Newsletter October 2005

 

          Am I a Jeremiah or what? I shall know when Ray pipes up sell, sell, sell. No, seriously. Where do you invest when none of the sums seem to add up?

            This morning Judith and I went for a walk around a new housing estate in Scissett. About 13 houses occupied and 3 unoccupied with two under construction. However no men at work!!! Prices were in the region of £300k. By contrast, earlier in the year they were building as fast as their little legs would allow and selling just as fast. What conclusions can one draw? Well, if you work in town (from Scissett that is) and pay for your fuel it’s getting much more expensive to get around, secondly people’s senses may be suggesting that the top of this housing cycle has finally passed and from here prices may go down in a self-perpetuating spiral. Perhaps not sudden but it will be a shock to the system.

             Reading the Daily Reckoning is a bit like deja-vu. The same sentiments are being peddled as in late 2000 and 2001 when Bob and I were keen Gold Bugs. However, now we are in a rising market the FTSE has hit 5500 getting way ahead of the original year-end forecasts and money is still pouring into stocks with 264 shares hitting new highs last week and only 41 hitting new lows. Admittedly, more than 150 of the new highs were investments companies which seem to lag the upturn in basic stocks in which they are invested. The Daily R is pointing out that all the risk factors that came together in 1974 are present and festering again e.g, rampant oil and commodity prices, soaring debt (especially in the US), record budget deficits, trade imbalances etc. Interest rates are having to be squeezed higher in the US to pinch out inflation. Consequently the DOW (down 2% this year, with bellwethers like Microsoft and Fannie Mae seriously off and Walmart down from £70 to $43) is the sickest stock market of all the big boys. Whereas Germany, UK and Japan (boosted well over a hundred points again yesterday) are well up. However, can inflation be controlled? The price of gold suggests that some investors around the world think not. Gold Bullion Securities shares have gone above £26 recently whereas I used to often mention in Mobius meetings that the price was stuck around the £22 area. Although those shares are related to the gold price fix, being a share, they can move sharply upwards or downwards as sentiment changes.

            A propos energy, the price of oil has steadied a bit ever since Rita passed with less damage than feared however there is still some hiatus expected in the gas market and shortages are still feared this winter. Set against that is the fact that futures for delivery in winter 2006 are 17% down on prices for delivery this winter. So the future looks more settled. The Daily Reckoning writes that it takes one barrel of oil to get 30 out of the ground which is great economics for now but the changes which will come as Peak Oil date comes round next year. Developed economies like Europe, the US and Japan are  well past their peak years of oil production which means we will in future be reliant on the Middle East Africa and Asia. Peak Oil is supposedly the date when the whole World as an entity will pass over the production hump. After that date oil production goes into slow but inexorable decline and it becomes harder and harder to obtain each fresh barrel. Ensuring supplies for our economies will become extremely expensive. Wars over control, long term policing of states and protection of pipelines will be inordinately expensive so prices will likely stay up. Whether that leads to greater profits for oil companies is not going to be certain at all times. For now the price of oil looks likely to brake economies as it is already steadying the UK retail scene.

Another point from the DR is the  situation in the US particularly where suburbanites live 30 to 60 minutes drive from their work. It is patently unsustainable. Another gem is a projection from India. Firstly that the middle class there will be 983 million by 2015, with half the population under 25. In 40 years it is estimated that India will be the most populous nation. Over the last ten years their net income has doubled.                             Sector watch shows few changes from last month although the high market has taken the usual suspects like Mining and Commodity shares further ahead of the pack..

            Our portfolio, close to fully invested is doing pretty well but buoyed by gains in, typically HMY, Merrill Lynch World and BHP. Others have been mixed. One of our recent ‘watches’ RTD has taken a tumble and may put itself in the frame. However if a rights issue is on the cards then we should hold off. Arla margins are being squeezed although the recent chairman’s statement is encouraging for the future and a bid could always materialise. Bids seem to be keeping the market dealers happy so watch out if they dry up.

            I recommend that members take a look at the chart of Redbus Interhouse. The strong momentum from May this year 14p to today 21p is supported by a positive trading statement. All indicators are up and it seems likely to keep following the 26 day ema  for a while at least. This is another tech share which is coming back from the dead in style.

            Any more doom required? The big bad day in 1987 was Monday Oct 21.The market plummeted 26.4% in the day.

                                                ML October 4^th 2005

Acknowledgements to Daily Reckoning, Daily Telegraph and FT