A really stupid investment

***A really stupid investment

***The cards keep stacking up against the UK consumer

***RECOMMENDED ARTICLES: Why central banks love inflation... Why the US yield curve inversion is important...

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There are few more important "sell" signals for the smart investor than when financial services providers are trying to persuade the man in the street to pile into a specific sector.

For example - in the first seven months of 2000, more than 40 technology funds were launched in the US, according to TheStreet.com. That was nearly twice the number launched in the whole of 1999, and four times the number in 1998. But by then, the tech bubble was already well past its sell-by date by May 2000, the tech-heavy Nasdaq index had fallen 30% from its March peak.

And it's with similarly imperfect timing that the hype machine is gearing up to flog various funds investing in UK residential property...

The new Abbey House Price Plus Fund aims to outperform the Halifax House Price Index over three to five years.

The group says that it will appeal to investors who had been hoping to put residential property into their Self Invested Personal Pensions, before the Chancellor belatedly put a stop to that idea.

Meanwhile we have property specialist Assetz saying that now 'is the perfect time to invest in a residential property fund.' Unsurprisingly enough, Assetz is pitching a range of residential property funds on its website.

Let's not beat about the bush. Investing in a fund like this at the moment seems like one of the daftest investments you could ever make.

Regular MoneyWeek readers will have realised that we are not at all bullish on property. We firmly believe that house prices are overvalued, and are set to fall further this year as the UK consumer crumbles under the weight of bills, taxes and debt.

But even if you don't subscribe to our opinion, investing in residential property still doesn't look good. Like the tech sector in mid-2000, the housing market is long past its sell-by date. The days of double-digit growth are long gone last year, depending on which figures you read, prices either fell by 2% (Hometrack), or rose by 5% (Halifax).

Even the most bullish of house price forecasters Ray Boulger at mortgage broker Charcol only predicts a rise of 5.5% in the next year. Meanwhile, Halifax - the indicator Abbey wants to outperform reckons house prices will be lucky to rise by 3% in 2006.

And check out this quote from Stuart Law, managing director of Assetz, who is anything but a property bear. 'I predict property price rises of five per cent nationally in 2006 and with property investment now accessible for as little as £5,000, thousands more people will be able to share in the profits next year.'

5%? Forgive us for not rushing to invest. The top cash Isas available on the market currently pay just over 5% annual interest, tax-free, with no risk to your money whatsoever, and no charges of any kind.

So why on earth would you stick your money into a risky investment sector like UK residential property, when its most optimistic proponents only expect gains on a par with a decent savings account?

To our mind, this flood of investment "opportunities" is very much comparable to the tech fund flood of 2000 smart investors should steer clear, just as they did back then.

As we pointed out all last week - and probably will this week - Christmas updates from retailers and a stream of updates from housebuilders show that the UK consumer isn't on the comeback trail that some were hoping for. And with hefty Christmas credit card bills due to hit doormats in the coming months, we reckon there are more lean times ahead.

We've already pointed out that higher food sales over Christmas were a sign that more people were entertaining at home. On Friday, bar and nightclub operator Ultimate Leisure backed this up. It expects annual profits to miss City hopes for the year to June 30, after trading at Christmas and New Year "proved to be very difficult."

And rising energy costs are going to make it more difficult for shops to cut prices to attract custom this year. Suppliers already have their backs to the wall. Chilled foods group Northern Foods, which supplies Marks & Spencer among others, warned that profits for the year to April will be lower than last year's £62.2m, despite a rise in underlying sales in its third quarter. It aims to claw back some of the losses by hiking prices in the first three months of 2006.

Rising energy bills, higher taxes and higher prices in the shops none of these factors are bullish for the property market. Be a smart investor ignore the sales pitch from the property pushers and put your money somewhere that might actually generate a decent return this year.

You can read MoneyWeek editor Merryn Somerset Webb's take on which markets look like good bets for 2006 on our website, by clicking here: What does 2006 hold for investors?

And more predictions for 2006 are available on the website to subscribers, including our latest cover story on the five Aim-listed stocks that are set to be big winners in the year ahead: Five small caps set for big gains in 2006

If you're not yet a subscriber, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a 3-week FREE trial of MoneyWeek

Turning to wider markets...

The FTSE 100 ended down 24 points at 5,711. Telecoms stocks remained among the big fallers after France Telecom's profit warning earlier in the week. BT lost 2% to 215p. International Power was the top riser, up 2% to 257.75p on bid speculation, with rumours circulating that E.ON is now interested in the power generator after its failed tilt at Scottish Power. For a full market report, see: London market close.

Over in continental Europe, the Paris Cac 40 closed down 39 at 4,850, while the German Dax fell 59 points to close at 5,483.

Across the Atlantic, US stocks were mixed as a profit warning from conglomerate Tyco International took its toll on sentiment. The Dow Jones eased back 2 points to 10,959, but the S&P 500 rose 1 to 1,287 and the tech-heavy Nasdaq was a fraction higher at 2,317.

In Asian trading hours, oil was little changed in New York, trading at around $63.90 a barrel, but Brent crude was sharply higher, at around $63.30.

Meanwhile, spot gold was at fresh 25-year highs, trading at around $557 an ounce. Silver was trading at around $9.15 an ounce.

In Asian stock markets, the Nikkei 225 shed 186 points to 16,268. Exporters such as Sony and Honda were among the main losers as the dollar continued to fall against the yen.

And in the UK this morning, accountancy firm Ernst & Young reports that UK profit warnings rose 30% in 2005 as economic growth slowed. Warnings are now at their highest since 2001.

And our two recommended articles for today...

Why central banks love inflation

- It is often thought that inflation is the enemy of those trying to run the economy. But in fact, central banks these days need to keep inflation going at all costs to prop up our increasingly fragile economic system, says Richard Benson of Specialty Finance Group. To find out why the US government's current economic policies are little better than those of a 'banana republic', click here: Why central banks love inflation

Why the US yield curve inversion is important

- Towards the end of 2005, the yield on 2-year Treasury bonds was occasionally slightly above that on the 10-year bonds - in other words, the yield curve inverted. In the past, this has been a useful predictor of coming recession, but many analysts argue that it's different this time. But that's exactly what a lot of people said last time this happened in early 2000, says Paul Kasriel in The Econtrarian newsletter - right before the recession of 2001. To find out why the yield curve is signalling a slowdown in the US economy - at the very least - click here: Why the US yield curve inversion is important