Tim Price: Happy New Fear
Comment of the Day

January 06 2010

Commentary by David Fuller

Tim Price: Happy New Fear

No book-talking cheerleader, the author of this report from PFP Wealth Management is in a sober but also realistic mood, in my opinion. Here is the opening paragraph which focuses on the UK economy
Public sector strikes. Growing union militancy. Increasingly vicious and intractable terrorism. Governments losing their grip, both upon the economy and upon social stability. Currency crisis. Food shortages. Readers with an interest in time travel can revisit the turbulent decade of the 1970s via the BBC?s excellent "Rock?n?Roll Years? documentaries (1974, for example, is here). Alternatively, simply stick around: history seems destined to repeat itself. As an enfeebled Labour administration lurches toward what seems likely to be electoral liquidation, there appears to be a disconcerting ignorance - or perhaps a simple refusal to believe - by much of the British public of the inevitable retrenchment in social services and welfare provision that lies ahead during 2010. The UK government has done itself few favours. While the MPs? expenses scandal was largely an equal opportunities blunder, Iraq War II was a partisan and cynical exercise on the part of New Labour under Tony Blair that has done much to extinguish faith in the political process. What faith remains in British politicians will be sorely tested by the tough choices that lie ahead, for whoever is unlucky enough to have to take them. Chancellor Darling was allegedly prevented in his Pre-Budget Review by Gordon Brown from taking the pruning shears to Labour?s unruly spending projects; that merely forces the emergency Budget likely to follow this year?s general election to be even more draconian.

David Fuller's view Readers may be interested in Tim Price's conservative and sensible "preferences across the investment landscape."

Briefly, I agree with him on bonds. I certainly agree on value stocks with secure yields above those of UK Gilts and US Treasuries, and would include other value stocks with an ongoing ability and willingness to boost dividends during the global economic recovery, wherever they may be listed. Additionally, we remain bullish of Fullermoney themes - Asian-led emerging markets, South American-led resources markets, and information technology - provided that primary trend consistency and momentum is maintained. We also remain bullish of commodities, subject to the same chart criteria mentioned immediately above.

How do we reconcile these bullish themes with the 'awful' economic background, at least for many OECD countries? Easily, for the time being, because even the worst affected economies are showing some evidence of recovery, and crucially, monetary policy remain extremely positive. What I fear is strong and / or synchronised global economic recovery, which would compete for liquidity currently flowing into stock markets and commodities, at a time when central banks would have little excuse not to tighten monetary conditions.

Stock markets move in cycles, for which monetary policy is often the crucial influence, not least near turning points. Stock markets are also discounting mechanisms and the better they do now - they are doing very well - the more they will have discounted future economic recovery. Recognising this, more companies will rush to raise capital in the form of IPOs and secondary offerings, adding to the supply of equities which will eventually overwhelm demand as the easy money conditions dry up.

Today, we remain in what I have previously described as a 'sweet spot' in terms of opportunity. Enjoy it while it lasts, in the certain knowledge that it won't last. No market trend ever does. I do not know how long these uptrends in equities and commodities will last and neither does anyone else because the outcome depends on events, not least eventual changes in monetary policy, among the known unknowns. Fortunately, this is something that we can monitor on a daily basis, along with our guiding price charts.

Most of the dangers that you and I have to guard against will be psychological rather than fundamental. It is not that the fundamentals are unimportant - they are crucial, as always. However experienced investors can already script the various ending scenarios, which will eventually terminate this bull market. I have briefly commented on the main known ones above.

The human problem is that those of us who are doing best may not want to exit the markets as the supply / demand balance deteriorates. The emotional conditions are usually hubris, greed and perhaps a perceived need. Instead of heeding the evidence of climactic trend acceleration and / or significant loss of momentum, including breaks in the progressions of rising lows, we either become inert like a rabbit in the headlights, or console ourselves with the overly bullish views of someone similarly afflicted.

During 44 years in the markets I have made this objectivity mistake more times than I care to recall. It is part of the learning curve. You may have done it as well. My purpose in mentioning this psychological risk today, at a time when most of our favourite markets are still trending consistently, is that if we can think about the process of our eventual exit strategy when we are not under pressure, perhaps we can increase our chances of acting in a timely manner.

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