IN THE wettest August since 1948 the sun shone on the Aureus Crux Investment Club, helping the unit price climb to £2.49, 2p below its all-time high.
While the club is up since the credit crunch began, the stock market is down. And now that it has fallen by more than 20 per cent from mid-June 2007, the "sole" searching a "plaice" starts. That is, the bottom-feeders begin soul-searching to place th
e bottom of the current bear market.
Barclays and HSBC analysts seem to be the first bottom-feeders breaking cover to encourage the shoal to follow. Strategists at Barclays stockbrokers see the FTSE 100 to be if not in positive territory by the end of 2008, then certainly within an 8 per cent casting distance below the year's opening, with a possible 6 per cent gain in 2009. HSBC equity strategists are even more optimistic, expecting the FTSE 100 to reach the 6,000 mark by close of trading this year. Given that my paper and pencil (pap) analysis is looking for a FTSE nadir of 4,000, on what could the bottom-feeders possibly base these positive forecasts and should the club take the bait?
One possible reason for optimism is that the current 13-month bear market might almost have run its course with a time frame falling between 1973-74 and 2000-3 bear market durations. Some analysts see the post-war financial markets of the UK having long bull markets punctuated by short bear markets.
But this analysis relies on selected time frames and conveniently ignores many short bull markets such as those of 1949-51 and 1952-55.
Another factor that some analysts feel could be indicative of a market turn is the lowest price-earnings ratio – a closely followed measure of share values – in two decades.
Strategists also point to company yields that on average have risen to match and surpass gilt yields, known technically as a crossover. The significance of this is that the last time crossover occurred was the demise of the 2000-3 bear market.
The impression given by this analysis is that two completely unrelated financial tools are confirming each other's positive signals. This is completely erroneous.
Both these measures are favourable for the same reason. Share prices have fallen and this simultaneously raises yields and lowers p/e ratios.
What is actually happening in the economy is that jobs are being lost at an alarming rate in the financial, construction and retailing sectors. Fund managers are decimating their clients' money.
Some Scotsman readers, I am sure, will be among those investors who have collectively lost £48 billion since we entered the bear market.
These losses have yet to manifest themselves in falling company profits, lower share values and negative UK GDP figures.
On this analysis the club should leave the "plaice" and "sole" traders well alone.
But if this is any guide to where the market is heading the Investment Club has to identify sectors or shares that will benefit in the current climate.
One such sector worth looking at is those companies that derive a substantial percentage of their profits in dollars. Therefore, in the coming month, pap analysis will identify any likely candidates in which the club can invest its precious money.
Hopefully, the new recommendation will be as successful as the club's National Express investment, which has returned about 8 per cent in under two months.
The full article contains 588 words and appears in The Scotsman newspaper.
