The above is a quotation from Francis Urquhart (though I suspect I’ve paraphrased a bit — I’ve rendered it from memory). Urquhart is the central character of the political drama House of Cards, about a Conservative chief whip who rises to become an extremely ruthless (not to mention murderous) PM.
Urquhart expresses a sentiment that many investors will share right now. So today, we’re going to look at how you should respond when events take over.
The last seven days alone provide very valuable lessons. Take last Monday. The House of Representatives rejected the US bailout. Markets fell in response.
Then, on Friday, the House passed the bailout. Markets fell again.
There’s an important lesson here. Predicting events is not enough. You also need to predict how the market will react...
That, of course, is much easier said than done. Several expectations were confounded last week. The FTSE didn’t plunge as expected on Tuesday (it’s fallen today, though... more on that in just a sec).
The dollar didn’t freefall when it was confirmed that 700 billion of the things will be used to buy bad debt. In fact it rallied. There seems to be a bit of a flight to ‘safety’ at the moment. I use the inverted commas as I still believe the long-term dollar outlook is weak. But it is, for the time being, the world’s reserve currency.
It also appears that many US investors liquidated positions abroad and repatriated the funds. American investors need the money...
Your editors began today by watching the FTSE 100. It was down 6% before lunchtime.
Not a pretty sight. But not a reason to panic, either. The Dow dropped sharply on Friday afternoon. That’s Friday afternoon US time, after London has closed. So the FTSE’s catching up... and if the US has a bounce, we should too.
There’s more to it than that, of course. We’ve had a whole weekend since Friday’s close, and a lot’s been happening. Here are the highlights:
- Eurobailout’s looking dead in the water. At a summit in Paris on Saturday, the European big cheeses said they’d tackle banking crises at a national, rather than supranational level. This was despite IMF boss Dominique Strauss-Kahn exhorting that a co-ordinated solution be found
- German chancellor Angela Merkel has become the latest to guarantee 100% of bank customer’s savings in her country. The pressure’s now on for the UK to follow suit (our government has already upped its guarantee from £35,000 to £50,000)
- The UK government is considering a plan to directly recapitalise British banks. In return, the taxpayer will get an equity stake. It would be, in effect, a part-nationalisation of the banking system. Everyone keeps mentioning how Sweden did something similar in the nineties, and ended up making a profit on it. But that’s really by the by — if the government believes there’s value to be had buying banks, it’s in a very lonely place. It’s financial stocks that are leading today’s FTSE plunge
- Speaking of which, trading in all financials has been suspended in Iceland. Iceland is in serious, serious trouble...
I outlined our response to the US bail-out defeat last Tuesday. If you haven’t already, have a read.
Today I’d like to add a little. Two schools of thought seem to be emerging from all this noise. Both are hot-headed, and both I would counsel against.
The first is the School of Outright Panic. Investors — many of whom probably wish they’d got out of the market sooner — are dumping stocks. Maybe they’re right... but I suspect they’ll rue their decision to sell as much as their decision to buy.
The second school is The School of Blind Opportunism. Contrarian for contrarianism’s sake. These investors are buying up stocks in the hope of a turnaround. If they’re good stock pickers — and they can afford to stay the course — these investors may do very well out of it.
But it’s worth remembering that throughout this crisis some people have been too clever for their own good. Those who bought Northern Rock... those who bought HBOS... investors who imagined their boldness would be handsomely rewarded. It wasn’t.
As I say, I’m not a fan of either school of thought. But I realise that this amounts to me saying "Don’t sell, but don’t buy either". How do I reconcile these two seemingly contradictory positions?
Allow me to qualify, starting with my objections to the School of Outright Panic. I’m opposed to making panicky decisions as an investment principle. True, there are occasions when a panic Sell turns out to be absolutely the right thing to do. More often, though, this kind of fevered decision-making creates poor investment returns. What if you sell today and the market rallies this week or next? I can’t promise you a bounce — no one can do that. But there is reason to suspect one may be on the cards.
Theo Casey, Fleet Street Letter investment director, writes in his bulletin to subscribers today that he can see five government actions that could prompt a rally. Any such rally could present a better opportunity than today to offload stocks you’re not keen on.
Of course, the final decision is up to you. You may decide the aggro of waiting and hoping just ain’t worth it. You may decide simply to sell stocks you’ve lost faith in. If you do sell today, do it and don’t look back.
But what of those who think now might be a time to buy? Well, short term we may see a bounce, but long term the picture’s still bleak. Economist Nouriel Roubini — who warned of the dangers of a credit crunch long before it hit — talks of a negative feedback loop between the banking sector and the real economy.
You see, it’s not just would-be first-time buyers that are being hit by banks’ unwillingness to lend. Companies are too — and that has grave implications for economic growth, which in turn exacerbates the financial crisis.
In short, volatility will be with us for some time. That volatility could present better selling opportunities in the short term. Long term, though, it’s a good reason to have fewer, not more, equities in your portfolio.
[Ed note: The Fleet Street Letter is currently looking for alternatives to equities, which will enable you to rebalance your portfolio. We are currently researching an investment that allows you to benefit from the upside while protecting your downside. And we already have another investment in the portfolio that allows you to diversify away from stocks. This bond-based investment pays a twice-yearly dividend, and is designed to benefit from a weakening of the pound. Follow this link to discover more about The Fleet Street Letter.]
Until tomorrow
Ben Traynor
Editor
Fleet Street Daily
The Daily Reckoning — Is inflation dead?
Inflation delenda est. Viva deflation!
And now Congress has passed a bailout bill...the fix is in...everyone will be protected...spared...saved. Inflation is going away. Prosperity is just around the corner. Hallelujah!
But wait...
Where’s the catch? There’s a crack in every bell God ever made...a little hairline fracture. Perhaps invisible to the human eye. Perhaps unnoticeable for many years. But hit the thing hard enough...and it falls to pieces. We’ll come back to this in a moment... First, let’s reminisce.
The last two weeks have been exhilarating.
You can read the Daily Reckoning in full here.
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