It should be an interesting hour of TV, but maybe a little backward looking. Call me an optimist, but I care more about the future – and how we can make money from the market going forward.
I pity the glass-half-empty brigade. They’re so busy moping about the state of the world economy, they’re going to miss out on all the opportunities.
So far this year, nickel, tin and zinc are up between 9% and 28%. The price of Copper, the bellwether of the metals sector – and a good barometer for the economy – is up 55%. The price of oil has moved from $42 per barrel to $50 per barrel. This bullish action in the commodities sector points towards renewed confidence that we’re through the worst of the recession.
Back here in the UK the share price of property leader Land Securities is up 31% in a month, leading house builder Persimmon is up 12%, and even the wretched Royal Bank of Scotland has seen a 57% move, from 19p to 30p. What is going on?
It all comes down to ‘risk appetite’. It’s one of those horrible terms like ‘wealth management’ and ‘high net worth’, coined by City whiz-kids to make it appear that they know a whole lot more than you or I. Perhaps you already know what it means. But in case you don’t, I would explain it as follows…
The blood of adventure is stirring
If you are nervous about the economic outlook you stick your money under the mattress. You have no ‘appetite for risk’. But if you think that things look a little rosier and your blood is stirred by the thought of quick trades and easy profits, then you plunge into Vietnamese property funds, frontier oil projects or whatever else allures your ‘appetite for risk’.
You get the picture. So what is clear from the prices that I have illustrated above – and I could give you many other examples – is that the blood of adventure is indeed stirring. To prove the point the price of gold – the ultimate haven of those who mistrust the entire financial world and all that it has to offer – has slipped back from $910 per oz to $880. It is clear that the mood of the market has changed.
There are three reasons for this. The first is that financial markets react to changes on the margin of expectation. In other words if the prevailing view alters from the belief that the world is going to end tomorrow to one that gives it another month or so, then markets will rise. Today we still feel gloomy about the economy – but not quite as suicidal as we did.
The next reason why some prices, especially of commodities, are rising is the inventory cycle. Consumer confidence hit its low point last October. Retailers slashed orders, their suppliers in turn cancelled contracts with their own raw material providers. Levels of inventory were cut to the bare minimum throughout the supply chain and manufacturing industry shuddered to a halt.
But that cannot last. Even if adjusting to a lower level of sales, retailers and manufacturers must maintain some inventory, so there must be some production of goods and some rebuilding of stocks. The inventory chain has duly been replenished in the first quarter.
Signs of a recovery that will feed off each other
And then there is a third factor – the actions of our political leaders may actually be working. As one leading fund manager pointed out last year, ‘the scale of the problems is unprecedented – but so is the policy response.’ Interest rates have been slashed, governments have given up any pretence of balancing budgets and now this mighty effort to float the sinking ship may be working.
The bears, of course, are in denial. Each piece of positive economic data is dismissed as a blip. ‘One swallow does not make a summer,’ they warn. But like it or not there are now signs of a recovery, and they will feed off each other. If we manage finally to sell our house we might celebrate with a meal at our hard pressed local restaurant.
Let us not make the mistake of dismissing the evidence just because it does not suit our view. The green shoots are appearing and I expect to see further evidence of economic recovery in the coming weeks. So ask yourself – does it really make sense to hoard your cash at this time? Does it really make sense to accept a derisory return on your bank deposit account when the UK stock market yields over 5%?
It is time to sharpen up your appetite for risk. It is time to be brave. It is time to hunt for bargains in the stock market. Where I am looking, in the downtrodden small company sector, we’re already being rewarded. The AIM index of small companies is up 18% in the last month compared to a 5% rise in the FTSE.
And there are still plenty of incredible bargains to be had. If you have the guts to get into the market now, I’m certain you’ll be richly rewarded.
Good investing,
Tom Bulford
For The Right Side
P.S. The stock market is now creeping up and is higher than it was six months ago. And small companies are beginning to outperform large companies. This is the time to start buying good quality small company shares. Click here to discover three of the right companies right now.
Market Notes
Despite a surge in the price of crude, oil stocks aren’t following
BY SHIVVY ARORA
The rebound in crude oil prices during the past five months hasn’t given much of a boost to the world’s biggest oil companies.
Take a look at the chart below. It shows the percentage change in crude oil prices versus oil company stocks for the past five months. The red line shows crude oil prices. The Amex Oil Index (blue line, ticker: XOI) represents stocks of 13 oil companies, such as Exxon, BP and Chevron.
You can see that crude oil prices jumped 48% since mid-December 2008. The Amex Oil Index however, has fallen by close to 6% in the same period.
No gains for oil stocks despite oil rising
Source: Bloomberg
Under normal circumstances, this would be a strange thing. But in the current climate, this actually makes sense. Flailing demand, the price of oil being still-too-low and the worldwide recession all drag on oil stocks. And Christof Ruhl, chief economist at BP, told Reuters only today that spare capacity in oil markets could weigh on the price for years to come.
Oil fell by two-thirds in five months last year as demand started to plummet. This has led OPEC to cut supply in a bid to stem the price slide. They long for a return to the heady days of July last year, when oil was knocking on $150 a barrel.
As for where oil heads now, most experts see support for oil prices, provided supply is curbed and inventories remain low.
Of course, when demand does return, oil will be squeezed higher – and eventually the oil companies will follow.
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