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Four weeks ago I noted that the price of oil had moderated. This movement has continued and we have all benefited from sliding prices at the pumps. World economies are also perhaps seeing the first signs of lower oil prices hinting at an eventual reduction in inflation rates. Early stages though, and at this point in the cycle there is every chance that inflation may go higher before easing in response to central bank rate tightening. It seems that a few benign influences such as; the sharp fall in some commodities like energy and base metals, the halting (perhaps temporary) of US rate rises, the lowering of bond yields and stronger equity prices are combining to suggest that the slowdown in the US economy will be cushioned.
This week has seen major stockmarkets nudging previous all-time highs. Confidence may be returning with an increase in M&A activity mooted. A takeover of Prudential by AXA would certainly light a fire. Behind this seemingly good news though lie some niggling worries so it is not unalloyed joy for investors. US house prices and empty new homes might presage a bigger slowdown in consumer spending than expected. Many observers believe there will be a serious setback there. The UK housing market is not thought to be quite as precarious since historically interest rates are still believed to be affordable with earnings strong and many families have two strong earners. October has often been a bad month for markets so the next few days or weeks might see some fireworks. P/E levels are reasonable and profits growth is fairly sustainable in the near term which might support the market into next year. Inflation, ultimately, may still have the biggest influence on major economies. Any rise in the headline rate might be the catalyst for serious trouble. One good sign is the reduction in credit card debt in UK. If this continues then inflation may be tamed but it is by no means a foregone conclusion.
With oil at just over $62 it was a salutary lesson to some US dealers when Nymex gas futures for Oct 2006 had plunged from $16 in May to $4 last week causing the Amaranth Advisors hedge fund to lose $6 billion. Reuters CRB commodity index had also fallen 8% since May. Both indices may rebound from now but who knows?
Mobius club is still predominantly in cash. The Mech portfolio has added Hyder Consulting, a firm with an impressive track record, which recently produced another strong set of results. All the mech portfolio are holding their own as the market rises apart from Betonsports which is giving a dead duck impression. Even Delta took a step up last week after a month or two with little activity.
A bad October could see the club ideally placed to re-enter the market (at advantageous prices) with potential purchases of Billiton and Merrill Lynch Mining which members seem keen to do. Doubtless there will be other share buying proposals from members to consider at the next meeting.
My personal portfolio is strengthening particularly due to Ashtead, still on the upward trend following the rights issue and Standard Chartered which has been on the acquisition trail again, in Taiwan this time. The latter share has a great spread of investment throughout SE Asia so I rate it a good investment into the region and possibly better than a direct investment in China itself. Subsea , which I concede is a gamble, has been steadily raising more copper in spite of delays from stormy weather and engineering problems. Like all big projects commencing work in extreme conditions there will be a lot of lessons to be learned and further slip-ups, which lead to delays, along the way. I confidently expect the company to fulfil it’s main objectives but on a longer time scale. Certainly no one wants to see personnel put in jeopardy by undue risk taking. Next financial year should see some great numbers from the company. I cannot wait, but I am patient.
ML - Acknowledgements to Daily Telegraph and FT.