SUMMARY. The news flow has been poor, and will continue to be for some months. But there are early signs of stability, from stock markets, mortgage applications, and the growing consciousness that the cost of living is falling, fast.
There were early signs of stability as November progressed. If you focus on the news headlines and economic announcements (for example a huge increase in US unemployment) this was not obvious, but the signs were there.
Take last Friday when the worst US increase in unemployment for 30-odd years was announced. At first their stock market fell sharply, and then rose sharply. How can it be so? There are two points to consider.
Firstly, the stock market does not reflect the news today, but rather it discounts events that it expects at some point in the future. It can be argued that the US stock market has not hit new lows, despite stark and continuing deterioration in their economy, because, among other things, it is making allowance for a substantial stimulus package from Barack Obama in early 2009, and an economic recovery later in 2009.
Secondly, the stock market has been driven to artificially low levels by hedge fund selling. Take Game Group in the UK, the leading video games retailer. If you have been in one of their shops on a Saturday morning over the last year or so, you will have been astonished by the queues. Signs of weakness lately? Not a bit of it. Sales in 2007 were very strong, yet in September 2008 sales were up a further 35% of the 2007 number. Even though we had a call from a client this morning in a frustratingly long queue in local Game shop, the share price was down 40% in November.
The clue for this is in their shareholder list, where you will not recognise half of the top 25 holders – that is because they are probably hedge funds, and in November they were desperate to sell anything at any price.
We acknowledge that this hedge fund selling might have pushed share prices to levels which are coincidentally justified by the gloomy economic outlook. Yet stock markets recently holding up in the face of this news flow suggests that the indices could be past their worst, or at least past the point of maximum drama, driven by hedge fund sales and those inclined to panic.
These negative news flows will continue for some months, yet for those that feel relatively secure in their jobs, or are retired and have secure income sources, the benefits of collapsing inflation are already being enjoyed. As one client put it just last week: “I have never lived so cheaply”.
The latter is a global phenomenon. For example, in the US housing affordability is at its best for 20 years, and in the last week of November mortgage applications increased in excess of 200%, as sharply lower interest rates encouraged buying at bombed-out prices.
Last but not least, as we grapple with our fear, we should also reflect on the truism that historic falls create historic opportunities. Next month, and in the next TopFunds Guide, we will focus on those sectors which have “bounceability”.