The Sorcerer's Apprentice

The end of the holidays and the beginning of September is really the start of a new investing year. The past few weeks have seen an enthusiastic equity rally, but is really based upon some pretty thin trading volumes. This period is often seen as being run by the Sorcerer’s Apprentice, in that the larger and senior traders are away and the juniors are covering - and the question is now what the Sorcerer will do upon his return? This does not necessarily mean that the increasingly more positive news and the market reaction to it has been misplaced, but it does mean that valuations may prove somewhat delicate in the face of much larger trading numbers.

The next fortnight should see a reasonable growth in trading numbers until after the St Leger has been run at Doncaster on Saturday 12th September (as in “sell in May, and go away, and don’t come back until St Leger Day”). In fact, had you sold out in May, and gone away, you would have missed out on a rise in the FTSE 100 of some 673 points from 4243 (1st May) to 4916 (25th Aug) which has been a rise of 15.8%. For the S&P 500 Index in the USA this was even higher, as it produced a growth of 17.2% during that time.

Mutter from the gutter has been telling me that many investment houses were quite significantly caught out by the sudden rally and are still sitting on significant cash amounts. They will no doubt be looking for a chance to get back in but are inevitably quite nervous at plunging back in at these levels. Watch out then, because if we do run into an Autumnal market squall, which is quite likely, then there will be quite a number of people looking to try and get their client monies back in the market. I am not too sure many investment managers will wish to face their clients at the end of the year saying that they entirely missed out on one of the largest equity rallies we have seen in a generation!

If ever there was a reason to underline the need for ongoing asset allocation, then this must be it. By ensuring that you had some reasonable equity exposure has meant that you did not miss out on the rise in prices. However, by then adding a process of tactical asset allocation, this would have allowed a further increase in equity investments both directly and through the use of derivatives to both control the downside risk and increase the upside leverage. Now that is a disciplined investment process and structure.

One issue that is going to have an increasing impact over the next few years is that of the
savings glut. The Eastern nations have for years sat on cash rather than spending it, but now both the US and UK consumers have reversed their reckless spending sprees and have started to save again.

However, with savings interest rates at record lows there will be more money than ever trying desperately to find a better return. As confidence returns, time passes and complacency replaces fear, so the risk appetite of investors will increase. This will be better news for investment markets, but the key issue will be to what extent will the fear of loss be overcome by the greed for higher returns? Investment memories can be remarkably short.

The effect of this awash of savings will be to depress interest rates which will be bad news for ordinary cash savers. For borrowers though, rates (or more usually spreads) have already risen as banks seek to boost margins and profits. One area that will continue to suffer will be the Building Societies who are finding it very difficult to offer decent rates to attract new savers, and thus have little capacity for lending, especially with the wholesale markets still being constricted. Watch out then for further mergers here - sadly with no sign of windfalls, but rather with rescue nets as they huddle together to survive.

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And finally... In a cross between The Full Monty meets The Calendar Girls - workers at the Chaffoteaux et Maury crisis-hit boiler factory in Brittany have decided to strip off for a nude calendar in a bid to save 204 jobs slated for redundancy.

They say they will use the proceeds to fund a trip to Italy where they plan to stage a protest at their parent company, Ariston Thermo Group (ATG) - hopefully by that time fully clothed. "Our aim is to show there are workers here who will do anything to save their jobs, even take their clothes off," said Brigitte Coadic, representative of the CGT union at the site and the woman behind the calendar, which is due out in the Autumn. But Coadic insists that the Chaffoteaux action, in which 13 male workers pose nude covered only
with masks or helmets, is completely peaceful. Well after “Boss-napping”, sit-ins, port blockages and lamb burning, this is probably a bit more appealing. I thought stripping down boilers was just something normally done by British Gas.

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And another and finally... more excellent value from local councils... Dundee Council is spending £144,000 on putting an overweight family of 8 on a diet. I quite understand and support food for those who cannot afford it, but paying people not to?

Have a good week.

Justin A Urquart Stewart
Director
Seven Investment Management Limited

For previous editions of our Weekly Update, please click here

This article represents a personal and light-hearted view from Director, Justin Urquhart Stewart of Seven Investment Management Limited, and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision. Seven Investment Management Limited is authorised and regulated by the Financial Services Authority. Member of the London Stock Exchange. Head office: 23 Austin Friars, London EC2N 2QP. Telephone 020 7760 8777. Registered in England and Wales number 4092911. Registered office: 3 More London Riverside, London SE1 2AQ.