Monday 10 October 2011

Maximum Pessimism has been passed for 2011?

This it he time to buy, when the last Bull has given up, when there is no one left to sell. Was that point reached last week?

It is fair to ask because calling the bottom is so utterly hard. However, we have some historical guidance to help us. First up is that the Markets tend to rally into Xmas as the Fund Managers need to hit their performance targets.

Secondly, September and October are the most volatile moths, especially in recent years the middle few weeks. Why? Well no one can be sure, but it may have something to do with the re-positioning for the point made above.

Thirdly, it is so hard to pick the bottom that things always seem to get worse.

When it comes to Shareprices though there have been a few key developments in the last 6 weeks:

1 - Libyan War has more or less ended, this was a big macro catalyst on the oil price and helped start the sell-off in March of this year.
2 - Oil Price Falls - below $100 a barrel, a key figure which has been a major contributor to holding back growth and pushing up inflation in the West (and is terrible for global imbalances as it piles up money in the Oil Rich Sheikdoms who then don't use it or use it to do vanity projects like Manchester City).
3 - Quantitative Easing - OK, now this is absurd in many ways, but in terms of investment returns, this will  have an impact on raising the market - even if only temporarily
4 - MerKozy conferences - though these are slow and have no concrete output, it does seem as if the Euro area is at last serious about sorting out the problems - they are of course somewhat intractable, but acknowledging hte problem is always the first step.
5 - Public Sector cuts - These are ahead of schedule, much to the dismay of Lefty institute's today - but again this is a good sign as overall employment is barely up - so great news all round.
6 - M&A is coming back, last week Premier Oil bought Encore Oil in the North Sea, the sector is the poster child of share collapses this year. With Corporates looking at it this suggests a bottom in the prices and real value to be found.

So there we go, much better than my mood of last Monday! There are also of course a few downsides, explored everywhere else at length, but is the Big Mo' with up or down for the rest of the year? (Predicting beyond this quarter is not currently possible given market volatility).


Ryan said...

QE = more cash in the system = inflation = bigger profits = bigger dividends = bigger share prices

What's not to like? Shares are usually limited in supply compared to cash while QE is going on so share prices must rise and provide a useful hedge against inflation (well, tbh shares only rise in general because of more money being pumped secretly into the system).

QE bound to continue for the next 5 years in my opinion because its the only tool we have for massaging the debt down. We sure as hell can't pay it off - not enough cash in the system for that - and rolling it over is becoming harder and harder.

Old BE said...

One factor which has been masked by the bad news is, as you point out, the employment situation. The private sector is - largely - filling the gap as the cuts begin to shift the public payroll downwards. If the government can institute some quick supply side reforms to encourage private business to expand quicker then we might well be on the road to recovery in two years time.

Budgie said...

Isn't the Coalition actually spending more money than Labour?

We do not have a capitalist economy when around 50% of GDP is directly spent by the government and the other 50% is controlled and taxed by that same government.

The UK is a corporatist/socialist state. And Cameron loves it that way.

Steven_L said...

On the 'cuts' - remember that most of the people who have left are the old codgers that have walked out with nice pay offs and pensions deals!

CityUnslicker said...

my comments never seem to come out these days - very odd.

Anyway, my real observation here is that when everyone thinks it is the end - and 3 city economists I have seen present in the last week think it is - then the end must be in sight.

Having said that the Euro crisis is a bit binary - either it is sorted by mid November G20 or the markets are going to have a fit. the credit markets already are pricing in 20% lower than Equity - so nervous times. I have a hunch credit markets are wrong and are just more worried about being in the wrong place in the trade like they were in 2008.

Budgie said...

Cameron's stifled call to pay back our credit cards was right (the call, not the stifling). The BBC sucked a lemon and brought a left think tank spokesman on to say that repayment would "cut the UK's GDP". Up to a point, Lord Copper.

The BBC, and others, are like the man who thought his credit card gave him free credit all the time instead of just for the first month's spend.

Our country's finances are run in the same loopy way. Labour wants to steal even more from our children to spend now, quite overlooking the fact that this means our children will have less to spend in the future.

And in the end the borrowing has to stop because we run out of people to lend to us, and the ability of our children to pay it back (or even service the interest). That moment is now.