For previous Newsletters, please click here

Last month I noted that markets were buckling under the strain. Since the time of writing Northern Rock became the high profile fall guy. It’s SP fell disastrously and people looked around for the next victim. There are question marks around the globe with a number of companies imploding. Most are related in some way to sub-prime lending a problem which many had seen coming but why was it allowed to grow to such unmanageable proportions? It was not just greed, because US authorities have recognised difficulties for some months although those who picked up the CDO’s (collateralised debt obligations) were probably motivated by prospective high returns and ultimately greed.

Questions are now being asked about the length of time these problems will remain and economies will be affected. Well, years rather than months would seem to be the answer. Investors who are aware must keep away from sectors liable to collateral damage. Many companies already have a lot of bad news in the price so stock picking is the key.

The housing market problems which are particularly obvious in the US and UK are leading to falls in property prices of some magnitude but the knock on effect in the financial sector will also be profound. Unsecured losses will blossom and many consumers are experiencing or facing repossession and bankruptcy. Central banks are trying to ameliorate the problems but they risk stimulating economic activity at the expense of accelerating inflation. The interest rate medicine is no longer available without a poison pill.

Interest rates are now heading downwards in the US. Where they go, the UK and Euroland cannot be far behind. Indeed the pips are squeaking in both the UK & Europe and the clamour for a relaxation of the squeeze is becoming deafening. Nobody wants the dollar, gold is on a charge. The reflationary rescue may take gold to the $1000 mark touted for several years. Japan, a massive part of the world economy and a manufacturing colossus has had 8 months of falling wages and it’s economy contracted by 0.3% in the second quarter. The strength of the Euro is hurting industry in Europe and it cannot stay high without causing extended problems.

Credit to companies and individuals needs reining in so that our collective indebtedness falls sharply. The house price collapse in the US is a prime example of the coming trend. Beware.

Commodities seem to be taking on safe-haven status. With their wide spread of base and precious metal assets it appears as if investors are buying mining shares in ever larger chunks driving companies such as BHP and Rio Tinto ever higher. It’s obviously not just the Chinese demand theory in operation now. Oil seems to be operating in a field of it’s own but is still in huge demand which is maintaining a very high price of crude. It’s dollar denominated status is causing a lot of the froth and tightness in refining capacity and crude supply is not easing natural constraints particularly in the US.

Mobius club are again heavily in cash. Probably a good position but more by luck than judgement. Much of our portfolios have hit S/L’s and been sold. The survivors are like gold dust and possibly candidates for doubling up. Umeco, Senoir and others are in fine fettle so far. We need to be ready to move funds into safe and promising sectors when the market is adjudged to have settled. My favourite share at present is Persimmon and the club has made profits in the past using it but it is now back to the price it held in early 2006 and is surely a bargain. No guarantee that it will not fall a bit further but within a year or two it should show a healthy profit.

Of course there are plenty of fish in the sea and mechanical selection is the flavour of choice for members just now. The problem is that we have lost money over the last few months and sometimes a share suggested does not come up to expectations. Several dead ducks have got themselves on to the buy list so sector selection is probably a move we should research further. Our UV could do with another boost to refund our cash assets again.

Recent purchases like Creston and TT Technologies have time to show their worth but personally I fear that one or the other may be a mistimed entry. Time will tell. Hamworthy should reward our faith and Tanfield could do well for us if and when we decide to repurchase.

Martin Longman - Acknowledgements to Daily Telegraph and FT.