Market commentary October 2005

Despite Greenspans discomfort, and ignoring what might cause the US economy to eventually slow (a surprise 0.5% rate increase?) there should be no doubt that the economy will eventually noticeably slow down.  At that point, which may not be far off, and as projections for global growth rates are cut, the current pre-occupation with oil prices will disintegrate, which is positive, but so will the froth on a lot of oil exploration stocks, and those on AIM, the junior section of the UK stockmarket, could take a real beating as punters head for the exit.  Oil stocks represent 16% of the whole AIM market, and one in four of these are pure exploration stocks.  Take care.

Similar froth is evident with the gold price, which has hit an 18 year high.  Gold can rise for investment reasons, such as fears of inflation or economic collapse, but neither apply now or you would have already seen marked weakness in other assets.  Are the rises driven by a shortage?  Not obviously, and central banks are still big sellers.  It appears the wobbly foundation for the current excitement is lots of cheap, hot, money (still) looking for a home.

The kind of euphoria and consensus surrounding oil and gold are no different to the view at the end of 2004 that the dollar was inevitably going to keep on falling, and a huge amount of research was produced, and parrotted by the media, to illustrate why this was so.  If you were caught out by dollar strength in 2005, or are now punting in oil and gold, do be clear that you are fodder for the next sharp downturn, and do distinguish this punting from when you take a fundamental investment view on a real business with real profits, as, we hope, most good fund managers do.