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Carnage! No other word for this correction. Ok, it is hitting certain sectors worse than others but the general effect is the same. Leading indicators are not promising. Last month we all basked in the rosy glow. Prices were toppy and mining stocks hitting new highs (on the back of soaring commodities prices admittedly). Well it had to steady sometime and why not during May. The reversal was forecast, only the date was not mentioned. So, what has changed? Well, nothing really, but all the chickens have come home to roost. Pick any one from these as the trigger; the US deficit, the dried up carry trade, hiccupping commodity prices and of course the Iran confrontation which is keeping oil prices above $70. Many stock markets have been hit worse than the UK and the currencies of some countries appear to have been kneecapped. Contrast the problem markets with the Chinese stock exchange. For some time it has been in the doghouse but just recently it has moved ahead and is again the place to be invested.
Even Gold has suffered, although to be fair it had got ahead of itself. Having dropped about $110 an ounce, it’s next move could well be up although a period while it gasps for breath is possible. Key factors may prove to be the enormous unrecorded purchases of bullion that have been carried out over recent months (up to 8 times previously thought ) and the proposal by Putin that Russia’s central bank should increase it’s gold share to 10% from 5% of foreign reserves.
We may well be in the doldrums with interest rates too. Inflation worries are exercising the minds of central bankers around the world, and it is by no means certain which way rates will go. The US may raise once more and perhaps the Eurozone and UK will follow suit. Will that be it for this round, who knows? The retail sector is certainly feeling the pinch as earnings get hit by the price of energy.
Every factor I reported last month has been borne out by the passage of time. The candlesticks were certainly on the money, if you are a ‘shorter’. I ended by suggesting that we keep cash in hand until prospects became more rosy. I still believe that, although many shares may be bargains relatively speaking. Having just looked at many share graphs this morning it seems most are exhibiting the similar trends. Firstly they had been above trend for nearly 6 months. Second feature was their fall in the last few weeks, most shares almost down to individual 200 ema and the third stage where they are again approaching individual 200 ema’s. Most RSI’s are also very weak . Of course a strong stomach might consider that the worst is over but for the club it may be better to bide our time.
Looking at individual stocks, Debtmatters is probably one of our hot prospects. Debt is the flavour of the year so this firm will benefit. Just now its price is 350 and it is up this morning however I think it may fall back to it’s 50 day ema at around 320/325 and I would still rather try to catch a bargain price.
Hamworthy posted great results which sent the share price sharply upwards last week. Still short of it’s last high though and current market weakness may prevent it scaling that peak for a time. But it’s good to be holding such an impressive share. We were fortunate to hold our nerve when Retail looked sick. The bid talk has restored the share price and put us back in profit.
Our joint meeting with Leeds to Riches club was a generally harmonious affair and I believe successful, in that we managed to swap some useful ideas. Interesting that their holdings are FTSE 100 companies. Their performance has been anything but pedestrian as one might have expected. The potential new members for our club who attended were a strange pair and not considered, by those present, to be an attractive addition to our current team. It seems that we shall have to wait a little longer.
I would like to re-iterate my feeling that the club should purchase 3i. The price is lower than it was when I suggested it as a buy. I pointed out that Merrill Lynch set a price target of £10.80 in 12 months, while they added the company is in a multi-year re-rating. It is an exciting time for that company in that they are opening an office in Beijing and already have offices in Singapore, Hong Kong, Shanghai and Mumbai. What better exposure to Asia could one wish for? International portfolio value has risen from 37% in 2003 to 58% in 2006 thus reducing the UK portion to 42%. The company goes ex-divi on June 15th . It is to return £700m to shareholders, considerably higher than last years £500m, if approved by the AGM.
ML June 6th 2006
Acknowledgements to Daily Telegraph and FT.