Market commentary December 2005

In March we felt that the FTSE 100 index (then at 5000) would be driven into our target range of 5200-5600 by bid activity, and though it has taken a bit longer than expected, this M&A activity is well underway, and is likely not yet over. Over the last 12 months the footsie has more or less mirrored the performance of the smallcaps, both up a little over 16%.

In April we analysed the Feds policy on persistently raising interest rates, and felt that this had not so much to do with inflation, but rather an “unholy rush by the Fed to get rates higher before the next downturn”. The jury is still out on this one, and right now social mood (analysed in June) is holding up, particularly in the US, as reflected in recent consumer confidence and house sale numbers.

In May, as gloom descended, we highlighted the singular confidence of Neil Woodford and Anthony Bolton buying a bombed-out Marconi. If only we had all had their confidence, we would now be somewhat richer.

In July and November we highlighted the barrier to progress on the footsie (5400, which we’re holding above right now), and where a typical retracement of the bull run since March 2003 might stop (4400-4800) the downside risk. By the August issue all asset classes were, unusually, rallying in tandem, which is a puzzle to which the answer is liquidity – the rising tide of liquidity raises all boats, with little discrimination. Ride these trends by all means, but, we suggested, keep your eye on the exit.

We were half right in September, highlighting how the avian flu story would unfold through the Autumn, yet the impact on market sentiment was very limited, and the seasonal Autumn wobbles never got going. In October we warned that you must take great care punting in oil and gold. Gold has now briefly topped the US$500 level, for the first time in 18 years, and other base metals have hit new highs for the year. Speculative demand is driving these prices, and though it is impossible to identify when and where this will end, you can be sure that there are a lot of people who can react much faster than you can when it comes time to sell, so beware.