There will be no trumpet fanfare or bell ringing to signal it’s now safe to come out. Nobody will wave a starting flag if past market corrections are anything to go off, that officially commences the rally. Slowly the good news will start to be seen amongst all of the bad news. Imperceptibly attitudes will change and business as usual will return, along with the investment markets commencing their gradual recovery.
Our 30% market falls were sudden and indiscriminate. It’s often said that market gains take the stairs up, but the lift down. Actually to be precise “markets take the escalator up but the elevator down”. The difference matters as we start to see the first glimmers of a slowdown in deaths and new cases in Italy, but new cases are doubling daily in New York. As I always say, markets are moved by what the Americans think rather than what we think and right now it looks like the deaths in America will exceed everywhere else on the planet combined. There are just so many older and at risk individuals who live there and healthcare isn’t free.
It was as long ago as November 11th that I published Things you maybe didn’t know about UK Shares – Part One. So it’s high time I published Part Two. I said I would move on from the FTSE 100 to the FTSE 250. However I will help you to understand the whole FTSE market framework.
The FTSE All Share Index
The FTSE 100 Index is the top of the tree. It comprises the top 100 largest UK listed companies. Below it sits the next 250 largest UK listed companies – The FTSE 250. Unsurprisingly together they form the FTSE 350 Index. Finally we add the FTSE Small Cap Index to make up the FTSE All Share Index in total.
The FTSE 100 climbed 248.93 points in total from it’s September close of 7438.84 points. With a very late Santa Rally, it finished December at an all time high of 7687.77 points. As late as the 20th December the market still stood at a maximum of around 7550 points, a level it first reached in May of this year. The final 150 points came in a week. So the market has had a full seven months to catch it’s breath.
Bet nobody has tried this one on you for a long time. Unless you have grandchildren.
What’s the heaviest? A tonne of lead or a ton of feathers?
The answer is they both weigh the same. I can see your sides splitting with that one.
However it was a trick question. I mixed my tonnes (Metric) and tons (Imperial).
Imperial ton = 2240 lb = 1016 kg metric tonne = 1000 kg = 2205 lb
The correct answer is therefore the ton of feathers. But frankly who cares? Well Brussels does actually. If either a ton or a tonne fell on you, you would be squished. The difference is the metric tonne would result in much more paperwork. It’s too early for me to comment on Europe but after reading Roger Bootle’s excellent book, I’m with Boris. Anyway enough of Europe.
Win or Lose
Let’s talk about the price of oil instead. Shell and BP are perhaps the obvious losers from a drop in the price of a barrel. Quite rightly the shares have fallen 48% and 40% from their peaks of September 2014. Ouch. They are a couple of the larger shares that make up the FTSE 100 index, so not surprisingly from it’s peak last April it too fell 19%. But neither Shell nor BP can set the price of oil. They cannot make the price rise to make more profit. Supply versus demand does that job and pulling the strings are nations not companies. Saudi Arabia, UAE, Iran, USA, Venezuela, Libya, Russia, Norway etc.
So here we are. Too much supply, we are awash with the stuff. Hence a barrel of oil is cheap. It’s been calculated (I don’t know who does this) that when oil falls by $10 a barrel, the revenue lost is a mighty $1 billion per day! It’s fallen by almost $100 over an 18 month period. I can’t calculate the losses the number is just too big. So let’s look at the oil producing nations as the ton of lead. One huge great lump of immediate and ongoing loss. A ton of losses.
Lost or moved?
So where does a $1 million trillion billion gazillion go when it gets lost. Well interestingly it isn’t lost it’s just been moved. We are the billions of feathers that make up the ton of feathers. I can’t prove there are a billion feathers in a ton. Just stick with me here. Think Blue Tit not Ostrich. If the oil nations can’t sell for $100 a barrel then we are not buying it at $100 a barrel. The money isn’t lost is been redistributed to us. Not in one big lump but in lots and lots of tiny feathers. Visible in petrol receipts, future utility bills, reduced delivery costs to supermarkets bringing the cost of food down, air fares, cruise tickets etc. etc. etc. It’s a zero sum game. OPEC win and we all lose. OPEC lose and we all win. It’s just taking some time for us all to realise we are the winners.
OK then. Why have other shares fallen too?
Well it’s supply and demand at work again. Imagine the Sheiks and Oligarchs with their wheelbarrows full of Petrodollars. The money has been coming in for decades. It’s been buying London property, Football clubs & bling of all shapes and sizes from diamond encrusted underwear to gold plated Rolls Royces. Some of the more sensible purchases though have been Global Shares, Government Gilts, Corporate Bonds & Foreign Currency. With the books no longer balancing at $30 a barrel, the wheelbarrows are being used to bring the cash back home. Whatever can be sold quickly and easily.
Normal service will be resumed
On the left side of the scales I give you a ton of lead. On the right side of the scales slowly building is a ton of feathers. Balance will be achieved when individually we all spend our oil savings, generating business profits from Greggs to Harrods. More company turnover means more profit. The profit leads to higher dividends which means share prices will rise once again.
The smart money is on the oil imbalance coming to an end towards the Autumn. Unless a deal is done behind the scenes where all the oil producing nations agree to cut back production now. That looks unlikely. Saudi Arabia agreeing anything with Iran?
At some point we will be investing in an oil fund, looking to ride the doubling in price from $30 to $60 a barrel. Just not yet. We can’t buy oil. Where would we store it?
Monday just gone, was the third Monday of January, so that makes it “Blue Monday” in the UK. The fabled most depressing day of the year. Meanwhile in the US, the exact same Monday was Martin Luther King, Jr. Day. A public holiday and a day to celebrate.
February 2nd is Groundhog Day. According to folklore, if it is cloudy when a groundhog emerges from its burrow on this day, then spring will come early; if it is sunny, the groundhog will supposedly see its shadow and retreat back into its burrow, and the winter weather will persist for six more weeks.
The film Groundhog Day was made in 1993 starring Bill Murray. You know, the main guy in Ghostbusters. The plot was simple enough and I remember it as being laugh out loud funny.
Murray plays Phil Connors, an arrogant Pittsburgh TV weatherman who, during an assignment covering the annual Groundhog Day event in Punxsutawney, Pennsylvania, finds himself in a time loop, repeating the same day again and again.
It’s nearly Groundhog Day in more ways than one. It looks like history is about to be repeated.
All that lovely growth in our portfolios that was achieved in the last 12 months has been taken away from us. Much of that loss occurring in this last two weeks.
2015 now counts for nothing. We start over again. Every doomsday merchant has been out revelling in “I told you so”. However these pundits are just like broken clocks. Even a broken clock is right twice a day.
As I have said many times before “I eat my own cooking”. When my clients lose some of their growth, so do I. I know times like this come around. The last time was in 2011. Back then I spent no time dwelling on what had just happened, I simply planned what I was to do next. Nothing changes.
Due to the generous recommendations from our existing clients, 2015 brought a dozen or so new clients. Many of my new clients however haven’t just lost some growth, they start February with less than they invested. Long term investors know that this hurts more at the beginning but does get better over your investing lifetime.
What has just happened?
The markets are not rational. They behave like any group of individuals. They behave much like kids in a playground. When a fight broke out at Farnworth Grammar School (It wasn’t ever me), every kid wanted to watch or join in. Many kids missed seeing it, the fight was usually over before word got out. But the playgrounds of our school days have changed. In today’s playgrounds, every child has a smartphone. The second a fight breaks out, all the other kids know and come running.
Investment theory demands markets are rational, filled with rational investors. I don’t buy it. I’ve never met an investor free from all biases and bad behaviours. Myself included. We can feel worried and we contemplate doing irrational things. The markets today are mostly inhabited by supercomputers that buy or sell in a fraction of a second. The computers are pre-programmed with complex algorithms, set to sell at the first sign of probable fisticuffs. One computer sells, triggering another and so on. The speed of change has become breathtaking and of course introduces much more volatility.
China’s fault, eh?
What triggered this stampede for the exit?
It would be nice to blame China but that’s not the likely answer. Their fumbling stock market is state run and closed to foreigners. A crash there maybe should only cause falls in Hong Kong.
The Chinese can’t buy our exports now, so every countries economy is now doomed?
Er, no again. Only 1% of US exports go to China, therefore the US market shouldn’t have fallen. The answer is more likely due to problems in the Middle East.
David Bowie, Glen Frey & the Organisation of Petroleum Exporting Countries
All recently dead I’m afraid. Even though OPEC refuses to acknowledge it just yet. When it kicked off in the Middle East playground in the past, it was bad news for us punters. Oil leapt up in price as production looked like it was set to be disrupted. But look now. Absolute bloody carnage and turmoil right across the Middle East but oil sits at $27.00 a barrel. It should be $127.00 based on history being repeated. $27.00 is great news for us punters now, so why have stock markets crashed?
Supply & Demand
The number of buyers versus the number of sellers always dictates the price. Saudi Arabia is skint and getting more skint every day. They are not making any money by flogging overpriced oil to the rest of the world anymore. They have the worlds largest Sovereign wealth reserves of any country. Since last year reserves have fallen by 10%. They were once regular buyers of everything, but now they are regular sellers. Many members of OPEC are in the same boat. With billions of dollars of shares, bonds and gold being sold, it’s not surprising the markets are struggling to rise and the sell computers have been triggered.
Many good companies’ shares are being given away by the oil rich (poor) nations at the moment. Needs must. Babies out with the bath water. A regular contributor to my blogs mentioned that the Al Saud family could fall this year. Many think the same.
Where’s the positive
Well computers sell first and think second. So the selling pendulum will undoubtedly swing too far, and should change when the buy side computers feel prices are now cheap enough.
Saudi Arabia and much of the rest of the Middle East has made obscene fortunes by running the cartel that kept oil prices artificially high since the 70’s. Indeed ever since my days at Farnworth Grammar School where I hardly ever got into a fight. But now the tables have turned. Every man, woman, household and business in the world is slowly becoming more profitable and saving money because energy costs have fallen. Oil prices will stay low for longer too. Interest rates will rise slower, again good for borrowers and businesses and stock markets .
Mind the gap
The world is adapting. It’s a whole new world order. The oil producing nations triggered the panic selling. There won’t be any panic buying I’m afraid. OPEC are immediate losers. We are all the winners but our benefits will take longer to be seen. But as the outlook continues to gradually look rosier for businesses, share prices will continue to rise. As everyone saves money on fuel, we will spend it, making businesses even more profitable as turnovers rise. We are currently in the gap.