GOD ONLY KNOWS

I normally enjoy my job. However, right now, I think being Osama Bin Laden's body double would be less stressful.

Seeing clients' investment, and pension fund, values fall by such a large amount over such a short period of time is not a nice experience. As a result, and to keep our sanity, we have increased the amount of research we receive, considered the views of both pessimists and optimists, as well as having a record number of fund manager meetings. The purpose - to determine if this time it really is different from previous falls. The upshot - we still firmly believe the patient investor will be rewarded.

What we have seen in the last few weeks and months has been a fall in asset values unseen for years. However, unlike previous falls which have tended to have been preceded by exuberance which has created a "bubble" ready to burst, apart from Residential property and possibly mining stocks, this has not been the case this time. Instead the causes have been far more obscure, but there is nothing to suggest that this fall will end any differently from previous ones, as each previous "crash" has had different characteristics.

There is no point in going over old ground as to what has been the cause, but what it has brought into sharp focus is the culture of greed that had been building up over the years. I am referring to institutional as well as personal greed. This was highlighted by the actions of the banks and their "too clever by half" manipulation of the loan markets and how these were packaged and sold on, and the rush by the crowd to achieve "easy money" by going into the buy-to-let market unhindered, and indeed encouraged, by banks. It has also been highlighted by my old favourite - hedge funds.

I should point out, to avoid getting even more criticism from hedge fund managers, that not all hedge funds and managers are the same. As with all professions there are good and bad in the industry. However, one has to ask whether these funds would have been as popular amongst management groups if the charges levied by the managers typically 2% per annum as well as a performance fee of 20% of any growth achieved over a set figure each year had not been in place. When markets are rising it is fairly easy to produce strong returns, particularly when the fund has borrowed heavily to invest in the market. This "gearing" works well when times are fair however, the chickens have now come home to roost.

As has been widely reported, certain hedge funds are "forced sellers" in the current market which is the last thing you want to be. This has been as a result of a number of investors pulling their money out, but as well as this we have also seen banks call in the loans made to these funds, and the most liquid asset the fund can realise to repay these is their equity holdings.

I am not suggesting this is the only reason we have seen the falls in the market by any means, but it certainly has not helped, and this brings me on to the subject of capitulation.

This term is used when we see mass selling in the stockmarket. The theory behind capitulation is that once everyone who wants to get out of the market has left, there are no sellers left to drive prices down. Theoretically therefore, the market will have bottomed and as there are only buyers left behind a sharp rebound could take place. We have seen selling, but I am not sure if we have reached the stage of capitulation as the volumes have not been quite as high as we would expect. Therefore there may be a bit more of a downside to the market in the short term, and we may even get close to the lows we saw in 2003.

However, as I said at the start, we see no reason to believe the end will be any different this time, so we need to remind ourselves as to what has happened in previous years.

A positive indicator strangely enough is the cover of Time magazine. I recently received an email which showed some Time covers from the last 34 years. Almost every one of these would have appeared relevant today. The headlines included "Recessions greetings" (Christmas issue) "the energy mess" "unemployment - the biggest worry" "interest rate anguish" "the monster deficit" "America's banks - awash in troubles" "the crash" "the recession - how bad is it?" "how to survive the slump". You get the picture. Each one was published at a time which ended up being near the bottom of the market.

Strangely I actually felt heartened after reading these, as it reaffirmed what I believe, namely this is not anything new and we have survived as bad periods in the past. In each of these previous periods it felt as if the world was coming to an end, and I am certain that each time there were good reasons to believe that to be the case. However, on average the stockmarket had tripled ten years after the cover had been printed. The good news? - The most recent Time cover has a picture of a 1930's dole queue with the heading "the new hard times". Yippee!

There are other indicators that are pointing to markets being way oversold. A lot of these are technical and relatively boring so I will not go into detail here, but they include dividend to gilt yield ratios, and sentiment indicators (which are currently off the scale). One of my own personal buy indicators is the stockmarket ticker which is now a permanent fixture on both Sky and BBC news channels. As I have mentioned previously this little box of doom only appears when markets are in freefall. When it is no longer on screen, you can rest assured that the markets have risen quite strongly!

The last time we had as large a fall in the markets was 1973/74, when the UK stockmarket fell by nearly 75%. There was a completely unexpected rebound in 1975 when it rose by over 100%. The catalyst at that time was Insurance Companies deciding to increase their exposure to shares. This time I don't expect Insurance Companies to be the cavalry, but it would not surprise me if some of the large Sovereign Wealth funds in the Middle and Far East, which are awash with cash, were not eyeing up the prices in Global stockmarkets with a view to getting some bargains.

 

Who knows? Previously the recovery has come from most unexpected sources, and perhaps I should be looking upwards rather than East, as it has been reported that the Vatican has already been buying shares at the current distressed levels. Good to know that God is on our side!

Steve Forbes

Steve
Author
Steve Forbes
Managing Director
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This letter is the personal view of Steve Forbes. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.