. All the best with investing.
ML July 4th 2006
Acknowledgements to Daily Telegraph and FT.